4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of June 30, 2015 and December 31, 2014 (dollars in thousands):

 

		June 30, 2015 (1)				December 31, 2014
Real estate:
Land		$	95,948			$	88,394
Building and improvements			620,924				593,155
Tenant improvements			46,959				41,016
Accumulated depreciation			(102,243	)			(92,133	)
Real estate, net		$	661,588			$	630,432

 

(1)	Does not include real estate held for sale as of June 30, 2015.

Real estate depreciation expense on the building and tenant improvement assets was $5.5 million and $10.7 million for the three and six months ended June 30, 2015, respectively, and $4.6 million and $9.0 million for the three and six months ended June 30, 2014, respectively.

2015 Real Estate Activity

During the six months ended June 30, 2015, we acquired four 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			$	104			$	2,708			$	14,573
Birmingham, AL			3/20/2015				30,850				8.5 Years				1 (5 years)				3,648				71				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				144				2,411				13,000
Total							351,276											$	58,248			$	391			$	6,089			$	32,039

 

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

In accordance with Accounting Standards Codification, or ASC, 805, “Business Combinations,” we determined the fair value of the acquired assets related to the four properties acquired during the six months ended June 30, 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		$	2,709			$	12,503			$	2,761			$	2,046			$	1,791			$	1,915			$	975			$	—			$	24,700
Birmingham, AL			650				1,683				351				458				146				360				—				—				3,648
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
		$	7,945			$	29,558			$	5,927			$	6,044			$	3,590			$	4,520			$	1,796			$	(1,132	)		$	58,248

Below is a summary of the total revenue and earnings recognized on the four properties acquired during the six months ended June 30, 2015 (dollars in thousands):

 

						For the three months ended June 30,								For the six months ended June 30,
						2015								2015
Location		Acquisition Date				Rental Revenue				Earnings (1)				Rental Revenue				Earnings (1)
Richardson, TX			3/6/2015			$	657			$	90			$	839			$	328
Birmingham, AL			3/20/2015				83				(22	)			94				106
Columbus, OH			5/28/2015				67				149				67				149
Salt Lake City, UT			5/29/2015				207				278				207				278
						$	1,014			$	495			$	1,207			$	861

 

(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 and six months ended June 30, 2015 and the twelve months ended December 31, 2014, respectively were acquired as of January 1, 2014. The pro-forma earnings for the three and six months ended June 30, 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 June 30, (unaudited)								For the six months ended June 30, (unaudited)
		2015				2014				2015				2014
Operating Data:
Total operating revenue		$	21,122			$	21,938			$	42,114			$	43,395
Total operating expenses			(12,697	)			(13,033	)			(25,113	)			(25,851	)
Other expenses			(7,775	)			(6,860	)			(15,495	)			(28,907	) (1)
Net income (loss)			650				2,045				1,506				(11,363	)
Dividends attributable to preferred and senior common stock			(1,284	)			(1,133	)			(2,532	)			(2,257	)
Net loss attributable to common stockholders		$	(634	)		$	912			$	(1,026	)		$	(13,620	)
Share and Per Share Data:
Basic (loss) earnings per share of common stock - pro forma		$	(0.03	)		$	0.06			$	(0.05	)		$	(0.84	)
Diluted (loss) earnings per share of common stock - pro forma		$	(0.03	)		$	0.05			$	(0.05	)		$	(0.84	)
Basic (loss) earnings per share of common stock - actual		$	(0.04	)		$	0.01			$	(0.07	)		$	(0.90	)
Diluted (loss) earnings per share of common stock - actual		$	(0.04	)		$	0.01			$	(0.07	)		$	(0.90	)
Weighted average shares outstanding-basic			20,833,787				16,547,793				20,524,101				16,149,467
Weighted average shares outstanding-diluted			20,833,787				16,894,973				20,524,101				16,149,467

 

(1)	$14.0 million of other expenses relates to the impairment charge recorded in operating expenses during the six months ended June 30, 2014.

Significant Real Estate Activity on Existing Assets

On April 28, 2015, we modified the lease with the tenant occupying one of our properties located in Austin, 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 $1.1 million on or before March 31, 2017. The lease is scheduled to otherwise terminate in June 2022. As a result of the modification, the tenant forfeited its right to $0.5 million in tenant improvement allowance, provided in an earlier amendment. All other terms and conditions of the lease remain in full force and effect.

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 92.0% 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.

2014 Real Estate Activity

During the six months ended June 30, 2014, we acquired six 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 GAAP Rent				Debt Issued & Assumed
Allen, TX			3/27/2014				21,154				12 Years				4 (5 years each)			$	5,525			$	29			$	570			$	3,481
Colleyville, TX			3/27/2014				20,355				12 Years				4 (5 years each)				4,523				29				467				2,849
Rancho Cordova, CA			4/22/2014				61,358				10 Years				1 (5 year)				8,225				65				902				4,935
Coppell, TX			5/8/2014				21,171				12 Years				4 (5 years each)				5,838				22				601				3,816
Columbus, OH			5/13/2014				114,786				9.5 Years				N/A				11,800				65				1,278				N/A
Taylor, PA			6/9/2014				955,935				10 Years				4 (5 years each)				39,000				714				3,400				22,600
Total							1,194,759											$	74,911			$	924			$	7,218			$	37,681

In accordance with ASC 805, we determined the fair value of the acquired assets related to the six properties acquired during the six months ended June 30, 2014 as follows (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
		$	8,443			$	45,464			$	3,541			$	9,187			$	3,503			$	4,767			$	261			$	(6	)		$	(249	)		$	74,911

Below is a summary of the total revenue and earnings recognized on the six properties acquired during the three and six months ended June 30, 2014 (dollars in thousands):

 

						For the three months ended June 30,								For the six months ended June 30,
		Acquisition Date				2014								2014
Location						Rental Revenue				Earnings (1)				Rental Revenue				Earnings (1)
Allen, TX			3/27/2014			$	142			$	81			$	150			$	86
Colleyville, TX			3/27/2014				117				67				123				71
Rancho Cordova, CA			4/22/2014				173				65				173				65
Coppell, TX			5/8/2014				89				52				89				52
Columbus, OH			5/13/2014				167				68				167				68
Taylor, PA			6/9/2014				208				98				208				98
						$	896			$	431			$	910			$	440

 

(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.

 

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 June 30, 2015 and December 31, 2014 respectively (in thousands):

 

		June 30, 2015 (1)								December 31, 2014
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	65,177			$	(19,997	)		$	59,233			$	(17,379	)
Leasing costs			42,083				(13,038	)			38,305				(11,411	)
Customer relationships			45,777				(13,109	)			41,243				(11,177	)
		$	153,037			$	(46,144	)		$	138,781			$	(39,967	)
		Deferred Rent Receivable/(Liability)				Accumulated Amortization				Deferred Rent Receivable/(Liability)				Accumulated Amortization
Above market leases		$	9,548			$	(6,194	)		$	8,314			$	(6,384	)
Below market leases			17,071				(7,793	)			15,939				(7,345	)
		$	26,619			$	(13,987	)		$	24,253			$	(13,729	)
Total		$	179,656			$	(60,131	)		$	163,034			$	(53,696	)

 

(1)	Does not include real estate held for sale as of June 30, 2015.

Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $3.4 million and $6.4 million for the three and six months ended June 30, 2015, respectively, and $2.3 million and $4.7 million for the three and six months ended June 30, 2014, respectively, and is included in depreciation and amortization expense in the condensed consolidated statement of operations.

Total amortization related to above-market lease values was $0.1 million and $0.2 million, for the three and six months ended June 30, 2015, respectively, and $0.1 million, for both the three and six months ended June 30, 2014. Total amortization related to below-market lease values was $0.2 million and $0.4 million for the three and six months ended June 30, 2015, respectively, and $0.2 million and $0.3 million for the three and six months ended June 30, 2014, respectively.

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the six months ended June 30, 2015 and 2014, respectively, were as follows:

 

Intangible Assets & Liabilities		2015				2014
In-place leases			10.9				10.7
Leasing costs			10.9				10.7
Customer relationships			15.6				15.6
Above market leases			18.9				8.2
Below market leases			12.4				11.9
All intangible assets & liabilities			12.5				12.2