Real Estate Investments and Related Intangibles

Property Acquisitions

During the nine months ended September 30, 2018, the Company acquired controlling financial interests in 42 commercial properties for an aggregate purchase price of $280.4 million (the “2018 Acquisitions”), which includes $2.1 million related to an outstanding tenant improvement allowance recorded as a payable as of the acquisition date and for which the Company received a credit at close, and $1.6 million of external acquisition-related expenses that were capitalized. During the nine months ended September 30, 2017, the Company acquired a controlling interest in 65 commercial properties and three land parcels for an aggregate purchase price of $453.9 million (the “2017 Acquisitions”), which includes $1.9 million of external acquisition-related expenses that were capitalized and includes 22 properties acquired in a nonmonetary exchange.

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



	Nine Months Ended September 30,
	2018			2017
Real estate investments, at cost:
Land	$	54,732		$	82,337
Buildings, fixtures and improvements	181,011			293,419
Total tangible assets	235,743			375,756
Acquired intangible assets:
In-place leases and other intangibles ⁽¹⁾	42,050			68,306
Above-market leases⁽²⁾	2,750			10,270
Assumed intangible liabilities:
Below-market leases ⁽³⁾	(116		)	(395		)
Total purchase price of assets acquired	$	280,427		$	453,937

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(1)	The weighted average amortization period for acquired in-place leases and other intangibles is 15.7 years and 16.7 years for 2018 Acquisitions and 2017 Acquisitions, respectively.


(2)	The weighted average amortization period for acquired above-market leases is 10.8 years and 18.1 years for 2018 Acquisitions and 2017 Acquisitions, respectively.


(3)	The weighted average amortization period for acquired intangible lease liabilities is 9.9 years and 20.0 years for 2018 Acquisitions and 2017 Acquisitions, respectively.

Future Lease Payments

The following table presents future minimum base rent payments due to the Company over the next five years and thereafter. These amounts exclude contingent rent payments, as applicable, that may be collected from certain tenants based on provisions related to sales thresholds and increases in annual rent based on exceeding certain economic indexes among other items (in thousands):



	Future Minimum Operating Lease Base Rent Payments		Future Minimum Direct Financing Lease Payments ⁽¹⁾
October 1, 2018 - December 31, 2018	$	264,955	$	727
2019	1,098,352		2,508
2020	1,068,111		2,135
2021	1,030,610		2,014
2022	952,610		1,925
Thereafter	6,062,338		2,254
Total	$	10,476,976	$	11,563

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(1)	Related to 25 properties which are subject to direct financing leases and, therefore, revenue is recognized as direct financing lease income on the discounted cash flows of the lease payments. Amounts reflected are the minimum base rental cash payments due to the Company under the lease agreements on these respective properties.

Property Dispositions and Real Estate Assets Held for Sale

During the nine months ended September 30, 2018, the Company disposed of 112 properties, including one property conveyed to a lender in a deed-in-lieu of foreclosure transaction as discussed in Note 9 – Debt, for an aggregate gross sales price of $371.0 million, of which our share was $356.6 million after the profit participation payments related to the disposition of 22 Red Lobster properties. The dispositions resulted in proceeds of $352.8 million after closing costs. The Company recorded a gain of $70.3 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.

During the nine months ended September 30, 2018, the Company also disposed of one property owned by an unconsolidated joint venture for a gross sales price of $34.1 million, of which our share was $17.1 million based on our ownership interest in the joint venture, resulting in proceeds of $5.6 million after debt repayments of $20.4 million and closing costs. The Company recorded a gain of $0.7 million related to the sale and liquidation of the joint venture, which is included in equity in income and gain on disposition of unconsolidated entities in the accompanying consolidated statements of operations.

During the nine months ended September 30, 2017, the Company disposed of 112 properties, including six properties transferred to the lender in either a deed-in-lieu of foreclosure or foreclosure sale transaction and 15 properties disposed of in connection with a nonmonetary exchange, for an aggregate gross sales price of $507.5 million, of which our share was $491.0 million after the profit participation payment related to the disposition of 24 Red Lobster properties. The dispositions resulted in proceeds of $366.2 million after a mortgage loan assumption of $66.0 million and closing costs. Additionally, the Company’s tax provision for the nine months ended September 30, 2017 included $1.7 million of Canadian tax gain on the gain on sale of certain Canadian properties. The Company recorded a gain of $54.9 million, 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 September 30, 2018, there were eight properties classified as held for sale with a carrying value of $24.3 million, included in assets related to real estate assets held for sale and discontinued operations, net in the accompanying consolidated balance sheet, which are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. As of December 31, 2017, there were 30 properties classified as held for sale. During the nine months ended September 30, 2018, the Company recorded a loss of $1.9 million related to held for sale properties. During the nine months ended September 30, 2017, the Company recorded a loss of $0.5 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 September 30, 2018 and December 31, 2017 (amounts in thousands, except weighted-average useful life):



	Weighted-Average Useful Life	September 30, 2018		December 31, 2017
Intangible lease assets:
In-place leases and other intangibles, net of accumulated amortization of $680,775 and $599,680, respectively	15.4	$	1,006,399	$	1,091,433
Leasing commissions, net of accumulated amortization of $3,526 and $2,902, respectively	11.0	13,547		13,876
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $102,355 and $88,335, respectively	16.4	213,116		241,449
Total intangible lease assets, net		$	1,233,062	$	1,346,758

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $85,844 and $73,916, respectively	18.6	$	179,192	$	198,551

The following table provides the projected amortization expense and adjustments to rental income related to the intangible lease assets and liabilities for the next five years as of September 30, 2018 (amounts in thousands):



	Remainder of 2018		2019		2020		2021		2022
In-place leases and other intangibles:
Total projected to be included in amortization expense	$	33,935	$	126,466	$	119,158	$	111,333	$	97,138
Leasing commissions:
Total projected to be included in amortization expense	407		1,589		1,567		1,510		1,452
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental income	5,793		21,326		20,913		20,483		19,670
Below-market lease liabilities:
Total projected to be included in rental income	5,775		18,116		16,962		15,797		14,950

Impairment of Real Estate Investments

The Company performs quarterly impairment review procedures, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable.

As part of the Company’s quarterly impairment review procedures, net real estate assets with carrying values totaling $83.1 million were deemed to be impaired and their carrying values were reduced to their estimated fair values of $47.0 million resulting in impairment charges of $36.1 million during the nine months ended September 30, 2018. The impairment charges relate to certain restaurant and retail properties that, during 2018, management identified for potential sale or determined, based on discussions with the current tenants, will not be re-leased.

During the nine months ended September 30, 2017, net real estate assets with carrying values totaling $87.9 million were deemed to be impaired and their carrying values were reduced to their estimated fair values of $57.0 million, resulting in impairment charges of $30.9 million.

Consolidated Joint Ventures

The Company had an interest in one consolidated joint venture that owned one property as of September 30, 2018 and December 31, 2017. As of September 30, 2018 and December 31, 2017, the consolidated joint venture had total assets of $32.6 million and $33.7 million, of which $29.9 million and $30.7 million, respectively, were real estate investments, net of accumulated depreciation and amortization. The property was secured by a mortgage note payable, which was non-recourse to the Company and had a balance of $14.1 million and $14.9 million, as of September 30, 2018 and December 31, 2017, respectively. The Company has the ability to control operating and financial policies of the consolidated joint venture. There are restrictions on the use of these assets as the Company would generally be required to obtain the approval of the 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. The partner’s share of the loss from the consolidated joint venture was $0.1 million for each of the three and nine months ended September 30, 2018, respectively.

As of September 30, 2017, the Company had interests in two consolidated joint ventures. The partners’ share of the two consolidated joint ventures’ income was less than $0.1 million for the three months ended September 30, 2017. The partners’ share of the Consolidated Joint Ventures’ loss was less than $0.1 million for the nine months ended September 30, 2017.

Unconsolidated Joint Ventures

As of September 30, 2018, the Company held an investment in an unconsolidated joint venture that owned one property with a carrying value of $34.3 million. As of December 31, 2017, the Company held investments in two unconsolidated joint ventures that each owned one property with an aggregate carrying value of $39.5 million. During the nine months ended September 30, 2018, the Company disposed of one property owned by an unconsolidated joint venture as previously discussed in the “Property Dispositions and Real Estate Assets Held for Sale” section herein.

The Company had a 90% legal ownership interest in the unconsolidated joint venture at September 30, 2018 and December 31, 2017 and accounts for its investment using the equity method of accounting as the Company has the ability to exercise significant influence, but not control, over operating and financing policies of the investment. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in earnings and distributions from the joint venture. During the three and nine months ended September 30, 2018 the Company recognized $0.3 million and $1.1 million of net income, respectively, from unconsolidated joint ventures. During the three and nine months ended September 30, 2017, the Company recognized $0.4 million and $1.3 million of net income, respectively, from two unconsolidated joint ventures. The Company’s legal ownership interest may, at times, not equal the Company’s economic interest because of various provisions in certain joint venture agreements regarding distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns.

The carrying amount of the unconsolidated joint venture was greater than the underlying equity in net assets by $4.8 million and $5.0 million as of September 30, 2018 and December 31, 2017, 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. The Company and the unconsolidated joint venture partner are subject to the provisions of the applicable joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.