Annual report pursuant to Section 13 and 15(d)

VEREIT Office Assets, Real Estate Investments and Related Intangibles

v3.22.1
VEREIT Office Assets, Real Estate Investments and Related Intangibles
 12 Months Ended
Dec. 31, 2021
Entity Information [Line Items]  
Real Estate Investments and Related Intangibles
Note 3 – Real Estate Investments and Related Intangibles
Property Acquisitions
During the years ended December 31, 2021, 2020 and 2019, the Company had no acquisitions.
Intangible Lease Assets
Intangible lease assets consisted of the following (amounts in thousands, except weighted-average useful life):
Weighted-Average Useful Life (Years) December 31, 2021 December 31, 2020
Intangible lease assets:
In-place leases, net of accumulated amortization of $65,247 and $71,633, respectively
 4.8 $ 272,743  $ 25,800 
Leasing commissions, net of accumulated amortization of $456
 13.4 10,349  — 
Above-market lease assets, net of accumulated amortization of $6,239 and $7,166, respectively
 5.0 15,015  2,880 
Total intangible lease assets, net $ 298,107  $ 28,680 
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $14,459 and $13,482, respectively
 7.5 $ 20,609  $ 7,221 
The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $1.0 million, $0.8 million and $0.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $23.1 million for the year ended December 31, 2021, and $7.9 million and $8.7 million for the years ended December 31, 2020 and 2019, respectively.
The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of December 31, 2021 (amounts in thousands):
2022 2023 2024 2025 2026
In-place leases:
Total projected to be included in amortization expense $ 94,659  $ 73,859  $ 49,213  $ 21,652  $ 15,499 
Leasing commissions:
Total projected to be included in amortization expense $ 850  $ 850  $ 841  $ 836  $ 836 
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue $ 5,171  $ 4,791  $ 2,998  $ 860  $ 682 
Below-market lease liabilities:
Total projected to be added to rental revenue $ 6,443  $ 6,091  $ 3,786  $ 1,036  $ 817 
Consolidated Joint Venture
The Company had an interest in one consolidated joint venture that owned one property as of December 31, 2021. As of December 31, 2021, the consolidated joint venture had total assets of $27.4 million, of which $26.1 million were real estate investments, net of accumulated depreciation and amortization. The joint venture partner is the managing member of the joint venture. However, in accordance with the joint venture agreement, the Company has the ability to control the operating and financing policies of the consolidated joint venture and the joint venture partner must obtain the Company’s approval for any major transactions. The Company and the joint venture partner are subject to the provisions of the joint venture agreement, which includes provisions for when additional contributions may be required to fund certain cash shortfalls.
Investment in Unconsolidated Entity
The following is a summary of the Company’s investment in one unconsolidated entity, Arch Street Joint Venture, as of December 31, 2021 and for the year ended December 31, 2021 (dollar amounts in thousands):
Ownership % (1)
Number of Properties Carrying Amount of
Investment		 Equity in Income
Year Ended (2)
Investment December 31, 2021 December 31, 2021 December 31, 2021
Arch Street Joint Venture (3) (4)
20% 6 $ 18,631  $ (56)
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(1)The Company’s ownership interest reflects its legal ownership interest. Legal ownership may, at times, not equal the Company’s economic interest in the listed properties because of various provisions in certain joint venture agreements regarding capital contributions, distributions of cash flow based on capital account balances and allocations of profits and losses. As a result, the Company’s actual economic interest (as distinct from its legal ownership interest) in certain of the properties could fluctuate from time to time and may not wholly align with its legal ownership interests.
(2)The interest in the Arch Street Joint Venture was acquired by Realty Income as part of the Mergers, and was transferred to the Company upon the consummation of the Distribution. Therefore, the Company’s equity in income reflects operations following the Merger Effective Time.
(3)During year ended December 31, 2021, the Arch Street Joint Venture acquired one property from a third party for a purchase price of $30.5 million.
(4)The total carrying amount of the Company’s investment in the unconsolidated joint venture was greater than the underlying equity in net assets by $2.1 million as of December 31, 2021. This difference related to a step up in the fair value of the investment in the unconsolidated joint venture in connection with the Mergers. The step up in fair value was allocated to the Company’s investment in the unconsolidated joint venture and is amortized in accordance with the Company’s depreciation policy.
VEREIT Office Assets  
Entity Information [Line Items]  
Real Estate Investments and Related Intangibles
Note 2 – Real Estate Investments and Related Intangibles
Property Dispositions
During the year ended December 31, 2020, VEREIT Office Assets disposed of three properties, selling them to the unconsolidated joint venture for an aggregate net sales price of $135.5 million. The dispositions resulted in proceeds of $116.4 million after closing costs and VEREIT Office Assets recorded a net gain of $9.8 million related to the dispositions, which is included in gain on disposition of real estate assets, net in the accompanying combined and consolidated statements of operations.
Intangible Lease Assets
Intangible lease assets consisted of the following (amounts in thousands, except weighted-average useful life):
Weighted-Average Useful Life (Years) October 31, 2021 December 31, 2020
Intangible lease assets:
In-place leases, net of accumulated amortization of $119,604 and $118,093, respectively
 10.1 $ 29,091  $ 40,622 
Leasing commissions, net of accumulated amortization of $5,679 and $4,211, respectively
 9.1 8,744  7,974 
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $14,793 and $12,974, respectively
 9.8 6,649  8,417 
Total intangible lease assets, net $ 44,484  $ 57,013 
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $18,504 and $17,553, respectively
 10.3 $ 5,308  $ 7,188 
The aggregate amount of amortization of above-market and below-market leases and deferred lease incentives included as a net decrease to rental revenue was $29,000 for the ten months ended October 31, 2021 and $67,000 for the year ended December 31, 2020. The aggregate amount included as a net increase to rental revenue was $231,000 for the year ended December 31, 2019. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $13.0 million for the ten months ended October 31, 2021, and $17.8 million and $19.2 million for the years ended December 31, 2020 and 2019, respectively.
The following table provides the projected amortization expense and adjustments to rental revenue related to the intangible lease assets and liabilities for the next five years as of October 31, 2021 (amounts in thousands):
Remainder of 2021 2022 2023 2024 2025
In-place leases:
Total projected to be included in amortization expense $ 2,191  $ 10,475  $ 9,142  $ 5,512  $ 1,156 
Leasing commissions:
Total projected to be included in amortization expense $ 288  $ 1,692  $ 1,290  $ 1,201  $ 1,020 
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue $ 373  $ 2,223  $ 2,186  $ 1,104  $ 354 
Below-market lease liabilities:
Total projected to be included in rental revenue $ 345  $ 2,003  $ 1,878  $ 854  $ 208 
Consolidated Joint Venture
VEREIT Office Assets had an interest in one consolidated joint venture that owned one property as of October 31, 2021 and December 31, 2020. As of October 31, 2021 and December 31, 2020, the consolidated joint venture had total assets of $30.7 million and $33.0 million, respectively, of which $27.7 million and $29.1 million, respectively, were real estate investments, net of accumulated depreciation and amortization at each of the respective dates. The property was secured by a mortgage note payable, which was non-recourse to VEREIT Office Assets and had a net balance of $14.8 million as of December 31, 2020. During the ten months ended October 31, 2021, VEREIT, on behalf of VEREIT Office Assets, repaid the balance in full and there were no amounts outstanding as of October 31, 2021. The joint venture partner is the managing member of the joint venture. However, in accordance with the joint venture agreement, VEREIT Office Assets had the ability to control operating and financing policies of the consolidated joint venture and the joint venture partner must obtain VEREIT Office Assets’ approval for any major transactions. VEREIT Office Assets and the joint venture partner were subject to the provisions of the joint venture agreement, which included provisions for when additional contributions may be required to fund certain cash shortfalls.
Impairments
VEREIT management performed quarterly impairment review procedures for real estate investments, leasehold improvements and property and equipment and right of use assets, primarily through continuous monitoring of events and changes in circumstances that could indicate the carrying value of its real estate assets may not be recoverable.
As part of VEREIT management’s quarterly impairment review procedures, net real estate assets representing four properties of VEREIT Office Assets were deemed to be impaired resulting in impairment charges of $28.1 million during the ten months ended October 31, 2021. During the year ended December 31, 2020, net real estate assets related to two properties were deemed to be impaired resulting in impairment charges of $9.3 million. During the year ended December 31, 2019, net real estate assets related to two properties were deemed to be impaired resulting in impairment charges of $3.5 million. The impairment charges related to properties that VEREIT management identified for potential sale or were determined, based on discussions with the current tenants, would not be re-leased by the tenant and VEREIT management believed the property would not be leased to another tenant at a rental rate that supported the book value.
VEREIT estimated fair values using Level 3 inputs and used a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment required VEREIT’s management to exercise significant judgment and make certain key assumptions, including, but not limited to, the following: (1) capitalization rate; (2) discount rates; (3) number of years property will be held; (4) property operating expenses; and (5) re-leasing assumptions including number of months to re-lease, market rental revenue and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and performance and sustainability of VEREIT Office Assets’ tenants. For VEREIT’s impairment tests for the real estate assets during the ten months ended October 31, 2021, VEREIT used a weighted-average discount rate of 9.0% and a weighted-average capitalization rate of 8.5% . For VEREIT’s impairment tests for the real estate assets during the year ended December 31, 2020, VEREIT used a weighted-average discount rate of 8.9% and a weighted-average capitalization rate of 8.4%. For VEREIT’s impairment tests for the real estate assets during the year ended December 31, 2019, discount rates and capitalization rates were not applicable as VEREIT determined the fair value of the real estate assets of VEREIT Office Assets based on sale scenarios and the properties had leases expiring within 12 months of the impairment analysis.