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Real Estate and Intangible Assets | 3 Months Ended
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Mar. 31, 2019
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 the 86 farms we owned as of March 31, 2019 (dollars in thousands, except for footnotes):
Location |  | No. of Farms |  | Total Acres |  | Farm Acres |  | Net Cost Basis(1) |  | Encumbrances(2)
California |  | 33 |  | 10,147 |  | 9,336 |  | $ | 249,319 |  |  | $ | 166,109 |
Florida |  | 22 |  | 17,184 |  | 12,981 |  | 154,297 |  |  | 96,772 |
Arizona(3) |  | 6 |  | 6,280 |  | 5,228 |  | 55,340 |  |  | 22,008 |
Colorado |  | 10 |  | 31,448 |  | 24,513 |  | 41,790 |  |  | 25,046 |
Nebraska |  | 3 |  | 3,254 |  | 2,701 |  | 12,847 |  |  | 8,490 |
Washington |  | 1 |  | 746 |  | 417 |  | 8,709 |  |  | 5,190 |
Texas |  | 1 |  | 3,667 |  | 2,219 |  | 8,393 |  |  | 5,280 |
Oregon |  | 3 |  | 418 |  | 363 |  | 6,003 |  |  | 3,312 |
Michigan |  | 5 |  | 446 |  | 291 |  | 4,990 |  |  | 2,740 |
North Carolina |  | 2 |  | 310 |  | 295 |  | 2,313 |  |  | 1,270 |
|  | 86 |  | 73,900 |  | 58,344 |  | $ | 544,001 |  |  | $ | 336,217 |
(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 Sheets.
(2) | Excludes approximately $2.3 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 an aggregate net cost basis of approximately $2.5 million as of March 31, 2019 (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 March 31, 2019, and December 31, 2018 (dollars in thousands):
| March 31, 2019 |  | December 31, 2018
Real estate: |  |  |
Land and land improvements | $ | 419,602 |  |  | $ | 417,310 |
Irrigation and drainage systems | 73,864 |  |  | 71,583 |
Horticulture | 49,057 |  |  | 48,894 |
Farm-related facilities | 18,534 |  |  | 18,510 |
Other site improvements | 6,717 |  |  | 6,707 |
Real estate, at gross cost | 567,774 |  |  | 563,004 |
Accumulated depreciation | (26,323 | ) |  | (24,051 | )
Real estate, net | $ | 541,451 |  |  | $ | 538,953 |
Real estate depreciation expense on these tangible assets was approximately $2.3 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively. Included in the figures above are amounts related to improvements made on certain of our properties paid for by our tenants but owned by us, or tenant improvements. As of March 31, 2019, and December 31, 2018, we recorded tenant improvements, net of accumulated depreciation, of approximately $2.3 million and $2.4 million, respectively. We recorded both depreciation expense and additional lease revenue related to these tenant improvements of approximately $74,000 and $76,000 during the three months ended March 31, 2019 and 2018, respectively. Intangible Assets and Liabilities The following table summarizes the carrying values of certain lease intangible assets and the related accumulated amortization as of March 31, 2019, and December 31, 2018 (dollars in thousands):
|  | March 31, 2019 |  | December 31, 2018
Lease intangibles: |  |  |  |
Leasehold interest – land |  | $ | 3,498 |  |  | $ | 3,498 |
In-place leases |  | 2,046 |  |  | 2,046 |
Leasing costs |  | 1,965 |  |  | 1,963 |
Tenant relationships |  | 414 |  |  | 414 |
Lease intangibles, at cost |  | 7,923 |  |  | 7,921 |
Accumulated amortization |  | (2,559 | ) |  | (2,235 | )
Lease intangibles, net |  | $ | 5,364 |  |  | $ | 5,686 |
Total amortization expense related to these lease intangible assets was approximately $324,000 and $293,000 for the three months ended March 31, 2019 and 2018, 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 March 31, 2019, and December 31, 2018 (dollars in thousands):
|  | March 31, 2019 |  | December 31, 2018
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) |  | $ | 216 |  |  | $ | (51 | ) |  | $ | 126 |  |  | $ | (18 | )
Below-market lease values and other deferred revenue(2) |  | (917 | ) |  | 240 |  |  | (917 | ) |  | 202 |
|  | $ | (701 | ) |  | $ | 189 |  |  | $ | (791 | ) |  | $ | 184 |
(1) | Net 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 Lease revenue on the accompanying Condensed Consolidated Statements of Operations.
(2) | Net 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 Lease revenue on the accompanying Condensed Consolidated Statements of Operations.
Total amortization related to above-market lease values and lease incentives was approximately $33,000 and $2,000 for the three months ended March 31, 2019 and 2018, respectively. Total accretion related to below-market lease values and other deferred revenue was approximately $38,000 and $17,000 for the three months ended March 31, 2019 and 2018, respectively. Acquisitions Upon our adoption of ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” on October 1, 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, other than those costs that directly related to either originating new leases we execute upon acquisition or reviewing in-place leases we assumed upon acquisition, are capitalized and included as part of the fair value allocation of the identifiable tangible and intangible assets acquired or liabilities assumed. Upon our adoption of ASU 2016-02 on January 1, 2019, costs that directly related to either negotiating and originating new leases or reviewing assumed leases (generally, external legal costs) are expensed as incurred, whereas these costs were generally capitalized as part of leasing costs under the previous leasing standard. 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. Unless otherwise noted, all properties acquired during 2019 and 2018 were accounted for as asset acquisitions under ASC 360. 2019 Acquisitions During the three months ended March 31, 2019, we acquired one new farm, which is 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
Somerset Road |  | Lincoln, NE |  | 1/22/2019 |  | 695 |  | 1 |  | Popcorn and edible beans |  | 4.9 years |  | 1 (5 years) |  | $ | 2,400 |  |  | $ | 31 |  |  | $ | 126 |  |  | $ | 1,440 |
|  |  |  |  |  | 695 |  | 1 |  |  |  |  |  |  |  | $ | 2,400 |  |  | $ | 31 |  |  | $ | 126 |  |  | $ | 1,440 |
(1) | Includes approximately $4,000 of aggregate external legal fees associated with negotiating and originating the lease associated with this acquisition, which costs were expensed in the period incurred.
(2) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP, and excludes contingent rental payments, such as participation rents.
During the three months ended March 31, 2019, we recognized operating revenues of approximately $24,000 and net income of approximately $2,000 related to the above acquisition. 2018 Acquisitions During the three months ended March 31, 2018, we acquired two new farms, which are summarized in the table below (dollars in thousands, except for footnotes):
Property Name |  | Property Location |  | Acquisition Date |  | Total Acreage |  | No. of Farms |  | Primary Crop(s) |  | Lease Term |  | Renewal Options |  | Total Purchase Price |  | Acquisition Costs |  | Annualized Straight-line Rent(1) |  | New Long-term Debt
Taft Highway(2) |  | 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 |  | None |  | 2,100 |  |  | 39 |  |  | 150 |  |  | 1,260 |
|  |  |  |  |  | 337 |  | 2 |  |  |  |  |  |  |  | $ | 5,045 |  |  | $ | 71 |  |  | $ | 150 |  |  | $ | 2,733 |
(1) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the lease, as required under GAAP, and excludes contingent rental payments, such as participation rents.
(2) | Farm was purchased with no lease in place at the time of acquisition.
During the three months ended March 31, 2018, in the aggregate, we recognized operating revenues of approximately $8,000 and a net loss of approximately $5,000 related to the above acquisitions. Purchase Price Allocations The allocation of the aggregate purchase price for the farms acquired during each of the three months ended March 31, 2019 and 2018 is as follows (dollars in thousands):
Acquisition Period |  | Land and Land Improvements |  | Irrigation & Drainage Systems |  | Horticulture |  | Farm-related Facilities |  | In-place Leases |  | Leasing Costs |  | Total Purchase Price
2019 Acquisitions |  | $ | 2,090 |  |  | $ | 310 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,400 |
2018 Acquisitions |  | 3,256 |  |  | 582 |  |  | 961 |  |  | 123 |  |  | 76 |  |  | 47 |  |  | 5,045 |
Significant Existing Real Estate Activity Leasing Activity The following table summarizes certain leasing activity that occurred on our existing properties during the three months ended March 31, 2019 (dollars in thousands, except footnotes):
|  |  |  | PRIOR LEASES(1) |  | NEW LEASES(2)
Farm Locations | Number of Leases | Total Farm Acres |  | Total Annualized Straight-line Rent(3) | # of Leases with Participation Rents | Lease Structures (# of NNN / NN)(4) |  | Total Annualized Straight-line Rent(3) | Wtd. Avg. Term (Years) | # of Leases with Participation Rents | Lease Structures (# of NNN / NN)(4)
AZ, CA, FL, MI, & NE | 11 | 4,375 |  | $ | 2,143 |  | 1 | 8 / 4 |  | $ | 2,127 |  | 3.2 | 3 | 8 / 3
(1) | Includes a farm that was previously vacant.
(2) | In connection with certain of these leases, we committed to provide aggregate capital of up to $420,000 for certain improvements on these farms.
(3) | Annualized straight-line rent is based on the minimum cash rental payments guaranteed under the leases (presented on an annualized basis), as required under GAAP, and excludes contingent rental payments, such as participation rents.
(4) | “NNN” refers to leases under triple-net lease arrangements, and “NN” refers to leases under partial-net lease arrangements. For a description of each of these types of lease arrangements, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Leases—General.”
See Note 10, “Subsequent Events—Leasing Activity” for additional leasing activity that occurred subsequent to March 31, 2019. Project Completion During the year ended December 31, 2018, we replaced 23 irrigation pivots on one of our properties in Colorado at a total cost of approximately $1.4 million. Pursuant to a lease amendment executed during the three months ended March 31, 2019, in connection with this project, we will earn additional straight-line rental income of approximately $117,000 per year throughout the remaining term of the lease, which expires on February 28, 2021. Future Minimum Lease Payments We account for all of our leasing arrangements in which we are the lessor as operating leases. The majority of our leases are subject to fixed rental increases, and a small subset of our lease portfolio includes lease payments based on an index, such as the consumer price index (“CPI”). In addition, several of our leases contain participation rent components based on the gross revenues earned on the respective farms. Most of our leases also include tenant renewal options; however, these renewal options are generally based on then-current market rates and are therefore typically excluded from the determination of the minimum lease term. Our leases do not generally include tenant termination options. The following table summarizes the future lease payments to be received under non-cancelable leases as of March 31, 2019, and December 31, 2018 (dollars in thousands):
|  | Future Lease Payments(1)
Period |  | March 31, 2019 |  | December 31, 2018
2019 |  | $ | 20,546 |  |  | $ | 30,290 |
2020 |  | 28,179 |  |  | 26,917 |
2021 |  | 21,131 |  |  | 20,980 |
2022 |  | 20,285 |  |  | 19,775 |
2023 |  | 19,718 |  |  | 19,413 |
Thereafter |  | 62,793 |  |  | 59,934 |
|  | $ | 172,652 |  |  | $ | 177,309 |
(1) | Excludes variable rent payments, such as potential rent increases that are based on CPI or future contingent rents based on a percentage of the gross revenues earned on the respective farms.
Portfolio Diversification and Concentrations Diversification The following table summarizes the geographic locations (by state) of our farms owned and with leases in place as of and for the three months ended March 31, 2019 and 2018 (dollars in thousands):
|  | As of and For the Three Months Ended March 31, 2019 |  | As of and For the Three Months Ended March 31, 2018
State |  | Number of Farms |  | Total Acres |  | % of Total Acres |  | Lease Revenue |  | % of Total Lease Revenue |  | Number of Farms |  | Total Acres |  | % of Total Acres |  | Lease Revenue |  | % of Total Lease Revenue
California(1) |  | 33 |  | 10,147 |  | 13.7% |  | $ | 3,734 |  |  | 47.7% |  | 29 |  | 8,241 |  | 13.0% |  | $ | 3,030 |  |  | 45.3%
Florida |  | 22 |  | 17,184 |  | 23.2% |  | 2,339 |  |  | 29.9% |  | 16 |  | 11,006 |  | 17.4% |  | 1,754 |  |  | 26.2%
Colorado |  | 10 |  | 31,448 |  | 42.6% |  | 696 |  |  | 8.9% |  | 10 |  | 31,450 |  | 49.6% |  | 686 |  |  | 10.3%
Arizona |  | 6 |  | 6,280 |  | 8.5% |  | 539 |  |  | 6.9% |  | 6 |  | 6,280 |  | 9.9% |  | 532 |  |  | 7.9%
Texas |  | 1 |  | 3,667 |  | 5.0% |  | 131 |  |  | 1.7% |  | — |  | — |  | —% |  | — |  |  | —%
Oregon |  | 3 |  | 418 |  | 0.6% |  | 128 |  |  | 1.6% |  | 4 |  | 2,313 |  | 3.7% |  | 307 |  |  | 4.6%
Washington |  | 1 |  | 746 |  | 1.0% |  | 122 |  |  | 1.5% |  | 1 |  | 746 |  | 1.2% |  | 121 |  |  | 1.8%
North Carolina |  | 2 |  | 310 |  | 0.4% |  | 60 |  |  | 0.8% |  | 2 |  | 310 |  | 0.5% |  | 49 |  |  | 0.7%
Nebraska |  | 3 |  | 3,254 |  | 4.4% |  | 60 |  |  | 0.8% |  | 2 |  | 2,559 |  | 4.0% |  | 145 |  |  | 2.2%
Michigan |  | 5 |  | 446 |  | 0.6% |  | 21 |  |  | 0.2% |  | 5 |  | 446 |  | 0.7% |  | 70 |  |  | 1.0%
TOTALS |  | 86 |  | 73,900 |  | 100.0% |  | $ | 7,830 |  |  | 100.0% |  | 75 |  | 63,351 |  | 100.0% |  | $ | 6,694 |  |  | 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 March 31, 2019, our farms were leased to 64 different, unrelated third-party tenants, with certain tenants leasing more than one farm. One unrelated third-party tenant (“Tenant A”) leases five of our farms, and aggregate lease revenue attributable to Tenant A accounted for approximately $1.1 million, or 14.1%, of the total lease revenue recorded during the three months ended March 31, 2019. 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 lease revenue recorded during the three months ended March 31, 2019. Geographic Risk Farms located in California and Florida accounted for approximately $3.7 million (47.7%) and $2.3 million (29.9%), respectively, of the total lease revenue recorded during the three months ended March 31, 2019. 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. No other single state accounted for more than 10.0% of our total lease revenue recorded during the three months ended March 31, 2019.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 360 -URI http://asc.fasb.org/topic&trid=2155823 + Details
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