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, 2014 and December 31, 2013 (dollars in thousands):

 

		June 30, 2014				December 31, 2013
Real estate:
Land		$	83,352			$	79,153
Building and improvements			561,138				527,230
Tenant improvements			39,511				35,970
Accumulated depreciation			(88,520	)			(81,241	)
Real estate, net		$	595,481			$	561,112

 

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 Straight Line 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,
						2014								2014
Location		Acquisition Date				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.

 

Pro Forma

The following table reflects pro-forma consolidated statements of operations as if the six properties acquired during the three and six months ended June 30, 2014 were acquired as of the beginning of the previous period. The pro-forma earnings for the three and six months ended June 30, 2014 and 2013 were adjusted to assume that acquisition-related costs were incurred as of the beginning of the previous period (dollars in thousands, except per share amounts):

 

		For the three months ended June 30,								For the six months ended June 30,
		2014				2013				2014				2013
		(unaudited)								(unaudited)
Operating Data:
Total operating revenue		$	19,339			$	18,822			$	38,316			$	37,628
Total operating expenses			(10,986	)			(11,090	)			(35,799	)(1)			(21,608	)
Other expenses			(6,202	)			(7,566	)			(13,655	)			(15,355	)
Net income (loss)			2,151				166				(11,138	)			665
Dividends attributable to preferred and senior common stock			(1,133	)			(1,092	)			(2,257	)			(2,169	)
Net income (loss) available (attributable) to common stockholders		$	1,018			$	(926	)		$	(13,395	)		$	(1,504	)
Share and Per Share Data:
Basic and diluted earnings (loss) per share of common stock		$	0.06			$	(0.07	)		$	(0.83	)		$	(0.13	)
Weighted average shares outstanding-basic			16,547,793				12,380,402				16,149,467				11,808,701
Weighted average shares outstanding-diluted			16,894,973				12,380,402				16,149,467				11,808,701

 

(1)	$14.0 million relates to the impairment charge recorded in operating expenses during the three months ended March 31, 2014.

2013 Real Estate Activity

During the six months ended June 30, 2013, we acquired three 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				Acquistion 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				—
Total							393,932							$	36,738			$	417			$	4,099			$	3,700

 

(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 acquired assets related to the three properties acquired during the six months ended June 30, 2013 as follows (in thousands):

 

		Land				Building				Tenant Improvements				In-place Leases				Leasing Costs				Customer Relationships				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
		$	3,144			$	21,803			$	2,262			$	3,016			$	1,561			$	1,702			$	33,488

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

 

Location		Acquisition Date				For the three months ended June 30, 2013								For the six months ended June 30, 2013
						Rental Revenue				Earnings (1)				Rental Revenue				Earnings (1)
Egg Harbor Township, NJ			3/28/2013			$	122			$	69			$	128			$	72
Vance, AL			5/8/2013				170				70				170				70
Blaine, MN			5/10/2013				210				94				210				94
						$	502			$	233			$	508			$	236

 

(1)	Earnings is calculated as net income less 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 the remainder of 2014 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

 

Year		Tenant Lease Payments
Six Months ending December 31, 2014		$	34,255
2015			65,830
2016			63,228
2017			62,763
2018			61,125
2019			61,469
Thereafter			274,216

Significant Existing Real Estate Activity

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 $1.3 million in tenant improvements between now and 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 remainder 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 3 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 between now and first quarter 2015.

Intangible Assets

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

 

		June 30, 2014								December 31, 2013
		Lease Intangibles				Accumulated Amortization				Lease Intangibles				Accumulated Amortization
In-place leases		$	56,521			$	(17,205	)		$	47,442			$	(15,158	)
Leasing costs			35,251				(10,680	)			31,339				(9,323	)
Customer relationships			39,896				(11,654	)			35,739				(10,407	)
		$	131,668			$	(39,539	)		$	114,520			$	(34,888	)

 

The weighted average amortization periods in years for the intangible assets acquired and liabilities assumed during the six months ended June 30, 2014 and 2013, respectively, were as follows

 

Intangible Assets & Liabilities		2014				2013
In-place leases			10.7				9.3
Leasing costs			10.7				9.3
Customer relationships			15.6				14.2
Above market leases			8.2				—
Below market leases			11.9				—
All intangible assets & liabilities			12.2				10.9

The estimated aggregate amortization expense for the remainder of 2014 and for each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):

 

Year		Estimated Amortization Expense
Six Months ending December 31, 2014		$	5,834
2015			11,395
2016			10,732
2017			10,539
2018			10,251
2019			10,243
Thereafter			33,135