Document
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 September 30, 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 November 2, 2016
Common Stock ($0.01 par value)
 
75,588,466

9.0 % Series A Cumulative Redeemable Preferred Stock ($0.01 par value)
 
—

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 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

Part I. Financial Information
Item 1.  Financial Statements

STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)
 
September 30, 2016

December 31, 2015
Assets
 

 
Rental Property:
 

 
Land
$
254,909


$
228,919

Buildings and improvements, net of accumulated depreciation of $183,386 and $150,395, respectively
1,440,311


1,332,298

Deferred leasing intangibles, net of accumulated amortization of $238,235 and $200,758, respectively
276,829


276,272

Total rental property, net
1,972,049


1,837,489

Cash and cash equivalents
12,273


12,011

Restricted cash
9,325


8,395

Tenant accounts receivable, net
23,302


21,478

Prepaid expenses and other assets
24,978


18,064

Interest rate swaps
—


1,867

Assets held for sale, net
6,617


—

Total assets
$
2,048,544


$
1,899,304

Liabilities and Equity
 

 
Liabilities:
 

 
Unsecured credit facility
$
129,000


$
56,000

Unsecured term loans, net
297,032


296,618

Unsecured notes, net
397,909


397,720

Mortgage notes, net
200,855


229,910

Accounts payable, accrued expenses and other liabilities
34,994


25,662

Interest rate swaps
15,953


3,766

Tenant prepaid rent and security deposits
15,146


14,628

Dividends and distributions payable
8,814


8,234

Deferred leasing intangibles, net of accumulated amortization of $10,132 and $8,536, respectively
14,899


11,387

Total liabilities
1,114,602


1,043,925

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 September 30, 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 September 30, 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 September 30, 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, 72,460,009 and 68,077,333 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
725


681

Additional paid-in capital
1,117,045


1,017,394

Common stock dividends in excess of earnings
(416,540
)

(334,623
)
Accumulated other comprehensive loss
(15,669
)

(2,350
)
Total stockholders’ equity
899,561


820,102

Noncontrolling interest
34,381


35,277

Total equity
933,942


855,379

Total liabilities and equity
$
2,048,544


$
1,899,304

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

3
Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except share data)
 
Three months ended September 30,

Nine months ended September 30,
 
2016

2015

2016
 
2015
Revenue
    


    


    

 
 
Rental income
$
53,511


$
47,731


$
156,575

 
$
136,201

Tenant recoveries
8,911


8,063


26,807

 
23,135

Other income
173


127


327

 
410

Total revenue
62,595


55,921


183,709

 
159,746

Expenses
 


 


 

 
 
Property
11,258


10,949


35,672

 
31,265

General and administrative
7,603


6,429


26,373

 
21,453

Property acquisition costs
1,978


1,006


3,113

 
2,511

Depreciation and amortization
32,020


28,656


93,318

 
82,042

Loss on impairments
—


5,733


11,231

 
8,378

Other expenses
279


226


857

 
892

Total expenses
53,138


52,999


170,564

 
146,541

Other income (expense)
 


 


 

 
 
Interest income
3


2


8

 
7

Interest expense
(10,504
)

(9,317
)

(31,841
)
 
(26,260
)
Loss on extinguishment of debt
—


—


(1,973
)
 
—

Gain on the sales of rental property, net
643


1,713


21,589

 
1,713

Total other income (expense)
(9,858
)

(7,602
)

(12,217
)
 
(24,540
)
Net income (loss)
$
(401
)

$
(4,680
)

$
928

 
$
(11,335
)
Less: loss attributable to noncontrolling interest after preferred stock dividends
(216
)

(359
)

(505
)
 
(951
)
Net income (loss) attributable to STAG Industrial, Inc.
$
(185
)

$
(4,321
)

$
1,433

 
$
(10,384
)
Less: preferred stock dividends
4,001


2,712


10,914


8,136

Less: amount allocated to participating securities
95


95


289


291

Net loss attributable to common stockholders
$
(4,281
)

$
(7,128
)

$
(9,770
)
 
$
(18,811
)
Weighted average common shares outstanding — basic and diluted
71,130,848


67,799,700


68,984,670

 
65,803,304

Net loss per share — basic and diluted
 


 


 

 
 
Net loss per share — basic and diluted
$
(0.06
)
 
$
(0.11
)
 
$
(0.14
)
 
$
(0.29
)
The accompanying notes are an integral part of these consolidated financial statements.

4
Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
(401
)
 
$
(4,680
)
 
$
928

 
$
(11,335
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Income (loss) on interest rate swaps
2,863

 
(7,636
)
 
(14,028
)
 
(7,019
)
Other comprehensive income (loss)
2,863

 
(7,636
)
 
(14,028
)
 
(7,019
)
Comprehensive income (loss)
2,462

 
(12,316
)
 
(13,100
)
 
(18,354
)
Net loss attributable to noncontrolling interest after preferred stock dividends
216

 
359

 
505

 
951

Other comprehensive (income) loss attributable to noncontrolling interest
(140
)
 
371

 
709

 
343

Comprehensive income (loss) attributable to STAG Industrial, Inc.
$
2,538

 
$
(11,586
)
 
$
(11,886
)
 
$
(17,060
)
The accompanying notes are an integral part of these consolidated financial statements.

5
Table of Contents

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
 
 
 
 
 
 
Nine months ended September 30, 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 common stock
—

 
4,201,500

 
42

 
100,672

 
—

 
—

 
100,714

 
—

 
100,714

Proceeds from sale of series C preferred stock
75,000

 
—

 
—

 
—

 
—

 
—

 
75,000

 
—

 
75,000

Offering costs
—

 
—

 
—

 
(4,315
)
 
—

 
—

 
(4,315
)
 
—

 
(4,315
)
Issuance of restricted stock, net
—

 
99,968

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

Issuance of common stock
—

 
12,716

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends and distributions, net
(10,914
)
 
—

 
—

 
—

 
(72,436
)
 
—

 
(83,350
)
 
(4,118
)
 
(87,468
)
Non-cash compensation
—

 
—

 
—

 
2,746

 
—

 
—

 
2,746

 
4,986

 
7,732

Redemption of common units to common stock
—

 
68,492

 
1

 
616

 
—

 
—

 
617

 
(617
)
 
—

Rebalancing of noncontrolling interest
—

 
—

 
—

 
(67
)
 
—

 
—

 
(67
)
 
67

 
—

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(13,319
)
 
(13,319
)
 
(709
)
 
(14,028
)
Net income
10,914

 
—

 
—

 
—

 
(9,481
)
 
—

 
1,433

 
(505
)
 
928

Balance, September 30, 2016
$
214,000

 
72,460,009

 
$
725

 
$
1,117,045

 
$
(416,540
)
 
$
(15,669
)
 
$
899,561

 
$
34,381

 
$
933,942

Nine months ended September 30, 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
—

 
3,456,403

 
35

 
74,857

 
—

 
—

 
74,892

 
—

 
74,892

Offering costs
—

 
—

 
—

 
(1,229
)
 
—

 
—

 
(1,229
)
 
—

 
(1,229
)
Issuance of restricted stock, net
—

 
83,756

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

Issuance of common stock
—

 
11,277

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends and distributions, net
(8,136
)
 
—

 
—

 
—

 
(67,652
)
 
—

 
(75,788
)
 
(3,614
)
 
(79,402
)
Non-cash compensation
—

 
—

 
—

 
2,115

 
—

 
—

 
2,115

 
3,552

 
5,667

Redemption of common units to common stock
—

 
90,824

 
1

 
1,002

 
—

 
—

 
1,003

 
(1,003
)
 
—

Redemption of common units for cash
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(64
)
 
(64
)
Issuance of units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
21,902

 
21,902

Rebalancing of noncontrolling interest
—

 
—

 
—

 
10,141

 
—

 
—

 
10,141

 
(10,141
)
 
—

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(6,676
)
 
(6,676
)
 
(343
)
 
(7,019
)
Net loss
8,136

 
—

 
—

 
—

 
(18,520
)
 
—

 
(10,384
)
 
(951
)
 
(11,335
)
Balance, September 30, 2015
$
139,000

 
68,077,112

 
$
681

 
$
1,015,127

 
$
(289,413
)
 
$
(7,165
)
 
$
858,230

 
$
36,706

 
$
894,936

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

6
Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine months ended September 30,
 
2016
 
2015
Cash flows from operating activities:
    
 
    
Net income (loss)
$
928

 
$
(11,335
)
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
93,318

 
82,042

Loss on impairments
11,231

 
8,378

Non-cash portion of interest expense
1,208

 
907

Intangible amortization in rental income, net
4,751

 
6,331

Straight-line rent adjustments, net
(2,205
)
 
(2,318
)
Dividends on forfeited equity compensation
3

 
15

Loss on extinguishment of debt
1,973

 
—

Gain on the sales of rental property, net
(21,589
)
 
(1,713
)
Non-cash compensation expense
7,692

 
5,667

Change in assets and liabilities:
 
 
 
Tenant accounts receivable, net
(215
)
 
(1,477
)
Restricted cash
(461
)
 
(582
)
Prepaid expenses and other assets
(7,375
)
 
(4,407
)
Accounts payable, accrued expenses and other liabilities
8,128

 
6,821

Tenant prepaid rent and security deposits
518

 
1,728

Total adjustments
96,977

 
101,392

Net cash provided by operating activities
97,905

 
90,057

Cash flows from investing activities:
 
 
 
Acquisitions of land and buildings and improvements
(195,893
)
 
(187,698
)
Additions of land and building and improvements
(20,703
)
 
(10,053
)
Acquisitions of other assets
—

 
(565
)
Proceeds from the sales of rental property, net
50,301

 
9,186

Restricted cash
(469
)
 
(1,052
)
Acquisition deposits, net
(1,315
)
 
1,425

Acquisitions of deferred leasing intangibles
(51,937
)
 
(56,102
)
Net cash used in investing activities
(220,016
)
 
(244,859
)
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
286,000

 
190,750

Repayment of unsecured credit facility
(213,000
)
 
(144,000
)
Proceeds from unsecured notes
—

 
120,000

Repayment of mortgage notes
(33,084
)
 
(15,370
)
Payment of loan fees and costs
(140
)
 
(3,019
)
Payment of loan prepayment fees and costs
(1,969
)
 
—

Dividends and distributions
(86,890
)
 
(78,541
)
Proceeds from sales of common stock
100,714

 
74,892

Offering costs
(4,258
)
 
(1,228
)
Net cash provided by financing activities
122,373

 
143,420

Increase (decrease) in cash and cash equivalents
262

 
(11,382
)
Cash and cash equivalents—beginning of period
12,011

 
23,878

Cash and cash equivalents—end of period
$
12,273

 
$
12,496

Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest
$
29,127

 
$
22,445

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

Additions to building and other capital improvements
$
(1,004
)
 
$
(565
)
Transfer of other assets to building and other capital improvements
$
—

 
$
565

Acquisitions of land and buildings and improvements
$
(3,392
)
 
$
(34,460
)
Acquisitions of deferred leasing intangibles
$
(938
)
 
$
(10,203
)
Partial disposal of building due to involuntary conversion of building
$
492

 
$
—

Investing other receivables due to involuntary conversion of building
$
(492
)
 
$
—

Change in additions of land, building, and improvements included in accounts payable, accrued expenses, and other liabilities
$
(583
)
 
$
(1,687
)
Additions to building and improvements from non-cash compensation expense

$
(14
)
 
$
—

Assumption of mortgage notes
$
4,037

 
$
22,343

Fair market value adjustment to mortgage notes assumed
$
75

 
$
418

Change in loan fees and costs and offering costs included in accounts payable, accrued expenses, and other liabilities
$
6

 
$
64

Dividends and distributions declared but not paid
$
8,814

 
$
8,228

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

7
Table of Contents

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 September 30, 2016 and December 31, 2015, the Company owned a 95.2% 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 September 30, 2016, the Company owned 300 buildings in 37 states with approximately 58.6 million rentable square feet, consisting of 236 warehouse/distribution buildings, 47 light manufacturing buildings, 16 flex/office buildings, and one building in redevelopment. The Company’s buildings were approximately 95.3% leased to 262 tenants as of September 30, 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 statement 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.

New Accounting Pronouncements

In August of 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides clarified guidance on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company has elected to early adopt this standard effective July 1, 2016, and the effects of this standard were applied retrospectively to all prior periods presented. The effect of the change in accounting principle was an increase in net cash provided by operating activities of approximately $2.0 million for the six months ended June 30, 2016 and a corresponding increase in net cash used in financing activities for the six months ended June 30, 2016 related to the payment of loan prepayment fees and costs.

In March of 2016, the FASB issued 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

8
Table of Contents

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 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 new standard must be adopted using a modified retrospective transition and will require application of the new guidance at the beginning of the earliest comparative period. 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 $3.4 million, unsecured notes by approximately $2.3 million, and mortgage notes by approximately $1.3 million and a corresponding reduction of prepaid expenses and other assets by approximately $6.9 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

9
Table of Contents

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.

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 September 30, 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 September 30, 2016 and December 31, 2015, the Company had accrued rental income of approximately $17.7 million and $16.1 million, respectively. The Company maintains an allowance for estimated losses that may result from those revenues. As of September 30, 2016 and December 31, 2015, the Company had an allowance on accrued rental income of $0 and $0, respectively.

As of September 30, 2016 and December 31, 2015, the Company had approximately $6.9 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 September 30, 2016 and December 31, 2015, the Company had approximately $4.3 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 September 30, 2016 and December 31, 2015, the Company's total liability associated with these lease security deposits was approximately $4.7 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 September 30, 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.


10
Table of Contents

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 $2.7 million, $7.9 million, $2.7 million and $7.8 million for the three and nine months ended September 30, 2016 and September 30, 2015, respectively. These amounts would have been the maximum real estate tax expense of the Company, excluding any penalties or interest, 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 was being recognized on a straight-line basis from October 20, 2015 through the relinquishment of the space on October 31, 2016. On August 29, 2016, the Company sold the Dayton, OH property to an unaffiliated third party and recognized the remaining unamortized termination fee. The termination fee income of approximately $0.1 million and $0.2 million is included in rental income on the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2016, respectively.

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. On June 24, 2016, the Operating Partnership, through its wholly owned subsidiary, transferred a vacant land parcel located in Burlington, NJ to the Company's TRS. The Company's TRS recognized a net loss of approximately $0.1 million, $0.1 million, $7,000 and $7,000, for the three and nine months ended September 30, 2016 and September 30, 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, $0.7 million, $0.2 million and $0.8 million have been recorded in other expenses on the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and September 30, 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 September 30, 2016 and December 31, 2015, there were no liabilities for uncertain tax positions.

11
Table of Contents


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.

3. Rental Property

The following table summarizes the components of rental property as of September 30, 2016 and December 31, 2015.
Rental Property (in thousands)
 
September 30, 2016
 
December 31, 2015
Land
 
$
254,909

 
$
228,919

Buildings, net of accumulated depreciation of $124,766 and $104,297, respectively
 
1,318,058

 
1,232,360

Tenant improvements, net of accumulated depreciation of $29,389 and $26,283, respectively
 
22,383

 
23,586

Building and land improvements, net of accumulated depreciation of $29,231 and $19,815, respectively
 
91,413

 
74,694

Construction in progress
 
8,457

 
1,658

Deferred leasing intangibles, net of accumulated amortization of $238,235 and $200,758, respectively
 
276,829

 
276,272

Total rental property, net
 
$
1,972,049

 
$
1,837,489

 

Acquisitions

The following table summarizes the acquisitions of the Company during the three and nine months ended September 30, 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

West Chicago, IL
 
249,470

 
1

 
$
8,663

Visalia, CA
 
635,281

 
1

 
27,921

Norcross, GA
 
152,036

 
1

 
5,508

Reading, PA
 
248,000

 
1

 
9,594

Charlotte, NC
 
104,852

 
1

 
6,517

Three months ended June 30, 2016
 
1,389,639

 
5

 
$
58,203

Columbia, SC
 
185,600

 
1

 
$
7,300

Graniteville, SC
 
450,000

 
1

 
15,675

Fountain Inn, SC
 
168,087

 
1

 
7,025

Langhorne, PA
 
217,000

 
2

 
11,250

Warren, MI
 
268,000

 
1

 
18,700

New Castle, DE
 
485,987

 
1

 
27,500

Westborough, MA
 
121,700

 
1

 
7,885

Cedar Hill, TX
 
420,000

 
1

 
19,100

Forest Park, GA
 
799,200

 
2

 
24,915

Rock Hill, SC
 
315,520

 
1

 
9,850

Gardiner, ME
 
265,000

 
1

 
16,800

Three months ended September 30, 2016
 
3,696,094

 
13

 
$
166,000

Nine months ended September 30, 2016
 
5,796,487

 
23

 
$
252,085



12
Table of Contents

The following table summarizes the allocation of the consideration paid at the date of acquisition during the nine months ended September 30, 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
 
$
32,722

 
N/A
Buildings
 
146,762

 
N/A
Tenant improvements
 
3,902

 
N/A
Building and land improvements
 
15,899

 
N/A
Deferred leasing intangibles - In-place leases
 
36,561

 
7.9
Deferred leasing intangibles - Tenant relationships
 
18,205

 
9.5
Deferred leasing intangibles - Above market leases
 
4,091

 
7.8
Deferred leasing intangibles - Below market leases
 
(5,982
)
 
8.8
Above market assumed debt adjustment
 
(75
)
 
7.2
Total purchase price
 
$
252,085

 
 
Less: Mortgage note assumed
 
(4,037
)
 
 
Net assets acquired
 
$
248,048

 
 

On September 29, 2016, the Company assumed a mortgage note of approximately $4.0 million in connection with the acquisition of the property located in Rock Hill, SC. For a discussion of the method used to determine the fair value of the mortgage note, see Note 4.

The table below sets forth the results of operations for three and nine months ended September 30, 2016, for the properties acquired during the nine months ended September 30, 2016, included in the Company’s Consolidated Statements of Operations from the date of acquisition.
Results of Operations (in thousands)
 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
Revenue
 
$
3,543

 
$
4,950

Property acquisition costs
 
$
1,715

 
$
2,740

Net loss
 
$
1,560

 
$
2,521


The following tables set forth pro forma information for the nine months ended September 30, 2016 and September 30, 2015. 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)
 
Nine months ended September 30, 2016
 
Total revenue
 
$
196,336

 
Net income
 
$
4,896

(2)
Net loss attributable to common stockholders
 
$
6,003

 
Pro Forma (in thousands) (3)
 
Nine months ended September 30, 2015
 
Total revenue
 
$
188,176

 
Net loss
 
$
17,018

(2)
Net loss attributable to common stockholders
 
$
24,216

 
(1)
The unaudited pro forma information for the nine months ended September 30, 2016 is presented as if the properties acquired during the nine months ended September 30, 2016 had occurred at January 1, 2015, the beginning of the reporting period prior to acquisition.
(2)
The net income for the nine months ended September 30, 2016 excludes approximately $2.7 million of property acquisition costs related to the acquisition of buildings that closed during the nine months ended September 30, 2016, and the net loss for the nine months ended September 30, 2015 was adjusted to include these acquisition costs. Net loss for the nine months ended September 30, 2015 excludes approximately $2.2 million of property acquisition costs related to the acquisition of buildings that closed during the nine months ended September 30, 2015.
(3)
The unaudited pro forma information for the nine months ended September 30, 2015 is presented as if the properties acquired during the nine months ended September 30, 2016 and the properties acquired during the nine months ended September 30, 2015 had occurred at January 1, 2015 and January 1, 2014, respectively, the beginning of the reporting period prior to acquisition.

Dispositions

During the nine months ended September 30, 2016, the Company sold 14 buildings comprised of approximately 2.0 million square feet with a net book value of approximately $28.7 million to third parties. These buildings contributed approximately $2.5 million to revenue and approximately $0.4 million to net income (exclusive of loss on impairments, loss on extinguishment of debt, and gain on the sales of rental property, net) for the nine months ended September 30, 2016. Net proceeds from the sales of rental property were approximately $50.3 million and the Company recognized a gain on the sales of rental property, net of

13
Table of Contents

approximately $21.6 million for the nine months ended September 30, 2016. All of the dispositions were accounted for under the full accrual method.

Assets Held for Sale

As of September 30, 2016, the related land, building and improvements, net, and deferred leasing intangibles, net, for one property located in Pittsburgh, PA was classified as assets held for sale, net on the accompanying Consolidated Balance Sheets.

Loss on Impairments

The following table summarizes the Company's loss on impairments for assets held and used during the three and nine months ended September 30, 2016.
Property Location
 
Buildings
 
Event or Change in Circumstance Leading to Impairment Evaluation(1)
 
Valuation technique utilized to estimate fair value
 
Fair Value(2)
 
Loss on Impairments
(in thousands)
Fairfield, VA
 
1
 
Change in estimated hold period
(3)
Executed purchase and sale agreement
 


 


Jackson, MS
 
1
 
Change in estimated hold period
(4)
Executed purchase and sale agreement
 


 


Jackson, MS
 
1
 
Change in estimated hold period
(4)
Executed purchase and sale agreement
 


 


Mishawaka, IN
 
1
 
Market leasing conditions
 
Discounted cash flows
(5)


 


Newark, DE
 
1
 
Market leasing conditions
 
Discounted cash flows
(5)


 


Seville, OH
 
2
 
Market leasing conditions
 
Discounted cash flows
(5)


 


Sparks, MD
 
2
 
Change in estimated hold period
 
Discounted cash flows
(5)


 


Three months ended June 30, 2016
 
 
 
$
10,598

 
$
11,231

Nine months ended September 30, 2016
 
 
 
$
10,598

 
$
11,231

(1)
The Company tested the asset group for impairment utilizing a probability weighted recovery analysis of certain scenarios, and it was determined that the carrying value of the property and intangibles were not recoverable from the estimated future undiscounted cash flows.
(2)
The estimated fair value of the property is based on Level 3 inputs and is a non-recurring fair value measurement.
(3)
This property was sold during the three months ended June 30, 2016.
(4)
This property was sold during the three months ended September 30, 2016.
(5)
Level 3 inputs used to determine fair value for the properties impaired for the nine months ended September 30, 2016: discount rates ranged from 8.5% to 13.0% and exit capitalization rates ranged from 8.5% to 12.0%.

Involuntary Conversion

On September 1, 2016, the Company recorded an estimated loss on involuntary conversion of approximately $2.2 million for the three and nine months ended September 30, 2016. The Company's insurance policy provides coverage for these losses, and accordingly the loss on involuntary conversion was fully offset by the expected insurance proceeds for the three and nine months ended September 30, 2016. As of September 30, 2016, the remaining proceeds receivable from the insurance company are estimated to be approximately $1.7 million, which are included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets.

Deferred Leasing Intangibles

The following table summarizes the deferred leasing intangibles on the accompanying Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015.
 
 
September 30, 2016
 
December 31, 2015
Deferred Leasing Intangibles (in thousands)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Above market leases
 
$
70,354

 
$
(35,716
)
 
$
34,638

 
$
69,815

 
$
(31,554
)
 
$
38,261

Other intangible lease assets
 
444,710

 
(202,519
)
 
242,191

 
407,215

 
(169,204
)
 
238,011

Total deferred leasing intangible assets
 
$
515,064

 
$
(238,235
)
 
$
276,829

 
$
477,030

 
$
(200,758
)
 
$
276,272

 
 
 
 
 
 
 
 
 
 
 
 
 
Below market leases
 
$
25,031

 
$
(10,132
)
 
$
14,899

 
$
19,923

 
$
(8,536
)
 
$
11,387

Total deferred leasing intangible liabilities
 
$
25,031

 
$
(10,132
)
 
$
14,899

 
$
19,923

 
$
(8,536
)
 
$
11,387


14
Table of Contents


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 and nine months ended September 30, 2016 and September 30, 2015.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Deferred Leasing Intangibles Amortization (in thousands)
 
2016
 
2015
 
2016
 
2015
Net decrease to rental revenue related to above and below market lease amortization
 
$
1,564

 
$
2,051

 
$
4,751

 
$
6,331

Amortization expense related to other intangible lease assets
 
$
16,594

 
$
15,327

 
$
48,853

 
$
44,296


The following table sets forth the amortization of deferred leasing intangibles over the next five years as of September 30, 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
 
$
16,474

 
$
1,454

2017
 
$
58,683

 
$
4,767

2018
 
$
46,971

 
$
3,545

2019
 
$
34,935

 
$
3,026

2020
 
$
26,103

 
$
2,618



15
Table of Contents

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 September 30, 2016 and December 31, 2015.
Loan

Principal Outstanding as of September 30, 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)

$
129,000

  
$
56,000

 
L + 1.15%


Dec-18-2019

i
Total unsecured credit facility

129,000

  
56,000

 
 


 

 



 

 





Unsecured term loans:

 

  


 
 


 

 
Unsecured Term Loan C (4)

—

 
—

 
L + 1.30%


Sep-29-2020

i
Unsecured Term Loan B

150,000

  
150,000

 
L + 1.70%


Mar-21-2021

ii
Unsecured Term Loan A

150,000

  
150,000

 
L + 1.65%


Mar-31-2022

ii
Total unsecured term loans

300,000

 
300,000

 






Less: Total unamortized deferred financing fees and debt issuance costs

(2,968
)
 
(3,382
)
 






Total carrying value unsecured term loans

297,032

  
296,618

 
 


 

 



 

 





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 deferred financing fees and debt issuance costs

(2,091
)
 
(2,280
)
 






Total carrying value unsecured notes

397,909

  
397,720

  
 


 

 



 

 





Mortgage notes (secured debt):

 

 


 
 


 

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

—

 
3,229

 
6.05
%

Jun-1-2016

iii
Webster Bank, National Association

—

 
5,513

 
4.22
%

Aug-4-2016

iii
National Life Insurance Company

—

 
4,775

 
5.75
%

Aug-10-2016

iii
Union Fidelity Life Insurance Co.

5,478

 
5,754

 
5.81
%

Apr-30-2017

iv
Principal Life Insurance Company

5,527

 
5,676

 
5.73
%

May-05-2017

iii
Webster Bank, National Association

2,877

 
2,945

 
3.66
%

May-29-2017

iii
Webster Bank, National Association

3,098

 
3,172

 
3.64
%

May-31-2017

iii
Wells Fargo, National Association

4,061

 
4,115

 
5.90
%

Aug-1-2017

v
Connecticut General Life Insurance Company-1 Facility

56,474

 
57,171

 
6.50
%

Feb-1-2018

vi
Connecticut General Life Insurance Company-2 Facility

46,920

  
58,085

 
5.75
%

Feb-1-2018

vi
Connecticut General Life Insurance Company-3 Facility

16,207

  
16,401

 
5.88
%

Feb-1-2018

vi
Wells Fargo Bank, National Association CMBS Loan

57,007

  
63,897

 
4.31
%

Dec-1-2022

vii
Thrivent Financial for Lutherans
 
4,037

 
—

 
4.78
%
 
Dec-15-2023
 
iii
Total mortgage notes

201,686

  
230,733

 
 





Add: Total unamortized fair market value premiums

222

 
447

 
 





Less: Total unamortized deferred financing fees and debt issuance costs

(1,053
)
 
(1,270
)
 






Total carrying value mortgage notes

200,855

  
229,910

 
 





Total / weighted average interest rate (5)

$
1,024,796

  
$
980,248

 
4.03
%




(1)
Current interest rate as of September 30, 2016. At September 30, 2016, the one-month LIBOR (“L”) was 0.53111%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any 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, which the Company has until December 29, 2016 to draw.
(5)
The weighted average interest rate was calculated using the fixed interest rate swapped on the current notional amount of $450.0 million of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums.

The aggregate undrawn nominal commitments on the combined unsecured credit facility and unsecured term loans as of September 30, 2016 was approximately $467.5 million. The Company's actual borrowing capacity at any given point in time may

16
Table of Contents

be less and is restricted to a maximum amount based on the Company's debt covenant compliance. Total accrued interest for the Company's indebtedness was $5.3 million and $3.8 million as of September 30, 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 and debt issuance costs, net of accumulated amortization included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets were approximately $2.4 million and $3.0 million as of September 30, 2016 and December 31, 2015, respectively. Deferred financing fees and 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 $6.1 million and $6.9 million as of September 30, 2016 and December 31, 2015, respectively. For the three and nine months ended September 30, 2016 and September 30, 2015, amortization of deferred financing fees and debt issuance costs included in interest expense was approximately $0.5 million, $1.4 million, $0.4 million and $1.1 million, respectively.

On September 29, 2016, the Company assumed a mortgage note with Thrivent Financial for Lutherans of approximately $4.0 million in connection with the acquisition of the property located in Rock Hill, SC, which serves as collateral for the debt. The debt matures on December 15, 2023 and bears interest at 4.78% per annum. The assumed debt was recorded at fair value and a fair value premium of approximately $0.1 million was recorded. The fair value of debt was determined by discounting the future cash flows using the current rate of approximately 4.45% 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 fair value of the debt is based on Level 3 inputs and is a nonrecurring fair value measurement.

On June 22, 2016, the mortgage note held with Wells Fargo, National Association (CMBS loan) was partially defeased in the amount of approximately $1.5 million in connection with the sale of the Gloversville, NY 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 $0.3 million were written off to loss on extinguishment of debt in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 2016.

On May 18, 2016, the mortgage note held with National Life Insurance Company, in which the property located in Charlotte, NC served as collateral for the mortgage note, was paid in full.

On May 5, 2016, the mortgage note held with Webster Bank National Association, in which the property located in Norton, MA served as collateral for the mortgage note, was paid in full.

On April 26, 2016, the mortgage note held with Wells Fargo, National Association (CMBS loan) was partially defeased in the amount of approximately $1.7 million in connection with the sale of the Parsons, 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 nine months ended September 30, 2016.

On April 26, 2016, the mortgage note held with Wells Fargo, National Association (CMBS loan) was partially defeased in the amount of approximately $1.8 million in connection with the sale of the Kansas City, 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 $0.3 million were written off to loss on extinguishment of debt in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 2016.

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 during the nine months ended September 30, 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 during the nine months ended September 30, 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.

17
Table of Contents


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 financial and other covenants. The Company was in compliance with all such applicable restrictions and financial covenants as of September 30, 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. The real estate net book value of the properties that are collateral for the Company’s debt arrangements was approximately $261.2 million and $268.8 million at September 30, 2016 and December 31, 2015, respectively, and is limited to senior, property-level secured debt financing arrangements.

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 1.73% to 4.45% and 1.58% to 4.82% at September 30, 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 September 30, 2016 and December 31, 2015 (in thousands).
 
 
September 30, 2016
 
December 31, 2015
 
 
Principal Outstanding
 
Fair Value
 
Principal Outstanding
 
Fair Value
Unsecured credit facility
 
$
129,000

 
$
128,796

 
$
56,000

 
$
56,000

Unsecured term loans
 
300,000

 
304,613

 
300,000

 
303,457

Unsecured notes
 
400,000

 
422,653

 
400,000

 
392,054

Mortgage notes
 
201,686

 
207,623

 
230,733

 
237,327

Total principal amount
 
1,030,686

 
$
1,063,685

 
986,733

 
$
988,838

Add: Total unamortized fair market value premiums
 
222

 
 
 
447

 
 
Less: Total unamortized deferred financing fees and debt issuance costs
 
(6,112
)
 
 
 
(6,932
)
 
 
Total carrying value
 
$
1,024,796

 
 
 
$
980,248

 
 

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.

18
Table of Contents

The following table details the Company’s outstanding interest rate swaps as of September 30, 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

 
$
(12
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
Bank of America, N.A.
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(12
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
UBS AG
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(12
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
Royal Bank of Canada
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(12
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
RJ Capital Services, Inc.
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

 
$
(12
)
 
0.7975
%
 
One-month L
 
Sep-10-2017 
Bank of America, N.A.
 
Sep-20-2012
 
Oct-10-2012
 
$
25,000

 
$
(19
)
 
0.7525
%
 
One-month L
 
Sep-10-2017 
RJ Capital Services, Inc.
 
Sep-24-2012
 
Oct-10-2012
 
$
25,000

 
$
(13
)
 
0.7270
%
 
One-month L
 
Sep-10-2017 
Regions Bank
 
Mar-01-2013
 
Mar-01-2013
 
$
25,000

 
$
(376
)
 
1.3300
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Jul-01-2013
 
$
50,000

 
$
(1,335
)
 
1.6810
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Aug-01-2013
 
$
25,000

 
$
(686
)
 
1.7030
%
 
One-month L
 
Feb-14-2020 
Regions Bank
 
Sep-30-2013
 
Feb-03-2014
 
$
25,000

 
$
(928
)
 
1.9925
%
 
One-month L
 
Feb-14-2020 
The Toronto-Dominion Bank
 
Oct-14-2015
 
Sep-29-2016
 
$
25,000

 
$
(453
)
 
1.3830
%
 
One-month L