Note 3 – Real Estate Investments

Real Estate Portfolio

At December 31, 2014 and 2013, the Company’s gross investment in real estate assets, including properties under development and properties held for sale, totaled $589,147,000 and $471,366,000, respectively. Real estate investments consisted of the following as of December 31, 2014 and December 31, 2013:

	2014		2013

Number of Properties		209		130
Gross Leasable Area		4,315,000		3,662,000

Land	$	195,091,303	$	162,096,646
Buildings	$	393,826,467	$	297,464,585
Property under Development	$	229,242	$	6,959,174
Property Held for Sale	$	-	$	4,845,504
Gross Real Estate Investments	$	589,147,012	$	471,365,909
Less Accumulated Depreciation	$	(59,089,851)	$	(60,633,824)
Net Real Estate Investments	$	530,057,161	$	410,732,085

Lease Intangibles

The following table details lease intangibles, net of accumulated amortization, as of December 31, 2014 and December 31, 2013:

	December 31,		December 31,
	2014		2013
Intangible Lease Asset - In-Place Leases	$	36,680,631	$	17,597,357
Less: Accumulated Amortization		(3,897,008)		(1,836,593)
Intangible Lease Asset - Above-Market Leases		31,642,267		22,921,813
Less: Accumulated Amortization		(4,111,435)		(2,392,293)
Intangible Lease Liability - Below-Market Leases		(15,124,210)		(9,585,166)
Less: Accumulated Amortization		2,289,358		1,000,380
Lease Intangible Asset, net	$	47,479,602	$	27,705,499

Tenant Leases

The properties that the Company owns are typically leased to tenants under long term operating leases. The leases are generally net leases which typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. Certain of our properties are subject to leases under which we retain responsibility for specific costs and expenses of the property. The leases typically provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.

As of December 31, 2014, the future minimum rental income to be received under the terms of all non-cancellable tenant leases is as follows:

For the Year Ending December 31,
2015	$	54,370,464
2016		53,876,771
2017		53,123,664
2018		51,646,088
2019		48,813,782
Thereafter		414,382,007
Total	$	676,212,776

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the current lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the CPI or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales

Of these future minimum rents, approximately 25.4% of the total is attributable to Walgreens as of December 31, 2014. The loss of this tenant or the inability of it to pay rent could have an adverse effect on the Company’s business. No other tenant contributed 5.0% or more of the Company’s total revenues as of December 31, 2014.

Deferred Revenue

In July 2004, the Company’s tenant in a joint venture property located in Boynton Beach, FL repaid $4,000,000 that had been contributed by the Company’s joint venture partner. As a result of this repayment, the Company became the sole member of the limited liability company holding the property. Total assets of the property were approximately $4,000,000. The Company has treated the $4,000,000 as deferred revenue and accordingly, will recognize rental income over the term of the related leases.

The remaining deferred revenue of approximately $1,004,000 will be recognized as minimum rents over approximately 2.2 years

Land Lease Obligations

The Company is subject to land lease agreements for certain of its properties. Land lease expense was $471,840, $427,900, and $574,300 for the years ending December 31, 2014, 2013 and 2012, respectively. As of December 31, 2014, future annual lease commitments under these agreements are as follows:

For the Year Ending December 31,
2015	$	514,653
2016		514,653
2017		514,653
2018		515,569
2019		508,528
Thereafter		8,825,546
Total	$	11,393,602

The Company leased its executive offices from a limited liability company controlled by its Executive Chairman’s children. Under the terms of the lease, which expired on December 31, 2014, the Company was required to pay an annual rental of $90,000 and was responsible for the payment of real estate taxes, insurance and maintenance expenses relating to the building.

2014 and 2013 Acquisitions

During 2014, the Company purchased 77 retail net lease assets for approximately $148,400,000, including acquisition and closing costs. These properties are located in 23 states and 100% leased to 28 different tenants operating in 14 unique retail sectors for a weighted average lease term of approximately 14.1 years. The underwritten weighted average capitalization rate on our 2014 investments was approximately 8.2%. None of our investments during 2014 caused any new or existing tenant to comprise 10% or more of our total assets or generate 10% or more of our total annualized base rent at December 31, 2014.

The aggregate 2014 acquisitions were allocated $29,969,000 to land, $95,977,000 to buildings and improvements, and $22,265,000 to lease intangible costs. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions.

During 2013, the Company purchased 18 retail net lease assets for approximately $73,269,000, including acquisition and closing costs. These properties are located in 13 states and 100% leased to 13 different tenants operating in 10 unique retail sectors for a weighted average lease term of approximately 10.9 years. The underwritten weighted average capitalization rate on our 2013 investments was approximately 8.0%. None of our investments during 2013 caused any new or existing tenant to comprise 10% or more of our total assets or generate 10% or more of our total annualized base rent at December 31, 2013.

The aggregate 2013 acquisitions were allocated $13,535,000 to land, $53,565,000 to buildings and improvements, and $6,872,000 to lease intangible costs. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions.

We calculate the weighted average capitalization rate on our investments by dividing annual expected net operating income derived from the properties by the total investment in the properties. Annual expected net operating income is defined as the straight-line rent for the base term of the lease less property level expenses (if any) that are not recoverable from the tenant.

Unaudited Pro Forma Information

The following unaudited pro forma total revenue and income before discontinued operations, for 2014 and 2013, assumes all of our 2014 acquisitions had taken place on January 1, 2014 for the 2014 pro forma information, and on January 1, 2013 for the 2013 pro forma information:

Supplemental pro forma for the year ended December 31, 2014 (1)
Total revenue	$	57,840,000
Income before discontinued operations	$	19,369,000

Supplemental pro forma for the year ended December 31, 2013 (1)
Total revenue	$	50,549,000
Income before discontinued operations	$	20,023,000

(1)

This unaudited pro forma supplemental information does not purport to be indicative of what our operating results would have been had the acquisitions occurred on January 1, 2014 or January 1, 2013 and may not be indicative of future operating results. Various acquisitions were of newly leased or constructed assets and may not have been in service for the full periods shown.

Impairments

As a result of our review of Real Estate Investments we recognized the following real estate impairment charges for the year ended December 31:

	2014		2013		2012

Continuing operations	$	3,020,000	$	-	$	-
Discontinued operations		-		450,000		-

Total	$	3,020,000	$	450,000	$	-

In 2014, we recognized impairment charges of $220,000 and $2,800,000, respectively, for Petoskey Town Center and Chippewa Commons, which were included in continuing operations. Petoskey Town Center was under contract for sale, but not classified as held for sale at September 30, 2014 due to contingencies associated with the contract, and a $220,000 impairment charge was taken to write down the carrying value of the property to an amount that reflected the sales price. The property was subsequently sold in the fourth quarter. In the second quarter, an anchor tenant at Chippewa Commons declined to exercise an extension a lease extension option which we deemed would contribute to vacancy and diminished cash flows and result in a fair value that was less than the net book value of the asset. A $2,800,000 impairment charge was taken to write down the carrying value of the property to an amount that reflected management’s best estimate of fair market value.

In 2013, we recognized an impairment charge of $450,000 for Ironwood Commons, which was included in continuing operations at the time of the impairment charge. Ironwood Commons was under contract for sale, but not classified as held for sale at September 30, 2013 due to contingencies associated with the contract, and a $450,000 impairment charge was taken to write down the carrying value of the property to an amount that reflected the sales price. The property was subsequently reclassified as property held for sale and the impairment charge was included in discontinued operations as of December 31, 2013.