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REAL ESTATE AND RELATED LEASE INTANGIBLES, NET
 9 Months Ended
Sep. 30, 2019
Real Estate [Abstract]  
REAL ESTATE AND RELATED LEASE INTANGIBLES, NET
5. 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):

 
September 30, 2019
 
December 31, 2018
 
 
 
 
Land
$
197,682

 
$
195,644

Building
820,783

 
814,314

In-place leases and other intangibles
159,721

 
162,002

Less: Accumulated depreciation and amortization
(196,853
)
 
(173,938
)
Real estate and related lease intangibles, net
$
981,333

 
$
998,022

 
 
 
 
Below market lease intangibles, net (other liabilities)
$
(39,087
)
 
$
(40,367
)


At September 30, 2019 and December 31, 2018, the Company held foreclosed properties included in real estate, net with a carrying value of $23.9 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Depreciation expense(1)
$
7,394

 
$
8,063

 
$
22,776

 
$
24,058

Amortization expense
1,612

 
2,336

 
6,342

 
7,782

Total real estate depreciation and amortization expense
$
9,006

 
$
10,399

 
$
29,118

 
$
31,840

 
(1)
Depreciation expense on the consolidated statements of income also includes $24 thousand and $18 thousand of depreciation on corporate fixed assets for the three months ended September 30, 2019 and 2018, respectively, and $74 thousand and $56 thousand of depreciation on corporate fixed assets for the nine months ended September 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. The following tables present additional detail related to our intangible assets ($ in thousands):

 
September 30, 2019
 
December 31, 2018
 
 
 
 
Gross intangible assets(1)
$
159,721

 
$
162,002

Accumulated amortization
61,056

 
57,712

Net intangible assets
$
98,665

 
$
104,290

 
(1)
Includes $4.6 million and $5.5 million of unamortized favorable lease intangibles which are included in real estate and related lease intangibles, net on the consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Reduction in operating lease income for amortization of above market lease intangibles acquired
$
(94
)
 
$
(155
)
 
$
(727
)
 
$
(535
)
Increase in operating lease income for amortization of below market lease intangibles acquired
564

 
500

 
1,594

 
1,821



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 September 30, 2019 ($ in thousands):
Period Ending December 31,
 
Adjustment to Operating Lease Income
 
Amortization Expense
 
 
 
 
 
2019 (last 3 months)
 
$
263

 
$
1,601

2020
 
1,054

 
6,403

2021
 
1,054

 
6,232

2022
 
1,054

 
6,232

2023
 
1,054

 
6,232

Thereafter
 
29,981

 
67,233

Total
 
$
34,460

 
$
93,933



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 15, Fair Value of Financial Instruments for further detail.

There were $1.0 million and $0.8 million of rent receivables included in other assets on the consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.

There was unencumbered real estate of $90.8 million and $58.6 million as of September 30, 2019 and December 31, 2018, respectively.

During the three and nine months ended September 30, 2019, the Company recorded $1.1 million and $2.1 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 September 30, 2019 ($ in thousands):
 
Period Ending December 31,
 
Amount
 
 
 
2019 (last 3 months)
 
$
21,347

2020
 
80,401

2021
 
69,055

2022
 
65,936

2023
 
64,106

Thereafter
 
520,897

Total
 
$
821,742



Acquisitions

During the nine months ended September 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%
July 2019
 
Net Lease
 
Dexter, MO
 
1,150

 
100.0%
July 2019
 
Net Lease
 
Caledonia, MI
 
1,199

 
100.0%
August 2019
 
Net Lease
 
Poseyville, IN
 
1,220

 
100.0%
September 2019
 
Net Lease
 
Chillicothe, IL
 
1,445

 
100.0%
September 2019
 
Net Lease
 
Sullivan, IL
 
1,496

 
100.0%
September 2019
 
Net Lease
 
Becker, MN
 
1,185

 
100.0%
September 2019
 
Net Lease
 
Adrian, MO
 
1,138

 
100.0%
Total purchases of real estate
 
 
 
13,904

 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
$
32,104

 
 
 
(1)
Properties were consolidated as of acquisition date.
 
During the nine months ended September 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 foreclosure 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 nine months ended September 30, 2019, all acquisitions were determined to be asset acquisitions.

The purchase prices were allocated to the asset acquisitions during the nine months ended September 30, 2019, as follows ($ in thousands):
 
 
Purchase Price Allocation
 
 
 
Land
 
$
4,969

Building
 
25,571

Intangibles
 
2,309

Below Market Lease Intangibles
 
(745
)
Total purchase price
 
$
32,104



The weighted average amortization period for intangible assets acquired during the nine months ended September 30, 2019 was 38.3 years. The Company recorded $167 thousand and $246 thousand in revenues from its 2019 acquisitions for the three and nine months ended September 30, 2019, respectively, which is included in its consolidated statements of income. The Company recorded $(1.0) million and $(2.5) million in earnings (losses) from its 2019 acquisitions for the three and nine months ended September 30, 2019, respectively, which is included in its consolidated statements of income.

During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2018 was 18.5 years. The Company recorded $2.0 million and $3.4 million revenues from its 2018 acquisitions for the three and nine months ended September 30, 2018, respectively. The Company recorded $0.7 million and $1.5 million in earnings (losses) from its 2018 acquisitions for the three and nine months ended September 30, 2018, respectively, which is included in its consolidated statements of income.

Sales

The Company sold the following properties during the nine months ended September 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
 
4,195

 
3,796

 
399

 
—

 
14

 
8

April 2019
 
Diversified
 
Wayne, NJ
 
1,729

 
4,799

 
(3,070
)
 
1

 
—

 
—

May 2019
 
Diversified
 
Grand Rapids, MI
 
10,019

 
8,254

 
1,765

 
1

 
—

 
—

August 2019
 
Diversified
 
Grand Rapids, MI
 
6,970

 
4,920

 
2,050

 
1

 
—

 
—

Totals
 
 
 
 
 
$
22,913

 
$
21,769

 
$
1,144

 
 
 
 
 
 

The Company sold the following properties during the nine months ended September 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
 
$
6,228

 
$
3,116

 
$
3,112

 
—

 
8

 
5

Various
 
Condominium
 
Miami, FL
 
4,844

 
3,987

 
857

 
—

 
18

 
30

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

 
—

 
—

September 2018
 
Diversified
 
St. Paul, MN
 
109,275

 
47,627

 
61,648

(3)
4

 
—

 
—

Totals
 
 
 
 
 
$
213,120

 
$
118,710

 
$
94,410

 
 
 
 
 
 
 
 
(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 nine months ended September 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 nine months ended September 30, 2018, on the consolidated statements of income.
(3)
This property had a third party investor. The third party investor has been allocated $7.9 million of the realized gain, which is included in net (income) loss attributable to noncontrolling interest in consolidated joint ventures, for the nine months ended September 30, 2018, on the consolidated statements of income.