| Real Estate and Intangible Assets |
Real Estate and Intangible Assets
Real Estate
The following table sets forth the components of our investments in real estate as of December 31, 2017 and 2016, respectively, excluding real estate held for sale as of December 31, 2017 and 2016, respectively (dollars in thousands):
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December 31, 2017 |
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December 31, 2016 |
Real estate: |
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Land |
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$ |
121,783 |
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$ |
104,719 |
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Building and improvements |
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708,948 |
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662,661 |
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Tenant improvements |
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63,122 |
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54,369 |
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Accumulated depreciation |
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(149,417 |
) |
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(131,661 |
) |
Real estate, net |
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$ |
744,436 |
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$ |
690,088 |
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Real estate depreciation expense on building and tenant improvements was $26.9 million, $24.1 million, and $22.2 million for the years ended December 31, 2017, 2016, and 2015 respectively.
Acquisitions
Certain acquisitions during the year ended December 31, 2016, were accounted for as business combinations in accordance with ASC 805, as there was a prior leasing history on the property. The fair value of all assets acquired and liabilities assumed were determined in accordance with ASC 805, and all acquisition-related costs were expensed as incurred. Commencing in the fourth quarter of 2016, we adopted ASU 2017-01 which narrows the scope of transactions that would be accounted under ASC 805. Under ASU 2017-01, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the grouping is not a business, and rather an asset acquisition. Our fourth quarter 2016 acquisition has been deemed an asset acquisition when evaluated under the new guidance, and all acquisition-related costs have been capitalized.
During the year ended December 31, 2017 and 2016 we acquired seven and three properties, respectively, which are summarized below (dollars in thousands):
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Year Ended |
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Aggregate Square Footage |
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Weighted Average Lease Term |
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Aggregate Purchase Price |
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Acquisition Costs |
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Aggregate Annualized GAAP Rent |
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Aggregate Debt Issued or Assumed |
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December 31, 2017 |
(1) |
871,038 |
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10.1 Years |
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$ |
132,157 |
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$ |
1,356 |
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(3) |
$ |
15,507 |
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$ |
54,887 |
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(4) |
December 31, 2016 |
(2) |
329,620 |
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10.5 Years |
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$ |
66,570 |
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$ |
179 |
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$ |
5,589 |
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$ |
38,800 |
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(1) |
On June 22, 2017, we acquired a 60,016 square foot property in Conshohocken, Pennsylvania for $15.7 million. We assumed $11.2 million of mortgage debt in connection with this acquisition. The annualized GAAP rent on the 8.5 year lease is $1.7 million. On July 7, 2017, we acquired a 300,000 square foot property in Philadelphia, Pennsylvania for $27.1 million. We issued $14.9 million of mortgage debt with a fixed interest rate of 3.75% in connection with this acquisition. The annualized GAAP rent on the 15.4 year lease is $2.3 million. On July 31, 2017, we acquired a 306,435 square foot three property portfolio located in Maitland, Florida for $51.6 million. We issued $28.8 million of mortgage debt with a fixed interest rate of 3.89% in connection with this acquisition. This portfolio has a weighted average lease term of 8.6 years, and annualized GAAP rent of $6.8 million. On December 1, 2017, we acquired a 102,559 square foot property in Columbus, Ohio for $17.3 million. The annualized GAAP rent on the weighted average 6.9 year leases is $1.7 million. On December 1, 2017, we acquired a 102,028 square foot property in Salt Lake City, Utah for $20.5 million. The annualized GAAP rent on the 10.1 year lease is $3.0 million.
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(2) |
On May 26, 2016, we acquired a 107,062 square foot property in Salt Lake City, Utah for $17.0 million. We borrowed $9.9 million to fund the acquisition. The annualized GAAP rent on the 6.0 year lease is $1.4 million. On September 12, 2016 we acquired a 119,224 square foot property in Fort Lauderdale, Florida for $23.9 million. We borrowed $14.1 million to fund the acquisition. The annualized GAAP rent on the 9.0 year lease is $2.0 million. On December 14, 2016, we acquired a 103,334 square foot property in King of Prussia, Pennsylvania for $25.7 million, including $0.2 million of acquisition-related costs that were allocated among the identifiable assets acquired. These acquisition-related costs are not included in the aggregated costs in the table above. We borrowed $14.8 million to fund the acquisition. The annualized GAAP rent on the 15.0 year lease is $2.2 million. Our King of Prussia, PA acquisition in the fourth quarter was accounted for as an asset acquisition under ASC 360.
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(3) |
We adopted ASU 2017-01 during the quarter ended December 31, 2016. As a result, we treated our acquisitions during the year ended December 31, 2017 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $1.4 million of acquisition costs that would otherwise have been expensed under business combination treatment.
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(4) |
We assumed an interest rate swap in connection with $11.2 million of assumed debt on our Conshohocken, Pennsylvania acquisition, pursuant to which we will pay our counterparty a fixed interest rate of 1.80%, and receive a variable interest rate of one month LIBOR from our counterparty. Our total interest rate is fixed at 3.55%. The interest rate swap had a fair value of $0.04 million upon the date of assumption, and subsequently increased in value to $0.3 million at December 31, 2017. We have elected to treat this interest rate swap as a cash flow hedge, and all changes in fair market value will be recorded to accumulated other comprehensive income on the consolidated balance sheets.
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We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the year ended December 31, 2017 and 2016, respectively, as follows (dollars in thousands):
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Business Combinations |
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Year ended December 31, 2017 |
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Year ended December 31, 2016 |
Acquired assets and liabilities |
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Purchase price |
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Purchase price |
Land |
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$ |
— |
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$ |
7,125 |
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Building and improvements |
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— |
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22,934 |
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Tenant Improvements |
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— |
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3,240 |
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In-place Leases |
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— |
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3,355 |
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Leasing Costs |
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— |
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1,437 |
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Customer Relationships |
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— |
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3,090 |
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Above Market Leases |
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— |
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— |
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Below Market Leases |
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— |
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(281 |
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Total Purchase Price |
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$ |
— |
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$ |
40,900 |
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Asset Acquisitions |
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Year ended December 31, 2017 |
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Year ended December 31, 2016 |
Acquired assets and liabilities |
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Purchase price |
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Purchase price |
Land |
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$ |
21,509 |
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$ |
3,681 |
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Building |
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68,617 |
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11,682 |
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Tenant Improvements |
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9,977 |
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4,057 |
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In-place Leases |
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12,018 |
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2,669 |
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Leasing Costs |
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7,066 |
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1,987 |
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Customer Relationships |
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10,806 |
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1,406 |
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Above Market Leases |
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3,824 |
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188 |
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Below Market Leases |
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(2,101 |
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— |
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Discount on Assumed Debt |
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399 |
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— |
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Fair Value of Interest Rate Swap Assumed |
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42 |
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— |
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Total Purchase Price |
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$ |
132,157 |
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$ |
25,670 |
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Total Purchase Price on all Acquisitions |
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$ |
132,157 |
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$ |
66,570 |
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Below is a summary of the total revenue and earnings recognized on the two and six asset acquisitions treated as business combinations completed during the years ended December 31, 2016 and 2015 respectively (dollars in thousands):
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For the year ended December 31, 2016 |
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For the year ended December 31, 2015 |
Rental Revenue |
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$ |
1,462 |
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$ |
4,919 |
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Earnings |
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162 |
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63 |
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Pro Forma
The following table reflects pro-forma consolidated statements of operations as if the business combinations completed in 2016, were completed as of January 1, 2015, and the business combinations completed during 2015, were completed as of January 1, 2014. The pro-forma earnings for the years ended December 31, 2016 and 2015 were adjusted to assume that the acquisition-related costs were incurred as of the beginning of the comparative period (dollars in thousands, except per share amounts):
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For the year ended December 31, |
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(unaudited) |
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2016 |
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2015 |
Operating Data: |
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Total operating revenue |
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$ |
88,304 |
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$ |
89,720 |
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Total operating expenses |
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(56,697 |
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(54,480 |
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Other expenses, net |
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(27,429 |
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(31,014 |
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Net income |
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4,178 |
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4,226 |
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Dividends attributable to preferred and senior common stock |
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(7,656 |
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(5,101 |
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Net loss attributable to common stockholders |
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$ |
(3,478 |
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$ |
(875 |
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Share and Per Share Data: |
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Basic and diluted loss per share of common stock - pro forma |
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$ |
(0.15 |
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$ |
(0.04 |
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Basic and diluted loss per share of common stock - actual |
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$ |
(0.16 |
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$ |
(0.07 |
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Weighted average shares outstanding-basic and diluted |
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23,193,962 |
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21,159,597 |
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Significant Real Estate Activity on Existing Assets
During the year ended December 31, 2017 and 2016, we executed nine and nine leases, respectively, which are aggregated below (dollars in thousands):
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Year Ended |
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Aggregate Square Footage |
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Weighted Average Lease Term |
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Aggregate Annualized GAAP Rent |
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Aggregate Tenant Improvement |
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Aggregate Leasing Commissions |
December 31, 2017 |
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880,749 |
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9.2 Years |
(1) |
$ |
6,976 |
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$ |
1,264 |
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$ |
742 |
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December 31, 2016 |
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551,335 |
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3.9 Years |
(2) |
$ |
2,478 |
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$ |
1,244 |
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$ |
436 |
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(1) |
Weighted average lease term is weighted according to the annualized GAAP rent earned by each lease. Our leases have terms ranging from 1 year to 11.3 years.
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(2) |
Weighted average lease term is weighted according to the annualized GAAP rent earned by each lease. Our leases have terms ranging from 1 year to 7.7 years.
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On May 31, 2016, we reached a legal settlement with the previous tenant on one property to compensate us for deferred capital obligations and repairs they were required to perform during their tenancy. We recognized $0.3 million, recorded in other income on the consolidated statement of operations and comprehensive income, related to reimbursed deferred capital obligations, and received $0.9 million as a reimbursement of repairs incurred during the year ended December 31, 2016 in connection with the legal settlement received, which was recorded net against operating expenses on the consolidated statement of operations and comprehensive income.
During the year ended December 31, 2017, we completed a 75,000 square foot expansion of our existing industrial property in Vance, Alabama for a total project cost of $6.7 million. With the completion of the expansion, the lease term reset for a 10 year term, which has been included in the table above. We recognized rental income of $1.8 million, $1.2 million, and $1.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Future Lease Payments
Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and excluding real estate held for sale as of December 31, 2017, for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):
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Year |
Tenant Lease Payments |
2018 |
$ |
98,379 |
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2019 |
98,805 |
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2020 |
91,777 |
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2021 |
83,241 |
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2022 |
76,481 |
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Thereafter |
313,241 |
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$ |
761,924 |
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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, 2017 and 2016, excluding real estate held for sale as of December 31, 2017 and 2016, respectively (in thousands):
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December 31, 2017 |
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December 31, 2016 |
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Lease Intangibles |
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Accumulated Amortization |
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Lease Intangibles |
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Accumulated Amortization |
In-place leases |
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$ |
80,355 |
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$ |
(33,201 |
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$ |
71,482 |
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$ |
(28,182 |
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Leasing costs |
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55,695 |
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(23,016 |
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48,000 |
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(18,599 |
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Customer relationships |
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58,892 |
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(19,798 |
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50,252 |
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(17,400 |
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$ |
194,942 |
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$ |
(76,015 |
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$ |
169,734 |
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$ |
(64,181 |
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Deferred Rent Receivable/(Liability) |
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Accumulated (Amortization)/Accretion |
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Deferred Rent Receivable/(Liability) |
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Accumulated (Amortization)/Accretion |
Above market leases |
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$ |
14,425 |
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$ |
(7,962 |
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$ |
10,479 |
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$ |
(7,296 |
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Below market leases and deferred revenue |
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(26,725 |
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10,475 |
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(21,606 |
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8,959 |
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$ |
(12,300 |
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$ |
2,513 |
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$ |
(11,127 |
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$ |
1,663 |
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Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $15.9 million, $13.4 million, and $13.1 million for the years ended December 31, 2017, 2016, and 2015, respectively, and is included in depreciation and amortization expense in the consolidated statement of operations and comprehensive income.
Total amortization related to above-market lease values was $0.7 million, $0.5 million, and $0.4 million for the years ended December 31, 2017, 2016, and 2015, respectively, and is included in rental revenue in the consolidated statement of operations and comprehensive income.
Total amortization related to below-market lease values was $1.5 million, $1.2 million, and $0.9 million for the years ended December 31, 2017, 2016, and 2015, respectively, and is included in rental revenue in the consolidated statement of operations and comprehensive income.
The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the years ended December 31, 2017 and 2016, respectively, were as follows:
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Intangible Assets & Liabilities |
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2017 |
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2016 |
In-place leases |
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9.4 |
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11.5 |
Leasing costs |
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9.4 |
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11.5 |
Customer relationships |
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12.8 |
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15.8 |
Above market leases |
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10.0 |
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5.2 |
Below market leases |
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8.4 |
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7.9 |
All intangible assets & liabilities |
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10.2 |
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12.5 |
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, excluding real estate held for sale as of December 31, 2017 (dollars in thousands):
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Year |
Estimated Amortization Expense
of In-Place Leases, Leasing
Costs and Customer
Relationships |
2018 |
$ |
19,100 |
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2019 |
19,086 |
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2020 |
17,323 |
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2021 |
14,808 |
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2022 |
12,561 |
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Thereafter |
36,049 |
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$ |
118,927 |
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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, excluding real estate held for sale as of December 31, 2017 (dollars in thousands):
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Year |
Net Increase to Rental Income
Related to Above and Below
Market Leases |
2018 |
$ |
1,023 |
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2019 |
1,023 |
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2020 |
1,079 |
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2021 |
1,021 |
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2022 |
1,180 |
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Thereafter |
4,291 |
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$ |
9,617 |
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(1) Does not include ground lease amortization of $170.
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