Investments in Real Estate

9 Months Ended

Sep. 30, 2018

Real Estate Investments, Net [Abstract]

We acquire land, buildings and improvements necessary for the successful operations of commercial tenants.

A. Acquisitions During the First Nine Months of 2018 and 2017

During the first nine months of 2018, we invested $1.47 billion in 591 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.3%. The 591 new properties and properties under development or expansion are located in 37 states, will contain approximately 4.3 million leasable square feet, and are 100% leased with a weighted average lease term of 14.4 years. The tenants occupying the new properties operate in 20 industries and the property types consist of 96.1% retail and 3.9% industrial, based on rental revenue. None of our investments during 2018 caused any one tenant to be 10% or more of our total assets at September 30, 2018.

The $1.47 billion invested during the first nine months of 2018 was allocated as follows: $535.7 million to land, $846.1 million to buildings and improvements, $112.5 million to intangible assets related to leases, and $28.9 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first nine months of 2018 generated total revenues of $31.4 million and net income of $16.8 million during the nine months ended September 30, 2018.

In comparison, during the first nine months of 2017, we invested $956.9 million in 177 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.5%. The 177 new properties and properties under development or expansion were located in 35 states, contained approximately 4.3 million leasable square feet, and were 100% leased with a weighted average lease term of 14.9 years. The tenants occupying the new properties operated in 21 industries and the property types consisted of 96.6% retail and 3.4% industrial, based on rental revenue.

The $956.9 million invested during the first nine months of 2017 was allocated as follows: $235.4 million to land, $582.7 million to buildings and improvements, $154.3 million to intangible assets related to leases, and $15.5 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions.

The properties acquired during the first nine months of 2017 generated total revenues of $19.7 million and net income of $9.4 million during the nine months ended September 30, 2017.

The initial weighted average contractual lease rate for a property is generally computed as estimated contractual net operating income, which, in the case of a net leased property, is equal to the aggregate base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above.

In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the initial weighted average contractual lease rate is computed as follows: estimated net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. Of the $1.47 billion we invested during the first nine months of 2018, $69.7 million was invested in 11 properties under development or expansion with an initial weighted average contractual lease rate of 6.8%. Of the $956.9 million we invested during the first nine months of 2017, $16.4 million was invested in 13 properties under development or expansion with an initial weighted average contractual lease rate of 7.3%.

B. Investments in Existing Properties

During the first nine months of 2018 , we capitalized costs of $12.3 million on existing properties in our portfolio, consisting of $2.8 million for re-leasing costs, $529,000 for recurring capital expenditures and $8.9 million for non-recurring building improvements. In comparison, during the first nine months of 2017, we capitalized costs of $9.5 million on existing properties in our portfolio, consisting of $1.2 million for re-leasing costs, $536,000 for recurring capital expenditures and $7.8 million for non-recurring building improvements.

C. Properties with Existing Leases

Of the $1.47 billion we invested during the first nine months of 2018, approximately $307.5 million was used to acquire 147 properties with existing leases. In comparison, of the $956.9 million we invested during the first nine months of 2017, approximately $562.1 million was used to acquire 68 properties with existing leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheets, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheets.

The values of the in-place leases are amortized as depreciation and amortization expense. The amounts amortized to expense for all of our in-place leases, for the first nine months of 2018 and 2017 were $79.8 million and $79.1 million, respectively.

The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first nine months of 2018 and 2017 were $12.4 million and $10.2 million, respectively. If a lease was to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense, as appropriate.

The following table presents the estimated impact during the next five years and thereafter related to the amortization of the acquired above-market and below-market lease intangibles and the amortization of the in-place lease intangibles at September 30, 2018 (in thousands):


	Net decrease to rental revenue		Increase to amortization expense
2018	$	(4,388)	$	26,568
2019	(17,043)		98,078
2020	(16,314)		92,326
2021	(15,075)		84,355
2022	(13,369)		72,765
Thereafter	(46,164)		416,571
Totals	$	(112,352)	$	790,662