Annual report pursuant to Section 13 and 15(d)

VEREIT Office Assets, Real Estate Investments and Related Intangibles

v3.22.4
VEREIT Office Assets, Real Estate Investments and Related Intangibles
 12 Months Ended
Dec. 31, 2022
Entity Information [Line Items]  
Real Estate Investments and Related Intangibles
Note 3 – Real Estate Investments and Related Intangibles
Property Acquisitions
During the year ended December 31, 2022, the Company acquired for no consideration the fee interest in one parcel of land in connection with the maturity of the tax advantaged bond and ground lease structure. 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 sheets as of December 31, 2022. The Company did not have any other acquisitions during the year ended December 31, 2022 and during the years ended December 31, 2021 and 2020, the Company had no acquisitions.
Property Dispositions and Real Estate Assets Held for Sale
The following table summarizes the Company’s property dispositions for the years ended December 31, 2022, 2021 and 2020 (dollars in thousands):
Year Ended December 31,
2022 2021 2020
Total dispositions 11  —  — 
Aggregate gross sales price $ 33,098  $ —  $ — 
Gain on disposition of real estate assets $ 2,352  $ —  $ — 
Property count 5  —  — 
Impairments on disposition of real estate assets $ 5,089  $ —  $ — 
Property count 6  —  — 
As of December 31, 2022, there was one property classified as held for sale, which the Company expected to be sold in the next 12 months as part of its portfolio management strategy. The property had a carrying value of $2.5 million primarily comprised of land of $0.6 million and building, fixtures and improvements, net of $1.9 million, included in real estate assets held for sale, net in the accompanying consolidated and balance sheets. During the year ended December 31, 2022, the Company recorded a loss of $6.0 million related to held for sale properties, which is included in impairments in the accompanying consolidated and combined statements of operations.
Intangible Lease Assets and Liabilities
Intangible lease assets consisted of the following (in thousands, except weighted-average useful life):
Weighted-Average Useful Life (Years) December 31, 2022 December 31, 2021
Intangible lease assets:
In-place leases, net of accumulated amortization of $144,798 and $65,247, respectively
 5.4 $ 177,698  $ 272,743 
Leasing commissions, net of accumulated amortization of $1,553 and $456, respectively
 12.4 13,614  10,349 
Above-market lease assets, net of accumulated amortization of $11,391 and $6,239, respectively
 5.5 9,826  15,015 
Deferred lease incentives, net of accumulated amortization of $116
 4.7 1,694  — 
Total intangible lease assets, net $ 202,832  $ 298,107 
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $17,249 and $14,459, respectively
 8.4 $ 14,068  $ 20,609 
The aggregate amount of amortization of above-market and below-market leases included as a net increase to rental revenue was $1.2 million, $1.0 million and $0.8 million for the years ended December 31, 2022, 2021 and 2020, respectively. The aggregate amount of amortization of deferred lease incentives included as a net decrease to rental revenue was $0.1 million for the year ended December 31, 2022 as compared to no impact to rental revenue for the years ended December 31, 2021 and 2020. The aggregate amount of in-place leases, leasing commissions and other lease intangibles amortized and included in depreciation and amortization expense was $95.4 million, $23.1 million and $7.9 million for the years ended December 31, 2022, 2021 and 2020, 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, 2022 (in thousands):
2023 2024 2025 2026 2027
In-place leases:
Total projected to be included in amortization expense $ 73,501  $ 49,185  $ 21,652  $ 15,499  $ 7,441 
Leasing commissions:
Total projected to be included in amortization expense $ 1,340  $ 1,297  $ 1,229  $ 1,229  $ 1,226 
Above-market lease assets:
Total projected to be deducted from rental revenue $ 4,776  $ 2,995  $ 860  $ 682  $ 237 
Deferred lease incentives:
Total projected to be deducted from rental revenue $ 403  $ 403  $ 386  $ 288  $ 212 
Below-market lease liabilities:
Total projected to be added to rental revenue $ 5,994  $ 3,786  $ 1,036  $ 817  $ 655 
Consolidated Joint Venture
The Company had an interest in one consolidated joint venture that owned one property as of December 31, 2022 and 2021. As of December 31, 2022 and 2021, the consolidated joint venture had total assets of $27.7 million and $27.4 million, respectively, of which $24.9 million and $26.1 million, respectively, 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 Joint Venture
The following is a summary of the Company’s investment in the Arch Street Joint Venture, as of December 31, 2022 and 2021 and for the year ended December 31, 2022 and 2021 (dollars in thousands):
Ownership % (1)
Number of Properties Carrying Value of
Investment		 Equity in Loss, Net
Year Ended (2)
Investment December 31, 2022 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 December 31, 2020
Arch Street Joint Venture (3) (4)
20% 6 $ 15,824  $ 18,631  $ (524) $ (56) $ — 
____________________________________
(1)The Company’s ownership interest reflects its legal ownership interest. The Company’s legal ownership interest 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 interest.
(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 loss, net reflects operations following the Merger Effective Time.
(3)During the year ended December 31, 2022, the Arch Street Joint Venture did not acquire any properties. During the 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 value of the Company’s investment in the Arch Street Joint Venture was greater than the underlying equity in net assets by $0.9 million and $2.1 million as of December 31, 2022 and 2021, respectively. This difference is related to a step up in the fair value of the investment in the Arch Street Joint Venture in connection with the Mergers. The step up in fair value was allocated based on the underlying assets and liabilities of the Arch Street Joint Venture and is being amortized over the estimated useful lives of the respective assets and liabilities in accordance with the Company’s accounting policies.
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 Arch Street 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 was included in gain on disposition of real estate assets, net in the accompanying combined and consolidated statements of operations.
Intangible Lease Assets and Liabilities
Intangible lease assets consisted of the following (in thousands, except weighted-average useful life):
Weighted-Average Useful Life (Years) October 31, 2021
Intangible lease assets:
In-place leases, net of accumulated amortization of $119,604
 10.1 $ 29,091 
Leasing commissions, net of accumulated amortization of $5,679
 9.1 8,744 
Above-market lease assets and deferred lease incentives, net of accumulated amortization of $14,793
 9.8 6,649 
Total intangible lease assets, net $ 44,484 
Intangible lease liabilities:
Below-market leases, net of accumulated amortization of $18,504
10.3 $ 5,308 
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 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 for the year ended December 31, 2020.
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 (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. As of October 31, 2021, the consolidated joint venture had total assets of $30.7 million, of which $27.7 million were real estate investments, net of accumulated depreciation and amortization. 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 of the mortgage note in full and there were no amounts outstanding as of October 31, 2021. The joint venture partner was 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 was required to 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 and two properties of VEREIT Office Assets were deemed to be impaired resulting in impairment charges of $28.1 million and $9.3 million during the ten months ended October 31, 2021 and year ended December 31, 2020, respectively. 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 properties 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, which included 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 were 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%.