Quarterly report pursuant to Section 13 or 15(d)

Real Estate and Intangible Assets

v3.7.0.1
Real Estate and Intangible Assets
 6 Months Ended
Jun. 30, 2017
Real Estate [Abstract]  
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 June 30, 2017 and December 31, 2016 excluding real estate held for sale as of June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
June 30, 2017

December 31, 2016
Real estate:
 
 
 
 
Land
 
$
104,300

 
$
104,719

Building and improvements
 
660,354

 
662,661

Tenant improvements
 
54,375

 
54,369

Accumulated depreciation
 
(139,303
)
 
(131,661
)
Real estate, net
 
$
679,726

 
$
690,088


Real estate depreciation expense on building and tenant improvements was $6.4 million and $12.8 million for the three and six months ended June 30, 2017, respectively, and $5.9 million and $11.8 million for the three and six months ended June 30, 2016, respectively.

Acquisitions

Acquisitions during the six months ended June 30, 2016 were accounted for as business combinations in accordance with Accounting Standards Codification (“ASC”) 805 “Business Combinations” (“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 early adopted Accounting Standards Update (“ASU”) 2017-01, “Clarifying the Definition of a Business” (“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. Beginning in the fourth quarter 2016, acquisitions have been deemed an asset acquisition when evaluated under the new guidance, and all acquisition-related costs have been capitalized.

We acquired one property during each of the six months ended June 30, 2017 and 2016, which is summarized below (dollars in thousands):

Six Months Ended
 
Square Footage
 
Lease Term
 
Purchase Price
 
Acquisition Expenses
 
Annualized GAAP Rent
 
Debt Issued or Assumed
 
June 30, 2017
(1)
60,016

 
8.5 Years
 
$
15,697

 
$
247

(3)
$
1,680

 
$
11,179

(4)
June 30, 2016
(2)
107,062


6.0 Years
 
$
17,000

 
$
105

 
$
1,393

 
$
9,900

 

(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. The annualized GAAP rent on the 8.5 year lease is $1.7 million.
(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.
(3) We early adopted ASU 2017-01. As a result, we treated our Conshohocken, Pennsylvania acquisition as an asset acquisition rather than a business combination. As a result of this treatment, we capitalized $0.2 million of acquisition costs that would otherwise have been expensed under business combination treatment.
(4) We assumed an interest rate swap in connection with the assumed debt, in 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 interest expense exposure 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 $0.2 million at June 30, 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 condensed consolidated balance sheets.

We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the six months ended June 30, 2017 and 2016 as follows (dollars in thousands):

Business Combinations
 
 
 
 
 
 
Six months ended June 30, 2017
 
Six months ended June 30, 2016
Acquired assets and liabilities
 
Purchase price
 
Purchase price
Land
 
$
—

 
$
3,008

Building and improvements
 
—

 
8,973

Tenant Improvements
 
—

 
1,685

In-place Leases
 
—

 
1,352

Leasing Costs
 
—

 
337

Customer Relationships
 
—

 
1,675

Above Market Leases
 
—

 
—

Below Market Leases
 
—

 
(30
)
Total Purchase Price
 
$
—

 
$
17,000

 
 
 
 
 
Asset Acquisitions
 
 
 
 
 
 
Six months ended June 30, 2017
 
Six months ended June 30, 2016
Acquired assets and liabilities
 
Purchase price
 
Purchase price
Land
 
$
1,996

 
$
—

Building
 
9,975

 
—

Tenant Improvements
 
905

 
—

In-place Leases
 
1,690

 
—

Leasing Costs
 
464

 
—

Customer Relationships
 
1,256

 
—

Below Market Leases
 
(1,030
)
 
—

Discount on Assumed Debt
 
399

 
—

Fair Value of Interest Rate Swap Assumed
 
42

 
—

Total Purchase Price
 
$
15,697

 
$
—

 
 
 
 
 
Total Purchase Price on all Acquisitions
 
$
15,697

 
$
17,000



Below is a summary of the total revenue and earnings (loss) recognized on the one asset acquisition treated as a business combination completed during the six months ended June 30, 2016 (dollars in thousands):
 
 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2016
 
2016
Rental Revenue
 
$
139

 
$
139

Earnings (Loss)
 
(121
)
 
(121
)


Pro Forma

The following table reflects pro-forma consolidated statements of operations as if the business combinations completed through June 30, 2017, were completed as of January 1, 2016, and the business combinations completed in 2016, were completed as of January 1, 2015. The pro-forma earnings for the three and six months ended June 30, 2017 and 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):

 
 
For the three months ended June 30,
 
For the six months ended June 30,
 
 
2016 (1)
 
 
(unaudited)
Operating Data:
 
 
 
 
Total operating revenue
 
$
21,965

 
$
44,349

Total operating expenses
 
(13,768
)
 
(27,566
)
Other expenses, net
 
(7,157
)
 
(14,847
)
Net income
 
1,040

 
1,936

Dividends attributable to preferred and senior common stock
 
(1,514
)
 
(2,794
)
Net loss attributable to common stockholders
 
$
(474
)
 
$
(858
)
Share and Per Share Data:
 
 
 
 
Basic and diluted loss per share of common stock - pro forma
 
$
(0.02
)
 
$
(0.04
)
Basic and diluted loss per share of common stock - actual
 
$
(0.03
)
 
$
(0.05
)
Weighted average shares outstanding-basic and diluted
 
22,684,391

 
22,614,838


(1) Pro-forma results for the three and six months ended June 30, 2017 are identical to actual results on the condensed consolidated statement of operations because we did not complete an asset acquisition treated as a business combination for the three and six months ended June 30, 2017.

Significant Real Estate Activity on Existing Assets

During the six months ended June 30, 2017 and 2016, we executed one and three leases, respectively, which are aggregated below (dollars in thousands):

Six Months Ended
 
Aggregate Square Footage
 
Weighted Average Lease Term
 
Aggregate Annualized GAAP Rent
 
Aggregate Tenant Improvement
 
Aggregate Leasing Commissions
June 30, 2017
 
83,662

 
11.3 years
 
1,683

 
1,020

 
445

June 30, 2016
 
67,085

 
5.7 years
(1)
322

 
69

 
166



(1) Weighted average lease term is weighted according to the annualized GAAP rent earned by each lease. These leases have terms ranging from 5.2 years to 7.2 years.


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, 2017 and December 31, 2016, excluding real estate held for sale as of June 30, 2017 and December 31, 2016 (in thousands):

 
 
June 30, 2017

December 31, 2016
 
 
Lease Intangibles
 
Accumulated Amortization
 
Lease Intangibles
 
Accumulated Amortization
In-place leases
 
$
71,149

 
$
(30,343
)
 
$
71,482

 
$
(28,182
)
Leasing costs
 
49,051

 
(20,712
)
 
48,000

 
(18,599
)
Customer relationships
 
50,252

 
(18,362
)
 
50,252

 
(17,400
)
 
 
$
170,452

 
$
(69,417
)
 
$
169,734

 
$
(64,181
)
 
 
 
 
 
 
 
 
 
 
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
 
Deferred Rent Receivable/(Liability)
 
Accumulated (Amortization)/Accretion
Above market leases
 
$
10,601

 
$
(7,551
)
 
$
10,479

 
$
(7,296
)
Below market leases and deferred revenue
 
(24,207
)
 
9,626

 
(21,606
)
 
8,959

 
 
$
(13,606
)
 
$
2,075

 
$
(11,127
)
 
$
1,663


Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $3.5 million and $7.0 million for the three and six months ended June 30, 2017, respectively, and $3.3 million and $6.6 million for the three and six months ended June 30, 2016, 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 $0.3 million for the three and six months ended June 30, 2017, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2016, respectively, and is included in rental revenue in the condensed consolidated statement of operations. Total amortization related to below-market lease values was $0.3 million and $0.7 million for the three and six months ended June 30, 2017, respectively, and $0.2 million and $0.5 million for the three and six months ended June 30, 2016, respectively, and is included in rental revenue in the condensed consolidated statement of operations.

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the six months ended June 30, 2017 and 2016 were as follows:
 
Intangible Assets & Liabilities
 
2017
 
2016
In-place leases
 
8.5
 
6.1
Leasing costs
 
8.5
 
6.1
Customer relationships
 
13.5
 
9.1
Below market leases
 
8.5
 
6.1
All intangible assets & liabilities
 
9.8
 
6.9