Property Acquisitions

12 Months Ended

Dec. 31, 2014

Business Combinations [Abstract]

Property Acquisitions

10. PROPERTY ACQUISITIONS

2014 Activity

During the year ended December 31, 2014, we acquired fee title to ten gasoline stations and convenience store properties in separate transactions for an aggregate purchase price of $17,598,000.

We accounted for these acquisitions as business combinations. We estimated the fair value of acquired tangible assets (consisting of land, buildings and equipment) “as if vacant.” Based on these estimates, we allocated $16,576,000 of the purchase price to land, buildings and equipment and $1,022,000 to in-place leases, favorable financing and other intangible assets. We incurred transaction costs of $104,000 directly related to the acquisitions which are included in general and administrative expenses in our consolidated statements of operations. As of December 31, 2014, our allocations of the purchase price among the assets acquired are preliminary and subject to change.

2013 Activity

On May 9, 2013, we acquired 16 Mobil-branded gasoline station and convenience store properties in the metro New York region and 20 Exxon- and Shell-branded gasoline station and convenience store properties located within the Washington, D.C. “Beltway” for $72,500,000 in two sale/leaseback transactions with subsidiaries of Capitol Petroleum Group, LLC (“Capitol”). The two new triple-net unitary leases have an initial term of 15 years plus three renewal options with provisions for rent escalations during the initial and renewal terms. As triple-net lessees, our tenants are required to pay all expenses pertaining to the properties subject to the unitary leases, including environmental expenses, taxes, assessments, licenses and permit fees, charges for public utilities and all governmental charges. We utilized $11,500,000 of proceeds from 1031 exchanges, $57,500,000 of borrowings under our Credit Agreement and cash on hand to fund this acquisition.

We accounted for these transactions as business combinations. We estimated the fair value of acquired tangible assets (consisting of land, buildings and equipment) “as if vacant.” Based on these estimates, we allocated $62,365,000 of the purchase price to land, buildings and equipment, $6,267,000 to direct financing leases and $3,868,000 to in-place leases and other intangible assets. We incurred transaction costs of $480,000 directly related to the acquisition which are included in general and administrative expenses in our consolidated statements of operations.

In addition, in 2013, we acquired fee or leasehold title to three gasoline station and convenience store properties in separate transactions for an aggregate purchase price of $750,000.

Acquired Intangible Assets

Acquired above-market (when we are a lessor) and below-market leases (when we are a lessee) are included in prepaid expenses and other assets and had a balance of $3,300,000 and $3,784,000 (net of accumulated amortization of $3,220,000 and $2,727,000, respectively) at December 31, 2014 and 2013, respectively. Acquired above-market (when we are a lessee) and below-market (when we are a lessor) leases are included in accounts payable and accrued liabilities and had a balance of $7,531,000 and $8,685,000 (net of accumulated amortization of $10,036,000 and $8,940,000, respectively) at December 31, 2014 and 2013, respectively. Above-market and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental revenue over the remaining term of the associated lease in place at the time of purchase, when we are a lessor. In-place leases are included in prepaid expenses and other assets and had a balance of $5,328,000 and $5,169,000 (net of accumulated amortization of $2,773,000 and $2,290,000, respectively) at December 31, 2014 and 2013, respectively. Above-market and below-market leases are amortized and recorded as either an increase (in the case of below-market leases) or a decrease (in the case of above-market leases) to rental expense over the remaining term of the associated lease in place at the time of purchase, when we are a lessee. Rental income included amortization from acquired leases of $1,239,000, $986,000 and $1,113,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Rent expense included amortization from acquired leases of $333,000, $353,000 and $529,000 for the years ended December 31, 2014, 2013 and 2012, respectively. The value associated with in-place leases and lease origination costs are amortized into depreciation and amortization expense over the remaining life of the lease. Depreciation and amortization expense included amortization from in-place leases of $518,000, $408,000 and $241,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

The amortization for acquired intangible assets during the next five years and thereafter, assuming no early lease terminations, is as follows:

	Above-Market		Below-Market		In-Place
As Lessor:	Leases		Leases		Leases
Year ending December 31,
2015	$	156,000	$	1,039,000	$	497,000
2016		156,000		1,020,000		491,000
2017		142,000		956,000		477,000
2018		41,000		901,000		450,000
2019		24,000		791,000		429,000
Thereafter		32,000		2,824,000		2,984,000
	$	551,000	$	7,531,000	$	5,328,000

	Below-Market
As Lessee:	Leases
Year ending December 31,
2015	$	333,000
2016		333,000
2017		320,000
2018		317,000
2019		312,000
Thereafter		1,134,000
	$	2,749,000

Unaudited Pro Forma Condensed Consolidated Financial Information

The following unaudited pro forma condensed consolidated financial information for the years ended December 31, 2013 and 2012 has been prepared utilizing our historical financial statements and the combined effect of additional revenue and expenses from the properties acquired from Capitol in 2013 assuming that the acquisitions had occurred as of the beginning of the earliest period presented, after giving effect to certain adjustments including: (a) rental income adjustments resulting from the straight-lining of scheduled rent increases; and (b) rental income adjustments resulting from the recognition of revenue under direct financing leases over the lease term using the effective interest rate method which produces a constant periodic rate of return on the net investment in the leased properties. The following information also gives effect to the additional interest expense resulting from the assumed increase in borrowings outstanding under the Credit Agreement to fund the acquisition and the elimination of acquisition costs. The unaudited pro forma condensed financial information is not indicative of the results of operations that would have been achieved had the Capitol acquisition reflected herein been consummated on the dates indicated or that will be achieved in the future.

	Year ended December 31,
(in thousands, except per share amounts):	2013		2012
Revenues	$	104,710	$	102,086
Net earnings	$	71,277	$	15,792
Basic and diluted net earnings per common share	$	2.11	$	0.47