Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended September 30, 2013

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             .

 

Commission file number 1-34907

 


 

STAG INDUSTRIAL, INC.

(Exact name of registrant as specified in its charter)

 


 

Maryland

 

27-3099608

(State or other jurisdiction
of incorporation or organization)

 

(IRS Employer
Identification No.)

 

 

 

99 High Street, 28th Floor
Boston, Massachusetts

 

02110

(Address of principal executive offices)

 

(Zip Code)

 

(617) 574-4777

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Check one:

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred shares as of the latest practicable date.

 

Class

 

Outstanding at November 4, 2013

Common Stock ($0.01 par value)

 

44,159,083

9.0 % Series A Cumulative Redeemable Preferred Stock ($0.01 par value)

 

2,760,000

6.625 % Series B Cumulative Redeemable Preferred Stock ($0.01 par value)

 

2,800,000

 

 

 



Table of Contents

 

STAG INDUSTRIAL, INC.

Table of Contents

 

PART I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited)

3

 

 

 

 

Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

3

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012

5

 

 

 

 

Consolidated Statements of Equity for the Nine Months Ended September 30, 2013 and 2012

6

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

PART II.

Other Information

38

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 3.

Defaults Upon Senior Securities

39

 

 

 

Item 4.

Mine Safety Disclosures

39

 

 

 

Item 5.

Other Information

39

 

 

 

Item 6.

Exhibits

39

 

 

 

 

SIGNATURE

40

 

2



Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements

STAG Industrial, Inc.

Consolidated Balance Sheets

(unaudited, in thousands, except share data)

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Rental Property:

 

 

 

 

 

Land

 

$

126,685

 

$

104,656

 

Buildings

 

813,705

 

654,518

 

Tenant improvements

 

35,717

 

34,900

 

Building and land improvements

 

30,831

 

22,153

 

Less: accumulated depreciation

 

(64,562

)

(46,175

)

Total rental property, net

 

942,376

 

770,052

 

Cash and cash equivalents

 

23,909

 

19,006

 

Restricted cash

 

6,810

 

5,497

 

Tenant accounts receivable, net

 

12,911

 

9,351

 

Prepaid expenses and other assets

 

3,590

 

1,556

 

Interest rate swaps

 

2,282

 

 

Deferred financing fees, net

 

5,354

 

4,704

 

Leasing commissions, net

 

2,720

 

1,674

 

Goodwill

 

4,923

 

4,923

 

Due from related parties

 

180

 

806

 

Deferred leasing intangibles, net

 

208,097

 

187,555

 

Total assets

 

$

1,213,152

 

$

1,005,124

 

Liabilities and Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage notes payable

 

$

226,686

 

$

229,915

 

Unsecured credit facility

 

20,000

 

99,300

 

Unsecured term loans

 

250,000

 

150,000

 

Accounts payable, accrued expenses and other liabilities

 

16,158

 

12,111

 

Interest rate swaps

 

131

 

480

 

Tenant prepaid rent and security deposits

 

7,956

 

5,686

 

Dividends and distributions payable

 

15,285

 

11,301

 

Deferred leasing intangibles, net

 

6,871

 

6,871

 

Total liabilities

 

 

543,087

 

 

515,664

 

Commitments and contingencies

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, par value $0.01 per share, 10,000,000 shares authorized,

 

 

 

 

 

Series A, 2,760,000 shares (liquidation preference of $25.00 per share) issued and outstanding at September 30, 2013 and December 31, 2012

 

69,000

 

69,000

 

Series B, 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at September 30, 2013 and no shares issued and outstanding at December 31, 2012

 

70,000

 

 

Common stock, par value $0.01 per share, 100,000,000 shares authorized, 44,052,248 and 35,698,582 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

 

440

 

357

 

Additional paid-in capital

 

562,511

 

419,643

 

Common stock dividends in excess of earnings

 

(105,697

)

(61,024

)

Accumulated other comprehensive income (loss)

 

1,906

 

(371

)

Total stockholders’ equity

 

598,160

 

427,605

 

Noncontrolling interest

 

71,905

 

61,855

 

Total equity

 

670,065

 

489,460

 

Total liabilities and equity

 

$

1,213,152

 

$

1,005,124

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

STAG Industrial, Inc.

Consolidated Statements of Operations

(unaudited, in thousands, except per share data)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue

 

 

 

 

 

 

 

 

 

Rental income

 

$

30,391

 

$

18,708

 

$

84,871

 

$

50,797

 

Tenant recoveries

 

4,285

 

2,063

 

11,427

 

6,068

 

Other income

 

207

 

331

 

865

 

981

 

Total revenue

 

34,883

 

21,102

 

97,163

 

57,846

 

Expenses

 

 

 

 

 

 

 

 

 

Property

 

2,686

 

1,262

 

7,699

 

4,030

 

General and administrative

 

4,376

 

3,656

 

13,358

 

9,962

 

Real estate taxes and insurance

 

3,622

 

1,603

 

9,518

 

4,574

 

Property acquisition costs

 

986

 

1,067

 

2,831

 

2,509

 

Depreciation and amortization

 

17,463

 

10,236

 

49,411

 

28,110

 

Loss on impairment

 

 

 

 

622

 

Other expenses

 

89

 

86

 

336

 

145

 

Total expenses

 

29,222

 

17,910

 

83,153

 

49,952

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

3

 

9

 

9

 

17

 

Interest expense

 

(5,370

)

(3,558

)

(14,866

)

(11,776

)

Gain on interest rate swaps

 

 

 

 

215

 

Offering costs

 

 

 

(27

)

(68

)

Loss on extinguishment of debt

 

 

(947

)

 

(929

)

Total other income (expense)

 

(5,367

)

(4,496

)

(14,884

)

(12,541

)

Net income (loss) from continuing operations

 

$

294

 

$

(1,304

)

$

(874

)

$

(4,647

)

Discontinued operations

 

 

 

 

 

 

 

 

 

Income attributable to discontinued operations

 

 

329

 

102

 

564

 

Loss on impairment attributable to discontinued operations

 

 

(3,941

)

 

(3,941

)

Gain on sales of real estate

 

 

 

464

 

219

 

Total income (loss) attributable to discontinued operations

 

 

(3,612

)

566

 

(3,158

)

Net income (loss)

 

$

294

 

$

(4,916

)

$

(308

)

$

(7,805

)

Less: loss attributable to noncontrolling interest after preferred stock dividends

 

(335

)

(1,248

)

(958

)

(3,244

)

Net income (loss) attributable to STAG Industrial, Inc.

 

$

629

 

$

(3,668

)

$

650

 

$

(4,561

)

Less: preferred stock dividends

 

2,712

 

1,553

 

6,783

 

4,659

 

Less: amount allocated to unvested restricted stockholders

 

64

 

41

 

197

 

81

 

Net loss attributable to common stockholders

 

$

(2,147

)

$

(5,262

)

$

(6,330

)

$

(9,301

)

Weighted average common shares outstanding — basic and diluted

 

42,753,722

 

29,752,057

 

41,766,740

 

21,716,590

 

Loss per share — basic and diluted

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to common stockholders

 

$

(0.05

)

$

(0.08

)

$

(0.16

)

$

(0.32

)

Income (loss) from discontinued operations attributable to common stockholders

 

$

 

$

(0.10

)

$

0.01

 

$

(0.11

)

Loss per share — basic and diluted

 

$

(0.05

)

$

(0.18

)

$

(0.15

)

$

(0.43

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

STAG Industrial, Inc.

 

Consolidated Statements of Comprehensive Income (Loss)

(unaudited, in thousands)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

294

 

$

(4,916

)

$

(308

)

$

(7,805

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on interest rate swaps

 

(1,034

)

(577

)

2,632

 

(577

)

Other comprehensive income (loss)

 

(1,034

)

(577

)

2,632

 

(577

)

Comprehensive income (loss)

 

(740

)

(5,493

)

2,324

 

(8,382

)

Net loss attributable to noncontrolling interest after preferred stock dividends

 

335

 

1,248

 

958

 

3,244

 

Other comprehensive (income) loss attributable to noncontrolling interest

 

143

 

111

 

(355

)

150

 

Comprehensive income (loss) attributable to STAG Industrial, Inc.

 

$

(262

)

$

(4,134

)

$

2,927

 

$

(4,988

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

STAG Industrial, Inc.

Consolidated Statements of Equity

(unaudited, in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

Interest — Unit

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Accumulated Other

 

Total

 

holders in

 

 

 

 

 

 

 

Common Shares

 

Paid-in

 

in excess of

 

Comprehensive

 

Stockholders’

 

Operating

 

 

 

 

 

Preferred Stock

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

Partnership

 

Total Equity

 

Nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

69,000

 

35,698,582

 

$

357

 

$

419,643

 

$

(61,024

)

$

(371

)

$

427,605

 

$

61,855

 

$

489,460

 

Proceeds from sales of common stock

 

 

8,247,322

 

82

 

154,587

 

 

 

154,669

 

 

154,669

 

Issuance of series B preferred stock

 

70,000

 

 

 

 

 

 

70,000

 

 

70,000

 

Offering costs

 

 

 

 

(8,457

)

 

 

(8,457

)

 

(8,457

)

Issuance of restricted stock, net

 

 

96,287

 

1

 

(1

)

 

 

 

 

 

Issuance of common stock

 

 

7,871

 

 

 

 

 

 

 

 

Dividends and distributions, net

 

(6,783

)

 

 

 

(38,540

)

 

(45,323

)

(6,334

)

(51,657

)

Non-cash compensation

 

 

 

 

1,020

 

 

 

1,020

 

1,207

 

2,227

 

Issuance of units

 

 

 

 

 

 

 

 

11,499

 

11,499

 

Conversion of operating partnership units to common stock

 

 

2,186

 

 

23

 

 

 

23

 

(23

)

 

Rebalancing of noncontrolling interest

 

 

 

 

(4,304

)

 

 

(4,304

)

4,304

 

 

Comprehensive income

 

 

 

 

 

 

2,277

 

2,277

 

355

 

2,632

 

Net income (loss)

 

6,783

 

 

 

 

(6,133

)

 

650

 

(958

)

(308

)

Balance, September 30, 2013

 

$

139,000

 

44,052,248

 

$

440

 

$

562,511

 

$

(105,697

)

$

1,906

 

$

598,160

 

$

71,905

 

$

670,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

$

69,000

 

15,901,560

 

$

159

 

$

179,919

 

$

(18,385

)

$

 

$

230,693

 

$

79,216

 

$

309,909

 

Proceeds from sale of common stock

 

 

17,537,500

 

176

 

237,392

 

 

 

237,568

 

 

237,568

 

Offering costs

 

 

 

 

(10,863

)

 

 

(10,863

)

 

(10,863

)

Issuance of restricted stock

 

 

87,025

 

1

 

(1

)

 

 

 

 

 

Issuance of common stock

 

 

9,790

 

 

 

 

 

 

 

 

Dividends and distributions, net

 

(4,659

)

 

 

 

(20,311

)

 

(24,970

)

(5,938

)

(30,908

)

Non-cash compensation

 

 

 

 

746

 

 

 

746

 

711

 

1,457

 

Issuance of units for acquisition fee

 

 

 

 

 

 

 

 

225

 

225

 

Conversion of operating partnership units to common stock

 

 

1,335,224

 

13

 

13,148

 

 

 

13,161

 

(13,161

)

 

Rebalancing of noncontrolling interest

 

 

 

 

(11,507

)

 

 

(11,507

)

11,507

 

 

Comprehensive loss

 

 

 

 

 

 

(427

)

(427

)

(150

)

(577

)

Net income (loss)

 

4,659

 

 

 

 

(9,220

)

 

(4,561

)

(3,244

)

(7,805

)

Balance, September 30, 2012

 

$

69,000

 

34,871,099

 

$

349

 

$

408,834

 

$

(47,916

)

$

(427

)

$

429,840

 

$

69,166

 

$

499,006

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

STAG Industrial, Inc.

Consolidated Statements of Cash Flows

(unaudited, in thousands)

 

 

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(308

)

$

(7,805

)

Adjustment to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

49,508

 

28,486

 

Loss on impairment

 

 

4,563

 

Non-cash portion of interest expense

 

783

 

755

 

Intangible amortization in rental income, net

 

4,399

 

3,481

 

Straight-line rent adjustments, net

 

(2,139

)

(1,733

)

Gain on interest rate swaps

 

 

(215

)

Loss on extinguishment of debt

 

 

929

 

Gain on sales of real estate

 

(464

)

(219

)

Non-cash compensation expense

 

2,227

 

1,457

 

Issuance of units for acquisition fee

 

 

225

 

Change in assets and liabilities:

 

 

 

 

 

Tenant accounts receivable, net

 

(1,399

)

(317

)

Leasing commissions, net

 

(1,453

)

(567

)

Restricted cash

 

(764

)

(943

)

Prepaid expenses and other assets

 

(1,611

)

(716

)

Accounts payable, accrued expenses and other liabilities

 

3,539

 

2,308

 

Tenant prepaid rent and security deposits

 

2,270

 

492

 

Due from related parties

 

626

 

25

 

Total adjustments

 

55,522

 

38,011

 

Net cash provided by operating activities

 

55,214

 

30,206

 

Cash flows from investing activities:

 

 

 

 

 

Additions of land and building improvements

 

(183,882

)

(159,951

)

Proceeds from sales of rental property, net

 

4,843

 

3,216

 

Restricted cash

 

(549

)

3,339

 

Cash paid for deal deposits, net

 

(460

)

(3,675

)

Additions to lease intangibles

 

(54,842

)

(54,239

)

Net cash used in investing activities

 

(234,890

)

(211,310

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from sale of Series B Preferred stock

 

70,000

 

 

Proceeds from credit facility

 

 

124,300

 

Repayment of credit facility

 

 

(124,300

)

Proceeds from unsecured credit facility

 

90,000

 

12,000

 

Repayment of unsecured credit facility

 

(169,300

)

 

Proceeds from unsecured term loans

 

100,000

 

100,000

 

Proceeds from mortgage notes payable

 

 

9,252

 

Repayment of mortgage notes payable

 

(3,151

)

(143,985

)

Payment of loan fees and costs

 

(1,511

)

(2,833

)

Dividends and distributions

 

(47,671

)

(24,296

)

Proceeds from sales of common stock

 

154,669

 

237,568

 

Offering costs

 

(8,457

)

(10,863

)

Restricted cash - escrow for dividends

 

 

(1,553

)

Net cash provided by financing activities

 

184,579

 

175,290

 

Increase (decrease) in cash and cash equivalents

 

4,903

 

(5,814

)

Cash and cash equivalents—beginning of period

 

19,006

 

16,498

 

Cash and cash equivalents—end of period

 

$

23,909

 

$

10,684

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

STAG Industrial, Inc.

 

Notes to Consolidated Financial Statements

 

(unaudited)

 

1. Organization and Description of Business

 

STAG Industrial, Inc. (the “Company”) is an industrial operating company focused on the acquisition, ownership and management of single-tenant net-leased industrial buildings throughout the United States. The Company was formed as a Maryland corporation on July 21, 2010 and has elected to be treated as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). The Company is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns substantially all of its assets and conducts substantially all of its business through its operating partnership, STAG Industrial Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”).  As of September 30, 2013 and December 31, 2012, the Company owned an 86.46% and 85.29% limited partnership interest in the Operating Partnership, respectively.  As used herein, the “Company” refers to STAG Industrial, Inc., the Operating Partnership and their consolidated subsidiaries and partnerships except where context otherwise requires.

 

As of September 30, 2013, the Company owned 200 buildings in 34 states with approximately 35.3 million square feet, consisting of 136 warehouse/distribution buildings, 44 light manufacturing buildings and 20 flex/office buildings.  The Company also owned one vacant land parcel adjacent to one of the Company’s buildings.  The Company’s buildings were 94.0% leased to 180 tenants as of September 30, 2013.

 

2. Summary of Significant Accounting Policies

 

Interim Financial Information

 

The accompanying interim financial statements have been presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q of Regulation S-X for interim financial information.  Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, the accompanying interim financial statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP.  Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

Basis of Presentation

 

The Company’s consolidated financial statements include the accounts of the Company, the Operating Partnership and their subsidiaries. The equity interests of other limited partners in the Operating Partnership held in the form of common units (“Noncontrolling Common Units” or “Common Units”) are reflected as noncontrolling interest.  All significant intercompany balances and transactions have been eliminated in the consolidation and combination of entities. The financial statements of the Company are presented on a consolidated basis, for all periods presented.

 

Adoption of New Accounting Pronouncements

 

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to present information about reclassification adjustments from accumulated other comprehensive income in their interim and annual financial statements in a single note or on the face of the financial statements. ASU 2013-02 was effective for the Company on January 1, 2013. The Company’s adoption of this authoritative guidance did not have a material impact on its operating results or financial position.

 

Consolidated Statements of Cash Flows—Supplemental Disclosures

 

The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):

 

8



Table of Contents

 

 

 

Nine months
ended

September 30,
2013

 

Nine months
ended

September 30,
2012

 

Supplemental cash flow information

 

 

 

 

 

Cash paid for interest

 

$

14,096

 

$

11,132

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

Non-cash investing activities included in additions of land and building improvements

 

$

(11,984

)

$

(377

)

Issuance of Common Units for acquisitions

 

$

11,499

 

$

 

Dividends and distributions declared but not paid

 

$

15,285

 

$

12,722

 

 

Restricted Cash

 

Restricted cash may include security deposits and cash held in escrow for real estate taxes and capital improvements as required in various mortgage loan agreements. Restricted cash also may include amounts held by the Company’s transfer agent for preferred stock dividends that are distributed subsequent to period end.

 

Tenant Accounts Receivable, net

 

Tenant accounts receivable, net on the Consolidated Balance Sheets, includes both tenant accounts receivable, net and accrued rental income, net. The Company provides an allowance for doubtful accounts against the portion of tenant accounts receivable that is estimated to be uncollectible. As of September 30, 2013 and December 31, 2012, the Company had an allowance for doubtful accounts of $4 thousand and $0, respectively.

 

The Company accrues rental revenue earned, but not yet receivable, in accordance with GAAP. As of September 30, 2013 and December 31, 2012, the Company had accrued rental revenue of $8.5 million and $6.4 million, respectively. The Company maintains an allowance for estimated losses that may result from those revenues. If a tenant fails to make contractual payments beyond any allowance, the Company may recognize additional bad debt expense in future periods equal to the amount of unpaid rent and accrued rental revenue. As of September 30, 2013 and December 31, 2012, the Company had an allowance on accrued rental revenue of $0 and $0, respectively.

 

As of September 30, 2013 and December 31, 2012, the Company had a total of approximately $4.9 million and $4.8 million, respectively, of total lease security deposits available in existing letters of credit, which are not reflected on the Company’s Consolidated Balance Sheets; and $2.8 million and $2.0 million, respectively, of lease security deposits available in cash.

 

Deferred Costs

 

Deferred financing fees include costs incurred in obtaining debt that are capitalized. The deferred financing fees are amortized to interest expense over the life of the respective loans, which approximates the effective interest method.  Any unamortized amounts upon early repayment of debt are written off in the period of repayment. During the three and nine months ended September 30, 2013 and September 30, 2012, amortization of deferred financing fees included in interest expense was $0.3 million, $0.9 million, $0.3 million and $0.9 million, respectively. Fully amortized deferred charges are removed upon maturity of the underlying debt.

 

Revenue Recognition

 

By the terms of their leases, certain tenants are obligated to pay directly the costs of their buildings’ insurance, real estate taxes, ground lease payments, and certain other expenses and these costs are not reflected on the Company’s Consolidated Financial Statements. To the extent any tenant responsible for these costs under its lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, the Company will record a liability for such obligations.  The Company estimates that real estate taxes, which are the responsibility of these certain tenants, were approximately $2.4 million, $7.0 million, $1.9 million and $4.9 million for the three and nine months ended September 30, 2013 and September 30, 2012, respectively. This would have been the maximum liability of the Company had the tenants not met their contractual obligations. The Company does not recognize recovery revenue related to leases where the tenant has assumed the cost for real estate taxes, insurance, ground lease payments and certain other expenses.

 

Income Taxes

 

The Company elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2011 and intends to continue to qualify as a REIT. As a REIT, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. The Company is generally not subject to corporate level income tax on the earnings distributed currently to its stockholders that it derives from its REIT qualifying activities. If the Company fails to qualify

 

9



Table of Contents

 

as a REIT in any taxable year, and is unable to avail itself of certain savings provisions set forth in the Code, all of the Company’s taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

 

The Company will not be required to make distributions with respect to income derived from the activities conducted through subsidiaries that the Company elects to treat as taxable REIT subsidiaries (“TRS”) for federal income tax purposes. Certain activities that the Company undertakes must be conducted by a TRS, such as performing non-customary services for its tenants and holding assets that it cannot hold directly. A TRS is subject to federal and state income taxes.  The Company’s TRS did not have any activity during the three and nine months ended September 30, 2013 and September 30, 2012.

 

The Company and certain of its subsidiaries are subject to certain state and local income, excise and franchise taxes. Taxes in the amount of $0.1 million, $0.3 million, $0.1 million, and $0.1 million have been recorded in other expenses in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and September 30, 2012, respectively.

 

The Company currently has no liabilities for uncertain tax positions.

 

3. Real Estate

 

The following table summarizes the acquisitions of the Company during the nine months ended September 30, 2013 and the year ended December 31, 2012:

 

Nine Months Ended September 30, 2013

 

Building Location

 

Date Acquired

 

Square Feet

 

Buildings

 

Orangeburg, SC

 

2/7/2013

 

319,000

 

1

 

Golden, CO

 

2/27/2013

 

227,500

 

1

 

Columbia, SC

 

2/28/2013

 

273,280

 

1

 

DeKalb, IL

 

3/15/2013

 

146,740

 

1

 

Ocala, FL

 

3/26/2013

 

619,466

 

1

 

Londonderry, NH

 

3/28/2013

 

125,060

 

1

 

Marion, IA

 

3/28/2013

 

95,500

 

1

 

Mishawaka, IN

 

4/5/2013

 

308,884

 

1

 

Southfield, MI (1)

 

4/9/2013

 

113,000

 

1

 

Houston, TX

 

4/9/2013

 

201,574

 

1

 

Idaho Falls, ID

 

4/11/2013

 

90,300

 

1

 

Mt. Prospect, IL

 

5/14/2013

 

87,380

 

1

 

Williamsport, PA

 

5/31/2013

 

250,000

 

1

 

Belvidere, IL

 

6/19/2013

 

1,006,960

 

8

 

Kentwood, MI

 

6/26/2013

 

85,157

 

1

 

Marshall, MI

 

6/26/2013

 

57,025

 

1

 

Nashville, TN

 

7/18/2013

 

150,000

 

1

 

Catoosa, OK

 

7/31/2013

 

100,100

 

1

 

New Berlin, WI

 

8/16/2013

 

205,063

 

1

 

Hampstead, MD

 

8/21/2013

 

1,035,249

 

1

 

New Hope, MN

 

9/20/2013

 

107,348

 

1

 

Springfield, OH

 

9/26/2013

 

350,500

 

1

 

 

 

Total

 

5,955,086

 

29

 

 


(1)         The Company also owns a 5.4 acre vacant land parcel adjacent to this building.

 

10



Table of Contents

 

Year Ended December 31, 2012

 

Building Location

 

Date Acquired

 

Square Feet

 

Buildings

 

East Windsor, CT

 

3/1/2012

 

145,000

 

1

 

South Bend, IN

 

3/8/2012

 

225,000

 

1

 

Lansing, MI

 

3/21/2012

 

129,325

 

1

 

Portland, ME

 

3/27/2012

 

100,600

 

1

 

Portland, TN

 

3/30/2012

 

414,043

 

1

 

Spartanburg, SC

 

4/5/2012

 

409,600

 

4

 

Franklin, IN

 

4/17/2012

 

703,496

 

1

 

Muhlenberg Township, PA

 

5/24/2012

 

394,289

 

1

 

Avon, CT

 

6/15/2012

 

78,400

 

1

 

Orlando, FL

 

6/15/2012

 

155,000

 

1

 

Pineville, NC

 

6/15/2012

 

75,400

 

1

 

Buffalo, NY

 

6/15/2012

 

117,000

 

1

 

Edgefield, SC

 

6/15/2012

 

126,190

 

1

 

Arlington, TX

 

6/15/2012

 

196,000

 

1

 

Bellevue, OH

 

7/18/2012

 

181,838

 

1

 

Atlanta, GA

 

8/1/2012

 

407,981

 

1

 

Huntersville, NC

 

8/6/2012

 

185,570

 

1

 

Simpsonville, SC

 

8/23/2012

 

204,952

 

1

 

Simpsonville, SC

 

8/23/2012

 

207,042

 

1

 

Dallas, GA

 

9/4/2012

 

92,807

 

1

 

Mebane, NC

 

9/4/2012

 

223,340

 

1

 

Mebane, NC

 

9/4/2012

 

202,691

 

1

 

De Pere, WI

 

9/13/2012

 

200,000

 

1

 

Duncan, SC

 

9/21/2012

 

474,000

 

1

 

Duncan, SC

 

9/21/2012

 

313,380

 

1

 

Buena Vista, VA

 

9/27/2012

 

172,759

 

1

 

Gurnee, IL

 

9/28/2012

 

223,760

 

1

 

Auburn Hills, MI

 

10/9/2012

 

87,932

 

1

 

El Paso, TX

 

10/9/2012

 

269,245

 

1

 

Gloversville, NY

 

10/9/2012

 

50,000

 

1

 

Gloversville, NY

 

10/9/2012

 

101,589

 

1

 

Gloversville, NY

 

10/9/2012

 

26,529

 

1

 

Gloversville, NY

 

10/9/2012

 

59,965

 

1

 

Greenwood, SC

 

10/9/2012

 

104,955

 

1

 

Greenwood, SC

 

10/9/2012

 

70,100

 

1

 

Holland, MI

 

10/9/2012

 

195,000

 

1

 

Independence, VA

 

10/9/2012

 

120,000

 

1

 

Jackson, TN

 

10/9/2012

 

250,000

 

1

 

Johnstown, NY

 

10/9/2012

 

52,500

 

1

 

Johnstown, NY

 

10/9/2012

 

60,000

 

1

 

Johnstown, NY

 

10/9/2012

 

42,325

 

1

 

Johnstown, NY

 

10/9/2012

 

57,102

 

1

 

Kansas City, KS

 

10/9/2012

 

56,580

 

1

 

Lafayette, IN

 

10/9/2012

 

71,400

 

1

 

Lafayette, IN

 

10/9/2012

 

120,000

 

1

 

Lafayette, IN

 

10/9/2012

 

275,000

 

1

 

Lansing, MI

 

10/9/2012

 

250,100

 

1

 

Marion, IN

 

10/9/2012

 

249,600

 

1

 

Novi, MI

 

10/9/2012

 

120,800

 

1

 

O’Hara, PA

 

10/9/2012

 

887,084

 

1

 

Parsons, KS

 

10/9/2012

 

120,000

 

1

 

Phenix City, AL

 

10/9/2012

 

117,568

 

1

 

Portage, IN

 

10/9/2012

 

212,000

 

1

 

Ware Shoals, SC

 

10/9/2012

 

20,514

 

1

 

Wichita, KS

 

10/9/2012

 

80,850

 

1

 

Wichita, KS

 

10/9/2012

 

120,000

 

1

 

Wichita, KS

 

10/9/2012

 

44,760

 

1

 

Wichita, KS

 

10/9/2012

 

47,700

 

1

 

Chicopee, MA

 

10/26/2012

 

217,000

 

1

 

Sterling Heights, MI

 

10/31/2012

 

108,000

 

1

 

Harrisonburg, VA

 

11/29/2012

 

357,673

 

1

 

Toledo, OH

 

12/13/2012

 

177,500

 

1

 

Woodstock, IL

 

12/14/2012

 

129,803

 

1

 

Kansas City, MO

 

12/19/2012

 

226,576

 

1

 

Smyrna, GA

 

12/20/2012

 

102,000

 

1

 

Montgomery, IL

 

12/20/2012

 

584,301

 

1

 

Statham, GA

 

12/21/2012

 

225,680

 

1

 

 

 

Total

 

12,829,194

 

70

 

 

The following table (in thousands) summarizes the allocation of the consideration paid during the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively, for the acquired assets and liabilities in connection with the acquisitions of buildings at the date of acquisition identified in the table above:

 

11



Table of Contents

 

 

 

Nine months
Ended September 30,
2013

 

Weighted Average
Amortization
Period (years)
Lease Intangibles

 

Year Ended
December 31, 2012

 

Weighted Average
Amortization Period
(years)
Lease Intangibles

 

Land

 

$

22,824

 

N/A

 

$

34,991

 

N/A

 

Buildings

 

160,057

 

N/A

 

269,616

 

N/A

 

Tenant improvements

 

1,768

 

N/A

 

10,624

 

N/A

 

Cash escrow for capital additions

 

 

N/A

 

785

 

N/A

 

Above market leases

 

5,915

 

5.7

 

16,728

 

10.0

 

Below market leases

 

(1,976

)

7.2

 

(5,962

)

6.5

 

In-place leases

 

35,654

 

5.7

 

63,397

 

6.6

 

Tenant relationships

 

15,246

 

8.4

 

26,241

 

8.2

 

Building and land improvements

 

5,470

 

N/A

 

7,488

 

N/A

 

Net assets acquired

 

$

246,958

 

 

 

$

423,908

 

 

 

 

As partial consideration for eight buildings acquired on June 19, 2013, the Company granted 555,758 Common Units in the Operating Partnership with a fair value of approximately $11.5 million based on the Company’s NYSE closing stock price on June 19, 2013.  The issuance of the Common Units was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended. The Company relied on the exemption based on representations given by the holders of the Common Units. The remaining purchase price of approximately $40.1 million was paid in cash.

 

The Company has included the results of operations for each of the 29 buildings acquired in its Consolidated Statements of Operations from the date of acquisition.  For the three and nine months ended September 30, 2013, the buildings acquired during the nine months ended September 30, 2013 contributed $5.7 million and $9.0 million, to total revenue and $0.4 million and $0.8 million to net loss including building acquisition costs of $0.9 million and $2.5 million related to the acquisition of the buildings, respectively.

 

The following tables set forth pro forma information for the nine months ended September 30, 2013 and 2012.  The below pro forma information does not purport to represent what the actual results of operations of the Company would have been had the acquisitions outlined above occurred on the first day of the applicable reporting period, nor do they purport to predict the results of operations of future periods.  The pro forma information has not been adjusted for property sales.

 

Pro Forma

 

Nine months ended
September 30, 2013
(in thousands, except share data) (1)

 

Total revenue

 

$

108,090

 

Net income (2)

 

$

5,468

 

Net loss attributable to common stockholders

 

$

(1,334

)

Weighted average shares outstanding

 

41,766,740

 

Net loss per share attributable to common stockholders

 

$

(0.03

)

 

Pro Forma

 

Nine months ended
September 30, 2012
(in thousands, except share data) (3)

 

Total revenue

 

$

88,597

 

Net loss (2)

 

$

(6,961

)

Net loss attributable to common stockholders

 

$

(8,677

)

Weighted average shares outstanding

 

21,716,590

 

Net loss per share attributable to common stockholders

 

$

(0.40

)

 


(1)                                 The pro forma information for the nine months ended September 30, 2013 is presented as if the acquisition of the buildings acquired during the nine months ended September 30, 2013 had occurred at January 1, 2012, the beginning of the reporting period prior to acquisition.

(2)                                 The net income for the nine months ended September 30, 2013 excludes $2.5 million of property acquisition costs related to the acquisition of buildings that closed during the nine months ended September 30, 2013, and the net loss for the nine months ended September 30, 2012 was adjusted to include these acquisition costs.  Net loss for the nine months ended September 30, 2012 excludes $2.0 million of property acquisition costs related to the acquisition of buildings that closed during the nine months ended September 30, 2012.

(3)                                 The pro forma information for the nine months ended September 30, 2012 is presented as if the acquisition of the buildings acquired during the nine months ended September 30, 2013 and the buildings acquired during the nine months ended September 30, 2012 had occurred at January 1, 2012 and January 1, 2011, respectively, the beginning of the reporting period prior to acquisition.

 

On June 12, 2013, the Company sold a 53,183 square feet flex/office building located in Pittsburgh, PA.  The building represented a non-core asset of the Company.  The carrying value of the building prior to sale was $4.4 million.  The sales price was $5.1 million and the Company received net proceeds of $4.8 million.  A gain on sale of real estate of $0.5 million was recognized at closing under the full accrual method of gain recognition.  The building contributed $0 million, $0.2 million, $0.1 million, and $0.4 million to total revenue during the three and nine months ended September 30, 2013 and September 30, 2012, respectively.  The

 

12



Table of Contents

 

results of operations and the gain on sale are included in income (loss) attributable to discontinued operations on the accompanying Consolidated Statements of Operations.

 

The Company tested the property located in Great Bend, KS for impairment as of September 30, 2012 utilizing a probability weighted recovery analysis of certain scenarios, and it was determined that the carrying value of the property was not recoverable from the estimated future undiscounted cash flows.  Accordingly, the property was written down to its estimated fair value resulting in a loss on impairment of $3.9 million (of which $0.7 million related to lease intangibles) for the three and nine months ended September 30, 2012.  Subsequently, on November 30, 2012, the Company sold the building for a purchase price of $4.0 million in an arm’s length transaction.  The building represented a non-core asset of the Company.  The loss on impairment and results of operations from this property are included in income (loss) attributable to discontinued operations on the accompanying Consolidated Statements of Operations.  There was no loss on impairment during the three or nine months ended September 30, 2013.

 

4. Deferred Leasing Intangibles

 

Deferred leasing intangibles included in total assets consisted of the following (in thousands):

 

 

 

September 30,
2013

 

December 31,
2012

 

In-place leases

 

$

132,648

 

$

108,363

 

Less: Accumulated amortization

 

(43,728

)

(28,289

)

In-place leases, net

 

88,920

 

80,074

 

Above market leases

 

56,079

 

50,699

 

Less: Accumulated amortization

 

(15,666

)

(10,362

)

Above market leases, net

 

40,413

 

40,337

 

Tenant relationships

 

73,728

 

61,050

 

Less: Accumulated amortization

 

(16,858

)

(11,298

)

Tenant relationships, net

 

56,870

 

49,752

 

Leasing commissions

 

30,437

 

23,376

 

Less: Accumulated amortization

 

(8,543

)

(5,984

)

Leasing commissions, net

 

21,894

 

17,392

 

Total deferred leasing intangibles, net

 

$

208,097

 

$

187,555

 

 

Deferred leasing intangibles included in total liabilities consisted of the following (in thousands):

 

 

 

September 30,
2013

 

December 31,
2012

 

Below market leases

 

$

11,091

 

$

9,878

 

Less: Accumulated amortization

 

(4,220

)

(3,007

)

Total deferred leasing intangibles, net

 

$

6,871

 

$

6,871

 

 

Amortization expense, inclusive of results from discontinued operations, related to in-place leases, leasing commissions and tenant relationships of deferred leasing intangibles was $10.2 million, $29.3 million, $5.8 million and $15.9 million for the three and nine months ended September 30, 2013 and September 30, 2012, respectively.  Rental income, inclusive of results from discontinued operations, related to net amortization of above (below) market leases decreased by $1.5 million, $4.4 million, $1.2 million and $3.5 million for the three and nine months ended September 30, 2013 and September 30, 2012, respectively.

 

Amortization related to deferred leasing intangibles over the next five years is as follows (in thousands):

 

 

 

Estimated Net Amortization
of In-Place Leases,
Leasing Commissions and
Tenant Relationships

 

Net Decrease to Rental
Income Related to Above and
Below Market Leases

 

Remainder of 2013

 

$

10,366

 

$

1,505

 

2014

 

37,284

 

5,734

 

2015

 

30,004

 

5,928

 

2016

 

25,078

 

5,610

 

2017

 

19,024

 

4,098

 

 

The Company assesses deferred leasing intangibles for impairments on a quarterly basis when certain triggering events are met.  If events or changes in circumstances indicate that the carrying values of certain deferred lease intangibles may be impaired, a recovery analysis is performed based on undiscounted future cash flows expected to be generated from the tenant over the remaining lease term.  If the recovery analysis indicates the carrying value of the tested lease intangibles are not recoverable from estimated future cash flows, it is written down to its estimated fair value and an impairment loss is recognized.  The fair value is determined

 

13



Table of Contents

 

based on the contractual lease rental payments over the remaining term discounted back to the current reporting period.  On June 11, 2012, the Company received notice from a tenant that the tenant was exercising an option in its lease to downsize its space from approximately 190,000 to 60,000 rentable square feet effective March 31, 2013.  After determining the undiscounted future cash flows were not recoverable, the Company calculated the fair value of the lease intangibles. Using the remaining contractual lease payments for the reduced space and discounting the cash flows at a risk adjusted return for a market participant of 11.4%, it was determined that the fair value of the lease intangibles was $0.4 million, resulting in a noncash impairment loss of $0.6 million during the three and nine months ended September 30, 2012, which is reflected in the accompanying Consolidated Statements of Operations.  The fair value calculation of the lease intangibles of $0.4 million was performed using Level 3 inputs, and this is a nonrecurring fair value measurement.  There was no impairment of lease intangibles during the three or nine months ended September 30, 2013.

 

5. Debt

 

Payments on mortgage notes are generally due in monthly installments of principal amortization and interest. Payments on the Unsecured Term Loans and the Unsecured Credit Facility (each defined below) are generally due in monthly installments of interest.

 

The following table sets forth a summary of the Company’s outstanding indebtedness, including mortgage notes payable and borrowings under the Company’s Unsecured Term Loans and Unsecured Credit Facility as of September 30, 2013 and December 31, 2012 (dollars in thousands):

 

Loan

 

Interest Rate (1)

 

Principal
outstanding as
of
September 30,
2013

 

Principal
outstanding as
of
December 31,
2012

 

Current
Maturity

 

Sun Life(2)

 

6.05%

 

$

3,884

 

$

4,079

 

Jun-1-2016

 

Webster Bank (3)

 

4.22%

 

5,872

 

5,984

 

Aug-4-2016

 

Bank of America Unsecured Credit Facility

 

LIBOR + 1.65%(4)

 

20,000

 

99,300

 

Sept-10-2016

 

Union Fidelity (5)

 

5.81%

 

6,639

 

6,898

 

Apr-30-2017

 

Webster Bank (6)

 

3.66%

 

3,141

 

3,203

 

May-29-2017

 

Webster Bank (7)

 

3.64%

 

3,383

 

3,450

 

May-31-2017

 

Bank of America Unsecured Term Loan

 

LIBOR + 1.65%(8)

 

150,000

 

150,000

 

Sept-10-2017

 

CIGNA-1 Facility(9)

 

6.50%

 

59,071

 

59,645

 

Feb-1-2018

 

CIGNA-2 Facility(10)

 

5.75%

 

60,213

 

60,863

 

Feb-1-2018

 

CIGNA-3 Facility(11)

 

5.88%

 

16,935

 

17,097

 

Oct-1-2019

 

Wells Fargo Unsecured Term Loan

 

LIBOR + 2.15%(12)

 

100,000

 

 

Feb-14-2020

 

Wells Fargo CMBS Loan (13)

 

4.31%

 

67,548

 

68,696

 

Dec-1-2022

 

 

 

 

 

$

 496,686

 

$

 479,215

 

 

 

 


(1)                                 Current interest rate as of September 30, 2013.  At September 30, 2013 and December 31, 2012, the one-month LIBOR rate was 0.17885% and 0.2087%, respectively.

 

(2)                                 This $4.1 million loan with Sun Life Assurance Company of Canada (U.S.) (“Sun Life”) was assumed on October 14, 2011 in connection with the acquisition of the building located in Gahanna, OH. The property is collateral for this loan. The principal outstanding includes an unamortized fair market value premium of $0.2 million and $0.2 million as of September 30, 2013 and December 31, 2012, respectively.

 

(3)                                 This $6.2 million loan with Webster Bank, National Association (“Webster Bank”) was entered into on August 4, 2011 in connection with the acquisition of the building located in Norton, MA.  The property is collateral for this loan.

 

(4)                                 The spread over LIBOR for this Bank of America, N.A. (“Bank of America”) unsecured revolving credit facility (“Unsecured Credit Facility”) is based on the Company’s consolidated leverage ratio and ranged between 1.65% and 2.25%. The spread was 1.65% as of September 30, 2013 and December 31, 2012.  The Company paid unused fees of $0.2 million, $0.5 million, $40 thousand, and $40 thousand for the three and nine months ended September 30, 2013 and September 30, 2012, respectively.  The borrowing capacity as of September 30, 2013 was $180.0 million, assuming current leverage levels.

 

(5)                                This $7.2 million loan with Union Fidelity Life Insurance Co. (“Union Fidelity”) was assumed on July 28, 2011 in connection with the acquisition of the St. Louis, MO building.  The property is collateral for this loan. The principal outstanding includes an unamortized fair market value premium of $0.1 million and $0.2 million as of September 30, 2013 and December 31, 2012, respectively.

 

14



Table of Contents

 

(6)                                 This $3.25 million loan with Webster Bank was entered into on May 29, 2012 in connection with the acquisition of the building located in Portland, ME.  The property is collateral for this loan.

 

(7)                                 This $3.5 million loan with Webster Bank was entered into on May 31, 2012 in connection with the acquisition of the building located in East Windsor, CT.  The property is collateral for this loan.

 

(8)                                 This Bank of America unsecured term loan (“Bank of America Unsecured Term Loan”) was entered into on September 10, 2012. The spread over LIBOR is based on the Company’s consolidated leverage ratio and ranged between 1.65% and 2.25%. The spread was 1.65% as of September 30, 2013 and December 31, 2012. The Company swapped the one-month LIBOR for a fixed rate for $100.0 million of the $150.0 million outstanding on the Bank of America Unsecured Term Loan. The net settlements of the swaps commenced on the effective date of the swaps, October 10, 2012.  For further details refer to Note 6.

 

(9)                                 This Connecticut General Life Insurance Company (“CIGNA”) credit facility originally was entered into in July 2010 (the “CIGNA-1 Facility”), which loan has various buildings serving as collateral, had no remaining borrowing capacity as of September 30, 2013.

 

(10)                          This CIGNA credit facility originally was entered into in October 2010 (the “CIGNA-2 Facility”), which loan has various buildings serving as collateral, had a remaining borrowing capacity of approximately $2.9 million as of September 30, 2013, subject to customary terms and conditions, including underwriting.

 

(11)                          This CIGNA credit facility originally was entered into on July 8, 2011 (“CIGNA-3 Facility”), which loan has various buildings serving as collateral. The CIGNA-3 Facility had a remaining borrowing capacity of approximately $47.9 million as of September 30, 2013, subject to customary terms and conditions, including underwriting.

 

(12)                          This Wells Fargo Bank, National Association (“Wells Fargo”) unsecured term loan (“Wells Fargo Unsecured Term Loan”) was entered into on February 14, 2013. The spread over LIBOR is based on the Company’s consolidated leverage ratio and will range between 2.15% and 2.70%. The spread was 2.15% as of September 30, 2013.  The Wells Fargo Unsecured Term Loan has an accordion feature that allows the Company to increase its borrowing capacity to $250.0 million, subject to the satisfaction of certain conditions. As of September 30, 2013, the Company swapped one-month LIBOR for a fixed rate on $125.0 million of the $150.0 million capacity on the unsecured term loan (see Note 6 for further details). The borrowing capacity as of September 30, 2013 was $50.0 million, assuming current leverage levels, and can be drawn down by the Company through February 14, 2014. The Wells Fargo Unsecured Term Loan has an unused commitment fee equal to 0.35% of its unused portion, which is paid monthly in arrears.  During the three months ended September 30, 2013 and the period February 14, 2013 to September 30, 2013, the Company incurred an unused fee of $0.1 million and $0.2 million, respectively.

 

(13)                          This $68.8 million Wells Fargo loan (“CMBS Loan”) was entered into on November 8, 2012 and is a non-recourse loan with 28 buildings serving as collateral.

 

On October 7, 2013, the Unsecured Credit Facility and the Bank of America Unsecured Term Loan were amended to reduce the spreads on the one-month LIBOR rate and the Base Rate and to reduce the unused fee rates.  See Note 13 for further details.

 

Financial Covenant Considerations

 

The Company’s ability to borrow under the Unsecured Credit Facility, the Bank of America Unsecured Term Loan and the Wells Fargo Unsecured Term Loan (together, the Bank of America Unsecured Term Loan and the Wells Fargo Unsecured Term Loan are the “Unsecured Term Loans”) is subject to its ongoing compliance with a number of customary financial covenants, including:

 

·                  a maximum consolidated leverage ratio of not greater than 0.60:1.00;

 

·                  a maximum secured leverage ratio of not greater than 0.45:1.00;

 

·                  a maximum unencumbered leverage ratio of not greater than 0.60:100;

 

·                  a maximum secured recourse debt ratio of not greater than 7.5%;

 

·                  a minimum fixed charge ratio of not less than 1.50 to 1.00;

 

·                  a minimum tangible net worth covenant test; and

 

·                  various thresholds on Company level investments.

 

15


 


Table of Contents

 

If a default or event of default occurs and is continuing, the Company may be precluded from paying certain distributions (other than those required to allow it to qualify and maintain its status as a REIT) under the terms of the Unsecured Credit Facility and Unsecured Term Loans.

 

Each of the Sun Life loan, the Webster Bank loans, the Union Fidelity loan, the CIGNA-1 Facility, the CIGNA-2 Facility, the CIGNA-3 Facility and the CMBS Loan have specific properties that are collateral for these loans. The acquisition costs of these properties were financed by the loans and by collateral assignments of the specific leases and rents. These debt facilities contain certain financial and other covenants. The Company was in compliance with all financial covenants as of September 30, 2013 and December 31, 2012.

 

Fair Value of Debt

 

The fair value of the Company’s debt was determined by discounting the future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities, similar terms, and similar loan-to-value ratios. The discount rates ranged from 1.58% to 5.24% and 1.86% to 4.64% at September 30, 2013 and December 31, 2012, respectively, and were applied to each individual debt instrument. The fair value of the Company’s debt is based on Level 3 inputs. The following table presents the aggregate carrying value of the Company’s debt and the corresponding estimate of fair value as of September 30, 2013 and December 31, 2012 (in thousands):

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Mortgage notes payable

 

$

226,686

 

$

230,364

 

$

229,915

 

$

242,175

 

Unsecured Credit Facility

 

$

20,000

 

$

20,117

 

$

99,300

 

$

99,300

 

Bank of America Unsecured Term Loan

 

$

150,000

 

$

150,444

 

$

150,000

 

$

150,000

 

Wells Fargo Unsecured Term Loan

 

$

100,000

 

$

96,951

 

$

 

$

 

 

6. Use of Derivative Financial Instruments

 

Risk Management Objective of Using Derivatives

 

The Company’s use of derivative instruments is limited to the utilization of interest rate swaps to manage interest rate risk exposures and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure, as well as to hedge specific transactions.

 

On March 1, 2013, the Company entered into an interest rate swap agreement for notional amount of $25.0 million with an effective date of March 1, 2013 that converts the one-month LIBOR rate on the $25.0 million then outstanding balance of the Wells Fargo Unsecured Term Loan from a variable rate of one-month LIBOR plus a spread of 2.15% to 2.70% based on the Company’s consolidated leverage ratio to a fixed rate of 1.33% plus a spread of 2.15% to 2.70% based on the Company’s consolidated leverage ratio. This swap was designated as a cash flow hedge of interest rate risk.

 

On June 13, 2013, the Company entered into two interest rate swap agreements for notional amounts of $50.0 million and $25.0 million with effective dates of July 1, 2013 and August 1, 2013 that convert the one-month LIBOR rate on the Wells Fargo Unsecured Term Loan from a variable rate of one-month LIBOR plus a spread of 2.15% to 2.70% based on the Company’s consolidated leverage ratio to a fixed rate of 1.681% and 1.703%, respectively, plus a spread of 2.15% to 2.70% based on the Company’s consolidated leverage ratio. These swaps were designated as cash flow hedges of interest rate risk.

 

On September 30, 2013, the Company entered into an interest rate swap agreement for a notional amount of $25.0 million with an effective date of February 3, 2014 that converts the one-month LIBOR rate on the Wells Fargo Unsecured Term Loan from a variable rate of one-month LIBOR plus a spread of 2.15% to 2.70% based on the Company’s consolidated leverage ratio to a fixed rate of 1.9925% plus a spread of 2.15% to 2.70% based on the Company’s consolidated leverage ratio. This swap was designated as cash flow hedge of interest rate risk. The $25.0 million notional amount has not been drawn as of September 30, 2013.

 

The following table details the Company’s outstanding interest rate swaps as of September 30, 2013 (collectively, the “Unsecured Term Loan Swaps”) (in thousands):

 

Interest Rate
Derivative

 

Trade Date

 

Notional
Amount

 

Fixed Interest Rate

 

Variable Interest
Rate

 

Maturity Date

 

Interest rate swap

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

Interest rate swap

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

Interest rate swap

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

Interest rate swap

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

Interest rate swap

 

Sept-14-2012

 

$

10,000

(1)

0.7975

%

One-month LIBOR

 

September 10, 2017

 

Interest rate swap

 

Sept-20-2012

 

$

25,000

(1)

0.7525

%

One-month LIBOR

 

September 10, 2017

 

Interest rate swap

 

Sept-24-2012

 

$

25,000

(1)

0.727

%

One-month LIBOR

 

September 10, 2017

 

Interest rate swap

 

March-1-2013

 

$

25,000

(2)

1.33

%

One-month LIBOR

 

February 14, 2020

 

Interest rate swap

 

June-13-2013

 

$

25,000

(2)

1.703

%

One-month LIBOR

 

February 14, 2020

 

Interest rate swap

 

June-13-2013

 

$

50,000

(2)

1.681

%

One-month LIBOR

 

February 14, 2020

 

Interest rate swap

 

Sept-30-2013

 

$

25,000

(2)

1.9925

%

One-month LIBOR

 

February 14, 2020

 

 

16



Table of Contents

 


(1) Fixes the interest rate of the Bank of America Unsecured Term Loan

(2) Fixes the interest rate of the Wells Fargo Unsecured Term Loan

 

The fair value of the interest rate swaps outstanding as of September 30, 2013 and December 31, 2012 was as follows (in thousands):

 

 

 

Balance Sheet
Location

 

Notional
Amount

September 30,
2013

 

Fair Value
September 30,
2013

 

Notional Amount
December 31,
2012

 

Fair Value
December 31,
2012

 

Unsecured Term Loan Swaps

 

Interest Rate Swaps-Asset

 

$

200,000

 

$

2,282

 

$

100,000

 

$

(480

)

Unsecured Term Loan Swaps

 

Interest Rate Swaps-Liability

 

$

25,000

 

$

(131

)

$

 

$

 

 

Cash Flow Hedges of Interest Rate Risk

 

The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of derivatives designated and qualified as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. On September 14, 2012, the Company commenced a program of utilizing such designated derivatives to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2013, the Company did not record any hedge ineffectiveness related to the hedged derivatives.

 

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that an additional $2.2 million will be reclassified from accumulated other comprehensive income (loss) as a decrease to interest expense over the next 12 months.

 

The table below details the location in the financial statements of the gain or loss recognized on interest rate swaps designated as cash flow hedges for the three and nine months ended September 30, 2013 and September 30, 2012, respectively:

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Amount of income (loss) recognized in accumulated other comprehensive income (loss) on interest rate swaps (effective portion)

 

$

(1,510

)

$

(577

)

$

1,776

 

$

(577

)

Amount of loss reclassified from accumulated other comprehensive income (loss) into income (loss) as interest expense (effective portion)

 

$

476

 

$

 

$

856

 

$

 

Amount of loss recognized in income on swaps (ineffective portion and amount excluded from effectiveness testing)

 

$

 

$

 

$

 

$

 

 

The Company is exposed to credit risk in the event of non-performance by the counterparties to the interest rate swaps.  The Company minimizes this risk exposure by limiting counterparties to major banks and investment brokers who meet established credit and capital guidelines.

 

Credit-risk-related Contingent Features

 

As of September 30, 2013, the fair values of ten of 11 of the Company’s interest rate swaps were in an asset position of $2.5 million and one interest rate swap was in a liability position of $0.1 million, which includes accrued interest, but excludes any adjustment for nonperformance risk related to these agreements. As of September 30, 2013, the Company has not posted any collateral related to these agreements.  The adjustment for nonperformance risk included in the fair value of the Company’s net asset position

 

17



Table of Contents

 

was $0.4 million as of September 30, 2013. If the Company had breached any of its provisions at September 30, 2013, it could have been required to settle its obligations under the agreement of the interest rate swap in a liability position at its termination value of $50 thousand.

 

Fair Value of Interest Rate Swaps

 

The valuation of the interest rate swaps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs including interest rate curves. The fair values of interest rate swaps are determined by using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. As of September 30, 2013 and December 31, 2012, the Company applied the provisions of this standard to the valuation of its interest rate swaps.

 

The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

 

 

 

 

 

Fair Market Measurements as of
September 30, 2013 Using:

 

 

 

September 30,
2013

 

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Unobservable
Inputs
(Level 3)

 

Assets (liabilities):

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

2,282

 

$

 

$

2,282

 

$

 

Interest Rate Swaps

 

$

(131

)

$

 

$

(131

)

$

 

 

 

 

 

 

Fair Market Measurements as of
December 31, 2012 Using:

 

 

 

December 31,
2012

 

Quoted Prices
In Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Unobservable
Inputs
(Level 3)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

(480

)

$

 

$

(480

)

$

 

 

7. Stockholders’ Equity

 

Preferred Stock

 

Pursuant to its charter, the Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. On November 2, 2011, the Company completed an underwritten public offering of 2,760,000 shares (including 360,000 shares issued pursuant to the full exercise of the underwriters’ overallotment option) of 9.0% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”), at a price to the public of $25.00 per share.  Dividends on the Series A Preferred Stock are payable quarterly in arrears on or about the last day of March, June, September and December of each year. The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon the liquidation, dissolution or winding up of the Company.  The Series A Preferred Stock has no stated maturity date and is not subject to mandatory redemption or any sinking fund. Generally, the Company is not permitted to redeem the Series A Preferred Stock prior to November 2, 2016, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain other circumstances related to a change of control (as defined in the articles supplementary for the Series A Preferred Stock).

 

On April 16, 2013, the Company completed an underwritten public offering of 2,800,000 shares (including 300,000 shares issued pursuant to the full exercise of the underwriters’ overallotment option) of 6.625% Series B Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series B Preferred Stock”), at a price to the public of $25.00 per share.  The Company received net proceeds of $67.8 million, reflecting gross proceeds of $70.0 million net of the underwriters discount of $2.2 million. The Company also incurred direct offering costs of $0.2 million. The underwriters’ discount of $2.2 million and $0.2 million of direct offering costs incurred are reflected as a reduction to additional paid-in capital in the Consolidated Balance Sheet of the Company.   Dividends on the Series B Preferred Stock are payable quarterly in arrears on or about the last day of March, June, September and December of each year. The Series B Preferred Stock ranks senior to the Company’s common stock and on parity with the Company’s Series A Preferred Stock with respect to dividend rights and rights upon the liquidation, dissolution or winding up of the Company.  The Series B Preferred Stock has no stated maturity date and is not subject to mandatory redemption or any sinking fund. Generally, the Company is not permitted to redeem the Series B Preferred Stock prior to April 16, 2018, except in limited circumstances relating to the Company’s ability to qualify as a REIT and in certain ot