Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Organization, Basis of Presentation and Significant Accounting Policies
Gladstone Commercial Corporation is a real estate investment trust (“REIT”) that was incorporated under the General Corporation Law of the State of Maryland on February 14, 2003. We focus on acquiring, owning and managing primarily office and industrial properties. On a selective basis, we may make long term industrial and office mortgage loans; however, we do not have any mortgage loans currently outstanding. Subject to certain restrictions and limitations, our business is managed by Gladstone Management Corporation, a Delaware corporation (the “Adviser”), and administrative services are provided by Gladstone Administration, LLC, a Delaware limited liability company (the “Administrator”), each pursuant to a contractual arrangement with us. Our Adviser and Administrator collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Gladstone Commercial Corporation conducts substantially all of its operations through a subsidiary, Gladstone Commercial Limited Partnership, a Delaware limited partnership (the “Operating Partnership”).
All references herein to “we,” “our,” “us” and the “Company” mean Gladstone Commercial Corporation and its consolidated subsidiaries, except where it is made clear that the term means only Gladstone Commercial Corporation.
Interim Financial Information
Our interim financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and in accordance with Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data presented herein was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of our management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair statement of financial statements for the interim period, have been included. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the U.S. Securities and Exchange Commission on February 13, 2019. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.
Critical Accounting Policies
The preparation of our financial statements in accordance with GAAP, requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. There were no material changes to our critical accounting policies during the three and nine months ended September 30, 2019.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the recognition of revenue from contracts with customers. Under this guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this guidance for our annual and interim periods beginning January 1, 2018 and used the modified retrospective method, under which the cumulative effect of initially applying the guidance is recognized at the date of initial application. Our adoption of this guidance did not have a material impact on our consolidated financial statements. Further, as discussed below, we adopted the new guidance regarding the principles for the recognition measurement, presentation and disclosure of leases on January 1, 2019. The new revenue standard applies to executory costs and other components of revenue due under leases that are deemed to be non-lease components (examples include common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease. Revenue from these non-lease components, which were previously recognized on a straight-line basis under previous lease guidance, are recognized under the new revenue guidance as the related services are delivered. As a result, while our total revenue recognized over the lease term does not differ under the new guidance, the revenue recognition pattern could be different. The new leasing guidance allows for an accounting election to account for each separate lease component and its associated non-lease components as a single lease component. As a lessor, we have made an accounting election to account for each separate lease component and its associated non-lease components as a single lease component. As a result of this election, our revenue recognition pattern for our leasing arrangements is consistent with how we recognized lease revenue prior to our adoption of the new leasing standard.
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases: Amendments to the FASB Accounting Standards Codification” (“ASU 2016-02”). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. We adopted ASU 2016-02, as amended, as of January 1, 2019, which resulted in the recording of additional right-of-use assets from operating leases and operating lease liabilities of approximately $6.0 million for the four operating ground lease arrangements with terms greater than one year for which we are the lessee. We adopted the modified retrospective method, where we recorded the cumulative effect of applying the guidance as of January 1, 2019. We also adopted the full suite of practical expedients provided under this guidance, whereby we are not reassessing whether a contract is or contains a lease, the lease classification and the initial direct costs incurred upon onset of our leases. We have also adopted the hindsight practical expedient whereby we can use hindsight to determine the lease term as of the date of implementation, and we adopted the land easements practical expedient where we do not have to assess whether existing or expired land easements contain a lease. We analyzed our operating ground leases on the date of implementation and identified any option periods we believed were appropriate to include in the lease term, and discounted the future lease payments using a discount rate equivalent to a treasury rate with a similar lease term plus a spread ranging from 2.50% to 2.60%. This spread was determined by reviewing market premiums over treasuries for fully securitized assets. Three of our ground leases have fixed rental charges, and one has variable charges that are driven by the consumer price index. Three of our ground leases have options to extend, and one ground lease has multiple early termination options. We will include option periods or exclude termination options in future lease payments for ground leases located in our target markets.
2. Related-Party Transactions
Gladstone Management and Gladstone Administration
We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits, and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr. David Gladstone, our chairman and chief executive officer. Two of our executive officers, Mr. Gladstone and Mr. Terry Lee Brubaker (our vice chairman and chief operating officer) serve as directors and executive officers of our Adviser and our Administrator. Our president, Mr. Robert Cutlip, is an executive managing director of our Adviser. Mr. Michael LiCalsi, our general counsel and secretary, also serves as our Administrator’s president, general counsel and secretary. We have entered into an advisory agreement with our Adviser, as amended from time to time (the “Advisory Agreement”), and an administration agreement with our Administrator (the “Administration Agreement”). The services and fees under the Advisory Agreement and Administration Agreement are described below. As of September 30, 2019 and December 31, 2018, $2.7 million and $2.5 million, respectively, were collectively due to our Adviser and Administrator. Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreement with our Adviser each July. During its July 2019 meeting, our Board of Directors reviewed and renewed the Advisory Agreement for an additional year, through August 31, 2020.
Base Management Fee
On January 8, 2019, we entered into a Fifth Amended and Restated Investment Advisory Agreement with the Adviser, effective as of October 1, 2018 to clarify that the agreement’s definition of Total Equity includes outstanding OP Units held by the Operating Partnership’s non-controlling limited partners (“Non-controlling OP Unitholders”).
Under the Advisory Agreement, the calculation of the annual base management fee equals 1.5% of our Total Equity, which is our total stockholders’ equity plus total mezzanine equity (before giving effect to the base management fee and incentive fee), adjusted to exclude the effect of any unrealized gains or losses that do not affect realized net income (including impairment charges), adjusted for any one-time events and certain non-cash items (the later to occur for a given quarter only upon the approval of our Compensation Committee), and adjusted to include OP Units held by Non-controlling OP Unitholders. The fee is calculated and accrued quarterly as 0.375% per quarter of such Total Equity figure. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties, as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources.
For the three and nine months ended September 30, 2019, we recorded a base management fee of $1.3 million and $3.9 million, respectively. For the three and nine months ended September 30, 2018, we recorded a base management fee of $1.2 million and $3.8 million, respectively.
Incentive Fee
Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders’ equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.
For the three and nine months ended September 30, 2019, we recorded an incentive fee of $1.0 million and $2.7 million, respectively. For the three and nine months ended September 30, 2018, we recorded an incentive fee of $0.8 million and $2.2 million, respectively. The Adviser did not waive any portion of the incentive fee for the three and nine months ended September 30, 2019 or 2018, respectively.
Capital Gain Fee
Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property’s original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three and nine months ended September 30, 2019 or 2018.
Termination Fee
The Advisory Agreement includes a termination fee whereby, in the event of our termination of the agreement without cause (with 120 days’ prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the Advisory Agreement after we have defaulted and applicable cure periods have expired. The Advisory Agreement may also be terminated for cause by us (with 30 days’ prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the agreement to include if the Adviser breaches any material provisions thereof, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.
Administration Agreement
Under the terms of the Administration Agreement, we pay separately for our allocable portion of the Administrator’s overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator’s employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator’s president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator’s expenses are generally derived by multiplying our Administrator’s total expenses by the approximate percentage of time the Administrator’s employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements. We believe this approach helps approximate fees paid by us to actual services performed by the Administrator for us. For the three and nine months ended September 30, 2019, we recorded an administration fee of $0.4 million and $1.2 million, respectively. For the three and nine months ended September 30, 2018, we recorded an administration fee of $0.4 million and $1.2 million, respectively.
Gladstone Securities
Gladstone Securities, LLC (“Gladstone Securities”), is a privately held broker dealer registered with the Financial Industry Regulatory Authority and insured by the Securities Investor Protection Corporation. Gladstone Securities is an affiliate of ours, as its parent company is owned and controlled by David Gladstone, our chairman and chief executive officer. Mr. Gladstone also serves on the board of managers of Gladstone Securities.
Mortgage Financing Arrangement Agreement
We entered into an agreement with Gladstone Securities, effective June 18, 2013, for it to act as our non-exclusive agent to assist us with arranging mortgage financing for properties we own (the “Financing Arrangement Agreement”). In connection with this engagement, Gladstone Securities will, from time to time, continue to solicit the interest of various commercial real estate lenders or recommend to us third party lenders offering credit products or packages that are responsive to our needs. We pay Gladstone Securities a financing fee in connection with the services it provides to us for securing mortgage financing on any of our properties. The amount of these financing fees, which are payable upon closing of the financing, are based on a percentage of the amount of the mortgage, generally ranging from 0.15% to a maximum of 1.0% of the mortgage obtained. The amount of the financing fees may be reduced or eliminated, as determined by us and Gladstone Securities, after taking into consideration various factors, including, but not limited to, the involvement of any third party brokers and market conditions. We paid financing fees to Gladstone Securities of $3,000 and $0.10 million during the three and nine months ended September 30, 2019, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.08% and 0.19%, respectively, of the mortgage principal secured and/or extended. We paid financing fees to Gladstone Securities of $18,363 and $42,663 during the three and nine months ended September 30, 2018, respectively, which are included in mortgage notes payable, net, in the condensed consolidated balance sheets, or 0.15% and 0.12%, respectively, of the mortgage principal secured and/or extended. Our Board of Directors renewed the Financing Arrangement Agreement for an additional year, through August 31, 2020, at its July 2019 meeting.
3. (Loss) Earnings Per Share of Common Stock
The following tables set forth the computation of basic and diluted (loss) earnings per share of common stock for the three and nine months ended September 30, 2019 and 2018. The OP Units held by Non-controlling OP Unitholders (which may be redeemed for shares of common stock) have been excluded from the diluted (loss) earnings per share calculations, as there would be no effect on the amounts since the Non-controlling OP Unitholders’ share of (loss) income would also be added back to net (loss) income. Net (loss) income figures are presented net of such non-controlling interests in the (loss) earnings per share calculation.
We computed basic (loss) earnings per share for the three and nine months ended September 30, 2019 and 2018 using the weighted average number of shares outstanding during the respective periods. Diluted (loss) earnings per share for the three and nine months ended September 30, 2019 and 2018 reflects additional shares of common stock related to our convertible senior common stock (the “Senior Common Stock”), if the effect would be dilutive, that would have been outstanding if dilutive potential shares of common stock had been issued, as well as an adjustment to net (loss) income (attributable) available to common stockholders as applicable to common stockholders that would result from their assumed issuance (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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2019
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2018
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2019
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2018
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|
Calculation of basic (loss) earnings per share of common stock:
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Net (loss) income (attributable) available to common stockholders
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$
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(631
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)
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|
$
|
(170
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)
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|
$
|
543
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|
|
$
|
1,304
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|
|
Denominator for basic weighted average shares of common stock (1)
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|
31,032,802
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|
|
28,734,380
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|
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30,338,690
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|
|
28,532,224
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Basic (loss) earnings per share of common stock
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$
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(0.02
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)
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$
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(0.01
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)
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$
|
0.02
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$
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0.05
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|
Calculation of diluted (loss) earnings per share of common stock:
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Net (loss) income (attributable) available to common stockholders
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$
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(631
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)
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|
$
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(170
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)
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|
$
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543
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|
|
$
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1,304
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Add: income impact of assumed conversion of senior common stock (2)
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—
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—
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—
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—
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Net (loss) income (attributable) available to common stockholders plus assumed conversions (2)
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$
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(631
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)
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|
$
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(170
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)
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|
$
|
543
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|
|
$
|
1,304
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|
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Denominator for basic weighted average shares of common stock (1)
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31,032,802
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|
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28,734,380
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30,338,690
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|
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28,532,224
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Effect of convertible Senior Common Stock (2)
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—
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—
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—
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—
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Denominator for diluted weighted average shares of common stock (2)
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31,032,802
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28,734,380
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30,338,690
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28,532,224
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Diluted (loss) earnings per share of common stock
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$
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(0.02
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)
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$
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(0.01
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)
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$
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0.02
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|
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$
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0.05
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(1)
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The weighted average number of OP Units held by Non-controlling OP Unitholders was 742,937 for the three and nine months ended September 30, 2019. The Company was the sole holder of OP Units for all periods prior to October 30, 2018.
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(2)
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We excluded convertible shares of Senior Common Stock of 709,906 and 737,752 from the calculation of diluted (loss) earnings per share for the three and nine months ended September 30, 2019 and 2018, respectively, because they were anti-dilutive.
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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, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):
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September 30, 2019
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December 31, 2018
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Real estate:
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Land
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$
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130,962
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$
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125,905
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Building and improvements
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810,774
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755,584
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Tenant improvements
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66,702
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65,160
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Accumulated depreciation
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(202,480
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)
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(178,257
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)
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Real estate, net
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$
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805,958
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|
|
$
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768,392
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Real estate depreciation expense on building and tenant improvements was $8.3 million and $24.4 million for the three and nine months ended September 30, 2019, respectively, and $7.5 million and $22.3 million for the three and nine months ended September 30, 2018, respectively.
Acquisitions
We acquired nine properties during the nine months ended September 30, 2019, and two properties during the nine months ended September 30, 2018. The acquisitions are summarized below (dollars in thousands):
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Nine Months Ended
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Aggregate Square Footage
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Weighted Average Lease Term
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Aggregate Purchase Price
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Acquisition Expenses
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Aggregate Annualized GAAP Rent
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Aggregate Debt Issued or Assumed
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September 30, 2019
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(1)
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1,463,763
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14.8 Years
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$
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67,272
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$
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621
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(3)
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$
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5,437
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$
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8,900
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September 30, 2018
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(2)
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285,254
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11.7 Years
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22,800
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|
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225
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(3)
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1,851
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4,745
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(1)
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On February 8, 2019, we acquired a 26,050 square foot property in a suburb of Philadelphia, Pennsylvania, for $2.7 million. The annualized GAAP rent on the 15.1 year lease is $0.2 million. On February 28, 2019, we acquired a 34,800 square foot property in Indianapolis, Indiana for $3.6 million. The annualized GAAP rent on the 10.0 year lease is $0.3 million. On April 5, 2019, we acquired a 207,000 square foot property in Ocala, Florida, for $11.9 million. The annualized GAAP rent on the 20.1 year lease is $0.8 million. On April 5, 2019, we acquired a 176,000 square foot property in Ocala, Florida, for $7.3 million. The annualized GAAP rent on the 20.1 year lease is $0.7 million. On April 30, 2019, we acquired a 54,430 square foot property in Columbus, Ohio, for $3.2 million. The annualized GAAP rent on the 7.0 year lease is $0.2 million. On June 18, 2019, we acquired a 676,031 square foot property in Tifton, Georgia, for $17.9 million. The annualized GAAP rent on the 8.5 year lease is $1.6 million. We issued $8.9 million of mortgage debt with a fixed interest rate of 4.35% in connection with this acquisition. On July 30, 2019, we acquired a 78,452 square foot property in Denton, Texas, for $6.6 million. The annualized GAAP rent on the 11.9 year lease is $0.5 million. On September 26, 2019, we acquired a 211,000 square foot two property portfolio in Temple, Texas, for $14.1 million. The annualized GAAP rent on the 20.0 year lease is $1.2 million.
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(2)
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On March 9, 2018, we acquired a 127,444 square foot property in Vance, Alabama for $14.3 million. The annualized GAAP rent on the 9.8 year lease is $1.1 million. On September 20, 2018, we acquired a 157,810 square foot property in Columbus, Ohio for $8.5 million. We issued $4.7 million of mortgage debt in connection with this acquisition. The annualized GAAP rent on the 15.0 year lease is $0.8 million.
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(3)
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We accounted for these transactions under ASU 2017-01, “Clarifying the Definition of a Business.” As a result, we treated our acquisitions during the nine months ended September 30, 2019 and 2018 as asset acquisitions rather than business combinations. As a result of this treatment, we capitalized $0.6 million and $0.2 million, respectively, of acquisition costs that would otherwise have been expensed under business combination treatment.
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We determined the fair value of assets acquired and liabilities assumed related to the properties acquired during the nine months ended September 30, 2019 and 2018 as follows (dollars in thousands):
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Nine months ended September 30, 2019
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Nine months ended September 30, 2018
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Acquired assets and liabilities
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Purchase price
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Purchase price
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Land
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$
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5,046
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$
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1,140
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Building
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48,898
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17,849
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Tenant Improvements
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1,541
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|
776
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In-place Leases
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4,868
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1,249
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Leasing Costs
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4,481
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|
|
1,245
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Customer Relationships
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2,200
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792
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Above Market Leases
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1,865
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|
|
49
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Below Market Leases
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|
(1,627
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)
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|
(300
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)
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Total Purchase Price
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$
|
67,272
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|
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$
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22,800
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Significant Real Estate Activity on Existing Assets
During the nine months ended September 30, 2019 and 2018, we executed five leases and two leases, respectively, which are summarized below (dollars in thousands):
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Nine Months Ended
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Aggregate Square Footage
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Weighted Average Remaining Lease Term
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Aggregate Annualized GAAP Rent
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Aggregate Tenant Improvement
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Aggregate Leasing Commissions
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|
September 30, 2019
|
|
230,264
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|
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8.8 years
|
|
$
|
3,366
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|
|
$
|
785
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|
|
$
|
910
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|
|
September 30, 2018
|
(1)
|
184,441
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|
|
1.6 years
|
|
391
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|
—
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14
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(1)
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One of the new leases we entered into was on our South Hadley, Massachusetts property, which was classified as held for sale on the condensed consolidated balance sheets as of September 30, 2018.
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Future Lease Payments
Future operating lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses, for the three months ending December 31, 2019 and each of the five succeeding fiscal years and thereafter is as follows (dollars in thousands):
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Year
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Tenant Lease Payments
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|
Three Months Ending 2019
|
$
|
27,585
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|
|
2020
|
102,850
|
|
|
2021
|
96,826
|
|
|
2022
|
89,192
|
|
|
2023
|
81,303
|
|
|
2024
|
72,155
|
|
|
Thereafter
|
275,658
|
|
|
|
$
|
745,569
|
|
We account for all of our real estate leasing arrangements as operating leases. A majority of our leases are subject to fixed rental increases, but a small subset of our lease portfolio has variable lease payments that are driven by the consumer price index. Many of our tenants have renewal options in their respective leases, but we seldom include option periods in the determination of lease term, as we generally will not enter into leasing arrangements with bargain renewal options. A small number of tenants have termination options.
Future minimum lease payments from tenants under non-cancelable leases, excluding tenant reimbursement of expenses and real estate held for sale as of December 31, 2018, for each of the five succeeding fiscal years and thereafter, is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
Year
|
Tenant Lease Payments
|
|
2019
|
$
|
103,322
|
|
|
2020
|
97,302
|
|
|
2021
|
89,057
|
|
|
2022
|
82,336
|
|
|
2023
|
74,337
|
|
|
Thereafter
|
279,424
|
|
|
|
$
|
725,778
|
|
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 operating expenses on the respective properties in the event the tenants fail to pay them.
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, 2019 and December 31, 2018, excluding real estate held for sale as of December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
Lease Intangibles
|
|
Accumulated Amortization
|
|
Lease Intangibles
|
|
Accumulated Amortization
|
|
In-place leases
|
|
$
|
88,762
|
|
|
$
|
(46,418
|
)
|
|
$
|
83,894
|
|
|
$
|
(40,445
|
)
|
|
Leasing costs
|
|
64,986
|
|
|
(32,252
|
)
|
|
59,671
|
|
|
(28,092
|
)
|
|
Customer relationships
|
|
62,656
|
|
|
(27,537
|
)
|
|
60,455
|
|
|
(24,035
|
)
|
|
|
|
$
|
216,404
|
|
|
$
|
(106,207
|
)
|
|
$
|
204,020
|
|
|
$
|
(92,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Rent Receivable/(Liability)
|
|
Accumulated (Amortization)/Accretion
|
|
Deferred Rent Receivable/(Liability)
|
|
Accumulated (Amortization)/Accretion
|
|
Above market leases
|
|
$
|
16,417
|
|
|
$
|
(9,723
|
)
|
|
$
|
14,551
|
|
|
$
|
(8,981
|
)
|
|
Below market leases and deferred revenue
|
|
(34,098
|
)
|
|
14,344
|
|
|
(29,807
|
)
|
|
12,502
|
|
|
|
|
$
|
(17,681
|
)
|
|
$
|
4,621
|
|
|
$
|
(15,256
|
)
|
|
$
|
3,521
|
|
Total amortization expense related to in-place leases, leasing costs and customer relationship lease intangible assets was $4.7 million and $14.2 million for the three and nine months ended September 30, 2019, respectively, and $4.3 million and $12.9 million for the three and nine months ended September 30, 2018, respectively, and is included in depreciation and amortization expense in the condensed consolidated statements of operations and comprehensive income.
Total amortization related to above-market lease values was $0.3 million and $0.8 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2018, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income. Total amortization related to below-market lease values was $0.7 million and $1.8 million for the three and nine months ended September 30, 2019, respectively, and $0.5 million and $1.5 million for the three and nine months ended September 30, 2018, respectively, and is included in lease revenue in the condensed consolidated statements of operations and comprehensive income.
The weighted average amortization periods in years for the intangible assets acquired during the nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
Intangible Assets & Liabilities
|
|
2019
|
|
2018
|
|
In-place leases
|
|
15.9
|
|
13.0
|
|
Leasing costs
|
|
15.9
|
|
13.0
|
|
Customer relationships
|
|
20.6
|
|
21.2
|
|
Above market leases
|
|
9.3
|
|
9.8
|
|
Below market leases
|
|
9.6
|
|
15.0
|
|
All intangible assets & liabilities
|
|
17.3
|
|
15.0
|
5. Real Estate Dispositions, Held for Sale and Impairment Charges
Real Estate Dispositions
During the nine months ended September 30, 2019, we continued to execute our capital recycling program, whereby we sell properties outside of our core markets and redeploy proceeds to either fund property acquisitions in our target secondary growth markets, or repay outstanding debt. We expect to continue to execute our capital recycling plan and sell non-core properties as reasonable disposition opportunities become available. On January 31, 2019, we sold one non-core property, located in Maitland, Florida, which is detailed in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square Footage Sold
|
|
Sales Price
|
|
Sales Costs
|
|
Gain on Sale of Real Estate, net
|
|
50,000
|
|
|
$
|
6,850
|
|
|
$
|
532
|
|
|
$
|
2,952
|
|
Our disposition during the nine months ended September 30, 2019 was not classified as a discontinued operation because it did not represent a strategic shift in operations, nor will it have a major effect on our operations and financial results. Accordingly, the operating results of this property is included within continuing operations for all periods reported.
The table below summarizes the components of operating income from the real estate and related assets disposed of during the three and nine months ended September 30, 2019, and 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating revenue
|
|
$
|
—
|
|
|
$
|
254
|
|
|
$
|
245
|
|
|
$
|
749
|
|
|
Operating expense
|
|
1
|
|
|
269
|
|
|
786
|
|
|
810
|
|
|
Other income, net
|
|
—
|
|
|
(84
|
)
|
|
2,614
|
|
(1)
|
(251
|
)
|
|
(Expense) income from real estate and related assets sold
|
|
$
|
(1
|
)
|
|
$
|
(99
|
)
|
|
$
|
2,073
|
|
|
$
|
(312
|
)
|
|
|
|
|
(1)
|
Includes a $3.0 million gain on sale of real estate, net on one property.
|
Real Estate Held for Sale
At September 30, 2019, we did not have any properties classified as held for sale. At December 31, 2018, we had one property classified as held for sale, located in Maitland, Florida. This property was sold during the nine months ended September 30, 2019.
The table below summarizes the components of the assets and liabilities held for sale reflected on the accompanying condensed consolidated balance sheets (dollars in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Assets Held for Sale
|
|
|
Real estate, at cost
|
$
|
3,173
|
|
|
Less: accumulated depreciation
|
218
|
|
|
Total real estate held for sale, net
|
2,955
|
|
|
Lease intangibles, net
|
1,105
|
|
|
Deferred rent receivable, net
|
91
|
|
|
Total Assets Held for Sale
|
$
|
4,151
|
|
Impairment Charges
We evaluated our portfolio for triggering events to determine if any of our held and used assets were impaired during the nine months ended September 30, 2019 and did not identify any held and used assets which were impaired. We also did not recognize an impairment charge during the nine months ended September 30, 2018.
The property we classified as held for sale was reviewed through our held for sale carrying value analysis, during the three and nine months ended September 30, 2018, and we concluded that the fair market value less selling costs was greater than the carrying value of the property. We sold this property during the nine months ended September 30, 2019.
We continue to evaluate our properties on a quarterly basis for changes that could create the need to record impairment. Future impairment losses may result, and could be significant, should market conditions deteriorate in the markets in which we hold our assets or should we be unable to secure leases at terms that are favorable to us, which could impact the estimated cash flow of our properties over the period in which we plan to hold our properties. Additionally, changes in management’s decisions to either own and lease long-term or sell a particular asset will have an impact on this analysis.
6. Mortgage Notes Payable and Credit Facility
Our mortgage notes payable and Credit Facility as of September 30, 2019 and December 31, 2018 are summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encumbered properties at
|
|
|
|
Carrying Value at
|
|
Stated Interest Rates at
|
|
Scheduled Maturity Dates at
|
|
|
|
September 30, 2019
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
September 30, 2019
|
|
September 30, 2019
|
|
Mortgage and other secured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate mortgage loans
|
|
51
|
|
|
|
|
$
|
393,220
|
|
|
$
|
385,051
|
|
|
(1)
|
|
(2)
|
|
Variable rate mortgage loans
|
|
12
|
|
|
|
|
45,514
|
|
|
60,659
|
|
|
(3)
|
|
(2)
|
|
Premiums and discounts, net
|
|
-
|
|
|
|
|
(254
|
)
|
|
(301
|
)
|
|
N/A
|
|
N/A
|
|
Deferred financing costs, mortgage loans, net
|
|
-
|
|
|
|
|
(3,791
|
)
|
|
(4,063
|
)
|
|
N/A
|
|
N/A
|
|
Total mortgage notes payable, net
|
|
63
|
|
|
|
|
$
|
434,689
|
|
|
$
|
441,346
|
|
|
(4)
|
|
|
|
Variable rate revolving credit facility
|
|
43
|
|
|
(6)
|
|
$
|
35,800
|
|
|
$
|
50,600
|
|
|
LIBOR + 1.65%
|
|
7/2/2023
|
|
Deferred financing costs, revolving credit facility
|
|
-
|
|
|
|
|
(885
|
)
|
|
(516
|
)
|
|
N/A
|
|
N/A
|
|
Total revolver, net
|
|
43
|
|
|
|
|
$
|
34,915
|
|
|
$
|
50,084
|
|
|
|
|
|
|
Variable rate term loan facility
|
|
-
|
|
|
(6)
|
|
$
|
122,300
|
|
|
$
|
75,000
|
|
|
LIBOR + 1.60%
|
|
7/2/2024
|
|
Deferred financing costs, term loan facility
|
|
-
|
|
|
|
|
(1,081
|
)
|
|
(371
|
)
|
|
N/A
|
|
N/A
|
|
Total term loan, net
|
|
N/A
|
|
|
|
|
$
|
121,219
|
|
|
$
|
74,629
|
|
|
|
|
|
|
Total mortgage notes payable and credit facility
|
|
106
|
|
|
|
|
$
|
590,823
|
|
|
$
|
566,059
|
|
|
(5)
|
|
|
|
|
|
|
(1)
|
Interest rates on our fixed rate mortgage notes payable vary from 3.42% to 6.63%.
|
|
|
|
|
(2)
|
We have 47 mortgage notes payable with maturity dates ranging from 12/6/2019 through 7/1/2045.
|
|
|
|
|
(3)
|
Interest rates on our variable rate mortgage notes payable vary from one month LIBOR + 2.00% to one month LIBOR + 2.75%. At September 30, 2019, one month LIBOR was approximately 2.02%.
|
|
|
|
|
(4)
|
The weighted average interest rate on the mortgage notes outstanding at September 30, 2019 was approximately 4.58%.
|
|
|
|
|
(5)
|
The weighted average interest rate on all debt outstanding at September 30, 2019 was approximately 4.33%.
|
|
|
|
|
(6)
|
The amount we may draw under our Credit Facility is based on a percentage of the fair value of a combined pool of 43 unencumbered properties as of September 30, 2019.
|
N/A - Not Applicable
Mortgage Notes Payable
As of September 30, 2019, we had 47 mortgage notes payable, collateralized by a total of 63 properties with a net book value of $632.3 million. We have limited recourse liabilities that could result from any one or more of the following circumstances: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. We have full recourse for $16.2 million of the mortgages notes payable, net, or 3.7% of the outstanding balance. We will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property.
During the nine months ended September 30, 2019, we partially repaid one mortgage collateralized by three properties, releasing one of the collateralized properties that we sold on January 31, 2019, and we fully repaid three mortgages fully collateralized by seven properties, all of which are summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Variable Rate Debt Repaid
|
|
Weighted Average Interest Rate on Variable Rate Debt Repaid
|
|
Aggregate Fixed Rate Debt Repaid
|
|
Weighted Average Interest Rate on Fixed Rate Debt Repaid
|
|
$
|
13,600
|
|
|
LIBOR +
|
2.47%
|
|
$
|
25,042
|
|
|
4.18
|
%
|
During the nine months ended September 30, 2019, we issued three mortgages, collateralized by three properties, which are summarized in the table below (dollars in thousands):
|
|
|
|
|
|
|
|
|
Aggregate Fixed Rate Debt Issued
|
|
Weighted Average Interest Rate on Fixed Rate Debt
|
|
$
|
41,140
|
|
(1)
|
3.95%
|
|
|
|
|
(1)
|
We issued $10.6 million of fixed rate debt in connection with one property acquired on December 27, 2018 with a maturity date of February 8, 2029. The interest rate is fixed at 4.70% for the first seven years of the mortgage. After the fixed interest rate period expires, we have the option to adjust the interest rate to a fixed interest rate equal to 1.8% plus the three year treasury rate per annum, or a variable interest rate equal to 1.8% plus the 30 day LIBOR rate per annum. On May 31, 2019, we issued $21.6 million of floating rate debt swapped to fixed rate debt of 3.42% in connection with refinancing mortgage debt at one property with a new maturity date of June 1, 2024. We issued $8.9 million of fixed rate debt in connection with our June 18, 2019 property acquisition with a maturity date of June 18, 2024 and a rate of 4.35%.
|
During the nine months ended September 30, 2019, we extended the maturity date of two mortgages, collateralized by four properties, which is summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Variable Rate Debt Extended
|
|
Weighted Average Interest Rate on Variable Rate Debt Extended
|
|
Weighted Average Extension Term
|
|
$
|
12,561
|
|
|
LIBOR +
|
2.51%
|
|
2.4 years
|
We made payments of $1.4 million and $2.1 million for deferred financing costs during the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.3 million for deferred financing costs during the three and nine months ended September 30, 2018, respectively.
Scheduled principal payments of mortgage notes payable for the three months ending December 31, 2019, and each of the five succeeding years and thereafter are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Year
|
|
Scheduled Principal Payments
|
|
|
Three Months Ending December 31, 2019
|
|
$
|
8,804
|
|
|
|
2020
|
|
31,118
|
|
|
|
2021
|
|
37,838
|
|
|
|
2022
|
|
106,189
|
|
|
|
2023
|
|
70,465
|
|
|
|
2024
|
|
47,514
|
|
|
|
Thereafter
|
|
136,806
|
|
|
|
Total
|
|
$
|
438,734
|
|
(1)
|
|
|
|
|
(1)
|
This figure does not include $0.3 million of premiums and discounts, net, and $3.8 million of deferred financing costs, which are reflected in mortgage notes payable, net on the condensed consolidated balance sheets.
|
We believe we will be able to address all mortgage notes payable maturing over the next 12 months through a combination of refinancing our existing indebtedness, cash from operations, proceeds from one or more equity offerings and availability on our Credit Facility.
Interest Rate Cap and Interest Rate Swap Agreements
We have entered into interest rate cap agreements that cap the interest rate on certain of our variable-rate debt and we have assumed or entered into interest rate swap agreements in which we hedged our exposure to variable interest rates by agreeing to pay fixed interest rates to our respective counterparty. We have adopted the fair value measurement provisions for our financial instruments recorded at fair value. The fair value guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Generally, we will estimate the fair value of our interest rate caps and interest rate swaps, in the absence of observable market data, using estimates of value including estimated remaining life, counterparty credit risk, current market yield and interest rate spreads of similar securities as of the measurement date. At September 30, 2019 and December 31, 2018, our interest rate cap agreements and interest rate swap were valued using Level 2 inputs.
The fair value of the interest rate cap agreements is recorded in other assets on our accompanying condensed consolidated balance sheets. We record changes in the fair value of the interest rate cap agreements quarterly based on the current market valuations at quarter end. If the interest rate cap qualifies for hedge accounting, the change in the estimated fair value is recorded to accumulated other comprehensive income to the extent that it is effective, with any ineffective portion recorded to interest expense in our condensed consolidated statements of operations and comprehensive income. If the interest rate cap does not qualify for hedge accounting, or if it is determined the hedge is ineffective, any change in the fair value is recognized in interest expense in our consolidated statements of operations and comprehensive income. The following table summarizes the interest rate caps at September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Aggregate Cost
|
|
Aggregate Notional Amount
|
|
Aggregate Fair Value
|
|
Aggregate Notional Amount
|
|
Aggregate Fair Value
|
|
$
|
1,596
|
|
(1)
|
$
|
167,062
|
|
|
$
|
368
|
|
|
$
|
134,678
|
|
|
$
|
622
|
|
|
|
|
|
(1)
|
We have entered into various interest rate cap agreements on variable rate debt with LIBOR caps ranging from 2.50% to 3.00%.
|
We have assumed or entered into interest rate swap agreements in connection with certain of our acquisitions or mortgage financings, whereby we will pay our counterparty a fixed rate interest rate on a monthly basis, and receive payments from our counterparty equivalent to the stipulated floating rate. The fair values of our interest rate swap agreements are recorded in other assets or other liabilities on our accompanying condensed consolidated balance sheets. We have designated our interest rate swaps as cash flow hedges, and we record changes in the fair value of the interest rate swap agreement to accumulated other comprehensive income on the condensed consolidated balance sheets. We record changes in fair value on a quarterly basis, using current market valuations at quarter end. The following table summarizes our interest rate swaps at September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Aggregate Notional Amount
|
|
Aggregate Fair Value Asset
|
|
Aggregate Fair Value Liability
|
|
Aggregate Notional Amount
|
|
Aggregate Fair Value Asset
|
|
Aggregate Fair Value Liability
|
|
$
|
45,919
|
|
|
$
|
—
|
|
|
$
|
(1,609
|
)
|
|
$
|
24,732
|
|
|
$
|
451
|
|
|
$
|
(396
|
)
|
The following tables present the impact of our derivative instruments in the condensed consolidated financial statements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain, net recognized in Comprehensive Income
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Derivatives in cash flow hedging relationships
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
(187
|
)
|
|
$
|
107
|
|
|
$
|
(671
|
)
|
|
$
|
576
|
|
|
Interest rate swaps
|
|
(437
|
)
|
|
138
|
|
|
(1,664
|
)
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(624
|
)
|
|
$
|
245
|
|
|
$
|
(2,335
|
)
|
|
$
|
1,028
|
|
The following table sets forth certain information regarding our derivative instruments (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability) Derivatives Fair Value at
|
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
Interest rate caps
|
|
Other assets
|
|
$
|
366
|
|
|
$
|
552
|
|
|
Interest rate swaps
|
|
Other assets
|
|
—
|
|
|
451
|
|
|
Interest rate swaps
|
|
Other liabilities
|
|
(1,609
|
)
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Interest rate caps
|
|
Other assets
|
|
$
|
2
|
|
|
$
|
70
|
|
|
|
|
|
|
|
|
|
|
Total derivative (liabilities) assets
|
|
|
|
$
|
(1,241
|
)
|
|
$
|
677
|
|
The fair value of all mortgage notes payable outstanding as of September 30, 2019 was $447.8 million, as compared to the carrying value stated above of $438.7 million. The fair value is calculated based on a discounted cash flow analysis, using management’s estimate of market interest rates on long-term debt with comparable terms and loan to value ratios. The fair value was calculated using Level 3 inputs of the hierarchy established by ASC 820, “Fair Value Measurements and Disclosures.”
Credit Facility
On August 7, 2013, we procured our senior unsecured revolving credit facility (“Revolver”) with KeyBank National Association (“KeyBank”) (serving as revolving lender, a letter of credit issuer and an administrative agent). In October 2015, we expanded our Revolver to $85.0 million and entered into a term loan facility (“Term Loan”) whereby we added a $25.0 million, five-year Term Loan subject to the same leverage tiers as the Revolver, with the interest rate at each leverage tier being five basis points lower than that of the Revolver. We have the option to repay the Term Loan in full, or in part, at any time without penalty or premium prior to the maturity date. We refer to the Revolver and Term Loan collectively herein as the Credit Facility.
On October 27, 2017, we amended the Credit Facility, increasing the Term Loan from $25.0 million, to $75.0 million, with the Revolver commitment remaining at $85.0 million. The Term Loan maturity date was extended to October 27, 2022, and the Revolver maturity date was extended to October 27, 2021. In connection with the amendment, the interest rate for the Credit Facility was reduced by 25 basis points at each of the leverage tiers. At the time of the amendment, we entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR at 2.75% to hedge our exposure to variable interest rates.
On July 2, 2019, we amended, extended and upsized our Credit Facility, increasing the Term Loan from $75.0 million to $160.0 million, inclusive of a delayed draw component whereby we can incrementally borrow on the Term Loan up to the $160.0 million commitment, and increasing the Revolver from $85.0 million to $100.0 million. The Term Loan has a new five-year term, with a maturity date of July 2, 2024, and the Revolver has a new four-year term, with a maturity date of July 2, 2023. The interest rate for the Credit Facility was reduced by 10 basis points at each of the leverage tiers. We entered into multiple interest rate cap agreements on the amended Term Loan, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. We used the net proceeds derived from the amended Credit Facility to repay all previously existing borrowings under the Revolver. We incurred fees of approximately $1.3 million in connection with the Credit Facility amendment. The bank syndicate is now comprised of KeyBank, Fifth Third Bank, U.S. Bank National Association, The Huntington National Bank, Goldman Sachs Bank USA, and Wells Fargo Bank, National Association.
As of September 30, 2019, there was $158.1 million outstanding under our Credit Facility, at a weighted average interest rate of approximately 3.63%, and $8.3 million outstanding under letters of credit, at a weighted average interest rate of 1.65%. As of September 30, 2019, the maximum additional amount we could draw under the Credit Facility was $25.8 million. We were in compliance with all covenants under the Credit Facility as of September 30, 2019.
The amount outstanding under the Credit Facility approximates fair value as of September 30, 2019.
7. Commitments and Contingencies
Ground Leases
We are obligated as lessee under four ground leases. Future lease payments due under the terms of these leases as of September 30, 2019 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
Year
|
|
Future Lease Payments Due Under Operating Leases
|
|
Three Months Ending December 31, 2019
|
|
$
|
117
|
|
|
2020
|
|
466
|
|
|
2021
|
|
477
|
|
|
2022
|
|
489
|
|
|
2023
|
|
492
|
|
|
2024
|
|
493
|
|
|
Thereafter
|
|
7,799
|
|
|
Total anticipated lease payments
|
|
$
|
10,333
|
|
|
Less: amount representing interest
|
|
(4,447
|
)
|
|
Present value of lease payments
|
|
$
|
5,886
|
|
Rental expense incurred for properties with ground lease obligations during the three and nine months ended September 30, 2019 was $0.1 million and $0.4 million, respectively, and during the three and nine months ended September 30, 2018 was $0.1 million and $0.4 million, respectively. Our ground leases are treated as operating leases and rental expenses are reflected in property operating expenses on the condensed consolidated statements of operations and comprehensive income.
Future minimum rental payments due under the terms of these leases as of December 31, 2018, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
Minimum Rental Payments Due
|
|
2019
|
|
$
|
465
|
|
|
2020
|
|
466
|
|
|
2021
|
|
392
|
|
|
2022
|
|
319
|
|
|
2023
|
|
322
|
|
|
Thereafter
|
|
3,914
|
|
|
Total
|
|
$
|
5,878
|
|
Letters of Credit
As of September 30, 2019, there was $8.3 million outstanding under letters of credit. These letters of credit are not reflected on our condensed consolidated balance sheets.
8. Equity and Mezzanine Equity
Stockholders’ Equity
The following table summarizes the changes in our equity for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|
Series A and B Preferred Stock
|
2019
|
2018
|
2019
|
2018
|
|
Balance, beginning of period
|
$
|
2
|
|
$
|
2
|
|
$
|
2
|
|
$
|
2
|
|
|
Issuance of Series A and B preferred stock, net
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Balance, end of period
|
$
|
2
|
|
$
|
2
|
|
$
|
2
|
|
$
|
2
|
|
|
Senior Common Stock
|
|
|
|
|
|
Balance, beginning of period
|
$
|
1
|
|
$
|
1
|
|
$
|
1
|
|
$
|
1
|
|
|
Issuance of senior common stock, net
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Balance, end of period
|
$
|
1
|
|
$
|
1
|
|
$
|
1
|
|
$
|
1
|
|
|
Common Stock
|
|
|
|
|
|
Balance, beginning of period
|
$
|
31
|
|
$
|
29
|
|
$
|
29
|
|
$
|
28
|
|
|
Issuance of common stock, net
|
—
|
|
—
|
|
2
|
|
1
|
|
|
Balance, end of period
|
$
|
31
|
|
$
|
29
|
|
$
|
31
|
|
$
|
29
|
|
|
Additional Paid in Capital
|
|
|
|
|
|
Balance, beginning of period
|
$
|
592,706
|
|
$
|
538,276
|
|
$
|
559,977
|
|
$
|
534,790
|
|
|
Issuance of Series A and B preferred stock and common stock, net
|
7,362
|
|
6,619
|
|
40,608
|
|
10,139
|
|
|
Retirement of senior common stock, net
|
—
|
|
—
|
|
—
|
|
(34
|
)
|
|
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
|
(112
|
)
|
—
|
|
(629
|
)
|
—
|
|
|
Balance, end of period
|
$
|
599,956
|
|
$
|
544,895
|
|
$
|
599,956
|
|
$
|
544,895
|
|
|
Accumulated Other Comprehensive Income
|
|
|
|
|
|
Balance, beginning of period
|
$
|
(1,859
|
)
|
$
|
818
|
|
$
|
(148
|
)
|
$
|
35
|
|
|
Comprehensive income
|
(624
|
)
|
245
|
|
(2,335
|
)
|
1,028
|
|
|
Balance, end of period
|
$
|
(2,483
|
)
|
$
|
1,063
|
|
$
|
(2,483
|
)
|
$
|
1,063
|
|
|
Distributions in Excess of Accumulated Earnings
|
|
|
|
|
|
Balance, beginning of period
|
$
|
(331,461
|
)
|
$
|
(287,910
|
)
|
$
|
(310,117
|
)
|
$
|
(268,058
|
)
|
|
Distributions declared to common, senior common, and preferred stockholders
|
(14,482
|
)
|
(13,633
|
)
|
(42,674
|
)
|
(40,615
|
)
|
|
Net income
|
2,207
|
|
2,677
|
|
9,055
|
|
9,807
|
|
|
Balance, end of period
|
$
|
(343,736
|
)
|
$
|
(298,866
|
)
|
$
|
(343,736
|
)
|
$
|
(298,866
|
)
|
|
Total Stockholders' Equity
|
|
|
|
|
|
Balance, beginning of period
|
$
|
259,420
|
|
$
|
251,216
|
|
$
|
249,744
|
|
$
|
266,798
|
|
|
Issuance of Series A and B preferred stock and common stock, net
|
7,362
|
|
6,619
|
|
40,610
|
|
10,140
|
|
|
Retirement of senior common stock, net
|
—
|
|
—
|
|
—
|
|
(34
|
)
|
|
Distributions declared to common, senior common, and preferred stockholders
|
(14,482
|
)
|
(13,633
|
)
|
(42,674
|
)
|
(40,615
|
)
|
|
Comprehensive income
|
(624
|
)
|
245
|
|
(2,335
|
)
|
1,028
|
|
|
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
|
(112
|
)
|
—
|
|
(629
|
)
|
—
|
|
|
Net income
|
2,207
|
|
2,677
|
|
9,055
|
|
9,807
|
|
|
Balance, end of period
|
$
|
253,771
|
|
$
|
247,124
|
|
$
|
253,771
|
|
$
|
247,124
|
|
|
Non-Controlling Interest
|
|
|
|
|
|
Balance, beginning of period
|
$
|
4,665
|
|
$
|
—
|
|
$
|
4,675
|
|
$
|
—
|
|
|
Distributions declared to Non-controlling OP Unit holders
|
(279
|
)
|
—
|
|
(835
|
)
|
—
|
|
|
Adjustment to OP Units held by Non-controlling OP Unitholders resulting from changes in ownership of the Operating Partnership
|
112
|
|
—
|
|
629
|
|
—
|
|
|
Net income
|
(16
|
)
|
—
|
|
13
|
|
—
|
|
|
Balance, end of period
|
$
|
4,482
|
|
$
|
—
|
|
$
|
4,482
|
|
$
|
—
|
|
|
Total Equity
|
$
|
258,253
|
|
$
|
247,124
|
|
$
|
258,253
|
|
$
|
247,124
|
|
Distributions
We paid the following distributions per share for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
For the nine months ended September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Common Stock and Non-controlling OP Units
|
|
$
|
0.375
|
|
|
$
|
0.375
|
|
|
$
|
1.125
|
|
|
$
|
1.125
|
|
|
Senior Common Stock
|
|
0.2625
|
|
|
0.2625
|
|
|
0.7875
|
|
|
0.7875
|
|
|
Series A Preferred Stock
|
|
0.4843749
|
|
|
0.4843749
|
|
|
1.4531247
|
|
|
1.4531247
|
|
|
Series B Preferred Stock
|
|
0.46875
|
|
|
0.46875
|
|
|
1.4063
|
|
|
1.4063
|
|
|
Series D Preferred Stock
|
|
0.4374999
|
|
|
0.4374999
|
|
|
1.3124997
|
|
|
1.3124997
|
|
Recent Activity
Common Stock ATM Program
During the nine months ended September 30, 2019, we sold 2.0 million shares of common stock, raising $40.7 million in net proceeds under our open market sales agreement with Cantor Fitzgerald (the “Common Stock ATM Program”). As of September 30, 2019, we had remaining capacity to sell up to $28.7 million of common stock under the Common Stock ATM Program.
Series A and B Preferred Stock ATM Programs
Under another open market sales agreement with Cantor Fitzgerald (the “Series A and B Preferred ATM Program”), we would, from time to time, offer to sell (i) shares of our 7.75% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred”), and (ii) shares of our 7.50% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred”), having an aggregate offering price of up to $40.0 million, through Cantor Fitzgerald, acting as sales agent and/or principal. We did not sell any shares of our Series A Preferred or Series B Preferred under our Series A and B Preferred ATM Program during the nine months ended September 30, 2019. As of September 30, 2019, we had remaining capacity to sell up to $37.2 million of preferred stock under the Series A and B Preferred ATM Program.
On October 28, 2019, we terminated the Series A and B Preferred ATM Program with Cantor Fitzgerald, as the Series A Preferred and Series B Preferred were fully redeemed on this date.
Mezzanine Equity
Our 7.00% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred”) is classified as mezzanine equity on our condensed consolidated balance sheets because it is redeemable at the option of the shareholder upon a change of control of greater than 50% in accordance with ASC 480-10-S99 “Distinguishing Liabilities from Equity,” which requires mezzanine equity classification for preferred stock issuances with redemption features which are outside of the control of the issuer. A change in control of our company, outside of our control, is only possible if a tender offer is accepted by over 90% of our shareholders. All other change in control situations would require input from our Board of Directors. We will periodically evaluate the likelihood that a change of control greater than 50% will take place, and if we deem this probable, we would adjust the Series D Preferred presented in mezzanine equity to their redemption value, with the offset to gain (loss) on extinguishment. We currently believe the likelihood of a change of control greater than 50% is remote.
Under a third open market sales agreement with Cantor Fitzgerald (the “Series D Preferred ATM Program”), we may, from time to time, offer to sell shares of our Series D Preferred, having an aggregate offering price of up to $50.0 million, through Cantor Fitzgerald, acting as sales agent and/or principal. We did not sell any shares of our Series D Preferred under our Series D Preferred ATM Program during the nine months ended September 30, 2019. As of September 30, 2019, we had remaining capacity to sell up to $18.6 million of Series D Preferred under the Series D Preferred ATM Program.
Amendment to Articles of Incorporation
On April 11, 2018, we filed with the Maryland State Department of Assessments and Taxation an Articles Supplementary reclassifying 3,500,000 authorized but unissued shares of our Senior Common Stock, as authorized but unissued shares of our common stock. As a result of the reclassification, there were 57,969 authorized but unissued shares of Senior Common Stock.
On April 11, 2018, we also filed with the Maryland State Department of Assessments and Taxation an Articles of Amendment to increase the number of shares of capital stock we have authority to issue to 100,000,000 and authorized common stock to 87,700,000 shares.
On September 27, 2019, the Company filed with the Maryland State Department of Assessments and Taxation the Articles Supplementary (i) setting forth the rights, preferences and terms of its newly designated 6.625% Series E Cumulative Redeemable Preferred Stock, par value $0.001 per share, with a liquidation preference of $25.00 per share (the “Series E Preferred Stock”) and (ii) reclassifying and designating 4,000,000 shares of the Company’s authorized and unissued shares of Common Stock as shares of Series E Preferred Stock. The reclassification decreased the number of shares classified as Common Stock from 87,700,000 shares immediately prior to the reclassification to 83,700,000 shares immediately after the reclassification.
Universal Shelf Registration Statement
On January 11, 2019, we filed a universal registration statement on Form S-3, File No. 333-229209, and an amendment thereto on Form-S-3/A on January 24, 2019 (collectively referred to as the “Universal Shelf”). The Universal Shelf became effective on February 13, 2019 and replaces our prior universal shelf registration statement. The Universal Shelf allows us to issue up to $500.0 million of securities. As of September 30, 2019, we had the ability to issue up to $462.3 million under the Universal Shelf.
9. Subsequent Events
Debt Activity
On October 2, 2019, we fully repaid one mortgage with an outstanding balance of $6.3 million collateralized by one property. This mortgage had a fixed rate of 6.0%.
Equity Activity
On October 4, 2019, we completed an underwritten public offering of 2,760,000 shares of our Series E Preferred Stock at a public offering price of $25.00 per share, raising $69.0 million in gross proceeds and approximately $66.6 million in net proceeds, after payment of underwriting discounts and commissions. We used the net proceeds from this offering to redeem all outstanding shares of our Series A Preferred and Series B Preferred, and pay down our Credit Facility.
On October 28, 2019, we voluntarily redeemed all 1,000,000 outstanding shares of our Series A Preferred Stock and all 1,264,000 outstanding shares of our Series B Preferred Stock at a redemption price of $25.1506944 per share and $25.1458333 per share, respectively, which represents the liquidation preference per share, plus accrued and unpaid dividends through October 28, 2019 for an aggregate redemption price of approximately $56.9 million.
Distributions
On October 8, 2019, our Board of Directors declared the following monthly distributions for the months of October, November and December of 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Common Stock and Non-controlling OP Unit Distributions per Share
|
|
Series D Preferred Distributions per Share
|
|
Series E Preferred Distributions per Share
|
|
|
October 22, 2019
|
|
October 31, 2019
|
|
$
|
0.125
|
|
|
$
|
0.1458333
|
|
|
$
|
0.128819
|
|
(1)
|
|
November 19, 2019
|
|
November 29, 2019
|
|
0.125
|
|
|
0.1458333
|
|
|
0.138021
|
|
|
|
December 19, 2019
|
|
December 31, 2019
|
|
0.125
|
|
|
0.1458333
|
|
|
0.138021
|
|
|
|
|
|
|
|
$
|
0.375
|
|
|
$
|
0.4374999
|
|
|
$
|
0.404861
|
|
|
|
|
|
|
(1)
|
Represents a prorated monthly distribution, based upon the issuance date of October 4, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
Senior Common Stock Distributions
|
|
Payable to the Holders of Record During the Month of:
|
|
Payment Date
|
|
Distribution per Share
|
|
October
|
|
November 7, 2019
|
|
$
|
0.0875
|
|
|
November
|
|
December 6, 2019
|
|
0.0875
|
|
|
December
|
|
January 7, 2020
|
|
0.0875
|
|
|
|
|
|
|
$
|
0.2625
|
|
ATM Equity Activity
On October 28, 2019, we terminated the Series A and B Preferred ATM Program with Cantor Fitzgerald, as the Series A Preferred and Series B Preferred were fully redeemed on this date.