4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of September 30, 2013 and December 31, 2012 (in thousands):

 

		September 30, 2013				December 31, 2012
Real estate:
Land		$	77,299			$	69,126
Building and improvements			511,335				442,451
Tenant improvements			33,847				22,176
Accumulated depreciation			(76,923	)			(65,730	)
Real estate, net		$	545,558			$	468,023

 

2013 Real Estate Activity

During the nine months ended September 30, 2013, we acquired five properties and completed an expansion of one property, which are summarized below (dollars in thousands):

 

Location		Acquisition/ Expansion Date				Square Footage				Lease Term		Renewal Options				Total Purchase/ Expansion Price				Acquisition Expenses				Annualized Straight Line Rent				Debt Issued
Egg Harbor Township, NJ			3/28/2013				29,257			10 years			1 (5 years)			$	5,650			$	152			$	490			$	3,700
Clintonville, WI (1)			4/11/2013				102,400			15 years			N/A				3,250				N/A				961				—
Vance, AL			5/8/2013				170,000			10 years			2 (5 year options)				13,388				186				1,173				—
Blaine, MN			5/10/2013				92,275			6.9 years			2 (5 year options)				14,450				79				1,475				8,200
Austin, TX			7/9/2013				320,000			8 years			3 (3 year options)				57,000				155				4,641				35,300
Allen, TX			7/10/2013				115,200			11.5 years			2 (5 year options)				15,150				81				1,478				8,900
Total							829,132									$	108,888			$	653			$	10,218			$	56,100

 

(1)	The Clintonville, WI property was originally acquired in November 2005 for $5.3 million. After the expansion completed in April 2013, the total investment in the property is $8.6 million.

In accordance with ASC 805, we determined the fair value of the acquired assets related to the five properties acquired during the nine months ended September 30, 2013 as follows (in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				Above Market Leases				Below Market Leases				Total Purchase Price
Egg Harbor Township, NJ		$	1,627			$	2,735			$	282			$	558			$	189			$	259			$	—			$	—			$	5,650
Vance, AL			457				9,721				808				1,097				678				627				—				—				13,388
Blaine, MN			1,060				9,347				1,172				1,361				694				816				—				—				14,450
Austin, TX			2,330				37,207				6,814				6,118				1,906				3,793				—				(1,168	)			57,000
Allen, TX			2,699				5,758				2,187				1,525				1,146				1,499				336				—				15,150
		$	8,173			$	64,768			$	11,263			$	10,659			$	4,613			$	6,994			$	336			$	(1,168	)		$	105,638

Below is a summary of the total revenue and earnings recognized on the five properties acquired during the nine months ended September 30, 2013 (dollars in thousands):

 

						Rental Revenue								Net Income
Location		Acquisition Date				For the three months ended September 30, 2013				For the nine months ended September 30, 2013				For the three months ended September 30, 2013(1)				For the nine months ended September 30, 2013(1)
Egg Harbor Township, NJ			3/28/2013			$	122			$	250			$	61			$	130
Vance, AL			5/8/2013				293				464				147				218
Blaine, MN			5/10/2013				369				579				161				256
Austin, TX			7/9/2013				1,098				1,098				297				297
Allen, TX			7/10/2013				325				325				136				136
						$	2,207			$	2,716			$	802			$	1,037

 

(1)	Earnings is calculated as net income less interest expense and acquisition related costs that are required to be expensed under ASC 805.

 

Pro Forma

We acquired five properties during the nine months ended September 30, 2013. The following table reflects pro-forma condensed consolidated statements of operations as if the properties were acquired as of the beginning of the previous period. The pro-forma earnings for the three and nine months ended September 30, 2013, were adjusted to exclude $0.2 million and $0.6 million, respectively, of acquisition-related costs incurred during 2013 (dollars in thousands, except per share data):

 

		For the three months ended September 30,								For the nine months ended September 30,
		2013				2012				2013				2012
		(unaudited)								(unaudited)
Operating Data:
Total operating revenue		$	16,314			$	15,720			$	48,744			$	47,109
Total operating expenses			(8,502	)			(8,066	)			(25,901	)			(24,861	)
Other expenses			(7,287	)			(6,718	)			(21,520	)			(19,659	)
Net income			525				936				1,323				2,589
Dividends attributable to preferred and senior common stock			(1,106	)			(1,053	)			(3,275	)			(3,141	)
Net (loss) income available to common stockholders		$	(581	)		$	(117	)		$	(1,952	)		$	(552	)
Share and Per Share Data:
Basic & diluted (loss) earnings per share of common stock		$	(0.04	)		$	(0.01	)		$	(0.15	)		$	(0.05	)
Diluted earnings per share of common stock		$	(0.04	)		$	(0.01	)		$	(0.15	)		$	(0.05	)
Weighted average shares outstanding-basic			14,196,423				10,945,379				12,613,354				10,945,379
Weighted average shares outstanding-diluted			14,196,423				10,945,379				12,613,354				10,945,379

2012 Real Estate Activity

During the nine months ended September 30, 2012, we acquired six properties, which are summarized below (dollars in thousands):

 

Location		Acquisition Date				Square Footage				Lease Term		Renewal Options		Total Purchase Price				Acquisition Expenses				Annualized Straight Line Rent				Debt Issued / Assumed
Ashburn, VA			1/25/2012				52,130			15 years		2 (5 years each)		$	10,775			$	102			$	989				N/A
Ottumwa, IA			5/30/2012				352,860			11.5 years		3 (5 years each)			7,100				47				684				5,000
New Albany, OH			6/5/2012				89,000			10.5 years		2 (5 years each)			13,333				188				1,361				N/A
Columbus, GA			6/21/2012				32,000			11.5 years		2 (5 years each)			7,320				126				656				4,750
Columbus, OH			6/28/2012				31,293			10 years		N/A			4,037				59				342				N/A
Jupiter, FL			9/26/2012				60,000			10.5 years		2 (5 years each)			15,500				55				1,372				10,758
							617,283							$	58,065			$	577			$	5,404			$	20,508

In accordance with ASC 805, we determined the fair value of acquired assets related to the six properties acquired during the nine months ended September 30, 2012 as follows (in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				Above Market Leases				Below Market Leases				Discount on Assumed Debt				Total Purchase Price
Ashburn, VA		$	706			$	6,551			$	1,307			$	804			$	908			$	499			$	—			$	—			$	—			$	10,775
Ottumwa, IA			212				4,743				329				940				484				499				—				(107	)			—				7,100
New Albany, OH			1,658				7,511				1,235				1,122				857				903				47				—				—				13,333
Columbus, GA			1,378				3,894				626				574				473				375				—				—				—				7,320
Columbus, OH			542				1,856				597				391				213				325				113				—				—				4,037
Jupiter, FL			1,160				11,249				745				1,603				701				909				—				—				(867	)			15,500
		$	5,656			$	35,804			$	4,839			$	5,434			$	3,636			$	3,510			$	160			$	(107	)		$	(867	)		$	58,065

 

Below is a summary of the total revenue and earnings recognized on the six properties acquired during the nine months ended September 30, 2012 (dollars in thousands):

 

						Rental Revenue								Net Income
Location		Acquisition Date				For the three months ended September 30, 2012				For the nine months ended September 30, 2012				For the three months ended September 30, 2012(1)				For the nine months ended September 30, 2012(1)
Ashburn, VA			1/25/2012			$	247			$	678			$	147			$	409
Ottumwa, IA			5/30/2012				173				235				85				116
New Albany, OH			6/5/2012				339				437				197				248
Columbus, GA			6/21/2012				164				182				88				98
Columbus, OH			6/28/2012				83				86				31				34
Jupiter, FL			9/26/2012				19				19				10				10
						$	1,025			$	1,637			$	558			$	915

 

(1)	Earnings is calculated as net income less interest expense and acquisition related costs that are required to be expensed under ASC 805

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the nine months ended September 30, 2013 and 2012, respectively, were as follows:

 

Intangible Assets & Liabilities		2013				2012
In-place leases			8.8				10.7
Leasing costs			8.8				10.7
Customer relationships			13.5				15.1
Above market leases			8.8				10.1
Below market leases			7.2				11.3
All intangible assets & liabilities			9.9				12.1

Future Lease Payments

Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the remainder of 2013 and each of the five succeeding fiscal years and thereafter is as follows (in thousands):

 

Year		Tenant Lease Payments
Three Months ending December 31, 2013		$	14,727
2014			59,940
2015			59,267
2016			56,272
2017			54,641
2018			52,850
Thereafter			279,421

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 property taxes on the respective properties in the event the tenants fail to pay them. The total annual property taxes for all properties owned by us as of September 30, 2013, were $10.2 million.

 

Existing Real Estate Activity

On January 14, 2013, we extended the lease with the tenant occupying our property located in Champaign, Illinois. The lease covering this property was extended for an additional 11 years through December 2024. The lease was originally set to expire in December 2013. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.4 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.4 million in leasing commissions.

On April 10, 2013, we extended the lease with the tenant occupying our property located in Akron, Ohio. The lease covering this property was extended for an additional 10 years, through January 2024. The lease was originally set to expire in January 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.3 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.5 million.

On April 11, 2013, we funded a $3.3 million 102,400 square foot recently completed expansion of our property located in Clintonville, Wisconsin. In connection with the expansion of the property, we executed a lease amendment to extend the lease for an additional eight years, through October 2028. The lease was originally set to expire in October 2020. The lease was also amended to provide for an increase to the rental income over the life of the lease, with annualized straight line rents of approximately $1.0 million, up from $0.6 million under the original lease.

On May 14, 2013, our tenant occupying our Dayton, Ohio property notified us of their intention to exercise their early termination option. The lease requires the tenant to continue to pay monthly rent through the effective termination date of June 30, 2015.

On July 17, 2013, we executed a revised lease with a tenant to occupy our previously vacant property located in Hazelwood, Missouri. The lease commenced on August 1, 2013 and expires in May 2023. The tenant has two options to purchase the property: one option in March 2017 and the other option in May 2023. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.2 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.1 million in leasing commissions and $0.3 million in tenant improvements.

On August 7, 2013, we extended the lease with the tenant occupying our property located in South Hadley, Massachusetts. The lease covering this property was extended for an additional year through January 2015. The lease was originally set to expire in January 2014. The lease provides a scheduled rent increase over the previous lease, with annualized straight line rents of approximately $0.3 million. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $3,400 in leasing commissions.

On August 15, 2013, we extended the lease with the tenant occupying our property located in Lexington, North Carolina. The lease covering this property was extended for an additional 12 years through April 2026. The lease was originally set to expire in April 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.4 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.05 million, and we paid $0.2 million in leasing commissions

On August 15, 2013, we extended the lease with the tenant occupying our property located in Crenshaw, Pennsylvania. The lease covering this property was extended for an additional 12 years through April 2026. The lease was originally set to expire in April 2014. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.7 million. In connection with the extension of the lease and the modification of certain terms under the lease, we provided a tenant allowance of $0.08 million, and we paid $0.4 million in leasing commissions.

 

Intangible Assets

The following table summarizes the carrying value of intangible assets and the accumulated amortization for each intangible asset class (in thousands):

 

		September 30, 2013								December 31, 2012
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	44,743			$	(14,237	)		$	34,085			$	(12,125	)
Leasing costs			29,692				(8,694	)			24,071				(7,103	)
Customer relationships			33,664				(9,823	)			26,671				(8,345	)
		$	108,099			$	(32,754	)		$	84,827			$	(27,573	)

The estimated aggregate amortization expense for the remainder of 2013 and for each of the five succeeding fiscal years and thereafter is as follows (in thousands):

 

Year		Estimated Amortization Expense
Three Months ending December 31, 2013		$	2,456
2014			9,643
2015			9,077
2016			8,278
2017			8,078
2018			7,510
Thereafter			30,303