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Real Estate and Intangible Assets | 6 Months Ended
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Jun. 30, 2018
Real Estate [Abstract] |
REAL ESTATE AND INTANGIBLE ASSETS | REAL ESTATE AND INTANGIBLE ASSETS All of our properties are wholly-owned on a fee-simple basis, except where noted. The following table provides certain summary information about our 75 farms as of June 30, 2018 (dollars in thousands, except for footnotes):
Location |  | No. of Farms |  | Total Acres |  | Farm Acres |  | Net Cost Basis(1) |  | Encumbrances(2)
California |  | 29 |  | 8,241 |  | 7,465 |  | $ | 211,344 |  |  | $ | 147,559 |
Florida |  | 16 |  | 10,980 |  | 8,822 |  | 115,376 |  |  | 72,782 |
Arizona(3) |  | 6 |  | 6,280 |  | 5,228 |  | 49,956 |  |  | 22,677 |
Colorado |  | 10 |  | 31,450 |  | 24,513 |  | 41,752 |  |  | 24,509 |
Oregon |  | 4 |  | 2,313 |  | 2,003 |  | 19,863 |  |  | 11,934 |
Nebraska |  | 2 |  | 2,559 |  | 2,101 |  | 10,545 |  |  | 6,602 |
Washington |  | 1 |  | 746 |  | 417 |  | 9,115 |  |  | 5,325 |
Michigan |  | 5 |  | 446 |  | 291 |  | 4,989 |  |  | 2,786 |
North Carolina |  | 2 |  | 310 |  | 295 |  | 2,342 |  |  | 1,270 |
|  | 75 |  | 63,325 |  | 51,135 |  | $ | 465,282 |  |  | $ | 295,444 |
(1) | Consists of the initial acquisition price (including the costs allocated to both tangible and intangible assets acquired and liabilities assumed), plus subsequent improvements and other capitalized costs associated with the properties, and adjusted for accumulated depreciation and amortization. Includes Investments in real estate, net (excluding improvements paid for by the tenant) and Lease intangibles, net; plus net above-market lease values and lease incentives included in Other assets, net; and less net below-market lease values and other deferred revenue included in Other liabilities, net; each as shown on the accompanying Condensed Consolidated Balance Sheet.
(2) | Excludes approximately $2.0 million of debt issuance costs related to mortgage notes and bonds payable, included in Mortgage notes and bonds payable, net on the accompanying Condensed Consolidated Balance Sheet.
(3) | Includes two farms in which we own a leasehold interest via ground leases with the State of Arizona that expire in February 2022 and February 2025, respectively. In total, these two farms consist of 1,368 total acres and 1,221 farm acres and had a net cost basis of approximately $2.9 million as of June 30, 2018 (included in Lease intangibles, net on the accompanying Condensed Consolidated Balance Sheet).
Real Estate The following table sets forth the components of our investments in tangible real estate assets as of June 30, 2018, and December 31, 2017 (dollars in thousands):
|  | June 30, 2018 |  | December 31, 2017
Real estate: |  |  |  |
Land and land improvements |  | $ | 360,576 |  |  | $ | 356,316 |
Irrigation systems |  | 62,158 |  |  | 50,282 |
Buildings |  | 18,463 |  |  | 18,191 |
Horticulture |  | 35,928 |  |  | 34,803 |
Other improvements |  | 6,687 |  |  | 6,551 |
Real estate, at gross cost |  | 483,812 |  |  | 466,143 |
Accumulated depreciation |  | (20,538 | ) |  | (16,657 | )
Real estate, net |  | $ | 463,274 |  |  | $ | 449,486 |
Real estate depreciation expense on these tangible assets was approximately $2.0 million and $3.9 million for the three and six months ended June 30, 2018, respectively, and $1.4 million and $2.7 million for the three and six months ended June 30, 2017, respectively. Included in the figures above are amounts related to tenant improvements, which are improvements made on certain of our properties paid for by our tenants but owned by us. As of each of June 30, 2018, and December 31, 2017, we recorded tenant improvements, net of accumulated depreciation, of approximately $2.4 million. We recorded both depreciation expense and additional rental revenue related to these tenant improvements of approximately $74,000 and $150,000 for the three and six months ended June 30, 2018, respectively, and $53,000 and $89,000 for three and six months ended June 30, 2017, respectively. Intangible Assets and Liabilities The following table summarizes the carrying values of certain lease intangible assets and the related accumulated amortization as of June 30, 2018, and December 31, 2017 (dollars in thousands):
|  | June 30, 2018 |  | December 31, 2017
Lease intangibles: |  |  |  |
Leasehold interest – land |  | $ | 3,498 |  |  | $ | 3,498 |
In-place leases |  | 1,404 |  |  | 1,451 |
Leasing costs |  | 1,526 |  |  | 1,490 |
Tenant relationships |  | 439 |  |  | 439 |
Lease intangibles, at cost |  | 6,867 |  |  | 6,878 |
Accumulated amortization |  | (1,789 | ) |  | (1,386 | )
Lease intangibles, net |  | $ | 5,078 |  |  | $ | 5,492 |
Total amortization expense related to these lease intangible assets was approximately $253,000 and $546,000 for the three and six months ended June 30, 2018, respectively, and $210,000 and $348,000 for the three and six months ended June 30, 2017, respectively. The following table summarizes the carrying values of certain lease intangible assets or liabilities included in Other assets, net or Other liabilities, net, respectively, on the accompanying Condensed Consolidated Balance Sheets and the related accumulated amortization or accretion, respectively, as of June 30, 2018, and December 31, 2017 (dollars in thousands):
|  | June 30, 2018 |  | December 31, 2017
Intangible Asset or Liability |  | Deferred Rent Asset (Liability) |  | Accumulated (Amortization) Accretion |  | Deferred Rent Asset (Liability) |  | Accumulated (Amortization) Accretion
Above-market lease values and lease incentives(1) |  | $ | 26 |  |  | $ | (9 | ) |  | $ | 26 |  |  | $ | (5 | )
Below-market lease values and other deferred revenue(2) |  | (823 | ) |  | 159 |  |  | (823 | ) |  | 125 |
|  | $ | (797 | ) |  | $ | 150 |  |  | $ | (797 | ) |  | $ | 120 |
(1) | Above-market lease values and lease incentives are included as part of Other assets, net on the accompanying Condensed Consolidated Balance Sheets, and the related amortization is recorded as a reduction of rental income.
(2) | Below-market lease values and other deferred revenue are included as a part of Other liabilities, net on the accompanying Condensed Consolidated Balance Sheets, and the related accretion is recorded as an increase to rental income.
Total amortization related to above-market lease values and lease incentives was approximately $2,000 and $4,000 for the three and six months ended June 30, 2018, respectively, and $2,000 and $4,000 during the three and six months ended June 30, 2017, respectively. Total accretion related to below-market lease values and other deferred revenue was approximately $17,000 and $34,000 for the three and six months ended June 30, 2018, respectively, and $15,000 and $30,000 for the three and six months ended June 30, 2017, respectively. Acquisitions Upon our adoption of ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” during the three months ended December 31, 2016, most acquisitions, including those with a prior leasing history, are generally treated as an asset acquisition under ASC 360. For acquisitions accounted for as asset acquisitions under ASC 360, all acquisition-related costs are capitalized and included as part of the fair value allocation of the identifiable tangible and intangible assets acquired, other than those costs that directly related to originating new leases we execute upon acquisition, which are capitalized as part of leasing costs. In addition, total consideration for acquisitions may include a combination of cash and equity securities, such as OP Units. When OP Units are issued in connection with acquisitions, we determine the fair value of the OP Units issued based on the number of units issued multiplied by the closing price of the Company’s common stock on the date of acquisition. 2018 Acquisitions During the six months ended June 30, 2018, we acquired two new farms, which are summarized in the table below (dollars in thousands):
Property Name |  | Property Location |  | Acquisition Date |  | Total Acreage |  | No. of Farms |  | Primary Crop(s) |  | Lease Term |  | Renewal Options |  | Total Purchase Price |  | Acquisition Costs(1) |  | Annualized Straight-line Rent(2) |  | New Long-term Debt
Taft Highway(3) |  | Kern, CA |  | 1/31/2018 |  | 161 |  | 1 |  | Potatoes and Melons |  | N/A |  | N/A |  | $ | 2,945 |  |  | $ | 32 |  |  | $ | — |  |  | $ | 1,473 |
Cemetery Road |  | Van Buren, MI |  | 3/13/2018 |  | 176 |  | 1 |  | Blueberries |  | 9.6 years |  | N/A |  | 2,100 |  |  | 39 |  |  | 150 |  |  | 1,260 |
|  |  |  |  |  | 337 |  | 2 |  |  |  |  |  |  |  | $ | 5,045 |  |  | $ | 71 |  |  | $ | 150 |  |  | $ | 2,733 |
(1) | Unless noted otherwise, acquisitions were accounted for as asset acquisitions under ASC 360.
(2) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP.
(3) | Farm was purchased with no lease in place at the time of acquisition. On May 10, 2018, we entered into a new, short-term lease for a portion of the farm. The new lease is scheduled to expire on September 30, 2018, and provides for annualized straight-line rent of approximately $27,000.
During the three and six months ended June 30, 2018, in the aggregate, we recognized operating revenues of approximately $41,000 and $49,000, respectively, and a net loss of approximately $23,000 and $28,000, respectively, related to the above acquisitions. 2017 Acquisitions During the six months ended June 30, 2017, we acquired seven new farms, which are summarized in the table below (dollars in thousands).
Property Name |  | Property Location |  | Acquisition Date |  | Total Acreage |  | No. of Farms |  | Primary Crop(s) |  | Lease Term(1) |  | Renewal Options |  | Total Purchase Price |  | Acquisition Costs(2) |  | Annualized Straight-line Rent(3) |  | Net Long-term Debt
Citrus Boulevard |  | Martin, FL |  | 1/12/2017 |  | 3,748 |  | 1 |  | Organic Vegetables |  | 7.0 years |  | 3 (5 years) |  | $ | 54,000 |  |  | $ | 80 |  |  | $ | 2,926 |  |  | $ | 32,400 |
Spot Road (4) |  | Yuma, AZ |  | 6/1/2017 |  | 3,280 |  | 4 |  | Melons and Alfalfa Hay |  | 8.6 years |  | 1 (10 years) & 1 (2 years) |  | 27,500 |  |  | 88 |  |  | 1,673 |  |  | 15,300 |
Poplar Street |  | Bladen, NC |  | 6/2/2017 |  | 310 |  | 2 |  | Organic Blueberries |  | 9.6 years |  | 1 (5 years) |  | 2,169 |  |  | 49 |  |  | 122 |  | (5) | 1,301 |
|  |  |  |  |  | 7,338 |  | 7 |  |  |  |  |  |  |  | $ | 83,669 |  |  | $ | 217 |  |  | $ | 4,721 |  |  | $ | 49,001 |
(1) | Where more than one lease was assumed or executed, represents the weighted average lease term on the property.
(2) | Unless noted otherwise, acquisitions were accounted for as asset acquisitions under ASC 360.
(3) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP.
(4) | Includes two farms (1,368 total acres) acquired through a leasehold interest, with the State of Arizona as the lessor. These state leases expire in February 2022 (485 total acres) and February 2025 (883 total acres). In addition, in connection with the acquisition of this property, we assumed four in-place leases with us as the lessor or sublessor. Three of these leases are agricultural leases, with one lease expiring on June 30, 2019, and two leases expiring on September 15, 2026. The fourth lease is a residential lease that expires on September 30, 2019.
(5) | This lease provides for a variable rent component based on the gross crop revenues earned on the property. The figure above represents only the minimum cash guarantee under the lease.
During the three and six months ended June 30, 2017, in the aggregate, we recognized operating revenues of approximately $883,000 and $1.5 million, respectively, and earnings of approximately $429,000 and $809,000, respectively, related to the above acquisition. Purchase Price Allocations The allocation of the aggregate purchase price for the farms acquired during each of the six months ended June 30, 2018 and 2017 is as follows (dollars in thousands):
Acquisition Period |  | Land and Land Improvements |  | Buildings |  | Irrigation & Drainage Systems |  | Other Improvements |  | Horticulture |  | Leasehold Interest – Land |  | In-place Leases |  | Leasing Costs |  | Total Purchase Price
2018 Acquisitions |  | $ | 3,256 |  |  | $ | 123 |  |  | $ | 582 |  |  | $ | — |  |  | $ | 961 |  |  | $ | — |  |  | 76 |  |  | $ | 47 |  |  | $ | 5,045 |
2017 Acquisitions |  | 65,839 |  |  | 2,123 |  |  | 10,336 |  |  | 455 |  |  | 706 |  |  | 3,488 |  |  | 254 |  |  | 468 |  |  | 83,669 |
Acquired Intangibles and Liabilities The following table shows the weighted-average amortization periods (in years) for the intangible assets acquired and liabilities assumed in connection with new real estate acquired during the six months ended June 30, 2018 and 2017:
|  | Weighted-Average Amortization Period (in Years)
Intangible Assets and Liabilities |  | 2018 |  | 2017
Leasehold interest – land |  | 0.0 |  | 6.9
In-place leases |  | 9.6 |  | 9.1
Leasing costs |  | 9.6 |  | 9.2
Above-market lease values |  | 0.0 |  | 2.1
Below-market lease values and deferred revenue |  | 0.0 |  | 2.3
All intangible assets and liabilities | 9.6 |  | 7.3
Significant Existing Real Estate Activity Lease Renewals During the three months ended March 31, 2018, we terminated the leases on two of our farms in Cochise County, Arizona, early and entered into two new lease agreements with a new tenant. Each of the new leases is for a term of one year and provides for aggregate minimum rents of approximately $480,000, which represents a decrease of approximately $203,000 (approximately 29.7%) from that of the prior leases (before each of their terminations). However, each of the new leases also contains a variable rent component based on the total gross revenues earned by the tenants on the respective farms, whereas the prior leases were both fixed-rent leases. In addition, both of the new leases are pure, triple-net lease agreements, whereas one of the prior leases was a partial-net lease (with us responsible for the property taxes on the farm). In connection with one of the early lease terminations, on the termination date, the lease had a deferred rent liability balance of approximately $84,000. In accordance with ASC 360-10, we recognized this balance as additional rental income during the three months ended March 31, 2018 (on the lease termination date). In connection with the other early lease termination, a full allowance of the respective lease’s deferred rent asset balance (which was approximately $50,000) was recorded to bad debt expense during the three months ended December 31, 2017. No downtime was incurred as a result of the early terminations and re-leasing of these farms, nor were any leasing commissions or tenant improvements incurred in connection with the new leases. On June 11, 2018, we entered into a new 10-year lease agreement with a new, unrelated third-party tenant on the 169-acre farm located in Ventura County, California, previously farmed by Land Advisers. The new lease commenced on August 1, 2018, and provides for annualized straight-line rent of approximately $667,000, which represents a decrease of approximately $91,000, or 12.0%, from that of the previous lease that was assigned to Land Advisers (see Note 6, “Related-Party Transactions—TRS Lease Assumption” for further discussion on this lease assignment). However, the new lease is a pure, triple-net lease, whereas the previous lease was a partial-net lease (with us, as landlord, responsible for the property taxes on the farm), which is expected to result in annual tax savings of at least $108,000 per year. Land Exchange On June 7, 2018, we completed a transaction with the current tenant on one of our Florida farms where we exchanged land for total consideration consisting of both land and cash. As a result of the transaction, we sold 26 net acres for total cash proceeds of approximately $132,000 and, after closing costs, recognized a nominal loss on the transaction. Project Completion In connection with a lease amendment executed on one of our Florida properties in June 2017, we committed to providing additional capital to expand and upgrade the existing cooler on the property. These improvements were completed during the three months ended March 31, 2018, at a total cost of approximately $748,000. As a result of these improvements (and pursuant to the lease amendment), we expect to receive approximately $302,000 of additional rental income throughout the term of the lease, which expires on June 30, 2022. Property and Casualty Loss In January 2018, a lightning strike damaged the power plant that supplies power to one of our Arizona properties, causing damage to certain irrigation improvements on our property. We estimated the carrying value of the improvements damaged by the lightning strike to be approximately $129,000. During the three months ended March 31, 2018, we wrote down the carrying values of the damaged improvements by approximately $129,000, and, in accordance with ASC 610-30, “Revenue Recognition—Other Income—Gains and Losses on Involuntary Conversions,” recorded a corresponding property and casualty loss on the accompanying Condensed Consolidated Statement of Operations. Repairs were completed on the damaged irrigation improvements during the three months ended March 31, 2018. During the three months ended March 31, 2018, we incurred approximately $81,000 to repair the damaged improvements, of which approximately $34,000 was capitalized as real estate additions and $47,000 was recorded as repairs and maintenance expense, which is included within Property operating expenses on the accompanying Condensed Consolidated Statements of Operations. We are still in the process of assessing the amount expected to be recovered, as well as the collectability of such amounts; thus, no offset to the loss has been recorded as of June 30, 2018. Portfolio Diversification and Concentrations Diversification The following table summarizes the geographic locations, by state, of our farms with leases to unrelated third-party tenants in place as of June 30, 2018 and 2017 (dollars in thousands):
|  | As of and For the Six Months Ended June 30, 2018 |  | As of and For the Six Months Ended June 30, 2017
State |  | Number of Farms |  | Total Acres |  | % of Total Acres |  | Rental Revenue |  | % of Total Rental Revenue |  | Number of Farms |  | Total Acres |  | % of Total Acres |  | Rental Revenue |  | % of Total Rental Revenue
California(1) |  | 29 |  | 8,241 |  | 13.0% |  | $ | 6,061 |  |  | 45.5% |  | 22 |  | 6,713 |  | 11.6% |  | $ | 5,728 |  |  | 48.8%
Florida |  | 16 |  | 10,980 |  | 17.3% |  | 3,530 |  |  | 26.5% |  | 16 |  | 9,315 |  | 16.1% |  | 3,143 |  |  | 26.8%
Colorado |  | 10 |  | 31,450 |  | 49.7% |  | 1,372 |  |  | 10.3% |  | 9 |  | 30,170 |  | 52.1% |  | 1,345 |  |  | 11.4%
Arizona |  | 6 |  | 6,280 |  | 9.9% |  | 955 |  |  | 7.2% |  | 6 |  | 6,280 |  | 10.8% |  | 512 |  |  | 4.3%
Oregon |  | 4 |  | 2,313 |  | 3.7% |  | 618 |  |  | 4.6% |  | 4 |  | 2,313 |  | 4.0% |  | 589 |  |  | 5.0%
Nebraska |  | 2 |  | 2,559 |  | 4.0% |  | 290 |  |  | 2.2% |  | 2 |  | 2,559 |  | 4.4% |  | 290 |  |  | 2.5%
Washington |  | 1 |  | 746 |  | 1.2% |  | 242 |  |  | 1.8% |  | — |  | — |  | —% |  | — |  |  | —%
Michigan |  | 5 |  | 446 |  | 0.7% |  | 170 |  |  | 1.3% |  | 4 |  | 270 |  | 0.5% |  | 125 |  |  | 1.1%
North Carolina |  | 2 |  | 310 |  | 0.5% |  | 82 |  |  | 0.6% |  | 2 |  | 310 |  | 0.5% |  | 10 |  |  | 0.1%
TOTALS |  | 75 |  | 63,325 |  | 100.0% |  | $ | 13,320 |  |  | 100.0% |  | 65 |  | 57,930 |  | 100.0% |  | $ | 11,742 |  |  | 100.0%
(1) | According to the California Chapter of the American Society of Farm Managers and Rural Appraisers, there are eight distinct growing regions within California; our farms are spread across four of these growing regions.
Concentrations Credit Risk As of June 30, 2018, our farms were leased to 51 different, unrelated third-party tenants (plus one related-party tenant), with certain tenants leasing more than one farm. One unrelated tenant (“Tenant A”) leases five of our farms, and aggregate rental revenue attributable to Tenant A accounted for approximately $2.2 million, or 16.6%, of the rental revenue recorded during the six months ended June 30, 2018. If Tenant A fails to make rental payments, elects to terminate its leases prior to their expirations, or does not renew its leases (and we cannot re-lease the farms on satisfactory terms), there could be a material adverse effect on our financial performance and ability to continue operations. No other individual tenant represented greater than 10.0% of the total rental revenue recorded during the six months ended June 30, 2018. Geographic Risk As of June 30, 2018, 29 of the 75 farms we owned were located in California, 16 farms were located in Florida, and 10 farms were located in Colorado. Further, our California, Florida, and Colorado farms accounted for approximately $6.1 million (45.5%), $3.5 million (26.5%), and $1.4 million (10.3%), respectively, of the rental revenue recorded during the six months ended June 30, 2018. Though we seek to continue to further diversify geographically, as may be desirable or feasible, should an unexpected natural disaster occur where our properties are located, there could be a material adverse effect on our financial performance and ability to continue operations. None of our farms in California or Florida were materially impacted by the recent wildfires or hurricanes in those respective areas. No other single state accounted for more than 10.0% of the total rental revenue recorded during the six months ended June 30, 2018.

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- Definition The entire disclosure for long-lived, physical assets used in the normal conduct of business and not intended for resale. Includes, but is not limited to, accounting policies and methodology, roll forwards, depreciation, depletion and amortization expense, including composite depreciation, accumulated depreciation, depletion and amortization expense, useful lives and method used, income statement disclosures, assets held for sale and public utility disclosures. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 360 -URI http://asc.fasb.org/topic&trid=2155823 + Details
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