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Real Estate Investments and Related Intangibles

3 Months Ended

Mar. 31, 2020

Real Estate Investments and Related Intangibles

Property Acquisitions

During the three months ended March 31, 2020, the Company acquired controlling financial interests in 25 commercial properties for an aggregate purchase price of $147.1 million (the “2020 Acquisitions”), which includes one land parcel for build-to-suit development, further discussed below and $0.9 million of external acquisition-related expenses that were capitalized.

During the three months ended March 31, 2019, the Company acquired a controlling interest in eight commercial properties for an aggregate purchase price of $81.1 million (the “2019 Acquisitions”), which includes $0.3 million of external acquisition-related expenses that were capitalized.

The following table presents the allocation of the fair values of the assets acquired and liabilities assumed during the periods presented (in thousands):



	Three Months Ended March 31,
	2020		2019
Real estate investments, at cost:
Land	$	19,953	$	17,716
Buildings, fixtures and improvements	95,728		53,923
Total tangible assets	115,681		71,639
Acquired intangible assets:
In-place leases and other intangibles ⁽¹⁾	15,739		9,445
Above-market leases⁽²⁾	15,701		—
Total purchase price of assets acquired	$	147,121	$	81,084

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(1)	The weighted average amortization period for acquired in-place leases and other intangibles is 18.1 years and 12.5 years for 2020 Acquisitions and 2019 Acquisitions, respectively.


(2)	The weighted average amortization period for acquired above-market leases is 20.1 years for 2020 Acquisitions.

As of March 31, 2020, the Company invested $19.3 million, including $0.3 million of external acquisition-related expenses and interest that were capitalized, in one build-to-suit development project. The Company’s estimated remaining committed investment is $25.5 million, and the project is expected to be completed within the next 12 months.

Property Dispositions and Real Estate Assets Held for Sale

During the three months ended March 31, 2020, the Company disposed of 30 properties, including the sale of two consolidated properties to a newly-formed joint venture in which the Company owns a 20% equity interest (the “Office Partnership”), for an aggregate gross sales price of $152.2 million, of which our share was $150.5 million after the profit participation payments related to the disposition of two Red Lobster properties. The dispositions resulted in proceeds of $140.4 million after closing costs, including proceeds from the contribution of properties to the Office Partnership. The Company recorded a gain of $25.2 million related to the dispositions, which is included in gain on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.

During the three months ended March 31, 2019, the Company disposed of 22 properties, for an aggregate gross sales price of $66.0 million, of which our share was $62.1 million after the profit participation payment related to the disposition of six Red Lobster properties. The dispositions resulted in proceeds of $60.5 million after closing costs. The Company recorded a gain of $10.8 million related to the sales which is included in gain on disposition of real estate and real estate assets held for sale, net in the accompanying consolidated statements of operations.

As of March 31, 2020 and December 31, 2019, there were five properties classified as held for sale. As of March 31, 2020, the five properties classified as held for sale had a carrying value of $88.5 million, included in real estate assets held for sale, net, primarily comprised of land of $26.2 million and building, fixtures and improvements, net of $62.2 million, in the accompanying consolidated balance sheets, and are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. During the three months ended March 31, 2020, the Company did not record any losses related to held for sale properties. During the three months ended March 31, 2019 the Company recorded a loss of less than $0.1 million related to held for sale properties.

Intangible Lease Assets and Liabilities

Intangible lease assets and liabilities of the Company consisted of the following as of March 31, 2020 and December 31, 2019 (amounts in thousands, except weighted-average useful life):



	Weighted-Average Useful Life	March 31, 2020		December 31, 2019
Intangible lease assets:
In-place leases and other intangibles, net of accumulated amortization of $765,649 and $748,689, respectively	16.0	$	818,815	$	854,196
Leasing commissions, net of accumulated amortization of $6,093 and $6,027, respectively	7.8	17,524		17,808
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $116,628 and $112,438, respectively	16.7	175,191		165,483
Total intangible lease assets, net		$	1,011,530	$	1,037,487

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $101,968 and $99,315, respectively	18.3	$	134,410	$	143,583

The aggregate amount of amortization of above‑ and below-market leases and deferred lease incentives included as a net decrease to rental revenue was $0.7 million for each of the three months ended March 31, 2020 and 2019. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $43.0 million and $33.8 million for the three months ended March 31, 2020 and 2019, respectively.

The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of March 31, 2020 (amounts in thousands):



	Remainder of 2020		2021		2022		2023		2024
In-place leases and other intangibles:
Total projected to be included in amortization expense	$	86,460	$	107,728	$	94,017	$	83,827	$	73,528
Leasing commissions:
Total projected to be included in amortization expense	1,896		2,341		2,239		1,964		1,747
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue	14,943		19,519		18,708		17,764		16,393
Below-market lease liabilities:
Total projected to be included in rental revenue	12,481		14,950		13,258		12,535		10,688

Consolidated Joint Venture

The Company had an interest in one consolidated joint venture that owned one property as of March 31, 2020 and December 31, 2019. As of March 31, 2020 and December 31, 2019, the consolidated joint venture had total assets of $33.7 million and $32.5 million, respectively, of which $30.2 million and $29.6 million, respectively, were real estate investments, net of accumulated depreciation and amortization at each of the respective dates. The property is secured by a mortgage note payable, which is non-recourse to the Company and had a balance of $15.2 million and $14.3 million as of March 31, 2020 and December 31, 2019, respectively. The Company has the ability to control operating and financing policies of the consolidated joint venture. There are restrictions on the use of these assets as the Company is generally required to obtain the approval of the joint venture partner in accordance with the joint venture agreement for any major transactions. The Company and the joint venture partner are subject to the provisions of the joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.

Unconsolidated Joint Ventures

The following is a summary of the Company’s investments in unconsolidated joint ventures as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 (dollar amounts in thousands):



			Carrying Amount of Investment				Equity in Income
			Carrying Amount of Investment				Three Months Ended
Investment	Ownership % ⁽¹⁾	Number of Properties	March 31, 2020		December 31, 2019		March 31, 2020			March 31, 2019
Faison JV Bethlehem GA ⁽²⁾	90%	1	$	40,178	$	40,416	$	(7	)	$	500
Industrial Partnership	20%	6	28,365		28,409		180			—
Office Partnership ⁽³⁾	20%	3	10,175		—		73			—

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(1)

The Company’s ownership interest reflects its legal ownership interest. Legal ownership may, at times, not equal the Company’s economic interest in the listed properties because of various provisions in certain joint venture agreements regarding capital contributions, distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interests.

(2)

The total carrying amount of the investments was greater than the underlying equity in net assets by $4.6 million and $4.7 million as of March 31, 2020 and December 31, 2019, respectively. This difference relates to a purchase price allocation of goodwill and a step up in fair value of the investment assets acquired in connection with mergers. The step up in fair value was allocated to the individual investment assets and is being amortized in accordance with the Company’s depreciation policy.


(3)	During the three months ended March 31, 2020, the Office Partnership acquired one property from a third party for a purchase price of $33.1 million.

The unconsolidated joint ventures had total aggregate debt outstanding of $341.8 million as of March 31, 2020, which is non-recourse to the Company, as discussed in Note 6 – Debt. There was $269.3 million of debt outstanding related to the unconsolidated joint ventures as of December 31, 2019.

The Company and the respective unconsolidated joint venture partners are subject to the provisions of the applicable joint venture agreements, which include provisions for when additional contributions may be required to fund certain cash shortfalls, including the Company’s share of expansion project capital expenditures.