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Investments in Real Estate | 12 Months Ended
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Dec. 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 2017 and 2016 During 2017, we invested $1.52 billion in 303 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.4%. The 303 new properties and properties under development or expansion are located in 40 states, will contain approximately 7.8 million leasable square feet, and are 100% leased with a weighted average lease term of 14.4 years. The tenants occupying the new properties operate in 23 industries and the property types consist of 94.5% retail and 5.5% 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 December 31, 2017. The $1.52 billion invested during 2017 was allocated as follows: $354.1 million to land, $955.1 million to buildings and improvements, $228.0 million to intangible assets related to leases, and $17.8 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions. The properties acquired during 2017 generated total revenues of $37.1 million and net income of $17.9 million during the year ended December 31, 2017. In comparison, during 2016, we invested $1.86 billion in 505 new properties and properties under development or expansion with an initial weighted average contractual lease rate of 6.3%. The 505 new properties and properties under development or expansion were located in 40 states, contained approximately 8.2 million leasable square feet, and were 100% leased with a weighted average lease term of 14.7 years. The tenants occupying the new properties operated in 28 industries and the property types consisted of 86.4% retail and 13.6% industrial, based on rental revenue. The $1.86 billion invested during 2016 was allocated as follows: $517.6 million to land, $1.18 billion to buildings and improvements, $204.5 million to intangible assets related to leases, and $38.8 million to intangible liabilities related to leases and other assumed liabilities. There was no contingent consideration associated with these acquisitions. The properties acquired during 2016 generated total revenues of $44.6 million and net income of $22.0 million during the year ended December 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 $1.52 billion we invested during 2017, $21.2 million was invested in 17 properties under development or expansion with an estimated initial weighted average contractual lease rate of 6.9%. Of the $1.86 billion we invested during 2016, $103.8 million was invested in 33 properties under development or expansion with an estimated initial weighted average contractual lease rate of 7.1%. B. Acquisition Transaction Costs Acquisition transaction costs of $255,000 and $346,000 were recorded to general and administrative expense on our consolidated statements of income during 2017 and 2016, respectively. Subsequent to our adoption of ASU 2017-01 in October 2017, $34,000 of acquisition transactions costs incurred were capitalized as part of the costs of acquisitions. C. Investments in Existing Properties During 2017, we capitalized costs of $12.7 million on existing properties in our portfolio, consisting of $1.6 million for re-leasing costs, $912,000 for recurring capital expenditures and $10.2 million for non-recurring building improvements. In comparison, during 2016, we capitalized costs of $16.3 million on existing properties in our portfolio, consisting of $797,000 for re-leasing costs, $679,000 for recurring capital expenditures and $14.9 million for non-recurring building improvements. D. Properties with Existing Leases Of the $1.52 billion we invested during 2017, approximately $1.1 billion was used to acquire 178 properties with existing leases. In comparison, of the $1.86 billion we invested during 2016, approximately $748.9 million was used to acquire 91 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 2017, 2016, and 2015 were $104.8 million, $94.0 million, and $87.9 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 2017, 2016, and 2015 were $14.0 million, $9.3 million, and $7.9 million, respectively. If a lease were 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 for properties held for investment at December 31, 2017 (in thousands):
|  | Net |  | Increase to |
|  | decrease to |  | amortization |
|  | rental revenue |  | expense |
2018 |  | $ | (16,527 | ) | $ | 104,612 |
2019 |  | (15,545 | ) | 94,374 |
2020 |  | (14,776 | ) | 88,679 |
2021 |  | (13,484 | ) | 80,513 |
2022 |  | (11,753 | ) | 69,700 |
Thereafter |  | (25,373 | ) | 390,798 |
Totals |  | $ | (97,458 | ) | $ | 828,676 |

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