Real Estate, net and Real Estate Held for Sale

9 Months Ended

Sep. 30, 2020

Real Estate, net and Real Estate Held for Sale

The following table presents the Company’s net lease portfolio, net, as of September 30, 2020, and December 31, 2019 (dollars in thousands):


	September 30, 2020		December 31, 2019
Land and improvements	$	181,409	$	209,693
Buildings, building leaseholds, and improvements	762,433		899,889
Tenant improvements	20,491		25,077
Construction-in-progress	3,144		415
Subtotal	$	967,477	$	1,135,074
Less: Accumulated depreciation	(74,055)		(63,995)
Less: Impairment(1)	—		(23,911)
Net lease portfolio, net	$	893,422	$	1,047,168

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(1)See Note 14, “Fair Value,” for discussion of impairment of real estate.

The following table presents the Company’s portfolio of real estate included in its Legacy, Non-Strategic Portfolio, including foreclosed properties, as of September 30, 2020 and December 31, 2019 (dollars in thousands):


	September 30, 2020		December 31, 2019
Land and improvements	$	59,523	$	91,997
Buildings, building leaseholds, and improvements	341,197		536,046
Tenant improvements	25,128		38,230
Furniture, fixtures and equipment	3,791		3,183
Construction-in-progress	1,806		6,325
Subtotal	$	431,445	$	675,781
Less: Accumulated depreciation	(35,677)		(46,079)
Less: Impairment(1)	(155,872)		(192,074)
Other portfolio, net	$	239,896	$	437,628

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(1)See Note 14, “Fair Value,” for discussion of impairment of real estate.

For the nine months ended September 30, 2020, the Company had no single property with rental and other income equal to or greater than 10.0% of total revenue.

At September 30, 2020 and December 31, 2019, the Company held foreclosed properties which are included in real estate, net with a carrying value of $25.6 million and $50.7 million, respectively. At September 30, 2020 and December 31, 2019, the Company held foreclosed properties in assets held for sale of $42.4 million and $57.9 million, respectively.

Depreciation Expense

Depreciation expense on real estate was $10.6 million and $18.1 million for the three months ended September 30, 2020 and September 30, 2019, respectively. Depreciation expense on real estate was $32.0 million and $58.7 million for the nine months ended September 30, 2020 and 2019, respectively.

Property Operating Income

For the nine months ended September 30, 2020 and 2019, the components of property operating income were as follows (dollars in thousands):


	Three Months Ended September 30, 2020				Nine Months Ended September 30,
	2020		2019		2020		2019
Lease revenues(1)
Minimum lease revenue	$	35,529	$	45,555	$	114,691	$	135,198
Variable lease revenue	5,390		6,304		18,080		18,478
	$	40,919	$	51,859	$	132,771	$	153,676
Hotel operating income	910		10,802		4,728		35,324
	$	41,829	$	62,661	$	137,499	$	189,000

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(1)Excludes net amortization expense related to above and below-market leases of $0.2 million and income of $0.4 million for the three and nine months ended September 30, 2020, respectively.

Minimum Future Rents

Minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The following table presents approximate future minimum rental income under noncancellable operating leases, excluding variable lease revenue of tenant reimbursements, to be received over the next five years and thereafter as of September 30, 2020 (dollars in thousands):


Remainder of 2020	$	25,288
2021	98,543
2022	92,488
2023	78,687
2024	69,665
2025 and thereafter	467,422
Total(1)	$	832,093

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(1)Excludes minimum future rents for real estate that is classified as held for sale totaling $40.4 million through 2050.

The following table presents approximate future minimum rental income under noncancellable operating leases to be received over the next five years and thereafter as of December 31, 2019 (dollars in thousands):


2020	$	120,967
2021	113,170
2022	102,314
2023	85,367
2024	71,714
2025 and thereafter	448,812
Total	$	942,344

The rental properties owned at September 30, 2020 are leased under noncancellable operating leases with current expirations ranging from 2020 to 2038, with certain tenant renewal rights. For certain properties, the tenants pay the Company, in addition to the contractual base rent, their pro rata share of real estate taxes and operating expenses. Certain lease agreements provide for periodic rental increases and others provide for increases based on the consumer price index.

Lease Concessions Related to COVID-19

As a result of the COVID-19 crisis, some tenants sought more flexible payment terms and the Company is currently engaged with affected tenants on a case-by-case basis to evaluate and respond to the current environment. For lease concessions resulting directly from the impact of COVID-19 that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee, for example, where total payments required by the modified contract will be substantially the same as or less than the original contract, the Company made a policy election to account for the concessions as though the enforceable rights and obligations for those concessions existed in the lease contracts, under a relief provided by the FASB. Under the relief, the concessions will not be treated as lease modifications that are accounted for over the remaining term of the respective leases, as the Company believes this would not accurately reflect the temporary economic effect of the concessions. Instead, (i) rent deferrals that meet the criteria will be treated as if no changes were made to the lease contract, with continued recognition of lease income and receivable under the original terms of the contract; and (ii) rent forgiveness that meets the criteria will be accounted for as variable lease payments in the affected periods.

Commitments and Contractual Obligations

Ground Lease Obligation

In connection with real estate acquisitions, the Company assumed certain noncancellable operating ground leases as lessee or sublessee with expiration dates through 2055. Rents on certain ground leases are paid directly by the tenants. Ground rent expense for the three and nine months ended September 30, 2020 was $0.8 million and $2.4 million, respectively. Ground rent expense for the three and nine months ended September 30, 2019 was $0.8 million and $2.3 million, respectively.

Refer to Note 16, “Commitments and Contingencies” for the details of future minimum rental payments on noncancellable ground lease on real estate as of September 30, 2020.

Real Estate Asset Acquisitions

The following table summarizes the Company’s real estate asset acquisitions for the year ended December 31, 2019 (dollars in thousands):


					Purchase Price Allocation
Acquisition Date	Property Type and Location	Number of Buildings	Purchase Price(1)		Land and Improvements(2)		Building and Improvements(2)		Furniture, Fixtures and Equipment		Lease Intangible Assets(2)		Other Assets		Other Liabilities
Year Ended December 31, 2019
June	Retail - Massachusetts(3)	3	$	21,919	$	9,294	$	6,598	$	—	$	5,256	$	1,538	$	(767)
January	Various - in U.S.(3)	28	105,437		38,145		66,413		—		879		3,223		(3,223)
			$	127,356	$	47,439	$	73,011	$	—	$	6,135	$	4,761	$	(3,990)

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(1)Dollar amounts of purchase price and allocation to assets acquired and liabilities assumed are translated using foreign exchange rate as of the respective dates of acquisitions, where applicable.

(2)Useful life of real estate acquired is 4 to 33 years for buildings, 1 to 20 years for site improvements, 1 to 27 years for tenant improvements, 5 to 7 years for furniture, fixtures and equipment, and 1 to 27 years for lease intangibles.

(3)Represents assets acquired by the Company through foreclosure.

The Company did not have any real estate acquisitions in 2020.

Real Estate Held for Sale

The following table summarizes the Company’s assets and related liabilities held for sale related to real estate (dollars in thousands):


	September 30, 2020		December 31, 2019
Assets
Real estate, net	$	182,356	$	178,564
Deferred leasing costs and intangible assets, net	10,109		5,890
Total assets held for sale	$	192,465	$	184,454

Liabilities
Intangible liabilities, net	$	10,787	$	294
Total liabilities related to assets held for sale	$	10,787	$	294

During the three months ended September 30, 2020, the Company classified several properties in its Net Leased Real Estate and Legacy, Non-Strategic Portfolio as held for sale.

There were no assets held for sale that constituted discontinued operations as of September 30, 2020 and December 31, 2019.

Real Estate Sales

During the nine months ended September 30, 2020, the Company completed the sale of eleven properties. Sales included five offices, one hotel, two multifamily, one retail and one manufactured housing property included in the Company’s Legacy, Non-Strategic Portfolio for a total gross sales price of $185.7 million and a total loss on sale of $2.1 million. In addition, there was one sale of an industrial property in the Company’s Core Portfolio for a total gross sales price of $131.4 million and a total gain on sale of $9.0 million.

The real estate sold during the nine months ended September 30, 2020 did not constitute discontinued operations.

Refer to Note 19, “Subsequent Events” for further detail on additional real estate sales.