10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________________________________________________________________
 
FORM 10-Q 
____________________________________________________________________________
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2016
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to              .
 
Commission file number 1-34907
 
____________________________________________________________________________
 
STAG INDUSTRIAL, INC.
(Exact name of registrant as specified in its charter)
 
____________________________________________________________________________

Maryland
27-3099608
(State or other jurisdiction
of incorporation or organization)
(IRS Employer
Identification No.)
 
 
One Federal Street, 23rd Floor
Boston, Massachusetts
02110
(Address of principal executive offices)
(Zip Code)
 
(617) 574-4777
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Check one:
Large accelerated filer x
Accelerated filer ¨
 
 
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred stock as of the latest practicable date.
 
Class
 
Outstanding at April 29, 2016
Common Stock ($0.01 par value)
 
68,186,375

9.0 % Series A Cumulative Redeemable Preferred Stock ($0.01 par value)
 
2,760,000

6.625 % Series B Cumulative Redeemable Preferred Stock ($0.01 par value)
 
2,800,000

6.875 % Series C Cumulative Redeemable Preferred Stock ($0.01 par value)
 
3,000,000

 

Table of Contents

STAG INDUSTRIAL, INC.
Table of Contents 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

Part I. Financial Information
Item 1.  Financial Statements

STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)
 
March 31, 2016

December 31, 2015
Assets
 

 
Rental Property:
 

 
Land
$
229,288


$
228,919

Buildings and improvements, net of accumulated depreciation of $160,820 and $150,395, respectively
1,328,602


1,332,298

Deferred leasing intangibles, net of accumulated amortization of $209,898 and $200,758, respectively
263,867


276,272

Total rental property, net
1,821,757


1,837,489

Cash and cash equivalents
15,469


12,011

Restricted cash
8,403


8,395

Tenant accounts receivable, net
22,425


21,478

Prepaid expenses and other assets
26,896


23,888

Interest rate swaps
—


1,867

Assets held for sale, net
2,996


—

Total assets
$
1,897,946


$
1,905,128

Liabilities and Equity
 

 
Liabilities:
 

 
Unsecured credit facility
$
6,000


$
56,000

Unsecured term loans
299,779


299,769

Unsecured notes
399,384


399,366

Mortgage notes
214,727


230,937

Accounts payable, accrued expenses and other liabilities
28,139


25,662

Interest rate swaps
13,732


3,766

Tenant prepaid rent and security deposits
13,318


14,628

Dividends and distributions payable
8,527


8,234

Deferred leasing intangibles, net of accumulated amortization of $8,514 and $8,536, respectively
10,830


11,387

Total liabilities
994,436


1,049,749

Commitments and contingencies (Note 10)



Equity:
 

 
Preferred stock, par value $0.01 per share, 15,000,000 shares authorized,
 

 
Series A, 2,760,000 shares (liquidation preference of $25.00 per share) issued and outstanding at March 31, 2016 and December 31, 2015
69,000


69,000

Series B, 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at March 31, 2016 and December 31, 2015
70,000


70,000

Series C, 3,000,000 shares (liquidation preference of $25.00 per share) issued and outstanding at March 31, 2016 and no shares issued and outstanding at December 31, 2015
75,000


—

Common stock, par value $0.01 per share, 150,000,000 shares authorized, 68,182,802 and 68,077,333 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
682


681

Additional paid-in capital
1,016,764


1,017,394

Common stock dividends in excess of earnings
(349,881
)

(334,623
)
Accumulated other comprehensive loss
(13,567
)

(2,350
)
Total stockholders’ equity
867,998


820,102

Noncontrolling interest
35,512


35,277

Total equity
903,510


855,379

Total liabilities and equity
$
1,897,946


$
1,905,128

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except share data)
 
Three months ended March 31,
 
2016

2015
Revenue
    


    

Rental income
$
51,349


$
43,249

Tenant recoveries
9,442


7,587

Other income
81


153

Total revenue
60,872


50,989

Expenses
 


 

Property
12,655


10,246

General and administrative
11,019


7,530

Property acquisition costs
552


318

Depreciation and amortization
30,280


26,129

Other expenses
260


186

Total expenses
54,766


44,409

Other income (expense)
 


 

Interest income
3


3

Interest expense
(10,847
)

(8,010
)
Loss on extinguishment of debt
(1,134
)

—

Gain on the sales of rental property
17,673


—

Total other income (expense)
5,695


(8,007
)
Net income (loss) from continuing operations
$
11,801


$
(1,427
)
Net income (loss)
$
11,801


$
(1,427
)
Less: income (loss) attributable to noncontrolling interest after preferred stock dividends
455


(198
)
Net income (loss) attributable to STAG Industrial, Inc.
$
11,346


$
(1,229
)
Less: preferred stock dividends
2,912


2,712

Less: amount allocated to participating securities
100


101

Net income (loss) attributable to common stockholders
$
8,334


$
(4,042
)
Weighted average common shares outstanding — basic
67,889,217


64,286,213

Weighted average common shares outstanding — diluted
67,964,559


64,286,213

Income (loss) per share — basic and diluted
 


 

Income (loss) from continuing operations attributable to common stockholders - basic
$
0.12


$
(0.06
)
Income (loss) from continuing operations attributable to common stockholders - diluted
$
0.12


$
(0.06
)
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
 
Three months ended March 31,
 
2016
 
2015
Net income (loss)
$
11,801

 
$
(1,427
)
Other comprehensive loss:
 
 
 
Loss on interest rate swaps
(11,823
)
 
(4,005
)
Other comprehensive loss
(11,823
)
 
(4,005
)
Comprehensive loss
(22
)
 
(5,432
)
Net (income) loss attributable to noncontrolling interest after preferred stock dividends
(455
)
 
198

Other comprehensive loss attributable to noncontrolling interest
606

 
192

Comprehensive income (loss) attributable to STAG Industrial, Inc.
$
129

 
$
(5,042
)
The accompanying notes are an integral part of these consolidated financial statements.

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STAG Industrial, Inc.
Consolidated Statements of Equity
(unaudited, in thousands, except share data)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Common Stock Dividends in excess of Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders' Equity
 
Noncontrolling Interest - Unit holders in Operating Partnership
 
Total Equity
 
 
Shares
 
Amount
 
 
 
 
 
 
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
$
139,000

 
68,077,333

 
$
681

 
$
1,017,394

 
$
(334,623
)
 
$
(2,350
)
 
$
820,102

 
$
35,277

 
$
855,379

Proceeds from sale of series C preferred stock
75,000

 
—

 
—

 
—

 
—

 
—

 
75,000

 
—

 
75,000

Offering costs
—

 
—

 
—

 
(2,590
)
 
—

 
—

 
(2,590
)
 
—

 
(2,590
)
Issuance of restricted stock, net
—

 
100,737

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

Issuance of common stock
—

 
4,732

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends and distributions, net
(2,912
)
 
—

 
—

 
—

 
(23,692
)
 
—

 
(26,604
)
 
(1,284
)
 
(27,888
)
Non-cash compensation
—

 
—

 
—

 
841

 
—

 
—

 
841

 
2,790

 
3,631

Rebalancing of noncontrolling interest
—

 
—

 
—

 
1,120

 
—

 
—

 
1,120

 
(1,120
)
 
—

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(11,217
)
 
(11,217
)
 
(606
)
 
(11,823
)
Net income
2,912

 
—

 
—

 
—

 
8,434

 
—

 
11,346

 
455

 
11,801

Balance, March 31, 2016
$
214,000

 
68,182,802

 
$
682

 
$
1,016,764

 
$
(349,881
)
 
$
(13,567
)
 
$
867,998

 
$
35,512

 
$
903,510

Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
$
139,000

 
64,434,852

 
$
644

 
$
928,242

 
$
(203,241
)
 
$
(489
)
 
$
864,156

 
$
27,368

 
$
891,524

Proceeds from sale of common stock
—

 
417,115

 
4

 
10,129

 
—

 
—

 
10,133

 
—

 
10,133

Offering costs
—

 
—

 
—

 
(202
)
 
—

 
—

 
(202
)
 
—

 
(202
)
Issuance of restricted stock, net
—

 
92,119

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

Issuance of common stock
—

 
3,298

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends and distributions, net
(2,712
)
 
—

 
—

 
—

 
(21,824
)
 
—

 
(24,536
)
 
(1,120
)
 
(25,656
)
Non-cash compensation
—

 
—

 
—

 
710

 
—

 
—

 
710

 
1,137

 
1,847

Redemption of common units for cash
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(64
)
 
(64
)
Issuance of units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
21,902

 
21,902

Rebalancing of noncontrolling interest
—

 
—

 
—

 
10,589

 
—

 
—

 
10,589

 
(10,589
)
 
—

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(3,813
)
 
(3,813
)
 
(192
)
 
(4,005
)
Net loss
2,712

 
—

 
—

 
—

 
(3,941
)
 
—

 
(1,229
)
 
(198
)
 
(1,427
)
Balance, March 31, 2015
$
139,000

 
64,947,384

 
$
649

 
$
949,467

 
$
(229,006
)
 
$
(4,302
)
 
$
855,808

 
$
38,244

 
$
894,052

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Three months ended March 31,
 
2016
 
2015
Cash flows from operating activities:
    
 
    
Net income (loss)
$
11,801

 
$
(1,427
)
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
30,280

 
26,129

Non-cash portion of interest expense
379

 
299

Intangible amortization in rental income, net
1,666

 
2,065

Straight-line rent adjustments, net
(424
)
 
(1,293
)
Dividends on forfeited equity compensation
2

 
—

Loss on extinguishment of debt
4

 
—

Gain on sales of rental property
(17,673
)
 
—

Non-cash compensation expense
3,605

 
1,847

Change in assets and liabilities:
 
 
 
Tenant accounts receivable, net
(461
)
 
(468
)
Restricted cash
(46
)
 
(162
)
Prepaid expenses and other assets
(4,280
)
 
(3,096
)
Accounts payable, accrued expenses and other liabilities
519

 
(2,242
)
Tenant prepaid rent and security deposits
(1,285
)
 
164

Total adjustments
12,286

 
23,243

Net cash provided by operating activities
24,087

 
21,816

Cash flows from investing activities:
 
 
 
Acquisitions of land and buildings and improvements
(21,256
)
 
(48,621
)
Additions of land and building and improvements
(3,668
)
 
(2,644
)
Proceeds from sales of rental property, net
31,890

 
—

Restricted cash
38

 
(165
)
Acquisition deposits, net
167

 
(480
)
Acquisitions of deferred leasing intangibles
(6,571
)
 
(14,795
)
Net cash provided by (used in) investing activities
600

 
(66,705
)
Cash flows from financing activities:
 
 
 
Proceeds from sale of series C preferred stock
75,000

 
—

Redemption of common units for cash
—

 
(64
)
Proceeds from unsecured credit facility
54,000

 
62,000

Repayment of unsecured credit facility
(104,000
)
 
(120,000
)
Proceeds from unsecured notes
—

 
120,000

Repayment of mortgage notes
(16,128
)
 
(12,942
)
Payment of loan fees and costs
(57
)
 
(930
)
Dividends and distributions
(27,597
)
 
(25,314
)
Proceeds from sales of common stock
—

 
10,133

Offering costs
(2,447
)
 
(184
)
Net cash provided by (used in) financing activities
(21,229
)
 
32,699

Increase (decrease) in cash and cash equivalents
3,458

 
(12,190
)
Cash and cash equivalents—beginning of period
12,011

 
23,878

Cash and cash equivalents—end of period
$
15,469

 
$
11,688

Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest
$
8,721

 
$
6,990

Supplemental schedule of non-cash investing and financing activities
 
 
 
Issuance of units for acquisitions of land and building and improvements and deferred leasing intangibles
$
—

 
$
21,902

Acquisitions of land and buildings and improvements
$
(39
)
 
$
(25,936
)
Acquisitions of deferred leasing intangibles
$
(16
)
 
$
(7,731
)
Change in additions of land and building and improvements included in accounts payable, accrued expenses, and other liabilities
$
(1,761
)
 
$
1,747

Additions to building and improvements from non-cash compensation expense

$
(9
)
 
$
—

Assumption of mortgage note
$
—

 
$
11,765

Change in loan fees and costs and offering costs included in accounts payable, accrued expenses, and other liabilities
$
(80
)
 
$
(22
)
Dividends and distributions declared but not paid
$
8,527

 
$
7,696

The accompanying notes are an integral part of these consolidated financial statements.

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STAG Industrial, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Organization and Description of Business
STAG Industrial, Inc. (the “Company”) is an industrial real estate operating company focused on the acquisition and operation of single-tenant, industrial properties throughout the United States. The Company was formed as a Maryland corporation and has elected to be treated and intends to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”).  The Company is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns substantially all of its assets and conducts substantially all of its business through its operating partnership, STAG Industrial Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). As of March 31, 2016 and December 31, 2015, the Company owned a 94.8% and 95.1%, respectively, common equity interest in the Operating Partnership. The Company, through its wholly owned subsidiary, is the sole general partner of the Operating Partnership.  As used herein, the “Company” refers to STAG Industrial, Inc. and its consolidated subsidiaries and partnerships, including the Operating Partnership, except where context otherwise requires.

As of March 31, 2016, the Company owned 292 buildings in 38 states with approximately 54.3 million rentable square feet, consisting of 224 warehouse/distribution buildings, 47 light manufacturing buildings and 21 flex/office buildings. The Company’s buildings were approximately 94.8% leased to 260 tenants as of March 31, 2016.

2. Summary of Significant Accounting Policies
Interim Financial Information
 
The accompanying interim financial statements have been presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Regulation S-X for interim financial information.  Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, the accompanying interim financial statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP.  Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Basis of Presentation
The Company’s consolidated financial statements include the accounts of the Company, the Operating Partnership and their subsidiaries. Interests in the Operating Partnership not owned by the Company are referred to as “Noncontrolling Common Units.” These Noncontrolling Common Units are held by other limited partners in the form of common units ("Other Common Units") and long term incentive plan units (“LTIP units”) issued pursuant to the STAG Industrial, Inc. 2011 Equity Incentive Plan, as amended (the “2011 Plan”). All significant intercompany balances and transactions have been eliminated in the consolidation of entities. The financial statements of the Company are presented on a consolidated basis for all periods presented.

Reclassifications and New Accounting Pronouncements
Certain prior year amounts have been reclassified to conform to the current year presentation.
In March of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-09, Stock Compensation (Topic 718), which addresses certain aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeitures, and classification on the statement of cash flow. This standard is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The Company has elected to early adopt this standard effective January 1, 2016. As a result, the Company's policy is to recognize forfeitures in the period which they occur, whereas the former guidance required the Company to estimate expected forfeitures. The adoption of this standard did not have a material effect on the consolidated financial statements.

In February of 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). 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 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

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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. ASU 2016-02 is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee. Topic 842 supersedes the previous leases standard, Topic 840, Leases. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on the Company’s financial position or results of operations.

In April of 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. In August of 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Subtopic 835-30), which clarified that debt issuance costs related to line-of-credit arrangements may be presented as an asset and amortized over the term of the line-of-credit arrangement regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted this standard effective January 1, 2016. As a result, debt issuance costs related to the debt liabilities that are not line-of-credit arrangements are included as a direct deduction from the related debt liability and those related to line-of-credit arrangements continue to be included as an asset within prepaid expenses and other assets on the accompanying Consolidated Balance Sheets. The effects of this standard were applied retrospectively to all prior periods presented. The effect of the change in accounting principle was the reduction of unsecured term loans by approximately $0.2 million, unsecured notes by approximately $0.6 million, and mortgage notes by approximately $0.2 million and a corresponding reduction of prepaid expenses and other assets by approximately $1.1 million as of December 31, 2015.

In February of 2015, the FASB issued ASU 2015-02, Amendments to Consolidation Analysis (Topic 810), which amends the current consolidation model. On January 1, 2016, the Company adopted this standard, modifying the analysis it must perform to determine whether it should consolidate certain types of legal entities. The guidance does not amend the existing disclosure requirements for variable interest entities or voting interest model entities. The guidance, however, modified the requirements to qualify under the voting interest model. Under the revised guidance, the Operating Partnership will be a variable interest entity of the Company. As the Operating Partnership is already consolidated in the financial statements of the Company, the identification of this entity as a variable interest entity had no impact on the consolidated financial statements of the Company. There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption. In addition, there were no voting interest entities under prior existing guidance determined to be variable interest entities under the revised guidance.
In January of 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for the annual periods beginning after December 31, 2017 and for annual periods and interim periods within those years. Early adoption is permitted for all financial statements of fiscal years and interim periods that have not yet been issued. The adoption of ASU 2016-01 is not expected to materially impact the Company’s consolidated financial statements.
In August of 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ending December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The adoption of ASU 2014-15 is not expected to materially impact the Company’s consolidated financial statements.
In May of 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Revenue from a lease contract with a tenant is not within the scope of this revenue standard. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017. Early adoption is permitted for the first interim period within annual reporting periods beginning after December 15, 2016. The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on the Company’s financial position or results of operations.

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Rental Property
The Company capitalizes costs directly and indirectly related to the development, pre-development, redevelopment or improvement of rental property. Real estate taxes, compensation costs of development personnel, insurance, interest, and other directly related costs during construction periods are capitalized as incurred and depreciated commencing with the date the property is substantially completed. Such costs begin to be capitalized to the development projects from the point the Company is undergoing the necessary activities to get the development ready for its intended use and cease when the development projects are substantially completed and held available for occupancy. Interest is capitalized based on actual capital expenditures from the period when development or redevelopment commences until the asset is ready for its intended use, at the weighted average borrowing rate of the Company's unsecured indebtedness during the period.

Tenant Accounts Receivable, net
Tenant accounts receivable, net on the accompanying Consolidated Balance Sheets includes both tenant accounts receivable, net and accrued rental income, net. The Company provides an allowance for doubtful accounts against the portion of tenant accounts receivable that is estimated to be uncollectible. As of March 31, 2016 and December 31, 2015, the Company had an allowance for doubtful accounts of approximately $0.1 million and $0.1 million, respectively.
The Company accrues rental income earned, but not yet receivable, in accordance with GAAP. As of March 31, 2016 and December 31, 2015, the Company had accrued rental income of approximately $16.6 million and $16.1 million, respectively. The Company maintains an allowance for estimated losses that may result from those revenues. As of March 31, 2016 and December 31, 2015, the Company had an allowance on accrued rental income of $0 and $0, respectively.
As of March 31, 2016 and December 31, 2015, the Company had approximately $6.1 million and $6.1 million, respectively, of total lease security deposits available in the form of existing letters of credit, which are not reflected on the accompanying Consolidated Balance Sheets. As of March 31, 2016 and December 31, 2015, the Company had approximately $4.2 million and $4.1 million, respectively, of lease security deposits available in cash, which are included in cash and cash equivalents on the accompanying Consolidated Balance Sheets, and approximately $0.4 million and $0.4 million, respectively, of lease security deposits available in cash, which are included in restricted cash on the accompanying Consolidated Balance Sheets. These funds may be used to settle tenant accounts receivables in the event of a default under the related lease. As of March 31, 2016 and December 31, 2015, the Company's total liability associated with these lease security deposits was approximately $4.6 million and $4.5 million, respectively, and is included in tenant prepaid rent and security deposits on the accompanying Consolidated Balance Sheets.
Related Parties

As of March 31, 2016 and December 31, 2015, the Company had approximately $0.1 million and $0.1 million, respectively, of amounts due from related parties, which are included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets.

Revenue Recognition

Tenant Recoveries

By the terms of their leases, certain tenants are obligated to pay directly the costs of their properties’ insurance, real estate taxes, ground lease payments, and certain other expenses, and these costs are not reflected on the Company’s consolidated financial statements. The Company does not recognize recovery revenue related to leases where the tenant has assumed the cost for real estate taxes, insurance, ground lease payments and certain other expenses. To the extent any tenant responsible for these costs under its respective lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, the Company will record a liability for such obligation. The Company estimates that real estate taxes, which are the responsibility of these certain tenants, were approximately $2.6 million and $2.5 million for the three months ended March 31, 2016 and March 31, 2015, respectively. These amounts would have been the maximum expense of the Company had the tenants not met their contractual obligations for these periods.

Termination Income

On October 20, 2015, the tenant at the Dayton, OH property exercised its early lease termination option per the terms of the lease agreement. The option provided that the tenant's lease terminate effective October 31, 2016 and required the tenant to pay a termination fee of approximately $0.2 million. The termination fee is being recognized on a straight-line basis from October 20,

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2015 through the relinquishment of the space on October 31, 2016 and approximately $54,000 is included in rental income on the accompanying Consolidated Statements of Operations for the three months ended March 31, 2016.
Taxes
Federal Income Taxes

The Company elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2011 and intends to continue to qualify as a REIT. The Company is generally not subject to corporate level income tax on the earnings distributed currently to its stockholders that it derives from its REIT qualifying activities. As a REIT, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership.

The Company will not be required to make distributions with respect to income derived from the activities conducted through subsidiaries that the Company elects to treat as taxable REIT subsidiaries (“TRS”) for federal income tax purposes, nor will it have to comply with income, assets, or ownership restrictions inside of the TRS. Certain activities that the Company undertakes must or should be conducted by a TRS, such as performing non-customary services for its tenants and holding assets that it cannot hold directly. A TRS is subject to federal and state income taxes. The Company's TRS recognized a net loss of $11,000 and $0, during the three months ended March 31, 2016 and March 31, 2015, respectively, which has been included on the accompanying Consolidated Statements of Operations.

State and Local Income, Excise, and Franchise Tax

The Company and certain of its subsidiaries are subject to certain state and local income, excise and franchise taxes. Taxes in the amount of $0.2 million and $0.2 million have been recorded in other expenses on the accompanying Consolidated Statements of Operations for the three months ended March 31, 2016 and March 31, 2015, respectively.
Uncertain Tax Positions

Tax benefits of uncertain tax positions are recognized only if it is more likely than not that the tax position will be sustained based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. The measurement of a tax benefit for an uncertain tax position that meets the “more likely than not” threshold is based on a cumulative probability model under which the largest amount of tax benefit recognized is the amount with a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority having full knowledge of all the relevant information. As of March 31, 2016 and December 31, 2015, there were no liabilities for uncertain tax positions.
Concentrations of Credit Risk

Concentrations of credit risk relevant to the Company may arise when a number of financing arrangements, including revolving credit facilities or derivatives, are entered into with the same lenders or counterparties, and have similar economic features that would cause their inability to meet contractual obligations. The Company mitigates the concentration of credit risk as it relates to financing arrangements by entering into loan syndications with multiple, reputable financial institutions and diversifying its debt counterparties. The Company also reduces exposure by diversifying its derivatives across multiple counterparties who meet established credit and capital guidelines.

Concentration of credit risk may also arise when the Company enters into leases with multiple tenants concentrated in the same industry, or into a significant lease or multiple leases with a single tenant, or tenants are located in the same geographic region, or have similar economic features that would cause their inability to meet contractual obligations, including those to the Company, to be similarly affected. The Company regularly monitors its tenant base to assess potential concentrations of credit risk through financial statement review, tenant management calls, and press releases. Management believes the current credit risk portfolio is reasonably well diversified and does not contain any unusual concentration of credit risk.


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3. Real Estate
The following table summarizes the components of rental property as of March 31, 2016 and December 31, 2015.
Rental property (in thousands)
 
March 31, 2016
 
December 31, 2015
Land
 
$
229,288

 
$
228,919

Buildings, net of accumulated depreciation of $110,783 and $104,297, respectively
 
1,227,133

 
1,232,360

Tenant improvements, net of accumulated depreciation of $27,262 and $26,283, respectively
 
21,902

 
23,586

Building and land improvements, net of accumulated depreciation of $22,775 and $19,815, respectively
 
74,635

 
74,694

Construction in progress
 
4,932

 
1,658

Deferred leasing intangibles, net of accumulated amortization of $209,898 and $200,758, respectively
 
263,867

 
276,272

Total rental property, net
 
$
1,821,757

 
$
1,837,489

 

Acquisitions

The following tables summarize the acquisitions of the Company during the three months ended March 31, 2016.
Location of property
 
Square Feet
 
Buildings
 
Purchase Price
(in thousands)
Biddeford, ME
 
265,126

 
2

 
$
12,452

Fairfield, OH
 
206,448

 
1

 
5,330

Mascot, TN
 
130,560

 
1

 
4,500

Erlanger, KY
 
108,620

 
1

 
5,600

Three months ended March 31, 2016
 
710,754

 
5

 
$
27,882


The following table summarizes the allocation of the consideration paid at the date of acquisition during the three months ended March 31, 2016 for the acquired assets and liabilities in connection with the acquisitions identified in the table above.
Acquired assets and liabilities
 
Purchase price (in thousands)
 
Weighted average amortization period (years) of intangibles at acquisition
Land
 
$
3,236

 
N/A
Buildings
 
15,879

 
N/A
Tenant improvements
 
138

 
N/A
Building and land improvements
 
2,042

 
N/A
Deferred leasing intangibles - In-place leases
 
3,990

 
4.5
Deferred leasing intangibles - Tenant relationships
 
2,541

 
7.4
Deferred leasing intangibles - Above market leases
 
245

 
3.9
Deferred leasing intangibles - Below market leases
 
(189
)
 
5.2
Total purchase price
 
$
27,882

 
 

The table below sets forth the results of operations for the properties acquired during the three months ended March 31, 2016, included in the Company’s Consolidated Statements of Operations from the date of acquisition.
Results of operations (in thousands)
 
Three months ended March 31, 2016
Revenue
 
$
127

Property acquisition costs
 
$
521

Net income
 
$
576


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The following tables set forth pro forma information for the three months ended March 31, 2016 and March 31, 2015, respectively. The below pro forma information does not purport to represent what the actual results of operations of the Company would have been had the acquisitions outlined above occurred on the first day of the applicable reporting period, nor do they purport to predict the results of operations of future periods. The pro forma information has not been adjusted for property sales.
Pro Forma (in thousands) (1)
 
Three months ended March 31, 2016
 
Total revenue
 
$
61,309

 
Net income
 
$
12,954

(2)
Net income attributable to common stockholders
 
$
9,428

 
Pro Forma (in thousands) (3)
 
Three months ended March 31, 2015
 
Total revenue
 
$
53,112

 
Net loss
 
$
2,300

(2)
Net loss attributable to common stockholders
 
$
4,873

 
(1)
The unaudited pro forma information for the three months ended March 31, 2016 is presented as if the properties acquired during the three months ended March 31, 2016 had occurred at January 1, 2015, the beginning of the reporting period prior to acquisition.
(2)
The net income for the three months ended March 31, 2016 excludes approximately $0.5 million of property acquisition costs related to the acquisition of buildings that closed during the three months ended March 31, 2016, and the net loss for the three months ended March 31, 2015 was adjusted to include these acquisition costs. Net loss for the three months ended March 31, 2015 excludes approximately $0.2 million of property acquisition costs related to the acquisition of buildings that closed during the three months ended March 31, 2015.
(3)
The unaudited pro forma information for the three months ended March 31, 2015 is presented as if the properties acquired during the three months ended March 31, 2016 and the properties acquired during the three months ended March 31, 2015 had occurred at January 1, 2015 and January 1, 2014, respectively, the beginning of the reporting period prior to acquisition.


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Dispositions
The following table summarizes the dispositions of the Company during the three months ended March 31, 2016 (in thousands, except for square feet and building count). All of the dispositions were accounted for under the full accrual method.
Location of property
 
Square Feet
 
Buildings
 
 Carrying Value
 
 Sales Price
 
 Net Proceeds
 
Gain on Sale
Wichita, KS (1)
 
44,760

 
1

 
 
 
 
 
 
 
 
Gresham, OR (2)
 
420,690

 
1

 
 
 
 
 
 
 
 
Canton, OH (3)
 
398,000

 
1

 
 
 
 
 
 
 
 
Orangeburg, SC (4)
 
319,000

 
1

 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 
1,182,450

 
4

 
$
14,217

 
$
32,800

 
$
31,890

 
$
17,673

(1)
The building contributed approximately $0 and $0 to total revenue and approximately $34,000 (exclusive of the gain on sale of rental property and loss on extinguishment of debt) and $26,000 of net loss to the net income (loss) of the Company during the three months ended March 31, 2016 and March 31, 2015, respectively.
(2)
The building contributed approximately $0.3 million and $0.4 million to total revenue and approximately ($8,000) (exclusive of the gain on sale of rental property and loss on extinguishment of debt) and $39,000 to net income (loss) of the Company during the three months ended March 31, 2016 and March 31, 2015, respectively.
(3)
The building contributed approximately $0.3 million and $0.5 million to total revenue and approximately $0.1 million (exclusive of the gain on the sale of rental property) and ($17,000) to net income (loss) of the Company during the three months ended March 31, 2016 and March 31, 2015, respectively.
(4)
The building contributed approximately $0.2 million and $0.3 million to total revenue and approximately $0.2 million (exclusive of the gain on sale of rental property) and $0.1 million to net income (loss) of the Company during the three months ended March 31, 2016 and March 31, 2015, respectively.

As of March 31, 2016, the related land, building and improvements, net, and deferred leasing intangibles, net, for two properties located in Kansas City, KS and Parsons, KS were classified as assets held for sale on the accompanying Consolidated Balance Sheets. In April 2016, the Company completed the sale of these properties.

Deferred Leasing Intangibles

The following table summarizes the deferred leasing intangibles on the accompanying Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015.
 
 
March 31, 2016
 
December 31, 2015
Deferred Leasing Intangibles (in thousands)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Above market leases
 
$
68,850

 
$
(32,879
)
 
$
35,971

 
$
69,815

 
$
(31,554
)
 
$
38,261

Other intangible lease assets
 
404,915

 
(177,019
)
 
227,896

 
407,215

 
(169,204
)
 
238,011

Total deferred leasing intangible assets
 
$
473,765

 
$
(209,898
)
 
$
263,867

 
$
477,030

 
$
(200,758
)
 
$
276,272

 
 
 
 
 
 
 
 
 
 
 
 
 
Below market leases
 
$
19,344

 
$
(8,514
)
 
$
10,830

 
$
19,923

 
$
(8,536
)
 
$
11,387

Total deferred leasing intangible liabilities
 
$
19,344

 
$
(8,514
)
 
$
10,830

 
$
19,923

 
$
(8,536
)
 
$
11,387

The following table sets forth the amortization expense and the net decrease to rental revenue for the amortization of deferred leasing intangibles during the three months ended March 31, 2016 and March 31, 2015.
 
 
Three months ended March 31,
Deferred Leasing Intangibles Amortization (in thousands)
 
2016
 
2015
Net decrease to rental revenue related to above and below market lease amortization
 
$
1,666

 
$
2,064

Amortization expense related to other intangible lease assets
 
$
15,913

 
$
14,275

The following table sets forth the amortization of deferred leasing intangibles over the next five years as of March 31, 2016.
Year
 
Amortization Expense Related to Other Intangible Lease Assets (in thousands)
 
Net Decrease to Rental Revenue Related to Above and Below Market Lease Amortization (in thousands)
Remainder of 2016
 
$
44,659

 
$
4,695

2017
 
$
50,687

 
$
4,796

2018
 
$
40,003

 
$
3,557

2019
 
$
29,529

 
$
3,242

2020
 
$
22,463

 
$
3,078



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4. Debt
The following table sets forth a summary of the Company’s outstanding indebtedness, including borrowings under the Company’s unsecured credit facility, unsecured term loans, unsecured notes and mortgage notes as of March 31, 2016 and December 31, 2015.
Loan

Principal outstanding as of March 31, 2016 (in thousands)
    
Principal outstanding as of December 31, 2015 (in thousands)

Interest 
Rate (1)
    
Current Maturity
 
Prepayment Terms (2) 
Unsecured credit facility:










Unsecured Credit Facility (3)

$
6,000

  
$
56,000

 
L + 1.20%

 
Dec-18-2019

i
Total unsecured credit facility

6,000

  
56,000

 
 

 
 

 







 



Unsecured term loans:

 

  


 
 

 
 

 
Unsecured Term Loan C (4)

—


—


L + 1.35%


Sep-29-2020

i
Unsecured Term Loan B

150,000

  
150,000

 
L + 1.75%

 
Mar-21-2021

ii
Unsecured Term Loan A

150,000

  
150,000

 
L + 1.80%

 
Mar-31-2022

ii
Total unsecured term loans

300,000


300,000








Less: Total unamortized debt issuance costs

221


231








Total carrying value unsecured term loans

299,779

  
299,769

 
 

 
 

 







 



Unsecured notes:

 

  


 
 

 
 

 
Series F Unsecured Notes

100,000


100,000


3.98
%

Jan-05-2023

ii
Series A Unsecured Notes

50,000

  
50,000

 
4.98
%

Oct-1-2024

ii
Series D Unsecured Notes

100,000

  
100,000

 
4.32
%

Feb-20-2025

ii
Series B Unsecured Notes

50,000

  
50,000

 
4.98
%

Jul-1-2026

ii
Series C Unsecured Notes

80,000

  
80,000

 
4.42
%

Dec-30-2026

ii
Series E Unsecured Notes

20,000

  
20,000

 
4.42
%

Feb-20-2027

ii
Total unsecured notes

400,000


400,000








Less: Total unamortized debt issuance costs

616


634








Total carrying value unsecured notes

399,384

  
399,366

  
 


 

 











Mortgage notes (secured debt):

 





 


 

 
Sun Life Assurance Company of Canada (U.S.)

—


3,229


6.05
%

Jun-1-2016

iii
Webster Bank, National Association

5,471


5,513


4.22
%

Aug-4-2016

iii
National Life Insurance Company

4,732


4,775


5.75
%

Aug-10-2016

iii
Union Fidelity Life Insurance Co.

5,663


5,754


5.81
%

Apr-30-2017

iv
Principal Life Insurance Company

5,632


5,676


5.73
%
 
May-05-2017

iii
Webster Bank, National Association

2,923


2,945


3.66
%
 
May-29-2017

iii
Webster Bank, National Association

3,148


3,172


3.64
%
 
May-31-2017

iii
Wells Fargo, National Association

4,097


4,115


5.90
%
 
Aug-1-2017

v
Connecticut General Life Insurance Company-1 Facility

56,942


57,171


6.50
%
 
Feb-1-2018

vi
Connecticut General Life Insurance Company-2 Facility

47,345

 
58,085

 
5.75
%

Feb-1-2018

vi
Connecticut General Life Insurance Company-3 Facility

16,338

 
16,401

 
5.88
%

Feb-1-2018

vi
Wells Fargo Bank, National Association CMBS Loan

62,315

 
63,897

 
4.31
%

Dec-1-2022

vii
Total mortgage notes

214,606

 
230,733

 
 





Add: Total unamortized fair market value premiums

325


447


 





Less: Total unamortized debt issuance costs

204


243








Total carrying value mortgage notes

214,727

  
230,937


 





Total / weighted average interest rate (5)

$
919,890

  
$
986,072


4.24
%




(1)
Current interest rate as of March 31, 2016. At March 31, 2016, the one-month LIBOR (“L”) was 0.43725%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or the unamortized fair market value premiums. The spread over the applicable rate for the Company's unsecured credit facility and unsecured term loans is based on the Company's consolidated leverage ratio, as defined in the respective loan agreements.
(2)
Prepayment terms consist of (i) pre-payable with no penalty; (ii) pre-payable with penalty; (iii) pre-payable without penalty three months prior to the maturity date; (iv) pre-payable without penalty two months prior to the maturity date; (v) pre-payable without penalty three months prior to the maturity date, however can be defeased; (vi) pre-payable without penalty six months prior to the maturity date; and (vii) pre-payable without penalty three months prior to the maturity date, however can be defeased beginning January 1, 2016. 
(3)
The capacity of the unsecured credit facility is $450.0 million.
(4)
Capacity of $150.0 million, in which the Company has until September 29, 2016 to draw the full amount.
(5)
The weighted average interest rate was calculated using the fixed interest rate swapped on the current notional amount of $300.0 million of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or the unamortized fair market value premiums.

The aggregate undrawn nominal commitments on the combined unsecured credit facility and unsecured term loans as of March 31, 2016 was approximately $594.0 million. The Company's actual borrowing capacity at any given point in time may be less and is

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restricted to a maximum amount based on the Company's unencumbered assets. Total accrued interest for the Company's indebtedness was $5.5 million and $3.8 million as of March 31, 2016 and December 31, 2015, respectively, and is included in accounts payable, accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.

Deferred financing fees, net of accumulated amortization included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets were approximately $8.4 million and $8.9 million as of March 31, 2016 and December 31, 2015, respectively. Debt issuance costs, net of accumulated amortization included as a direct deduction from the related debt liability on the accompanying Consolidated Balance Sheets were approximately $1.0 million and $1.1 million as of March 31, 2016 and December 31, 2015, respectively. For the three months ended March 31, 2016 and March 31, 2015, amortization of deferred financing fees and debt issuance costs included in interest expense was approximately $0.5 million and $0.3 million, respectively.
On March 17, 2016, the mortgage note held with Connecticut General Life Insurance Company (Facility 2) was partially paid in the amount of approximately $10.5 million in connection with the sale of the Gresham, OR property which had served as partial collateral for the mortgage note. The prepayment fees and associated unamortized deferred financing fees and debt issuance costs of approximately $0.9 million were written off to loss on extinguishment of debt in the accompanying Consolidated Statement of Operations for the three months ended March 31, 2016.

On March 3, 2016, the mortgage note held with Wells Fargo, National Association (CMBS loan) was partially defeased in the amount of approximately $1.2 million in connection with the sale of the Wichita, KS property which had served as partial collateral for the mortgage note. The associated defeasance fees and unamortized deferred financing fees and debt issuance costs of approximately $0.2 million were written off to loss on extinguishment of debt in the accompanying Consolidated Statement of Operations for the three months ended March 31, 2016.

On March 1, 2016 the mortgage note held with Sun Life Assurance Company of Canada (U.S.), in which the property located in Gahanna, OH served as collateral for the mortgage note, was paid in full. The associated unamortized deferred financing fees, debt issuance costs, and fair value market premium were written off as a net gain of approximately $17,000 and is included in loss on extinguishment of debt in the accompanying Consolidated Statement of Operations for the three months ended March 31, 2016.

Financial Covenant Considerations
The Company’s ability to borrow under the unsecured credit facility and the unsecured term loans are subject to its ongoing compliance with a number of financial and other covenants. The Company's unsecured notes and mortgage notes also contain covenants. The Company was in compliance with all such applicable restrictions and financial covenants as of March 31, 2016 and December 31, 2015.  In the event of a default under the unsecured credit facility or the unsecured term loans, the Company’s dividend distributions are limited to the minimum amount necessary for the Company to maintain its status as a REIT.  
Fair Value of Debt
The fair value of the Company’s debt was determined by discounting the future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities, similar terms, and similar loan-to-value ratios. The discount rates ranged from approximately 1.74% to 4.19% and 1.58% to 4.82% at March 31, 2016 and December 31, 2015, respectively, and were applied to each individual debt instrument. The applicable 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. The fair value of the Company’s debt is based on Level 3 inputs. The following table presents the aggregate principal outstanding of the Company’s debt and the corresponding estimate of fair value as of March 31, 2016 and December 31, 2015 (in thousands).
 
 
March 31, 2016
 
December 31, 2015
 
 
Principal Outstanding
 
Fair Value
 
Principal Outstanding
 
Fair Value
Unsecured credit facility
 
$
6,000

 
$
5,978

 
$
56,000

 
$
56,000

Unsecured term loans
 
300,000

 
304,923

 
300,000

 
303,457

Unsecured notes
 
400,000

 
409,980

 
400,000

 
392,054

Mortgage notes
 
214,606

 
220,597

 
230,733

 
237,327

Total principal amount
 
920,606

 
$
941,478

 
986,733

 
$
988,838

Add: Total unamortized fair market value premiums
 
325

 
 
 
447

 
 
Less: Total unamortized debt issuance costs
 
1,041

 
 
 
1,108

 
 
Total carrying value
 
$
919,890

 
 
 
$
986,072

 
 

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5. Use of Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company’s use of derivative instruments is limited to the utilization of interest rate swaps to manage interest rate risk exposure on existing and future liabilities and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and related costs associated with the Company’s operating and financial structure.
The following table details the Company’s outstanding interest rate swaps as of March 31, 2016.
Interest Rate
Derivative Counterparty
 
Trade Date    
 
Effective Date
 
Notional Amount (in thousands)
 
Fair Value (in thousands)
 
Pay Fixed Interest Rate
 
Receive Variable Interest Rate
 
Maturity Date
PNC Bank, N.A.
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(25
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
Bank of America, N.A.
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(25
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
UBS AG
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(25
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
Royal Bank of Canada
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(25
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
RJ Capital Services, Inc.
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(26
)
 
0.7975
%
 
One-month L
 
Sep-10-2017 
Bank of America, N.A.
 
Sep-20-2012
 
Oct-10-2012
 
$
25,000

 
$
(48
)
 
0.7525
%
 
One-month L
 
Sep-10-2017 
RJ Capital Services, Inc.
 
Sep-24-2012
 
Oct-10-2012
 
$
25,000

 
$
(39
)
 
0.7270
%
 
One-month L
 
Sep-10-2017 
Regions Bank
 
Mar-01-2013
 
Mar-01-2013
 
$
25,000

 
$
(411
)
 
1.3300
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Jul-01-2013
 
$
50,000

 
$
(1,480
)
 
1.6810
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Aug-01-2013
 
$
25,000

 
$
(761
)
 
1.7030
%
 
One-month L
 
Feb-14-2020 
Regions Bank
 
Sep-30-2013
 
Feb-03-2014
 
$
25,000

 
$
(1,037
)
 
1.9925
%
 
One-month L
 
Feb-14-2020 
The Toronto-Dominion Bank
 
Oct-14-2015
 
Sep-29-2016
 
$
25,000

 
$
(329
)
 
1.3830
%
 
One-month L
 
Sep-29-2020
PNC Bank, N.A.
 
Oct-14-2015
 
Sep-29-2016
 
$
50,000

 
$
(674
)
 
1.3906
%
 
One-month L
 
Sep-29-2020
Regions Bank
 
Oct-14-2015
 
Sep-29-2016
 
$
35,000

 
$
(475
)
 
1.3858
%
 
One-month L
 
Sep-29-2020
U.S. Bank, N.A.
 
Oct-14-2015
 
Sep-29-2016
 
$
25,000

 
$
(339
)
 
1.3950
%
 
One-month L
 
Sep-29-2020
Capital One, N.A.
 
Oct-14-2015
 
Sep-29-2016
 
$
15,000

 
$
(205
)
 
1.3950
%
 
One-month L
 
Sep-29-2020
Royal Bank of Canada
 
Jan-08-2015
 
Mar-20-2015
 
$
25,000

 
$
(809
)
 
1.7090
%
 
One-month L
 
Mar-21-2021
The Toronto-Dominion Bank
 
Jan-08-2015
 
Mar-20-2015
 
$
25,000

 
$
(805
)
 
1.7105
%
 
One-month L
 
Mar-21-2021
The Toronto-Dominion Bank
 
Jan-08-2015
 
Sep-10-2017
 
$
100,000

 
$
(3,346
)
 
2.2255
%
 
One-month L
 
Mar-21-2021
Wells Fargo Bank, N.A.
 
Jan-08-2015
 
Mar-20-2015
 
$
25,000

 
$
(944
)
 
1.8280
%
 
One-month L
 
Mar-31-2022
The Toronto-Dominion Bank
 
Jan-08-2015
 
Feb-14-2020
 
$
25,000

 
$
(359
)
 
2.4535
%
 
One-month L
 
Mar-31-2022
Regions Bank
 
Jan-08-2015
 
Feb-14-2020
 
$
50,000

 
$
(756
)
 
2.4750
%
 
One-month L
 
Mar-31-2022
Capital One, N.A.
 
Jan-08-2015
 
Feb-14-2020
 
$
50,000

 
$
(789
)
 
2.5300
%
 
One-month L
 
Mar-31-2022

The fair value of the interest rate swaps outstanding as of March 31, 2016 and December 31, 2015 was as follows:
Balance Sheet Line Item (in thousands)
 
Notional Amount March 31, 2016
 
Fair Value March 31, 2016
 
Notional Amount December 31, 2015
 
Fair Value December 31, 2015
Interest rate swaps-Asset
 
$
—

 
$
—

 
$
275,000

 
$
1,867

Interest rate swaps-Liability
 
$
675,000

 
$
(13,732
)
 
$
400,000

 
$
(3,766
)

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements.  The Company uses interest rate swaps to fix the rate of its long term variable rate debt. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and qualified as cash flow hedges is recorded in accumulated other comprehensive loss and will be reclassified to interest expense in the period that the hedged forecasted transaction affects earnings on the Company’s variable rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings into interest expense. During the three months ended March 31, 2016 and March 31, 2015, the Company did not record any hedge ineffectiveness related to the hedged derivatives. The Company estimates that approximately $3.1 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next 12 months.


17
Table of Contents

The table below details the location in the financial statements of the gain or loss recognized on interest rate swaps designated as cash flow hedges for the three months ended March 31, 2016 and March 31, 2015, (in thousands).
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Amount of loss recognized in accumulated other comprehensive income (loss) on interest rate swaps (effective portion)
 
$
12,568

 
$
4,671

Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion)
 
$
745

 
$
666

Amount of gain (loss) recognized in interest expense (ineffective portion and amount excluded from effectiveness testing)
 
$
—

 
$
—


Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.

As of March 31, 2016, the fair values of all of the Company's 23 interest rate swaps were in a liability position of approximately $14.6 million, excluding any adjustment for nonperformance risk related to these agreements.  The adjustment for nonperformance risk included in the fair value of the Company’s net liability position was approximately $0.9 million as of March 31, 2016. Accrued interest expense for the Company's interest rate swaps was approximately $0.1 million as of March 31, 2016 and is included in accounts payable, accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.  As of March 31, 2016, the Company has not posted any collateral related to these agreements.  If the Company had breached any of its provisions at March 31, 2016, it could have been required to settle its obligations under the agreement of the interest rate swaps in a liability position at its termination value of approximately $14.8 million.
Fair Value of Interest Rate Swaps
The Company’s valuation of the interest rate swaps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs including interest rate curves. The fair values of interest rate swaps are determined by using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties.  However, as of March 31, 2016 and December 31, 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.


18
Table of Contents

The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of March 31, 2016 and December 31, 2015. 
 
 
 
 
Fair Value Measurements as of
March 31, 2016 Using
Balance Sheet Line Item (in thousands)
 
Fair Value March 31, 2016
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps-Asset
 
$
—

 
$
—

 
$
—

 
$
—

Interest rate swaps-Liability
 
$
(13,732
)
 
$
—

 
$
(13,732
)
 
$
—


 
 
 
 
Fair Value Measurements as of
December 31, 2015 Using
Balance Sheet Line Item (in thousands)
 
Fair Value December 31, 2015
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps-Asset
 
$
1,867

 
$
—

 
$
1,867

 
$
—

Interest rate swaps-Liability
 
$
(3,766
)
 
$
—

 
$
(3,766
)
 
$
—


6. Equity
Preferred Stock
Pursuant to its charter, the Company is authorized to issue 15,000,000 shares of preferred stock, par value $0.01 per share.
The table below sets forth the Company’s outstanding preferred stock issuances as of March 31, 2016.
Preferred Stock Issuances
 
Issuance Date
 
Number of Shares
 
Price and Liquidation Value per share
 
Interest Rate
Series A Preferred Stock 
 
November 2, 2011
 
2,760,000

 
$
25.00

 
9.000
%
Series B Preferred Stock 
 
April 16, 2013
 
2,800,000

 
$
25.00

 
6.625
%
Series C Preferred Stock 
 
March 17, 2016
 
3,000,000

 
$
25.00

 
6.875
%

Dividends on the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock (collectively, the "Preferred Stock Issuances") are payable quarterly in arrears on or about the last day of March, June, September, and December of each year. Dividends for the Series C Preferred Stock will accrue and be cumulative from and including March 17, 2016 to the first payment date on June 30, 2016. The Preferred Stock Issuances rank on parity and rank senior to the Company’s common stock with respect to dividend rights and rights upon the liquidation, dissolution or winding up of the Company.  The Preferred Stock Issuances have no stated maturity date and are not subject to mandatory redemption or any sinking fund. Generally, the Company is not permitted to redeem the Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock prior to November 2, 2016, April 16, 2018, and March 17, 2021, respectively, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of control.
The tables below set forth the dividends attributable to the Preferred Stock Issuances during the three months ended March 31, 2016 and the year ended December 31, 2015:
Quarter Ended 2016

Declaration Date

Series A
Preferred Stock Per Share

Series B
Preferred Stock Per Share

Payment Date
March 31

February 22, 2016

$
0.5625


$
0.4140625


March 31, 2016
Total

 

$
0.5625


$
0.4140625


 
Quarter Ended 2015
 
Declaration Date
 
Series A
Preferred Stock Per Share
 
Series B
Preferred Stock Per Share
 
Payment Date
December 31
 
October 22, 2015
 
$
0.5625

 
$
0.4140625

 
December 31, 2015
September 30
 
July 21, 2015 
 
0.5625

 
0.4140625

 
September 30, 2015
June 30
 
May 4, 2015
 
0.5625

 
0.4140625

 
June 30, 2015
March 31
 
February 20, 2015
 
0.5625

 
0.4140625

 
March 31, 2015 
Total
 
 
 
$
2.2500

 
$
1.6562500

 
 


19
Table of Contents

On May 2, 2016, the Company’s board of directors declared the Series A Preferred Stock and Series B Preferred Stock dividend for the quarter ending June 30, 2016 at a quarterly rate of $0.5625 per share and $0.4140625 per share, respectively. On May 2, 2016, the Company’s board of directors declared the Series C Preferred Stock dividend for the period from the issuance date of March 17, 2016 through June 30, 2016 at a rate of $0.49653 per share.

Common Stock
The following sets forth the Company’s at-the market ("ATM") common stock offering program as of March 31, 2016. Once the ATM offering program is associated with the Company’s most recent shelf registration statement, the Company may from time to time sell its common stock through sales agents under the program.
ATM Stock Offering Program (in thousands)
 
Date
 
Maximum Aggregate Offering Price
 
Aggregate Common Stock Available as of March 31, 2016
 
2014 $200 million ATM
 
September 10, 2014
 
$
200,000

 
$
107,380

 

The table below sets forth the activity for the ATM common stock offering programs during the year ended December 31, 2015 (in thousands, except share data). There was no activity for the ATM common stock offering programs during three months ended March 31, 2016.
 
 
Year ended December 31, 2015
ATM Stock Offering Program
 
Shares
Sold
 
Weighted Average Price Per Share
 
Gross
Proceeds
 
Sales
Agents’ Fee
 
Net
Proceeds
2014 $200 million ATM
 
2,661,403

 
$
21.63

 
$
57,571

 
$
864

 
$
56,707