Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________________________________________________________________
 
FORM 10-Q 
____________________________________________________________________________
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 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 October 31, 2018
Common Stock ($0.01 par value)
 
108,893,286

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

 

Table of Contents

STAG INDUSTRIAL, INC.
Table of Contents 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

Part I. Financial Information
Item 1.  Financial Statements

STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)
 
September 30, 2018

December 31, 2017
Assets
 

 
Rental Property:
 

 
Land
$
355,590


$
321,560

Buildings and improvements, net of accumulated depreciation of $301,787 and $249,057, respectively
2,202,755


1,932,764

Deferred leasing intangibles, net of accumulated amortization of $237,892 and $280,642, respectively
327,734


313,253

Total rental property, net
2,886,079


2,567,577

Cash and cash equivalents
6,024


24,562

Restricted cash
5,231


3,567

Tenant accounts receivable, net
39,170


33,602

Prepaid expenses and other assets
35,122


25,364

Interest rate swaps
17,649


6,079

Assets held for sale, net
—


19,916

Total assets
$
2,989,275


$
2,680,667

Liabilities and Equity
 

 
Liabilities:
 

 
Unsecured credit facility
$
95,000


$
271,000

Unsecured term loans, net
596,085


446,265

Unsecured notes, net
572,389


398,234

Mortgage notes, net
56,993


58,282

Accounts payable, accrued expenses and other liabilities
53,445


43,216

Interest rate swaps
—


1,217

Tenant prepaid rent and security deposits
19,328


19,045

Dividends and distributions payable
14,530


11,880

Deferred leasing intangibles, net of accumulated amortization of $13,043 and $13,555, respectively
20,708


21,221

Total liabilities
1,428,478


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 September 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 September 30, 2018 and December 31, 2017
75,000


75,000

Common stock, par value $0.01 per share, 150,000,000 shares authorized, 107,825,791 and 97,012,543 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
1,078


970

Additional paid-in capital
2,003,983


1,725,825

Cumulative dividends in excess of earnings
(589,785
)

(516,691
)
Accumulated other comprehensive income
16,485


3,936

Total stockholders’ equity
1,506,761


1,359,040

Noncontrolling interest
54,036


51,267

Total equity
1,560,797


1,410,307

Total liabilities and equity
$
2,989,275


$
2,680,667

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

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Table of Contents

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

Nine months ended September 30,
 
2018

2017

2018
 
2017
Revenue
    


    


    

 
 
Rental income
$
75,159


$
65,673


$
217,227

 
$
186,621

Tenant recoveries
13,518


12,366


39,443

 
32,952

Other income
269


105


1,033

 
244

Total revenue
88,946


78,144


257,703

 
219,817

Expenses
 


 


 

 
 
Property
17,112


15,401


50,735

 
42,312

General and administrative
8,911


8,380


25,637

 
25,090

Property acquisition costs
—


1,386


—

 
4,684

Depreciation and amortization
44,355


38,186


125,221

 
110,286

Loss on impairments
—


—


2,934

 
—

Loss on involuntary conversion
—

 
—

 
—

 
330

Other expenses
223


58


864

 
1,502

Total expenses
70,601


63,411


205,391

 
184,204

Other income (expense)
 


 


 

 
 
Interest and other income
3

 
2

 
16

 
10

Interest expense
(12,698
)

(10,446
)

(35,602
)
 
(31,557
)
Loss on extinguishment of debt
(13
)

(13
)

(13
)
 
(15
)
Gain on the sales of rental property, net
3,239


17,563


32,276

 
19,225

Total other income (expense)
(9,469
)

7,106


(3,323
)
 
(12,337
)
Net income
$
8,876


$
21,839


$
48,989

 
$
23,276

Less: income attributable to noncontrolling interest after preferred stock dividends
281


828


1,589

 
673

Net income attributable to STAG Industrial, Inc.
$
8,595


$
21,011


$
47,400

 
$
22,603

Less: preferred stock dividends
1,289


2,449


6,315

 
7,345

Less: redemption of preferred stock
—

 
—

 
2,661

 
—

Less: amount allocated to participating securities
69


84


209

 
250

Net income attributable to common stockholders
$
7,237


$
18,478


$
38,215

 
$
15,008

Weighted average common shares outstanding — basic
105,783


92,787


101,095

 
87,632

Weighted average common shares outstanding — diluted
106,333


93,435


101,495

 
88,238

Net income per share — basic and diluted
 


 


 

 
 
Net income per share attributable to common stockholders — basic
$
0.07

 
$
0.20

 
$
0.38

 
$
0.17

Net income per share attributable to common stockholders — diluted
$
0.07

 
$
0.20

 
$
0.38

 
$
0.17

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

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
8,876

 
$
21,839

 
$
48,989

 
$
23,276

Other comprehensive income:
 
 
 
 
 
 
 
Income on interest rate swaps
2,060

 
598

 
12,811

 
300

Other comprehensive income
2,060

 
598

 
12,811

 
300

Comprehensive income
10,936

 
22,437

 
61,800

 
23,576

Income attributable to noncontrolling interest after preferred stock dividends
(281
)
 
(828
)
 
(1,589
)
 
(673
)
Other comprehensive income attributable to noncontrolling interest
(76
)
 
(26
)
 
(509
)
 
(13
)
Comprehensive income attributable to STAG Industrial, Inc.
$
10,579

 
$
21,583

 
$
59,702

 
$
22,890

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

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of 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
 
 
 
 
 
 
Nine months ended September 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
—

 
10,387,962

 
104

 
276,353

 
—

 
—

 
276,457

 
—

 
276,457

Redemption of preferred stock
(70,000
)
 
—

 
—

 
5,141

 
(5,158
)
 
—

 
(70,017
)
 
—

 
(70,017
)
Offering costs
—

 
—

 
—

 
(3,129
)
 
—

 
—

 
(3,129
)
 
—

 
(3,129
)
Dividends and distributions, net
—

 
—

 
—

 
—

 
(114,541
)
 
—

 
(114,541
)
 
(5,253
)
 
(119,794
)
Non-cash compensation activity, net
—

 
73,231

 
1

 
1,829

 
(537
)
 
—

 
1,293

 
3,880

 
5,173

Redemption of common units to common stock
—

 
352,055

 
3

 
4,398

 
—

 
—

 
4,401

 
(4,401
)
 
—

Rebalancing of noncontrolling interest
—

 
—

 
—

 
(6,434
)
 
—

 
—

 
(6,434
)
 
6,434

 
—

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
12,302

 
12,302

 
509

 
12,811

Net income
—

 
—

 
—

 
—

 
47,400

 
—

 
47,400

 
1,589

 
48,989

Balance, September 30, 2018
$
75,000

 
107,825,791

 
$
1,078

 
$
2,003,983

 
$
(589,785
)
 
$
16,485

 
$
1,506,761

 
$
54,036

 
$
1,560,797

Nine months ended September 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
—

 
13,165,996

 
132

 
339,492

 
—

 
—

 
339,624

 
—

 
339,624

Offering costs
—

 
—

 
—

 
(4,746
)
 
—

 
—

 
(4,746
)
 
—

 
(4,746
)
Dividends and distributions, net
—

 
—

 
—

 
—

 
(100,509
)
 
—

 
(100,509
)
 
(4,932
)
 
(105,441
)
Non-cash compensation activity, net
—

 
43,492

 
—

 
2,911

 
(194
)
 
—

 
2,717

 
3,509

 
6,226

Redemption of common units to common stock
—

 
300,991

 
3

 
3,314

 
—

 
—

 
3,317

 
(3,317
)
 
—

Issuance of units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
18,558

 
18,558

Rebalancing of noncontrolling interest
—

 
—

 
—

 
3,632

 
—

 
—

 
3,632

 
(3,632
)
 
—

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
287

 
287

 
13

 
300

Net income
—

 
—

 
—

 
—

 
22,603

 
—

 
22,603

 
673

 
23,276

Balance, September 30, 2017
$
145,000

 
93,862,783

 
$
939

 
$
1,638,309

 
$
(489,078
)
 
$
(1,209
)
 
$
1,293,961

 
$
50,762

 
$
1,344,723

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

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine months ended September 30,
 
2018
 
2017
Cash flows from operating activities:
    
 
    
Net income
$
48,989

 
$
23,276

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
125,221

 
110,286

Loss on impairments
2,934

 
—

Loss on involuntary conversion
—

 
330

Non-cash portion of interest expense
1,698

 
1,465

Intangible amortization in rental income, net
3,206

 
3,873

Straight-line rent adjustments, net
(8,297
)
 
(4,855
)
Dividends on forfeited equity compensation
15

 
2

Loss on extinguishment of debt
13

 
15

Gain on the sales of rental property, net
(32,276
)
 
(19,225
)
Non-cash compensation expense
6,671

 
7,159

Change in assets and liabilities:
 
 
 
Tenant accounts receivable, net
501

 
(955
)
Prepaid expenses and other assets
(9,597
)
 
(10,479
)
Accounts payable, accrued expenses and other liabilities
9,249

 
5,572

Tenant prepaid rent and security deposits
283

 
3,570

Total adjustments
99,621

 
96,758

Net cash provided by operating activities
148,610

 
120,034

Cash flows from investing activities:
 
 
 
Acquisitions of land and buildings and improvements
(382,981
)
 
(405,790
)
Additions of land and building and improvements
(23,578
)
 
(27,539
)
Acquisitions of other assets
(794
)
 
—

Acquisitions of other liabilities
242

 
—

Proceeds from sales of rental property, net
89,407

 
43,454

Proceeds from insurance on involuntary conversion
—

 
857

Acquisition deposits, net
(695
)
 
685

Acquisitions of deferred leasing intangibles
(74,851
)
 
(79,961
)
Net cash used in investing activities
(393,250
)
 
(468,294
)
Cash flows from financing activities:
 
 
 
Proceeds from unsecured credit facility
643,000

 
538,000

Repayment of unsecured credit facility
(819,000
)
 
(321,000
)
Proceeds from unsecured term loans
150,000

 
—

Proceeds from unsecured notes
175,000

 
—

Repayment of mortgage notes
(1,379
)
 
(105,027
)
Payment of loan fees and costs
(4,451
)
 
(1,185
)
Proceeds from sales of common stock
276,457

 
339,624

Redemption of preferred stock
(70,000
)
 
—

Offering costs
(3,191
)
 
(4,746
)
Dividends and distributions
(117,146
)
 
(103,655
)
Repurchase and retirement of share-based compensation
(1,524
)
 
(969
)
Net cash provided by financing activities
227,766

 
341,042

Decrease in cash and cash equivalents and restricted cash
(16,874
)
 
(7,218
)
Cash and cash equivalents and restricted cash—beginning of period
28,129

 
21,805

Cash and cash equivalents and restricted cash—end of period
$
11,255

 
$
14,587

Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest
$
31,875

 
$
30,476

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

Acquisitions of land and buildings and improvements
$
(232
)
 
$
(17,304
)
Acquisitions of deferred leasing intangibles
$
(48
)
 
$
(2,064
)
Partial disposal of building due to involuntary conversion of building
$
—

 
$
363

Investing other receivables due to involuntary conversion of building
$
—

 
$
(363
)
Change in additions of land, building, and improvements included in accounts payable, accrued expenses, and other liabilities
$
(1,475
)
 
$
(13,201
)
Additions to building and other capital improvements from non-cash compensation
$
(20
)
 
$
(24
)
Change in loan fees, costs, and offering costs included in accounts payable, accrued expenses, and other liabilities
$
48

 
$
30

Reclassification of preferred stock called for redemption to liability
$
70,000

 
$
—

Dividends and distributions accrued
$
14,530

 
$
11,516

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

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Table of Contents

STAG Industrial, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Organization and Description of Business

STAG Industrial, Inc. (the “Company”) is an industrial real estate operating company focused on the acquisition and operation of single-tenant, industrial properties throughout the United States. The Company was formed as a Maryland corporation and has elected to be treated and intends to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns substantially all of its assets and conducts substantially all of its business through its operating partnership, STAG Industrial Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). As of September 30, 2018 and December 31, 2017, the Company owned a 96.4% 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 September 30, 2018, the Company owned 381 buildings in 37 states with approximately 75.4 million rentable square feet, consisting of 313 warehouse/distribution buildings, 59 light manufacturing buildings, and 9 flex/office buildings. The Company’s buildings were approximately 95.4% leased to 330 tenants as of September 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.


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Table of Contents

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 nine months ended September 30, 2017, the effect of the change in accounting principle was a decrease in cash provided by operating activities of approximately $0.5 million and an increase in cash used in investing activities of approximately $5.6 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. 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.


9
Table of Contents

New Accounting Standards Issued but not yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and various subsequent ASU’s, 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 the modified retrospective transition method by recognizing a cumulative effect adjustment to the opening balance of cumulative dividends in excess of earnings, by either applying the new guidance at the beginning of the earliest comparative period or by applying the new guidance at the adoption date. The Company intends to adopt available practical expedients which allows the Company to 1) not reassess whether any expired or existing contracts are or contain leases; 2) not reassess the lease classification for any expired or existing leases; and 3) not reassess initial direct costs for any existing leases. 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.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which the Company adopted on January 1, 2018, as discussed in “New Accounting Standards Adopted” above. While lease contracts with customers, which constitute a vast majority of the Company’s revenues, are specifically excluded from the model’s scope, once the new leases standard under ASU 2016-02 is adopted by the Company, 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. In July 2018, the FASB issued ASU 2018-11 which amends Topic 842, Leases, and provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance and both of the following are met: i) the timing and pattern of transfer of the non-lease component(s) and associated lease component are the same; and ii) the lease component, if accounted for separately, would be classified as an operating lease. Under this new expedient, if the non-lease components associated with the lease component are the predominant component of the combined component, a company should account for the combined component in accordance with Topic 606. Otherwise, the company should account for the combined component as an operating lease in accordance with Topic 842. 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)
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
 
$
6,024

 
$
24,562

Restricted cash
 
5,231

 
3,567

Total cash and cash equivalents and restricted cash
 
$
11,255

 
$
28,129


Tenant Accounts Receivable, net

As of September 30, 2018 and December 31, 2017, the Company had an allowance for doubtful accounts of approximately $0.6 million and $0.1 million, respectively.

10
Table of Contents


As of September 30, 2018 and December 31, 2017, the Company had accrued rental income, net of allowance of approximately $30.7 million and $24.7 million, respectively. As of September 30, 2018 and December 31, 2017, the Company had an allowance on accrued rental income of $0.2 million and $0.2 million, respectively.

As of September 30, 2018 and December 31, 2017, the Company had approximately $14.6 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 September 30, 2018 and December 31, 2017, the Company had 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. The Company's remaining lease security deposits are commingled in cash and cash equivalents. These funds may be used to settle tenant accounts receivables in the event of a default under the related lease. As of September 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 $3.8 million, $10.9 million, $2.9 million and $9.2 million for the three and nine months ended September 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.

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 $22,000, $0.1 million, $0.2 million and $0.4 million for the three and nine months ended September 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 $0.1 million, $0.6 million, $0.3 million and $0.7 million have been recorded in other expenses on the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017, respectively.

Uncertain Tax Positions

As of September 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.


11
Table of Contents

3. Rental Property

The following table summarizes the components of rental property as of September 30, 2018 and December 31, 2017.
Rental Property (in thousands)
 
September 30, 2018
 
December 31, 2017
Land
 
$
355,590

 
$
321,560

Buildings, net of accumulated depreciation of $190,538 and $160,281, respectively
 
2,006,013

 
1,756,579

Tenant improvements, net of accumulated depreciation of $35,495 and $32,714, respectively
 
30,577

 
30,138

Building and land improvements, net of accumulated depreciation of $75,754 and $56,062, respectively
 
160,496

 
143,170

Construction in progress
 
5,669

 
2,877

Deferred leasing intangibles, net of accumulated amortization of $237,892 and $280,642, respectively
 
327,734

 
313,253

Total rental property, net
 
$
2,886,079

 
$
2,567,577


Acquisitions

The following table summarizes the acquisitions of the Company during the three and nine months ended September 30, 2018.
Market (1)
 
Date Acquired
 
Square Feet
 
Buildings
 
Purchase Price
(in thousands)
Greenville/Spartanburg, SC
 
January 11, 2018
 
203,000

 
1

 
$
10,755

Minneapolis/St Paul, MN
 
January 26, 2018
 
145,351

 
1

 
13,538

Philadelphia, PA
 
February 1, 2018
 
278,582

 
1

 
18,277

Houston, TX
 
February 22, 2018
 
242,225

 
2

 
22,478

Greenville/Spartanburg, SC
 
March 30, 2018
 
222,710

 
1

 
13,773

Three months ended March 31, 2018
 
 
 
1,091,868

 
6

 
78,821

Chicago, IL
 
April 23, 2018
 
169,311

 
2

 
10,975

Milwaukee/Madison, WI
 
April 26, 2018
 
53,680

 
1

 
4,316

Pittsburgh, PA
 
April 30, 2018
 
175,000

 
1

 
15,380

Detroit, MI
 
May 9, 2018
 
274,500

 
1

 
19,328

Minneapolis/St Paul, MN
 
May 15, 2018
 
509,910

 
2

 
26,983

Cincinnati/Dayton, OH
 
May 23, 2018
 
158,500

 
1

 
7,317

Baton Rouge, LA
 
May 31, 2018
 
279,236

 
1

 
21,379

Las Vegas, NV
 
June 12, 2018
 
122,472

 
1

 
17,920

Greenville/Spartanburg, SC
 
June 15, 2018
 
131,805

 
1

 
5,621

Denver, CO
 
June 18, 2018
 
64,750

 
1

 
7,044

Cincinnati/Dayton, OH
 
June 25, 2018
 
465,136

 
1

 
16,421

Charlotte, NC
 
June 29, 2018
 
69,200

 
1

 
5,446

Houston, TX
 
June 29, 2018
 
252,662

 
1

 
27,170

Three months ended June 30, 2018
 
 
 
2,726,162

 
15

 
185,300

Knoxville, TN
 
July 10, 2018
 
106,000

 
1

 
6,477

Pittsburgh, PA
 
August 2, 2018
 
265,568

 
1

 
19,186

Raleigh/Durham, NC
 
August 2, 2018
 
365,000

 
1

 
21,067

Detroit, MI
 
August 6, 2018
 
439,150

 
1

 
21,077

Des Moines, IA
 
August 8, 2018
 
121,922

 
1

 
6,053

McAllen/Edinburg/Pharr, TX
 
August 9, 2018
 
270,084

 
1

 
18,523

Pittsburgh, PA
 
August 15, 2018
 
200,500

 
1

 
11,327

Minneapolis/St Paul, MN
 
August 24, 2018
 
120,606

 
1

 
8,422

Milwaukee/Madison, WI
 
September 28, 2018
 
100,800

 
1

 
7,484

Milwaukee/Madison, WI
 
September 28, 2018
 
174,633

 
2

 
13,288

Chicago, IL
 
September 28, 2018
 
105,637

 
1

 
6,368

Indianapolis, IN
 
September 28, 2018
 
478,721

 
1

 
29,085

Augusta/Richmond County, GA
 
September 28, 2018
 
203,726

 
1

 
9,379

Charlotte, NC
 
September 28, 2018
 
301,000

 
1

 
16,807

Three months ended September 30, 2018
 
 
 
3,253,347

 
15

 
194,543

Nine months ended September 30, 2018
 
 
 
7,071,377

 
36

 
$
458,664

(1) As defined by CoStar Realty Information Inc.


12
Table of Contents

The following table summarizes the allocation of the consideration paid at the date of acquisition during the nine months ended September 30, 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
 
$
39,340

 
N/A
Buildings
 
317,293

 
N/A
Tenant improvements
 
4,849

 
N/A
Building and land improvements
 
21,731

 
N/A
Deferred leasing intangibles - In-place leases
 
52,276

 
8.7
Deferred leasing intangibles - Tenant relationships
 
21,861

 
11.8
Deferred leasing intangibles - Above market leases
 
4,062

 
8.2
Deferred leasing intangibles - Below market leases
 
(3,122
)
 
6.7
Deferred leasing intangibles - Above market ground leases
 
(178
)
 
48.1
Other assets
 
794

 
N/A
Other liabilities
 
(242
)
 
N/A
Total purchase price
 
$
458,664

 
 

The table below sets forth the results of operations for the three and nine months ended September 30, 2018 for the buildings acquired during the nine months ended September 30, 2018 included in the Company’s Consolidated Statements of Operations from the date of acquisition.
Results of Operations (in thousands)
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Total revenue
 
$
7,122

 
$
11,156

Net income
 
$
1,556

 
$
1,642


Dispositions

During the nine months ended September 30, 2018, the Company sold 11 buildings comprised of approximately 2.0 million square feet with a net book value of approximately $57.1 million to third parties. These buildings contributed approximately $0.1 million, $2.7 million, $2.6 million and $7.7 million to revenue for the three and nine months ended September 30, 2018 and 2017, respectively. These buildings contributed approximately $5,000, $0.1 million, $0.5 million and $1.4 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 nine months ended September 30, 2018 and 2017, respectively. Net proceeds from the sales of rental property were approximately $89.4 million and the Company recognized the full gain on the sales of rental property, net of approximately $32.3 million for the nine months ended September 30, 2018.

Loss on Impairments

The following table summarizes the Company's loss on impairments for assets held and used during the nine months ended September 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
(6)
 
 
 
Sergeant Bluff, IA(4)
 
1
 
Change in estimated hold period
(5)
Discounted cash flows
(6)
 
 
 
Three months ended March 31, 2018
 
 
 
$
3,176

 
$
2,934

Nine months ended September 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 assets held and used 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 during the nine months ended September 30, 2018.
(6)
Level 3 inputs used to determine fair value for the impaired assets held and used 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%.


13
Table of Contents

Deferred Leasing Intangibles

The following table sets forth the deferred leasing intangibles on the accompanying Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017.
 
 
September 30, 2018
 
December 31, 2017
Deferred Leasing Intangibles (in thousands)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Above market leases
 
$
70,454

 
$
(31,663
)
 
$
38,791

 
$
78,558

 
$
(36,810
)
 
$
41,748

Other intangible lease assets
 
495,172

 
(206,229
)
 
288,943

 
515,337

 
(243,832
)
 
271,505

Total deferred leasing intangible assets
 
$
565,626

 
$
(237,892
)
 
$
327,734

 
$
593,895

 
$
(280,642
)
 
$
313,253

 
 
 
 
 
 
 
 
 
 
 
 
 
Below market leases
 
$
33,751

 
$
(13,043
)
 
$
20,708

 
$
34,776

 
$
(13,555
)
 
$
21,221

Total deferred leasing intangible liabilities
 
$
33,751

 
$
(13,043
)
 
$
20,708

 
$
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 nine months ended September 30, 2018 and 2017.
 
 
Three months ended September 30,
 
Nine months ended September 30,
Deferred Leasing Intangibles Amortization (in thousands)
 
2018
 
2017
 
2018
 
2017
Net decrease to rental income related to above and below market lease amortization
 
$
1,150

 
$
1,318

 
$
3,206

 
$
3,873

Amortization expense related to other intangible lease assets
 
$
20,361

 
$
17,934

 
$
56,698

 
$
53,747


The following table sets forth the amortization of deferred leasing intangibles over the next five calendar years beginning with 2018 as of September 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
 
$
17,263

 
$
927

2019
 
$
57,841

 
$
3,926

2020
 
$
47,750

 
$
3,546

2021
 
$
37,229

 
$
2,163

2022
 
$
29,690

 
$
1,154



14
Table of Contents

4. Debt

The following table sets forth a summary of the Company’s outstanding indebtedness, including borrowings under the Company’s unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes as of September 30, 2018 and December 31, 2017.
Loan

Principal Outstanding as of September 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)

$
95,000

  
$
271,000

 
L + 1.05%


Jan-15-2023

i
Total unsecured credit facility

95,000

  
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
 
150,000

  
—

 
L + 1.30%

 
Jan-04-2023
 
i
Unsecured Term Loan E (4)
 
—

 
—

 
L + 1.20%

 
Jan-15-2024
 
i
Total unsecured term loans

600,000

 
450,000

 






Less: Total unamortized deferred financing fees and debt issuance costs

(3,915
)
 
(3,735
)
 






Total carrying value unsecured term loans, net

596,085

  
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

(2,611
)
 
(1,766
)
 






Total carrying value unsecured notes, net

572,389

  
398,234

  
 


 

 
 


 

 





Mortgage notes (secured debt):

 

 


 
 


 

 
Wells Fargo Bank, National Association CMBS Loan

53,652

  
54,949

 
4.31
%

Dec-1-2022

iii
Thrivent Financial for Lutherans
 
3,824

 
3,906

 
4.78
%
 
Dec-15-2023
 
iv
Total mortgage notes

57,476

  
58,855

 
 





Add: Total unamortized fair market value premiums

52

 
61

 
 





Less: Total unamortized deferred financing fees and debt issuance costs 

(535
)
 
(634
)
 






Total carrying value mortgage notes, net

56,993

  
58,282

 
 





Total / weighted average interest rate (5)

$
1,320,467

  
$
1,173,781

 
3.69
%




(1)
Interest rate as of September 30, 2018. At September 30, 2018, the one-month LIBOR (“L”) was 2.26056%. 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.
(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.
(3)
The capacity of the unsecured credit facility is $500.0 million. Deferred financing fees and debt issuance costs, net of accumulated amortization related to the unsecured credit facility of approximately $3.4 million and $1.5 million is included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.
(4)
Capacity of $175.0 million, which the Company has until July 25, 2019 to draw.
(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 September 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 September 30, 2018 was approximately $574.4 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 $7.7 million and $5.6 million as of September 30, 2018 and December 31, 2017, respectively, and is included in accounts payable, accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.


15
Table of Contents

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 nine months ended September 30, 2018 and 2017.
 
 
Three months ended September 30,
 
Nine months ended September 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
 
$
617

 
$
546

 
$
1,698

 
$
1,553

Facility fees and unused fees
 
$
275

 
$
286

 
$
928

 
$
839


On July 26, 2018, the Company closed on the refinancing of its unsecured credit facility. The refinancing transaction included extending the maturity date to January 15, 2023, increasing the capacity to $500.0 million, and reducing the annual interest rate. As of September 30, 2018, the interest rate on the unsecured credit facility was LIBOR plus a spread of 1.05% based on the Company’s consolidated leverage ratio, as defined in the credit agreement. The Company recognized a loss of approximately $13,000 as a result of the acceleration of unamortized deferred financing fees, which is included in loss on extinguishment of debt in the accompanying Consolidated Statements of Operations. The remaining unamortized deferred financing fees were carried over and will be amortized with any new deferred financing fees through the new maturity date of the unsecured credit facility. As of September 30, 2018, the unsecured credit facility has an annual facility fee of 0.15% based on the Company’s consolidated leverage ratio, as defined in the credit agreement, of total commitments that is due and payable quarterly. The Company also is required to pay an annual fee of $50,000.
On July 26, 2018, the Company entered into a $175.0 million unsecured term loan agreement ("Unsecured Term Loan E"). As of September 30, 2018, the interest rate on the Unsecured Term Loan E was LIBOR plus a spread of 1.20% based on the Company's consolidated leverage ratio, as defined in the loan agreement. Unless otherwise terminated pursuant to the loan agreement, the Unsecured Term Loan E will mature on January 15, 2024. The Unsecured Term Loan E has an accordion feature that allows the Company to increase its borrowing capacity to $350.0 million, subject to the satisfaction of certain conditions and lender consents. The agreement includes a delayed draw feature that allows the Company to draw up to six advances of at least $25.0 million each until July 25, 2019. To the extent that the Company does not request advances of the $175.0 million of aggregate commitments by July 25, 2019, the unadvanced commitments terminate. The Unsecured Term Loan E has an unused commitment fee equal to 0.15% of its unused commitments, which began to accrue on October 24, 2018 and is due and payable monthly until the earlier of (i) the date that commitments of $175.0 million have been fully advanced, (ii) July 26, 2019, and (iii) the date that commitments of $175.0 million have been reduced to zero pursuant to the terms of the agreement. The Company also is required to pay an annual fee of $35,000. The Company and certain wholly owned subsidiaries of the Operating Partnership are guarantors of the Unsecured Term Loan E. The agreement also contains financial and other covenants substantially similar to the covenants in the Company's unsecured credit facility.

On July 26, 2018, the Company entered into amendments to its unsecured term loan agreements to conform certain provisions to the Unsecured Term Loan E agreement and the new unsecured credit facility agreement.

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 September 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 $88.4 million and $90.9 million at September 30, 2018 and December 31, 2017, respectively, and is limited to senior, property-level secured debt financing arrangements.

16
Table of Contents


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 September 30, 2018 and December 31, 2017 (in thousands).
 
 
September 30, 2018
 
December 31, 2017
 
 
Principal Outstanding
 
Fair Value
 
Principal Outstanding
 
Fair Value
Unsecured credit facility
 
$
95,000

 
$
95,000

 
$
271,000

 
$
271,528

Unsecured term loans
 
600,000

 
607,663

 
450,000

 
451,463

Unsecured notes
 
575,000

 
569,493

 
400,000

 
415,599

Mortgage notes
 
57,476

 
57,608

 
58,855

 
59,769

Total principal amount
 
1,327,476

 
$
1,329,764

 
1,179,855

 
$
1,198,359

Add: Total unamortized fair market value premiums
 
52

 
 
 
61

 
 
Less: Total unamortized deferred financing fees and debt issuance costs
 
(7,061
)
 
 
 
(6,135
)
 
 
Total carrying value
 
$
1,320,467

 
 
 
$
1,173,781

 
 

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.


17
Table of Contents

The following table details the Company’s outstanding interest rate swaps as of September 30, 2018. All of the Company’s interest rate swaps are designated as qualifying cash flow hedges.
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

 
$
471

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

 
$
703

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

 
$
344

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

 
$
245

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

 
$
700

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

 
$
1,391

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

 
$
978

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

 
$
695

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

 
$
417

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

 
$
684

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

 
$
682

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

 
$
1,488

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

 
$
886

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

 
$
271

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

 
$
520

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

 
$
467

 
2.5300
%
 
One-month L
 
Mar-31-2022
The Toronto-Dominion Bank
 
Jul-20-2017
 
Oct-30-2017
 
$
25,000

 
$
1,054

 
1.8485
%
 
One-month L
 
Jan-04-2023
Royal Bank of Canada
 
Jul-20-2017
 
Oct-30-2017
 
$
25,000

 
$
1,054

 
1.8505<