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 |
|
(IRS Employer |
|
|
|
99 High Street, 28th Floor |
|
02110 |
(Address of principal executive offices) |
|
(Zip Code) |
(617) 574-4777
(Registrants 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 issuers 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 |
STAG INDUSTRIAL, INC.
STAG Industrial, Inc.
(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.
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.
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.
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.
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 equivalentsbeginning of period |
|
19,006 |
|
16,498 |
| ||
Cash and cash equivalentsend of period |
|
$ |
23,909 |
|
$ |
10,684 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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 Companys buildings. The Companys 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 Companys consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
Basis of Presentation
The Companys 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 Companys adoption of this authoritative guidance did not have a material impact on its operating results or financial position.
Consolidated Statements of Cash FlowsSupplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):
|
|
Nine months |
|
Nine months |
| ||
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 Companys 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 Companys 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 Companys 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
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 Companys 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 Companys 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.
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 |
|
OHara, 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:
|
|
Nine months |
|
Weighted Average |
|
Year Ended |
|
Weighted Average |
| ||
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 Companys 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 |
| |
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 |
| |
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
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 arms 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, |
|
December 31, |
| ||
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, |
|
December 31, |
| ||
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 |
|
Net Decrease to Rental |
| ||
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
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 Companys outstanding indebtedness, including mortgage notes payable and borrowings under the Companys Unsecured Term Loans and Unsecured Credit Facility as of September 30, 2013 and December 31, 2012 (dollars in thousands):
Loan |
|
Interest Rate (1) |
|
Principal |
|
Principal |
|
Current |
| ||
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 Companys 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.
(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 Companys 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 Companys 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 Companys 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.
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 Companys 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 Companys debt is based on Level 3 inputs. The following table presents the aggregate carrying value of the Companys 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 |
|
Fair |
|
Carrying |
|
Fair |
| ||||
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 Companys 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 Companys 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 Companys consolidated leverage ratio to a fixed rate of 1.33% plus a spread of 2.15% to 2.70% based on the Companys 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 Companys 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 Companys 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 Companys consolidated leverage ratio to a fixed rate of 1.9925% plus a spread of 2.15% to 2.70% based on the Companys 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 Companys outstanding interest rate swaps as of September 30, 2013 (collectively, the Unsecured Term Loan Swaps) (in thousands):
Interest Rate |
|
Trade Date |
|
Notional |
|
Fixed Interest Rate |
|
Variable Interest |
|
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 |
|
(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 |
|
Notional |
|
Fair Value |
|
Notional Amount |
|
Fair Value |
| ||||
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 Companys 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 Companys 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 Companys 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 Companys net asset position
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 Companys 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, |
|
Quoted Prices |
|
Significant |
|
Unobservable |
| ||||
Assets (liabilities): |
|
|
|
|
|
|
|
|
| ||||
Interest Rate Swaps |
|
$ |
2,282 |
|
$ |
|
|
$ |
2,282 |
|
$ |
|
|
Interest Rate Swaps |
|
$ |
(131 |
) |
$ |
|
|
$ |
(131 |
) |
$ |
|
|
|
|
|
|
Fair Market Measurements as of |
| ||||||||
|
|
December 31, |
|
Quoted Prices |
|
Significant |
|
Unobservable |
| ||||
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 Companys 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 Companys 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 Companys common stock and on parity with the Companys 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 Companys ability to qualify as a REIT and in certain ot