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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
____________________________________________________________________________
 
FORM 10-Q 
____________________________________________________________________________
 
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2019
 
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
 
(IRS Employer Identification No.)
incorporation or organization)
 
 
 
 
 
 
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
STAG
New York Stock Exchange
6.875% Series C Cumulative Redeemable Preferred Stock ($0.01 par value)
STAG-PC
New York Stock Exchange

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   No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes   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      Accelerated filer       Non-accelerated filer      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 

The number of shares of common stock outstanding at July 29, 2019 was 127,148,836.
 


Table of Contents

STAG INDUSTRIAL, INC.
Table of Contents 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

Part I. Financial Information
Item 1.  Financial Statements

STAG Industrial, Inc.
Consolidated Balance Sheets
(unaudited, in thousands, except share data)
 
June 30, 2019

December 31, 2018
Assets
 
 
 
Rental Property:
 
 
 
Land
$
397,193


$
364,023

Buildings and improvements, net of accumulated depreciation of $344,597 and $316,930, respectively
2,574,746


2,285,663

Deferred leasing intangibles, net of accumulated amortization of $229,864 and $246,502, respectively
381,133


342,015

Total rental property, net
3,353,072


2,991,701

Cash and cash equivalents
5,092


7,968

Restricted cash
4,503


14,574

Tenant accounts receivable
45,871


42,236

Prepaid expenses and other assets
36,919


36,902

Interest rate swaps
983


9,151

Operating lease right-of-use assets
15,717

 

Total assets
$
3,462,157


$
3,102,532

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Unsecured credit facility
$
129,000


$
100,500

Unsecured term loans, net
596,879


596,360

Unsecured notes, net
572,684


572,488

Mortgage notes, net
55,659


56,560

Accounts payable, accrued expenses and other liabilities
49,911


45,507

Interest rate swaps
18,865


4,011

Tenant prepaid rent and security deposits
21,220


22,153

Dividends and distributions payable
16,822


13,754

Deferred leasing intangibles, net of accumulated amortization of $10,854 and $12,764, respectively
20,340


21,567

Operating lease liabilities
17,525

 

Total liabilities
1,498,905


1,432,900

Commitments and contingencies (Note 11)
 
 
 
Equity:
 
 
 
Preferred stock, par value $0.01 per share, 20,000,000 and 15,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively,
 
 
 
Series C, 3,000,000 shares (liquidation preference of $25.00 per share) issued and outstanding at June 30, 2019 and December 31, 2018
75,000


75,000

Common stock, par value $0.01 per share, 300,000,000 and 150,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively, 126,372,945 and 112,165,786 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
1,264


1,122

Additional paid-in capital
2,501,013


2,118,179

Cumulative dividends in excess of earnings
(653,759
)

(584,979
)
Accumulated other comprehensive income (loss)
(17,771
)

4,481

Total stockholders’ equity
1,905,747


1,613,803

Noncontrolling interest
57,505


55,829

Total equity
1,963,252


1,669,632

Total liabilities and equity
$
3,462,157


$
3,102,532

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

3

Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Operations
(unaudited, in thousands, except per share data)
 
Three months ended June 30,

Six months ended June 30,
 
2019

2018

2019
 
2018
Revenue
    


    


    

 
 
Rental income
$
96,362


$
84,866


$
191,977

 
$
167,993

Other income
284


608


371

 
764

Total revenue
96,646


85,474


192,348

 
168,757

Expenses
 


 


 

 
 
Property
16,955


16,124


36,466

 
33,623

General and administrative
8,587


7,978


17,799

 
16,726

Depreciation and amortization
44,633


40,901


86,936

 
80,866

Loss on impairments




5,344

 
2,934

Other expenses
427


350


826

 
641

Total expenses
70,602


65,353


147,371

 
134,790

Other income (expense)
 


 


 

 
 
Interest and other income
2

 
7

 
18

 
13

Interest expense
(12,193
)

(11,512
)

(25,027
)
 
(22,904
)
Gain on the sales of rental property, net
317


6,348


1,591

 
29,037

Total other income (expense)
(11,874
)

(5,157
)

(23,418
)
 
6,146

Net income
$
14,170


$
14,964


$
21,559

 
$
40,113

Less: income attributable to noncontrolling interest after preferred stock dividends
408


392


622

 
1,334

Net income attributable to STAG Industrial, Inc.
$
13,762


$
14,572


$
20,937

 
$
38,779

Less: preferred stock dividends
1,289


2,578


2,578

 
5,026

Less: redemption of preferred stock

 
2,661

 

 
2,661

Less: amount allocated to participating securities
79


69


158

 
140

Net income attributable to common stockholders
$
12,394


$
9,264


$
18,201

 
$
30,952

Weighted average common shares outstanding — basic
125,251


100,386


120,015

 
98,713

Weighted average common shares outstanding — diluted
125,560


100,733


120,306

 
99,037

Net income per share — basic and diluted
 


 


 

 
 
Net income per share attributable to common stockholders — basic
$
0.10

 
$
0.09

 
$
0.15

 
$
0.31

Net income per share attributable to common stockholders — diluted
$
0.10

 
$
0.09

 
$
0.15

 
$
0.31

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

4

Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited, in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
14,170

 
$
14,964

 
$
21,559

 
$
40,113

Other comprehensive income (loss):
 
 
 
 
 
 
 
Income (loss) on interest rate swaps
(16,028
)
 
3,028

 
(23,006
)
 
10,751

Other comprehensive income (loss)
(16,028
)
 
3,028

 
(23,006
)
 
10,751

Comprehensive income (loss)
(1,858
)
 
17,992

 
(1,447
)
 
50,864

Income attributable to noncontrolling interest after preferred stock dividends
(408
)
 
(392
)
 
(622
)
 
(1,334
)
Other comprehensive (income) loss attributable to noncontrolling interest
510

 
(122
)
 
754

 
(442
)
Comprehensive income (loss) attributable to STAG Industrial, Inc.
$
(1,756
)
 
$
17,478

 
$
(1,315
)
 
$
49,088

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

5

Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Equity
(unaudited, in thousands, except share data)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Cumulative 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 June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
$
75,000

 
118,174,102

 
$
1,182

 
$
2,266,695

 
$
(621,225
)
 
$
(2,253
)
 
$
1,719,399

 
$
55,442

 
$
1,774,841

Proceeds from sales of common stock, net

 
8,180,794

 
82

 
236,254

 

 

 
236,336

 

 
236,336

Dividends and distributions, net

 

 

 

 
(46,296
)
 

 
(46,296
)
 
(2,326
)
 
(48,622
)
Non-cash compensation activity, net

 
3,190

 

 
1,656

 

 

 
1,656

 
899

 
2,555

Redemption of common units to common stock

 
14,859

 

 
207

 

 

 
207

 
(207
)
 

Rebalancing of noncontrolling interest

 

 

 
(3,799
)
 

 

 
(3,799
)
 
3,799

 

Other comprehensive loss

 

 

 

 

 
(15,518
)
 
(15,518
)
 
(510
)
 
(16,028
)
Net income

 

 

 

 
13,762

 

 
13,762

 
408

 
14,170

Balance, June 30, 2019
$
75,000

 
126,372,945

 
$
1,264

 
$
2,501,013

 
$
(653,759
)
 
$
(17,771
)
 
$
1,905,747

 
$
57,505

 
$
1,963,252

Three months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Proceeds from sales of common stock, net

 
6,819,580

 
68

 
174,850

 

 

 
174,918

 

 
174,918

Redemption of preferred stock
(70,000
)
 

 

 
5,141

 
(5,158
)
 

 
(70,017
)
 

 
(70,017
)
Dividends and distributions, net

 

 

 

 
(38,481
)
 

 
(38,481
)
 
(1,997
)
 
(40,478
)
Non-cash compensation activity, net

 
2,615

 

 
1,323

 

 

 
1,323

 
890

 
2,213

Redemption of common units to common stock

 
186,383

 
2

 
2,314

 

 

 
2,316

 
(2,316
)
 

Rebalancing of noncontrolling interest

 

 

 
(3,253
)
 

 

 
(3,253
)
 
3,253

 

Other comprehensive income

 

 

 

 

 
2,911

 
2,911

 
117

 
3,028

Net income

 

 

 

 
14,584

 

 
14,584

 
380

 
14,964

Balance, June 30, 2018
$
75,000

 
104,238,166

 
$
1,042

 
$
1,905,002

 
$
(559,312
)
 
$
14,492

 
$
1,436,224

 
$
53,403

 
$
1,489,627

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
75,000

 
112,165,786

 
$
1,122

 
$
2,118,179

 
$
(584,979
)
 
$
4,481

 
$
1,613,803

 
$
55,829

 
$
1,669,632

Leases cumulative effect adjustment (Note 2)

 

 

 

 
(214
)
 

 
(214
)
 

 
(214
)
Proceeds from sales of common stock, net

 
13,622,203

 
137

 
384,728

 

 

 
384,865

 

 
384,865

Dividends and distributions, net

 

 

 

 
(89,130
)
 

 
(89,130
)
 
(3,872
)
 
(93,002
)
Non-cash compensation activity, net

 
131,026

 
1

 
523

 
(373
)
 

 
151

 
3,267

 
3,418

Redemption of common units to common stock

 
453,930

 
4

 
6,231

 

 

 
6,235

 
(6,235
)
 

Rebalancing of noncontrolling interest

 

 

 
(8,648
)
 

 

 
(8,648
)
 
8,648

 

Other comprehensive loss

 

 

 

 

 
(22,252
)
 
(22,252
)
 
(754
)
 
(23,006
)
Net income

 

 

 

 
20,937

 

 
20,937

 
622

 
21,559

Balance, June 30, 2019
$
75,000

 
126,372,945

 
$
1,264

 
$
2,501,013

 
$
(653,759
)
 
$
(17,771
)
 
$
1,905,747

 
$
57,505

 
$
1,963,252

Six months ended June 30, 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

 

 

 

 
(258
)
 
247

 
(11
)
 
11

 

Proceeds from sales of common stock, net

 
6,819,580

 
68

 
174,743

 

 

 
174,811

 

 
174,811

Redemption of preferred stock
(70,000
)
 

 

 
5,141

 
(5,158
)
 

 
(70,017
)
 

 
(70,017
)
Dividends and distributions, net

 

 

 

 
(75,447
)
 

 
(75,447
)
 
(3,810
)
 
(79,257
)
Non-cash compensation activity, net

 
73,988

 
1

 
468

 
(537
)
 

 
(68
)
 
2,987

 
2,919

Redemption of common units to common stock

 
332,055

 
3

 
4,137

 

 

 
4,140

 
(4,140
)
 

Rebalancing of noncontrolling interest

 

 

 
(5,312
)
 

 

 
(5,312
)
 
5,312

 

Other comprehensive income

 

 

 

 

 
10,309

 
10,309

 
442

 
10,751

Net income

 

 

 

 
38,779

 

 
38,779

 
1,334

 
40,113

Balance, June 30, 2018
$
75,000

 
104,238,166

 
$
1,042

 
$
1,905,002

 
$
(559,312
)
 
$
14,492

 
$
1,436,224

 
$
53,403

 
$
1,489,627

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

6

Table of Contents

STAG Industrial, Inc.
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
Six months ended June 30,
 
2019
 
2018
Cash flows from operating activities:
    
 
    
Net income
$
21,559

 
$
40,113

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
86,936

 
80,866

Loss on impairments
5,344

 
2,934

Non-cash portion of interest expense
1,236

 
1,081

Amortization of above and below market leases, net
2,102

 
2,056

Straight-line rent adjustments, net
(5,522
)
 
(5,449
)
Dividends on forfeited equity compensation
7

 
9

Gain on the sales of rental property, net
(1,591
)
 
(29,037
)
Non-cash compensation expense
4,815

 
4,435

Change in assets and liabilities:
 
 
 
Tenant accounts receivable
1,389

 
1,916

Prepaid expenses and other assets
(3,338
)
 
(5,155
)
Accounts payable, accrued expenses and other liabilities
(1,433
)
 
1,161

Tenant prepaid rent and security deposits
(933
)
 
2,391

Total adjustments
89,012

 
57,208

Net cash provided by operating activities
110,571

 
97,321

Cash flows from investing activities:
 
 
 
Acquisitions of land and buildings and improvements
(368,188
)
 
(222,366
)
Additions of land and building and improvements
(18,949
)
 
(13,610
)
Acquisitions of other assets
(1,049
)
 

Proceeds from sales of rental property, net
17,688

 
79,701

Acquisition deposits, net
2,142

 
(905
)
Acquisitions of deferred leasing intangibles
(76,188
)
 
(41,755
)
Net cash used in investing activities
(444,544
)
 
(198,935
)
Cash flows from financing activities:
 
 
 
Proceeds from unsecured credit facility
381,000

 
249,000

Repayment of unsecured credit facility
(352,500
)
 
(503,000
)
Proceeds from unsecured term loans

 
75,000

Proceeds from unsecured notes

 
175,000

Repayment of mortgage notes
(961
)
 
(922
)
Payment of loan fees and costs
(48
)
 
(1,073
)
Proceeds from sales of common stock, net
384,913

 
174,802

Dividends and distributions
(89,934
)
 
(75,742
)
Repurchase and retirement of share-based compensation
(1,444
)
 
(1,524
)
Net cash provided by financing activities
321,026

 
91,541

Decrease in cash and cash equivalents and restricted cash
(12,947
)
 
(10,073
)
Cash and cash equivalents and restricted cash—beginning of period
22,542

 
28,129

Cash and cash equivalents and restricted cash—end of period
$
9,595

 
$
18,056

Supplemental disclosure:
 
 
 
Cash paid for interest, net of capitalized interest
$
21,965

 
$
19,748

Supplemental schedule of non-cash investing and financing activities
 
 
 
Acquisitions of land and buildings and improvements
$
(72
)
 
$

Acquisitions of deferred leasing intangibles
$
(24
)
 
$

Change in additions of land, building, and improvements included in accounts payable, accrued expenses, and other liabilities
$
(7,351
)
 
$
(1,642
)
Additions to building and other capital improvements from non-cash compensation
$
(40
)
 
$
(9
)
Change in loan fees, costs, and offering costs included in accounts payable, accrued expenses, and other liabilities
$
(62
)
 
$
(41
)
Reclassification of preferred stock called for redemption to liability
$

 
$
70,000

Leases cumulative effect adjustment (Note 2)
$
(214
)
 
$

Dividends and distributions accrued
$
16,822

 
$
15,396

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 June 30, 2019 and December 31, 2018, the Company owned a 97.0% and 96.5%, 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 June 30, 2019, the Company owned 409 buildings in 38 states with approximately 81.2 million rentable square feet, consisting of 341 warehouse/distribution buildings, 59 light manufacturing buildings, and nine flex/office buildings. The Company’s buildings were approximately 95.0% leased to 367 tenants as of June 30, 2019.

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, 2018.

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 and restated (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.

New Accounting Standards and Reclassifications

New Accounting Standards Adopted

In July 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-11 which amends Topic 842, Leases, and provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance and both of the following are met: i) the timing and pattern of transfer of the non-lease component(s) and associated lease component are the same; and ii) the lease component, if accounted for separately, would be classified as an operating lease. Under this new expedient, if the non-lease components associated with the lease component are the predominant component of the combined component, a company should account for the combined component in accordance with Topic 606, Revenue from Contracts with Customers. Otherwise, the company should account for the combined component as an operating lease in accordance with Topic 842. In December 2018, the FASB issued ASU 2018-20 which amends Topic 842, Leases, and allows lessors to continue to exclude from revenue the lessor costs that are paid by lessees directly to third parties. The Company adopted Topic 842 on January 1, 2019, using the practical

8

Table of Contents

expedient, and it did not have a material impact on the Company’s consolidated financial statements. The Company determined that for all leases where the Company is the lessor, that the timing and pattern of transfer of the non-lease components and associated lease components are the same, and that the lease components, if accounted for separately, would be classified as an operating lease. Accordingly, the Company has made an accounting policy election to recognize the combined component in accordance with Topic 842 as rental income on the accompanying Consolidated Statements of Operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and various subsequent ASU’s, which set 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 superseded 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 determines 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 are accounted for similar to the previous guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to the previous guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 impacted the Company’s consolidated financial statements as the Company has ground leases and its corporate office lease for which it is the lessee, which resulted in the recording of a right-of-use asset and the related lease liability.

The Company adopted ASU 2016-02 on January 1, 2019, using the modified retrospective transition method. The adoption of this standard resulted in a cumulative effect adjustment of approximately $0.2 million recorded as an increase to cumulative dividends in excess of earnings as of January 1, 2019 in the accompanying Consolidated Statements of Equity. The cumulative effect adjustment related to initial direct costs of leases where the Company is the lessor and that, as of January 1, 2019, had not begun to amortize and are no longer allowed to be capitalized under the new standard. On January 1, 2019, the Company recognized operating lease right-of-use assets of approximately $16.3 million and related operating lease liabilities of approximately $18.0 million on the accompanying Consolidated Balance Sheets, related to the leases where the Company is the lessee. The Company adopted the new standard using the practical expedient package which allowed the Company to (i) not reassess whether any expired or existing contracts are or contain leases; (ii) not reassess the lease classification for any expired or existing leases; and (iii) not reassess initial direct costs for any existing leases. This practical expedient allows the Company to continue to account for its ground leases as operating leases. Prospectively, any new or modified ground leases may be classified as a financing lease. The adoption of this standard by the Company has been applied as of January 1, 2019, and the comparative periods have not been restated.

For leases in which the Company is the lessee, the Company recognizes a right-of-use asset and corresponding lease liability on the accompanying Consolidated Balance Sheets equal to the present value of the fixed lease payments. In determining operating right-of-use asset and lease liability for the Company’s existing operating leases upon the adoption of the new lease guidance, the Company was required to estimate an appropriate incremental borrowing rate on a fully-collateralized basis for the terms of the leases. The Company utilized a market-based approach to estimate the incremental borrowing rate for each individual lease. Since the terms under the ground leases are significantly longer than the terms of borrowings available to the Company on a fully-collateralized basis, the estimate of this rate required significant judgment, and considered factors such as yields on outstanding public debt and other market based pricing on longer duration financing instruments.

The new leases standard requires the Company to evaluate cash basis versus accrual basis of rental income recognition based on the collectability of future lease payments.

Reclassifications

Prior period amounts have been reclassified to conform to the current year presentation due to the adoption of ASU 2016-02. Amounts previously classified as rental income and tenant recoveries in the prior period are now classified as rental income on the accompanying Consolidated Statements of Operations, as the Company has made an accounting policy election to combine these amounts that are accounted for under the new leases standard.

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



9

Table of Contents

Restricted Cash

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.
Reconciliation of cash and cash equivalents and restricted cash (in thousands)
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents
 
$
5,092

 
$
7,968

Restricted cash
 
4,503

 
14,574

Total cash and cash equivalents and restricted cash
 
$
9,595

 
$
22,542



Taxes

Federal Income Taxes

The Company’s taxable REIT subsidiaries recognized net income (loss) of approximately $0.3 million, $0.3 million, $(39,000) and $(0.1) million for the three and six months ended June 30, 2019 and 2018, 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 $0.4 million, $0.6 million, $0.3 million and $0.5 million have been recorded in other expenses on the accompanying Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018, respectively.

Uncertain Tax Positions

As of June 30, 2019 and December 31, 2018, there were no liabilities for uncertain tax positions.

Concentrations of Credit Risk

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

3. Rental Property

The following table summarizes the components of rental property as of June 30, 2019 and December 31, 2018.
Rental Property (in thousands)
 
June 30, 2019
 
December 31, 2018
Land
 
$
397,193

 
$
364,023

Buildings, net of accumulated depreciation of $227,359 and $199,497, respectively
 
2,330,493

 
2,082,781

Tenant improvements, net of accumulated depreciation of $20,796 and $36,450, respectively
 
32,127

 
30,704