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EX-32.1 - EXHIBIT 32.1 - STAG Industrial, Inc.stag-09302015xexh321.htm
EX-31.2 - EXHIBIT 31.2 - STAG Industrial, Inc.stag-09302015xexh312.htm
EX-31.1 - EXHIBIT 31.1 - STAG Industrial, Inc.stag-09302015xexh311.htm

 
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 September 30, 2015
 
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 or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Check one:
 
Large accelerated filer x
Accelerated filer ¨
 
 
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
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 October 23, 2015
Common Stock ($0.01 par value)
68,077,333

9.0 % Series A Cumulative Redeemable Preferred Stock ($0.01 par value)
2,760,000

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


 



STAG INDUSTRIAL, INC.
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Part I. Financial Information
Item 1. Financial Statements
 
STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)

 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Rental Property:
 
 
 
Land
$
219,775

 
$
191,238

Buildings and improvements, net of accumulated depreciation of $140,023 and $105,789, respectively
1,272,288

 
1,118,938

Deferred leasing intangibles, net of accumulated amortization of $189,937 and $146,026, respectively
264,115

 
247,904

Total rental property, net
1,756,178

 
1,558,080

Cash and cash equivalents
12,496

 
23,878

Restricted cash
8,540

 
6,906

Tenant accounts receivable, net
20,475

 
16,833

Prepaid expenses and other assets
26,518

 
22,661

Interest rate swaps

 
959

Total assets
$
1,824,207

 
$
1,629,317

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Unsecured credit facility
$
177,750

 
$
131,000

Unsecured term loans
150,000

 
150,000

Unsecured notes
300,000

 
180,000

Mortgage notes
232,568

 
225,347

Accounts payable, accrued expenses and other liabilities
29,849

 
21,558

Interest rate swaps
6,956

 
873

Tenant prepaid rent and security deposits
13,208

 
11,480

Dividends and distributions payable
8,228

 
7,355

Deferred leasing intangibles, net of accumulated amortization of $8,397 and $6,565, respectively
10,712

 
10,180

Total liabilities
929,271

 
737,793

Commitments and contingencies (Note 10)

 

Equity:
 
 
 
Preferred stock, par value $0.01 per share, 10,000,000 shares authorized,
 
 
 
Series A, 2,760,000 shares (liquidation preference of $25.00 per share) issued and outstanding at September 30, 2015 and December 31, 2014
69,000

 
69,000

Series B, 2,800,000 shares (liquidation preference of $25.00 per share) issued and outstanding at September 30, 2015 and December 31, 2014
70,000

 
70,000

Common stock, par value $0.01 per share, 100,000,000 shares authorized, 68,077,112 and 64,434,825 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
681

 
644

Additional paid-in capital
1,015,127

 
928,242

Common stock dividends in excess of earnings
(289,413
)
 
(203,241
)
Accumulated other comprehensive loss
(7,165
)
 
(489
)
Total stockholders’ equity
858,230

 
864,156

Noncontrolling interest
36,706

 
27,368

Total equity
894,936

 
891,524

Total liabilities and equity
$
1,824,207

 
$
1,629,317


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

3


STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except share data)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
 
 
 
 
 
 
 
Rental income
$
47,731

 
$
36,774

 
$
136,201

 
$
106,095

Tenant recoveries
8,063

 
5,399

 
23,135

 
17,094

Other income
127

 
185

 
410

 
594

Total revenue
55,921

 
42,358

 
159,746

 
123,783

Expenses
 
 
 
 
 
 
 
Property
10,949

 
7,694

 
31,265

 
24,285

General and administrative
6,429

 
5,704

 
21,453

 
19,462

Property acquisition costs
1,006

 
2,190

 
2,511

 
3,437

Depreciation and amortization
28,656

 
21,983

 
82,042

 
62,606

Loss on impairments
5,733

 

 
8,378

 

Other expenses
226

 
181

 
892

 
611

Total expenses
52,999

 
37,752

 
146,541

 
110,401

Other income (expense)
 
 
 
 
 
 
 
Interest income
2

 
3

 
7

 
11

Interest expense
(9,317
)
 
(6,462
)
 
(26,260
)
 
(17,941
)
Gain on sales of rental property
1,713

 
2,104

 
1,713

 
2,153

Total other income (expense)
(7,602
)
 
(4,355
)
 
(24,540
)
 
(15,777
)
Net income (loss) from continuing operations
$
(4,680
)
 
$
251

 
$
(11,335
)
 
$
(2,395
)
Net income (loss)
$
(4,680
)
 
$
251

 
$
(11,335
)
 
$
(2,395
)
Less: loss attributable to noncontrolling interest after preferred stock dividends
(359
)
 
(90
)
 
(951
)
 
(784
)
Net income (loss) attributable to STAG Industrial, Inc.
$
(4,321
)
 
$
341

 
$
(10,384
)
 
$
(1,611
)
Less: preferred stock dividends
2,712

 
2,712

 
8,136

 
8,136

Less: amount allocated to unvested restricted stockholders
95

 
87

 
291

 
258

Net loss attributable to common stockholders
$
(7,128
)
 
$
(2,458
)
 
$
(18,811
)
 
$
(10,005
)
Weighted average common shares outstanding — basic and diluted
67,799,700

 
55,354,125

 
65,803,304

 
51,157,219

Loss per share — basic and diluted
 
 
 
 
 
 
 
Loss from continuing operations attributable to common stockholders
$
(0.11
)
 
$
(0.04
)
 
$
(0.29
)
 
$
(0.20
)
Loss per share — basic and diluted
$
(0.11
)
 
$
(0.04
)
 
$
(0.29
)
 
$
(0.20
)

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

4


STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(4,680
)
 
$
251

 
$
(11,335
)
 
$
(2,395
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Income (loss) on interest rate swaps
(7,636
)
 
1,300

 
(7,019
)
 
(1,959
)
Other comprehensive income (loss)
(7,636
)
 
1,300

 
(7,019
)
 
(1,959
)
Comprehensive income (loss)
(12,316
)
 
1,551

 
(18,354
)
 
(4,354
)
Net loss attributable to noncontrolling interest after preferred stock dividends
359

 
90

 
951

 
784

Other comprehensive (income) loss attributable to noncontrolling interest
371

 
(47
)
 
343

 
146

Comprehensive income (loss) attributable to STAG Industrial, Inc.
$
(11,586
)
 
$
1,594

 
$
(17,060
)
 
$
(3,424
)

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


5


STAG Industrial, Inc.
Consolidated Statements of Equity
(unaudited, in thousands, except share data)

 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock
 
Shares
 
Amount
 
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
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
$
139,000

 
64,434,852

 
$
644

 
$
928,242

 
$
(203,241
)
 
$
(489
)
 
$
864,156

 
$
27,368

 
$
891,524

Proceeds from sale of common stock

 
3,456,403

 
35

 
74,857

 

 

 
74,892

 

 
74,892

Offering costs

 

 

 
(1,229
)
 

 

 
(1,229
)
 

 
(1,229
)
Issuance of restricted stock, net

 
83,756

 
1

 
(1
)
 

 

 

 

 

Issuance of common stock

 
11,277

 

 

 

 

 

 

 

Dividends and distributions, net
(8,136
)
 

 

 

 
(67,652
)
 

 
(75,788
)
 
(3,614
)
 
(79,402
)
Non-cash compensation

 

 

 
2,115

 

 

 
2,115

 
3,552

 
5,667

Redemption of common units to common stock

 
90,824

 
1

 
1,002

 

 

 
1,003

 
(1,003
)
 

Redemption of common units for cash

 

 

 

 

 

 

 
(64
)
 
(64
)
Issuance of units

 

 

 

 

 

 

 
21,902

 
21,902

Rebalancing of noncontrolling interest

 

 

 
10,141

 

 

 
10,141

 
(10,141
)
 

Other comprehensive loss

 

 

 

 

 
(6,676
)
 
(6,676
)
 
(343
)
 
(7,019
)
Net income (loss)
8,136

 

 

 

 
(18,520
)
 

 
(10,384
)
 
(951
)
 
(11,335
)
Balance, September 30, 2015
$
139,000

 
68,077,112

 
$
681

 
$
1,015,127

 
$
(289,413
)
 
$
(7,165
)
 
$
858,230

 
$
36,706

 
$
894,936

Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2013
$
139,000

 
44,764,377

 
$
447

 
$
577,039

 
$
(116,877
)
 
$
3,440

 
$
603,049

 
$
71,515

 
$
674,564

Proceeds from sales of common stock

 
7,191,537

 
72

 
164,005

 

 

 
164,077

 

 
164,077

Offering costs

 

 

 
(2,731
)
 

 

 
(2,731
)
 

 
(2,731
)
Issuance of restricted stock, net

 
101,934

 
1

 
(1
)
 

 

 

 

 

Issuance of common stock

 
9,488

 

 

 

 

 

 

 

Issuance of equity pursuant to outperformance program

 
43,657

 
1

 
(1,491
)
 

 

 
(1,490
)
 
1,015

 
(475
)
Dividends and distributions, net
(8,136
)
 

 

 

 
(50,227
)
 

 
(58,363
)
 
(3,572
)
 
(61,935
)
Non-cash compensation

 

 

 
1,546

 

 

 
1,546

 
3,760

 
5,306

Redemption of common units to common stock

 
5,105,584

 
51

 
54,681

 

 

 
54,732

 
(54,732
)
 

Redemption of common units for cash

 

 

 

 

 

 

 
(342
)
 
(342
)
Rebalancing of noncontrolling interest

 

 

 
(9,530
)
 

 

 
(9,530
)
 
9,530

 

Other comprehensive loss

 

 

 

 

 
(1,813
)
 
(1,813
)
 
(146
)
 
(1,959
)
Net income (loss)
8,136

 

 

 

 
(9,747
)
 

 
(1,611
)
 
(784
)
 
(2,395
)
Balance, September 30, 2014
$
139,000

 
57,216,577

 
$
572

 
$
783,518

 
$
(176,851
)
 
$
1,627

 
$
747,866

 
$
26,244

 
$
774,110


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

6


STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Nine months ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(11,335
)
 
$
(2,395
)
Adjustment to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
82,042

 
62,606

Non-cash portion of interest expense
907

 
1,009

Intangible amortization in rental income, net
6,331

 
4,600

Straight-line rent adjustments, net
(2,318
)
 
(2,314
)
Dividends on forfeited equity compensation
15

 
128

Loss on impairments
8,378

 

Gain on sales of rental property
(1,713
)
 
(2,153
)
Non-cash compensation expense
5,667

 
5,337

Change in assets and liabilities:
 
 
 
Tenant accounts receivable, net
(1,477
)
 
934

Restricted cash
(582
)
 
(596
)
Prepaid expenses and other assets
(4,407
)
 
(3,218
)
Accounts payable, accrued expenses and other liabilities
6,821

 
1,426

Tenant prepaid rent and security deposits
1,728

 
1,033

Total adjustments
101,392

 
68,792

Net cash provided by operating activities
90,057

 
66,397

Cash flows from investing activities:
 
 
 
Acquisitions of land and buildings and improvements
(188,263
)
 
(228,063
)
Additions to building and other capital improvements
(10,053
)
 
(5,038
)
Proceeds from sales of rental property, net
9,186

 
7,492

Restricted cash
(1,052
)
 
734

Acquisition deposits, net
1,425

 
(1,920
)
Acquisitions of deferred leasing intangibles
(56,102
)
 
(61,413
)
Net cash used in investing activities
(244,859
)
 
(288,208
)
Cash flows from financing activities:
 
 
 
Redemption of common units for cash
(64
)
 
(342
)
Proceeds from unsecured credit facility
190,750

 
187,500

Repayment of unsecured credit facility
(144,000
)
 
(162,000
)
Proceeds from unsecured term loans

 
50,000

Proceeds from unsecured notes
120,000

 
50,000

Repayment of mortgage notes payable
(15,370
)
 
(3,321
)
Payment of loan fees and costs
(3,019
)
 
(1,718
)
Dividends and distributions
(78,541
)
 
(60,663
)
Proceeds from sales of common stock
74,892

 
164,077

Offering costs
(1,228
)
 
(2,647
)
Withholding taxes for settlement of outperformance program

 
(475
)
Net cash provided by financing activities
143,420

 
220,411

Decrease in cash and cash equivalents
(11,382
)
 
(1,400
)
Cash and cash equivalents—beginning of period
23,878

 
6,690

Cash and cash equivalents—end of period
$
12,496

 
$
5,290

Supplemental disclosure:
 
 
 
Cash paid for interest
$
22,445

 
$
16,286

Supplemental schedule of non-cash investing and financing activities
 
 
 
Issuance of units for acquisitions of land and buildings and improvements
$
16,873

 
$

Issuance of units for acquisitions of deferred leasing intangibles
$
5,029

 
$

Additions to building and other capital improvements
$
(565
)
 
$

Transfer of other assets to building and other capital improvements
$
565

 
$

Acquisitions of land and buildings and improvements
$
(34,460
)
 
$

Acquisitions of deferred leasing intangibles
$
(10,203
)
 
$

Change in additions of land and building and improvements included in accounts payable, accrued expenses, and other liabilities
$
(1,687
)
 
$
(3,913
)
Assumption of mortgage notes payable
$
22,343

 
$

Fair market value adjustment to mortgage notes payable acquired
$
418

 
$

Change in loan fees and costs and offering costs included in accounts payable, accrued expenses, and other liabilities
$
(64
)
 
$
(159
)
Dividends and distributions declared but not paid
$
8,228

 
$
6,565


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

7


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 “Code”).  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 September 30, 2015 and December 31, 2014, the Company owned a 95.14% and 96.36%, 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 September 30, 2015, the Company owned 281 buildings in 37 states with approximately 52.1 million square feet, consisting of 210 warehouse/distribution buildings, 50 light manufacturing buildings and 21 flex/office buildings.  The Company also owned six vacant land parcels adjacent to six of the Company’s buildings. Subject to receipt of any required governmental permits, these vacant parcels may be used for building expansion or otherwise sold as developable parcels. The Company’s buildings were approximately 95.7% leased to 256 tenants as of September 30, 2015.

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 presentation 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, 2014.
 
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 Pronouncements
 
Certain prior year amounts have been reclassified to conform to the current year presentation.
 
In September of 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, Simplifying the Accounting for Measurement Period Adjustments (Topic 805). ASU 2015-16 requires an acquirer in a business combination to recognize provisional amounts when measurements were incomplete as of the end of a reporting period as an adjustment in the reporting period in which the provisional amount is determined. Prior to this standard, the acquirer was required to adjust such provisional amounts by restating prior period financial statements. ASU 2015-16 is effective for the annual period ending December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The Company has elected to early adopt this standard effective with the interim period beginning July 1, 2015 and this standard did not have a material effect on the consolidated financial statements.

8


In April of 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). ASU 2015-03 requires incremental debt issuance costs paid to third parties other than the lender to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Prior to this standard, debt issuance costs paid to third parties other than the lender were presented as an asset on the balance sheet. ASU 2015-03 is effective for the annual period ending December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. Upon the adoption of ASU 2015-03, the Company will present debt issuance costs paid to third parties other than the lender as a direct deduction from the carrying value of the associated debt liability. In August of 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Subtopic 835-30), which clarified the presentation of debt issuance costs related to credit facility arrangements, given the absence of authoritative guidance within ASU 2015-03. Under ASU 2015-15, debt issuance costs paid to third parties other than the lender related to credit facilities may be presented in the balance sheet as an asset, regardless of whether there are any outstanding borrowings on the credit facility. Upon the adoption of ASU 2015-15, the Company will continue to present debt issuance costs paid to third parties other than the lender related to a credit facility as an asset on the accompanying Consolidated Balance Sheets.
In August of 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ending December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The adoption of ASU 2014-15 is not expected to materially impact the Company’s consolidated financial statements.
In May of 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. Revenue from a lease contract with a tenant is not within the scope of this revenue standard. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017. Early adoption is permitted for the first interim period within annual reporting periods beginning after December 15, 2016. The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on the Company’s financial position or results of operations.
Tenant Accounts Receivable, net
 
Tenant accounts receivable, net on the Consolidated Balance Sheets, includes both tenant accounts receivable, net and accrued rental income, net. The Company provides an allowance for doubtful accounts against the portion of tenant accounts receivable that is estimated to be uncollectible. As of September 30, 2015 and December 31, 2014, the Company had an allowance for doubtful accounts of $0.1 million and $0.1 million, respectively.
 
The Company accrues rental income earned, but not yet receivable, in accordance with GAAP. As of September 30, 2015 and December 31, 2014, the Company had accrued rental income of $14.9 million and $12.8 million, respectively. The Company maintains an allowance for estimated losses that may result from those revenues. As of September 30, 2015 and December 31, 2014, the Company had an allowance for estimated losses on accrued rental income of $0 and $0, respectively.
 
As of September 30, 2015 and December 31, 2014, the Company had a total of approximately $6.2 million and $6.7 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 September 30, 2015 and December 31, 2014, the Company had approximately $4.1 million and $3.1 million, respectively, of lease security deposits available in cash, which are included in cash and cash equivalents on the accompanying Consolidated Balance Sheets, and $0.4 million and $0.4 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 September 30, 2015 and December 31, 2014, the Company's total liability associated with these lease security deposits was $4.5 million and $3.5 million, respectively, and is included in tenant prepaid rent and security deposits on the accompanying Consolidated Balance Sheets.

Related Parties

As of September 30, 2015 and December 31, 2014, the Company had approximately $0.1 million and $0.1 million, respectively, of amounts due from related parties, which are included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets.

9



Revenue Recognition
 
Tenant Recoveries
 
By the terms of their leases, certain tenants are obligated to pay directly the costs of their properties’ insurance, real estate taxes, ground lease payments, and certain other expenses, and these costs are not reflected on the Company’s consolidated financial statements. The Company does not recognize recovery revenue related to leases where the tenant has assumed the cost for real estate taxes, insurance, ground lease payments and certain other expenses. To the extent any tenant responsible for these costs under its respective lease defaults on its lease or it is deemed probable that the tenant will fail to pay for such costs, the Company will record a liability for such obligation. The Company estimates that real estate taxes, which are the responsibility of these certain tenants, were approximately $2.7 million, $7.8 million, $2.6 million and $7.6 million for the three and nine months ended September 30, 2015 and September 30, 2014, respectively. These amounts would have been the maximum expense of the Company had the tenants not met their contractual obligations for these periods.
 
Termination Income
 
On December 17, 2014, the Company entered into a first lease amendment with the tenant located at the Belfast, ME buildings. The terms of the lease amendment renewed 90,051 square feet of the premise and early terminated the remaining 228,928 square feet effective November 30, 2015. The tenant is required to pay a termination fee for the returned premise on or before October 31, 2015 in the amount of $2.1 million. The Company received the termination fee payment in full on September 23, 2015. This termination fee along with the reimbursement of certain miscellaneous costs per the lease amendment was being recorded on a straight-line basis from December 17, 2014 through the relinquishment of the space on November 30, 2015. On May 18, 2015, the Company entered into a second lease amendment with the tenant. The terms of the second lease amendment accelerated the termination of 35,295 square feet to April 30, 2015. The Company recognized the termination fee associated with the 35,295 square feet through the shortened lease life of April 30, 2015. The Company continues to recognize the remaining termination fee over the shortened lease life of the remaining 193,633 square feet through November 30, 2015. The termination fee of $0.5 million and $1.7 million for the three and nine months ended September 30, 2015, respectively, is included in rental income on the accompanying Consolidated Statements of Operations.
 
Taxes
 
Federal Income Taxes
 
The Company elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2011 and intends to continue to qualify as a REIT. The Company is generally not subject to corporate level income tax on the earnings distributed currently to its stockholders that it derives from its REIT qualifying activities. As a REIT, the Company is required to distribute at least 90% of its REIT taxable income to its stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership.
 
The Company will not be required to make distributions with respect to income derived from the activities conducted through subsidiaries that the Company elects to treat as taxable REIT subsidiaries (“TRS”) for federal income tax purposes, nor will it have to comply with income, assets, or ownership restrictions inside of the TRS. Certain activities that the Company undertakes must or should be conducted by a TRS, such as performing non-customary services for its tenants and holding assets that it cannot hold directly. A TRS is subject to federal and state income taxes.  On August 25, 2015, the Company's TRS acquired two vacant land parcels in connection with the Libertyville, IL acquisition. During the three and nine months ended September 30, 2015, the Company's TRS recognized a net loss of $7,000 and $7,000, respectively, which has been included on the accompanying Consolidated Statements of Operations.
 
State and Local Income, Excise, and Franchise Tax
 
The Company and certain of its subsidiaries are subject to certain state and local income, excise, and franchise taxes.  Taxes in the amount of $0.2 million, $0.8 million, $0.2 million and $0.4 million have been recorded in other expenses in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and September 30, 2014, respectively.

Uncertain Tax Positions
 

10


Tax benefits of uncertain tax positions are recognized only if it is more likely than not that the tax position will be sustained based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. The measurement of a tax benefit for an uncertain tax position that meets the “more likely than not” threshold is based on a cumulative probability model under which the largest amount of tax benefit recognized is the amount with a greater than 50% likelihood of being realized upon ultimate settlement with the taxing authority having full knowledge of all the relevant information.  As of September 30, 2015 and December 31, 2014, there were no liabilities for uncertain tax positions.
 
3. Rental Property
 
The following table summarizes the components of rental property as of September 30, 2015 and December 31, 2014 (in thousands):
 
 
September 30,
2015
 
December 31,
2014
Land
$
219,775

 
$
191,238

Buildings, net of accumulated depreciation of $97,525 and $75,116, respectively
1,178,956

 
1,042,086

Tenant improvements, net of accumulated depreciation of $25,525 and $20,943, respectively
23,439

 
22,619

Building and land improvements, net of accumulated depreciation of $16,973 and $9,730, respectively
69,893

 
54,233

Deferred leasing intangibles, net of accumulated amortization of $189,937 and $146,026, respectively
264,115

 
247,904

Total rental property, net
$
1,756,178

 
$
1,558,080

 
Acquisitions
 
The following table summarizes the acquisitions of the Company during the nine months ended September 30, 2015:
  
Location of property

Square Feet

Buildings

Purchase Price (in thousands)
Burlington, NJ(1)

503,490


1


$
34,883

Greenville, SC

157,500


1


4,800

North Haven, CT

824,727


3


57,400

Three months ended March 31, 2015

1,485,717


5


$
97,083

Plymouth, MI

125,214


1


6,000

Oakwood Village, OH

75,000


1


4,398

Stoughton, MA

250,213


2


10,675

Oklahoma City, OK

223,340


1


12,135

Clinton, TN(1)

166,000


1


5,000

Knoxville, TN

108,400


1


4,750

Fairborn, OH

258,680


1


9,100

El Paso, TX

126,456


1


9,700

Phoenix, AZ

102,747


1


9,500

Charlotte, NC

123,333


1


7,500

Machesney Park, IL

80,000


1


5,050

Three months ended June 30, 2015

1,639,383


12


$
83,808

Macedonia, OH

201,519


1


12,192

Novi, MI

125,060


1


8,716

Grand Junction, CO

82,800


1


5,254

Tulsa, OK

175,000


1


13,000

Chattanooga, TN

646,200


3


21,160

Libertyville, IL(1)

287,102


2


11,121

Greer, SC

290,000


4


9,025

Piedmont, SC

400,000


3


12,000

Belvidere, IL

100,000


1


5,938

Conyers, GA

201,403

 
1

 
9,880

Three months ended September 30, 2015

2,509,084


18


$
108,286

Nine months ended September 30, 2015

5,634,184


35


$
289,177

(1)
The Company also acquired a vacant land parcel adjacent to each of the buildings acquired. Subject to receipt of any required governmental permits, these vacant parcels may be used for building expansion or otherwise sold as developable parcels.

The following table summarizes the allocation of the consideration paid at the date of acquisition during the nine months ended September 30, 2015 for the acquired assets and liabilities in connection with the acquisitions identified in the table above.

11


 
Acquired assets and liabilities (dollars in thousands)
 
Nine Months Ended
September 30, 2015
 
Weighted Average
 Amortization Period (years) Intangibles
Land
 
$
31,618

 
N/A
Buildings
 
172,858

 
N/A
Tenant improvements
 
5,449

 
N/A
Building and land improvements
 
12,799

 
N/A
Deferred leasing intangibles - In-place leases
 
40,011

 
5.9
Deferred leasing intangibles - Tenant relationships
 
21,736

 
8.2
Deferred leasing intangibles - Above market leases
 
7,159

 
8.5
Deferred leasing intangibles - Below market leases
 
(2,600
)
 
5.4
Above market assumed debt adjustment
 
(418
)
 
1.4
Other assets
 
565

 
N/A
Total purchase price
 
$
289,177

 
 
Less: Mortgage notes assumed
 
(22,343
)
 
N/A
Net assets acquired
 
$
266,834

 
 
 
On January 22, 2015, the Company acquired a property located in Burlington, NJ for approximately $34.9 million. As consideration for the property acquired, the Company (i) granted 812,676 Other Common Units with a fair value of approximately $21.9 million, (ii) paid $1.2 million in cash, (iii) and assumed an $11.8 million mortgage note. The mortgage note was paid in full immediately subsequent to the acquisition. For a discussion of the method used to determine the fair value of the Other Common Units issued, see Note 7.

On June 25, 2015, the Company assumed a mortgage note of approximately $4.9 million in connection with the acquisition of the property located in Charlotte, NC. On September 29, 2015, the Company assumed a mortgage note of approximately $5.7 million in connection with the acquisition of the property located in Conyers, GA. For a discussion of the method used to determine the fair value of the mortgage notes, see Note 4.

The table below sets forth the results of operations for the properties acquired during the three and nine months ended September 30, 2015, respectively, included in the Company’s Consolidated Statements of Operations from the date of acquisition:

Results of operations (in thousands)
 
Three months ended September 30, 2015
 
Nine months ended September 30, 2015
Revenue
 
$
5,712

 
$
9,783

Property acquisition costs
 
$
882

 
$
2,156

Net loss
 
$
(288
)
 
$
(1,362
)
 
The following tables set forth pro forma information for the three and nine months ended September 30, 2015 and September 30, 2014, respectively.  The below pro forma information does not represent what the actual results of operations of the Company would have been had the acquisitions outlined above occurred on the first day of the applicable reporting period, nor do they predict the results of operations of future periods.  The pro forma information has not been adjusted for property sales.
 
 
 
Nine months ended September 30, 2015
 
Pro Forma
 
 (in thousands)(1)
 
Total revenue
 
$
171,476

 
Net loss
 
$
(8,511
)
(2) 
Net loss attributable to common stockholders
 
$
(16,124
)
 
 
 
Nine months ended September 30, 2014
 
Pro Forma
 
 (in thousands)(3)
 
Total revenue
 
$
160,083

 
Net loss
 
$
(6,544
)
(2) 
Net loss attributable to common stockholders
 
$
(13,845
)
 
(1)
The pro forma information for the nine months ended September 30, 2015 is presented as if the acquisition of the properties acquired during the nine months ended September 30, 2015 had occurred at January 1, 2014, the beginning of the reporting period prior to acquisition.

12


(2)
The net loss for the nine months ended September 30, 2015 excludes $2.2 million of property acquisition costs related to the acquisition of properties that closed during the nine months ended September 30, 2015, and the net loss for the nine months ended September 30, 2014 was adjusted to include these acquisition costs.  Net loss for the nine months ended September 30, 2014 excludes $3.3 million of property acquisition costs related to the acquisition of buildings that closed during the nine months ended September 30, 2014.
(3)
The pro forma information for the nine months ended September 30, 2014 is presented as if the acquisition of the properties acquired during the nine months ended September 30, 2015 and the properties acquired during the nine months ended September 30, 2014 had occurred at January 1, 2014 and January 1, 2013, respectively, the beginning of the reporting period prior to acquisition.

Dispositions

The following tables summarize the dispositions made by the Company during the nine months ended September 30, 2015 (in millions, except for square feet and building count). All of the dispositions were accounted for under the full accrual method.
Property Location
    
Square Feet
 
Buildings
 
 Carrying Value
 
 Sales Price
 
 Net Proceeds
 
 Gain (Loss) on Sale
Hazelwood, MO
 
242,630

 
1

 
$
4.4

 
$
4.4

 
$
4.3

 
$
(0.1
)
Round Rock, TX
 
79,180

 
1

 
3.1

 
5.2

 
4.9

 
1.8

Nine months ended September 30, 2015
 
321,810

 
2

 
$
7.5

 
$
9.6

 
$
9.2

 
$
1.7


Loss on Impairments

The Company recorded a loss on impairment for the three months ended June 30, 2015 related to a vacant building in Hazelwood, MO. The Company entered into a purchase and sale agreement to sell this property prior to June 30, 2015 to a third party market participant. The Company tested the property for impairment at December 31, 2014 and no impairment was noted. The Company updated the impairment calculation quarterly for changes in assumptions as necessary. The Company tested the property for impairment as of June 30, 2015 and it was determined that the carrying value of the asset group, based on the Company’s assessment of the various hold and sell scenarios, was not recoverable from the estimated future undiscounted cash flows. Accordingly, the property was written down to its estimated fair value of $4.4 million and the Company recorded an impairment loss of $2.6 million for the three months ended June 30, 2015. This loss was recorded in loss on impairments on the accompanying Consolidated Statements of Operations. The fair value of the property was based on unobservable inputs ("Level 3") and this was a non-recurring fair value measurement. This property was sold during the three months ended September 30, 2015.

The Company recorded a loss on impairment for the three months ended September 30, 2015 related to the property located in Canton, OH. The Company entered into a letter of intent to sell this property prior to September 30, 2015 to a third party market participant. The Company tested the property for impairment as of September 30, 2015 and it was determined that the carrying value of the asset group, based on the Company’s assessment of the various hold and sell scenarios, was not recoverable from the estimated future undiscounted cash flows. Accordingly, the property was written down to its estimated fair value of $1.6 million and the Company recorded an impairment loss of $2.9 million based on a discounted cash flow analysis. This loss was recorded in loss on impairments on the accompanying Consolidated Statements of Operations. The fair value of the property is based on Level 3 inputs and this is a non-recurring fair value measurement. The fair value was calculated using the following key Level 3 inputs: discount rate of 9.0% and exit capitalization rate of 12.0%. The letter of intent for the property included various contingencies, and was terminated subsequent to September 30, 2015.

The Company recorded a loss on impairment for the three months ended September 30, 2015 related to the property located in Jefferson, NC. The Company entered into a purchase and sale agreement to sell this property prior to September 30, 2015 to a third party market participant. The Company tested the property for impairment as of September 30, 2015 and it was determined that the carrying value of the asset group, based on the Company’s assessment of the various hold and sell scenarios, was not recoverable from the estimated future undiscounted cash flows. Accordingly, the property was written down to its estimated fair value of $1.0 million based on pricing from market transactions for comparable properties and the Company recorded an impairment loss of $1.4 million. This loss was recorded in loss on impairments on the accompanying Consolidated Statements of Operations. The fair value of the property is based on Level 3 inputs and this is a non-recurring fair value measurement. Since the purchase and sale agreement for the property includes various contingencies, the Company can make no assurance that it will sell the property or, if it does, what the timing of the sale will be.

The Company recorded a loss on impairment for the three months ended September 30, 2015 related to the property located in Milwaukee, WI. The Company entered into a letter of intent to sell this property prior to September 30, 2015 to a third party market participant. The Company tested the property for impairment as of September 30, 2015 and it was determined that the carrying value of the asset group, based on the Company’s assessment of the various hold and sell scenarios, was not

13


recoverable from the estimated future undiscounted cash flows. Accordingly, the property was written down to its estimated fair value of $3.9 million based on pricing from market transactions for comparable properties and the Company recorded an impairment loss of $1.4 million. This loss was recorded in loss on impairments on the accompanying Consolidated Statements of Operations. The fair value of the property is based on Level 3 inputs and this is a non-recurring fair value measurement. Since the letter of intent for the property includes various contingencies, the Company can make no assurance that it will sell the property or, if it does, what the timing of the sale will be.
 
Deferred Leasing Intangibles
 
The Company allocates the purchase price of business combinations of properties based upon the fair value of the assets and liabilities acquired, which generally consist of land, buildings, tenant improvements, mortgage debt assumed, and deferred leasing intangibles which includes in‑place leases, above market and below market leases, and tenant relationships. The portion of the purchase price that is allocated to above and below market leases is valued based on the present value of the difference between prevailing market rates and the in‑place rates measured over a period equal to the remaining term of the lease term plus the term of any bargain renewal options. The above and below market lease values are amortized into rental income over the remaining term plus the terms of bargain renewal options of the respective leases. The purchase price is further allocated to in‑place lease values and tenant relationships based on the Company’s evaluation of the specific characteristics of each tenant’s lease and its overall relationship with the respective tenant. The value of in‑place lease intangibles and tenant relationships, which are included as components of deferred leasing intangibles, are amortized over the remaining lease term (and expected renewal periods of the respective lease for tenant relationships) as increases or decreases to depreciation and amortization expense. If a tenant terminates its lease, the unamortized portion of above and below market leases are accelerated into rental income and the in‑place lease value and tenant relationships are accelerated into depreciation or amortization expense over the shortened lease term.

The purchase price allocated to deferred leasing intangible assets are included in rental property on the accompanying Consolidated Balance Sheets and the purchase price allocated to deferred leasing intangible liabilities are included in the deferred leasing intangibles on the accompanying Consolidated Balance Sheets under the liabilities section.

Deferred leasing intangibles on the accompanying Consolidated Balance Sheets consist of the following (in thousands):
 
 
September 30, 2015
 
December 31, 2014
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Above market leases
$
68,569

 
$
(31,360
)
 
$
37,209

 
63,830

 
$
(25,381
)
 
$
38,449

Other intangible lease assets
385,483

 
(158,577
)
 
226,906

 
$
330,100

 
(120,645
)
 
209,455

Total deferred leasing intangible assets
$
454,052

 
$
(189,937
)
 
$
264,115

 
$
393,930

 
$
(146,026
)
 
$
247,904

 
 
 
 
 
 
 
 
 
 
 
 
Below market leases
$
19,109

 
$
(8,397
)
 
$
10,712

 
$
16,745

 
$
(6,565
)
 
$
10,180

Total deferred leasing intangible liabilities
$
19,109

 
$
(8,397
)
 
$
10,712

 
$
16,745

 
$
(6,565
)
 
$
10,180

 
The following table sets forth the amortization expense and the net decrease to rental revenue for the amortization of deferred leasing intangibles during the three and nine months ended September 30, 2015 and September 30, 2014, respectively (in millions):
 
 
Three months ended September 30,
 
Nine months ended September 30,
Deferred Leasing Intangibles Amortization
2015
 
2014
 
2015
 
2014
Net decrease to rental revenue related to above and below market lease amortization
$
2.0

 
$
1.6

 
$
6.3

 
$
4.6

Amortization expense of other intangible lease assets
$
15.3

 
$
12.5

 
$
44.3

 
$
36.1

 
As of September 30, 2015, the amortization of deferred leasing intangibles over the next five years is as follows (in thousands):
 

14


 
Amortization Expense of Other Intangible Lease Assets
 
Net Decrease to Rental Revenue of Above and Below Market Lease Amortization
Remainder of 2015
$
15,416

 
$
1,952

2016
$
54,544

 
$
5,986

2017
$
44,670

 
$
4,284

2018
$
34,870

 
$
3,004

2019
$
25,055

 
$
2,666


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 September 30, 2015 and December 31, 2014 (dollars in thousands):
 
Loan

Principal outstanding as of September 30, 2015
     
Principal outstanding as of December 31, 2014
     
Interest Rate(2)

Current Maturity

Pre-payment Terms(3)
Unsecured credit facility:

 

  
 

  
 


 

 
$450 Million Wells Fargo Unsecured Credit Facility(1)

$
177,750

  
$
131,000

  
L + 1.15%


Dec-18-2019

i
Total unsecured credit facility

$
177,750

  
$
131,000

  
 


 

 














Unsecured term loans:

 

  
 

  
 


 

 
$150 Million Wells Fargo Unsecured Term Loan A

$
150,000

  
$
150,000

  
L + 1.65%


Mar-31-2022

ii
$150 Million Wells Fargo Unsecured Term Loan B


  

  
L + 1.70%


Mar-21-2021

ii
$150 Million Wells Fargo Unsecured Term Loan C





L + 1.30%


Sep-29-2020

i
Total unsecured term loans

$
150,000

  
$
150,000

  
 


 

 














Unsecured notes:

 

  
 

  
 


 

 
$50 Million Series A Unsecured Notes

$
50,000

  
$
50,000

  
4.98
%

Oct-1-2024

ii
$50 Million Series B Unsecured Notes

50,000

  
50,000

  
4.98
%

Jul-1-2026

ii
$80 Million Series C Unsecured Notes

80,000

  
80,000

  
4.42
%

Dec-30-2026

ii
$100 Million Series D Unsecured Notes

100,000

  

  
4.32
%

Feb-20-2025

ii
$20 Million Series E Unsecured Notes

20,000

  

  
4.42
%

Feb-20-2027

ii
Total unsecured notes

$
300,000

  
$
180,000

  
 


 

 














Mortgage notes (secured debt):

 

  
 

  
 


 

 
Sun Life Assurance Company of Canada (U.S.)

$
3,285

(4) 
$
3,445

(4) 
6.05
%

Jun-1-2016

iii
Webster Bank, National Association

5,555

  
5,677

  
4.22
%

Aug-4-2016

iii
National Life Insurance Company

4,817

(4) 

  
5.75
%

Aug-10-2016

iii
Union Fidelity Life Insurance Company

5,843

(4) 
6,103

(4) 
5.81
%

Apr-30-2017

iv
Principal Life Insurance Company

5,705

(4) 


5.73
%

May-05-2017

iii
Webster Bank, National Association

2,968


3,035

  
3.66
%

May-29-2017

iii
Webster Bank, National Association

3,197

  
3,268

  
3.64
%

May-31-2017

iii
Wells Fargo, National Association

4,131

(4) 
4,182

(4) 
5.90
%

Aug-1-2017

v
Connecticut General Life Insurance Company -1 Facility

57,396

  
58,050

  
6.50
%

Feb-1-2018

vi
Connecticut General Life Insurance Company -2 Facility

58,335

  
59,065

  
5.75
%

Feb-1-2018

vi
Connecticut General Life Insurance Company -3 Facility

16,464

  
16,647

  
5.88
%

Feb-1-2018

vi
Wells Fargo Bank, National Association CMBS Loan

64,315

  
65,567

  
4.31
%

Dec-1-2022

vii
Total mortgage notes

$
232,011

  
$
225,039

  
 


 

 
Total unamortized fair market value premiums

557

(5) 
308

(5) 
 


 

 
Total carrying value mortgage notes

$
232,568

  
$
225,347

  
 


 

 
Total / weighted average interest rate(6)

$
860,318

  
$
686,347

  
4.09
%

 

 
____________________________________________________________________________
(1)
On September 29, 2015, the capacity of the unsecured credit facility was increased from $300.0 million to $450.0 million.
(2)
Current interest rates as of September 30, 2015. At September 30, 2015 and December 31, 2014, the one-month LIBOR (“L”) was 0.19300% and 0.17125%, respectively.  The current interest rates presented in the table above are not adjusted to include the amortization of deferred financing fees incurred in obtaining debt or the unamortized fair market value premiums.

15


(3)
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; (iv) pre-payable without penalty two months prior to the maturity date; (v) pre-payable without penalty three months prior to the maturity date, however can be defeased; (vi) pre-payable without penalty six months prior to the maturity date; and (vii) pre-payable without penalty three months prior to the maturity date, however can be defeased beginning January 1, 2016. 
(4)
The principal outstanding does not include an unamortized fair market value premium.
(5)
Represents total unamortized fair market value premium for the mortgage notes referenced by Note (4) above.
(6)
The weighted average interest rate was calculated using the fixed interest rate swapped on the current notional amount of $300 million of debt, and is not adjusted to include the amortization of deferred financing fees incurred in obtaining debt or the unamortized fair market value premiums.
 
The aggregate undrawn nominal commitments on the combined unsecured credit facility and unsecured term loans as of September 30, 2015 was $572.3 million. Our actual borrowing capacity at any given point in time may be less and is restricted to a maximum amount based on the Company's unencumbered assets.

On January 22, 2015, the Company assumed a mortgage note of approximately $11.8 million in connection with the acquisition of the Burlington, NJ property. The mortgage note was paid in full immediately subsequent to the acquisition.
 
On February 20, 2015, the Company issued $100 million of its 4.32% Series D 10-year unsecured notes and $20 million of its 4.42% Series E 12-year unsecured notes.
 
On June 25, 2015, the Company assumed a mortgage note with National Life Insurance Company of approximately $4.9 million in connection with the acquisition of the property located in Charlotte, NC, which serves as collateral for the debt. The debt matures on August 10, 2016 and bears interest at 5.75% per annum. The assumed debt was recorded at fair value and a fair value premium of approximately $0.1 million was recorded. The fair value of debt was determined by discounting the future cash flows using the current rate of approximately 3.05% at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities, similar terms, and similar loan-to-value ratios. The fair value of the debt is based on Level 3 inputs and is a non-recurring fair value measurement.

On September 29, 2015, the Company assumed a mortgage note with Principal Life Insurance Company of approximately $5.7 million in connection with the acquisition of the property located in Conyers, GA, which serves as collateral for the debt. The debt matures on May 5, 2017 and bears interest at 5.73% per annum. The assumed debt was recorded at fair value and a fair value premium of approximately $0.3 million was recorded. The fair value of debt was determined by discounting the future cash flows using the current rate of approximately 2.64% at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities, similar terms, and similar loan-to-value ratios. The fair value of the debt is based on Level 3 inputs and is a non-recurring fair value measurement.

On September 29, 2015, the Company entered into an amendment to the unsecured credit facility to increase the capacity thereunder to $450.0 million. Additionally, the accordion feature that allows the Company to request an increase in the aggregate commitments subject to satisfaction of conditions and lender consent was increased, such that if the accordion was exercised in full, total capacity would be $800.0 million. The material terms of the agreement, including the financial covenants, are unchanged. The Company incurred $1.0 million in deferred financing fees, which will be amortized over the remaining term of the unsecured credit facility.

On September 29, 2015, the Company closed a $150.0 million unsecured term loan with Wells Fargo, N.A. ("Wells Fargo Unsecured Term Loan C") with the following terms:
Applicable Terms
Wells Fargo Unsecured Term Loan C
Maturity Date:
Sep-29-2020
Eurodollar Rate(1):
L + 130.0 bps - 190.0 bps
Base Rate(1):
Base rate + 30.0 bps - 90.0 bps
Terminated Commitments Fees(2):
50.0 bps
Unused Fees(3):
17.5 bps
Annual Fee:
$50,000
(1)
The spread over the applicable rate is based on the Company's consolidated leverage ratio, as defined in the loan agreement.

(2)
The Company has until September 29, 2016 to draw the full $150.0 million.

(3)
The unused fees will begin to accrue on November 29, 2015 and are due and payable monthly until the earlier of all commitments having been drawn or September 29, 2016.


16


The Wells Fargo Unsecured Term Loan C has an accordion feature that allows the Company to increase its borrowing capacity to $250.0 million, subject to the satisfaction of certain conditions and bank approval. The Company incurred $1.0 million in deferred financing fees associated with the closing of the Wells Fargo Unsecured Term Loan C, which will be amortized over its five year term. The agreement includes a delayed draw feature that allows the Company to draw up to six advances of at least $25.0 million each. The Company and certain wholly owned subsidiaries of the Operating Partnership are guarantors of the Wells Fargo Unsecured Term Loan C. The agreement also contains financial covenants substantially similar to the financial covenants in the unsecured credit facility.
 
Deferred financing fees, net of accumulated amortization were $9.7 million and $7.8 million as of September 30, 2015 and December 31, 2014, respectively, and are included in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets. During the three and nine months ended September 30, 2015 and September 30, 2014, amortization of deferred financing fees included in interest expense was $0.4 million, $1.1 million, $0.4 million and $1.1 million, respectively.
 
Financial Covenant Considerations
 
The Company’s unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes are subject to ongoing compliance with a number of financial and other covenants. The Company was in compliance with all financial covenants as of September 30, 2015 and December 31, 2014.
 
Fair Value of Debt
 
The fair value of the Company’s debt was determined by discounting the future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities, similar terms, and similar loan-to-value ratios. The discount rates ranged from 1.34% to 4.39% and 1.32% to 4.27% at September 30, 2015 and December 31, 2014, respectively, and were applied to each individual debt instrument. The fair value of the Company’s debt is based on Level 3 inputs. The following table presents the aggregate principal outstanding of the Company’s debt and the corresponding estimate of fair value as of September 30, 2015 and December 31, 2014 (in thousands):
 
 
September 30, 2015
 
December 31, 2014
 
Principal Outstanding
 
Fair Value
 
Principal Outstanding
 
Fair Value
Unsecured credit facility
$
177,750

 
$
177,750

 
$
131,000

 
$
131,000

Unsecured term loans
150,000

 
150,000

 
150,000

 
150,000

Unsecured notes
300,000

 
306,005

 
180,000

 
187,587

Mortgage notes
232,011

 
241,592

 
225,039

 
237,602

Total principal amount
$
859,761

 
$
875,347

 
$
686,039

 
$
706,189

Total unamortized fair market value premium
557

 
 
 
308

 
 
Total carrying value
$
860,318

 
 
 
$
686,347

 
 

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.

The following table details the Company’s outstanding interest rate swaps as of September 30, 2015 (in thousands):
 

17


Interest Rate Derivative Counterparty
 
Trade Date
 
Effective Date
 
Current Notional Amount
  
Fair Value
 
Pay Fixed Interest Rate
 
Receive Variable Interest Rate
 
Maturity Date
PNC Bank, N.A.
 
Sep-14-2012
 
Oct-10-2012
 
$
10,000

  
$
(32
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
Bank of America, N.A.
 
Sep-14-2012
 
Oct-10-2012
 
10,000

  
$
(32
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
UBS AG
 
Sep-14-2012
 
Oct-10-2012
 
10,000

  
$
(32
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
Royal Bank of Canada
 
Sep-14-2012
 
Oct-10-2012
 
10,000

  
$
(32
)
 
0.7945
%
 
One-month L
 
Sep-10-2017 
RJ Capital Services, Inc.
 
Sep-14-2012
 
Oct-10-2012
 
10,000

  
$
(32
)
 
0.7975
%
 
One-month L
 
Sep-10-2017 
Bank of America, N.A.
 
Sep-20-2012
 
Oct-10-2012
 
25,000

  
$
(58
)
 
0.7525
%
 
One-month L
 
Sep-10-2017 
RJ Capital Services, Inc.
 
Sep-24-2012
 
Oct-10-2012
 
25,000

  
$
(46
)
 
0.7270
%
 
One-month L
 
Sep-10-2017 
Regions Bank
 
Mar-01-2013
 
Mar-01-2013
 
25,000

  
$
(217
)
 
1.3300
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Jul-01-2013
 
50,000

  
$
(1,175
)
 
1.6810
%
 
One-month L
 
Feb-14-2020 
Capital One, N.A.
 
Jun-13-2013
 
Aug-01-2013
 
25,000

  
$
(611
)
 
1.7030
%
 
One-month L
 
Feb-14-2020 
Regions Bank
 
Sep-30-2013
 
Feb-03-2014
 
25,000

  
$
(929
)
 
1.9925
%
 
One-month L
 
Feb-14-2020 
Royal Bank of Canada
 
Jan-08-2015
 
Mar-20-2015
 
25,000

  
$
(527
)
 
1.7090
%
 
One-month L
 
Mar-21-2021