| 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 September 30, 2017 and December 31, 2016 excluding real estate held for sale as of December 31, 2016 (dollars in thousands):
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September 30, 2017 |
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December 31, 2016 |
Real estate: |
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Land |
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$ |
117,441 |
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$ |
104,719 |
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Building and improvements |
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703,644 |
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662,661 |
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Tenant improvements |
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59,529 |
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54,369 |
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Accumulated depreciation |
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(146,229 |
) |
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(131,661 |
) |
Real estate, net |
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$ |
734,385 |
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$ |
690,088 |
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Real estate depreciation expense on building and tenant improvements was $6.9 million and $19.8 million for the three and nine months ended September 30, 2017, respectively, and $6.1 million and $17.9 million for the three and nine months ended September 30, 2016, respectively.
Acquisitions
Acquisitions during the nine months ended September 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 five properties during the nine months ended September 30, 2017, and two properties during the nine months ended September 30, 2016, which are summarized below (dollars in thousands):
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Nine Months Ended |
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Square Footage |
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Lease Term |
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Purchase Price |
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Acquisition Expenses |
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Annualized GAAP Rent |
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Debt Issued or Assumed |
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September 30, 2017 |
(1) |
666,451 |
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10.7 Years |
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$ |
94,421 |
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$ |
1,171 |
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(3) |
$ |
10,776 |
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$ |
54,887 |
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(4) |
September 30, 2016 |
(2) |
226,286 |
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7.8 Years |
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$ |
40,900 |
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$ |
179 |
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$ |
3,367 |
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$ |
24,000 |
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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.
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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.
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(3) |
We early adopted ASU 2017-01. As a result, we treated our acquisitions during the nine months ended September 30, 2017 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $1.2 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, 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 $0.2 million at September 30, 2017. We have elected to treat this interest rate swap as a cash flow hedge, and all changes in fair market value will be recorded to accumulated other comprehensive income on the condensed consolidated balance sheets.
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We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the nine months ended September 30, 2017 and 2016 as follows (dollars in thousands):
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Business Combinations |
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Nine months ended September 30, 2017 |
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Nine months ended September 30, 2016 |
Acquired assets and liabilities |
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Purchase price |
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Purchase price |
Land |
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$ |
— |
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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 |
) |
Total Purchase Price |
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$ |
— |
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$ |
40,900 |
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Asset Acquisitions |
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Nine months ended September 30, 2017 |
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Nine months ended September 30, 2016 |
Acquired assets and liabilities |
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Purchase price |
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Purchase price |
Land |
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$ |
15,137 |
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$ |
— |
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Building |
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51,186 |
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— |
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Tenant Improvements |
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6,060 |
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— |
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In-place Leases |
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9,516 |
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— |
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Leasing Costs |
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5,083 |
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— |
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Customer Relationships |
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6,851 |
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— |
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Above Market Leases |
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1,916 |
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— |
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Below Market Leases |
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(1,769 |
) |
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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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$ |
94,421 |
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$ |
— |
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Total Purchase Price on all Acquisitions |
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$ |
94,421 |
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$ |
40,900 |
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Below is a summary of the total revenue and loss recognized on the two acquisitions treated as business combinations completed during the nine months ended September 30, 2016 (dollars in thousands):
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For the three months ended September 30, |
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For the nine months ended September 30, |
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2016 |
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2016 |
Rental Revenue |
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$ |
464 |
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$ |
603 |
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(Loss) |
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(82 |
) |
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(203 |
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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 three and nine months ended September 30, 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 three months ended September 30, |
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For the nine months ended September 30, |
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2016 (1) |
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(unaudited) |
Operating Data: |
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Total operating revenue |
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$ |
22,012 |
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$ |
66,406 |
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Total operating expenses |
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(15,205 |
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(42,968 |
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Other expenses, net |
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(6,612 |
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(21,453 |
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Net income |
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195 |
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1,985 |
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Dividends attributable to preferred and senior common stock |
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(2,256 |
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(5,050 |
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Net loss attributable to common stockholders |
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$ |
(2,061 |
) |
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$ |
(3,065 |
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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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$ |
(0.09 |
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$ |
(0.13 |
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Basic and diluted loss per share of common stock - actual |
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$ |
(0.10 |
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$ |
(0.15 |
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Weighted average shares outstanding-basic and diluted |
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23,509,054 |
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22,915,086 |
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(1) |
Pro-forma results for the three and nine months ended September 30, 2017 are identical to actual results on the condensed consolidated statement of operations and other comprehensive income (loss) because we did not complete an acquisition that was accounted for as a business combination during the three and nine months ended September 30, 2017, pursuant to our early adoption of ASU 2017-01.
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Significant Real Estate Activity on Existing Assets
During the nine months ended September 30, 2017 and 2016, we executed six and seven lease extensions and/or modifications, or new leases, respectively, which are aggregated below (dollars in thousands):
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Nine Months 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 |
September 30, 2017 |
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577,471 |
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8.9 years |
(1) |
4,062 |
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1,181 |
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475 |
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September 30, 2016 |
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460,017 |
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2.8 years |
(2) |
1,475 |
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333 |
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221 |
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(1) |
Weighted average lease term is weighted according to the annualized GAAP rent earned by each lease. These leases have terms ranging from 1.0 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. These leases have terms ranging from 1.0 year to 7.3 years.
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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 September 30, 2017 and December 31, 2016, excluding real estate held for sale as of December 31, 2016 (dollars in thousands):
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September 30, 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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$ |
78,975 |
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$ |
(32,140 |
) |
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$ |
71,482 |
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$ |
(28,182 |
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Leasing costs |
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53,706 |
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(21,889 |
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48,000 |
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(18,599 |
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Customer relationships |
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55,847 |
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(19,289 |
) |
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50,252 |
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(17,400 |
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$ |
188,528 |
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$ |
(73,318 |
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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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$ |
12,517 |
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$ |
(7,726 |
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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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(25,576 |
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10,022 |
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(21,606 |
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8,959 |
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$ |
(13,059 |
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$ |
2,296 |
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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 $3.9 million and $10.9 million for the three and nine months ended September 30, 2017, respectively, and $3.4 million and $9.9 million for the three and nine months ended September 30, 2016, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and other comprehensive income (loss).
Total amortization related to above-market lease values was $0.2 million and $0.4 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2016, respectively, and is included in rental revenue in the condensed consolidated statements of operations and other comprehensive income (loss). Total amortization related to below-market lease values was $0.4 million and $1.1 million for the three and nine months ended September 30, 2017, respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2016, respectively, and is included in rental revenue in the condensed consolidated statements of operations and other comprehensive income (loss).
The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2017 and 2016 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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9.7 |
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7.9 |
Leasing costs |
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9.7 |
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7.9 |
Customer relationships |
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12.7 |
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12.2 |
Above market leases |
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10.2 |
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0.0 |
Below market leases |
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9.4 |
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7.9 |
All intangible assets & liabilities |
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10.4 |
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9.0 |
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