Annual report pursuant to Section 13 and 15(d)

Real Estate

v3.10.0.1
Real Estate
12 Months Ended
Dec. 31, 2018
Real Estate [Abstract]  
Real Estate
Real Estate
    
Investment properties consist of the following (in thousands):
 
December 31,
 
2018
 
2017
Land and land improvements
$
98,846

 
$
91,108

Land held for development

 
2,305

Buildings and improvements
374,485

 
312,831

Investment properties at cost
473,331

 
406,244

Less accumulated depreciation
(40,189
)
 
(31,045
)
Investment properties, net
$
433,142

 
$
375,199


The Company’s depreciation expense on investment properties was $12.66 million, $10.59 million and $7.88 million for the years ended December 31, 2018, 2017 and 2016, respectively.
 
A significant portion of the Company’s land, buildings and improvements serve as collateral for its mortgage loans payable portfolio. Accordingly, restrictions exist as to the encumbered property's transferability, use and other common rights typically associated with property ownership.
    
JANAF Acquisition
On January 18, 2018, the Company acquired JANAF, a retail shopping center located in Norfolk, Virginia, for a purchase price of $85.65 million, paid through a combination of cash, restricted cash, debt assumption and the issuance of 150,000 shares of Common Stock at $7.53 per share. The shopping center, anchored by BJ's Wholesale Club, totals 810,137 square feet and was 94% leased at the acquisition date.
The following summarizes the consideration paid and the purchase allocation of assets acquired and liabilities assumed in conjunction with the acquisition described above in accordance with ASU 2017-01, along with a description of the methods used to determine the purchase price allocation (in thousands, unaudited). In determining the purchase price allocation, the Company considered many factors including, but not limited to, cash flows, market cap rates, location, occupancy rates, appraisals, other acquisitions and management’s knowledge of the current acquisition market for similar properties.
Purchase price allocation of assets acquired:
 
 
Investment property (a)
$
75,123

 
Lease intangibles and other assets (b)
10,718

 
Above market leases (d)
2,019

 
Restricted cash (c)
2,500

 
Below market leases (d)
(4,710
)
 
Net purchase price allocation of assets acquired:
$
85,650

 
 
 
 
 
Purchase consideration:
 
 
 
Consideration paid with cash
$
23,153

 
Consideration paid with restricted cash (c)
2,500

 
Consideration paid with assumption of debt (e)
58,867

 
Consideration paid with common stock
1,130

 
 
 
 
 
 
Total consideration (f)
$
85,650

a.
Represents the purchase price allocation of the net investment properties acquired which includes land, buildings, site improvements and tenant improvements. The purchase price allocation was determined using following approaches:
i.
the market approach valuation methodology for land by considering similar transactions in the markets;
ii.
a combination of the cost approach and income approach valuation methodologies for buildings, including replacement cost evaluations, “go dark” analyses and residual calculations incorporating the land values; and
iii.
the cost approach valuation methodology for site and tenant improvements, including replacement costs and prevailing quoted market rates.
b.
Represents the purchase price allocation of lease intangibles and other assets. Lease intangibles includes in place leases and ground lease sandwich interests associated with replacing existing leases. The income approach was used to determine the allocation of these intangible assets which included estimated market rates and expenses.
c.
Represents the purchase price allocation of deleveraging reserve (the “Deleveraging Reserve”) released upon the maturity or earlier payment in full of the loan or until the reduction of the principal balance of the loan to $50,000,000.
d.
Represents the purchase price allocation of above/below market leases. The income approach was used to determine the allocation of above/below market leases using market rental rates for similar properties.
e.
Assumption of $53.71 million of debt at a rate of 4.49%, maturing July 2023 with monthly principal and interest payments of $333,159 and assumption of $5.16 million of debt at a rate of 4.95%, maturing January 2026 with monthly principal and interest payments of $29,964.
f.
Represents the components of purchase consideration paid.
Assets Held for Sale

In 2018, the Company’s management and Board of Directors committed to a plan to sell the seven undeveloped land parcels (the “Land Parcels”), along with the Monarch Bank Building, Shoppes at Eagle Harbor, Graystone Crossing and Jenks Plaza. Accordingly, these properties have been classified as held for sale.

The sale of the Land Parcels represents discontinued operations as it is a strategic shift that has a major effect on the Company's financial position or results of operations. Accordingly, the assets and liabilities associated with the Land Parcels have been reclassified for all periods presented. See Note 6, for disclosure of operating results of discontinued operations.
    
As of December 31, 2018 and 2017, assets held for sale and associated liabilities, excluding discontinued operations, consisted of the following (in thousands):
 
 
December 31, 2018
 
December 31, 2017
 
 
 
 
 
Investment properties, net
 
$
4,912

 
$

Rents and other tenant receivables, net
 
72

 

Above market lease, net
 
420

 

Deferred costs and other assets, net
 
228

 

Total assets held for sale, excluding discontinued operations
$
5,632

 
$

 
 
December 31, 2018
 
December 31, 2017
 
 
 
 
 
Loans payable
 
$
3,818

 
$

Accounts payable
 
240

 

Total liabilities associated with assets held for sale, excluding discontinued operations
$
4,058

 
$

As of December 31, 2018 and 2017, assets held for sale and associated liabilities for discontinued operations, consisted of the following (in thousands):
 
 
December 31, 2018
 
December 31, 2017
 
 
 
 
 
Investment properties, net
 
$
3,350

 
$
9,135

Total assets held for sale, discontinued operations
 
$
3,350

 
$
9,135

    
 
 
December 31, 2018
 
December 31, 2017
 
 
 
 
 
Loans payable
 
$
533

 
$
747

Accounts payable
 
41

 
45

Total liabilities associated with assets held for sale, discontinued operations
$
574

 
$
792


Dispositions
 
 
Property
 
Contract Price
 
Gain/(Loss)
 
Net Proceeds
 
 
 
 
(in thousands)
October 22, 2018
 
Monarch Bank Building
 
$
1,750

 
$
151

 
$
299

September 27, 2018
 
Shoppes at Eagle Harbor
 
5,705

 
1,270

 
2,071

June 19, 2018
 
Laskin Road Land Parcel (1.5 acres)
 
2,858

 
903

 
2,747

January 12, 2018
 
Chipotle Ground Lease at Conyers Crossing
 
1,270

 
1,042

 
1,160

June 27, 2017
 
Carolina Place Land Parcel (2.14 acres)
 
250

 
(12
)
 
238

June 26, 2017
 
Steak n' Shake outparcel at Rivergate (1.06 acres)
 
2,250

 
1,033

 
2,178

February 28, 2017
 
Ruby Tuesday's and Outback at Pierpont
 
2,285

 
1,502

 
1,871

June 29, 2016
 
Starbucks/Verizon
 
2,128

 
688

 
1,385


The sale of the Chipotle ground lease at Conyers Crossing, Shoppes at Eagle Harbor, Monarch Bank Building, Steak n' Shake outparcel at Rivergate and the land parcel at Carolina Place did not represent a strategic shift that has a major effect on the Company's financial position or results of operations. Accordingly, the operating results of these properties remains classified within continuing operations for all periods presented. See Note 6 for discontinued operation disclosures for the sales of Laskin Road, Ruby Tuesday's and Outback at Pierpont and Starbuck/Verizon.

Impairment of Investment Properties and Assets Held for Sale

The annual review of investment properties for impairment performed for the year ended December 31, 2018 resulted in no impairment adjustment for the Company's properties in continuing operations.

During 2018, the Company made the strategic decision to sell the undeveloped land parcels as opposed to holding for development purposes. Upon this determination the properties were classified as held for sale. Based on recent real estate sales transactions for undeveloped land within the surrounding markets it was determined that the carrying value of the properties exceeded the fair value, less estimated selling costs by $3.94 million; accordingly, an impairment loss of that amount was recognized and is included in the loss from discontinued operations in the consolidated statement of operations, see Note 6. These valuation assumptions are based on the three-level valuation hierarchy for fair value measurement and represent Level 3 inputs.