4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of March 31, 2015 and December 31, 2014 (dollars in thousands):

 

		March 31, 2015(1)				December 31, 2014
Real estate:
Land		$	91,343			$	88,394
Building and improvements			605,375				593,155
Tenant improvements			44,124				41,016
Accumulated depreciation			(96,760	)			(92,133	)
Real estate, net		$	644,082			$	630,432

 

(1)	Does not include real estate held for sale as of March 31, 2015.

 

2015 Real Estate Activity

During the three months ended March 31, 2015, we acquired two properties, which are summarized below (dollars in thousands):

 

Location		Acquisition Date				Square Footage (unaudited)				Lease Term				Renewal Options				Total Purchase Price/Expansion Funded				Acquisition Expenses				Annualized Straight Line Rent				Debt Issued
Richardson, TX (1)			3/6/2015				155,984				9.5 Years				2 (5 years each)			$	24,700			$	103			$	2,708			$	14,573
Birmingham, AL			3/20/2015				30,850				8.5 Years				1 (5 years)				3,648				66				333				N/A
Total							186,834											$	28,348			$	169			$	3,041			$	14,573

 

(1)	The tenant occupying this property is subject to a gross lease.

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the two properties acquired during the three months ended March 31, 2015, as follows (dollars in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				Above Market Leases				Total Purchase Price
Richardson, TX		$	2,709			$	12,503			$	2,761			$	2,046			$	1,791			$	1,915			$	975			$	24,700
Birmingham, AL			650				1,683				351				458				146				360				—				3,648
		$	3,359			$	14,186			$	3,112			$	2,504			$	1,937			$	2,275			$	975			$	28,348

Below is a summary of the total revenue and earnings recognized on the two properties acquired during the three months ended March 31, 2015 (dollars in thousands):

 

				For the three months ended March 31,
				2015
Location		Acquisition Date		Rental Revenue				Earnings (1)
Richardson, TX		3/6/2015		$	182			$	51
Birmingham, AL		3/20/2015			11				4
				$	193			$	55

 

(1)	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

 

Pro Forma

The following table reflects pro-forma consolidated statements of operations as if the properties acquired during the three months ended March 31, 2015 and the twelve months ended December 31, 2014, respectively were acquired as of January 1, 2014. The pro-forma earnings for the three months ended March 31, 2015 and 2014 were adjusted to assume that acquisition-related costs were incurred as of the previous period (dollars in thousands, except per share amounts):

 

		For the three months ended March 31, (unaudited)
		2015				2014
Operating Data:
Total operating revenue		$	20,318			$	20,789
Total operating expenses			(11,920	)			(26,282	) (1)
Other expenses			(7,546	)			(7,914	)
Net income (loss)			852				(13,407	)
Dividends attributable to preferred and senior common stock			(1,247	)			(1,123	)
Net loss attributable to common stockholders		$	(395	)		$	(14,530	)
Share and Per Share Data:
Basic and diluted loss per share of common stock		$	(0.02	)		$	(0.92	)
Weighted average shares outstanding-basic and diluted			20,210,975				15,746,714

 

(1)	$14.0 million relates to the impairment charge recorded in operating expenses during the three months ended March 31, 2014.

Significant Real Estate Activity on Existing Assets

On January 29, 2015, we modified leases with two tenants occupying space in our Indianapolis, Indiana property. One tenant, occupying 3,546 square feet, extended its lease term for an additional seven years, through March 2023. The original lease term would have expired in February 2016. This lease contains prescribed rent escalations over its life with annualized straight line rents of approximately $0.06 million, unchanged from the previous lease. In connection with the extension of the lease and modification of certain of its terms, we provided $0.06 million in tenant improvements. The other tenant, previously occupying 7,639 square feet, added an additional suite to its lease, increasing its leased square footage to 8,275. The lease expiration date is unchanged at January 2018. The new lease contains prescribed rent escalations over the life of the lease with annualized straight line rents of approximately $0.1 million, a slight increase over the previous lease.

On February 9, 2015, we modified the leases with the tenant occupying two of our properties, both located in Raleigh, North Carolina. The leases covering these properties were extended for an additional five years each, through July 2020. Both leases were originally set to expire in July 2015. The tenant was previously fully occupying both buildings, totaling 174,426 square feet, but had reduced its space requirement in the industrial building by 94,200 square feet. Both leases contain prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.9 million, as compared to annualized straight line rents of $1.3 million under the previous terms of the lease. The tenant has two options to renew both leases for an additional period of five years each. In connection with the extension of the lease and modification of certain terms of the lease, we paid $0.2 million in leasing commissions, and paid $0.1 million in tenant improvements.

On February 20, 2015, we entered into a purchase and sale agreement with a third party to acquire our Columbus, Ohio property for $2.8 million, which is greater than the current carrying value of the property of $2.4 million. The lease on this property is scheduled to terminate in October 2015 and the current tenant has notified us of its plan to vacate. We anticipate the sale to be completed in November 2015. We considered this asset to be non-core to our long term strategy, and we will re-deploy the proceeds from this sale into future acquisitions.

On February 27, 2015, we modified the lease with the tenant occupying our property located in San Antonio, Texas. The modification provided the tenant a termination option, which allows the tenant to terminate its lease effective December 31, 2017, upon paying a termination penalty of approximately $1.0 million on or before March 31, 2017. All other terms and conditions of the lease remain in full force and effect.

 

2014 Real Estate Activity

During the three months ended March 31, 2014, we acquired two properties, which are summarized in the table below (dollars in thousands):

 

Location		Acquisition Date				Square Footage				Lease Term				Renewal Options				Total Purchase Price				Acquisition Expenses				Annualized Straight Line Rent				Debt Assumed
Allen, TX			3/27/2014				21,154				12 Years				4 (5 years each)			$	5,525			$	26			$	570			$	3,481
Colleyville, TX			3/27/2014				20,355				12 Years				4 (5 years each)				4,523				26				467				2,849
Total							41,509											$	10,048			$	52			$	1,037			$	6,330

In accordance with ASC 805, we determined the fair value of the acquired assets related to the two properties acquired during the three months ended March 31, 2014 as follows (in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				Below Market Leases				Discount on Assumed Debt				Total Purchase Price
Allen, TX		$	874			$	3,509			$	125			$	598			$	273			$	218			$	—			$	72			$	5,525
Colleyville, TX			1,277				2,307				117				486				220				181				6				59			$	4,523
		$	2,151			$	5,816			$	242			$	1,084			$	493			$	399			$	6			$	131			$	10,048

Below is a summary of the total revenue and earnings recognized on the two properties acquired during the three months ended March 31, 2014 (dollars in thousands):

 

						For the three months ended March 31,
						2014
Location		Acquisition Date				Rental Revenue				Earnings (1)
Allen, TX			3/27/2014			$	8			$	5
Colleyville, TX			3/27/2014				6				4
						$	14			$	9

 

(1)	Earnings is calculated as net income exclusive of both interest expense and acquisition related costs that are required to be expensed under ASC 805.

 

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2015 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

 

Year		Tenant Lease Payments
Nine Months ending December 31, 2015		$	55,082	(1)
2016			72,558
2017			72,269
2018			71,974
2019			72,429
2020			64,164
Thereafter			254,615

 

(1)	Does not include real estate held for sale as of March 31, 2015.

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class as of March 31, 2015 and December 31, 2014 respectively (in thousands):

 

		March 31, 2015 (1)								December 31, 2014
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	61,622			$	(18,583	)		$	59,233			$	(17,379	)
Leasing costs			40,361				(12,119	)			38,305				(11,411	)
Customer relationships			43,518				(11,991	)			41,243				(11,177	)
		$	145,501			$	(42,693	)		$	138,781			$	(39,967	)
		Deferred Rent Receivable/Liability				Accumulated Amortization				Deferred Rent Receivable/Liability				Accumulated Amortization
Above market leases		$	8,894			$	(6,096	)		$	8,314			$	(6,384	)
Below market leases			15,938				(7,564	)			15,939				(7,345	)
		$	24,832			$	(13,660	)		$	24,253			$	(13,729	)
Total		$	170,333			$	(56,353	)		$	163,034			$	(53,696	)

 

(1)	Does not include real estate held for sale as of March 31, 2015.

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the three months ended March 31, 2015 and 2014, respectively, were as follows:

 

Intangible Assets & Liabilities		2015				2014
In-place leases			9.1				11.9
Leasing costs			9.1				11.9
Customer relationships			14.1				16.9
Above market leases			9.7				—
Below market leases			—				11.9
All intangible assets & liabilities			10.5				13.3

 

The estimated aggregate amortization expense to be recorded for in-place leases, leasing costs, customer relationships and amortization of both above and below market leases for the remainder of 2015 and for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

 

Year		Estimated Amortization Expense of In-Place Leases, Leasing Costs and Customer Relationships				Net Increase to Rental Income Related to Above and Below Market Leases
Nine Months Ending December 31, 2015 (1)		$	13,962			$	228
2016			13,648				307
2017			12,167				429
2018			12,058				429
2019			12,051				429
Thereafter			38,922				3,754
Total		$	102,808			$	5,576

 

(1)	Does not include real estate held for sale as of March 31, 2015.