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Real Estate, net and Real Estate Held for Sale

12 Months Ended

Dec. 31, 2023

Real Estate, net and Real Estate Held for Sale

The following table presents the Company’s net lease portfolio, net, as of December 31, 2023 and December 31, 2022 (dollars in thousands):


	December 31, 2023		December 31, 2022
Land and improvements	$	127,003	$	128,608
Buildings, building leaseholds, and improvements	498,291		505,297
Tenant improvements	19,145		17,851

Subtotal	$	644,439	$	651,756
Less: Accumulated depreciation	(103,468)		(87,109)

Net lease portfolio, net	$	540,971	$	564,647

The following table presents the Company’s portfolio of other real estate, net as of December 31, 2023 and December 31, 2022 (dollars in thousands):


	December 31, 2023		December 31, 2022
Land and improvements	$	68,433	$	29,582
Buildings, building leaseholds, and improvements	217,554		152,186
Tenant improvements	27,668		18,757
Furniture, fixtures and equipment	1,204		135
Construction-in-progress	3,142		3,011
Subtotal	$	318,001	$	203,671
Less: Accumulated depreciation	(43,397)		(35,850)
Less: Impairment(1)	(7,590)		—
Other portfolio, net	$	267,014	$	167,821

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(1) See Note 13, “Fair Value,” for discussion of impairment of real estate.

At December 31, 2023, the Company held four foreclosed properties in other real estate, net with a combined carrying value of $100.4 million and one foreclosed property as held for sale with a carry value of $19.6 million.

Depreciation Expense

Depreciation expense on real estate was $24.7 million, $24.9 million and $25.8 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Property Operating Income

For the years ended December 31, 2023, 2022 and 2021 the components of property operating income were as follows (dollars in thousands):


	Year Ended December 31,
		2023		2022		2021
Lease revenues
Minimum lease revenue		$	81,127	$	77,270	$	83,498
Variable lease revenue		12,149		10,992		9,815
		$	93,276	$	88,262	$	93,313
Hotel operating income		—		1,566		9,200
Total property operating income(1)		$	93,276	$	89,828	$	102,513

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(1)Excludes amortization expense related to above and below-market leases of $1.3 million and income of $1.4 million for the year ended December 31, 2023, respectively. Excludes amortization expense related to above and below-market leases of $1.0 million and income of $1.4 million for the year ended December 31, 2022, respectively. Excludes amortization expense related to above and below-market leases of $1.3 million and income of $1.4 million for the year ended December 31, 2021, respectively.

For the years ended December 31, 2023, 2022 and 2021 the Company had no single property with property operating income equal to or greater than 10.0% of total revenue of the Company.

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 December 31, 2023 (dollars in thousands):


2024	$	84,560
2025	78,836
2026	71,758
2027	66,870
2028	57,927
2029 and thereafter	297,516
Total	$	657,467

The rental properties owned at December 31, 2023 are leased under noncancellable operating leases with current expirations ranging from 2024 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.

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 2050. Rents on certain ground leases are paid directly by the tenants. Ground rent expense for the years ended December 31, 2023, 2022 and 2021 was $3.1 million, $3.1 million and $3.1 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 December 31, 2023.

Real Estate Acquisitions

In the year ended December 31, 2023, the Company acquired legal title to four office properties and one multifamily property. In accordance with ASC 805, the Company allocated the fair value of the assumed assets and liabilities on the respective acquisition dates. Following the acquisitions, four properties are included in real estate, net on the Company’s consolidated balance sheets. One property is classified as held for sale at December 31, 2023.

The following table summarizes the Company’s real estate acquisitions for the year ended December 31, 2023 (dollars in thousands):


					Purchase Price Allocation
Acquisition Date	Property Type and Location	Number of Buildings/Units(1)	Purchase Price(2)		Land and Improvements(2)		Building and Improvements(2)		Furniture and Fixtures(2)		Lease Intangible Assets(2)		Other Assets		Lease Intangible Liabilities(2)		Other Liabilities
Year Ended December 31, 2023
July	Office - California(3)	1	$	13,933	$	5,718	$	3,262	$	—	$	4,404	$	922	$	(2)	$	(371)
June	Office - New York(3)	1	36,177		10,380		24,484		—		1,898		432		(528)		(489)
June	Office - New York(3)	1	36,922		14,786		15,958		—		6,867		876		(193)		(1,372)
November	Office - Washington D.C.(4)	1	19,600		—		—		—		—		—		—		—
December	Multifamily - Arizona(3)	236	35,213		7,590		25,745		832		1,271		325		—		(550)
			$	141,845	$	38,474	$	69,449	$	832	$	14,440	$	2,555	$	(723)	$	(2,782)

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(1) For office properties, represents number of buildings. For multifamily properties, represents number of units.

(2) Useful life of real estate acquired is 45 years for buildings, four to nine years for tenant improvements, four to nine years for furniture and fixtures, and three to 12 years for lease intangibles.

(3) Represents assets acquired by the Company through deeds-in-lieu of foreclosure.

(4) Represents an asset acquired through foreclosure and subsequently classified as held for sale. As such, no purchase price allocation was completed and purchase price represents the fair value of the property.

Impairment

During the fourth quarter of 2023, the Company recorded $7.6 million of impairment related to one of the New York office properties. The impairment was due to a reduction in the estimated holding period of the property and increased capital expenditures. The estimated fair value of the collateral was determined by using a discounted cash flow model. Refer to Note 13 “Fair Value” for further discussion.

Real Estate Held for Sale

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


	December 31, 2023
Assets
Real estate, net	$	19,600

Total assets held for sale	$	19,600

Upon acquisition of the Washington D.C. office through foreclosure in November 2023, the Company classified it as held for sale. The Company expects a sale to close during 2024. As of December 31, 2022, the Company did not have any properties held for sale.

Real Estate Sales

There were no sales during the year ended December 31, 2023.

During the year ended December 31, 2022, the Company completed the sale of one net lease property for a gross sales price of $19.6 million which resulted in a $7.6 million gain on sale and is included in other gain, net on the consolidated statement of operations. The Company also sold one hotel property for a gross sales price of $36.0 million which resulted in a $2.4 million gain on sale and is included in other gain, net on the consolidated statement of operations.