Summary of Significant Accounting Policies
|9 Months Ended|
Sep. 30, 2022
|Accounting Policies [Abstract]|
|Summary of Significant Accounting Policies||Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) as established by the Financial Accounting Standards Board (“FASB”) including modifications issued under Accounting Standards Updates (“ASUs”). In the opinion of management, all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation have been included.
The Merger was accounted for as a business combination because substantially all of the fair value of the gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets. The Parent elected to apply pushdown accounting. Accordingly, the purchase price of the Merger has been allocated to the Company’s assets and liabilities based upon their estimated fair values at the Acquisition Date in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. Costs related to the Merger have been expensed as incurred and classified within Merger costs in the Consolidated Statements of Operations, totaling $37,266, $94,805, and $100,952 for the period from July 20, 2022 through September 30, 2022, the period from July 1, 2022 through July 19, 2022, and the period from January 1, 2022 through July 19, 2022, respectively. The Company engaged a third-party valuation firm to assist in determination of the fair values of tangible and intangible assets acquired. As used herein, the term “Predecessor” refers to the financial position and results of operations of the Company prior to the Acquisition Date. The term “Successor” refers to the financial position and results of operations of the Company on or after the Acquisition Date.
Upon acquisition of a rental property that is accounted for as a business combination, the Company allocates the purchase price, of each acquired property based upon the fair value of the individual assets acquired and liabilities assumed, which generally include tangible assets, consisting of land, building, building improvements, tenant improvements, and identified intangible assets and liabilities, generally consisting of above-and below-market leases, in-place leases, and origination costs associated with in-place leases. In estimating the fair value of tangible and intangible assets and liabilities acquired, the Company considers information obtained about the property during its due diligence and marketing and leasing activities, and utilizes appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The values of above-and below-market leases are recorded to Lease-related intangible assets, net and Lease-related intangible liabilities, net, respectively, in the Consolidated Balance Sheets and are amortized as either a decrease (in the case of above-market leases) or an increase (in the case of below-market leases) to rental revenue over the remaining term of the associated tenant lease. The values associated with in-place leases are recorded in Lease-related intangible assets, net in the Consolidated Balance Sheets and are amortized to depreciation and amortization expense over the remaining lease term.
In a business combination, the initial allocation of the purchase price is considered preliminary and may change upon final determination of the fair values of the assets acquired and liabilities assumed. The final determination must occur within one year of the acquisition date.
The Company performs the following procedures for properties it acquires:
•Estimate the value of the property “as if vacant” as of the acquisition date;
•Calculate the value and associated life of above and below market leases on a tenant-by-tenant basis. The difference between the contractual rental rates and the Company’s estimate of market rental rates is measured over a period equal to the remaining term of the leases (using a discount rate which reflects the risks associated with the leases acquired);
•Estimate the fair value of land acquired based upon relevant adjusted land sales comparable;
•Estimate the fair value of the tenant improvements, legal expenses and leasing commissions incurred to obtain the leases and calculate the associated useful life for each;
•Estimate the intangible value of the in-place leases and their associated useful lives on a tenant-by-tenant basis;
•Estimate the carrying values of other assets and liabilities approximate fair value due to their short term nature and credit risk;
•Identify the fair value of assets to be sold within one year, and
•Allocate the purchase consideration of each acquired property based upon the fair value of the individual assets acquired and liabilities assumed.
The following table is a summary of the fair value of assets acquired less liabilities assumed of the Company recognized in connection with the Merger:
¹ Includes $143,111 of working capital contributed by our Parent.
As a result of the Merger discussed in Note 1 and the election to apply pushdown accounting, the Company also aligned its accounting policies with that of the Parent. Accordingly, certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. As of December 31, 2021, the reclassifications represent changes to aggregation and presentation of financial information and resulted in zero change to total assets and zero change to total liabilities. For the three and nine months ended September 30, 2021, it resulted in $30 and $449 changes to total revenue, $15 and $222 changes in total expenses, and $15 and $227 changes in total other income (expense), respectively. There was no change to net income as historically reported.
Principles of Consolidation
The Company’s policy is to consolidate all entities in which it owns more than 50% of the outstanding voting interest unless it does not control the entity. It is also the Company’s policy to consolidate any variable interest entity (“VIE”) for which the Company is the primary beneficiary, as defined by GAAP. The Company is deemed to be the primary beneficiary when it has (i) the power to direct the activities that most significantly impact the economic performance of the entity, and (ii) the obligation (or right) to absorb losses (or receive benefits) of the entity that could potentially be significant.
Investments in entities in which the Company does not control but which it has the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that the Company does not control and over which it does not exercise significant influence are carried at the lower of cost or fair value, as appropriate. The Company’s ability to correctly assess control over an entity affects the presentation of these investments in the Consolidated Financial Statements. The portions of consolidated entities not owned by the Company are presented as noncontrolling interests as of and during the periods presented. All intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates, judgments and assumptions are required in a number of areas, including, but not limited to, evaluating the impairment of long-lived assets and investments, allocating the purchase price of acquired properties, determining the fair value of debt and incentive compensation. These estimates, judgments and assumptions are based on historical experience and various other factors that the Company believes to be reasonable under the circumstances. Actual results may differ from those estimates.
Investments in Real Estate
Property and improvements, including interest and other costs capitalized during construction and development, are included in Investments in real estate, net and are stated at cost. Property and improvements, excluding land, are depreciated over their estimated useful lives using the straight-line method. The estimated useful lives by asset category are as follows:
Expenditures for ordinary repairs and maintenance are expensed as incurred. Renovations and improvements, which improve or extend the useful life of the assets, are capitalized.
Capitalization of Costs
During the land development and construction periods of qualifying projects, the Company capitalizes interest costs, insurance, real estate taxes and general and administrative costs of the personnel performing the development, renovation and rehabilitation if such costs are incremental and identifiable to a specific activity to ready the asset for its intended use. The Company capitalizes transaction costs related to the acquisition of land for future development and operating properties that qualify as asset acquisitions. The Company capitalizes incremental costs incurred to successfully originate a lease that result directly from obtaining a lease and would also not have been incurred if the lease had not been obtained. In assessing the amount of direct and indirect costs to be capitalized, allocations are made based on estimates of the actual amount of time spent in each activity. The Company does not capitalize any costs attributable to downtime or to unsuccessful projects.
Leasing costs that meet the requirements for capitalization are presented as a component of Lease-related intangible assets, net in the Consolidated Balance Sheets and all other capitalized costs are included in the investment basis of the real estate assets.
Acquisition of Real Estate
In accordance with the guidance for business combinations, the Company determines whether a transaction or other event is a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, the Company would account for the transaction or other event as an asset acquisition. The Company’s acquisitions of investment properties are accounted for as asset acquisitions, as substantially all of the fair value of the gross assets acquired is typically concentrated in a single identifiable asset or a group of similar identifiable assets. When acquisitions are treated as asset acquisitions, the related transaction costs are capitalized.
Disposition of Real Estate
The Company assesses whether a property is considered held for sale based on the criteria in ASC 360 Property, Plant, and Equipment (“ASC 360”). The Company generally classifies certain properties and related assets and liabilities as held for sale when the sale of an asset has been duly approved by management, a legally enforceable contract has been executed and the buyer’s due diligence period, if any, has expired and a non-refundable deposit has been received. If a property is considered held for sale, a provision for loss is recognized if the fair value of the property less the estimated cost to sell is less than its carrying amount. Depreciation and amortization expense cease once a property is considered held for sale. As of September 30, 2022 and December 31, 2021, zero and 12 properties were classified as held for sale, respectively.
The Company’s sales of real estate are generally considered to be sales to non-customers, requiring the Company to identify each distinct non-financial asset promised to the buyer. The Company determines whether the buyer obtains control of the non-financial assets, achieved through the transfer of the risks and rewards of ownership of the non-financial assets.
The Company recognizes gains on the disposition of real estate when the recognition criteria have been met, generally at the time the risks and rewards and title have transferred, and we no longer have substantial continuing involvement with the real estate sold. The Company recognizes gains or losses from the disposition of real estate when known as Gain (loss) on sale of real estate, net in the Consolidated Statement of Operations.
Impairment of Long-Lived Assets
The Company periodically assesses whether there are any indicators that the value of its real estate may be impaired. When impairment indicators exist, the Company’s properties are evaluated for impairment. A property’s value is considered impaired if the sum of expected future cash flows (on an undiscounted basis) over the anticipated holding period is less than the property’s carrying value. Upon determination that an impairment exists, properties are reduced to their fair value.
The evaluation of future cash flows is highly subjective and is based in part on the Company’s assumptions regarding future occupancy, rental rates, capital requirements, and holding periods. These assumptions could differ materially from actual results in future periods. Should circumstances change, and the Company shortens the expected holding period for an asset or group of assets, an impairment loss may be recognized, and such loss could be material. During the periods presented, no impairment was recognized in the Consolidated Financial Statements.
Impairment of Real Estate Assets Classified as Held for Sale
A property is classified as held for sale when all of the accounting criteria for a plan of sale have been met. Upon classification as held for sale, the Company recognizes an impairment charge, if necessary, to lower the carrying amount of the real estate asset to its estimated fair value less cost to sell. The determination of fair value can involve significant judgments and assumptions. The Company develops key assumptions based on the contractual sales price. If this information is not available, the Company uses estimated replacement costs or estimated cash flow projections that utilize estimated discount and capitalization rates. These estimates are subject to uncertainty and therefore require significant judgment by the Company. The Company reviews all assets held for sale each reporting period to determine whether the existing carrying amounts are fully recoverable in comparison to their estimated fair values less costs to sell.
Deferred Leasing Costs
Deferred leasing costs consist primarily of costs incurred to execute new and renewal tenant leases, primarily costs paid to third parties. Deferred leasing costs are amortized on a straight-line basis over the terms of the respective leases. The amortization of deferred leasing costs is included in the line item Depreciation and amortization in the Consolidated Statement of Operations.
Deferred Financing Costs
The Company defers fees and direct costs incurred to obtain financing, which is reflected as a component of Debt, net within the accompanying Consolidated Balance Sheets. Deferred financing costs are amortized to interest expense using the effective rate method, which approximates the effective interest method, over the term of the debt to which they apply. Unamortized deferred financing costs are charged to interest expense when the related financing is repaid prior to its scheduled maturity date.
The Company leases its operating properties to customers under agreements that are classified as operating leases. Rental revenue primarily consists of base rent arising from tenant leases and tenant reimbursements of property operating expenses related to common area maintenance, real estate taxes, and other recoverable costs included in lease agreements.
The Company begins to recognize revenue for leases that are assumed upon the acquisition of the related property or when a tenant takes possession of the leased space for a new lease.
If a lease provides for tenant reimbursement of building operating expenses, the Company recognizes revenue associated with the recovery of those building operating expenses as those expenses are incurred.
The Company records rental revenue on a straight-line basis as it is earned during the lease term. Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments change during the lease term. Accordingly, a receivable is recorded representing the difference between the straight-line rent and the rent that is contractually due from the tenant over the contractual lease term. These amounts are classified as Tenant and other receivables in the Consolidated Balance Sheets. When a property is acquired, the terms of existing leases are considered to commence as of the acquisition date for purposes of this calculation. As a result of the election of pushdown accounting for the Merger, the Acquisition Date was used as commencement date for purposes of active leases that existed as of that date.
Noncontrolling interests represent the share of consolidated entities owned by third parties. The Company recognizes each noncontrolling holder’s respective share of the estimated fair value of the net assets at the date of formation or acquisition. Noncontrolling interests are subsequently adjusted for the noncontrolling holder’s share of additional contributions, distributions and their share of the net earnings or losses of each respective consolidated entity. The Company allocates net income or loss to noncontrolling interests based on the weighted average ownership interest during the period. The net income or loss that is not attributable to the Company is reflected in the line item Net (income) loss attributable to noncontrolling interests within the Consolidated Statements of Operations. As of the Acquisition Date, noncontrolling interest was stepped up to fair value as a result of pushdown accounting.
Tenant and Other Receivables
The Company provides for potentially uncollectible accounts on tenant and other receivables based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past due accounts and considers information such as the nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant and the Company’s assessment of its ability to meet its lease obligations, the basis for any disputes, and the status of related lease negotiations.
The Company’s determination of the adequacy of its allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.
Cash and Cash Equivalents
Cash and cash equivalents represent cash held in banks, cash on hand, and liquid investments with maturities at date of purchase of three months or less.
Restricted cash primarily consists of reserves for certain capital improvements, leasing, interest and real estate tax and insurance payments as required by certain debt obligations.
Income and Other Taxes
The Company has elected to be taxed as a REIT. This, along with the nature of the operations of its operating properties, resulted in no provision for federal income taxes at the Company level. In addition, the Partnership generally is not liable for federal income taxes as the partners recognize their allocable share of income or loss in their tax returns; therefore no provision for federal income taxes has been made at the Partnership level. The Company generally only incurs certain state and local income, excise and franchise taxes. The Company has elected taxable REIT subsidiary (“TRS”) status for certain of its corporate subsidiaries and, as a result, these entities will incur both federal and state income taxes on any taxable income of such entities after consideration of any net operating losses.
The Company accounts for deferred income taxes using the asset and liability method and recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s Consolidated Financial Statements or tax returns. Under this method, the Company determines deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes management to change its judgment about expected future tax consequences of events, is included in the tax provision when such changes occur. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes management to change its judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur.
The Company recognizes the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties, if applicable, related to uncertain tax positions as part of income tax benefit or expense.
Derivatives and Hedging Activities
The Company buys or sells derivative financial instruments to limit exposure to changes in interest rates on variable rate debt. The Company does not use derivative instruments for speculative or trading purposes. None of the Company’s interest rate caps or swaps are currently or have been designated as hedges for accounting purposes. The Company’s derivative financial instruments are recorded at fair value and are recorded in the line items Prepaid expenses and other assets and Accounts payable, accrued expenses and other liabilities in the Consolidated Balance Sheets.
Changes in the fair value of our derivative financial instruments are marked to market through earnings each quarter and are reflected in Interest income (expense) in the Consolidated Statements of Operations.
Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less. Parties to interest rate cap or swap agreements are subject to market risk for changes in interest rates and credit risk in the event of nonperformance by the counterparty. The Company does not require any collateral under these agreements but deals only with highly rated institutional counterparties and expects that they will meet their obligations.
Fair Value Measurements
Various inputs are used in determining the fair value of derivative instruments presented in the Consolidated Financial Statements. The Company classifies the inputs as follows:
Level 1—Quoted unadjusted prices for identical instruments in active markets to which the Company has access at the date of measurement.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Company’s own assumptions that market participants would use to price the asset or liability based on the best available information.
Fair Value Measurements on a Recurring Basis. The Company estimates the fair value of its financial instruments using available market information and valuation methodologies management believes to be appropriate for these purposes. In connection with the Merger, the preferred stocks were valued using quoted market prices in active markets (Level 1).
The fair value of the Company’s derivatives was determined by management, based on valuation information prepared by an independent third party. Their fair value model incorporates credit risk and changes in credit risk to determine a credit valuation adjustment. This model is based on the applicable forward curve as a reflection of the market’s current expectation of payments discounted at market factors. The Company classifies these valuations within the Level 2 fair value hierarchy.
Under interest rate cap agreements, the Company makes initial premium payments to the counterparties in exchange for the right to receive payments from them if interest rates exceed specified levels during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less. Parties to interest rate cap agreements are subject to market risk for changes in interest rates and credit risk in the event of nonperformance by the counterparty. The Company does not require any collateral under these agreements but deals only with highly-rated institutional counterparties and expects that they will meet their obligations.
The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. Although the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties, the Company assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.
Fair Value Measurements on a Nonrecurring Basis. Assets measured at fair value on a nonrecurring basis generally consist of real estate assets and investments in unconsolidated equity investments that were subject to impairment charges related to the Company’s change of intent to sell the investments and through its recoverability analysis. The Company estimates fair value based on expected sales prices in the market (Level 2) or by applying the income approach methodology using a discounted cash flow analysis (Level 3)
Acquired lease intangible assets: The Company estimated the fair value of its above-market and below-market in-place leases based on the present value (using a discount rate that reflects the risk associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over the remaining non-cancelable term of the leases. Any below-market renewal options are also considered in the in-place lease values. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.
In-place lease liabilities: The Company estimated the fair value of its in-place leases using independent and internal sources, which are methods similar to those used by independent appraisers. Factors we consider in our analysis include an estimate of costs to execute similar leases including tenant improvements, leasing commissions and foregone costs and rent received during the estimated lease-up period as if the space was vacant. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.
Fair Value of Financial Instruments. The Company estimates the fair value of its debt, net by discounting the future cash flows using rates and borrowing spreads currently available to the Company (Level 3).
The Company currently operates in a single reportable operating segment, which includes the acquisition, leasing, and ownership of logistics properties. There is an immaterial amount of non logistics properties that do not meet the quantitative thresholds necessary to require reporting as a separate segment. The company’s chief operation decision maker assesses, measures, and reviews the operating financial results at the consolidated level for the entire portfolio.
Variable Interest Entities
The Company has equity interests in certain entities that primarily own and operate properties or hold land for development. The Company consolidates those entities that are considered to be VIEs where the Company is the primary beneficiary. The Company (i) evaluates the sufficiency of the total equity investment at risk, (ii) reviews the voting rights and decision- making authority of the equity investment holders as a group and whether there are limited partners (or similar owning entities) that lack substantive participating or kick out rights, guaranteed returns, protection against losses, or capping of residual returns within the group and (iii) establishes whether activities within the entities are on behalf of an investor with disproportionately few voting rights in making this VIE determination.
To the extent that the Company owns interests in a VIE and (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation or rights to absorb losses or receive benefits that could potentially be significant to the VIE, then the Company would be determined to be the primary beneficiary and would consolidate the VIE. At each reporting period, the Company re-assesses the conclusions as to which, if any, party within the VIE is considered the primary beneficiary.
The Company has a 98.2% interest in Brentford at The Mile, a planned 411-unit multifamily apartment complex (the “Brentford Joint Venture”). An unrelated real estate development company (the “JV Partner”) holds the remaining 1.8% interest. Based on management’s analysis of the joint venture and certain related agreements, the Company determined Brentford Joint Venture is a VIE because (a) Brentford Joint Venture does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, and (b) there are no substantive kick-out rights. The Company has also concluded it has control over the Brentford Joint Venture as it (a) is the managing member of the Brentford Joint Venture, (b) has designated decision making power to direct the activities that most significantly affect the economic performance of the Brentford Joint Venture, and (c) has a 98.2% economic interest in the investment. Thus, we determined that we are the primary beneficiary of Brentford Joint Venture. The assets of the Brentford Joint Venture may only be used to settle obligations of the Brentford Joint Venture and the creditors of the Brentford Joint Venture have no recourse to the general credit of the Company.
The following table presents a summary of financial data of the consolidated VIE included in the Company’s Consolidated Balance Sheets:
Recent Accounting Pronouncements
The Company evaluated recently issued accounting standards or pronouncements and determined such standards or pronouncements are either not relevant to the Company or not expected to have a material effect on the Company’s Consolidated Financial Statements.
No definition available.
The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef