| 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, 2018 and 2017, respectively, excluding real estate held for sale as of December 31, 2018 and 2017, respectively (dollars in thousands):
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December 31, 2018 |
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December 31, 2017 |
Real estate: |
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Land |
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$ |
125,905 |
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$ |
121,783 |
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Building and improvements |
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755,584 |
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708,948 |
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Tenant improvements |
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65,160 |
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63,122 |
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Accumulated depreciation |
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(178,257 |
) |
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(149,417 |
) |
Real estate, net |
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$ |
768,392 |
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$ |
744,436 |
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Real estate depreciation expense on building and tenant improvements was $29.9 million, $26.9 million, and $24.1 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Acquisitions
Certain acquisitions during the year ended December 31, 2016, were accounted for as business combinations in accordance with ASC 805, as there was a prior leasing history on the property. The fair value of all assets acquired and liabilities assumed were determined in accordance with ASC 805, and all acquisition-related costs were expensed as incurred. Commencing in the fourth quarter of 2016, we adopted ASU 2017-01 which narrows the scope of transactions that would be accounted under ASC 805. Under ASU 2017-01, if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the grouping is not a business, and rather an asset acquisition. Our fourth quarter 2016 acquisition has been deemed an asset acquisition when evaluated under the new guidance, and all acquisition-related costs have been capitalized.
During the year ended December 31, 2018 and 2017 we acquired five and seven properties, respectively, which are summarized below (dollars in thousands):
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Year Ended |
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Aggregate Square Footage |
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Weighted Average Lease Term |
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Aggregate Purchase Price |
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Acquisition Costs |
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Aggregate Annualized GAAP Rent |
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Aggregate Mortgage Debt Issued or Assumed |
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December 31, 2018 |
(1) |
591,037 |
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11.1 Years |
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$ |
63,245 |
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$ |
905 |
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(3) |
$ |
5,984 |
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$ |
11,663 |
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(4) |
December 31, 2017 |
(2) |
871,038 |
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10.1 Years |
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$ |
132,157 |
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$ |
1,348 |
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(3) |
$ |
15,507 |
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$ |
54,887 |
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(5) |
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(1) |
On March 9, 2018, we acquired a 127,444 square foot property in Vance, Alabama for $14.3 million. The annualized GAAP rent on the 9.8 year lease is $1.1 million. On September 20, 2018, we acquired a 157,810 square foot property in Columbus, Ohio for $8.5 million. We entered into an interest rate swap in connection with our $4.7 million of issued debt on our Columbus, Ohio acquisition resulting in a fixed interest rate of 5.32% on such debt. The annualized GAAP rent on the 15.0 year lease is $0.8 million. On October 30, 2018, we acquired a 218,703 square foot, two property portfolio located in Detroit, Michigan for $21.7 million. We assumed $6.9 million of mortgage debt with a fixed interest rate of 4.63% and issued 742,937 OP Units in connection with this acquisition. This portfolio has a weighted average lease term of 10.5 years, and annualized GAAP rent of $1.7 million. On December 27, 2018, we acquired an 87,080 square foot property in Lake Mary, Florida for $18.7 million. The annualized GAAP rent on the 11.0 year lease is $2.4 million.
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(2) |
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 6.9 year lease 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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(3) |
We accounted for these transactions under ASU 2017-01. As a result, we treated our acquisitions during the years ended December 31, 2018 and 2017 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.9 million and $1.3 million, respectively, of acquisition costs that would otherwise have been expensed under business combination treatment.
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(4) |
We entered into an interest rate swap in connection with $4.7 million of issued debt on our Columbus, Ohio acquisition, pursuant to which we will pay our counterparty a fixed interest rate of 3.22%, and receive a variable interest rate of one month LIBOR from our counterparty. Our total interest rate on this debt is fixed at 5.32%. 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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(5) |
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 on this debt 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 $0.5 million at December 31, 2018. We have elected to treat this interest rate swap as a cash flow hedge, and all changes in fair market value will be recorded to accumulated other comprehensive income on the consolidated balance sheets.
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We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the year ended December 31, 2018 and 2017, respectively, as follows (dollars in thousands):
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Year ended December 31, 2018 |
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Year ended December 31, 2017 |
Acquired assets and liabilities |
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Purchase price |
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Purchase price |
Land |
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$ |
6,278 |
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$ |
21,509 |
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Building |
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44,754 |
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68,617 |
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Tenant Improvements |
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2,400 |
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9,977 |
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In-place Leases |
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4,418 |
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12,018 |
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Leasing Costs |
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3,933 |
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7,066 |
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Customer Relationships |
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2,698 |
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10,806 |
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Above Market Leases |
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239 |
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3,824 |
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Below Market Leases |
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(1,475 |
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(2,101 |
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Discount on Assumed Debt |
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— |
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399 |
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Fair Value of Interest Rate Swap Assumed |
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— |
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42 |
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Total Purchase Price |
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$ |
63,245 |
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$ |
132,157 |
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Below is a summary of the total revenue and earnings recognized on the two acquisitions treated as business combinations completed during the year ended December 31, 2016 (dollars in thousands):
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For the year ended December 31, 2016 |
Rental Revenue |
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$ |
1,462 |
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Earnings |
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162 |
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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. The pro-forma earnings for the year ended December 31, 2016 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 |
Operating Data: |
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Total operating revenue |
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$ |
88,304 |
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Total operating expenses |
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(56,697 |
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Other expenses, net |
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(27,429 |
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Net income |
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4,178 |
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Dividends attributable to preferred and senior common stock |
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(7,656 |
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Net loss attributable to common stockholders |
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$ |
(3,478 |
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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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Basic and diluted loss per share of common stock - actual |
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$ |
(0.16 |
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Weighted average shares outstanding-basic and diluted |
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23,193,962 |
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Significant Real Estate Activity on Existing Assets
During the year ended December 31, 2018 and 2017, we executed three 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, 2018 |
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97,178 |
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5.3 Years |
(1) |
$ |
1,253 |
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$ |
433 |
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$ |
242 |
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December 31, 2017 |
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880,749 |
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9.2 Years |
(2) |
$ |
6,976 |
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$ |
1,264 |
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$ |
742 |
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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 3.6 years to 7.0 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 11.3 years.
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During the year ended December 31, 2018 and 2017, we had two and zero lease contractions, respectively, which are aggregated below (dollars in thousands):
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Year Ended |
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Aggregate Square Footage Reduced |
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Aggregate Square Footage Remaining |
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Aggregate Contraction Fee |
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Aggregate Deferred Rent Write Off |
December 31, 2018 |
(1) |
44,032 |
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169,133 |
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$ |
559 |
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$ |
184 |
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(1) |
A tenant in our Salt Lake City, Utah property exercised a lease contraction to reduce their occupancy in our building by 23,632 square feet. They will continue to lease 81,271 square feet through their original lease term. In connection with this contraction, we will earn a contraction fee of $0.3 million, which is recognized through rental revenue on the consolidated statements of operations and comprehensive income through the contraction term, and we wrote off $0.1 million of deferred rent asset to property operating expenses on the consolidated statements of operations and comprehensive income. A tenant in our Champaign, Illinois property exercised a lease contraction to reduce its occupancy in our building by 20,400 square feet. They will continue to lease 87,862 square feet through their original lease term. In connection with this contraction, we will earn a contraction fee of $0.2 million, which is recognized through rental revenue on the consolidated statements of operations and comprehensive income through the contraction term, and we wrote off $0.1 million of deferred rent asset to property operating expenses on the consolidated statements of operations and comprehensive income. We recorded contraction fees of $0.2 million, in the aggregate, during the year ended December 31, 2018.
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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 $2.1 million, $1.8 million, and $1.2 million for the years ended December 31, 2018, 2017, and 2016, 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, 2018, for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):
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Year |
Tenant Lease Payments |
2019 |
$ |
103,322 |
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2020 |
97,302 |
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2021 |
89,057 |
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2022 |
82,336 |
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2023 |
74,337 |
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Thereafter |
279,424 |
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$ |
725,778 |
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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, 2018 and 2017, excluding real estate held for sale as of December 31, 2018 and 2017, respectively (dollars in thousands):
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December 31, 2018 |
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December 31, 2017 |
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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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$ |
83,894 |
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$ |
(40,445 |
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$ |
80,355 |
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$ |
(33,201 |
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Leasing costs |
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59,671 |
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(28,092 |
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55,695 |
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(23,016 |
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Customer relationships |
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60,455 |
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(24,035 |
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58,892 |
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(19,798 |
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$ |
204,020 |
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$ |
(92,572 |
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$ |
194,942 |
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$ |
(76,015 |
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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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$ |
14,551 |
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$ |
(8,981 |
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$ |
14,425 |
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$ |
(7,962 |
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Below market leases and deferred revenue |
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(29,807 |
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12,502 |
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(26,725 |
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10,475 |
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$ |
(15,256 |
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$ |
3,521 |
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$ |
(12,300 |
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$ |
2,513 |
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Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $17.7 million, $15.9 million, and $13.4 million for the years ended December 31, 2018, 2017, and 2016, 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 $1.1 million, $0.7 million, and $0.5 million for the years ended December 31, 2018, 2017, and 2016, 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 $2.0 million, $1.5 million, and $1.2 million for the years ended December 31, 2018, 2017, and 2016, 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, 2018 and 2017, respectively, were as follows:
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Intangible Assets & Liabilities |
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2018 |
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2017 |
In-place leases |
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11.7 |
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9.4 |
Leasing costs |
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11.7 |
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9.4 |
Customer relationships |
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19.3 |
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12.8 |
Above market leases |
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10.4 |
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10.0 |
Below market leases |
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12.4 |
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8.4 |
All intangible assets & liabilities |
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13.6 |
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10.2 |
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, 2018 (dollars in thousands):
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Year |
Estimated Amortization Expense
of In-Place Leases, Leasing
Costs and Customer
Relationships |
2019 |
$ |
19,887 |
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2020 |
18,252 |
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2021 |
16,049 |
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2022 |
13,755 |
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2023 |
11,203 |
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Thereafter |
32,302 |
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$ |
111,448 |
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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, 2018 (dollars in thousands):
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Year |
Net Increase to Rental Income
Related to Above and Below
Market Leases |
2019 |
$ |
1,763 |
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2020 |
1,663 |
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2021 |
1,394 |
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2022 |
1,370 |
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2023 |
1,144 |
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Thereafter |
4,203 |
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$ |
11,537 |
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(1) Does not include ground lease amortization of $198.
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