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Real Estate Investments and Related Intangibles

6 Months Ended

Jun. 30, 2020

Real Estate Investments and Related Intangibles

Property Acquisitions

During the six months ended June 30, 2020, the Company acquired controlling financial interests in 25 commercial properties for an aggregate purchase price of $147.1 million (the “2020 Acquisitions”), which includes one land parcel for build-to-suit development, further discussed below and $0.9 million of external acquisition-related expenses that were capitalized.

During the six months ended June 30, 2019, the Company acquired controlling financial interests in 33 commercial properties for an aggregate purchase price of $200.5 million (the “2019 Acquisitions”), which includes $1.0 million of external acquisition-related expenses that were capitalized.

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



	Six Months Ended June 30,
	2020		2019
Real estate investments, at cost:
Land	$	19,953	$	40,460
Buildings, fixtures and improvements	95,728		135,182
Total tangible assets	115,681		175,642
Acquired intangible assets:
In-place leases and other intangibles ⁽¹⁾	15,739		24,817
Above-market leases⁽²⁾	15,701		—
Total purchase price of assets acquired	$	147,121	$	200,459

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(1)	The weighted average amortization period for acquired in-place leases and other intangibles is 18.1 years and 15.8 years for 2020 Acquisitions and 2019 Acquisitions, respectively.


(2)	The weighted average amortization period for acquired above-market leases is 20.1 years for 2020 Acquisitions.

As of June 30, 2020, the Company invested $23.4 million, including $0.3 million of external acquisition-related expenses and interest that were capitalized, in one build-to-suit development project. The Company’s estimated remaining committed investment is $21.4 million, and the project is expected to be completed within the next 12 months.

Property Dispositions and Real Estate Assets Held for Sale

During the six months ended June 30, 2020, the Company disposed of 47 properties, including the sale of two consolidated properties to the office partnership, for an aggregate gross sales price of $219.2 million, of which our share was $216.7 million after the profit participation payments related to the disposition of three Red Lobster properties. The dispositions resulted in proceeds of $204.1 million after closing costs, including proceeds from the contribution of properties to the office partnership. The Company recorded a gain of $34.2 million related to the dispositions, 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 six months ended June 30, 2019, the Company disposed of 75 properties, including the sale of six consolidated properties to the industrial partnership for an aggregate gross sales price of $809.2 million, of which our share was $796.4 million after the profit participation payment related to the disposition of 23 Red Lobster properties. The dispositions resulted in proceeds of $739.9 million after closing costs and contributions to the industrial partnership. The Company recorded a gain of $233.4 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.

As of June 30, 2020, there were eight properties classified as held for sale with a carrying value of $48.1 million, included in real estate assets held for sale, net, primarily comprised of land of $2.5 million and building, fixtures and improvements, net of $41.7 million, in the accompanying consolidated balance sheets, and are expected to be sold in the next 12 months as part of the Company’s portfolio management strategy. As of December 31, 2019, there were five properties classified as held for sale. During the six months ended June 30, 2020, the Company recorded a loss of $0.2 million related to held for sale properties. During the six months ended June 30, 2019 the Company recorded a loss of $0.8 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 June 30, 2020 and December 31, 2019 (amounts in thousands, except weighted-average useful life):



	Weighted-Average Useful Life	June 30, 2020		December 31, 2019
Intangible lease assets:
In-place leases and other intangibles, net of accumulated amortization of $787,231 and $748,689, respectively	16.1	$	788,686	$	854,196
Leasing commissions, net of accumulated amortization of $6,409 and $6,027, respectively	7.5	18,790		17,808
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $120,510 and $112,438, respectively	16.8	170,205		165,483
Total intangible lease assets, net		$	977,681	$	1,037,487

Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $106,116 and $99,315, respectively	19.2	$	130,208	$	143,583

The aggregate amount of amortization of above‑ and below-market leases and deferred lease incentives included as a net decrease to rental revenue was $1.5 million and $1.3 million for the six months ended June 30, 2020 and 2019, respectively. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $73.3 million and $65.8 million for the six months ended June 30, 2020 and 2019, respectively.

The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of June 30, 2020 (in thousands):



	Remainder of 2020		2021		2022		2023		2024		2025
In-place leases and other intangibles:
Total projected to be included in amortization expense	$	57,571	$	107,490	$	93,814	$	83,671	$	73,403	$	61,429
Leasing commissions:
Total projected to be included in amortization expense	1,317		2,461		2,360		2,085		1,867		1,599
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue	9,962		19,519		18,708		17,764		16,393		14,921
Below-market lease liabilities:
Total projected to be included in rental revenue	8,320		14,947		13,255		12,533		10,686		9,467

Consolidated Joint Venture

The Company had an interest in one consolidated joint venture that owned one property as of June 30, 2020 and December 31, 2019. As of June 30, 2020 and December 31, 2019, the consolidated joint venture had total assets of $33.6 million and $32.5 million, respectively, of which $30.0 million and $29.6 million, respectively, were real estate investments, net of accumulated depreciation and amortization at each of the respective dates. The property is secured by a mortgage note payable, which is non-recourse to the Company and had a balance of $15.2 million and $14.3 million as of June 30, 2020 and December 31, 2019, respectively. The Company has the ability to control operating and financing policies of the consolidated joint venture. There are restrictions on the use of these assets as the Company is generally required to obtain the approval of the joint venture 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.

Unconsolidated Joint Ventures

The following is a summary of the Company’s investments in unconsolidated joint ventures as of June 30, 2020 and December 31, 2019 and for the six months ended June 30, 2020 and 2019 (dollar amounts in thousands):



			Carrying Amount of Investment				Equity in Income
			Carrying Amount of Investment				Six Months Ended
Investment	Ownership % ⁽¹⁾	Number of Properties	June 30, 2020		December 31, 2019		June 30, 2020		June 30, 2019
Faison JV Bethlehem GA ⁽²⁾	90%	1	$	41,076	$	40,416	$	1,197	$	1,035
Industrial Partnership⁽³⁾	20%	6	35,257		28,409		347		(30		)
Office Partnership ⁽⁴⁾	20%	3	9,967		—		199		—

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(1)

The Company’s ownership interest reflects its legal ownership interest. Legal ownership may, at times, not equal the Company’s economic interest in the listed properties because of various provisions in certain joint venture agreements regarding capital contributions, distributions of cash flow based on capital account balances, allocations of profits and losses and payments of preferred returns. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interests.

(2)

The total carrying amount of the investment was greater than the underlying equity in net assets by $4.6 million and $4.7 million as of June 30, 2020 and December 31, 2019, respectively. This difference relates to a purchase price allocation of goodwill and a step up in fair value of the investment asset acquired in connection with mergers. The step up in fair value was allocated to the individual investment asset and is being amortized in accordance with the Company’s depreciation policy.


(3)	During the six months ended June 30, 2020, the Company made a capital contribution to the industrial partnership, in anticipation of the acquisition of a property.


(4)	During the six months ended June 30, 2020, the office partnership acquired one property from a third party for a purchase price of $33.1 million.

The unconsolidated joint ventures had total aggregate debt outstanding of $341.8 million as of June 30, 2020, which is non-recourse to the Company, as discussed in Note 6 – Debt. There was $269.3 million of debt outstanding related to the unconsolidated joint ventures as of December 31, 2019.

The Company and the respective unconsolidated joint venture partners are subject to the provisions of the applicable joint venture agreements, which include provisions for when additional contributions may be required to fund certain cash shortfalls, including the Company’s share of expansion project capital expenditures.