Edgar Filing: STAG Industrial, Inc.

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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 June 30, 2017

¨ 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer ¨

Non-accelerated filer ¨	Smaller reporting company ¨
(Do not check if a smaller reporting company)
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 July 31, 2017
Common Stock ($0.01 par value)		92,233,063
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

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STAG INDUSTRIAL, INC.

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PART I.	Financial Information	3

Item 1.	Financial Statements (unaudited)	3

	Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016	5

	Consolidated Statements of Equity for the Six Months Ended June 30, 2017 and 2016	6

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50

Item 4.	Controls and Procedures	50

PART II.	Other Information	51

Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	53

	SIGNATURES	54

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Part I. Financial Information

Item 1. Financial Statements

STAG Industrial, Inc.

Consolidated Balance Sheets

(unaudited, in thousands, except share data)



	June 30, 2017			December 31, 2016
Assets
Rental Property:
Land	$	310,753		$	272,162
Buildings and improvements, net of accumulated depreciation of $217,317 and $187,413, respectively	1,800,400			1,550,141
Deferred leasing intangibles, net of accumulated amortization of $257,790 and $237,456, respectively	322,503			294,533
Total rental property, net	2,433,656			2,116,836
Cash and cash equivalents	7,676			12,192
Restricted cash	8,783			9,613
Tenant accounts receivable, net	26,695			25,223
Prepaid expenses and other assets	24,611			20,821
Interest rate swaps	1,701			1,471
Assets held for sale, net	3,561			—
Total assets	$	2,506,683		$	2,186,156
Liabilities and Equity
Liabilities:
Unsecured credit facility	$	130,000		$	28,000
Unsecured term loans, net	446,954			446,608
Unsecured notes, net	398,101			397,966
Mortgage notes, net	146,641			163,565
Accounts payable, accrued expenses and other liabilities	37,547			35,389
Interest rate swaps	2,955			2,438
Tenant prepaid rent and security deposits	19,305			15,195
Dividends and distributions payable	11,153			9,728
Deferred leasing intangibles, net of accumulated amortization of $12,278 and $10,450, respectively	21,897			20,341
Total liabilities	1,214,553			1,119,230
Commitments and contingencies (Note 10)
Equity:
Preferred stock, par value $0.01 per share, 15,000,000 shares authorized,
Series B, 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2017 and December 31, 2016	70,000			70,000
Series C, 3,000,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2017 and December 31, 2016	75,000			75,000
Common stock, par value $0.01 per share, 150,000,000 shares authorized, 91,446,154 and 80,352,304 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively	914			804
Additional paid-in capital	1,572,943			1,293,706
Common stock dividends in excess of earnings	(474,756		)	(410,978		)
Accumulated other comprehensive loss	(1,781		)	(1,496		)
Total stockholders’ equity	1,242,320			1,027,036
Noncontrolling interest	49,810			39,890
Total equity	1,292,130			1,066,926
Total liabilities and equity	$	2,506,683		$	2,186,156

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

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STAG Industrial, Inc.

Consolidated Statements of Operations

(unaudited, in thousands, except share data)



	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Revenue
Rental income	$	61,726		$	51,715		$	120,948		$	103,064
Tenant recoveries	10,401			8,454			20,586			17,896
Other income	66			73			139			154
Total revenue	72,193			60,242			141,673			121,114
Expenses
Property	13,635			11,759			26,911			24,414
General and administrative	7,939			7,751			16,710			18,770
Property acquisition costs	2,558			583			3,298			1,135
Depreciation and amortization	36,147			30,487			72,100			60,236
Loss on impairments	—			11,231			—			11,231
Loss on involuntary conversion	—			—			330			—
Other expenses	1,250			318			1,444			578
Total expenses	61,529			62,129			120,793			116,364
Other income (expense)
Interest income	3			2			8			5
Interest expense	(10,634		)	(10,490		)	(21,111		)	(21,337		)
Loss on extinguishment of debt	(2		)	(839		)	(2		)	(1,973		)
Gain on the sales of rental property, net	1,337			3,273			1,662			20,946
Total other income (expense)	(9,296		)	(8,054		)	(19,443		)	(2,359		)
Net income (loss)	$	1,368		$	(9,941	)	$	1,437		$	2,391
Less: loss attributable to noncontrolling interest after preferred stock dividends	(44		)	(718		)	(145		)	(232		)
Net income (loss) attributable to STAG Industrial, Inc.	$	1,412		$	(9,223	)	$	1,582		$	2,623
Less: preferred stock dividends	2,448			4,001			4,897			6,913
Less: amount allocated to participating securities	83			95			166			195
Net loss attributable to common stockholders	$	(1,119	)	$	(13,319	)	$	(3,481	)	$	(4,485	)
Weighted average common shares outstanding — basic and diluted	88,181,117			67,910,361			85,012,106			67,899,789
Net loss per share — basic and diluted
Net loss per share — basic and diluted	$	(0.01	)	$	(0.20	)	$	(0.04	)	$	(0.07	)

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

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STAG Industrial, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(unaudited, in thousands)



	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Net income (loss)	$	1,368		$	(9,941	)	$	1,437		$	2,391
Other comprehensive loss:
Loss on interest rate swaps	(1,510		)	(5,068		)	(298		)	(16,891		)
Other comprehensive loss	(1,510		)	(5,068		)	(298		)	(16,891		)
Comprehensive income (loss)	(142		)	(15,009		)	1,139			(14,500		)
Net loss attributable to noncontrolling interest after preferred stock dividends	44			718			145			232
Other comprehensive loss attributable to noncontrolling interest	62			261			13			868
Comprehensive income (loss) attributable to STAG Industrial, Inc.	$	(36	)	$	(14,030	)	$	1,297		$	(13,400	)

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
	Preferred Stock			Shares	Amount		Additional Paid-in Capital			Common Stock Dividends in excess of Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity						Total Equity
Six months ended June 30, 2017
Balance, December 31, 2016	$	145,000		80,352,304	$	804	$	1,293,706		$	(410,978	)	$	(1,496	)	$	1,027,036		$	39,890		$	1,066,926
Proceeds from sales of common stock	—			10,756,543	107		274,278			—			—			274,385			—			274,385
Offering costs	—			—	—		(3,899		)	—			—			(3,899		)	—			(3,899		)
Dividends and distributions, net	(4,897		)	—	—		—			(60,269		)	—			(65,166		)	(3,645		)	(68,811		)
Non-cash compensation activity	—			40,301	—		1,684			(194		)	—			1,490			2,342			3,832
Redemption of common units to common stock	—			297,006	3		3,267			—			—			3,270			(3,270		)	—
Issuance of units	—			—	—		—			—			—			—			18,558			18,558
Rebalancing of noncontrolling interest	—			—	—		3,907			—			—			3,907			(3,907		)	—
Other comprehensive loss	—			—	—		—			—			(285		)	(285		)	(13		)	(298		)
Net income (loss)	4,897			—	—		—			(3,315		)	—			1,582			(145		)	1,437
Balance, June 30, 2017	$	145,000		91,446,154	$	914	$	1,572,943		$	(474,756	)	$	(1,781	)	$	1,242,320		$	49,810		$	1,292,130
Six months ended June 30, 2016
Balance, December 31, 2015	$	139,000		68,077,333	$	681	$	1,017,397		$	(332,271	)	$	(2,350	)	$	822,457		$	35,400		$	857,857
Issuance of series C preferred stock	75,000			—	—		—			—			—			75,000			—			75,000
Offering costs	—			—	—		(2,655		)	—			—			(2,655		)	—			(2,655		)
Dividends and distributions, net	(6,913		)	—	—		—			(47,386		)	—			(54,299		)	(3,151		)	(57,450		)
Non-cash compensation activity	—			109,042	1		1,797			—			—			1,798			3,888			5,686
Rebalancing of noncontrolling interest	—			—	—		1,564			—			—			1,564			(1,564		)	—
Other comprehensive loss	—			—	—		—			—			(16,023		)	(16,023		)	(868		)	(16,891		)
Net income (loss)	6,913			—	—		—			(4,290		)	—			2,623			(232		)	2,391
Balance, June 30, 2016	$	214,000		68,186,375	$	682	$	1,018,103		$	(383,947	)	$	(18,373	)	$	830,465		$	33,473		$	863,938

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

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STAG Industrial, Inc.

Consolidated Statements of Cash Flows

(unaudited, in thousands)



	Six months ended June 30,
	2017			2016
Cash flows from operating activities:
Net income	$	1,437		$	2,391
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	72,100			60,236
Loss on impairments	—			11,231
Loss on involuntary conversion	330			—
Non-cash portion of interest expense	980			780
Intangible amortization in rental income, net	2,555			3,187
Straight-line rent adjustments, net	(2,778		)	(1,293		)
Dividends on forfeited equity compensation	2			3
Loss on extinguishment of debt	2			1,973
Gain on the sales of rental property, net	(1,662		)	(20,946		)
Non-cash compensation expense	4,775			5,649
Change in assets and liabilities:
Tenant accounts receivable, net	1,362			752
Restricted cash	73			(366		)
Prepaid expenses and other assets	(6,317		)	(3,693		)
Accounts payable, accrued expenses and other liabilities	(543		)	1,949
Tenant prepaid rent and security deposits	4,110			(93		)
Total adjustments	74,989			59,369
Net cash provided by operating activities	76,426			61,760
Cash flows from investing activities:
Acquisitions of land and buildings and improvements	(303,624		)	(70,875		)
Additions of land and building and improvements	(14,238		)	(11,201		)
Proceeds from sales of rental property, net	10,309			48,670
Proceeds from insurance on involuntary conversion	639			—
Restricted cash	757			(5,805		)
Acquisition deposits, net	820			(556		)
Acquisitions of deferred leasing intangibles	(62,782		)	(14,992		)
Net cash used in investing activities	(368,119		)	(54,759		)
Cash flows from financing activities:
Proceeds from sale of series C preferred stock	—			75,000
Proceeds from unsecured credit facility	356,000			152,000
Repayment of unsecured credit facility	(254,000		)	(144,000		)
Repayment of mortgage notes	(17,033		)	(31,955		)
Payment of loan fees and costs	(43		)	(73		)
Payment of loan prepayment fees and costs	(2		)	(1,969		)
Dividends and distributions	(67,388		)	(57,360		)
Proceeds from sales of common stock	274,385			—
Repurchase and retirement of restricted stock	(969		)	—
Offering costs	(3,773		)	(2,650		)
Net cash provided by (used in) financing activities	287,177			(11,007		)
Decrease in cash and cash equivalents	(4,516		)	(4,006		)
Cash and cash equivalents—beginning of period	12,192			12,011
Cash and cash equivalents—end of period	$	7,676		$	8,005
Supplemental disclosure:
Cash paid for interest, net of capitalized interest	$	20,479		$	18,627
Supplemental schedule of non-cash investing and financing activities
Issuance of units for acquisitions of land and building and improvements and deferred leasing intangibles	$	18,558		$	—
Additions to building and other capital improvements	$	(503	)	$	(1,004	)
Acquisitions of land and buildings and improvements	$	(16,986	)	$	(174	)
Acquisitions of deferred leasing intangibles	$	(2,001	)	$	(44	)
Partial disposal of building due to involuntary conversion of building	$	424		$	—
Investing other receivables due to involuntary conversion of building	$	(424	)	$	—
Change in additions of land, building, and improvements included in accounts payable, accrued expenses, and other liabilities	$	(1,572	)	$	(1,207	)
Additions to building and other capital improvements from non-cash compensation	$	(16	)	$	(13	)
Change in loan fees, costs, and offering costs included in accounts payable, accrued expenses, and other liabilities	$	(141	)	$	58
Dividends and distributions declared but not paid	$	11,153		$	8,327

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 June 30, 2017 and December 31, 2016, the Company owned a 95.7% and 95.7%, 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 June 30, 2017, the Company owned 342 buildings in 37 states with approximately 67.7 million rentable square feet, consisting of 274 warehouse/distribution buildings, 53 light manufacturing buildings, 14 flex/office buildings, and one building in redevelopment. The Company’s buildings were approximately 94.0% leased to 296 tenants as of June 30, 2017.

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, 2016.

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.

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Revision of Previously Reported Consolidated Financial Statements

In connection with the preparation of the Company's consolidated financial statements for the year ended December 31, 2016, the Company identified an error in the estimated useful life of a building acquired in the fourth quarter of 2014. As a result of the error, depreciation expense had been overstated and thereby rental property, net and equity were understated. The Company concluded that the amounts were not material to any of its previously issued consolidated financial statements. Accordingly, the Company revised these balances in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. These adjustments do not impact the Company’s cash balances for any of the reporting periods. The effects of this revision to the prior period consolidated financial statements are as follows (in thousands, except for per share data).



Effect of Revision As of and For the Three and Six Months Ended June 30, 2016	As Previously Reported			Adjustment			As Revised
Consolidated Balance Sheet, June 30, 2016
Total equity	$	860,398		$	3,540		$	863,938

Consolidated Statement of Operations, Three Months Ended June 30, 2016
Depreciation and amortization	$	31,018		$	(531	)	$	30,487
Total expenses	$	62,660		$	(531	)	$	62,129
Net loss	$	(10,472	)	$	531		$	(9,941	)
Net loss attributable to STAG Industrial, Inc.	$	(9,727	)	$	504		$	(9,223	)
Net loss attributable to common stockholders	$	(13,823	)	$	504		$	(13,319	)
Net loss per share attributable to common stockholders — basic and diluted	$	(0.20	)	$	—		$	(0.20	)

Consolidated Statement of Operations, Six Months Ended June 30, 2016
Depreciation and amortization	$	61,298		$	(1,062	)	$	60,236
Total expenses	$	117,426		$	(1,062	)	$	116,364
Net income	$	1,329		$	1,062		$	2,391
Net income attributable to STAG Industrial, Inc.	$	1,616		$	1,007		$	2,623
Net loss attributable to common stockholders	$	(5,492	)	$	1,007		$	(4,485	)
Net loss per share attributable to common stockholders — basic and diluted	$	(0.08	)	$	0.01		$	(0.07	)

Consolidated Statement of Comprehensive Income (Loss), Three Months Ended June 30, 2016
Comprehensive loss	$	(15,540	)	$	531		$	(15,009	)

Consolidated Statement of Comprehensive Income (Loss), Six Months Ended June 30, 2016
Comprehensive loss	$	(15,562	)	$	1,062		$	(14,500	)

Reclassifications and New Accounting Pronouncements

Certain prior year amounts have been reclassified to conform to the current year presentation.

In May of 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting, which provides updated guidance about which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting under the topic. This standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those years with early adoption permitted, and should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 is not expected to materially impact the Company’s consolidated financial statements. The Company plans to adopt this standard effective January 1, 2018.

In February of 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new standard was issued as part of the new revenue standard (ASU 2014-09, as discussed below), and defines “in substance nonfinancial asset,” unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. As a result of the new guidance, the guidance specific to real estate sales in Subtopic 360-20 will be eliminated, and sales and partial sales of real estate assets will now be subject to the same derecognition model as all other nonfinancial assets. This standard is effective at the same time an entity adopts ASU 2014-09, and either the full retrospective approach or the modified retrospective approach may be used. The adoption of ASU 2017-05 is not expected to materially impact the Company’s consolidated financial statements. The Company plans to adopt this standard effective January 1, 2018.

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In January of 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company elected to early adopt this standard effective January 1, 2017. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

In January of 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard provides a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This standard is effective for annual periods beginning after December 15, 2017 and interim periods within those periods, with early adoption permitted, and should be applied prospectively on or after the effective date. Upon the adoption of ASU 2017-01, it is expected that the majority of the Company's acquisitions will be accounted for as asset acquisitions, whereas under the current guidance the majority of the Company's acquisitions have been accounted for as business combinations. The most significant difference between the two accounting models that will impact the Company's consolidated financial statements is that in an asset acquisition, property acquisition costs are generally a component of the consideration transferred to acquire a group of assets and are capitalized as a component of the cost of the assets, whereas in a business combination, property acquisition costs are expensed and not included as part of the consideration transferred. The Company plans to adopt this standard effective January 1, 2018.

In November of 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires that the statement of cash flows explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, with early adoption permitted, and should be applied using a retrospective transition method to each period presented. Upon the adoption of ASU 2016-18, the Company will reconcile both cash and cash equivalents and restricted cash in the accompanying Statements of Cash Flows, whereas under the current guidance the Company explains the changes during the period for cash and cash equivalents only. The Company expects that it will adopt the standard effective January 1, 2018.

In August of 2016, the FASB issued 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 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 $0.8 million and $2.0 million for the three and six months ended June 30, 2016 and a corresponding increase in net cash used in financing activities for the three and six months ended June 30, 2016 related to the payment of loan prepayment fees and costs.

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). Topic 842 supersedes the previous leases standard, Topic 840, Leases. 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, which will result in the recording of a right of use asset and the related lease liability. 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, and expects to adopt the standard effective January 1, 2019.

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

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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. The Company expects that it will adopt the standard effective January 1, 2018.

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. While lease contracts with customers, which constitute a vast majority of the Company's revenues, are specifically excluded from the model's scope, certain of the Company's revenue streams may be impacted by the new guidance. Once the new guidance setting forth principles for the recognition, measurement, presentation and disclosure of leases (ASU 2016-02, as discussed above) goes into effect, the new revenue standard may apply to executory costs and other components of revenue due under leases that are deemed to be non-lease components (such as common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease. In that case, revenue from these items previously recognized on a straight-line basis under current lease guidance would be recognized under the new revenue guidance as the related services are delivered. As a result, while the total revenue recognized over time would not differ under the new guidance, the recognition pattern would be different. The Company is in the process of evaluating the significance of the difference in the recognition pattern that would result from this change. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. The Company has not decided which method of adoption it will use. 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, and expects that it will adopt the standard effective January 1, 2018.

Tenant Accounts Receivable, net

As of June 30, 2017 and December 31, 2016, the Company had an allowance for doubtful accounts of approximately $0.3 million and $0.2 million, respectively.

As of June 30, 2017 and December 31, 2016, the Company had accrued rental income of approximately $21.2 million and $18.4 million, respectively. As of June 30, 2017 and December 31, 2016, the Company had an allowance on accrued rental income of $0 and $0, respectively.

As of June 30, 2017 and December 31, 2016, the Company had approximately $11.8 million and $9.0 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 June 30, 2017 and December 31, 2016, the Company had approximately $6.7 million and $5.4 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 June 30, 2017 and December 31, 2016, the Company's total liability associated with these lease security deposits was approximately $7.1 million and $5.8 million, respectively, and is included in tenant prepaid rent and security deposits on the accompanying Consolidated Balance Sheets.

Related Parties

As of June 30, 2017 and December 31, 2016, the Company had approximately $13,000 and $48,000, respectively, of amounts due from related parties, which are included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets.

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Revenue Recognition

Tenant Recoveries

The Company estimates that real estate taxes, which are the responsibility of certain tenants under the terms of their leases and are not reflected on the Company's consolidated financial statements, were approximately $3.0 million, $6.2 million, $2.6 million and $5.2 million for the three and six months ended June 30, 2017 and June 30, 2016, 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 March 27, 2017, the tenant at the Buena Vista, VA property exercised its early lease termination option per the terms of the lease agreement. The option provided that the tenant's lease terminate effective March 31, 2018 and required the tenant to pay a termination fee of approximately $0.5 million. The termination fee is being recognized on a straight-line basis from March 27, 2017 through the relinquishment of the space on March 31, 2018. 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 six months ended June 30, 2017.

On February 9, 2017, the Company entered into a lease termination agreement with the tenant located at the Belvidere, IL building. The agreement provided that the tenant’s lease terminate effective February 9, 2017 and required the tenant to pay a termination fee of $54,000. The full termination fee was recognized on February 9, 2017 and is included in rental income on the accompanying Consolidated Statements of Operations for the six months ended June 30, 2017.

Approximately $0.2 million and $0.4 million of termination fee income related to the Golden, CO property, the tenant at which exercised its termination option on December 21, 2016, is included in rental income on the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2017.

Taxes

Federal Income Taxes

The Company's taxable REIT subsidiaries recognized a net loss of approximately $0.2 million, $0.2 million, $20,000 and $31,000 for the three and six months ended June 30, 2017 and June 30, 2016, respectively, which has been included on the accompanying Consolidated Statements of Operations.

State and Local Income, Excise, and Franchise Tax

State and local income, excise, and franchise taxes in the amount of $0.2 million, $0.4 million, $0.3 million and $0.5 million have been recorded in other expenses on the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2017 and June 30, 2016, respectively.

Uncertain Tax Positions

As of June 30, 2017 and December 31, 2016, there were no liabilities for uncertain tax positions.

Concentrations of Credit Risk

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. Rental Property

The following table summarizes the components of rental property as of June 30, 2017 and December 31, 2016.



Rental Property (in thousands)	June 30, 2017			December 31, 2016
Land	$	310,753		$	272,162
Buildings, net of accumulated depreciation of $143,410 and $125,971, respectively	1,636,660		⁽¹⁾	1,408,406		⁽¹⁾
Tenant improvements, net of accumulated depreciation of $30,179 and $28,388, respectively	27,939			24,974
Building and land improvements, net of accumulated depreciation of $43,728 and $33,054, respectively	127,214			107,463
Construction in progress	8,587			9,298
Deferred leasing intangibles, net of accumulated amortization of $257,790 and $237,456, respectively	322,503			294,533
Total rental property, net	$	2,433,656		$	2,116,836


(1)	Includes one building in redevelopment.

Acquisitions

The following table summarizes the acquisitions of the Company during the three and six months ended June 30, 2017.



Location of Property	Square Feet	Buildings	Purchase Price (in thousands)
Jacksonville, FL	1,025,720	4	$	34,264
Sparks, NV	174,763	1	8,380
Salisbury, NC	288,000	1	8,250
Franklin Township, NJ	183,000	1	12,800
Milford, CT	200,000	1	12,762
Bedford Heights, OH	173,034	1	7,622
Redford, MI	135,728	1	7,769
Warren, MI	154,377	1	7,940
Three months ended March 31, 2017	2,334,622	11	$	99,787
Waukegan, IL	261,075	2	$	13,850
Gaffney, SC	226,968	1	7,200
Dayton, OH	569,966	1	29,750
Belvidere, IL	336,204	1	22,867
San Diego, CA	205,440	1	19,362
Edwardsville, KS	270,869	1	16,270
Pedricktown, NJ	245,749	1	16,000
Walton, KY	224,921	1	11,450
Rock Hill, SC	275,000	1	6,675
Laredo, TX	206,810	1	13,500
Clinton, PA	297,200	1	23,650
Batavia, IL	102,500	1	5,900
Wallingford, CT	105,000	1	8,200
Rockwall, TX	389,546	1	28,600
Houston, TX	232,800	3	25,000
Lebanon, PA	211,358	1	7,950
Maple Grove, MN	108,628	1	10,031
Romulus, MI	303,760	1	19,351
Three months ended June 30, 2017	4,573,794	21	$	285,606
Six months ended June 30, 2017	6,908,416	32	$	385,393

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The following table summarizes the allocation of the consideration paid at the date of acquisition during the six months ended June 30, 2017 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	$	39,900		N/A
Buildings	251,574			N/A
Tenant improvements	6,382			N/A
Building and land improvements	22,754			N/A
Deferred leasing intangibles - In-place leases	40,857			8.9
Deferred leasing intangibles - Tenant relationships	16,260			11.2
Deferred leasing intangibles - Above market leases	11,478			11.5
Deferred leasing intangibles - Below market leases	(3,812		)	9.0
Total purchase price	$	385,393

On May 31, 2017, the Company acquired a property located in San Diego, CA for approximately $19.4 million. As partial consideration for the property acquired, the Company granted 687,827 Other Common Units with a fair value of approximately $18.6 million. For a discussion of the method used to determine the fair value of the Other Common Units issued, see Note 7.

The table below sets forth the results of operations for the three and six months ended June 30, 2017, for the properties acquired during the six months ended June 30, 2017, included in the Company’s Consolidated Statements of Operations from the date of acquisition.



Results of Operations (in thousands)	Three months ended June 30, 2017		Six months ended June 30, 2017
Total revenue	$	4,174	$	5,611
Property acquisition costs	$	2,615	$	3,208
Net loss	$	2,430	$	3,099

The following tables set forth pro forma information for the six months ended June 30, 2017 and June 30, 2016. 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⁾	Six months ended June 30, 2017		Six months ended June 30, 2016
Total revenue	$	151,746	$	135,955
Net income (loss)⁽²⁾	$	5,757	$	(4,201	)
Net income (loss) attributable to common stockholders	$	658	$	(10,738	)


(1)	The unaudited pro forma information for the six months ended June 30, 2017 and June 30, 2016 is presented as if the properties acquired during the six months ended June 30, 2017 and June 30, 2016 were completed on January 1, 2016 and January 1, 2015, respectively.

(2)

The net income for the six months ended June 30, 2017 excludes approximately $3.2 million of property acquisition costs related to the acquisition of buildings that closed during the six months ended June 30, 2017, and the net income for the six months ended June 30, 2016 was adjusted to include these acquisition costs. Net income for the six months ended June 30, 2016 excludes approximately $1.0 million of property acquisition costs related to the acquisition of buildings that closed during the six months ended June 30, 2016.

Dispositions

During the six months ended June 30, 2017, the Company sold four buildings comprised of approximately 0.2 million square feet with a net book value of approximately $8.6 million to third parties. These buildings contributed approximately $15,000 to revenue (exclusive of acceleration of straight line rent) and approximately $0.1 million to net loss (exclusive of acceleration of straight line rent and gain on the sales of rental property, net) for the six months ended June 30, 2017. Net proceeds from the sales of rental property were approximately $10.3 million and the Company recognized a gain on the sales of rental property, net of approximately $1.7 million for the six months ended June 30, 2017. These dispositions were accounted for under the full accrual method.

Assets Held for Sale

As of June 30, 2017, the related land, building and improvements, net, and deferred leasing intangibles, net, for two buildings located in Milwaukee, WI were classified as assets held for sale, net on the accompanying Consolidated Balance Sheets.

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Involuntary Conversion

During the three and six months ended June 30, 2017, the Company wrote down a building in the amount of approximately $0.2 million and $0.8 million, respectively, related to the involuntary conversion event that occurred on September 1, 2016. The cumulative write down of the building since the involuntary conversion event is approximately $1.5 million as of June 30, 2017. The Company recognized a loss on involuntary conversion of approximately $0 and $0.3 million during the three and six months ended June 30, 2017, respectively. As of June 30, 2017, the remaining proceeds receivable from the insurance company are estimated to be approximately $0.8 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 June 30, 2017 and December 31, 2016.



	June 30, 2017							December 31, 2016
Deferred Leasing Intangibles (in thousands)	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Above market leases	$	78,476	$	(34,009	)	$	44,467	$	70,668	$	(32,868	)	$	37,800
Other intangible lease assets	501,817		(223,781		)	278,036		461,321		(204,588		)	256,733
Total deferred leasing intangible assets	$	580,293	$	(257,790	)	$	322,503	$	531,989	$	(237,456	)	$	294,533

Below market leases	$	34,175	$	(12,278	)	$	21,897	$	30,791	$	(10,450	)	$	20,341
Total deferred leasing intangible liabilities	$	34,175	$	(12,278	)	$	21,897	$	30,791	$	(10,450	)	$	20,341

The following table sets forth the amortization expense and the net decrease to rental income for the amortization of deferred leasing intangibles during the three and six months ended June 30, 2017 and June 30, 2016.



	Three months ended June 30,				Six months ended June 30,
Deferred Leasing Intangibles Amortization (in thousands)	2017		2016		2017		2016
Net decrease to rental income related to above and below market lease amortization	$	1,259	$	1,521	$	2,555	$	3,187
Amortization expense related to other intangible lease assets	$	17,420	$	16,346	$	35,813	$	32,259

The following table sets forth the amortization of deferred leasing intangibles over the next five years as of June 30, 2017.



Year	Amortization Expense Related to Other Intangible Lease Assets (in thousands)		Net Decrease to Rental Income Related to Above and Below Market Lease Amortization (in thousands)
Remainder of 2017	$	34,702	$	2,583
2018	$	58,161	$	4,211
2019	$	45,676	$	3,506
2020	$	35,970	$	3,104
2021	$	26,620	$	1,854

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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 June 30, 2017 and December 31, 2016.



Loan	Principal Outstanding as of June 30, 2017 (in thousands)			Principal Outstanding as of December 31, 2016 (in thousands)			Interest Rate ⁽¹⁾		Current Maturity	Prepayment Terms ⁽²⁾
Unsecured credit facility:
Unsecured Credit Facility ⁽³⁾	$	130,000		$	28,000		L + 1.15%		Dec-18-2019	i
Total unsecured credit facility	130,000			28,000

Unsecured term loans:
Unsecured Term Loan C	150,000			150,000			L + 1.30%		Sep-29-2020	i
Unsecured Term Loan B	150,000			150,000			L + 1.30%		Mar-21-2021	i
Unsecured Term Loan A	150,000			150,000			L + 1.30%		Mar-31-2022	i
Total unsecured term loans	450,000			450,000
Less: Total unamortized deferred financing fees and debt issuance costs	(3,046		)	(3,392		)
Total carrying value unsecured term loans	446,954			446,608

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	(1,899		)	(2,034		)
Total carrying value unsecured notes	398,101			397,966

Mortgage notes (secured debt):
Union Fidelity Life Insurance Company	—			5,384			5.81	%	Apr-30-2017	iii
Webster Bank, National Association	—			2,853			3.66	%	May-29-2017	iv
Webster Bank, National Association	—			3,073			3.64	%	May-31-2017	iv
Wells Fargo, National Association	—			4,043			5.90	%	Aug-1-2017	v
Connecticut General Life Insurance Company -1 Facility	35,012			35,320			6.50	%	Feb-1-2018	vi
Connecticut General Life Insurance Company -2 Facility	36,539			36,892			5.75	%	Feb-1-2018	vi
Connecticut General Life Insurance Company -3 Facility	16,004			16,141			5.88	%	Feb-1-2018	vi
Wells Fargo Bank, National Association CMBS Loan	55,778			56,608			4.31	%	Dec-1-2022	vii
Thrivent Financial for Lutherans	3,960			4,012			4.78	%	Dec-15-2023	iv
Total mortgage notes	147,293			164,326
Total unamortized fair market value premiums	66			112
Less: Total unamortized deferred financing fees and debt issuance costs	(718		)	(873		)
Total carrying value mortgage notes	146,641			163,565
Total / weighted average interest rate ⁽⁴⁾	$	1,121,696		$	1,036,139		3.62	%

(1)

Current interest rate as of June 30, 2017. At June 30, 2017, the one-month LIBOR (“L”) was 1.22389%. 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 two months prior to the maturity date; (iv) pre-payable without penalty three 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 currently $450.0 million. Deferred financing fees and debt issuance costs, net of accumulated amortization related to the unsecured credit facility of approximately $2.0 million and $2.3 million is included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, respectively.


(4)	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 commitment on the unsecured credit facility as of June 30, 2017 was approximately $314.4 million, including issued letters of credit. The Company's actual borrowing capacity at any given point in time may 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 approximately $5.4 million and $5.7 million as of June 30, 2017 and December 31, 2016, respectively, and is included in accounts payable, accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.

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The table below sets forth the costs included in interest expense related to the Company's debt arrangements on the accompanying Consolidated Statement of Operations for the three and six months ended June 30, 2017 and June 30, 2016.



	Three months ended June 30,				Six months ended June 30,
Costs Included in Interest Expense (in thousands)	2017		2016		2017		2016
Amortization of deferred financing fees and debt issuance costs and fair market value premiums	$	504	$	401	$	1,007	$	780
Facility fees and unused fees	$	278	$	344	$	553	$	688

On May 30, 2017, the mortgage note held with Wells Fargo, National Association, in which the property located in Yorkville, WI served as collateral for the mortgage note, was paid in full.

On March 3, 2017, the mortgage note held with Webster Bank, National Association, in which the property located in East Windsor, CT served as collateral for the mortgage note, was paid in full.

On March 1, 2017, the mortgage note held with Webster Bank, National Association, in which the property located in Portland, ME served as collateral for the mortgage note, was paid in full.

On March 1, 2017, the mortgage note held with Union Fidelity Life Insurance Company, in which the property located in Hazelwood, MO served as collateral for the mortgage note, was paid in full.

Financial Covenant Considerations

The Company was in compliance with all financial and other covenants as of June 30, 2017 and December 31, 2016 related to its unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes. The real estate net book value of the properties that are collateral for the Company’s debt arrangements was approximately $207.3 million and $229.9 million at June 30, 2017 and December 31, 2016, 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 1.77% to 4.23% and 1.92% to 4.85% at June 30, 2017 and December 31, 2016, 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 June 30, 2017 and December 31, 2016 (in thousands).



	June 30, 2017					December 31, 2016
	Principal Outstanding			Fair Value		Principal Outstanding			Fair Value
Unsecured credit facility	$	130,000		$	130,000	$	28,000		$	28,000
Unsecured term loans	450,000			450,000		450,000			450,000
Unsecured notes	400,000			417,932		400,000			399,091
Mortgage notes	147,293			149,236		164,326			166,099
Total principal amount	1,127,293			$	1,147,168	1,042,326			$	1,043,190
Add: Total unamortized fair market value premiums	66					112
Less: Total unamortized deferred financing fees and debt issuance costs	(5,663		)			(6,299		)
Total carrying value	$	1,121,696				$	1,036,139

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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 June 30, 2017.



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	$	8		0.7945	%	One-month L	Sep-10-2017
Bank of America, N.A.	Sep-14-2012	Oct-10-2012	$	10,000	$	8		0.7945	%	One-month L	Sep-10-2017
UBS AG	Sep-14-2012	Oct-10-2012	$	10,000	$	8		0.7945	%	One-month L	Sep-10-2017
Royal Bank of Canada	Sep-14-2012	Oct-10-2012	$	10,000	$	8		0.7945	%	One-month L	Sep-10-2017
RJ Capital Services, Inc.	Sep-14-2012	Oct-10-2012	$	10,000	$	8		0.7975	%	One-month L	Sep-10-2017
Bank of America, N.A.	Sep-20-2012	Oct-10-2012	$	25,000	$	23		0.7525	%	One-month L	Sep-10-2017
RJ Capital Services, Inc.	Sep-24-2012	Oct-10-2012	$	25,000	$	24		0.7270	%	One-month L	Sep-10-2017
Regions Bank	Mar-01-2013	Mar-01-2013	$	25,000	$	177		1.3300	%	One-month L	Feb-14-2020
Capital One, N.A.	Jun-13-2013	Jul-01-2013	$	50,000	$	(102	)	1.6810	%	One-month L	Feb-14-2020
Capital One, N.A.	Jun-13-2013	Aug-01-2013	$	25,000	$	(65	)	1.7030	%	One-month L	Feb-14-2020
Regions Bank	Sep-30-2013	Feb-03-2014	$	25,000	$	(254	)	1.9925	%	One-month L	Feb-14-2020
The Toronto-Dominion Bank	Oct-14-2015	Sep-29-2016	$	25,000	$	238		1.3830	%	One-month L	Sep-29-2020
PNC Bank, N.A.	Oct-14-2015	Sep-29-2016	$	50,000	$	466		1.3906	%	One-month L	Sep-29-2020
Regions Bank	Oct-14-2015	Sep-29-2016	$	35,000	$	329		1.3858	%	One-month L	Sep-29-2020
U.S. Bank, N.A.	Oct-14-2015	Sep-29-2016	$	25,000	$	230		1.3950	%	One-month L	Sep-29-2020
Capital One, N.A.	Oct-14-2015	Sep-29-2016	$	15,000	$	137		1.3950	%	One-month L	Sep-29-2020
Royal Bank of Canada	Jan-08-2015	Mar-20-2015	$	25,000	$	19		1.7090	%	One-month L	Mar-21-2021
The Toronto-Dominion Bank	Jan-08-2015	Mar-20-2015	$	25,000	$	17		1.7105	%	One-month L	Mar-21-2021
The Toronto-Dominion Bank	Jan-08-2015