Quarterly report pursuant to Section 13 or 15(d)

VEREIT Office Assets, Real Estate Investments and Related Intangibles

v3.22.1
VEREIT Office Assets, Real Estate Investments and Related Intangibles
 3 Months Ended
Mar. 31, 2022
Entity Information [Line Items]  
Real Estate Investments and Related Intangibles
Note 3 – Real Estate Investments and Related Intangibles
Property Acquisitions
During the three months ended March 31, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of a ground lease. As a result of the transaction, $4.7 million that was previously classified as a finance lease right-of-use asset with respect to such land parcel previously subject to the ground lease was reclassified from other assets, net to real estate investments in the Company’s consolidated balance sheet as of March 31, 2022. During the three months ended March 31, 2021, 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) March 31, 2022 December 31, 2021
Intangible lease assets:
In-place leases, net of accumulated amortization of $90,129 and $65,247, respectively
 4.9 $ 247,807  $ 272,743 
Leasing commissions, net of accumulated amortization of $694 and $456, respectively
 13.0 11,097  10,349 
Above-market lease assets, net of accumulated amortization of $7,535 and $6,239, respectively
 5.1 13,719  15,015 
Total intangible lease assets, net $ 272,623  $ 298,107 
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $16,075 and $14,459, respectively
 7.6 $ 18,993  $ 20,609 
The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $0.3 million for the three months ended March 31, 2022. The aggregate amount of amortization of above-market and below-market leases included as a net decrease to rental revenue was $0.2 million for the three months ended March 31, 2021. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $25.2 million and $1.7 million for the three months ended March 31, 2022 and March 31, 2021, 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 March 31, 2022 (amounts in thousands):
Remainder of 2022 2023 2024 2025 2026 2027
In-place leases:
Total projected to be included in amortization expense $ 69,724  $ 73,858  $ 49,213  $ 21,652  $ 15,499  $ 7,441 
Leasing commissions:
Total projected to be included in amortization expense $ 759  $ 1,012  $ 969  $ 901  $ 901  $ 901 
Above-market lease assets and deferred lease incentives:
Total projected to be deducted from rental revenue $ 3,874  $ 4,791  $ 2,998  $ 860  $ 682  $ 237 
Below-market lease liabilities:
Total projected to be added to rental revenue $ 4,828  $ 6,091  $ 3,786  $ 1,036  $ 817  $ 655 
Investment in Unconsolidated Entity
The following is a summary of the Company’s investment in one unconsolidated entity, Arch Street Joint Venture, as of March 31, 2022 and for the three months ended March 31, 2022 (dollar amounts in thousands):
Ownership % (1)
Number of Properties Carrying Amount of
Investment		 Equity in Income
Three Months Ended (2)
Investment March 31, 2022 March 31, 2022 December 31, 2021 March 31, 2022 March 31, 2021
Arch Street Joint Venture (3) (4)
20% 6 $ 17,952  18,631  $ (41) — 
____________________________________
(1)The Company’s ownership interest reflects its legal ownership interest. Legal ownership may, at times, not equal the Company’s economic interest because of various provisions in the joint venture agreement 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 three months ended March 31, 2022, the Arch Street Joint Venture did not acquire any properties.
(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 $1.7 million as of March 31, 2022. This difference is 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 being 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 Acquisitions/Dispositions
There were no property acquisitions or dispositions during the three months ended March 31, 2021.
Consolidated Joint Venture
VEREIT Office Assets had an interest in one consolidated joint venture that owned one property as of March 31, 2021. As of March 31, 2021, the consolidated joint venture had total assets of $32.6 million, of which $28.7 million 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 $15.0 million as of March 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 one property of VEREIT Office Assets was deemed to be impaired resulting in impairment charges of $21.2 million during the three months ended March 31, 2021. The impairment charges related to a property 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 the following: (1) capitalization rate; (2) discount rates; (3) number of years the 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 three months ended March 31, 2021, VEREIT used a discount rate of 8.6% and a capitalization rate of 8.1% .