4. Real Estate and Intangible Assets

Real Estate

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

 

		December 31, 2015 (1)				December 31, 2014
Real estate:
Land		$	97,117			$	88,394
Building and improvements			635,728				593,155
Tenant improvements			47,532				41,016
Accumulated depreciation			(112,243	)			(92,133	)
Real estate, net		$	668,134			$	630,432

 

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

2015 Real Estate Activity

During the year ended December 31, 2015, we acquired six properties, which are summarized below (dollars in thousands):

 

Location		Acquisition Date				Square Footage (unaudited)				Lease Term				Renewal Options				Total Purchase Price				Acquisition Expenses				Annualized GAAP Rent				Debt Issued
Richardson, TX (1)			3/6/2015				155,984				9.5 Years				2 (5 years each)			$	24,700			$	112			$	2,708			$	14,573
Birmingham, AL			3/20/2015				30,850				8.5 Years				1 (5 years)				3,648				76				333				N/A
Columbus, OH			5/28/2015				78,033				15.0 Years				2 (5 years each)				7,700				72				637				4,466
Salt Lake City, UT (1)			5/29/2015				86,409				6.5 Years				1 (5 years)				22,200				152				2,411				13,000
Atlanta, GA (2)			7/15/2015				78,151				Multiple	(2)			2 (5 years)				13,000				109				1,291				7,540
Villa Rica, GA			10/20/2015				90,626				18 Years				2 (5 years)				6,550				65				604				3,800
Total							520,053											$	77,798			$	586			$	7,984			$	43,379

 

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

(2)	This building is 100% leased to one tenant through two leases. 30% of this space is leased for 15 years, while the remaining space is leased for 7 years.

In accordance with Accounting Standards Codification, or ASC, 805, “Business Combinations,” we determined the fair value of the acquired assets and liabilities related to the six properties acquired during the year ended December 31, 2015, as follows (dollars in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				Above Market Leases				Below Market Leases				Total Purchase Price
Richardson, TX		$	2,728			$	12,591			$	2,781			$	2,060			$	1,804			$	1,929			$	807			$	—			$	24,700
Birmingham, AL			650				1,683				351				458				146				360				—				—				3,648
Columbus, OH			1,338				3,511				1,547				1,144				672				567				—				(1,079	)			7,700
Salt Lake City, UT			3,248				11,861				1,268				2,396				981				1,678				821				(53	)			22,200
Atlanta, GA			2,271				7,862				916				750				548				723				44				(114	)			13,000
Villa Rica, GA			293				5,144				133				602				187				151				40				—				6,550
		$	10,528			$	42,652			$	6,996			$	7,410			$	4,338			$	5,408			$	1,712			$	(1,246	)		$	77,798

 

Below is a summary of the total revenue and earnings recognized on the six properties acquired during the year ended December 31, 2015 (dollars in thousands):

 

						For the year ended December 31,
						2015
Location		Acquisition Date				Rental Revenue				Earnings (1)
Richardson, TX			3/6/2015			$	2,152			$	590
Birmingham, AL			3/20/2015				260				105
Columbus, OH			5/28/2015				421				181
Salt Lake City, UT			5/29/2015				1,368				344
Atlanta, GA			7/15/2015				598				345
Villa Rica, GA			10/20/2015				120				70
						$	4,919			$	1,635

 

(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 years ended December 31, 2015, and 2014, respectively, were acquired as of January 1, 2014. The table also assumes that properties acquired during the years ended December 31, 2014 and 2013, respectively, were acquired January 1, 2013. The pro-forma earnings for the years ended December 31, 2015, 2014 and 2013 were adjusted to assume that acquisition-related costs were incurred as of the beginning of the earliest period presented (dollars in thousands, except per share amounts):

 

		For the year ended December 31, (unaudited)
		2015				2014				2013
Operating Data:
Total operating revenue		$	86,321			$	87,439			$	80,081
Total operating expenses			(51,725	)			(66,052	)			(46,223	)
Other expenses			(29,926	)			(26,014	)			(32,929	)
Net income (loss)			4,670	(1)			(4,627	) (2)			929
Dividends attributable to preferred and senior common stock			(5,101	)			(4,636	)			(4,394	)
Net loss attributable to common stockholders		$	(431	)		$	(9,263	)		$	(3,465	)
Share and Per Share Data:
Basic and diluted loss per share of common stock—pro forma		$	(0.02	)		$	(0.54	)		$	(0.26	)
Basic and diluted loss per share of common stock—actual		$	(0.07	)		$	(0.61	)		$	(0.22	)
Weighted average shares outstanding-basic and diluted			21,159,597				17,253,503				13,164,244

 

(1)	We recognized a $0.6 million impairment loss on our Dayton, Ohio property during the year ended December 31, 2015.

(2)	We recognized a $14.2 million impairment loss and a $5.3 million gain on debt extinguishment as a result of our Roseville, Minnesota deed-in-lieu transaction during the year ended December 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 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 its life 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 their lives, 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 five year extension options on each lease. 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 provided $0.1 million in tenant improvements.

On April 29, 2015, we modified the lease with the anchor tenant occupying one of our properties located in Columbus, Ohio. The anchor tenant is currently occupying 92% of the property and the modification allows the anchor tenant to expand into the remaining space, currently occupied by another tenant through November 30, 2016. The lease term for the expansion space is coterminous with their current lease, and both leases expire on December 2023. In connection with the expansion of the lease and modification of certain terms of the lease, we provided approximately $0.1 million in tenant improvements.

On July 13, 2015 we executed a lease with a new tenant in our Raleigh, North Carolina property to occupy 86,886 square feet, representing 75.0% of the total square footage. The current tenant retained 18.0% of the space. Therefore, the building is approximately 93.0% occupied. The lease commenced on August 1, 2015 and will expire in December 2027. The new lease provides for prescribed rent escalations over its life, with annualized straight line rents of approximately $0.5 million. The lease grants the tenant two extension options for an additional five years each. In connection with the execution of the lease, we provided $0.8 million in tenant improvements, and paid $0.4 million in leasing commissions.

On August 28, 2015 we modified a lease with one of our other tenants in our multi-tenant Indianapolis, Indiana property. This tenant, previously occupying 4,512 square feet, added an additional suite to its lease, increasing its leased square footage to 6,903. The tenant also extended their lease term an additional 3 years through September 2021. The original lease term would have expired in October 2018. This lease contains prescribed rent escalations over its life with annualized straight line rents of approximately $0.1 million, a $0.03 million increase over 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.

On September 18, 2015 we executed a lease with a tenant to occupy a portion of our previously vacant property located in Baytown, Texas. The lease is for 57.0% of the building, and is for a seven year term. The lease provides for prescribed rent escalations over its life, with annualized straight line rents of approximately $0.13 million. The tenant has two options to renew the lease for an additional period of five years each. In connection with the execution of the lease, we provided $0.2 million in tenant improvements and paid $0.06 million in leasing commissions.

On October 2, 2015 we modified a lease with one of our tenants in our multi-tenant Indianapolis, Indiana property. This tenant, occupying 1,427 square feet, extended their lease term an additional three years through March 2019. The original lease term would have expired on December 31, 2015. This lease contains prescribed rent escalations over its life with annualized straight line rents of approximately $0.02 million, unchanged from the previous lease.

 

On October 26, 2015 we extended the lease with the tenant occupying our property located in Duncan, South Carolina. The lease covering this property was extended for an additional eight years through July 31, 2028. The lease was originally set to expire in July 31, 2020. The lease provides for prescribed rent escalations over its life, with annualized straight line rents of approximately $2.1 million, a $0.2 million increase over the previous lease. In connection with the extension of the lease and modification of certain terms of the lease, we paid $0.7 million in leasing commissions, and provided approximately $0.3 million in tenant improvements during 2016.

On November 4, 2015 our tenant occupying 73,960 square feet of our Burnsville, Minnesota property added an additional suite to its lease, increasing its leased square footage by 5,630 square feet. The new lease commences on January 1, 2016 and expires in February 2021. This lease contains prescribed rent escalations over its life with annualized straight line rents of approximately $0.1 million. The tenant has one option to renew the lease for an additional period of five years. In connection with the execution of the lease, we provided $0.2 million in tenant improvements and paid $0.05 million in leasing commissions.

On November 5, 2015 we extended the lease with the tenant occupying our property located in Chalfont, Pennsylvania. The lease covering the property was extended for an additional five years through February 2021. The lease was originally set to expire in February 2016. The lease provides for prescribed rent escalations over its life, with annualized straight line rents of approximately $0.8 million, a $0.02 million increase over the previous lease. 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 provided approximately $0.2 million in tenant improvements during 2016.

On November 10, 2015 we extended the lease with the tenant occupying our property located in Menomonee Falls, Wisconsin. The lease covering the property was extended for an additional 12 years through August 2028. The lease was originally set to expire in June 2016. The lease provides for prescribed rent escalations over its life, with annualized straight line rents of approximately $0.7 million, a $0.03 million decrease over the previous lease. 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 provided approximately $0.6 million in tenant improvements.

On December 4, 2015 we extended the lease with the tenant occupying our property located in Montgomery, Alabama. The lease covering the property was extended for an additional year through September 2017. The lease was originally set to expire in September 2016. Annualized straight line rents are approximately $0.1 million, a slight increase over the previous lease.

On December 29, 2015 we executed a lease with a tenant to occupy a portion of our property located in Maple Heights, Ohio. The lease is for 81.1% of the building, and is for a three year term. The rental rates in the lease remain flat over its life, with annualized straight line rents of approximately $0.7 million. The tenant has two options to renew the lease for an additional period of three years each. In connection with the execution of the lease, we provided $0.1 million in tenant improvements and anticipate paying $0.07 million in leasing commissions.

 

2014 Real Estate Activity

During the year ended December 31, 2014, we completed 10 acquisitions of 11 properties and completed an expansion of one property, which is summarized in the table 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 & Assumed
Allen, TX			3/27/2014				21,154				12 Years				4 (5 years each)			$	5,525			$	33			$	570			$	3,481
Colleyville, TX			3/27/2014				20,355				12 Years				4 (5 years each)				4,523				33				467				2,849
Rancho Cordova, CA (4)			4/22/2014				61,358				10 Years				1 (5 year)				8,225				73				902				4,935
Coppell, TX			5/8/2014				21,171				12 Years				4 (5 years each)				5,838				26				601				3,816
Columbus, OH			5/13/2014				114,786				9.5 Years	(1)			N/A (1)				11,800				70				1,278	(3)			N/A
Taylor, PA			6/9/2014				955,935				10 Years				4 (5 years each)				39,000				730				3,400				22,600
Aurora, CO			7/1/2014				124,800				15 Years				2 (5 years each)				8,300				93				768				N/A
Indianapolis, IN (4)			9/3/2014				86,495				11.5 Years	(2)			2 (5 years each) (2)				10,500				63				1,504	(3)			6,100
Denver, CO			10/31/2014				189,120				10 Years				2 (10 years each)				10,000				103				860				N/A
Canton, NC (5)			11/1/2014				365,960				20 Years				2 (10 years each)				5,550				N/A				1,343				N/A
Monroe, MI (6)			12/23/2014				535,500				8.5 Years				2 (5 years each)				30,750				68				2,523				18,450
Total							2,496,634											$	140,011			$	1,292			$	14,216			$	62,231

 

(1)	Lease term and renewal options are reflective of the largest tenant. The smaller tenant’s lease terminates in November 2016 and contains no renewal options.

(2)	Lease term and renewal options are reflective of the largest tenant. The other tenants in the building have varying lease expirations from December 2015 to October 2018. No other tenants have renewal options.

(3)	Rent figure is reflective of aggregate rent among all tenants occupying the building.

(4)	Tenants occupying these properties are subject to a gross lease. The largest tenant in this property occupies 61,306 square feet.

(5)	The Canton, NC property was originally acquired in July 2004 for $5.2 million. After the expansion was completed in November 2014, our total investment in the property is $10.8 million.

(6)	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the 11 properties acquired during the year ended December 31, 2014 as follows (dollars in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				Above Market Leases				Below Market Leases				Premium 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
Rancho Cordova, CA			752				5,898				278				473				546				278				—				—				—				8,225
Coppell, TX			1,448				3,221				128				636				293				230				—				—				(118	)			5,838
Columbus, OH			990				6,080				1,937				823				719				990				261				—				—				11,800
Taylor, PA			3,102				24,449				956				6,171				1,452				2,870				—				—				—				39,000
Aurora, CO			2,882				3,825				92				413				806				282				—				—				—				8,300
Indianapolis, IN			502				5,334				1,088				1,990				741				732				126				(13	)			—				10,500
Denver, CO			1,621				6,503				568				1,152				721				652				—				(1,217	)			—				10,000
Monroe, MI(1)			1,118				23,890				942				1,497				1,350				1,953				—				—				—				30,750
		$	14,566			$	85,016			$	6,231			$	14,239			$	7,121			$	8,386			$	387			$	(1,236	)		$	(249	)		$	134,461

 

(1)	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

 

Below is a summary of the total revenue and earnings recognized on the 11 properties acquired during the year ended December 31, 2014 (dollars in thousands):

 

						For the year ended December 31,
						Jul-05
Location		Acquisition Date				Rental Revenue				Earnings (1)
Allen, TX			3/27/2014			$	435			$	249
Colleyville, TX			3/27/2014				357				206
Rancho Cordova, CA			4/22/2014				625				239
Coppell, TX			5/8/2014				390				226
Columbus, OH(2)			5/13/2014				790				272
Taylor, PA			6/9/2014				1,908				890
Aurora, CO			7/1/2014				384				253
Indianapolis, IN(2)			9/3/2014				489				44
Denver, CO			10/31/2014				166				82
Monroe, MI(3)			12/23/2014				61				31
						$	5,605			$	2,492

 

(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.

(2)	Rental revenue and earnings is reflective of aggregated rent and operating expenses among all tenants occupying the building.

(3)	We acquired two properties and two leases with this acquisition. Rental revenue and earnings is reflective of aggregate rent and operating expenses among both properties.

Future Lease Payments

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

 

Year		Tenant Lease Payments (1)
2016		$	78,908
2017			79,913
2018			79,638
2019			79,494
2020			72,333
Thereafter			306,741

 

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

In accordance with the lease terms, substantially all operating expenses are required to be paid by the tenant; however, we would be required to pay operating expenses on the respective properties in the event the tenants fail to pay them.

 

Intangible Assets

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

 

		December 31, 2015 (1)								December 31, 2014
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	66,244			$	(22,679	)		$	59,233			$	(17,379	)
Leasing costs			44,360				(14,774	)			38,305				(11,411	)
Customer relationships			46,485				(14,722	)			41,243				(11,177	)
		$	157,089			$	(52,175	)		$	138,781			$	(39,967	)
		Deferred Rent Receivable/(Liability)				Accumulated Amortization				Deferred Rent Receivable/(Liability)				Accumulated Amortization
Above market leases		$	10,176			$	(6,818	)		$	8,314			$	(6,384	)
Below market leases			17,951				(8,294	)			15,939				(7,345	)
		$	28,127			$	(15,112	)		$	24,253			$	(13,729	)
Total		$	185,216			$	(67,287	)		$	163,034			$	(53,696	)

 

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

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $13.1 million, $10.0 million, and $7.3 million for the years ended December 31, 2015, 2014, and 2013, respectively, and is included in depreciation and amortization expense in the consolidated statement of operations.

Total amortization related to above-market lease values was $0.4 million, $0.3 million, and $0.3 million for the years ended December 31, 2015, 2014, and 2013, respectively. Total amortization related to below-market lease values was $0.9 million, $0.7 million, and $0.6 million for the years ended December 31, 2015, 2014, and 2013, respectively, and is included in rental income in the consolidated statement of operations.

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

 

Intangible Assets & Liabilities		2015				2014
In-place leases			13.0				10.1
Leasing costs			13.0				10.1
Customer relationships			17.5				15.1
Above market leases			18.6				9.3
Below market leases			13.5				10.0
All intangible assets & liabilities			14.3				11.5

 

The estimated aggregate amortization expense to be recorded for in-place leases, leasing costs and customer relationships 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
2016 (1)		$	17,440
2017			14,813
2018			13,410
2019			13,403
2020			11,851
Thereafter			33,997
Total		$	104,914

 

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

The estimated aggregate rental income to be recorded for the amortization of both above and below market leases for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

 

Year		Net Increase to Rental Income Related to Above and Below Market Leases
2016 (1)		$	192
2017			414
2018			457
2019			457
2020			493
Thereafter			4,286
Total		$	6,299

 

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