Real Estate

3 Months Ended

Mar. 31, 2020

As of March 31, 2020, the Company’s real estate portfolio consisted of 100 properties in 25 states consisting substantially of office, warehouse, and manufacturing facilities and one land parcel held for future development with a combined acquisition value of approximately $4.2 billion, including the allocation of the purchase price to above- and below-market lease valuation.

Depreciation expense for buildings and improvements for the three months ended March 31, 2020 was $22.7 million. Amortization expense for intangibles, including, but not limited to, tenant origination and absorption costs for the three months ended March 31, 2020 was $18.5 million.

2020 Acquisitions

The purchase price and other acquisition items for the property acquired during the three months ended March 31, 2020 are shown below:

Property

Location

Tenant/Major Lessee

Acquisition Date

Purchase Price

Square Feet

Acquisition Fees and Expenses

Year of Lease Expiration

Pepsi Bottling Ventures

North Carolina

PepsiCo

2/5/2020

$34,937

526,320

$386

2032

Real Estate - Valuation and Purchase Price Allocation

The Company allocates the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company's review of the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In calculating the “as-if vacant” value for the acquisition completed during the three months ended March 31, 2020, the Company used a discount rate of 5.50% to 6.25%.

In determining the fair value of intangible lease assets or liabilities, the Company also considers Level 3 inputs. Acquired above and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with asset acquisitions are capitalized during the period they are incurred.

The following table summarizes the purchase price allocation of the property acquired during the three months ended March 31, 2020.



Acquisition	Land Value		Building		Improvements		Tenant origination and absorption costs		In-place lease valuation - (below) market			Debt discount (premium)			Total ⁽¹⁾
Pepsi Bottling Ventures	$	3,407	$	26,813	$	954	$	4,970	$	(712	)	$	(109	)	$	35,323


(1)	The allocations noted above are based on a determination of the relative fair value of the total consideration provided and represent the amount paid including capitalized acquisition costs.

Intangibles

The Company allocated a portion of the acquired and contributed real estate asset value to in-place lease valuation, tenant origination and absorption cost, and other intangibles, net of the write-off of intangibles, as of March 31, 2020 and December 31, 2019:



	March 31, 2020			December 31, 2019
In-place lease valuation (above market)	$	44,012		$	44,012
In-place lease valuation (above market) - accumulated amortization	(34,011		)	(33,322		)
In-place lease valuation (above market), net	10,001			10,690

Ground leasehold interest (below market)	2,254			2,254
Ground leasehold interest (below market) - accumulated amortization	(170		)	(164		)
Ground leasehold interest (below market), net	2,084			2,090
Intangible assets, net	$	12,085		$	12,780

In-place lease valuation (below market)	$	(68,335	)	$	(67,622	)
Land Leasehold interest (above market)	(3,072		)	(3,073		)
In-place lease valuation & land leasehold interest - accumulated amortization	40,420			38,890
Intangible liabilities, net	$	(30,987	)	$	(31,805	)

Tenant origination and absorption cost	$	749,743		$	744,773
Tenant origination and absorption cost - accumulated amortization	(371,971		)	(354,379		)
Tenant origination and absorption cost, net	$	377,772		$	390,394

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, net, tenant origination and absorption costs, ground leasehold improvements, and other leasing costs as of March 31, 2020 for the next five years:



Year	In-place lease valuation, net			Tenant origination and absorption costs		Ground leasehold interest			Other leasing costs
Remaining 2020	$	(1,386	)	$	46,667	$	(218	)	$	3,994
2021	$	(2,119	)	$	57,989	$	(290	)	$	5,923
2022	$	(2,519	)	$	54,886	$	(290	)	$	5,911
2023	$	(2,466	)	$	50,084	$	(290	)	$	5,783
2024	$	(1,649	)	$	37,724	$	(291	)	$	5,514
2025	$	(1,182	)	$	27,447	$	(290	)	$	5,397

3. Real Estate (continued)

Restricted Cash

In conjunction with the acquisition of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. Additionally, an ongoing replacement reserve is funded by certain tenants pursuant to each tenant’s respective lease as follows:



	Balance as of
	March 31, 2020		December 31, 2019
Cash reserves⁽¹⁾	$	34,087	$	48,129
Restricted Lockbox	10,677		10,301
Total	$	44,764	$	58,430

^{(1) Approximately}^{$13.3 million}^{is held in escrow pending a tax-deferred real estate exchange, as permitted by Section 1031 of the Internal Revenue Code with the sale of 10 Commerce Center Parkway property.}