4. Real Estate and Intangible Assets

Real Estate

The following table sets forth the components of our investments in real estate as of December 31, 2014 and 2013 (dollars in thousands):

 

		December 31, 2014				December 31, 2013
Real estate:
Land		$	88,394			$	79,153
Building and improvements			593,155				527,230
Tenant improvements			41,016				35,970
Accumulated depreciation			(92,133	)			(81,241	)
Real estate, net		$	630,432			$	561,112

 

2014 Real Estate Activity

During the year ended December 31, 2014, we completed 10 acquisitions of 11 properties and completed an expansion of one property, which are summarized below (dollars in thousands):

 

Location						Acquisition Date				Square Footage (unaudited)				Lease Term		Renewal Options				Total Purchase Price/Expansion Funded				Acquisition Expenses				Annualized Straight Line Rent				Debt Issued & Assumed
Allen, TX							3/27/2014				21,154			12 Years			4 (5 years each)			$	5,525			$	33			$	570			$	3,481
Colleyville, TX							3/27/2014				20,355			12 Years			4 (5 years each)				4,523				33				467				2,849
Rancho Cordova, CA			(4	)			4/22/2014				61,358			10 Years			1 (5 year)				8,225				73				902				4,935
Coppell, TX							5/8/2014				21,171			12 Years			4 (5 years each)				5,838				26				601				3,816
Columbus, OH							5/13/2014				114,786			9.5 Years (1)			N/A	(1)			11,800				70				1,278	(3)			N/A
Taylor, PA							6/9/2014				955,935			10 Years			4 (5 years each)				39,000				730				3,400				22,600
Aurora, CO							7/1/2014				124,800			15 Years			2 (5 years each)				8,300				93				768				N/A
Indianapolis, IN			(4	)			9/3/2014				86,495			11.5 Years (2)			2 (5 years each)	(2)			10,500				63				1,504	(3)			6,100
Denver, CO							10/31/2014				189,120			10 Years			2 (10 years each)				10,000				103				860				N/A
Canton, NC			(5	)			11/1/2014				365,960			20 Years			2 (10 years each)				5,550				N/A				1,343				N/A
Monroe, MI			(6	)			12/23/2014				535,500			8.5 Years			2 (5 years each)				30,750				68				2,523				18,450
Total											2,496,634									$	140,011			$	1,292			$	14,216			$	62,231

 

(1)	Lease term and renewal options are reflective of the largest tenant. The smaller tenant’s lease terminates in November 2016 and contains no renewal options.

(2)	Lease term and renewal options are reflective of the largest tenant. The other tenants in the building have varying lease expirations from December 2015 to October 2018. No other tenants have renewal options.

(3)	Rent figure is reflective of aggregate rent among all tenants occupying the building.

(4)	Tenants occupying these properties are subject to a gross lease. The largest tenant in this property occupies 61,306 square feet.

(5)	The Canton, NC property was originally acquired in July 2004 for $5.2 million. After the expansion was completed in November 2014, our total investment in the property is $10.8 million.

(6)	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

In accordance with ASC 805, we determined the fair value of the acquired assets and assumed liabilities related to the 11 properties acquired during the year ended December 31, 2014 as follows (dollars 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
Aurora, CO							2,882				3,825				92				413				806				282								—				—				8,300
Indianapolis, IN							502				5,334				1,088				1,990				741				732				126				(13	)			—				10,500
Denver, CO							1,621				6,503				568				1,152				721				652				—				(1,217	)			—				10,000
Monroe, MI			(1	)			1,118				23,890				942				1,497				1,350				1,953				—				—				—				30,750
						$	14,566			$	85,016			$	6,231			$	14,239			$	7,121			$	8,386			$	387			$	(1,236	)		$	(249	)		$	134,461

 

(1)	This property acquisition consists of two buildings with two separate leases which have identical lease terms. The figures above are aggrigated to reflect both buildings.

 

Below is a summary of the total revenue and earnings recognized on the 11 properties acquired during the year ended December 31, 2014 (dollars in thousands):

										For the year ended December 31,
										2014
Location						Acquisition Date				Rental Revenue				Earnings (1)
Allen, TX							3/27/2014			$	435			$	249
Colleyville, TX							3/27/2014				357				206
Rancho Cordova, CA							4/22/2014				625				239
Coppell, TX							5/8/2014				390				226
Columbus, OH			(2	)			5/13/2014				790				272
Taylor, PA							6/9/2014				1,908				890
Aurora, CO							7/1/2014				384				253
Indianapolis, IN			(2	)			9/3/2014				489				44
Denver, CO							10/31/2014				166				82
Monroe, MI			(3	)			12/23/2014				61				31
										$	5,605			$	2,492

 

(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.

(2)	Rental revenue and earnings is reflective of aggregate rent and operating expenses among all tenants occupying the building.

(3)	We acquired two properties and two leases with this acquisition. Rental revenue and earnings is reflective of aggregate rent and operating expenses among both properties.

Pro Forma

The following table reflects pro-forma consolidated statements of operations as if the properties acquired during the years ended December 31, 2014 and 2013, respectively were acquired as of January 1, 2013. The table also assumes that properties acquired during the years ended December 31, 2013 and 2012, respectively, were acquired as of January 1, 2012. The pro-forma earnings for the years ended December 31, 2014, 2013 and 2012 were adjusted to assume that acquisition-related costs were incurred as of the beginning of the earliest period presented (dollars in thousands, except per share amounts):

 

		For the year ended December 31, (unaudited)
		2014				2013				2012
Operating Data:
Total operating revenue		$	80,759			$	80,081			$	68,940
Total operating expenses			(60,728	)			(46,223	)			(37,457	)
Other expenses			(24,290	)			(32,929	)			(28,754	)
Net income (loss)			(4,259	) (1)			929				2,729
Dividends attributable to preferred and senior common stock			(4,636	)			(4,394	)			(4,206	)
Net loss attributable to common stockholders		$	(8,895	)		$	(3,465	)		$	(1,477	)
Share and Per Share Data:
Basic and diluted loss per share of common stock		$	(0.52	)		$	(0.26	)		$	(0.13	)
Weighted average shares outstanding-basic and diluted			17,253,503				13,164,244				10,953,325

 

(1)	We recognized a $14.2 million impairment loss and a $5.3 million gain on debt extinguishment as a result of our Roseville, MN deed in lieu transaction during the year ended December 31, 2014.

 

Significant Real Estate Activity on Existing Assets

On April 4, 2014, our tenant occupying our Newburyport, Massachusetts property notified us of their intention not to exercise their renewal option, as the tenant is relocating to Rhode Island. The tenant will continue paying rent and operating expenses through the lease termination date of April 30, 2015.

On May 6, 2014, we extended the lease with the tenant occupying our property located in Austin, Texas. The lease covering this property was extended for an additional eight years, through June 2022. The lease was originally set to expire in June 2015. 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 modification of certain terms of the lease, we paid $0.2 million in leasing commissions, and will pay a total of approximately $1.3 million in tenant improvements prior to the end of second quarter 2015.

On June 11, 2014, we extended the lease with the tenant occupying our property located in Burnsville, Minnesota. The new lease covers approximately two-thirds of the space and was extended for an additional eight years, through January 2023. The lease was originally set to expire in June 2015. The tenant in this property will continue to pay rent on the entire building through June 2015, and we are working to identify tenants to lease the remaining one-third of the building. The new lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $1.0 million. Rental income per square foot increased 14% from the previous lease. The lease grants the tenant two options to extend the lease for an additional three years each. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.5 million in leasing commissions, and will pay $3.3 million in tenant improvements prior to the end of first quarter 2015.

On July 7, 2014, we extended the lease with one of the tenants occupying our property located in Akron, Ohio. The new lease covers approximately two-thirds of the space and was extended for an additional five years, through March 2020. The lease was originally set to expire in March 2015. This tenant will continue to pay its existing rent through March 2015. The new lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $0.6 million. The lease grants the tenant two options to extend the lease for an additional five years each. In connection with the extension of the lease and the modification of certain terms under the lease, we paid $0.2 million in leasing commissions, and will pay $0.9 million in tenant improvements prior to the end of second quarter 2015. On December 24, 2014, we extended the lease with the other tenant occupying our property located in Akron, Ohio. The new lease covers the remaining space and was extended for an additional five years through March 2020. The lease was originally set to expire in March 2015. This tenant will also continue to pay its existing rent through March 2015. The new lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of $0.1 million. The lease grants the tenant two options to extend the lease for an additional five years each. In connection with the extension of the lease and the modification of certain terms under the lease, we will pay $0.1 million in tenant improvements during fiscal year 2015.

On September 25, 2014, we modified the lease with the tenant occupying our property located in Concord Township, Ohio. The lease covering this property was adjusted to defer a portion of rental payments covering the period August 2014 through December 2014. The tenant will repay the deferred rent balance monthly during calendar year 2015. On November 14, 2014, we further modified the lease with this tenant. The lease covering this property was adjusted to change the lease termination date from August 2034, to December 2024. Accordingly, annual straight line rent decreased from $1.7 million under the prior amendment, to $1.4 million. The lease grants the tenant three options to extend the lease for an additional five years each. Upon execution of this lease amendment, we determined that a portion of our existing deferred rent balance of $2.5 million was uncollectible, due to the reduction in lease payments and lease term, and we adjusted the balance by approximately $0.8 million, which is recorded in general and administrative expense.

On October 16, 2014, we executed a lease with a tenant to occupy our previously vacant property located in Richmond, Virginia. The lease was effective as of September 8, 2014 and has a three-year term. The tenant has an early termination option at any time after July 31, 2016, contingent upon the tenant losing a contract with the vendor supporting their operations in our building. The tenant is subject to a termination payment of approximately $0.03 million if they exercise this option. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.2 million. The tenant has one option to renew the lease for an additional period of three years. In connection with the extension of the lease and modification of certain terms of the lease, we paid $0.1 million in leasing commissions. No tenant improvements were paid in connection with the new lease.

On October 22, 2014, we extended the lease with the tenant occupying our property located in Canton, North Carolina. We financed a $5.5 million expansion project on this property, which added an additional 150,000 square feet to the building, which was completed in November 2014. The lease covering this property was extended for an additional 10 years, through September 2034. The lease was originally set to expire in July 2024. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $1.4 million, as compared to straight line rents of $0.6 million under the previous lease.

On October 27, 2014, 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 two years through January 2017. The lease was originally set to expire in January 2015. The lease provides a scheduled rent increase over the previous lease, with annualized straight line rents of approximately $0.3 million. The tenant has two options to renew the lease for additional periods of one year each.

On October 30, 2014, we modified the lease with the tenant occupying our property located in Tewksbury, Massachusetts. The lease covering this property was amended to reduce rental charges through the remaining lease term, which is set to expire May 31, 2017. In the event we identify a tenant or a purchaser for the property, we can terminate the lease with the current tenant. Straight line rent on this lease has decreased from $0.9 million per year to $0.4 million per year after the amendment.

On December 1, 2014, we executed a lease with a tenant to occupy a 7,125 square foot vacant outbuilding located on our property in Maple Heights, Ohio. The lease was effective as of December 1, 2014 and has a three-year term. The lease provides for consistent rental payments of $0.03 million annually. In connection with the extension of the lease and modification of certain terms of the lease, we paid $0.01 million in leasing commissions.

On December 1, 2014, we executed a lease with a tenant to occupy a portion of our property located in Bolingbrook, Illinois. The lease is for seven years and the tenant occupies 38% of the building. The lease provides for prescribed rent escalations over the life of the lease, with annualized straight line rents of approximately $0.2 million. The tenant has one option to renew the lease for an additional period of five years. In connection with the extension of the lease and modification of certain terms of the lease, we paid $0.2 million in leasing commissions, and will pay to $0.5 million in tenant improvements during fiscal year 2015.

 

2013 Real Estate Activity

During the year ended December 31, 2013, we acquired seven properties, and completed an expansion of one property, which are summarized below (dollars in thousands):

 

Location		Acquisition/ Expansion Date				Square Footage (unaudited)				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			5/9/2013				170,000			10 years			2 (5 years)				13,388				186				1,173				—
Blaine, MN			5/10/2013				92,275			7 years			2 (5 years)				14,450				79				1,475				8,200
Austin, TX			7/9/2013				320,000			7 years			3 (3 years)				57,000				155				4,641				35,300
Allen, TX			7/10/2013				115,200			9 years			2 (5 years)				15,150				81				1,478				8,900
Englewood, CO			12/11/2013				99,797			8 years			2 (5 years)				18,250				66				1,497				11,315
Novi, MI			12/27/2013				156,200			10 years			1 (5 years)				7,300				42				684				4,380
Total							1,085,129									$	134,438			$	761			$	12,399			$	71,795

 

(1)	The Clintonville, WI property was originally acquired in November 2005 for $5.3 million. After the expansion was 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 acquired assets related to the seven properties acquired during the year ended December 31, 2013 as follows (dollars in thousands):

 

										Tenant				In-place								Customer				Above Market				Below Market				Total Purchase
		Land				Building				Improvements				Leases				Leasing Costs				Relationships				Leases				Leases				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
Englewood, CO			1,503				9,889				1,850				2,036				1,178				1,850				—				(56	)			18,250
Novi, MI			352				5,354				272				663				434				225				—				—				7,300
		$	10,028			$	80,011			$	13,385			$	13,358			$	6,225			$	9,069			$	336			$	(1,224	)		$	131,188

Below is a summary of the total revenue and earnings recognized on the seven properties acquired during the year ended December 31, 2013 (dollars in thousands):

 

						For the year ended December 31,
						2013
		Acquisition
Location		Date				Rental Revenue				Earnings (1)
Egg Harbor Township, NJ			3/28/2013			$	373			$	209
Vance, AL			5/9/2013				757				363
Blaine, MN			5/10/2013				947				424
Austin, TX			7/9/2013				2,299				655
Allen, TX			7/10/2013				685				300
Englewood, CO			12/11/2013				85				25
Novi, MI			12/27/2013				9				5
						$	5,155			$	1,981

 

(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.

 

Future Lease Payments

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

 

Year		Tenant Lease Payments
2015		$	70,794
2016			68,669
2017			68,290
2018			67,983
2019			68,405
Thereafter			312,030

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 December 31, 2014, were $12.6 million.

Intangible Assets

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

 

		December 31, 2014								December 31, 2013
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	59,233			$	(17,379	)		$	47,442			$	(15,158	)
Leasing costs			38,305				(11,411	)			31,339				(9,323	)
Customer relationships			41,243				(11,177	)			35,739				(10,407	)
		$	138,781			$	(39,967	)		$	114,520			$	(34,888	)
		Deferred Rent Receivable/Liability				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
Above market leases		$	8,314			$	(6,384	)		$	7,928			$	(6,085	)
Below market leases		$	15,939			$	(7,345	)		$	12,672			$	(6,657	)
		$	24,253			$	(13,729	)		$	20,600			$	(12,742	)
Total		$	163,034			$	(53,696	)		$	135,120			$	(47,630	)

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the years ended December 31, 2014 and 2013, respectively, were as follows:

 

Intangible Assets & Liabilities		2014				2013
In-place leases			10.1				8.9
Leasing costs			10.1				8.9
Customer relationships			15.1				13.7
Above market leases			9.3				8.8
Below market leases			10.0				7.5
All intangible assets & liabilities			11.5				10.0

 

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 (dollars in thousands):

 

		Estimated
Year		Amortization Expense
2015		$	12,801
2016			11,972
2017			11,733
2018			11,633
2019			11,610
Thereafter			39,065
Total		$	98,814

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 (dollars in thousands):

 

		Estimated Rental
Year		Income
2015		$	557
2016			438
2017			432
2018			432
2019			432
Thereafter			4,374
Total		$	6,665