AGREE REALTY CORP

The Company recognizes above- and below-market lease intangibles in connection with most acquisitions of real estate (see Accounting for Acquisitions of Real Estate below).  The capitalized above- and below-market lease intangibles are amortized over the remaining term of the related leases.  The Company historically presented this amortization as a component of Depreciation and Amortization expense within the Consolidated Statement of Income and Comprehensive Income.  During 2019, the Company changed this classification to recognize this amortization as an adjustment of Rental Income.  The prior period results have been reclassified to conform to the current year classification.  During the three months ended March 31, 2019 and 2018, the Company incurred $3.3 million and $2.2 million of amortization of capitalized above- and below-market lease intangibles, respectively.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes how entities measure credit losses for most financial assets. This guidance requires an entity to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses”, which clarified that receivables arising from operating leases are within the scope of the leasing standard (Topic 842). This new standard will be effective for the Company on January 1, 2020. The Company is evaluating the impact this new standard would have on its consolidated financial statements, in the event any of its leases ever were to be classified as sales-type or direct finance leases and become subject to the provisions of ASU 2016-13.

The Company attempts to maximize the amount it expects to derive from the underlying real estate property following the end of the lease, to the extent it is not extended.  We maintain a proactive leasing and capital improvement program that, combined with the quality and locations of our properties, has made our properties attractive to tenants. We intend to continue to hold our properties for long-term investment and, accordingly, place a strong emphasis on the quality of construction and an on-going program of regular and preventative maintenance.  However, the residual value of a real estate property is still subject to various market-specific, asset-specific, and tenant-specific risks and characteristics.  As the classification of a lease is dependent on the fair value of its cash flows at lease commencement, the residual value of a property represents a significant assumption in our accounting for tenant leases.  Similarly, the exercise of options is also subject to these same risks, making a tenant’s lease term another significant variable in a lease’s cash flows.

The Company defines Core FFO as Nareit FFO with the addback of noncash amortization of above- and below- market lease intangibles. Under GAAP and Nareit’s definition of FFO, lease intangibles created upon acquisition of a net lease must be amortized over the remaining term of the lease. The Company believes that by recognizing amortization charges for above- and below-market lease intangibles, the utility of FFO as a financial performance measure can be diminished.  Management believes that its measure of Core FFO facilitates useful comparison of performance to its peers who predominantly transact in sale-leaseback transactions and are thereby not required by GAAP to allocate purchase price to lease intangibles.  Unlike many of its peers, the Company has acquired the substantial majority of its net leased properties through acquisitions of properties from third parties or in connection with the acquisitions of ground leases from third parties.

On April 22, 2019, Agree Realty Corporation (the “Company”) adopted a form of performance unit award notice (the “PSU Agreement”) for certain incentive awards to employees commencing in 2019 under the Company’s 2014 Omnibus Incentive Plan (as amended from time to time, the “Plan”). Each participant receiving an award under a PSU Agreement will receive an award of performance units (“Company PSUs”) under the Plan, subject to forfeiture and the restrictions set forth therein. The PSU Agreement provides for a performance term, and the participant must generally remain continuously employed with the Company or its subsidiary through the certification date to receive the Company PSUs. 50% of each grant vests based on relative annualized total shareholder return compared to constituent companies comprising the MSCI US REIT index and the remaining 50% of each grant vests based on relative annualized total shareholder return of certain designated peer companies over the performance period.  Once performance measures have been certified, any restricted shares awarded will be subject to the terms and conditions of the Company’s standard form restricted stock award agreement.  The Company PSUs are subject to accelerated vesting in the event of a Change in Control where the acquirer/successor company does not assume or substitute such award or in the event of a termination without Cause or termination for Good Reason within twenty-four months following a Change in Control where the acquirer successor company assumes or substitutes such award. For purposes of the PSU Agreement, Change in Control, Cause and Good Reason have the meanings given to such terms in the PSU Agreement or the Plan. A copy of the PSU Agreement is filed herewith as Exhibit 10.1. The summary set forth above is qualified in its entirety by reference to Exhibit 10.1.