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 June 30, 2014

 

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.)

 

 

 

One Federal Street, 23rd 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 x

 

Accelerated filer o

 

 

 

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 stock as of the latest practicable date.

 

Class

 

Outstanding at August 1, 2014

 

Common Stock ($0.01 par value)

 

55,274,255

 

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 June 30, 2014 and December 31, 2013

3

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2014 and 2013

5

 

 

 

 

Consolidated Statements of Equity for the Six Months Ended June 30, 2014 and 2013

6

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

45

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

PART II.

Other Information

46

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

Item 1A.

Risk Factors

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 3.

Defaults Upon Senior Securities

46

 

 

 

Item 4.

Mine Safety Disclosures

46

 

 

 

Item 5.

Other Information

46

 

 

 

Item 6.

Exhibits

47

 

 

 

 

SIGNATURE

48

 

2



Table of Contents

 

Part I. Financial Information

Item 1. Financial Statements

STAG Industrial, Inc.

Consolidated Balance Sheets

(unaudited, in thousands, except share data)

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Rental Property:

 

 

 

 

 

Land

 

$

145,931

 

$

134,399

 

Buildings

 

944,057

 

871,422

 

Tenant improvements

 

39,625

 

36,994

 

Building and land improvements

 

46,454

 

36,231

 

Less: accumulated depreciation

 

(88,138

)

(71,653

)

Total rental property, net

 

1,087,929

 

1,007,393

 

Cash and cash equivalents

 

6,031

 

6,690

 

Restricted cash

 

6,525

 

6,806

 

Tenant accounts receivable, net

 

14,387

 

13,790

 

Prepaid expenses and other assets

 

4,687

 

2,594

 

Interest rate swaps

 

1,077

 

3,924

 

Deferred financing fees, net

 

6,245

 

5,467

 

Leasing commissions, net

 

3,607

 

3,542

 

Goodwill

 

4,923

 

4,923

 

Due from related parties

 

156

 

185

 

Deferred leasing intangibles, net of accumulated amortization of $121,060 and $95,201, respectively

 

214,586

 

214,967

 

Total assets

 

$

1,350,153

 

$

1,270,281

 

Liabilities and Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Mortgage notes payable

 

$

223,331

 

$

225,591

 

Unsecured credit facility

 

35,500

 

80,500

 

Unsecured term loans

 

300,000

 

250,000

 

Accounts payable, accrued expenses and other liabilities

 

17,386

 

18,574

 

Interest rate swaps

 

412

 

 

Tenant prepaid rent and security deposits

 

10,040

 

8,972

 

Dividends and distributions payable

 

6,003

 

5,166

 

Deferred leasing intangibles, net of accumulated amortization of $5,373 and $4,520, respectively

 

7,586

 

6,914

 

Total liabilities

 

600,258

 

595,717

 

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 June 30, 2014 and December 31, 2013

 

69,000

 

69,000

 

Series B, 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2014 and December 31, 2013

 

70,000

 

70,000

 

Common stock, par value $0.01 per share, 100,000,000 shares authorized, 55,153,982 and 44,764,377 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

551

 

447

 

Additional paid-in capital

 

744,248

 

577,039

 

Common stock dividends in excess of earnings

 

(155,911

)

(116,877

)

Accumulated other comprehensive income

 

489

 

3,440

 

Total stockholders’ equity

 

728,377

 

603,049

 

Noncontrolling interest

 

21,518

 

71,515

 

Total equity

 

749,895

 

674,564

 

Total liabilities and equity

 

$

1,350,153

 

$

1,270,281

 

 

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 June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenue

 

 

 

 

 

 

 

 

 

Rental income

 

$

35,203

 

$

28,105

 

$

69,321

 

$

54,039

 

Tenant recoveries

 

6,279

 

3,476

 

11,695

 

7,134

 

Other income

 

200

 

262

 

409

 

658

 

Total revenue

 

41,682

 

31,843

 

81,425

 

61,831

 

Expenses

 

 

 

 

 

 

 

 

 

Property

 

3,194

 

2,316

 

7,244

 

5,011

 

General and administrative

 

8,283

 

4,477

 

13,758

 

8,983

 

Real estate taxes and insurance

 

5,412

 

3,244

 

9,347

 

5,872

 

Property acquisition costs

 

688

 

1,269

 

1,247

 

1,845

 

Depreciation and amortization

 

20,769

 

16,244

 

40,623

 

31,642

 

Other expenses

 

193

 

161

 

430

 

245

 

Total expenses

 

38,539

 

27,711

 

72,649

 

53,598

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

4

 

3

 

8

 

6

 

Interest expense

 

(5,813

)

(4,846

)

(11,479

)

(9,497

)

Offering costs

 

 

(27

)

 

(27

)

Total other income (expense)

 

(5,809

)

(4,870

)

(11,471

)

(9,518

)

Net loss from continuing operations

 

$

(2,666

)

$

(738

)

$

(2,695

)

$

(1,285

)

Discontinued operations

 

 

 

 

 

 

 

 

 

Income attributable to discontinued operations

 

 

90

 

 

219

 

Gain on sales of real estate

 

 

464

 

 

464

 

Total income attributable to discontinued operations

 

$

 

$

554

 

$

 

$

683

 

Gain on sale of real estate

 

$

 

$

 

$

50

 

$

 

Net loss

 

$

(2,666

)

$

(184

)

$

(2,645

)

$

(602

)

Less: loss attributable to noncontrolling interest after preferred stock dividends

 

(310

)

(357

)

(766

)

(623

)

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

 

$

(2,356

)

$

173

 

$

(1,879

)

$

21

 

Less: preferred stock dividends

 

2,712

 

2,519

 

5,424

 

4,071

 

Less: amount allocated to unvested restricted stockholders

 

83

 

64

 

171

 

133

 

Net loss attributable to common stockholders

 

$

(5,151

)

$

(2,410

)

$

(7,474

)

$

(4,183

)

Weighted average common shares outstanding — basic and diluted

 

52,865,801

 

42,006,954

 

49,023,985

 

41,265,070

 

Loss per share — basic and diluted

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to common stockholders

 

$

(0.10

)

$

(0.07

)

$

(0.15

)

$

(0.11

)

Income from discontinued operations attributable to common stockholders

 

 

$

0.01

 

 

$

0.01

 

Loss per share — basic and diluted

 

$

(0.10

)

$

(0.06

)

$

(0.15

)

$

(0.10

)

 

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 June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,666

)

$

(184

)

$

(2,645

)

$

(602

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on interest rate swaps

 

(2,177

)

3,655

 

(3,260

)

3,666

 

Other comprehensive income (loss)

 

(2,177

)

3,655

 

(3,260

)

3,666

 

Comprehensive income (loss)

 

(4,843

)

3,471

 

(5,905

)

3,064

 

Net loss attributable to noncontrolling interest after preferred stock dividends

 

310

 

357

 

766

 

623

 

Other comprehensive (income) loss attributable to noncontrolling interest

 

125

 

(482

)

309

 

(489

)

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

 

$

(4,408

)

$

3,346

 

$

(4,830

)

$

3,198

 

 

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 Stock

 

Paid-in

 

in excess of

 

Comprehensive

 

Stockholders’

 

Operating

 

 

 

 

 

Preferred Stock

 

Shares

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

Partnership

 

Total Equity

 

Six months ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

139,000

 

44,764,377

 

$

447

 

$

577,039

 

$

(116,877

)

$

3,440

 

$

603,049

 

$

71,515

 

$

674,564

 

Proceeds from sale of common stock

 

 

5,188,072

 

52

 

119,313

 

 

 

119,365

 

 

119,365

 

Offering costs

 

 

 

 

(1,944

)

 

 

(1,944

)

 

 

(1,944

)

Issuance of restricted stock, net

 

 

101,934

 

1

 

(1

)

 

 

 

 

 

Issuance of common stock

 

 

6,015

 

 

 

 

 

 

 

 

Dividends and distributions, net

 

(5,424

)

 

 

 

(31,731

)

 

(37,155

)

(2,902

)

(40,057

)

Non-cash compensation

 

 

 

 

1,098

 

 

 

1,098

 

3,116

 

4,214

 

Conversion of operating partnership units to common stock

 

 

5,093,584

 

51

 

54,425

 

 

 

54,476

 

(54,476

)

 

Redemption of operating partnership units for cash

 

 

 

 

 

 

 

 

(342

)

(342

)

Rebalancing of noncontrolling interest

 

 

 

 

(5,682

)

 

 

(5,682

)

5,682

 

 

Other comprehensive loss

 

 

 

 

 

 

(2,951

)

(2,951

)

(309

)

(3,260

)

Net income (loss)

 

5,424

 

 

 

 

(7,303

)

 

(1,879

)

(766

)

(2,645

)

Balance, June 30, 2014

 

$

139,000

 

55,153,982

 

$

551

 

$

744,248

 

$

(155,911

)

$

489

 

$

728,377

 

$

21,518

 

$

749,895

 

Six months ended June 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

 

 

6,433,352

 

64

 

117,675

 

 

 

117,739

 

 

117,739

 

Issuance of series B preferred stock

 

70,000

 

 

 

 

 

 

70,000

 

 

70,000

 

Offering costs

 

 

 

 

(7,847

)

 

 

(7,847

)

 

(7,847

)

Issuance of restricted stock, net

 

 

96,287

 

1

 

(1

)

 

 

 

 

 

Issuance of common stock

 

 

5,269

 

 

 

 

 

 

 

 

Dividends and distributions, net

 

(4,071

)

 

 

 

(25,324

)

 

(29,395

)

(4,198

)

(33,593

)

Non-cash compensation

 

 

 

 

680

 

 

 

680

 

805

 

1,485

 

Issuance of units

 

 

 

 

 

 

 

 

11,499

 

11,499

 

Conversion of operating partnership units to common stock

 

 

2,186

 

 

23

 

 

 

23

 

(23

)

 

Rebalancing of noncontrolling interest

 

 

 

 

(2,196

)

 

 

(2,196

)

2,196

 

 

Other comprehensive income

 

 

 

 

 

 

3,177

 

3,177

 

489

 

3,666

 

Net income (loss)

 

4,071

 

 

 

 

(4,050

)

 

21

 

(623

)

(602

)

Balance, June 30, 2013

 

$

139,000

 

42,235,676

 

$

422

 

$

527,977

 

$

(90,398

)

$

2,806

 

$

579,807

 

$

72,000

 

$

651,807

 

 

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)

 

 

 

Six months ended June 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(2,645

)

$

(602

)

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

 

 

 

 

 

Depreciation and amortization

 

40,623

 

32,045

 

Non-cash portion of interest expense

 

658

 

515

 

Intangible amortization in rental income, net

 

3,019

 

2,875

 

Straight-line rent adjustments, net

 

(1,622

)

(1,507

)

Dividends on forfeited equity compensation

 

128

 

 

Gain on sale of real estate

 

(50

)

(464

)

Non-cash compensation expense

 

4,245

 

1,485

 

Change in assets and liabilities:

 

 

 

 

 

Tenant accounts receivable, net

 

1,267

 

(77

)

Leasing commissions, net

 

(444

)

(1,420

)

Restricted cash

 

(500

)

(421

)

Prepaid expenses and other assets

 

(1,994

)

(1,633

)

Accounts payable, accrued expenses and other liabilities

 

(2,968

)

969

 

Tenant prepaid rent and security deposits

 

1,068

 

1,429

 

Due from related parties

 

29

 

550

 

Total adjustments

 

43,459

 

34,346

 

Net cash provided by operating activities

 

40,814

 

33,744

 

Cash flows from investing activities:

 

 

 

 

 

Additions of land and building improvements

 

(96,213

)

(120,458

)

Proceeds from sale of rental property, net

 

473

 

4,843

 

Restricted cash

 

781

 

(837

)

Cash paid for deal deposits, net

 

(178

)

(100

)

Additions to lease intangibles

 

(25,472

)

(38,422

)

Net cash used in investing activities

 

(120,609

)

(154,974

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from sale of Series B Preferred stock

 

 

70,000

 

Redemption of operating partnership units for cash

 

(342

)

 

Proceeds from unsecured credit facility

 

51,500

 

65,000

 

Repayment of unsecured credit facility

 

(96,500

)

(164,300

)

Proceeds from unsecured term loans

 

50,000

 

75,000

 

Repayment of mortgage notes payable

 

(2,208

)

(1,965

)

Payment of loan fees and costs

 

(1,386

)

(1,487

)

Dividends and distributions

 

(39,349

)

(27,634

)

Proceeds from sales of common stock

 

119,365

 

117,739

 

Offering costs

 

(1,944

)

(7,847

)

Restricted cash - escrow for dividends

 

 

(2,519

)

Net cash provided by financing activities

 

79,136

 

121,987

 

Increase (decrease) in cash and cash equivalents

 

(659

)

757

 

Cash and cash equivalents—beginning of period

 

6,690

 

19,006

 

Cash and cash equivalents—end of period

 

$

6,031

 

$

19,763

 

 

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 real estate operating company focused on the acquisition and management of single-tenant industrial properties 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”). The Company intends to continue to qualify as a REIT. As of June 30, 2014 and December 31, 2013, the Company owned a 96.48% and 86.65%, respectively, limited partnership interest in the Operating Partnership.  As used herein, the “Company” refers to STAG Industrial, Inc. and its consolidated subsidiaries and partnerships except where context otherwise requires.

 

As of June 30, 2014, the Company owned 221 buildings in 34 states with approximately 41.2 million square feet, consisting of 153 warehouse/distribution buildings, 48 light manufacturing buildings and 20 flex/office buildings.  The Company also owned two vacant land parcels adjacent to two of the Company’s buildings.  The Company’s buildings were 94.5% leased to 202 tenants as of June 30, 2014.

 

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 and 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, 2013.

 

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 of entities. The financial statements of the Company are presented on a consolidated basis, for all periods presented.

 

Adoption of New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. Revenue from a lease contract with a tenant is not within the scope of this revenue standard. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on the Company’s financial position or results of operations.

 

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Table of Contents

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which prospectively changed the definition of a discontinued operation to the disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations.  While the new guidance is not effective until annual periods beginning December 15, 2014, and interim periods within those years, companies are permitted to early adopt the provision.  The Company has elected to early adopt this standard effective with the interim period beginning January 1, 2014.  Prior to January 1, 2014, properties identified as held for sale and/or disposed of were presented in discontinued operations for all periods presented.

 

Consolidated Statements of Cash Flows—Supplemental Disclosures

 

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

 

 

 

Six months
ended

June 30,
2014

 

Six months
ended

June 30,
2013

 

Supplemental cash flow information

 

 

 

 

 

Cash paid for interest

 

$

10,858

 

$

8,720

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

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

 

$

(1,405

)

$

(11,277

)

Issuance of units for acquisitions of properties

 

$

 

$

11,499

 

Non-cash financing activities included in additions of deferred financing fees

 

$

(102

)

$

 

Dividends and distributions declared but not paid

 

$

6,003

 

$

17,259

 

 

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 June 30, 2014 and December 31, 2013, the Company had an allowance for doubtful accounts of $48 thousand and $19 thousand, respectively.

 

The Company accrues rental revenue earned, but not yet receivable, in accordance with GAAP. As of June 30, 2014 and December 31, 2013, the Company had accrued rental revenue of $11.2 million and $9.3 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 June 30, 2014 and December 31, 2013, the Company had an allowance on accrued rental revenue of $0 and $0, respectively.

 

As of June 30, 2014 and December 31, 2013, the Company had a total of approximately $5.0 million and $4.9 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 $3.0 million and $3.0 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 on a basis 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 six months ended June 30, 2014 and June 30, 2013, amortization of deferred financing fees included in interest expense was $0.4 million, $0.7 million, $0.3 million and $0.6 million, respectively. Fully amortized deferred charges are removed upon maturity of the underlying debt.

 

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Table of Contents

 

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 $2.5 million, $5.0 million, $2.3 and $4.6 million for the three and six months ended June 30, 2014 and June 30, 2013, respectively. This would have been the maximum liability of the Company had the tenants not met its 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 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 six months ended June 30, 2014 and June 30, 2013.

 

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 $0.2 million have been recorded in other expenses in the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2014 and June 30, 2013, respectively.

 

The Company currently has no liabilities for uncertain tax positions.

 

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3. Real Estate

 

The following table summarizes the acquisitions of the Company during the six months ended June 30, 2014 and the year ended December 31, 2013:

 

Six Months Ended June 30, 2014

 

Property Location

 

Date Acquired

 

Square Feet

 

Buildings

 

Allentown, PA

 

2/27/2014

 

289,900

 

1

 

Nashua, NH

 

2/28/2014

 

337,391

 

1

 

Strongsville, OH

 

3/14/2014

 

161,984

 

1

 

Columbus, OH

 

3/26/2014

 

186,000

 

1

 

Savannah, GA

 

4/15/2014

 

504,200

 

1

 

Garland, TX

 

4/17/2014

 

253,900

 

1

 

West Chester, OH

 

4/29/2014

 

245,000

 

1

 

Calhoun, GA

 

5/14/2014

 

151,200

 

1

 

Hebron, KY

 

5/15/2014

 

109,000

 

1

 

Houston, TX

 

5/29/2014

 

151,260

 

1

 

East Troy, WI

 

6/24/2014

 

149,624

 

1

 

Jefferson City, TN

 

6/30/2014

 

486,109

 

1

 

New Berlin, WI

 

6/30/2014

 

80,665

 

1

 

Total

 

 

 

3,106,233

 

13

 

 

Year Ended December 31, 2013

 

Property 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(2)

 

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

 

Orlando, FL

 

10/8/2013

 

215,900

 

1

 

North Jackson, OH

 

11/6/2013

 

209,835

 

1

 

Mebane, NC

 

11/14/2013

 

383,500

 

1

 

Shannon, GA

 

11/26/2013

 

568,516

 

1

 

Lansing, MI

 

12/11/2013

 

160,000

 

1

 

Harvard, IL

 

12/17/2013

 

126,304

 

1

 

Sauk Village, IL

 

12/17/2013

 

375,785

 

1

 

South Holland, IL

 

12/17/2013

 

202,902

 

1

 

Mascot, TN

 

12/19/2013

 

130,560

 

1

 

Janesville, WI

 

12/27/2013

 

700,000

 

1

 

Total

 

 

 

9,028,388

 

39

 

 


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

 

(2)         The Company owns a 2.0 acre vacant land parcel adjacent to one of these buildings.  Title to the land was conveyed to its own legal entity within the Company for nominal consideration during the three months ended June 30, 2014.

 

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Table of Contents

 

The following table (in thousands) summarizes the allocation of the consideration paid during the six months ended June 30, 2014 and the year ended December 31, 2013, respectively, for the acquired assets and liabilities in connection with the acquisitions of buildings at the date of acquisition identified in the tables above:

 

 

 

Six months
Ended June 30,
2014

 

Weighted Average
Amortization
Period (years)
Lease Intangibles

 

Year Ended
December 31,
2013

 

Weighted Average
Amortization
Period (years)
Lease Intangibles

 

Land

 

$

11,591

 

N/A

 

$

31,310

 

N/A

 

Buildings

 

73,071

 

N/A

 

223,420

 

N/A

 

Tenant improvements

 

2,485

 

N/A

 

2,526

 

N/A

 

Building and land improvements

 

5,255

 

N/A

 

9,133

 

N/A

 

Above market leases

 

2,837

 

4.9

 

8,219

 

5.8

 

Below market leases

 

(1,868

)

4.7

 

(2,538

)

7.2

 

In-place leases

 

16,797

 

4.8

 

50,005

 

5.8

 

Tenant relationships

 

7,706

 

7.7

 

21,257

 

8.2

 

Net assets acquired

 

$

117,874

 

 

 

$

343,332

 

 

 

 

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 New York Stock Exchange (“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 13 buildings acquired during the three months ended June 30, 2014 in its Consolidated Statements of Operations from the date of acquisition.  For the three and six months ended June 30, 2014, the entities acquired during the six months ended June 30, 2014 contributed $2.1 million and $2.4 million, respectively, to total revenue and $0.6 million and $1.1 million, respectively, to net loss, including $0.7 million and $1.2 million, respectively, to property acquisition costs.

 

The following tables set forth pro forma information for the six months ended June 30, 2014 and June 30, 2013.  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

 

Six months ended
June 30, 2014
(in thousands, except share data) (1)

 

Total revenue

 

$

85,385

 

Net loss (2)

 

$

(284

)

Net loss attributable to common stockholders

 

$

(5,337

)

Weighted average shares outstanding

 

49,023,985

 

Loss per share attributable to common stockholders

 

$

(0.11

)

 

Pro Forma

 

Six months ended
June 30, 2013
(in thousands, except share data) (3)

 

Total revenue

 

$

74,138

 

Net income (2)

 

$

1,027

 

Net loss attributable to common stockholders

 

$

(2,771

)

Weighted average shares outstanding

 

41,265,070

 

Loss per share attributable to common stockholders

 

$

(0.07

)

 


(1)                                 The pro forma information for the six months ended June 30, 2014 is presented as if the acquisition of the buildings acquired during the six months ended June 30, 2014 had occurred at January 1, 2013, the beginning of the reporting period prior to acquisition.

(2)                                 The net loss for the six months ended June 30, 2014 excludes $1.2 million of property acquisition costs related to the acquisition of buildings that closed during the six months ended June 30, 2014, and the net income for the six months ended June 30, 2013 was adjusted to include these acquisition costs.  Net income for the six months ended June 30, 2013 excludes $1.7 million of property acquisition costs related to the acquisition of buildings that closed during the six months ended June 30, 2013.

(3)                                 The pro forma information for the six months ended June 30, 2013 is presented as if the acquisition of the buildings acquired during the six months ended June 30, 2014 and the buildings acquired during the six months ended June 30, 2013 had occurred at January 1, 2013 and January 1, 2012, respectively, the beginning of the reporting period prior to acquisition.

 

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Table of Contents

 

On March 25, 2014, the Company sold a 15,085 square feet warehouse/distribution building located in Lexington, VA.  The carrying value of the building prior to sale was $0.4 million.  The sales price was $0.5 million and the Company received net proceeds of $0.5 million.  A gain on sale of real estate of $50 thousand was recognized at closing under the full accrual method of gain recognition.  Based on the early adoption of the new discontinued operations guidance, the sale of this property did not represent a strategic shift by the Company and it has not been reflected as part of discontinued operations.

 

On June 12, 2013, the Company sold a 53,183 square feet flex/office building located in Pittsburgh, PA. 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 $0.1 million and $0.2 million to total revenue and $0.5 and $0.6 to net income during the three and six months ended June 30, 2013, 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.

 

4. Deferred Leasing Intangibles

 

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

 

 

 

June 30,
2014

 

December 31,
2013

 

In-place leases

 

$

155,239

 

$

142,518

 

Less: Accumulated amortization

 

(63,443

)

(49,756

)

In-place leases, net

 

91,796

 

92,762

 

Above market leases

 

59,882

 

57,283

 

Less: Accumulated amortization

 

(21,210

)

(17,232

)

Above market leases, net

 

38,672

 

40,051

 

Tenant relationships

 

84,585

 

77,260

 

Less: Accumulated amortization

 

(24,400

)

(18,693

)

Tenant relationships, net

 

60,185

 

58,567

 

Leasing commissions

 

35,940

 

33,107

 

Less: Accumulated amortization

 

(12,007

)

(9,520

)

Leasing commissions, net

 

23,933

 

23,587

 

Total deferred leasing intangibles, net

 

$

214,586

 

$

214,967

 

 

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Table of Contents

 

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

 

 

 

June 30,
2014

 

December 31,
2013

 

Below market leases

 

$

12,959

 

$

11,434

 

Less: Accumulated amortization

 

(5,373

)

(4,520

)

Total deferred leasing intangibles, net

 

$

7,586

 

$

6,914

 

 

Amortization expense, inclusive of results from discontinued operations, related to in-place leases, leasing commissions and tenant relationships of deferred leasing intangibles was $12.0 million, $23.5 million, $9.7 million and $19.1 million for the three and six months ended June 30, 2014 and June 30, 2013, respectively.  Rental income, inclusive of results from discontinued operations, related to net amortization of above and below market leases decreased by $1.5 million, $3.0 million, $1.5 million and $2.9 million for the three and six months ended June 30, 2014 and June 30, 2013, 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 2014

 

$

22,906

 

$

3,075

 

2015

 

37,656

 

6,427

 

2016

 

30,939

 

5,824

 

2017

 

24,783

 

4,462

 

2018

 

18,364

 

3,103

 

 

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 June 30, 2014 and December 31, 2013 (dollars in thousands):

 

Loan

 

Interest Rate (1)

 

Principal
outstanding as
of
June 30,
2014

 

Principal
outstanding as
of
December 31,
2013

 

Current
Maturity

 

Mortgage notes payable:

 

 

 

 

 

 

 

 

 

Sun Life(2)

 

6.05%

 

$

3,682

 

$

3,817

 

Jun-1-2016

 

Webster Bank(3)

 

4.22%

 

5,755

 

5,834

 

Aug-4-2016

 

Union Fidelity(4)

 

5.81%

 

6,371

 

6,551

 

Apr-30-2017

 

Webster Bank(5)

 

3.66%

 

3,078

 

3,121

 

May-29-2017

 

Webster Bank(6)

 

3.64%

 

3,315

 

3,360

 

May-31-2017

 

CIGNA-1 Facility(7)

 

6.50%

 

58,468

 

58,874

 

Feb-1-2018

 

CIGNA-2 Facility(8)

 

5.75%

 

59,534

 

59,990

 

Feb-1-2018

 

CIGNA-3 Facility(9)

 

5.88%

 

16,765

 

16,879

 

Oct-1-2019

 

Wells Fargo CMBS Loan(10)

 

4.31%

 

66,363

 

67,165

 

Dec-1-2022

 

Total mortgage notes payable

 

 

 

$

223,331

 

$

225,591

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured credit facility:

 

 

 

 

 

 

 

 

 

Bank of America Unsecured Credit Facility(11)

 

LIBOR + 1.45%

 

35,500

 

80,500

 

Sept-10-2016

 

Total unsecured credit facility

 

 

 

$

35,500

 

$

80,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsecured term loans:

 

 

 

 

 

 

 

 

 

Bank of America Unsecured Term Loan(12)

 

LIBOR + 1.40%

 

150,000

 

150,000

 

Sept-10-2017

 

Wells Fargo Unsecured Term Loan A(13)

 

LIBOR + 2.15%

 

150,000

 

100,000

 

Feb-14-2020

 

Wells Fargo Unsecured Term Loan B(14)

 

LIBOR + 1.70%

 

 

 

Mar-21-2021

 

Total unsecured term loans

 

 

 

$

300,000

 

$

250,000

 

 

 

 

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(1)                                 Current interest rate as of June 30, 2014.  At June 30, 2014 and December 31, 2013, the one-month LIBOR rate was 0.1552% and 0.1677%, respectively.

 

(2)                                 This loan with Sun Life Assurance Company of Canada (U.S.) (“Sun Life”) was assumed on October 14, 2011 in connection with the acquisition of a building located in Gahanna, OH. 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 June 30, 2014 and December 31, 2013, respectively.

 

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

 

(4)                                This loan with Union Fidelity Life Insurance Co. (“Union Fidelity”) was assumed on July 28, 2011 in connection with the acquisition of a building in St. Louis, MO.  The property is collateral for this loan. The principal outstanding includes an unamortized fair market value premium of $0.1 million and $0.1 million as of June 30, 2014 and December 31, 2013, respectively.

 

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

 

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

 

(7)                                 This Connecticut General Life Insurance Company (“CIGNA”) credit facility was entered into in July 2010 (the “CIGNA-1 Facility”). This loan has various buildings serving as collateral and has no remaining borrowing capacity as of June 30, 2014.

 

(8)                                 This CIGNA credit facility was entered into in October 2010 (the “CIGNA-2 Facility”). This loan has various buildings serving as collateral and has no remaining borrowing capacity as of June 30, 2014.

 

(9)                                 This CIGNA credit facility was entered into in July 2011 (“CIGNA-3 Facility”). This loan has various buildings serving as collateral and has no remaining borrowing capacity as of June 30, 2014.

 

(10)                          This Wells Fargo Bank, National Association (“Wells Fargo”) loan (“CMBS Loan”) was entered into on November 8, 2012 and is a non-recourse loan with 28 buildings serving as collateral.

 

(11)                          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. The spread was 1.45% as of June 30, 2014 and December 31, 2013.  The Company paid unused fees of $0.1 million, $0.2 million, $0.2 million and $0.3 million for the three and six months ended June 30, 2014 and June 30, 2013, respectively.  The borrowing capacity as of June 30, 2014 was $164.3 million, assuming current leverage levels.

 

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(12)                          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. The spread was 1.40% as of June 30, 2014 and December 31, 2013. 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 (see Note 6 for further details).  There was no remaining borrowing capacity as of June 30, 2014.

 

(13)                          This Wells Fargo unsecured term loan (“Wells Fargo Unsecured Term Loan A”) was entered into on February 14, 2013. The spread over LIBOR is based on the Company’s consolidated leverage. The spread was 2.15% as of June 30, 2014 and December 31, 2013.  As of June 30, 2014, the Company swapped the one-month LIBOR for a fixed rate for $125.0 million of the $150.0 million outstanding on the Wells Fargo Unsecured Term Loan A (see Note 6 for further details).  There was no remaining borrowing capacity as of June 30, 2014 as the Company drew upon the remaining $50.0 million on January 30, 2014.  During the three and six months ended June 30, 2014 and the period February 14, 2013 to June 30, 2013, the Company incurred an unused commitment fee of $14 thousand, $14 thousand and $0.2 million, respectively.

 

(14)                          This Wells Fargo unsecured term loan (“Wells Fargo Unsecured Term Loan B”) was entered into on March 21, 2014. The spread over LIBOR is based on the Company’s consolidated leverage. The spread was 1.70% as of June 30, 2014. The remaining capacity as of June 30, 2014 was $150.0 million.

 

On March 21, 2014, the Company closed the Wells Fargo Unsecured Term Loan B, a $150.0 million unsecured term loan with Wells Fargo with a maturity date of March 21, 2021.  Borrowings under the Wells Fargo Unsecured Term Loan B bear interest at a floating rate equal to the one-month LIBOR plus a spread that will range from 1.70% to 2.30%, based on the Company’s consolidated leverage ratio.  The Wells Fargo Unsecured Term Loan B has an accordion feature that allows the Company to increase its borrowing capacity to $250.0 million, subject to the satisfaction of certain conditions. The Company incurred $1.2 million in deferred financing fees associated with the closing of the Wells Fargo Unsecured Term Loan B, which will be amortized over its seven year term. The Company also incurs an annual fee of $50 thousand, which is amortized over each respective year of the term.  The Company has one year from the closing date to draw the funds. As of June 30, 2014, the Company has not drawn funds on this unsecured term loan. The Wells Fargo Unsecured Term Loan B has an unused commitment fee equal to 0.225% of its unused portion, which is paid monthly in arrears.  The unused commitment fee began to accrue on May 21, 2014.  During the period May 21, 2014 to June 30, 2014, the Company incurred an unused commitment fee of $39 thousand.

 

On April 16, 2014, the Company entered into a Note Purchase Agreement (“NPA”) for a $100.0 million private placement by the Operating Partnership of $50.0 million Series A 10-Year Unsecured Senior Notes (“Series A Unsecured Senior Notes”) and $50.0 million Series B 12-Year Unsecured Senior Notes (“Series B Unsecured Senior Notes”)  (together, the Series A Unsecured Senior Notes and the Series B Unsecured Senior Notes are referred to herein as, the “Unsecured Senior Notes”).  Pursuant to the NPA, borrowings under the Unsecured Senior Notes bear interest at a fixed rate of 4.98% and, subject to customary closing conditions, must be issued (i) between July 1, 2014 and July 3, 2014 for the Series B Unsecured Senior Notes and (ii) between October 1, 2014 and October 3, 2014 for the Series A Unsecured Senior Notes.  Upon the funds being drawn, Bank of America, as agent, will receive a placement fee equal to 0.4% of the principal amount of the securities purchased by investors.  Subsequent to June, 30, 2014, on July 1, 2014, the Company issued the Series B Unsecured Senior Notes.  The Company and certain wholly owned subsidiaries of the Operating Partnership are guarantors of the Unsecured Senior Notes and the obligations under the Unsecured Senior Notes rank pari passu to the Company’s unsecured senior indebtedness, which includes the Unsecured Credit Facility and Unsecured Term Loans (as defined below).

 

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Table of Contents

 

Financial Covenant Considerations

 

The Company’s ability to borrow under the Unsecured Credit Facility, the Bank of America Unsecured Term Loan, Wells Fargo Unsecured Term Loan A and the Wells Fargo Unsecured Term Loan B (collectively, the Bank of America Unsecured Term Loan, the Wells Fargo Unsecured Term Loan A and the Wells Fargo Unsecured Term Loan B 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 level of not greater than 7.5%;

 

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

 

·                  a minimum tangible net worth covenant test; and

 

·                  various thresholds on Company level investments.

 

The Unsecured Senior Notes are also subject to the above covenants as well as a minimum interest coverage ratio of not less than 1.50:1.00.  The Company was in compliance with all such applicable restrictions and financial covenants as of June 30, 2014.  In the event of a default under the Unsecured Credit Facility or Unsecured Term Loans, the Company’s dividend distributions are limited to the minimum amount necessary for the Company to maintain its status as a REIT. The total borrowing capacity on the combined Unsecured Credit Facility and the Unsecured Term Loans as of June 30, 2014 was $270.1 million, assuming current leverage levels.

 

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 and assignments of rents from leases that are collateral for these loans. These debt facilities contain certain financial and other covenants. The Company was in compliance with all financial covenants as of June 30, 2014 and December 31, 2013. The 21 properties held as collateral for the CIGNA-1, CIGNA-2, and CIGNA-3 facilities are cross-defaulted and cross-collateralized among the respective facilities.

 

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 1.56% to 5.15% and 1.57% to 5.24% at June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013 (in thousands):

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

Mortgage notes payable

 

$

223,331

 

$

228,845

 

$

225,591

 

$

228,996

 

Unsecured Credit Facility

 

$

35,500

 

$

35,500

 

$

80,500

 

$

80,500

 

Bank of America Unsecured Term Loan

 

$

150,000

 

$

149,186

 

$

150,000

 

$

148,781

 

Wells Fargo Unsecured Term Loan A

 

$

150,000

 

$

150,050

 

$

100,000

 

$

97,302

 

 

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Table of Contents

 

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.

 

The following table details the Company’s outstanding interest rate swaps as of June 30, 2014 (collectively, the “Unsecured Term Loan Swaps”) (in thousands):

 

Interest Rate
Derivative Counterparty

 

Trade Date

 

Notional
Amount

 

Fixed Interest
Rate

 

Variable Interest
Rate

 

Maturity Date

 

PNC Bank, National Association

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

Bank of America

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

UBS AG

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

Royal Bank of Canada

 

Sept-14-2012

 

$

10,000

(1)

0.7945

%

One-month LIBOR

 

September 10, 2017

 

RJ Capital Services, Inc.

 

Sept-14-2012

 

$

10,000

(1)

0.7975

%

One-month LIBOR

 

September 10, 2017

 

Bank of America

 

Sept-20-2012

 

$

25,000

(1)

0.7525

%

One-month LIBOR

 

September 10, 2017

 

RJ Capital Services, Inc.

 

Sept-24-2012

 

$

25,000

(1)

0.727

%

One-month LIBOR

 

September 10, 2017

 

Regions Bank

 

March-1-2013

 

$

25,000

(2)

1.33

%

One-month LIBOR

 

February 14, 2020

 

Capital One, N.A.

 

June-13-2013

 

$

25,000

(2)

1.703

%

One-month LIBOR

 

February 14, 2020

 

Capital One, N.A.

 

June-13-2013

 

$

50,000

(2)

1.681

%

One-month LIBOR

 

February 14, 2020

 

Regions Bank

 

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 A

 

The fair value of the interest rate swaps outstanding as of June 30, 2014 and December 31, 2013 was as follows (in thousands):

 

 

 

Balance Sheet
Location

 

Notional
Amount
June 30,

2014

 

Fair Value
June 30,

2014

 

Notional Amount
December 31,
2013

 

Fair Value
December 31,
2013

 

Unsecured Term Loan Swaps

 

Interest Rate Swaps-Asset

 

$

175,000

 

$

1,077

 

$

225,000

 

$

3,924

 

Unsecured Term Loan Swaps

 

Interest Rate Swaps-Liability

 

$

50,000

 

$

(412

)

$

 

$

 

 

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. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2014 and June 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 $2.5 million will be reclassified from accumulated other comprehensive income (loss) as an increase to interest expense over the next 12 months.

 

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Table of Contents

 

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 six months ended June 30, 2014 and June 30, 2013, respectively (in thousands):

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

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

 

$

(2,815

)

$

3,440

 

$

(4,482

)

$

3,286

 

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

 

$

638

 

$

215

 

$

1,222

 

$

380

 

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 attempts to minimize this risk by limiting counterparties to major banks and investment brokers who meet established credit and capital guidelines.

 

Credit-risk-related Contingent Features

 

As of June 30, 2014, the fair values of ten of the 11 of the Company’s interest rate swaps were in an asset position of $1.2 million and one interest rate swap was in a liability position of $0.4 million, excluding any adjustment for nonperformance risk related to these agreements.  After adjusting the Company’s interest rate swaps for nonperformance risk, the fair values of nine of the 11 interest rate swaps were in an asset position and two were in a liability position. The adjustment for nonperformance risk included in the fair value of the Company’s net asset position and net liability position was $0.1 million and $34 thousand, respectively, as of June 30, 2014. Accrued interest expense for all 11 swaps was $0.2 million as of June 30, 2014.  As of June 30, 2014, the Company has not posted any collateral related to these agreements.  If the Company had breached any of its provisions at June 30, 2014, 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 $0.4 million.

 

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 June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

Fair Value Measurements as of
June 30, 2014 Using:

 

 

 

June 30,
2014

 

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

 

$

1,077

 

$

 

$

1,077

 

$

 

Interest Rate Swaps

 

$

(412

)

$

 

$

(412

)

$

 

 

 

 

 

 

Fair Value Measurements as of
December 31, 2013 Using:

 

 

 

December 31,
2013

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

3,924

 

$

 

$

3,924

 

$

 

 

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Table of Contents

 

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’ 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.  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’ 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.  Dividends on the Series A Preferred Stock and 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 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 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 A Preferred Stock and Series B Preferred Stock have no stated maturity date and are not subject to mandatory redemption or any sinking fund. Generally, the Company is not permitted to redeem the Series A Preferred Stock and Series B Preferred Stock prior to November 2, 2016 and April 16, 2018, respectively, 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 and Series B Preferred Stock).

 

The table below sets forth the dividends attributable to the Series A Preferred Stock during the six months ended June 30, 2014 and the year ended December 31, 2013:

 

Amount Declared During Quarter Ended 2014

 

Declaration Date

 

Per Share

 

Date Paid

 

June 30

 

May 5, 2014

 

$

0.5625

 

June 30, 2014

 

March 31

 

February 21, 2014

 

0.5625

 

March 31, 2014

 

Total 2014

 

 

 

$

1.125

 

 

 

 

Amount Declared During Quarter Ended 2013

 

Declaration Date

 

Per Share

 

Date Paid

 

December 31

 

November 1, 2013

 

$

0.5625

 

December 31, 2013

 

September 30

 

August 2, 2013

 

0.5625

 

September 30, 2013

 

June 30

 

May 6, 2013

 

0.5625

 

July 1, 2013

 

March 31

 

March 1, 2013

 

0.5625

 

April 1, 2013

 

Total 2013

 

 

 

$

2.25

 

 

 

 

The table below sets forth the dividends attributable to the Series B Preferred Stock during the six months ended June 30, 2014 and the year ended December 31, 2013:

 

Amount Declared During Quarter Ended 2014

 

Declaration Date

 

Per Share

 

Date Paid

 

June 30

 

May 5, 2014

 

$

0.4140625

 

June 30, 2014

 

March 31

 

February 21, 2014

 

0.4140625

 

March 31, 2014

 

Total 2014

 

 

 

$

0.828125

 

 

 

 

Amount Declared During Quarter Ended 2013

 

Declaration Date

 

Per Share

 

Date Paid

 

December 31

 

November 1, 2013

 

$

0.4140625

 

December 31, 2013

 

September 30

 

August 2, 2013

 

0.4140625

 

September 30, 2013

 

June 30 (prorated for April 16, 2013 to June 30, 2013)

 

May 6, 2013

 

0.3450500

 

July 1, 2013

 

Total 2013

 

 

 

$

1.1731750

 

 

 

 

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Table of Contents

 

Common Stock

 

During the three and six months ended June 30, 2014, the Company sold 189,735 and 661,930 shares of common stock, respectively, under its “at the market” stock offering program that commenced on December 14, 2012 (“2012 ATM”). During the three and six months ended June 30, 2014, the Company received net proceeds of $4.4 million and $14.7 million, reflecting gross proceeds of $4.5 million and $14.9 million, net of the sales agents’ fees of approximately $0.1 million and $0.2 million, respectively. The Company used the net proceeds to fund acquisitions, to repay indebtedness, and for working capital and other general corporate purposes.  As of June 30, 2014, there was no remaining common stock available to be sold under the 2012 ATM.

 

On March 10, 2014, the Company established a new “at the market” stock offering program (“2014 ATM”) through which it may sell from time to time up to an aggregate of $150.0 million of its common stock through sales agents.  During the three months ended June 30, 2014 and the period March 10, 2014 through June 30, 2014, the Company sold 1,566,878 and 4,526,142 shares of common stock, respectively, under its 2014 ATM resulting in net proceeds of $36.7 million and $102.9 million, reflecting gross proceeds of $37.3 million and $104.5 million, net of the sales agents’ fees of approximately $0.6 million and $1.6 million, respectively.  The Company used the net proceeds for acquisitions, repayment of debt, and general corporate purposes. As of June 30, 2014, there was approximately $45.5 million of common stock available to be sold under the 2014 ATM.

 

The table below sets forth the dividends attributable to the common stock during the six months ended June 30, 2014 and the year ended December 31, 2013:

 

Amount Declared During 2014

 

Declaration Date

 

Per Share

 

Date Paid

 

Month ended June 30

 

February 21, 2014

 

$

0.105

 

July 15, 2014

 

Month ended May 31

 

February 21, 2014

 

0.105

 

June 16, 2014

 

Month ended April 30

 

February 21, 2014

 

0.105

 

May 15, 2014

 

Month ended March 31

 

December 18, 2013

 

0.105

 

April 15, 2014

 

Month ended February 28

 

December 18, 2013

 

0.105

 

March 17, 2014

 

Month ended January 31

 

December 18, 2013

 

0.105

 

February 17, 2014

 

Total 2014

 

 

 

$

0.63

 

 

 

 

Amount Declared During 2013

 

Declaration Date

 

Per Share

 

Date Paid

 

Month ended December 31

 

September 24, 2013

 

$

0.10

 

January 15, 2014

 

Month ended November 30

 

September 24, 2013

 

0.10

 

December 16, 2013

 

Month ended October 31

 

September 24, 2013

 

0.10

 

November 15, 2013

 

Quarter ended September 30

 

August 2, 2013

 

0.30

 

October 15, 2013

 

Quarter ended June 30

 

May 6, 2013

 

0.30

 

July 15, 2013

 

Quarter ended March 31

 

March 1, 2013

 

0.30