Note 3 – Real Estate Investments

Real Estate Portfolio

The Company’s real estate investments consisted of the following as of December 31, 2016 and December 31, 2015 (in thousands, except number of properties):

	December 31,		December 31,
	2016		2015
Number of Properties		366		278
Gross Leasable Area		7,033		5,207

Land	$	309,687	$	225,274
Buildings	$	703,506	$	526,912
Property under Development	$	6,764	$	3,663
Gross Real Estate Investments	$	1,019,957	$	755,849
Less Accumulated Depreciation	$	(69,696)	$	(56,401)
Net Real Estate Investments	$	950,261	$	699,448

Lease Intangibles

The following table details lease intangibles, net of accumulated amortization, as of December 31, 2016 and December 31, 2015 (in thousands):

	December 31,		December 31,
	2016		2015
Intangible Lease Asset - In-Place Leases	$	62,422	$	47,052
Less: Accumulated Amortization		(11,976)		(7,239)
Intangible Lease Asset - Above-Market Leases		103,116		61,241
Less: Accumulated Amortization		(13,690)		(7,367)
Intangible Lease Liability - Below-Market Leases		(37,126)		(21,163)
Less: Accumulated Amortization		7,078		4,028
Lease Intangible Asset, net	$	109,824	$	76,552

As of December 31, 2016, our portfolio was approximately 99.6% leased and had a weighted average remaining lease term of approximately 10.6 years.

Tenant Leases

The properties that the Company owns are typically leased to tenants under long term operating leases. The leases are generally net leases which typically require the tenant to be responsible for minimum monthly rent and property operating expenses including property taxes, insurance and maintenance. Certain of our properties are subject to leases under which we retain responsibility for specific costs and expenses of the property. The leases typically provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions, including rent increases, consistent with the initial lease term.

As of December 31, 2016, the future minimum rental income to be received under the terms of all non-cancellable tenant leases is as follows (in thousands):

For the Year Ending December 31,
2017	$	91,308
2018		90,109
2019		87,285
2020		84,578
2021		81,195
Thereafter		575,249
Total	$	1,009,724

Since lease renewal periods are exercisable at the option of the tenant, the above table only presents future minimum lease payments due during the current lease terms. In addition, this table does not include amounts for potential variable rent increases that are based on the Consumer Price Index (“CPI”) or future contingent rents which may be received on the leases based on a percentage of the tenant’s gross sales.

Of these future minimum rents, approximately 11.6% of the total is attributable to Walgreens as of December 31, 2016. The loss of this tenant or the inability of them to pay rent could have an adverse effect on the Company’s business.

No other tenant contributed 5.0% or more of the Company’s total revenues as of December 31, 2016.

Deferred Revenue

In July 2004, the Company’s tenant in a joint venture property located in Boynton Beach, FL repaid $4.0 million that had been contributed by the Company’s joint venture partner. As a result of this repayment, the Company became the sole member of the limited liability company holding the property. Total assets of the property were approximately $4.0 million. The Company has treated the $4.0 million as deferred revenue and accordingly, will recognize rental income over the term of the related leases. The remaining deferred revenue for the Boynton Beach, FL property was fully recognized in 2016.

As of December 31, 2016 and December 31, 2015, there was $1.8 million and $1.7 million, respectively, in deferred revenues resulting from rents paid in advance.

Land Lease Obligations

The Company is subject to land lease agreements for certain of its properties. Land lease expense was $0.7 million, $0.6 million, and $0.5 million for the years ending December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, future annual lease commitments under these agreements are as follows (in thousands):

For the Year Ending December 31,
2017	$	640
2018		641
2019		634
2020		632
2021		588
Thereafter		7,840
Total	$	10,975

Acquisitions

During 2016, the Company purchased 82 retail net lease assets for approximately $295.6 million, including acquisition and closing costs. These properties are located in 27 states and 100% leased to 49 different tenants operating in 22 unique retail sectors for a weighted average lease term of approximately 10.7 years. The underwritten weighted average capitalization rate on our 2016 investments was approximately 7.8%. None of the Company’s investments during 2016 caused any new or existing tenant to comprise 10% or more of the Company’s total assets or generate 10% or more of the Company’s total annualized base rent at December 31, 2016.

The aggregate 2016 acquisitions were allocated approximately $84.3 million to land, $170.0 million to buildings and improvements, and $41.3 million to lease intangible costs. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions.

During 2015, the Company purchased 73 retail net lease assets for approximately $220.6 million, including acquisition and closing costs. These properties are located in 24 states and 100% leased to 40 different tenants operating in 19 unique retail sectors for a weighted average lease term of approximately 12.2 years. The underwritten weighted average capitalization rate on our 2015 investments was approximately 8.0%. None of the Company’s investments during 2015 caused any new or existing tenant to comprise 10% or more of the Company’s total assets or generate 10% or more of the Company’s total annualized base rent at December 31, 2015.

The aggregate 2015 acquisitions were allocated approximately $33.8 million to land, $152.8 million to buildings and improvements, and $34.0 million to lease intangible costs. The acquisitions were substantially all cash purchases and there was no contingent consideration associated with these acquisitions.

The Company calculates the weighted average capitalization rate on our investments by dividing annual expected net operating income derived from the properties by the total investment in the properties. Annual expected net operating income is defined as the straight-line rent for the base term of the lease less property level expenses (if any) that are not recoverable from the tenant.

Unaudited Pro Forma Information

The following unaudited pro forma total revenue and income before discontinued operations for 2016, 2015 and 2014, assumes all of our 2016 acquisitions had taken place on January 1, 2016 for the 2016 pro forma information, January 1, 2015 for the 2015 proforma information, and on January 1, 2014 for the 2014 pro forma information (in thousands):

Supplemental pro forma for the year ended December 31, 2016 (1)
Total Revenue	$	104,178
Income before discontinued operations	$	56,375

Supplemental pro forma for the year ended December 31, 2015 (1)
Total Revenue	$	79,056
Income before discontinued operations	$	36,149

Supplemental pro forma for the year ended December 31, 2014 (1)
Total Revenue	$	57,840
Income before discontinued operations	$	19,369

(1)

This unaudited pro forma supplemental information does not purport to be indicative of what our operating results would have been had the acquisitions occurred on January 1, 2016, January 1, 2015 or January 1, 2014 and may not be indicative of future operating results. Various acquisitions were of newly leased or constructed assets and may not have been in service for the full periods shown.

Developments

During the fourth quarter, construction continued on the Company’s four development and PCS projects with anticipated total project costs of approximately $21.7 million. These projects include one Burger King development in Heber, Utah; two Camping World projects in Tyler, Texas and Georgetown, Kentucky; and the redevelopment and expansion of an existing property in Boynton Beach, Florida for Orchard Supply Hardware.

For the year ended December 31, 2016, the Company completed or commenced construction on 14 development or PCS projects net leased to a number of industry-leading retail tenants. Total anticipated project costs for those developments are approximately $38.0 million and include the following completed or commenced projects:

Tenant	Location	Lease Structure	Lease Term	Actual or Anticipated Rent Commencement	Status
Hobby Lobby	Springfield, OH	Build-to-Suit	15 Years	Q1 2016	Completed
Family Fare Quick Stop	Marshall, MI	Ground Lease	10 Years	Q2 2016	Completed
Burger King(1)	Farr West, UT	Build-to-Suit	20 Years	Q2 2016	Completed
Chick-fil-A	Frankfort, KY	Ground Lease	20 Years	Q3 2016	Completed
Burger King(1)	Devil's Lake, ND	Build-to-Suit	20 Years	Q3 2016	Completed
Wawa	Orlando, FL	Ground Lease	20 Years	Q3 2016	Completed
Starbucks	North Lakeland, FL	Build-to-Suit	10 Years	Q4 2016	Completed
Burger King(1)	Hamilton, MT	Build-to-Suit	20 Years	Q4 2016	Completed
Texas Roadhouse	Mount Pleasant, MI	Ground Lease	15 Years	Q4 2016	Completed
Burger King(1)	West Fargo, ND	Build-to-Suit	20 Years	Q4 2016	Completed
Camping World	Tyler, TX	Build-to-Suit	20 Years	Q1 2017	Under Construction
Burger King(1)	Heber, UT	Build-to-Suit	20 Years	Q1 2017	Under Construction
Camping World	Georgetown, KY	Build-to-Suit	20 Years	Q3 2017	Under Construction
Orchard Supply	Boynton Beach, FL	Build-to-Suit	15 Years	Q3 2017	Under Construction

(1) Franchise restaurants operated by Meridian Restaurants Unlimited, LC.

Dispositions

During 2016, the Company sold four properties for aggregate gross proceeds of $29.7 million, which resulted in a gain of $10.0 million. The four properties sold are single tenant buildings, all leased to Walgreens (Port St. John, Florida; Rancho Cordova, California; Macomb, Michigan, and Silver Springs Shores, Florida).

During 2015, the Company sold eight properties for aggregate gross proceeds of $29.0 million, which resulted in a gain of $12.1 million. Dispositions included three land parcels, two single tenant buildings and three non-core community shopping centers (Marshall Plaza in Marshall, Michigan, Ferris Commons in Big Rapids, Michigan and Lakeland Plaza in Lakeland, Florida).

During 2014, the Company sold four properties for aggregate gross proceeds of $12.9 million, which resulted in a loss of $0.4 million. Dispositions included three non-core community shopping centers (Ironwood Commons in Ironwood, Michigan, Petoskey Town Center in Petoskey, Michigan and Chippewa Commons in Chippewa Falls, Wisconsin) as well as a ground lease parcel in East Lansing, Michigan.

Impairments

As a result of our review of Real Estate Investments we recognized the following real estate impairment charges for the year ended December 31(in thousands):

	2016		2015		2014

Continuing operations	$	-	$	-	$	3,020
Discontinued operations		-		-		-

Total	$	-	$	-	$	3,020

In 2014, we recognized impairment charges of $0.2 million and $2.8 million, for Petoskey Town Center and Chippewa Commons, respectively, which were included in continuing operations. Petoskey Town Center was under contract for sale, but not classified as held for sale at September 30, 2014 due to contingencies associated with the contract, and a $0.2 million impairment charge was taken to write down the carrying value of the property to an amount that reflected the sales price. The property was subsequently sold in the fourth quarter of 2014. In the second quarter of 2014, an anchor tenant at Chippewa Commons declined to exercise a lease extension option which we deemed would contribute to vacancy and diminished cash flows and result in a fair value that was less than the net book value of the asset. A $2.8 million impairment charge was taken to write down the carrying value of the property to an amount that reflected management’s best estimate of fair market value.