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 |
|
(IRS Employer |
|
|
|
One Federal Street, 23rd 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 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 issuers 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 |
|
STAG INDUSTRIAL, INC.
STAG Industrial, Inc.
(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.
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.
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.
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.
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 equivalentsbeginning of period |
|
6,690 |
|
19,006 |
| ||
Cash and cash equivalentsend of period |
|
$ |
6,031 |
|
$ |
19,763 |
|
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 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 Companys buildings. The Companys 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 Companys consolidated financial statements and notes thereto contained in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
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 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 Companys financial position or results of operations.
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 entitys 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 FlowsSupplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows (in thousands):
|
|
Six months |
|
Six months |
| ||
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 Companys 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.
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 $2.5 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 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 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.
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 |
|
Square |
|
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.
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 |
|
Weighted Average |
|
Year Ended |
|
Weighted Average |
| ||
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 Companys 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 |
| |
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 |
| |
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.
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, |
|
December 31, |
| ||
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 |
|
Deferred leasing intangibles included in total liabilities consisted of the following (in thousands):
|
|
June 30, |
|
December 31, |
| ||
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 |
|
Net Decrease to Rental |
| ||
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 Companys outstanding indebtedness, including mortgage notes payable and borrowings under the Companys Unsecured Term Loans and Unsecured Credit Facility as of June 30, 2014 and December 31, 2013 (dollars in thousands):
Loan |
|
Interest Rate (1) |
|
Principal |
|
Principal |
|
Current |
| ||
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 |
|
|
|
(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 Companys 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.
(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 Companys 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 Companys 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 Companys 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 Companys 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 Companys unsecured senior indebtedness, which includes the Unsecured Credit Facility and Unsecured Term Loans (as defined below).
Financial Covenant Considerations
The Companys 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 Companys 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 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 1.56% 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 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 June 30, 2014 and December 31, 2013 (in thousands):
|
|
June 30, 2014 |
|
December 31, 2013 |
| ||||||||
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
| ||||
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 |
|
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.
The following table details the Companys outstanding interest rate swaps as of June 30, 2014 (collectively, the Unsecured Term Loan Swaps) (in thousands):
Interest Rate |
|
Trade Date |
|
Notional |
|
Fixed Interest |
|
Variable Interest |
|
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 |
|
Notional |
|
Fair Value |
|
Notional Amount |
|
Fair Value |
| ||||
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 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. 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 Companys 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.
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 Companys 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 Companys 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 Companys 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 Companys 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, |
|
Quoted Prices |
|
Significant |
|
Unobservable |
| ||||
Assets (liabilities): |
|
|
|
|
|
|
|
|
| ||||
Interest Rate Swaps |
|
$ |
1,077 |
|
$ |
|
|
$ |
1,077 |
|
$ |
|
|
Interest Rate Swaps |
|
$ |
(412 |
) |
$ |
|
|
$ |
(412 |
) |
$ |
|
|
|
|
|
|
Fair Value Measurements as of |
| ||||||||
|
|
December 31, |
|
Quoted Prices |
|
Significant |
|
Unobservable |
| ||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Interest Rate Swaps |
|
$ |
3,924 |
|
$ |
|
|
$ |
3,924 |
|
$ |
|
|
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 Companys 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 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 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 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 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 |
|
|
|
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 |
|