REAL ESTATE AND RELATED LEASE INTANGIBLES, NET

6 Months Ended

Jun. 30, 2019

REAL ESTATE AND RELATED LEASE INTANGIBLES, NET

6. REAL ESTATE AND RELATED LEASE INTANGIBLES, NET

The following tables present additional detail related to our real estate portfolio, net, including foreclosed properties ($ in thousands):



	June 30, 2019			December 31, 2018

Land	$	197,086		$	195,644
Building	817,595			814,314
In-place leases and other intangibles	158,868			162,002
Less: Accumulated depreciation and amortization	(189,172		)	(173,938		)
Real estate and related lease intangibles, net	$	984,377		$	998,022

Below market lease intangibles, net (other liabilities)	$	(39,163	)	$	(40,367	)

At June 30, 2019 and December 31, 2018, the Company held foreclosed properties included in real estate, net with a carrying value of $24.1 million and $6.3 million, respectively.

The following table presents depreciation and amortization expense on real estate recorded by the Company ($ in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018

Depreciation expense (1)	$	7,697	$	8,208	$	15,382	$	15,995
Amortization expense	2,213		2,429		4,730		5,447
Total real estate depreciation and amortization expense	$	9,910	$	10,637	$	20,112	$	21,442


(1)	Depreciation expense on the consolidated statements of income also includes $25 thousand and $19 thousand of depreciation on corporate fixed assets for the three months ended June 30, 2019 and 2018, respectively, and $50 thousand and $37 thousand of depreciation on corporate fixed assets for the six months ended June 30, 2019 and 2018, respectively.

The Company’s intangible assets are comprised of in-place leases, favorable leases compared to market leases and other intangibles. At June 30, 2019, gross intangible assets totaled $158.9 million with total accumulated amortization of $59.8 million, resulting in net intangible assets of $99.0 million, including $4.7 million of unamortized favorable lease intangibles which are included in real estate and related lease intangibles, net on the consolidated balance sheets. At December 31, 2018, gross intangible assets totaled $162.0 million with total accumulated amortization of $57.7 million, resulting in net intangible assets of $104.3 million, including $5.5 million of unamortized favorable lease intangibles which are included in real estate and related lease intangibles, net on the consolidated balance sheets. For the three and six months ended June 30, 2019, the Company recorded a reduction in operating lease income of $0.2 million and $0.6 million, respectively, for amortization of above market leases intangibles acquired, compared to $0.2 million and $0.4 million, respectively, for the three and six months ended June 30, 2018. For the three and six months ended June 30, 2019, the Company recorded an increase in operating lease income of $0.5 million and $1.0 million for amortization of below market lease intangibles acquired, compared to $0.7 million and $1.3 million for the three and six months ended June 30, 2018.

The following table presents expected adjustment to operating lease income and expected amortization expense during the next five years and thereafter related to the above and below market leases and acquired in-place lease and other intangibles for property owned as of June 30, 2019 ($ in thousands):



Period Ending December 31,	Adjustment to Operating Lease Income		Amortization Expense

2019 (last 6 months)	$	517	$	3,327
2020	1,036		6,347
2021	1,037		6,259
2022	1,041		6,195
2023	1,041		6,195
Thereafter	29,756		66,043
Total	$	34,428	$	94,366

Lease Prepayment by Lessor, Retirement of Related Mortgage Loan Financing and Impairment of Real Estate

On January 10, 2019, the Company received $10.0 million prepayment of a lease on a single-tenant two-story office building in Wayne, NJ. As of March 31, 2019, this property had a book value of $5.6 million, which is net of accumulated depreciation and amortization of $2.7 million. The Company recognized the $10.0 million of operating lease income on a straight-line basis over the revised lease term. On February 6, 2019, the Company paid off $6.6 million of mortgage loan financing related to the property, recognizing a loss on extinguishment of debt of $1.1 million. During the three months ended March 31, 2019, the Company recorded a $1.4 million impairment of real estate to reduce the carrying value of the real estate to the estimated fair value of the real estate. On May 1, 2019, the Company completed the sale of the property recognizing $3.9 million of operating lease income, $3.5 million realized loss on sale of real estate, net and $0.4 million of depreciation and amortization expense, resulting in a net loss of $20 thousand. See Note 9, Fair Value of Financial Instruments for further detail.

There were $1.4 million and $0.8 million of rent receivables included in other assets on the consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively.

There was unencumbered real estate of $71.5 million and $58.6 million as of June 30, 2019 and December 31, 2018, respectively.

During the three and six months ended June 30, 2019, the Company recorded $0.8 million and $1.0 million of real estate operating income, respectively, which is included in operating lease income in the consolidated statements of income.

The following is a schedule of non-cancellable, contractual, future minimum rent under leases (excluding property operating expenses paid directly by tenant under net leases) at June 30, 2019 ($ in thousands):



Period Ending December 31,	Amount

2019 (last 6 months)	$	42,016
2020	77,970
2021	68,304
2022	64,406
2023	62,219
Thereafter	510,864
Total	$	825,779

Acquisitions

During the six months ended June 30, 2019, the Company acquired the following properties ($ in thousands):



Acquisition Date	Type	Primary Location(s)	Purchase Price/Fair Value on the Date of Foreclosure		Ownership Interest (1)

Purchases of real estate
February 2019	Net Lease	Houghton Lake, MI	$	1,242	100.0%
February 2019	Net Lease	Trenton, MO	1,164		100.0%
April 2019	Net Lease	Centralia, IL	1,242		100.0%
June 2019	Net Lease	Fayette, MO	1,423		100.0%
Total purchases of real estate			5,071

Real estate acquired via foreclosure
February 2019	Diversified	Omaha, NE	18,200		100.0%
Total real estate acquired via foreclosure			18,200

Total real estate acquisitions			$	23,271


(1)	Properties were consolidated as of acquisition date.

During the six months ended June 30, 2019, the Company acquired title to real estate in a foreclosure. The real estate had a fair value of $18.2 million and previously served as collateral for a mortgage loan receivable held for investment, which was previously on non-accrual status. This loan had an amortized cost of $17.8 million, accrued interest of $0.2 million and an unamortized discount of $0.1 million. The acquisition was accounted for in real estate, net, at fair value on the date of foreclosure. There was no gain or loss resulting from the disposition of the loan.

On October 1, 2016, the Company early adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). As a result of this adoption, acquisitions of real estate may not meet the revised definition of a business and may be treated as asset acquisitions rather than business combinations. The measurement of assets and liabilities acquired will no longer be recorded at fair value and the Company will now allocate purchase consideration based on relative fair values. Real estate acquisition costs, which are no longer expensed as incurred, will be capitalized as a component of the cost of the assets acquired. During the six months ended June 30, 2019, all acquisitions were determined to be asset acquisitions.

The purchase prices were allocated to the asset acquisitions during the six months ended June 30, 2019, as follows ($ in thousands):



	Purchase Price Allocation

Land	$	3,789
Building	18,885
Intangibles	854
Below Market Lease Intangibles	(257		)
Total purchase price	$	23,271

The weighted average amortization period for intangible assets acquired during the six months ended June 30, 2019 was 37.0 months. The Company recorded $62 thousand and $79 thousand in revenues from its 2019 acquisitions for the three and six months ended June 30, 2019, respectively, which is included in its consolidated statements of income. The Company recorded $(1.2) million and $(1.5) million in earnings (losses) from its 2019 acquisitions for the three and six months ended June 30, 2019, respectively, which is included in its consolidated statements of income.

During the six months ended June 30, 2018, the Company acquired the following properties ($ in thousands):



Acquisition Date	Type	Primary Location(s)	Purchase Price		Ownership Interest (1)

March 2018	Diversified(2)	Lithia Springs, GA	$	24,466	70.6%
April 2018	Net Lease	Kirbyville, MO	1,156		100.0%
April 2018	Net Lease	Gladwin, MI	1,171		100.0%
April 2018	Net Lease	Foley, MN	1,176		100.0%
April 2018	Net Lease	Moscow Mills, MO	1,237		100.0%
April 2018	Net Lease	Wonder Lake, IL	1,255		100.0%
May 2018	Diversified(3)	Isla Vista, CA	85,087		75.0%

Total real estate acquisitions			$	115,548


(1)	Properties were consolidated as of acquisition date.


(2)	Joint venture partner contributed $2.9 million to the partnership.


(3)	Joint venture partner contributed $4.6 million to the partnership.

The purchase prices were allocated to the asset acquisitions during the six months ended June 30, 2018, as follows ($ in thousands):



	Purchase Price Allocation

Land	$	40,019
Building	73,794
Intangibles	2,065
Below Market Lease Intangibles	(330		)
Total purchase price	$	115,548

The weighted average amortization period for intangible assets acquired during the six months ended June 30, 2018 was 18.4 years. The Company recorded $1.4 million revenues from its 2018 acquisition for the three and six months ended June 30, 2018. The Company recorded $0.8 million in earnings (losses) from its 2018 acquisition for the three and six months ended June 30, 2018, which is included in its consolidated statements of income.

Sales

The Company sold the following properties during the six months ended June 30, 2019 ($ in thousands):



Sales Date	Type	Primary Location(s)	Net Sales Proceeds		Net Book Value		Realized Gain/(Loss)				Properties	Units Sold	Units Remaining

N/A	Condominium	Las Vegas, NV	$	—	$	—	$	—			—	—	1
Various	Condominium	Miami, FL	3,917		3,550		367				—	13	9
April 2019	Diversified	Wayne, NJ	1,729		4,799		(3,070		)	(1)	1	—	—
May 2019	Diversified	Grand Rapids, MI	10,019		8,254		1,765			(2)	1	—	—
Totals			$	15,665	$	16,603	$	(938	)

The Company sold the following properties during the six months ended June 30, 2018 ($ in thousands):



Sales Date	Type	Primary Location(s)	Net Sales Proceeds		Net Book Value		Realized Gain/(Loss)			Properties	Units Sold	Units Remaining

Various	Condominium	Las Vegas, NV	$	4,509	$	1,939	$	2,570		—	6	7
Various	Condominium	Miami, FL	3,296		2,662		634			—	12	36
March 2018	Diversified	El Monte, CA	71,807		52,610		19,197		(1)	1	—	—
March 2018	Diversified	Richmond, VA	20,966		11,370		9,596		(2)	1	—	—
Totals			$	100,578	$	68,581	$	31,997


(1)	This property had a third party investor. The third party investor has been allocated $7.0 million of the realized gain, which is included in net (income) loss attributable to noncontrolling interest in consolidated joint ventures, for the six months ended June 30, 2018, on the consolidated statements of income.

(2)

This property had a third party investor. The third party investor has been allocated $0.4 million of the realized gain, which is included in net (income) loss attributable to noncontrolling interest in consolidated joint ventures, for the six months ended June 30, 2018, on the consolidated statements of income.