Document
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, 2018
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, 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 30, 2018 |
Common Stock ($0.01 par value) | | 104,450,616 |
|
6.875% Series C Cumulative Redeemable Preferred Stock ($0.01 par value) | | 3,000,000 |
|
STAG INDUSTRIAL, INC.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)
|
| | | | | | | |
| June 30, 2018 |
| December 31, 2017 |
Assets | |
| |
Rental Property: | |
| |
Land | $ | 342,722 |
|
| $ | 321,560 |
|
Buildings and improvements, net of accumulated depreciation of $280,540 and $249,057, respectively | 2,073,088 |
|
| 1,932,764 |
|
Deferred leasing intangibles, net of accumulated amortization of $220,340 and $280,642, respectively | 316,221 |
|
| 313,253 |
|
Total rental property, net | 2,732,031 |
|
| 2,567,577 |
|
Cash and cash equivalents | 11,932 |
|
| 24,562 |
|
Restricted cash | 6,124 |
|
| 3,567 |
|
Tenant accounts receivable, net | 35,236 |
|
| 33,602 |
|
Prepaid expenses and other assets | 28,699 |
|
| 25,364 |
|
Interest rate swaps | 15,596 |
|
| 6,079 |
|
Assets held for sale, net | 1,509 |
|
| 19,916 |
|
Total assets | $ | 2,831,127 |
|
| $ | 2,680,667 |
|
Liabilities and Equity | |
| |
Liabilities: | |
| |
Unsecured credit facility | $ | 17,000 |
|
| $ | 271,000 |
|
Unsecured term loans, net | 521,745 |
|
| 446,265 |
|
Unsecured notes, net | 572,293 |
|
| 398,234 |
|
Mortgage notes, net | 57,421 |
|
| 58,282 |
|
Preferred stock called for redemption | 70,000 |
| | — |
|
Accounts payable, accrued expenses and other liabilities | 45,381 |
|
| 43,216 |
|
Interest rate swaps | — |
|
| 1,217 |
|
Tenant prepaid rent and security deposits | 21,436 |
|
| 19,045 |
|
Dividends and distributions payable | 15,396 |
|
| 11,880 |
|
Deferred leasing intangibles, net of accumulated amortization of $11,835 and $13,555, respectively | 20,828 |
|
| 21,221 |
|
Total liabilities | 1,341,500 |
|
| 1,270,360 |
|
Commitments and contingencies (Note 10) |
|
|
|
Equity: | |
| |
Preferred stock, par value $0.01 per share, 15,000,000 shares authorized, | |
| |
Series B, -0- and 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2018 and December 31, 2017, respectively | — |
|
| 70,000 |
|
Series C, 3,000,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2018 and December 31, 2017 | 75,000 |
|
| 75,000 |
|
Common stock, par value $0.01 per share, 150,000,000 shares authorized, 104,238,166 and 97,012,543 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively | 1,042 |
|
| 970 |
|
Additional paid-in capital | 1,905,002 |
|
| 1,725,825 |
|
Cumulative dividends in excess of earnings | (559,312 | ) |
| (516,691 | ) |
Accumulated other comprehensive income | 14,492 |
|
| 3,936 |
|
Total stockholders’ equity | 1,436,224 |
|
| 1,359,040 |
|
Noncontrolling interest | 53,403 |
|
| 51,267 |
|
Total equity | 1,489,627 |
|
| 1,410,307 |
|
Total liabilities and equity | $ | 2,831,127 |
|
| $ | 2,680,667 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, |
| Six months ended June 30, |
| 2018 |
| 2017 |
| 2018 | | 2017 |
Revenue | |
|
| |
|
| |
| | |
Rental income | $ | 72,140 |
|
| $ | 61,726 |
|
| $ | 142,068 |
| | $ | 120,948 |
|
Tenant recoveries | 12,726 |
|
| 10,401 |
|
| 25,925 |
| | 20,586 |
|
Other income | 608 |
|
| 66 |
|
| 764 |
| | 139 |
|
Total revenue | 85,474 |
|
| 72,193 |
|
| 168,757 |
| | 141,673 |
|
Expenses | |
|
| |
|
| |
| | |
Property | 16,124 |
|
| 13,635 |
|
| 33,623 |
| | 26,911 |
|
General and administrative | 7,978 |
|
| 7,939 |
|
| 16,726 |
| | 16,710 |
|
Property acquisition costs | — |
|
| 2,558 |
|
| — |
| | 3,298 |
|
Depreciation and amortization | 40,901 |
|
| 36,147 |
|
| 80,866 |
| | 72,100 |
|
Loss on impairments | — |
|
| — |
|
| 2,934 |
| | — |
|
Loss on involuntary conversion | — |
| | — |
| | — |
| | 330 |
|
Other expenses | 350 |
|
| 1,250 |
|
| 641 |
| | 1,444 |
|
Total expenses | 65,353 |
|
| 61,529 |
|
| 134,790 |
| | 120,793 |
|
Other income (expense) | |
|
| |
|
| |
| | |
Interest expense | (11,505 | ) |
| (10,631 | ) |
| (22,891 | ) | | (21,103 | ) |
Loss on extinguishment of debt | — |
|
| (2 | ) |
| — |
| | (2 | ) |
Gain on the sales of rental property, net | 6,348 |
|
| 1,337 |
|
| 29,037 |
| | 1,662 |
|
Total other income (expense) | (5,157 | ) |
| (9,296 | ) |
| 6,146 |
| | (19,443 | ) |
Net income | $ | 14,964 |
|
| $ | 1,368 |
|
| $ | 40,113 |
| | $ | 1,437 |
|
Less: income (loss) attributable to noncontrolling interest after preferred stock dividends | 392 |
|
| (44 | ) |
| 1,334 |
| | (145 | ) |
Net income attributable to STAG Industrial, Inc. | $ | 14,572 |
|
| $ | 1,412 |
|
| $ | 38,779 |
| | $ | 1,582 |
|
Less: preferred stock dividends | 2,578 |
|
| 2,448 |
|
| 5,026 |
| | 4,897 |
|
Less: redemption of preferred stock | 2,661 |
| | — |
| | 2,661 |
| | — |
|
Less: amount allocated to participating securities | 69 |
|
| 83 |
|
| 140 |
| | 166 |
|
Net income (loss) attributable to common stockholders | $ | 9,264 |
|
| $ | (1,119 | ) |
| $ | 30,952 |
| | $ | (3,481 | ) |
Weighted average common shares outstanding — basic | 100,386 |
|
| 88,181 |
|
| 98,713 |
| | 85,012 |
|
Weighted average common shares outstanding — diluted | 100,733 |
|
| 88,181 |
|
| 99,037 |
| | 85,012 |
|
Net income (loss) per share — basic and diluted | |
|
| |
|
| |
| | |
Net income (loss) per share attributable to common stockholders — basic | $ | 0.09 |
| | $ | (0.01 | ) | | $ | 0.31 |
| | $ | (0.04 | ) |
Net income (loss) per share attributable to common stockholders — diluted | $ | 0.09 |
| | $ | (0.01 | ) | | $ | 0.31 |
| | $ | (0.04 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 14,964 |
| | $ | 1,368 |
| | $ | 40,113 |
| | $ | 1,437 |
|
Other comprehensive income (loss): | | | | | | | |
Income (loss) on interest rate swaps | 3,028 |
| | (1,510 | ) | | 10,751 |
| | (298 | ) |
Other comprehensive income (loss) | 3,028 |
| | (1,510 | ) | | 10,751 |
| | (298 | ) |
Comprehensive income (loss) | 17,992 |
| | (142 | ) | | 50,864 |
| | 1,139 |
|
(Income) loss attributable to noncontrolling interest after preferred stock dividends | (392 | ) | | 44 |
| | (1,334 | ) | | 145 |
|
Other comprehensive (income) loss attributable to noncontrolling interest | (122 | ) | | 62 |
| | (442 | ) | | 13 |
|
Comprehensive income (loss) attributable to STAG Industrial, Inc. | $ | 17,478 |
| | $ | (36 | ) | | $ | 49,088 |
| | $ | 1,297 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Equity
(unaudited, in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Cumulative Dividends in excess of Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity | | Noncontrolling Interest - Unit holders in Operating Partnership | | Total Equity |
| | Shares | | Amount | | | | | | |
Six months ended June 30, 2018 | | | | | | | | | | | | | | | | | |
Balance, December 31, 2017 | $ | 145,000 |
| | 97,012,543 |
| | $ | 970 |
| | $ | 1,725,825 |
| | $ | (516,691 | ) | | $ | 3,936 |
| | $ | 1,359,040 |
| | $ | 51,267 |
| | $ | 1,410,307 |
|
Cash flow hedging instruments cumulative effect adjustment (Note 2) | — |
| | — |
| | — |
| | — |
| | (258 | ) | | 247 |
| | (11 | ) | | 11 |
| | — |
|
Proceeds from sales of common stock | — |
| | 6,819,580 |
| | 68 |
| | 176,694 |
| | — |
| | — |
| | 176,762 |
| | — |
| | 176,762 |
|
Redemption of preferred stock | (70,000 | ) | | — |
| | — |
| | 5,141 |
| | (5,158 | ) | | — |
| | (70,017 | ) | | — |
| | (70,017 | ) |
Offering costs | — |
| | — |
| | — |
| | (1,951 | ) | | — |
| | — |
| | (1,951 | ) | | — |
| | (1,951 | ) |
Dividends and distributions, net | — |
| | — |
| | — |
| | — |
| | (75,447 | ) | | — |
| | (75,447 | ) | | (3,810 | ) | | (79,257 | ) |
Non-cash compensation activity, net | — |
| | 73,988 |
| | 1 |
| | 468 |
| | (537 | ) | | — |
| | (68 | ) | | 2,987 |
| | 2,919 |
|
Redemption of common units to common stock | — |
| | 332,055 |
| | 3 |
| | 4,137 |
| | — |
| | — |
| | 4,140 |
| | (4,140 | ) | | — |
|
Rebalancing of noncontrolling interest | — |
| | — |
| | — |
| | (5,312 | ) | | — |
| | — |
| | (5,312 | ) | | 5,312 |
| | — |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 10,309 |
| | 10,309 |
| | 442 |
| | 10,751 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 38,779 |
| | — |
| | 38,779 |
| | 1,334 |
| | 40,113 |
|
Balance, June 30, 2018 | $ | 75,000 |
| | 104,238,166 |
| | $ | 1,042 |
| | $ | 1,905,002 |
| | $ | (559,312 | ) | | $ | 14,492 |
| | $ | 1,436,224 |
| | $ | 53,403 |
| | $ | 1,489,627 |
|
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 | — |
| | — |
| | — |
| | — |
| | (65,166 | ) | | — |
| | (65,166 | ) | | (3,645 | ) | | (68,811 | ) |
Non-cash compensation activity, net | — |
| | 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 | — |
| | — |
| | — |
| | — |
| | 1,582 |
| | — |
| | 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 |
|
The accompanying notes are an integral part of these consolidated financial statements.
STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
|
| | | | | | | |
| Six months ended June 30, |
| 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net income | $ | 40,113 |
| | $ | 1,437 |
|
Adjustment to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 80,866 |
| | 72,100 |
|
Loss on impairments | 2,934 |
| | — |
|
Loss on involuntary conversion | — |
| | 330 |
|
Non-cash portion of interest expense | 1,081 |
| | 980 |
|
Intangible amortization in rental income, net | 2,056 |
| | 2,555 |
|
Straight-line rent adjustments, net | (5,449 | ) | | (2,778 | ) |
Dividends on forfeited equity compensation | 9 |
| | 2 |
|
Loss on extinguishment of debt | — |
| | 2 |
|
Gain on the sales of rental property, net | (29,037 | ) | | (1,662 | ) |
Non-cash compensation expense | 4,435 |
| | 4,775 |
|
Change in assets and liabilities: | | | |
Tenant accounts receivable, net | 1,916 |
| | 1,362 |
|
Prepaid expenses and other assets | (5,155 | ) | | (6,317 | ) |
Accounts payable, accrued expenses and other liabilities | 1,161 |
| | (543 | ) |
Tenant prepaid rent and security deposits | 2,391 |
| | 4,110 |
|
Total adjustments | 57,208 |
| | 74,916 |
|
Net cash provided by operating activities | 97,321 |
| | 76,353 |
|
Cash flows from investing activities: | | | |
Acquisitions of land and buildings and improvements | (222,366 | ) | | (303,624 | ) |
Additions of land and building and improvements | (13,610 | ) | | (14,238 | ) |
Proceeds from sales of rental property, net | 79,701 |
| | 10,309 |
|
Proceeds from insurance on involuntary conversion | — |
| | 639 |
|
Acquisition deposits, net | (905 | ) | | 820 |
|
Acquisitions of deferred leasing intangibles | (41,755 | ) | | (62,782 | ) |
Net cash used in investing activities | (198,935 | ) | | (368,876 | ) |
Cash flows from financing activities: | | | |
Proceeds from unsecured credit facility | 249,000 |
| | 356,000 |
|
Repayment of unsecured credit facility | (503,000 | ) | | (254,000 | ) |
Proceeds from unsecured term loans | 75,000 |
| | — |
|
Proceeds from unsecured notes | 175,000 |
| | — |
|
Repayment of mortgage notes | (922 | ) | | (17,033 | ) |
Payment of loan fees and costs | (1,073 | ) | | (45 | ) |
Dividends and distributions | (75,742 | ) | | (67,388 | ) |
Proceeds from sales of common stock | 176,762 |
| | 274,385 |
|
Repurchase and retirement of share-based compensation | (1,524 | ) | | (969 | ) |
Offering costs | (1,960 | ) | | (3,773 | ) |
Net cash provided by financing activities | 91,541 |
| | 287,177 |
|
Decrease in cash and cash equivalents and restricted cash | (10,073 | ) | | (5,346 | ) |
Cash and cash equivalents and restricted cash—beginning of period | 28,129 |
| | 21,805 |
|
Cash and cash equivalents and restricted cash—end of period | $ | 18,056 |
| | $ | 16,459 |
|
Supplemental disclosure: | | | |
Cash paid for interest, net of capitalized interest | $ | 19,748 |
| | $ | 20,479 |
|
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 | ) |
Acquisitions of land and buildings and improvements | $ | — |
| | $ | (16,986 | ) |
Acquisitions of deferred leasing intangibles | $ | — |
| | $ | (2,001 | ) |
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 | $ | (1,642 | ) | | $ | (1,572 | ) |
Additions to building and other capital improvements from non-cash compensation | $ | (9 | ) | | $ | (16 | ) |
Change in loan fees, costs, and offering costs included in accounts payable, accrued expenses, and other liabilities | $ | (41 | ) | | $ | (141 | ) |
Reclassification of preferred stock called for redemption to liability | $ | 70,000 |
| | $ | — |
|
Dividends and distributions accrued | $ | 15,396 |
| | $ | 11,153 |
|
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 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, 2018 and December 31, 2017, the Company owned a 96.2% and 95.9%, 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, 2018, the Company owned 370 buildings in 37 states with approximately 72.5 million rentable square feet, consisting of 300 warehouse/distribution buildings, 58 light manufacturing buildings, and 12 flex/office buildings. The Company’s buildings were approximately 95.6% leased to 321 tenants as of June 30, 2018.
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, 2017.
Basis of Presentation
The Company’s consolidated financial statements include the accounts of the Company, the Operating Partnership, and their subsidiaries. Interests in the Operating Partnership not owned by the Company are referred to as “Noncontrolling Common Units.” These Noncontrolling Common Units are held by other limited partners in the form of common units (“Other Common Units”) and long term incentive plan units (“LTIP units”) issued pursuant to the STAG Industrial, Inc. 2011 Equity Incentive Plan, as amended (the “2011 Plan”). All significant intercompany balances and transactions have been eliminated in the consolidation of entities. The financial statements of the Company are presented on a consolidated basis for all periods presented.
Reclassifications and New Accounting Standards
Certain prior year amounts have been reclassified to conform to the current year presentation.
New Accounting Standards Adopted
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those years, with early adoption permitted, and the Company adopted this standard effective January 1, 2018 using the modified retrospective transition method. The adoption of this standard resulted in a cumulative effect adjustment of approximately $0.3 million recorded as an increase to cumulative dividends in excess of earnings and an increase to accumulated other comprehensive income as of January 1, 2018 in the accompanying Consolidated Statements of Equity.
In May 2017, the FASB issued 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, and the Company adopted this standard prospectively effective January 1, 2018. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.
In February 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 was 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, which the Company adopted effective January 1, 2018. The Company adopted this standard effective January 1, 2018 using the modified retrospective approach. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.
In January 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, and the Company adopted this standard prospectively effective January 1, 2018. As a result, it is expected that the majority of the Company's acquisitions will be accounted for as asset acquisitions, whereas under the former guidance the majority of the Company's acquisitions had been accounted for as business combinations. The most significant difference between the two accounting models that impacts 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.
In November 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 the Company adopted this standard effective January 1, 2018. As a result, the Company has included restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts on the accompanying Consolidated Statements of Cash Flows. The effects of this standard were applied retrospectively to all prior periods presented. For the six months ended June 30, 2017, the effect of the change in accounting principle was a decrease in cash provided by operating activities of approximately $0.1 million and an increase in cash used in investing activities of approximately $0.8 million on the accompanying Consolidated Statements of Cash Flows.
In January 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, and the Company adopted this standard prospectively effective January 1, 2018. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.
In May 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 below) 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 may 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 upon the adoption of ASU 2016-02 on January 1, 2019. Additionally, the new revenue guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard effective January 1, 2018 using the modified retrospective approach. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.
New Accounting Standards Issued but not yet Adopted
In February 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 plans to adopt this standard effective January 1, 2019.
Restricted Cash
Restricted cash may include tenant security deposits and cash held in escrow for real estate taxes and capital improvements as required in various mortgage note agreements. Restricted cash also may include amounts held by the Company’s transfer agent for preferred stock dividends that are distributed subsequent to period end. The following table presents a reconciliation of cash and cash equivalents and restricted cash reported on the accompanying Consolidated Balance Sheets to amounts reported on the accompanying Consolidated Statements of Cash Flows.
|
| | | | | | | | |
Reconciliation of cash and cash equivalents and restricted cash (in thousands) | | June 30, 2018 | | December 31, 2017 |
Cash and cash equivalents | | $ | 11,932 |
| | $ | 24,562 |
|
Restricted cash | | 6,124 |
| | 3,567 |
|
Total cash and cash equivalents and restricted cash | | $ | 18,056 |
| | $ | 28,129 |
|
Tenant Accounts Receivable, net
As of June 30, 2018 and December 31, 2017, the Company had an allowance for doubtful accounts of approximately $0.5 million and $0.1 million, respectively.
As of June 30, 2018 and December 31, 2017, the Company had accrued rental income, net of allowance of approximately $28.2 million and $24.7 million, respectively. As of June 30, 2018 and December 31, 2017, the Company had an allowance on accrued rental income of $0.1 million and $0.2 million, respectively.
As of June 30, 2018 and December 31, 2017, the Company had approximately $13.8 million and $12.7 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, 2018 and December 31, 2017, the Company had approximately $8.0 million and $7.4 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 $0.7 million and $0.7 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, 2018 and December 31, 2017, the Company's total liability associated with these lease security deposits was approximately $8.7 million and $8.1 million, respectively, and is included in tenant prepaid rent and security deposits on the accompanying Consolidated Balance Sheets.
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 $4.0 million, $7.1 million, $3.0 million and $6.2 million for the three and six months ended June 30, 2018 and 2017, 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
Approximately $0, $0.1 million, $0.1 million and $0.2 million of termination fee income related to the Buena Vista, VA property, the tenant at which exercised its early lease termination option on March 27, 2017, is included in rental income on the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017, respectively.
Gain on the Sales of Rental Property, net
The timing of the derecognition of a rental property and the corresponding recognition of gain on the sales of rental property, net is measured by various criteria related to the terms of the sale transaction, and if the Company has lost control of the property and the acquirer has gained control of the property after the transaction. If the derecognition criteria is met, the full gain is recognized.
Taxes
Federal Income Taxes
The Company's taxable REIT subsidiaries recognized a net loss of approximately $39,000, $0.1 million, $0.2 million and $0.2 million for the three and six months ended June 30, 2018 and 2017, 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 $0.3 million, $0.5 million, $0.2 million and $0.4 million have been recorded in other expenses on the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017, respectively.
Uncertain Tax Positions
As of June 30, 2018 and December 31, 2017, 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.
3. Rental Property
The following table summarizes the components of rental property as of June 30, 2018 and December 31, 2017.
|
| | | | | | | | |
Rental Property (in thousands) | | June 30, 2018 | | December 31, 2017 |
Land | | $ | 342,722 |
| | $ | 321,560 |
|
Buildings, net of accumulated depreciation of $178,512 and $160,281, respectively | | 1,886,651 |
| | 1,756,579 |
|
Tenant improvements, net of accumulated depreciation of $33,710 and $32,714, respectively | | 30,103 |
| | 30,138 |
|
Building and land improvements, net of accumulated depreciation of $68,318 and $56,062, respectively | | 151,471 |
| | 143,170 |
|
Construction in progress | | 4,863 |
| | 2,877 |
|
Deferred leasing intangibles, net of accumulated amortization of $220,340 and $280,642, respectively | | 316,221 |
| | 313,253 |
|
Total rental property, net | | $ | 2,732,031 |
| | $ | 2,567,577 |
|
Acquisitions
The following table summarizes the acquisitions of the Company during the three and six months ended June 30, 2018.
|
| | | | | | | | | | |
Market (1) | | Square Feet | | Buildings | | Purchase Price
(in thousands) |
Greenville/Spartanburg, SC | | 203,000 |
| | 1 |
| | $ | 10,755 |
|
Minneapolis/St Paul, MN | | 145,351 |
| | 1 |
| | 13,538 |
|
Philadelphia, PA | | 278,582 |
| | 1 |
| | 18,277 |
|
Houston, TX | | 242,225 |
| | 2 |
| | 22,478 |
|
Greenville/Spartanburg, SC | | 222,710 |
| | 1 |
| | 13,773 |
|
Three months ended March 31, 2018 | | 1,091,868 |
| | 6 |
| | 78,821 |
|
Chicago, IL | | 169,311 |
| | 2 |
| | 10,975 |
|
Milwaukee/Madison, WI | | 53,680 |
| | 1 |
| | 4,316 |
|
Pittsburgh, PA | | 175,000 |
| | 1 |
| | 15,380 |
|
Detroit, MI | | 274,500 |
| | 1 |
| | 19,328 |
|
Minneapolis/St Paul, MN | | 509,910 |
| | 2 |
| | 26,983 |
|
Cincinnati/Dayton, OH | | 158,500 |
| | 1 |
| | 7,317 |
|
Baton Rouge, LA | | 279,236 |
| | 1 |
| | 21,379 |
|
Las Vegas, NV | | 122,472 |
| | 1 |
| | 17,920 |
|
Greenville/Spartanburg, SC | | 131,805 |
| | 1 |
| | 5,621 |
|
Denver, CO | | 64,750 |
| | 1 |
| | 7,044 |
|
Cincinnati/Dayton, OH | | 465,136 |
| | 1 |
| | 16,421 |
|
Charlotte, NC | | 69,200 |
| | 1 |
| | 5,446 |
|
Houston, TX | | 252,662 |
| | 1 |
| | 27,170 |
|
Three months ended June 30, 2018 | | 2,726,162 |
| | 15 |
| | 185,300 |
|
Six months ended June 30, 2018 | | 3,818,030 |
| | 21 |
| | $ | 264,121 |
|
(1) As defined by CoStar Realty Information Inc.
The following table summarizes the allocation of the consideration paid at the date of acquisition during the six months ended June 30, 2018 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 | | $ | 25,741 |
| | N/A |
Buildings | | 181,185 |
| | N/A |
Tenant improvements | | 2,525 |
| | N/A |
Building and land improvements | | 12,915 |
| | N/A |
Deferred leasing intangibles - In-place leases | | 28,623 |
| | 8.4 |
Deferred leasing intangibles - Tenant relationships | | 12,815 |
| | 11.3 |
Deferred leasing intangibles - Above market leases | | 2,528 |
| | 6.6 |
Deferred leasing intangibles - Below market leases | | (2,211 | ) | | 6.9 |
Total purchase price | | $ | 264,121 |
| | |
The table below sets forth the results of operations for the three and six months ended June 30, 2018 for the buildings acquired during the six months ended June 30, 2018 included in the Company’s Consolidated Statements of Operations from the date of acquisition.
|
| | | | | | | | |
Results of Operations (in thousands) | | Three months ended June 30, 2018 | | Six months ended June 30, 2018 |
Total revenue | | $ | 3,110 |
| | $ | 4,034 |
|
Net income | | $ | 191 |
| | $ | 87 |
|
Dispositions
During the six months ended June 30, 2018, the Company sold seven buildings comprised of approximately 1.7 million square feet with a net book value of approximately $50.7 million to third parties. These buildings contributed approximately $0.8 million, $1.9 million, $2.0 million and $4.0 million to revenue for the three and six months ended June 30, 2018 and 2017, respectively. These buildings contributed approximately $0.6 million, $0.1 million, $0.3 million and $0.5 million to net income (exclusive of loss on involuntary conversion, loss on impairments and gain on the sales of rental property, net) for the three and six months ended June 30, 2018 and 2017, respectively. Net proceeds from the sales of rental property were approximately $79.7 million and
the Company recognized the full gain on the sales of rental property, net of approximately $29.0 million for the six months ended June 30, 2018.
Assets Held for Sale
As of June 30, 2018, the related land, building and improvements, net, and deferred leasing intangibles, net, of approximately $0.1 million, $1.4 million, and $0, respectively, for one building was classified as assets held for sale, net on the accompanying Consolidated Balance Sheets. This building contributed approximately $37,000, $0.1 million, $0.2 million and $0.4 million to revenue for the three and six months ended June 30, 2018 and 2017, respectively. This building contributed a net income (loss) of approximately $(49,000), $(0.1) million, $0.1 million and $0.2 million to net income for the three and six months ended June 30, 2018 and 2017, respectively.
Loss on Impairments
The following table summarizes the Company's loss on impairments for assets held and used during the six months ended June 30, 2018.
|
| | | | | | | | | | | | | | |
Market (1) | | Buildings | | Event or Change in Circumstance Leading to Impairment Evaluation(2) | | Valuation technique utilized to estimate fair value | | Fair Value(3) | | Loss on Impairments |
(in thousands) |
Buena Vista, VA(4) | | 1 | | Change in estimated hold period | (5) | Discounted cash flows | (7) | | | |
Sergeant Bluff, IA(4) | | 1 | | Change in estimated hold period | (6) | Discounted cash flows | (7) | | | |
Three months ended March 31, 2018 | | | | $ | 3,176 |
| | $ | 2,934 |
|
Six months ended June 30, 2018 | | | | $ | 3,176 |
| | $ | 2,934 |
|
| |
(1) | As defined by CoStar Realty Information Inc. |
| |
(2) | 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. |
| |
(3) | The estimated fair value of the property is based on Level 3 inputs and is a non-recurring fair value measurement. Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
| |
(4) | These buildings do not have markets as defined by CoStar Realty Information Inc. |
| |
(5) | This property was sold subsequent to June 30, 2018. |
| |
(6) | This property was sold during the six months ended June 30, 2018. |
| |
(7) | Level 3 inputs used to determine fair value for the properties impaired for the three months ended March 31, 2018: discount rates ranged from 11.0% to 14.5% and exit capitalization rates ranged from 11.0% to 13.0%. |
Deferred Leasing Intangibles
The following table sets forth the deferred leasing intangibles on the accompanying Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
Deferred Leasing Intangibles (in thousands) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Above market leases | | $ | 69,560 |
| | $ | (29,944 | ) | | $ | 39,616 |
| | $ | 78,558 |
| | $ | (36,810 | ) | | $ | 41,748 |
|
Other intangible lease assets | | 467,001 |
| | (190,396 | ) | | 276,605 |
| | 515,337 |
| | (243,832 | ) | | 271,505 |
|
Total deferred leasing intangible assets | | $ | 536,561 |
| | $ | (220,340 | ) | | $ | 316,221 |
| | $ | 593,895 |
| | $ | (280,642 | ) | | $ | 313,253 |
|
| | | | | | | | | | | | |
Below market leases | | $ | 32,663 |
| | $ | (11,835 | ) | | $ | 20,828 |
| | $ | 34,776 |
| | $ | (13,555 | ) | | $ | 21,221 |
|
Total deferred leasing intangible liabilities | | $ | 32,663 |
| | $ | (11,835 | ) | | $ | 20,828 |
| | $ | 34,776 |
| | $ | (13,555 | ) | | $ | 21,221 |
|
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, 2018 and 2017.
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
Deferred Leasing Intangibles Amortization (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Net decrease to rental income related to above and below market lease amortization | | $ | 849 |
| | $ | 1,259 |
| | $ | 2,056 |
| | $ | 2,555 |
|
Amortization expense related to other intangible lease assets | | $ | 18,237 |
| | $ | 17,420 |
| | $ | 36,337 |
| | $ | 35,813 |
|
The following table sets forth the amortization of deferred leasing intangibles over the next five calendar years beginning with 2018 as of June 30, 2018.
|
| | | | | | | | |
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 2018 | | $ | 33,763 |
| | $ | 1,974 |
|
2019 | | $ | 54,370 |
| | $ | 3,980 |
|
2020 | | $ | 44,279 |
| | $ | 3,599 |
|
2021 | | $ | 33,573 |
| | $ | 2,195 |
|
2022 | | $ | 26,464 |
| | $ | 1,185 |
|
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, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | |
Loan |
| Principal Outstanding as of June 30, 2018 (in thousands) | | Principal Outstanding as of December 31, 2017 (in thousands) | | Interest
Rate (1) | | Maturity Date | | Prepayment Terms (2) |
Unsecured credit facility: |
|
| |
| |
|
|
|
|
|
Unsecured Credit Facility (3) |
| $ | 17,000 |
| | $ | 271,000 |
| | L + 1.15% |
|
| Dec-18-2019 |
| i |
Total unsecured credit facility |
| 17,000 |
| | 271,000 |
| | |
|
| |
| |
|
|
| |
| |
|
|
|
|
|
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 |
Unsecured Term Loan D (4) | | 75,000 |
| | — |
| | L + 1.30% |
| | Jan-04-2023 | | i |
Total unsecured term loans |
| 525,000 |
| | 450,000 |
| |
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs |
| (3,255 | ) | | (3,735 | ) | |
|
|
|
|
|
|
Total carrying value unsecured term loans, net |
| 521,745 |
| | 446,265 |
| | |
|
| |
| |
|
|
| |
| |
|
|
|
|
|
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 G Unsecured Notes | | 75,000 |
| | — |
| | 4.10 | % | | Jun-13-2025 | | 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 |
Series H Unsecured Notes | | 100,000 |
| | — |
| | 4.27 | % | | Jun-13-2028 | | ii |
Total unsecured notes |
| 575,000 |
| | 400,000 |
| |
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs |
| (2,707 | ) | | (1,766 | ) | |
|
|
|
|
|
|
Total carrying value unsecured notes, net |
| 572,293 |
| | 398,234 |
| | |
|
| |
| |
|
|
| |
| |
|
|
|
|
|
Mortgage notes (secured debt): |
| |
| |
|
| | |
|
| |
| |
Wells Fargo Bank, National Association CMBS Loan |
| 54,082 |
| | 54,949 |
| | 4.31 | % |
| Dec-1-2022 |
| iii |
Thrivent Financial for Lutherans | | 3,851 |
| | 3,906 |
| | 4.78 | % | | Dec-15-2023 | | iv |
Total mortgage notes |
| 57,933 |
| | 58,855 |
| | |
|
|
|
|
|
Total unamortized fair market value premiums |
| 55 |
| | 61 |
| | |
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs |
| (567 | ) | | (634 | ) | |
|
|
|
|
|
|
Total carrying value mortgage notes, net |
| 57,421 |
| | 58,282 |
| | |
|
|
|
|
|
Total / weighted average interest rate (5) |
| $ | 1,168,459 |
| | $ | 1,173,781 |
| | 3.84 | % |
|
|
|
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(1) | Interest rate as of June 30, 2018. At June 30, 2018, the one-month LIBOR (“L”) was 2.09025%. The 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. |
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(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, however can be defeased beginning January 1, 2016; and (iv) pre-payable without penalty three months prior to the maturity date. |
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(3) | The capacity of the unsecured credit facility is $450.0 million. Deferred financing fees and debt issuance costs, net of accumulated amortization related to the unsecured credit facility of approximately $1.2 million and $1.5 million is included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017, respectively. |
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(4) | The remaining capacity was $75.0 million as of June 30, 2018. The Company funded the remaining $75.0 million on July 27, 2018. |
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(5) | The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of $600.0 million of debt that was in effect as of June 30, 2018, 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 and unsecured term loans as of June 30, 2018 was approximately $502.1 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 $7.8 million and $5.6 million as of June 30, 2018 and December 31, 2017, respectively, and is included in accounts payable, accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.
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, 2018 and 2017.
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| | Three months ended June 30, | | Six months ended June 30, |
Costs Included in Interest Expense (in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Amortization of deferred financing fees and debt issuance costs and fair market value premiums | | $ | 547 |
| | $ | 504 |
| | $ | 1,081 |
| | $ | 1,007 |
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Facility fees and unused fees | | $ | 314 |
| | $ | 278 |
| | $ | 653 |
| | $ | 553 |
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On April 10, 2018, the Company entered into a note purchase agreement (“NPA”) for the private placement by the Operating Partnership of $75.0 million senior unsecured notes (“Series G Unsecured Notes”) maturing June 13, 2025 with a fixed annual interest rate of 4.10%, and $100.0 million senior unsecured notes (“Series H Unsecured Notes”) maturing June 13, 2028 with a fixed annual interest rate of 4.27%. The NPA contains a number of financial covenants substantially similar to the financial covenants contained in the Company’s unsecured credit facility and other unsecured notes. The Operating Partnership issued the Series G Unsecured Notes and the Series H Unsecured Notes on June 13, 2018. In addition, on April 10, 2018, the Company entered into amendments to the note purchase agreements related to the Company’s outstanding unsecured notes to conform certain provisions in the agreements to the provisions in the NPA.
On March 28, 2018, the Company drew $75.0 million of the $150.0 million unsecured term loan that was entered into on July 28, 2017. On July 27, 2018, the Company drew the remaining $75.0 million of the $150.0 million unsecured term loan.
Financial Covenant Considerations
The Company was in compliance with all financial and other covenants as of June 30, 2018 and December 31, 2017 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 $88.8 million and $90.9 million at June 30, 2018 and December 31, 2017, respectively, and is limited to senior, property-level secured debt financing arrangements.
Fair Value of Debt
The following table presents the aggregate principal outstanding under the Company’s debt arrangements and the corresponding estimate of fair value as of June 30, 2018 and December 31, 2017 (in thousands).
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| | June 30, 2018 | | December 31, 2017 |
| | Principal Outstanding | | Fair Value | | Principal Outstanding | | Fair Value |
Unsecured credit facility | | $ | 17,000 |
| | $ | 17,025 |
| | $ | 271,000 |
| | $ | 271,528 |
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Unsecured term loans | | 525,000 |
| | 526,561 |
| | 450,000 |
| | 451,463 |
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Unsecured notes | | 575,000 |
| | 580,045 |
| | 400,000 |
| | 415,599 |
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Mortgage notes | | 57,933 |
| | 57,721 |
| | 58,855 |
| | 59,769 |
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Total principal amount | | 1,174,933 |
| | $ | 1,181,352 |
| | 1,179,855 |
| | $ | 1,198,359 |
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Add: Total unamortized fair market value premiums | | 55 |
| | | | 61 |
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Less: Total unamortized deferred financing fees and debt issuance costs | | (6,529 | ) | | | | (6,135 | ) | | |
Total carrying value | | $ | 1,168,459 |
| | | | $ | 1,173,781 |
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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.
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, 2018. All of the Company’s interest rate swaps are designated as qualifying cash flow hedges.
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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 |
Regions Bank | | Mar-01-2013 | | Mar-01-2013 | | $ | 25,000 |
| | $ | 487 |
| | 1.3300 | % | | One-month L | | Feb-14-2020 |
Capital One, N.A. | | Jun-13-2013 | | Jul-01-2013 | | $ | 50,000 |
| | $ | 692 |
| | 1.6810 | % | | One-month L | | Feb-14-2020 |
Capital One, N.A. | | Jun-13-2013 | | Aug-01-2013 | | $ | 25,000 |
| | $ | 337 |
| | 1.7030 | % | | One-month L | | Feb-14-2020 |
Regions Bank | | Sep-30-2013 | | Feb-03-2014 | | $ | 25,000 |
| | $ | 220 |
| | 1.9925 | % | | One-month L | | Feb-14-2020 |
The Toronto-Dominion Bank | | Oct-14-2015 | | Sep-29-2016 | | $ | 25,000 |
| | $ | 685 |
| | 1.3830 | % | | One-month L | | Sep-29-2020 |
PNC Bank, N.A. | | Oct-14-2015 | | Sep-29-2016 | | $ | 50,000 |
| | $ | 1,363 |
| | 1.3906 | % | | One-month L | | Sep-29-2020 |
Regions Bank | | Oct-14-2015 | | Sep-29-2016 | | $ | 35,000 |
| | $ | 958 |
| | 1.3858 | % | | One-month L | | Sep-29-2020 |
U.S. Bank, N.A. | | Oct-14-2015 | | Sep-29-2016 | | $ | 25,000 |
| | $ | 680 |
| | 1.3950 | % | | One-month L | | Sep-29-2020 |
Capital One, N.A. | | Oct-14-2015 | | Sep-29-2016 | | $ | 15,000 |
| | $ | 408 |
| | 1.3950 | % | | One-month L | | Sep-29-2020 |
Royal Bank of Canada | | Jan-08-2015 | | Mar-20-2015 | | $ | 25,000 |
| | $ | 634 |
| | 1.7090 | % | | One-month L | | Mar-21-2021 |
The Toronto-Dominion Bank | | Jan-08-2015 | | Mar-20-2015 | | $ | 25,000 |
| | $ | 632 |
| | 1.7105 | % | | One-month L | | Mar-21-2021 |
The Toronto-Dominion Bank | | Jan-08-2015 | | Sep-10-2017 | | $ | 100,000 |
| | $ | 1,160 |
| | 2.2255 | % | | One-month L | | Mar-21-2021 |
Wells Fargo, N.A. | | Jan-08-2015 | | Mar-20-2015 | | $ | 25,000 |
| | $ | 797 |
| | 1.8280 | % | | One-month L | | Mar-31-2022 |
The Toronto-Dominion Bank | | Jan-08-2015 | | Feb-14-2020 | | $ | 25,000 |
| | $ | 197 |
| | 2.4535 | % | | One-month L | | Mar-31-2022 |
Regions Bank | | Jan-08-2015 | | Feb-14-2020 | | $ | 50,000 |
| | $ | 374 |
| | 2.4750 | % | | One-month L | | Mar-31-2022 |
Capital One, N.A. | | Jan-08-2015 | | Feb-14-2020 | | $ | 50,000 |
| | $ | 320 |
| | 2.5300 | % | | One-month L | | Mar-31-2022 |
The Toronto-Dominion Bank | | Jul-20-2017 | | Oct-30-2017 | | $ | 25,000 |
| | $ | 941 |
| | 1.8485 | % | | One-month L | | Jan-04-2023 |
Royal Bank of Canada | | Jul-20-2017 | | Oct-30-2017 | | $ | 25,000 |
| | $ | 941 |
| | 1.8505 | % | | One-month L | | Jan-04-2023 |
Wells Fargo, N.A. | | Jul-20-2017 | | Oct-30-2017 | | $ | 25,000 |
| | $ | 941 |
| | 1.8505 | % | | One-month L | | Jan-04-2023 |
PNC Bank, N.A. | | Jul-20-2017 | | Oct-30-2017 | | $ | 25,000 |
| | $ | 942 |
| | 1.8485 | % | | One-month L | | Jan-04-2023 |
PNC Bank, N.A. | | Jul-20-2017 | | Oct-30-2017 | | $ | 50,000 |
| | $ | 1,887 |
| | 1.8475 | % | | One-month L | | Jan-04-2023 |
The fair value of the interest rate swaps outstanding as of June 30, 2018 and December 31, 2017 was as follows.
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Balance Sheet Line Item (in thousands) | | Notional Amount June 30, 2018 | | Fair Value
June 30, 2018 | | Notional Amount December 31, 2017 | | Fair Value December 31, 2017 |
Interest rate swaps-Asset | | $ | 725,000 |
| | $ | 15,596 |
| | $ | 475,000 |
| | $ | 6,079 |
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Interest rate swaps-Liability | | $ | — |
| | $ | — |
| | $ | 250,000 |
| | $ | (1,217 | ) |
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings.
Amounts reported in accumulated other comprehensive income related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company's variable rate debt. The Company estimates that approximately $3.8 million will be reclassified from accumulated other comprehensive income as a decrease to interest expense over the next 12 months.
The table below presents the effect of cash flow hedge accounting and the location in the consolidated financial statements for the three and six months ended June 30, 2018 and 2017 (in thousands). |
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| | Three months ended June 30, | | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Income (loss) recognized in accumulated other comprehensive income on interest rate swaps | | $ | 3,284 |
| | $ | (1,956 | ) | | $ | 10,777 |
| | $ | (1,442 | ) |
Income (loss) reclassified from accumulated other comprehensive income into income (loss) as interest expense | | $ | 256 |
| | $ | (446 | ) | | $ | 26 |
| | $ | (1,144 | ) |
Total interest expense presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
| | $ | 11,505 |
| | $ | 10,631 |
| | $ | 22,891 |
| | $ | 21,103 |
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Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
As of June 30, 2018, the Company had no derivatives that were in a net liability position by counterparty.
Fair Value of Interest Rate Swaps
The Company’s valuation of the interest rate swaps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs including interest rate curves.
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2018 and December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of June 30, 2018 and December 31, 2017.
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| | | | Fair Value Measurements as of
June 30, 2018 Using |
Balance Sheet Line Item (in thousands) | | Fair Value
June 30, 2018 | | Level 1 | | Level 2 | | Level 3 |
Interest rate swaps-Asset | | $ | 15,596 |
| | $ | — |
| | $ | 15,596 |
| | $ | — |
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Interest rate swaps-Liability | | $ | — |
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