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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________________________________________________________________
 
FORM 10-Q 
____________________________________________________________________________
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2018
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to              .
 
Commission file number 1-34907
 
____________________________________________________________________________
 
STAG INDUSTRIAL, INC.
(Exact name of registrant as specified in its charter)
 
____________________________________________________________________________

Maryland
27-3099608
(State or other jurisdiction
of incorporation or organization)
(IRS Employer
Identification No.)
 
 
One Federal Street, 23rd Floor
Boston, Massachusetts
02110
(Address of principal executive offices)
(Zip Code)
 
(617) 574-4777
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
 
 
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred stock as of the latest practicable date.
 
Class
 
Outstanding at April 30, 2018
Common Stock ($0.01 par value)
 
97,233,361

6.625% Series B Cumulative Redeemable Preferred Stock ($0.01 par value)
 
2,800,000

6.875% Series C Cumulative Redeemable Preferred Stock ($0.01 par value)
 
3,000,000

 


Table of Contents

STAG INDUSTRIAL, INC.
Table of Contents 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Part I. Financial Information
Item 1.  Financial Statements

STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)
 
March 31, 2018

December 31, 2017
Assets
 

 
Rental Property:
 

 
Land
$
324,734


$
321,560

Buildings and improvements, net of accumulated depreciation of $266,158 and $249,057, respectively
1,958,432


1,932,764

Deferred leasing intangibles, net of accumulated amortization of $215,597 and $280,642, respectively
305,188


313,253

Total rental property, net
2,588,354


2,567,577

Cash and cash equivalents
10,455


24,562

Restricted cash
7,259


3,567

Tenant accounts receivable, net
34,013


33,602

Prepaid expenses and other assets
29,776


25,364

Interest rate swaps
12,577


6,079

Assets held for sale, net
13,498


19,916

Total assets
$
2,695,932


$
2,680,667

Liabilities and Equity
 

 
Liabilities:
 

 
Unsecured credit facility
$
218,000


$
271,000

Unsecured term loans, net
521,506


446,265

Unsecured notes, net
398,226


398,234

Mortgage notes, net
57,851


58,282

Accounts payable, accrued expenses and other liabilities
38,294


43,216

Interest rate swaps


1,217

Tenant prepaid rent and security deposits
21,876


19,045

Dividends and distributions payable
14,460


11,880

Deferred leasing intangibles, net of accumulated amortization of $11,321 and $13,555, respectively
20,720


21,221

Total liabilities
1,290,933


1,270,360

Commitments and contingencies (Note 10)



Equity:
 

 
Preferred stock, par value $0.01 per share, 15,000,000 shares authorized,
 

 
Series B, 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at March 31, 2018 and December 31, 2017
70,000


70,000

Series C, 3,000,000 shares (liquidation preference of $25.00 per share) issued and outstanding at March 31, 2018 and December 31, 2017
75,000


75,000

Common stock, par value $0.01 per share, 150,000,000 shares authorized, 97,229,588 and 97,012,543 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
972


970

Additional paid-in capital
1,724,627


1,725,825

Common stock dividends in excess of earnings
(530,257
)

(516,691
)
Accumulated other comprehensive income
11,581


3,936

Total stockholders’ equity
1,351,923


1,359,040

Noncontrolling interest
53,076


51,267

Total equity
1,404,999


1,410,307

Total liabilities and equity
$
2,695,932


$
2,680,667

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
 
Three months ended March 31,
 
2018

2017
Revenue
    


    

Rental income
$
69,928


$
59,222

Tenant recoveries
13,199


10,185

Other income
156


73

Total revenue
83,283


69,480

Expenses
 


 

Property
17,499


13,276

General and administrative
8,748


8,771

Property acquisition costs


740

Depreciation and amortization
39,965


35,953

Loss on impairments
2,934



Loss on involuntary conversion

 
330

Other expenses
291


194

Total expenses
69,437


59,264

Other income (expense)
 


 

Interest expense
(11,386
)

(10,472
)
Gain on the sales of rental property, net
22,689


325

Total other income (expense)
11,303


(10,147
)
Net income
$
25,149


$
69

Less: income (loss) attributable to noncontrolling interest after preferred stock dividends
954


(103
)
Net income attributable to STAG Industrial, Inc.
$
24,195


$
172

Less: preferred stock dividends
2,448


2,448

Less: amount allocated to participating securities
71


83

Net income (loss) attributable to common stockholders
$
21,676


$
(2,359
)
Weighted average common shares outstanding — basic
97,021


81,808

Weighted average common shares outstanding — diluted
97,323


81,808

Net income (loss) per share — basic and diluted
 


 

Net income (loss) per share attributable to common stockholders — basic
$
0.22

 
$
(0.03
)
Net income (loss) per share attributable to common stockholders — diluted
$
0.22

 
$
(0.03
)
The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
 
Three months ended March 31,
 
2018
 
2017
Net income
$
25,149

 
$
69

Other comprehensive income:
 
 
 
Income on interest rate swaps
7,723

 
1,212

Other comprehensive income
7,723

 
1,212

Comprehensive income
32,872

 
1,281

(Income) loss attributable to noncontrolling interest after preferred stock dividends
(954
)
 
103

Other comprehensive income attributable to noncontrolling interest
(325
)
 
(52
)
Comprehensive income attributable to STAG Industrial, Inc.
$
31,593

 
$
1,332

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Equity
(unaudited, in thousands, except share data)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Common Stock Dividends in excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Noncontrolling Interest - Unit holders in Operating Partnership
 
Total Equity
 
 
Shares
 
Amount
 
 
 
 
 
 
Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
145,000

 
97,012,543

 
$
970

 
$
1,725,825

 
$
(516,691
)
 
$
3,936

 
$
1,359,040

 
$
51,267

 
$
1,410,307

Cash flow hedging instruments cumulative effect adjustment (Note 2)

 

 

 

 
(258
)
 
247

 
(11
)
 
11

 

Offering costs

 

 

 
(107
)
 

 

 
(107
)
 

 
(107
)
Dividends and distributions, net
(2,448
)
 

 

 

 
(34,518
)
 

 
(36,966
)
 
(1,813
)
 
(38,779
)
Non-cash compensation activity, net

 
71,373

 
1

 
(855
)
 
(537
)
 

 
(1,391
)
 
2,097

 
706

Redemption of common units to common stock

 
145,672

 
1

 
1,823

 

 

 
1,824

 
(1,824
)
 

Rebalancing of noncontrolling interest

 

 

 
(2,059
)
 

 

 
(2,059
)
 
2,059

 

Other comprehensive income

 

 

 

 

 
7,398

 
7,398

 
325

 
7,723

Net income
2,448

 

 

 

 
21,747

 

 
24,195

 
954

 
25,149

Balance, March 31, 2018
$
145,000

 
97,229,588

 
$
972

 
$
1,724,627

 
$
(530,257
)
 
$
11,581

 
$
1,351,923

 
$
53,076

 
$
1,404,999

Three months ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
145,000

 
80,352,304

 
$
804

 
$
1,293,706

 
$
(410,978
)
 
$
(1,496
)
 
$
1,027,036

 
$
39,890

 
$
1,066,926

Proceeds from sales of common stock

 
2,843,907

 
28

 
68,515

 

 

 
68,543

 

 
68,543

Offering costs

 

 

 
(1,068
)
 

 

 
(1,068
)
 

 
(1,068
)
Dividends and distributions, net
(2,448
)
 

 

 

 
(28,881
)
 

 
(31,329
)
 
(1,814
)
 
(33,143
)
Non-cash compensation activity, net

 
37,353

 

 
454

 
(194
)
 

 
260

 
1,171

 
1,431

Redemption of common units to common stock

 
145,029

 
1

 
1,592

 

 

 
1,593

 
(1,593
)
 

Rebalancing of noncontrolling interest

 

 

 
(2,248
)
 

 

 
(2,248
)
 
2,248

 

Other comprehensive income

 

 

 

 

 
1,160

 
1,160

 
52

 
1,212

Net income
2,448

 

 

 

 
(2,276
)
 

 
172

 
(103
)
 
69

Balance, March 31, 2017
$
145,000

 
83,378,593

 
$
833

 
$
1,360,951

 
$
(442,329
)
 
$
(336
)
 
$
1,064,119

 
$
39,851

 
$
1,103,970

The accompanying notes are an integral part of these consolidated financial statements.

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STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Three months ended March 31,
 
2018
 
2017
Cash flows from operating activities:
    
 
    
Net income
$
25,149

 
$
69

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,965

 
35,953

Loss on impairments
2,934

 

Loss on involuntary conversion

 
330

Non-cash portion of interest expense
534

 
345

Intangible amortization in rental income, net
1,207

 
1,296

Straight-line rent adjustments, net
(2,781
)
 
(967
)
Dividends on forfeited equity compensation
7

 
1

Gain on the sales of rental property, net
(22,689
)
 
(325
)
Non-cash compensation expense
2,220

 
2,387

Change in assets and liabilities:
 
 
 
Tenant accounts receivable, net
848

 
157

Prepaid expenses and other assets
(5,531
)
 
(5,723
)
Accounts payable, accrued expenses and other liabilities
(2,720
)
 
(4,457
)
Tenant prepaid rent and security deposits
2,831

 
2,342

Total adjustments
16,825

 
31,339

Net cash provided by operating activities
41,974

 
31,408

Cash flows from investing activities:
 
 
 
Acquisitions of land and buildings and improvements
(67,077
)
 
(84,689
)
Additions of land and building and improvements
(6,317
)
 
(6,015
)
Proceeds from sales of rental property, net
49,631

 
3,919

Proceeds from insurance on involuntary conversion

 
439

Acquisition deposits, net
(605
)
 
(645
)
Acquisitions of deferred leasing intangibles
(11,744
)
 
(15,098
)
Net cash used in investing activities
(36,112
)
 
(102,089
)
Cash flows from financing activities:
 
 
 
Proceeds from unsecured credit facility
110,000

 
141,000

Repayment of unsecured credit facility
(163,000
)
 
(98,000
)
Proceeds from unsecured term loans
75,000

 

Repayment of mortgage notes
(462
)
 
(12,167
)
Payment of loan fees and costs
(3
)
 
(35
)
Dividends and distributions
(36,200
)
 
(32,723
)
Proceeds from sales of common stock

 
68,543

Repurchase and retirement of share-based compensation
(1,524
)
 
(969
)
Offering costs
(88
)
 
(971
)
Net cash provided by (used in) financing activities
(16,277
)
 
64,678

Decrease in cash and cash equivalents and restricted cash
(10,415
)
 
(6,003
)
Cash and cash equivalents and restricted cash—beginning of period
28,129

 
21,805

Cash and cash equivalents and restricted cash—end of period
$
17,714

 
$
15,802

Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest
$
11,057

 
$
10,568

Supplemental schedule of non-cash investing and financing activities
 
 
 
Additions to building and other capital improvements
$

 
$
(503
)
Partial disposal of building due to involuntary conversion of building
$

 
$
221

Investing other receivables due to involuntary conversion of building
$

 
$
(221
)
Change in additions of land, building, and improvements included in accounts payable, accrued expenses, and other liabilities
$
1,908

 
$
1,385

Additions to building and other capital improvements from non-cash compensation
$
(4
)
 
$
(7
)
Change in loan fees, costs, and offering costs included in accounts payable, accrued expenses, and other liabilities
$
(90
)
 
$
(67
)
Dividends and distributions accrued
$
14,460

 
$
10,149

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

STAG Industrial, Inc.
Notes to Consolidated Financial Statements
(unaudited)
1. Organization and Description of Business

STAG Industrial, Inc. (the “Company”) is an industrial real estate operating company focused on the acquisition and operation of single-tenant, industrial properties throughout the United States. The Company was formed as a Maryland corporation and has elected to be treated and intends to continue to qualify as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company is structured as an umbrella partnership REIT, commonly called an UPREIT, and owns substantially all of its assets and conducts substantially all of its business through its operating partnership, STAG Industrial Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). As of March 31, 2018 and December 31, 2017, the Company owned a 95.8% and 95.9%, respectively, common equity interest in the Operating Partnership. The Company, through its wholly owned subsidiary, is the sole general partner of the Operating Partnership. As used herein, the “Company” refers to STAG Industrial, Inc. and its consolidated subsidiaries and partnerships, including the Operating Partnership, except where context otherwise requires.

As of March 31, 2018, the Company owned 360 buildings in 37 states with approximately 70.8 million rentable square feet, consisting of 291 warehouse/distribution buildings, 55 light manufacturing buildings, and 14 flex/office buildings. The Company’s buildings were approximately 94.7% leased to 312 tenants as of March 31, 2018.

2. Summary of Significant Accounting Policies

Interim Financial Information
 
The accompanying interim financial statements have been presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements include all adjustments, consisting of normal recurring items, necessary for their fair statement in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Basis of Presentation

The Company’s consolidated financial statements include the accounts of the Company, the Operating Partnership and their subsidiaries. Interests in the Operating Partnership not owned by the Company are referred to as “Noncontrolling Common Units.” These Noncontrolling Common Units are held by other limited partners in the form of common units (“Other Common Units”) and long term incentive plan units (“LTIP units”) issued pursuant to the STAG Industrial, Inc. 2011 Equity Incentive Plan, as amended (the “2011 Plan”). All significant intercompany balances and transactions have been eliminated in the consolidation of entities. The financial statements of the Company are presented on a consolidated basis for all periods presented.

Reclassifications and New Accounting Standards

Certain prior year amounts have been reclassified to conform to the current year presentation.

New Accounting Standards Adopted

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. This standard is effective for fiscal years beginning after December 15, 2018 and interim periods within those years, with early adoption permitted, and the Company adopted this standard effective January 1, 2018 using the modified retrospective transition method. The adoption of this standard resulted in a cumulative effect adjustment of approximately $0.3 million recorded as an increase to common stock dividends in excess of earnings and an increase to accumulated other comprehensive income as of January 1, 2018 in the accompanying Consolidated Statements of Equity.


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In May 2017, the FASB issued ASU 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting, which provides updated guidance about which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting under the topic. This standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, and the Company adopted this standard prospectively effective January 1, 2018. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new standard was issued as part of the new revenue standard (ASU 2014-09, as discussed below), and defines “in substance nonfinancial asset,” unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. As a result of the new guidance, the guidance specific to real estate sales in Subtopic 360-20 was eliminated, and sales and partial sales of real estate assets will now be subject to the same derecognition model as all other nonfinancial assets. This standard is effective at the same time an entity adopts ASU 2014-09, which the Company adopted effective January 1, 2018. The Company adopted this standard effective January 1, 2018 using the modified retrospective approach. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard provides a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This standard is effective for annual periods beginning after December 15, 2017 and interim periods within those periods, and the Company adopted this standard prospectively effective January 1, 2018. As a result, it is expected that the majority of the Company's acquisitions will be accounted for as asset acquisitions, whereas under the former guidance the majority of the Company's acquisitions had been accounted for as business combinations. The most significant difference between the two accounting models that impacts the Company's consolidated financial statements is that in an asset acquisition, property acquisition costs are generally a component of the consideration transferred to acquire a group of assets and are capitalized as a component of the cost of the assets, whereas in a business combination, property acquisition costs are expensed and not included as part of the consideration transferred.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires that the statement of cash flows explain the changes during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This standard is effective for fiscal years beginning after December 15, 2017 and the Company adopted this standard effective January 1, 2018. As a result, the Company has included restricted cash with cash and cash equivalents when reconciling the beginning and end of period total amounts on the accompanying Consolidated Statements of Cash Flows. The effects of this standard were applied retrospectively to all prior periods presented. For the three months ended March 31, 2017, the effect of the change in accounting principle was an increase in cash provided by operating activities of approximately $0.3 million and an increase in cash used in investing activities of approximately $1.1 million on the accompanying Consolidated Statements of Cash Flows.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for the annual periods beginning after December 31, 2017 and for annual periods and interim periods within those years, and the Company adopted this standard prospectively effective January 1, 2018. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. While lease contracts with customers, which constitute a vast majority of the Company's revenues, are specifically excluded from the model's scope, certain of the Company's revenue streams may be impacted by the new guidance. Once the new guidance setting forth principles for the recognition, measurement, presentation and disclosure of leases (ASU 2016-02, as discussed below) goes into effect, the new revenue standard may apply to executory costs and other components of revenue due under leases that are deemed to be non-lease components (such as common area maintenance and provision of utilities), even when the revenue for such activities is not separately stipulated in the lease. In that case, revenue from these items previously recognized on a straight-line basis under current lease guidance would be recognized under the new revenue guidance as the related services are delivered. As a result,

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while the total revenue recognized over time would not differ under the new guidance, the recognition pattern may be different. The Company is in the process of evaluating the significance of the difference in the recognition pattern that would result from this change upon the adoption of ASU 2016-02 on January 1, 2019. Additionally, the new revenue guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard effective January 1, 2018 using the modified retrospective approach. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

New Accounting Standards Issued but not yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Topic 842 supersedes the previous leases standard, Topic 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 is expected to impact the Company’s consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee, which will result in the recording of a right of use asset and the related lease liability. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard must be adopted using a modified retrospective transition and will require application of the new guidance at the beginning of the earliest comparative period. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on the Company’s financial position or results of operations, and plans to adopt this standard effective January 1, 2019.

Restricted Cash

Restricted cash may include tenant security deposits and cash held in escrow for real estate taxes and capital improvements as required in various mortgage note agreements. Restricted cash also may include amounts held by the Company’s transfer agent for preferred stock dividends that are distributed subsequent to period end. The following table presents a reconciliation of cash and cash equivalents and restricted cash reported on the accompanying Consolidated Balance Sheets to amounts reported on the accompanying Consolidated Statements of Cash Flows (in thousands).
 
 
As of March 31,
 
 
2018
 
2017
Cash and cash equivalents
 
$
10,455

 
$
7,082

Restricted cash
 
7,259

 
8,720

Total cash and cash equivalents and restricted cash
 
$
17,714

 
$
15,802


Tenant Accounts Receivable, net

As of March 31, 2018 and December 31, 2017, the Company had an allowance for doubtful accounts of approximately $0.1 million and $0.1 million, respectively.

As of March 31, 2018 and December 31, 2017, the Company had accrued rental income, net of allowance of approximately $25.9 million and $24.7 million, respectively. As of March 31, 2018 and December 31, 2017, the Company had an allowance on accrued rental income of $0.1 million and $0.2 million, respectively.

As of March 31, 2018 and December 31, 2017, the Company had approximately $12.7 million and $12.7 million, respectively, of total lease security deposits available in the form of existing letters of credit, which are not reflected on the accompanying Consolidated Balance Sheets. As of March 31, 2018 and December 31, 2017, the Company had approximately $7.7 million and $7.4 million, respectively, of lease security deposits available in cash, which are included in cash and cash equivalents on the accompanying Consolidated Balance Sheets, and approximately $0.7 million and $0.7 million, respectively, of lease security deposits available in cash, which are included in restricted cash on the accompanying Consolidated Balance Sheets. These funds may be used to settle tenant accounts receivables in the event of a default under the related lease. As of March 31, 2018 and December 31, 2017, the Company's total liability associated with these lease security deposits was approximately $8.4 million and $8.1 million, respectively, and is included in tenant prepaid rent and security deposits on the accompanying Consolidated Balance Sheets.

10

Table of Contents


Related Parties

As of March 31, 2018 and December 31, 2017, the Company had approximately $4,000 and $0, respectively, of amounts due from related parties, which are included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets.

Revenue Recognition

Tenant Recoveries

The Company estimates that real estate taxes, which are the responsibility of certain tenants under the terms of their leases and are not reflected on the Company's consolidated financial statements, were approximately $3.1 million and $3.1 million for the three months ended March 31, 2018 and 2017, respectively. These amounts would have been the maximum real estate tax expense of the Company, excluding any penalties or interest, had the tenants not met their contractual obligations for these periods.

Termination Income

Approximately $0.1 million and $39,000 of termination fee income related to the Buena Vista, VA property, the tenant at which exercised its early lease termination option on March 27, 2017, is included in rental income on the accompanying Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017, respectively.

Gain on the Sales of Rental Property, net

The timing of the derecognition of a rental property and the corresponding recognition of gain on the sales of rental property, net is measured by various criteria related to the terms of the sale transaction, and if the Company has lost control of the property and the acquirer has gained control of the property after the transaction. If the derecognition criteria is met, the full gain is recognized.

Taxes

Federal Income Taxes

The Company's taxable REIT subsidiaries recognized a net loss of approximately $36,000 and $31,000 for the three months ended March 31, 2018 and 2017, respectively, which has been included on the accompanying Consolidated Statements of Operations.

State and Local Income, Excise, and Franchise Tax

State and local income, excise, and franchise taxes in the amount of $0.2 million and $0.2 million have been recorded in other expenses on the accompanying Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017, respectively.

Uncertain Tax Positions

As of March 31, 2018 and December 31, 2017, there were no liabilities for uncertain tax positions.

Concentrations of Credit Risk

Management believes the current credit risk portfolio is reasonably well diversified and does not contain any unusual concentration of credit risk.


11

Table of Contents

3. Rental Property

The following table summarizes the components of rental property as of March 31, 2018 and December 31, 2017.
Rental Property (in thousands)
 
March 31, 2018
 
December 31, 2017
Land
 
$
324,734

 
$
321,560

Buildings, net of accumulated depreciation of $171,058 and $160,281, respectively
 
1,784,897

 
1,756,579

Tenant improvements, net of accumulated depreciation of $33,669 and $32,714, respectively
 
29,648

 
30,138

Building and land improvements, net of accumulated depreciation of $61,431 and $56,062, respectively
 
141,936

 
143,170

Construction in progress
 
1,951

 
2,877

Deferred leasing intangibles, net of accumulated amortization of $215,597 and $280,642, respectively
 
305,188

 
313,253

Total rental property, net
 
$
2,588,354

 
$
2,567,577


Acquisitions

The following table summarizes the acquisitions of the Company during the three months ended March 31, 2018.
Location
 
Square Feet
 
Buildings
 
Purchase Price
(in thousands)
Fountain Inn, SC
 
203,000

 
1

 
$
10,755

Bloomington, MN
 
145,351

 
1

 
13,538

York, PA
 
278,582

 
1

 
18,277

Houston, TX
 
242,225

 
2

 
22,478

Greer, SC
 
222,710

 
1

 
13,773

Three months ended March 31, 2018
 
1,091,868

 
6

 
$
78,821


The following table summarizes the allocation of the consideration paid at the date of acquisition during the three months ended March 31, 2018 for the acquired assets and liabilities in connection with the acquisitions identified in the table above.
Acquired Assets and Liabilities
 
Purchase Price (in thousands)
 
Weighted Average Amortization Period (years) of Intangibles at Acquisition
Land
 
$
6,415

 
N/A
Buildings
 
57,248

 
N/A
Tenant improvements
 
996

 
N/A
Building and land improvements
 
2,418

 
N/A
Deferred leasing intangibles - In-place leases
 
8,122

 
6.3
Deferred leasing intangibles - Tenant relationships
 
3,712

 
10.5
Deferred leasing intangibles - Above market leases
 
583

 
5.8
Deferred leasing intangibles - Below market leases
 
(673
)
 
9.7
Total purchase price
 
$
78,821

 
 

The table below sets forth the results of operations for the three months ended March 31, 2018 for the buildings acquired during the three months ended March 31, 2018 included in the Company’s Consolidated Statements of Operations from the date of acquisition.
Results of Operations (in thousands)
 
Three months ended March 31, 2018
Total revenue
 
$
924

Net loss
 
$
104


Dispositions

During the three months ended March 31, 2018, the Company sold two buildings comprised of approximately 0.7 million square feet with a net book value of approximately $26.9 million to third parties. These buildings contributed approximately $0.3 million and $0.9 million to revenue for the three months ended March 31, 2018 and 2017, respectively. These buildings contributed approximately $49,000 and $46,000 to net income (exclusive of loss on involuntary conversion and gain on the sales of rental property, net) for the three months ended March 31, 2018 and 2017, respectively. Net proceeds from the sales of rental property were approximately $49.6 million and the Company recognized the full gain on the sales of rental property, net of approximately $22.7 million for the three months ended March 31, 2018.


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Table of Contents

Assets Held for Sale

As of March 31, 2018, the related land, building and improvements, net, and deferred leasing intangibles, net, of approximately $2.0 million, $10.7 million, and $0.8 million, respectively, for two buildings were classified as assets held for sale, net on the accompanying Consolidated Balance Sheets. These buildings contributed approximately $0.2 million and $0.5 million to revenue for the three months ended March 31, 2018 and 2017, respectively. These buildings contributed a net loss of approximately $0.8 million and $29,000 to net income for the three months ended March 31, 2018 and 2017, respectively.

Loss on Impairments

The following table summarizes the Company's loss on impairments for assets held and used during the three months ended March 31, 2018.
Property Location
 
Buildings
 
Event or Change in Circumstance Leading to Impairment Evaluation(1)
 
Valuation technique utilized to estimate fair value
 
Fair Value(2)
 
Loss on Impairments
(in thousands)
Buena Vista, VA
 
1
 
Change in estimated hold period
(3)
Discounted cash flows
 
 
 
 
Sergeant Bluff, IA
 
1
 
Change in estimated hold period
(3)
Discounted cash flows
 
 
 
 
Three months ended March 31, 2018
 
 
 
$
3,176

 
$
2,934

(1)
The Company tested the asset group for impairment utilizing a probability weighted recovery analysis of certain scenarios, and it was determined that the carrying value of the property and intangibles were not recoverable from the estimated future undiscounted cash flows.
(2)
The estimated fair value of the property is based on Level 3 inputs and is a non-recurring fair value measurement. Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
(3)
Level 3 inputs used to determine fair value for the properties impaired for the three months ended March 31, 2018: discount rates ranged from 11.0% to 14.5% and exit capitalization rates ranged from 11.0% to 13.0%.

Deferred Leasing Intangibles

The following table sets forth the deferred leasing intangibles on the accompanying Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017.
 
 
March 31, 2018
 
December 31, 2017
Deferred Leasing Intangibles (in thousands)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Above market leases
 
$
70,675

 
$
(30,725
)
 
$
39,950

 
$
78,558

 
$
(36,810
)
 
$
41,748

Other intangible lease assets
 
450,110

 
(184,872
)
 
265,238

 
515,337

 
(243,832
)
 
271,505

Total deferred leasing intangible assets
 
$
520,785

 
$
(215,597
)
 
$
305,188

 
$
593,895

 
$
(280,642
)
 
$
313,253

 
 
 
 
 
 
 
 
 
 
 
 
 
Below market leases
 
$
32,041

 
$
(11,321
)
 
$
20,720

 
$
34,776

 
$
(13,555
)
 
$
21,221

Total deferred leasing intangible liabilities
 
$
32,041

 
$
(11,321
)
 
$
20,720

 
$
34,776

 
$
(13,555
)
 
$
21,221


The following table sets forth the amortization expense and the net decrease to rental income for the amortization of deferred leasing intangibles during the three months ended March 31, 2018 and 2017.
 
 
Three months ended March 31,
Deferred Leasing Intangibles Amortization (in thousands)
 
2018
 
2017
Net decrease to rental income related to above and below market lease amortization
 
$
1,207

 
$
1,296

Amortization expense related to other intangible lease assets
 
$
18,100

 
$
18,393


The following table sets forth the amortization of deferred leasing intangibles over the next five calendar years beginning with 2018 as of March 31, 2018.
Year
 
Amortization Expense Related to Other Intangible Lease Assets (in thousands)
 
Net Decrease to Rental Income Related to Above and Below Market Lease Amortization (in thousands)
Remainder of 2018
 
$
48,805

 
$
2,987

2019
 
$
50,905

 
$
3,846

2020
 
$
40,954

 
$
3,504

2021
 
$
30,242

 
$
2,178

2022
 
$
23,113

 
$
1,210



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Table of Contents

4. Debt

The following table sets forth a summary of the Company’s outstanding indebtedness, including borrowings under the Company’s unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes as of March 31, 2018 and December 31, 2017.
Loan

Principal Outstanding as of March 31, 2018 (in thousands)
    
Principal Outstanding as of December 31, 2017 (in thousands)
 
Interest 
Rate
(1)
    
Maturity Date
 
Prepayment Terms (2) 
Unsecured credit facility:


 

 





Unsecured Credit Facility (3)

$
218,000

  
$
271,000

 
L + 1.15%


Dec-18-2019

i
Total unsecured credit facility

218,000

  
271,000

 
 


 

 
 


 

 





Unsecured term loans:

 

  


 
 


 

 
Unsecured Term Loan C

150,000

 
150,000

 
L + 1.30%


Sep-29-2020

i
Unsecured Term Loan B

150,000

  
150,000

 
L + 1.30%


Mar-21-2021

i
Unsecured Term Loan A

150,000

  
150,000

 
L + 1.30%


Mar-31-2022

i
Unsecured Term Loan D (4)
 
75,000

  

 
L + 1.30%

 
Jan-04-2023
 
i
Total unsecured term loans

525,000

 
450,000

 






Less: Total unamortized deferred financing fees and debt issuance costs

(3,494
)
 
(3,735
)
 






Total carrying value unsecured term loans, net

521,506

  
446,265

 
 


 

 
 


 

 





Unsecured notes:

 

  


 
 


 

 
Series F Unsecured Notes

100,000

 
100,000

 
3.98
%

Jan-05-2023

ii
Series A Unsecured Notes

50,000

  
50,000

 
4.98
%

Oct-1-2024

ii
Series D Unsecured Notes

100,000

  
100,000

 
4.32
%

Feb-20-2025

ii
Series B Unsecured Notes

50,000

  
50,000

 
4.98
%

Jul-1-2026

ii
Series C Unsecured Notes

80,000

  
80,000

 
4.42
%

Dec-30-2026

ii
Series E Unsecured Notes

20,000

  
20,000

 
4.42
%

Feb-20-2027

ii
Total unsecured notes

400,000

 
400,000

 






Less: Total unamortized deferred financing fees and debt issuance costs

(1,774
)
 
(1,766
)
 






Total carrying value unsecured notes, net

398,226

  
398,234

  
 


 

 
 


 

 





Mortgage notes (secured debt):

 

 


 
 


 

 
Wells Fargo Bank, National Association CMBS Loan

54,515

  
54,949

 
4.31
%

Dec-1-2022

iii
Thrivent Financial for Lutherans
 
3,879

 
3,906

 
4.78
%
 
Dec-15-2023
 
iv
Total mortgage notes

58,394

  
58,855

 
 





Total unamortized fair market value premiums

58

 
61

 
 





Less: Total unamortized deferred financing fees and debt issuance costs 

(601
)
 
(634
)
 






Total carrying value mortgage notes, net

57,851

  
58,282

 
 





Total / weighted average interest rate (5)

$
1,195,583

  
$
1,173,781

 
3.56
%




(1)
Interest rate as of March 31, 2018. At March 31, 2018, the one-month LIBOR (“L”) was 1.88313%. The interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for the Company's unsecured credit facility and unsecured term loans is based on the Company's consolidated leverage ratio, as defined in the respective loan agreements.
(2)
Prepayment terms consist of (i) pre-payable with no penalty; (ii) pre-payable with penalty; (iii) pre-payable without penalty three months prior to the maturity date, however can be defeased beginning January 1, 2016; and (iv) pre-payable without penalty three months prior to the maturity date.
(3)
The capacity of the unsecured credit facility is $450.0 million. Deferred financing fees and debt issuance costs, net of accumulated amortization related to the unsecured credit facility of approximately $1.3 million and $1.5 million is included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, respectively.
(4)
The remaining capacity is $75.0 million, which the Company has until July 27, 2018 to draw.
(5)
The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of $600.0 million of debt that was in effect as of March 31, 2018, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums.

The aggregate undrawn nominal commitment on the unsecured credit facility and unsecured term loans as of March 31, 2018 was approximately $301.1 million, including issued letters of credit. The Company's actual borrowing capacity at any given point in time may be less and is restricted to a maximum amount based on the Company's debt covenant compliance. Total accrued interest for the Company's indebtedness was approximately $5.4 million and $5.6 million as of March 31, 2018 and December 31, 2017, respectively, and is included in accounts payable, accrued expenses and other liabilities on the accompanying Consolidated Balance Sheets.


14

Table of Contents

The table below sets forth the costs included in interest expense related to the Company's debt arrangements on the accompanying Consolidated Statement of Operations for the three months ended March 31, 2018 and 2017.
 
 
Three months ended March 31,
Costs Included in Interest Expense (in thousands)
 
2018
 
2017
Amortization of deferred financing fees and debt issuance costs and fair market value premiums
 
$
534

 
$
501

Facility fees and unused fees
 
$
339

 
$
275


On March 28, 2018, the Company drew $75.0 million of the $150.0 million unsecured term loan that was entered into on July 28, 2017.

Financial Covenant Considerations

The Company was in compliance with all financial and other covenants as of March 31, 2018 and December 31, 2017 related to its unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes. The real estate net book value of the properties that are collateral for the Company’s debt arrangements was approximately $89.8 million and $90.9 million at March 31, 2018 and December 31, 2017, respectively, and is limited to senior, property-level secured debt financing arrangements.

Fair Value of Debt

The following table presents the aggregate principal outstanding under the Company’s debt arrangements and the corresponding estimate of fair value as of March 31, 2018 and December 31, 2017 (in thousands).
 
 
March 31, 2018
 
December 31, 2017
 
 
Principal Outstanding
 
Fair Value
 
Principal Outstanding
 
Fair Value
Unsecured credit facility
 
$
218,000

 
$
218,371

 
$
271,000

 
$
271,528

Unsecured term loans
 
525,000

 
526,685

 
450,000

 
451,463

Unsecured notes
 
400,000

 
410,058

 
400,000

 
415,599

Mortgage notes
 
58,394

 
58,611

 
58,855

 
59,769

Total principal amount
 
1,201,394

 
$
1,213,725

 
1,179,855

 
$
1,198,359

Add: Total unamortized fair market value premiums
 
58

 
 
 
61

 
 
Less: Total unamortized deferred financing fees and debt issuance costs
 
(5,869
)
 
 
 
(6,135
)
 
 
Total carrying value
 
$
1,195,583

 
 
 
$
1,173,781

 
 

The applicable fair value guidance establishes a three tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The fair value of the Company’s debt is based on Level 3 inputs.

5. Use of Derivative Financial Instruments

Risk Management Objective of Using Derivatives

The Company’s use of derivative instruments is limited to the utilization of interest rate swaps to manage interest rate risk exposure on existing and future liabilities and not for speculative purposes. The principal objective of such arrangements is to minimize the risks and related costs associated with the Company’s operating and financial structure.


15

Table of Contents

The following table details the Company’s outstanding interest rate swaps as of March 31, 2018. All of the Company's interest rate swaps are designated as qualifying cash flow hedges.
Interest Rate
Derivative Counterparty
 
Trade Date    
 
Effective Date
 
Notional Amount
(in thousands)
 
Fair Value
(in thousands)
 
Pay Fixed Interest Rate
 
Receive Variable Interest Rate
 
Maturity Date
Regions Bank
 
Mar-01-2013
 
Mar-01-2013
 
$
25,000

 
$
461

 
1.3300
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Jul-01-2013
 
$
50,000

 
$
595

 
1.6810
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Aug-01-2013
 
$
25,000

 
$
287

 
1.7030
%
 
One-month L
 
Feb-14-2020 
Regions Bank
 
Sep-30-2013
 
Feb-03-2014
 
$
25,000

 
$
153

 
1.9925
%
 
One-month L
 
Feb-14-2020 
The Toronto-Dominion Bank
 
Oct-14-2015
 
Sep-29-2016
 
$
25,000

 
$
622

 
1.3830
%
 
One-month L
 
Sep-29-2020
PNC Bank, N.A.
 
Oct-14-2015
 
Sep-29-2016
 
$
50,000

 
$
1,237

 
1.3906
%
 
One-month L
 
Sep-29-2020
Regions Bank
 
Oct-14-2015
 
Sep-29-2016
 
$
35,000

 
$
870

 
1.3858
%
 
One-month L
 
Sep-29-2020
U.S. Bank, N.A.
 
Oct-14-2015
 
Sep-29-2016
 
$
25,000

 
$
618

 
1.3950
%
 
One-month L
 
Sep-29-2020
Capital One, N.A.
 
Oct-14-2015
 
Sep-29-2016
 
$
15,000

 
$
370

 
1.3950
%
 
One-month L
 
Sep-29-2020
Royal Bank of Canada
 
Jan-08-2015
 
Mar-20-2015
 
$
25,000

 
$
529

 
1.7090
%
 
One-month L
 
Mar-21-2021
The Toronto-Dominion Bank
 
Jan-08-2015
 
Mar-20-2015
 
$
25,000

 
$
526

 
1.7105
%
 
One-month L
 
Mar-21-2021
The Toronto-Dominion Bank
 
Jan-08-2015
 
Sep-10-2017
 
$
100,000

 
$
615

 
2.2255
%
 
One-month L
 
Mar-21-2021
Wells Fargo, N.A.
 
Jan-08-2015
 
Mar-20-2015
 
$
25,000

 
$
646

 
1.8280
%
 
One-month L
 
Mar-31-2022
The Toronto-Dominion Bank
 
Jan-08-2015
 
Feb-14-2020
 
$
25,000

 
$
105

 
2.4535
%
 
One-month L
 
Mar-31-2022
Regions Bank
 
Jan-08-2015
 
Feb-14-2020
 
$
50,000

 
$
188

 
2.4750
%
 
One-month L
 
Mar-31-2022
Capital One, N.A.
 
Jan-08-2015
 
Feb-14-2020
 
$
50,000

 
$
135

 
2.5300
%
 
One-month L
 
Mar-31-2022
The Toronto-Dominion Bank
 
Jul-20-2017
 
Oct-30-2017
 
$
25,000

 
$
768

 
1.8485
%
 
One-month L
 
Jan-04-2023
Royal Bank of Canada
 
Jul-20-2017
 
Oct-30-2017
 
$
25,000

 
$
770

 
1.8505
%
 
One-month L
 
Jan-04-2023
Wells Fargo, N.A.
 
Jul-20-2017
 
Oct-30-2017
 
$
25,000

 
$
770

 
1.8505
%
 
One-month L
 
Jan-04-2023
PNC Bank, N.A.
 
Jul-20-2017
 
Oct-30-2017
 
$
25,000

 
$
770

 
1.8485
%
 
One-month L
 
Jan-04-2023
PNC Bank, N.A.
 
Jul-20-2017
 
Oct-30-2017
 
$
50,000

 
$
1,542

 
1.8475
%
 
One-month L
 
Jan-04-2023

The fair value of the interest rate swaps outstanding as of March 31, 2018 and December 31, 2017 was as follows.
Balance Sheet Line Item (in thousands)
 
Notional Amount March 31, 2018
 
Fair Value
March 31, 2018
 
Notional Amount December 31, 2017
 
Fair Value December 31, 2017
Interest rate swaps-Asset
 
$
725,000

 
$
12,577

 
$
475,000

 
$
6,079

Interest rate swaps-Liability
 
$

 
$

 
$
250,000

 
$
(1,217
)

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. 

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings.

Amounts reported in accumulated other comprehensive income related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company's variable rate debt. The Company estimates that approximately $2.3 million will be reclassified from accumulated other comprehensive income as a decrease to interest expense over the next 12 months.

The table below presents the effect of cash flow hedge accounting and the location in the consolidated financial statements for the three months ended March 31, 2018 and 2017 (in thousands).
 
 
Three months ended March 31,
 
 
2018
 
2017
Income recognized in accumulated other comprehensive income on interest rate swaps
 
$
7,493

 
$
514

Loss reclassified from accumulated other comprehensive income into income (loss) as interest expense
 
$
230

 
$
698

Total interest expense presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded

 
$
11,386

 
$
10,472



16

Table of Contents

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.

As of March 31, 2018, the Company had no derivatives that were in a net liability position by counterparty.

Fair Value of Interest Rate Swaps

The Company’s valuation of the interest rate swaps is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs including interest rate curves.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2018 and December 31, 2017, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of March 31, 2018 and December 31, 2017
 
 
 
 
Fair Value Measurements as of
March 31, 2018 Using
Balance Sheet Line Item (in thousands)
 
Fair Value
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps-Asset
 
$
12,577

 
$

 
$
12,577

 
$

Interest rate swaps-Liability
 
$

 
$

 
$

 
$


 
 
 
 
Fair Value Measurements as of
December 31, 2017 Using
Balance Sheet Line Item (in thousands)
 
Fair Value December 31, 2017
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps-Asset
 
$
6,079

 
$

 
$
6,079

 
$

Interest rate swaps-Liability
 
$
(1,217
)
 
$

 
$
(1,217
)
 
$


6. Equity

Preferred Stock

The table below sets forth the Company’s outstanding preferred stock issuances as of March 31, 2018.
Preferred Stock Issuances
 
Issuance Date
 
Number of Shares
 
Liquidation Value Per Share
 
Interest Rate
6.625% Series B Cumulative Redeemable Preferred Stock (Series B Preferred Stock)
 
April 16, 2013
 
2,800,000

 
$
25.00

 
6.625
%
6.875% Series C Cumulative Redeemable Preferred Stock (Series C Preferred Stock)
 
March 17, 2016
 
3,000,000

 
$
25.00

 
6.875
%


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Table of Contents

The tables below set forth the dividends attributable to the Company's outstanding preferred stock issuances during the three months ended March 31, 2018 and the year ended December 31, 2017.
Quarter Ended 2018
 
Declaration Date
 
Series B
Preferred Stock Per Share
 
Series C
Preferred Stock Per Share
 
Payment Date
March 31
 
February 14, 2018

0.4140625


0.4296875


April 2, 2018
Total
 
 

$
0.4140625


$
0.4296875


 
Quarter Ended 2017
 
Declaration Date
 
Series B Preferred Stock Per Share
 
Series C Preferred Stock Per Share
 
Payment Date
December 31
 
November 2, 2017
 
$
0.4140625

 
$
0.4296875

 
December 29, 2017
September 30
 
July 31, 2017
 
0.4140625

 
0.4296875

 
September 29, 2017
June 30
 
May 1, 2017
 
0.4140625

 
0.4296875

 
June 30, 2017
March 31
 
February 15, 2017
 
0.4140625

 
0.4296875

 
March 31, 2017
Total
 
 
 
$
1.6562500

 
$
1.7187500

 
 

On April 10, 2018, the Company’s board of directors declared the Series B Preferred Stock and Series C Preferred Stock dividends for the quarter ending June 30, 2018 at a quarterly rate of $0.4140625 per share and $0.4296875 per share, respectively.

Common Stock

The following table sets forth the terms of the Company’s at-the market (“ATM”) common stock offering program as of March 31, 2018.
ATM Common Stock Offering Program
 
Date
 
Maximum Aggregate Offering Price (in thousands)

Aggregate Common Stock Available as of
March 31, 2018 (in thousands)
2017 $500 million ATM
 
November 13, 2017
 
$
500,000

 
$
489,674


The table below set forth the activity under the ATM common stock offering programs during the year ended December 31, 2017 (in thousands, except share data). There was no activity under the ATM common stock offering programs during three months ended March 31, 2018.
 
 
Year ended December 31, 2017
ATM Common Stock Offering Program
 
Shares
Sold
 
Weighted Average Price Per Share
 
Gross
Proceeds
 
Sales
Agents’ Fee
 
Net
Proceeds
2017 $500 million ATM
 
363,843

 
$
28.38

 
$
10,326

 
$
129

 
$
10,197

2017 $300 million ATM(1)
 
11,098,748

 
$
27.03

 
300,000

 
3,637

 
296,363

2016 $228 million ATM(1)
 
4,799,784

 
$
24.42

 
117,216

 
1,604

 
115,612

Total/weighted average
 
16,262,375

 
$
26.29

 
$
427,542

 
$
5,370

 
$
422,172

(1)
These programs ended before December 31, 2017.


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Table of Contents

Dividends

The table below sets forth the dividends attributable to the Company's outstanding shares of common stock that were declared during the three months ended March 31, 2018 and the year ended December 31, 2017.
Month Ended 2018

Declaration Date
 
Record Date
 
Per Share
 
Payment Date
March 31

November 2, 2017

March 29, 2018

0.118333


April 16, 2018
February 28

November 2, 2017

February 28, 2018

0.118333


March 15, 2018
January 31

November 2, 2017

January 31, 2018

0.118333


February 15, 2018
Total

 
 
 

$
0.354999


 
Month Ended 2017
 
Declaration Date
 
Record Date
 
Per Share
 
Payment Date
December 31
 
July 31, 2017
 
December 29, 2017
 
$
0.117500

 
January 16, 2018
November 30
 
July 31, 2017
 
November 30, 2017
 
0.117500

 
December 15, 2017
October 31
 
July 31, 2017
 
October 31, 2017
 
0.117500

 
November 15, 2017
September 30
 
May 1, 2017
 
September 29, 2017
 
0.117500

 
October 16, 2017
August 31
 
May 1, 2017
 
August 31, 2017
 
0.117500

 
September 15, 2017
July 31
 
May 1, 2017
 
July 31, 2017
 
0.117500

 
August 15, 2017
June 30
 
February 15, 2017
 
June 30, 2017
 
0.116667

 
July 17, 2017
May 31
 
February 15, 2017
 
May 31, 2017
 
0.116667

 
June 15, 2017
April 30
 
February 15, 2017
 
April 28, 2017
 
0.116667

 
May 15, 2017
March 31
 
November 2, 2016
 
March 31, 2017
 
0.116667

 
April 17, 2017
February 28
 
November 2, 2016
 
February 28, 2017
 
0.116667

 
March 15, 2017
January 31
 
November 2, 2016
 
January 31, 2017
 
0.116667

 
February 15, 2017
Total
 
 
 
 
 
$
1.405002

 
 

On April 10, 2018, the Company’s board of directors declared the common stock dividends for the months ending April 30, 2018, May 31, 2018 and June 30, 2018 at a monthly rate of $0.118333 per share of common stock.

Restricted Stock-Based Compensation

Restricted shares of common stock granted on January 5, 2018 to certain employees of the Company, subject to the recipient’s continued employment, will vest in four equal installments on January 1 of each year beginning in 2019. The following table summarizes activity related to the Company’s unvested restricted shares of common stock for the three months ended March 31, 2018 and the year ended December 31, 2017.
Unvested Restricted Shares of Common Stock
 
Shares
    
Balance at December 31, 2016
 
272,337

 
Granted
 
75,001

(1)
Vested
 
(109,209
)
(2)
Forfeited
 
(922
)
 
Balance at December 31, 2017
 
237,207

 
Granted
 
76,659

(1)
Vested
 
(112,405
)
(2)
Forfeited
 
(5,090
)
 
Balance at March 31, 2018
 
196,371

 
(1)
The fair value per share on the grant date of January 5, 2018 and January 6, 2017 was $26.40 and $24.41, respectively.
(2)
The Company repurchased and retired 41,975 and 40,836 restricted shares of common stock that vested during the three months ended March 31, 2018 and the year ended December 31, 2017, respectively.

The unrecognized compensation expense associated with the Company’s restricted shares of common stock at March 31, 2018 was approximately $4.1 million and is expected to be recognized over a weighted average period of approximately 2.9 years.

The following table summarizes the fair value at vesting for the restricted shares of common stock that vested during the three months ended March 31, 2018 and 2017
 
 
Three months ended March 31,
 
 
2018
 
2017
Vested restricted shares of common stock
 
112,405

 
109,209

Fair value of vested restricted shares of common stock (in thousands)
 
$
3,002

 
$
2,591

 


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Table of Contents

7. Noncontrolling Interest

The table below summarizes the activity for noncontrolling interest in the Company for the three months ended March 31, 2018 and the year ended December 31, 2017.
 
LTIP Units
 
Other
Common Units
 
Total
Noncontrolling Common Units