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Investments in Real Estate | 3 Months Ended
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Mar. 31, 2017
Investments in Real Estate |
Investments in Real Estate | 4. Investments in Real Estate We acquire land, buildings and improvements necessary for the successful operations of commercial tenants. A.Acquisitions During the First Three Months of 2017 and 2016 During the first three months of 2017, we invested $370.7 million in 60 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.1%. The 60 new properties and properties under development or expansion are located in 18 states, will contain approximately 1.5 million leasable square feet, and are 100% leased with a weighted average lease term of 16.4 years. The tenants occupying the new properties operate in 13 industries and the property types consist of 98.7% retail and 1.3% industrial, based on rental revenue. None of our investments during 2017 caused any one tenant to be 10% or more of our total assets at March 31, 2017. The $370.7 million invested during the first three months of 2017 was allocated as follows: $108.7 million to land, $209.5 million to buildings and improvements, $53.9 million to intangible assets related to leases, and $1.4 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions. The properties acquired during the first three months of 2017 generated total revenues of $688,000 and net income of $217,000. Of the $370.7 million we invested during the first three months of 2017, $365.7 million of the purchase price allocation is based on a preliminary measurement of fair value and is subject to change. Additionally, $351.6 million invested in the fourth quarter of 2016 is based on a preliminary measurement of fair value and is subject to change. The allocation for these properties represents our current best estimate of fair value, and we expect to finalize the valuations and complete the purchase price allocations in 2017. During the first three months of 2017, we finalized the purchase price allocations for $417.9 million invested in the fourth quarter of 2016. There were no material changes to our consolidated balance sheets or income statements as a result of these purchase price allocations being finalized. In comparison, during the first three months of 2016, we invested $352.6 million in 103 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.6%. The 103 new properties and properties under development or expansion are located in 31 states, contain approximately 1.7 million leasable square feet, and are 100% leased with a weighted average lease term of 15.8 years. The tenants occupying the new properties operate in 18 industries and the property types consisted of 85.7% retail and 14.3% industrial, based on rental revenue. The $352.6 million invested during the first three months of 2016 was allocated as follows: $102.2 million to land, $243.1 million to buildings and improvements, $10.0 million to intangible assets related to leases, and $2.0 million to intangible liabilities related to leases and other assumed liabilities. We also recorded mortgage premiums of $692,000. There was no contingent consideration associated with these acquisitions. The properties acquired during the first three months of 2016 generated total revenues of $1.1 million and net income of $408,000 for the three months ended March 31, 2016. The estimated initial weighted average contractual lease rate for a property is generally computed as estimated contractual net operating income, which, in the case of a net leased property, is equal to the aggregate base rent for the first full year of each lease, divided by the total cost of the property. Since it is possible that a tenant could default on the payment of contractual rent, we cannot provide assurance that the actual return on the funds invested will remain at the percentages listed above. In the case of a property under development or expansion, the contractual lease rate is generally fixed such that rent varies based on the actual total investment in order to provide a fixed rate of return. When the lease does not provide for a fixed rate of return on a property under development or expansion, the estimated initial weighted average contractual lease rate is computed as follows: estimated net operating income (determined by the lease) for the first full year of each lease, divided by our projected total investment in the property, including land, construction and capitalized interest costs. Of the $370.7 million we invested during the first three months of 2017, $5.0 million was invested in nine properties under development or expansion with an estimated initial weighted average contractual lease rate of 7.7%. Of the $352.6 million we invested during the first three months of 2016, $52.1 million was invested in 23 properties under development or expansion with an estimated initial weighted average contractual lease rate of 6.8%. B.Acquisition Transaction Costs Acquisition transaction costs of $131,000 and $24,000 were recorded to general and administrative expense on our consolidated statements of income during the first three months of 2017 and 2016, respectively. C.Investments in Existing Properties During the first three months of 2017, we capitalized costs of $3.4 million on existing properties in our portfolio, consisting of $410,000 for re-leasing costs, $341,000 for recurring capital expenditures and $2.6 million for non-recurring building improvements. In comparison, during the first three months of 2016, we capitalized costs of $1.3 million on existing properties in our portfolio, consisting of $191,000 for re-leasing costs, $72,000 for recurring capital expenditures and $1.0 million for non-recurring building improvements. D.Properties with Existing Leases Of the $370.7 million we invested during the first three months of 2017, approximately $321.7 million was used to acquire 35 properties with existing leases. In comparison, of the $352.6 million we invested during the first three months of 2016, approximately $26.8 million was used to acquire four properties with existing leases. The value of the in-place and above-market leases is recorded to acquired lease intangible assets, net on our consolidated balance sheets, and the value of the below-market leases is recorded to acquired lease intangible liabilities, net on our consolidated balance sheets. The values of the in-place leases are amortized as depreciation and amortization expense. The amounts amortized to expense for all of our in-place leases, for the first three months of 2017 and 2016 were $24.8 million and $22.6 million, respectively. The values of the above-market and below-market leases are amortized over the term of the respective leases, including any bargain renewal options, as an adjustment to rental revenue on our consolidated statements of income. The amounts amortized as a net decrease to rental revenue for capitalized above-market and below-market leases for the first three months of 2017 and 2016 were $2.4 million and $2.1 million, respectively. If a lease was to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recorded to revenue or expense, as appropriate. The following table presents the estimated impact during the next five years and thereafter related to the amortization of the acquired above-market and below-market lease intangibles and the amortization of the in-place lease intangibles at March 31, 2017 (in thousands):
|  | Net increase |  | Increase to |
|  | (decrease) to |  | amortization |
|  | rental revenue |  | expense |
2017 |  | $ | (7,724 | ) | $ | 75,038 |
2018 |  | (10,063 | ) | 97,739 |
2019 |  | (9,084 | ) | 87,481 |
2020 |  | (8,315 | ) | 81,997 |
2021 |  | (7,038 | ) | 73,768 |
Thereafter |  | 30,813 |  | 412,176 |
Totals |  | $ | (11,411 | ) | $ | 828,199 |

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