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Section 1: 10-Q (10-Q)

Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
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: 001-36008
 
Rexford Industrial Realty, Inc.
(Exact name of registrant as specified in its charter) 
 
 
MARYLAND
46-2024407
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
11620 Wilshire Boulevard, Suite 1000,
Los Angeles, California
90025
(Address of principal executive offices)
(Zip Code)
(310) 966-1680
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
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  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See 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
 þ

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  þ
The number of shares of common stock outstanding at October 30, 2017 was 77,898,858.




REXFORD INDUSTRIAL REALTY, INC.
QUARTERLY REPORT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS
 
PART I.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION
 
Item 1.        Financial Statements

REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands – except share and per share data)
 
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Land
$
925,360

 
$
683,919

Buildings and improvements
1,051,037

 
811,614

Tenant improvements
47,663

 
38,644

Furniture, fixtures and equipment
167

 
174

Construction in progress
33,158

 
17,778

Total real estate held for investment
2,057,385

 
1,552,129

Accumulated depreciation
(165,385
)
 
(135,140
)
Investments in real estate, net
1,892,000

 
1,416,989

Cash and cash equivalents
12,918

 
15,525

Note receivable, net

 
5,934

Rents and other receivables, net
3,040

 
2,749

Deferred rent receivable, net
14,929

 
11,873

Deferred leasing costs, net
10,756

 
8,672

Deferred loan costs, net
2,084

 
847

Acquired lease intangible assets, net
49,147

 
36,365

Acquired indefinite-lived intangible
5,156

 
5,170

Interest rate swap asset
4,752

 
5,594

Other assets
7,144

 
5,290

Acquisition related deposits
1,075

 

Total Assets
$
2,003,001

 
$
1,515,008

LIABILITIES & EQUITY
 
 
 
Liabilities
 
 
 
Notes payable
$
664,209

 
$
500,184

Interest rate swap liability
785

 
2,045

Accounts payable, accrued expenses and other liabilities
22,190

 
13,585

Dividends payable
11,580

 
9,282

Acquired lease intangible liabilities, net
18,147

 
9,130

Tenant security deposits
19,149

 
15,187

Prepaid rents
5,738

 
3,455

Total Liabilities
741,798

 
552,868

Equity
 
 
 
Rexford Industrial Realty, Inc. stockholders’ equity
 
 
 
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 5.875% series A cumulative redeemable preferred stock, liquidation preference $25.00 per share, 3,600,000 shares outstanding at September 30, 2017 and December 31, 2016
86,651

 
86,651

Common Stock, $0.01 par value 490,000,000 shares authorized and 77,595,240 and 66,454,375 shares outstanding at September 30, 2017 and December 31, 2016, respectively
773

 
662

Additional paid in capital
1,213,123

 
907,834

Cumulative distributions in excess of earnings
(67,578
)
 
(59,277
)
Accumulated other comprehensive income
3,870

 
3,445

Total stockholders’ equity
1,236,839

 
939,315

Noncontrolling interests
24,364

 
22,825

Total Equity
1,261,203


962,140

Total Liabilities and Equity
$
2,003,001

 
$
1,515,008

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

3



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands – except share and per share data)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
RENTAL REVENUES
 
 
 
 
 
 
 
Rental income
$
36,748

 
$
28,285

 
$
97,494

 
$
77,903

Tenant reimbursements
6,279

 
4,467

 
16,606

 
12,144

Other income
203

 
192

 
550

 
764

TOTAL RENTAL REVENUES
43,230

 
32,944

 
114,650

 
90,811

Management, leasing and development services
109

 
131

 
380

 
376

Interest income

 
228

 
445

 
228

TOTAL REVENUES
43,339

 
33,303

 
115,475

 
91,415

OPERATING EXPENSES
 
 

 
 
 
 
Property expenses
11,229

 
8,978

 
29,987

 
24,480

General and administrative
5,843

 
5,067

 
16,052

 
13,190

Depreciation and amortization
17,971

 
13,341

 
46,085

 
37,165

TOTAL OPERATING EXPENSES
35,043

 
27,386

 
92,124

 
74,835

OTHER EXPENSES
 
 
 
 
 
 
 
Acquisition expenses
16

 
380

 
421

 
1,490

Interest expense
6,271

 
3,804

 
14,571

 
10,774

TOTAL OTHER EXPENSES
6,287

 
4,184

 
14,992

 
12,264

TOTAL EXPENSES
41,330

 
31,570

 
107,116

 
87,099

Equity in income from unconsolidated real estate entities

 
1,328

 
11

 
1,451

Loss on extinguishment of debt

 

 
(22
)
 

Gains on sale of real estate

 

 
19,237

 
11,563

NET INCOME
2,009

 
3,061

 
27,585

 
17,330

 Less: net income attributable to noncontrolling interest
(21
)
 
(63
)
 
(684
)
 
(533
)
NET INCOME ATTRIBUTABLE TO REXFORD INDUSTRIAL REALTY, INC.
1,988

 
2,998

 
26,901

 
16,797

 Less: preferred stock dividends
(1,322
)
 
(661
)
 
(3,966
)
 
(661
)
 Less: earnings allocated to participating securities
(80
)
 
(70
)
 
(327
)
 
(223
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
586

 
$
2,267

 
$
22,608

 
$
15,913

Net income attributable to common stockholders per share - basic and diluted
$
0.01

 
$
0.03

 
$
0.33

 
$
0.26

Weighted average shares of common stock outstanding - basic
72,621,219

 
65,707,476

 
68,984,047

 
61,694,835

Weighted average shares of common stock outstanding - diluted
73,068,081

 
67,985,177

 
69,364,855

 
61,919,976

Dividends declared per common share
$
0.145

 
$
0.135

 
$
0.435

 
$
0.405

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


4



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
2,009

 
$
3,061

 
$
27,585

 
$
17,330

Other comprehensive income (loss): cash flow hedge adjustment
662

 
1,613

 
418

 
(2,794
)
Comprehensive income
2,671

 
4,674

 
28,003

 
14,536

Comprehensive income attributable to noncontrolling interests
(29
)
 
(112
)
 
(677
)
 
(470
)
Comprehensive income attributable to Rexford Industrial Realty, Inc.
$
2,642

 
$
4,562

 
$
27,326

 
$
14,066

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

5



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited and in thousands – except share data) 
 
 
Preferred Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at January 1, 2017
$
86,651

 
66,454,375

 
$
662

 
$
907,834

 
$
(59,277
)
 
$
3,445

 
$
939,315

 
$
22,825

 
$
962,140

Issuance of common stock

 
11,043,880

 
110

 
308,994

 

 

 
309,104

 

 
309,104

Offering costs

 

 

 
(5,236
)
 

 

 
(5,236
)
 

 
(5,236
)
Share-based compensation

 
67,132

 
1

 
1,711

 

 

 
1,712

 
2,478

 
4,190

Shares acquired to satisfy employee tax withholding requirements on vesting restricted stock

 
(31,403
)
 

 
(798
)
 

 

 
(798
)
 

 
(798
)
Conversion of units to common stock

 
61,256

 

 
618

 

 

 
618

 
(618
)
 

Net income
3,966

 

 

 

 
22,935

 

 
26,901

 
684

 
27,585

Other comprehensive income

 

 

 

 

 
425

 
425

 
(7
)
 
418

Preferred stock dividends
(3,966
)
 

 

 

 

 

 
(3,966
)
 

 
(3,966
)
Common stock dividends

 

 

 

 
(31,236
)
 

 
(31,236
)
 

 
(31,236
)
Distributions

 

 

 

 

 

 

 
(998
)
 
(998
)
Balance at September 30, 2017
$
86,651

 
77,595,240

 
$
773

 
$
1,213,123

 
$
(67,578
)
 
$
3,870

 
$
1,236,839

 
$
24,364

 
$
1,261,203

 
 

6



 
Preferred Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at January 1, 2016
$

 
55,598,684

 
$
553

 
$
722,722

 
$
(48,103
)
 
$
(3,033
)
 
$
672,139

 
$
21,605

 
$
693,744

Issuance of preferred stock
90,000

 

 

 

 

 

 
90,000

 

 
90,000

Issuance of common stock

 
10,350,000

 
104

 
182,574

 

 

 
182,678

 

 
182,678

Offering costs
(3,336
)
 

 

 
(8,435
)
 

 

 
(11,771
)
 

 
(11,771
)
Share-based compensation

 
77,093

 
1

 
1,489

 

 

 
1,490

 
1,500

 
2,990

Shares acquired to satisfy employee tax withholding requirements on vesting restricted stock

 
(25,236
)
 

 
(501
)
 

 

 
(501
)
 

 
(501
)
Conversion of units to common stock

 
47,800

 

 
505

 

 

 
505

 
(505
)
 

Acquisition of real estate portfolio

 

 

 

 

 

 

 
125

 
125

Net income

 

 

 

 
16,797

 

 
16,797

 
533

 
17,330

Other comprehensive loss

 

 

 

 

 
(2,731
)
 
(2,731
)
 
(63
)
 
(2,794
)
Common stock dividends

 

 

 

 
(25,345
)
 

 
(25,345
)
 

 
(25,345
)
Distributions

 

 

 

 

 

 

 
(898
)
 
(898
)
Balance at September 30, 2016
$
86,664

 
66,048,341

 
$
658

 
$
898,354

 
$
(56,651
)
 
$
(5,764
)
 
$
923,261

 
$
22,297

 
$
945,558

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


7



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 
Nine Months Ended September 30,
  
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
27,585

 
$
17,330

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Equity in income from unconsolidated real estate entities
(11
)
 
(1,451
)
Provision for doubtful accounts
863

 
1,105

Depreciation and amortization
46,085

 
37,165

Amortization of (below) above market lease intangibles, net
(1,203
)
 
17

Accretion of loan origination fees
(150
)
 
(75
)
Deferred interest income on notes receivable
84

 
(42
)
Loss on extinguishment of debt
22

 

Gain on sale of real estate
(19,237
)
 
(11,563
)
Amortization of debt issuance costs
853

 
748

Accretion of premium on notes payable
(131
)
 
(178
)
Equity based compensation expense
4,070

 
2,879

Straight-line rent
(3,259
)
 
(3,412
)
Change in working capital components:
 
 
 
Rents and other receivables
(1,154
)
 
(688
)
Deferred leasing costs
(3,612
)
 
(3,787
)
Other assets
(2,301
)
 
(10
)
Accounts payable, accrued expenses and other liabilities
6,227

 
3,910

Tenant security deposits
2,054

 
1,830

Prepaid rents
1,344

 
232

Net cash provided by operating activities
58,129

 
44,010

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of investments in real estate
(532,108
)
 
(308,277
)
Capital expenditures
(29,182
)
 
(23,687
)
Acquisition related deposits
(1,075
)
 
(400
)
Distributions from unconsolidated real estate entities
11

 
5,530

Issuance of notes receivable

 
(5,700
)
Principal repayments of note receivable
6,000

 

Proceeds from sale of real estate
64,406

 
20,435

Net cash used in investing activities
(491,948
)
 
(312,099
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Issuance of preferred stock, net

 
87,032

Issuance of common stock, net
303,868

 
174,302

Proceeds from notes payable
552,000

 
263,000

Repayment of notes payable
(387,497
)
 
(178,923
)
Debt issuance costs
(2,266
)
 
(1,924
)
Debt extinguishment costs
(193
)
 

Dividends paid to preferred stockholders
(3,966
)
 

Dividends paid to common stockholders
(28,955
)
 
(23,935
)
Distributions paid to common unitholders
(981
)
 
(900
)
Repurchase of common shares to satisfy employee tax withholding requirements
(798
)
 
(501
)
Net cash provided by financing activities
431,212

 
318,151

(Decrease) increase in cash and cash equivalents
(2,607
)
 
50,062

Cash and cash equivalents, beginning of period
15,525

 
5,201

Cash and cash equivalents, end of period
$
12,918

 
$
55,263

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of capitalized interest of $1,311 and $1,315 for the nine months ended September 30, 2017 and 2016, respectively)
$
14,105

 
$
11,125

Supplemental disclosure of noncash investing and financing transactions:
 
 
 
Capital expenditure accruals
$
1,659

 
$
2,886

Accrual of dividends
$
11,580

 
$
9,214

Accrual of offering costs
$

 
$
427

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

8


REXFORD INDUSTRIAL REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Organization
Rexford Industrial Realty, Inc. is a self-administered and self-managed full-service real estate investment trust (“REIT”) focused on owning and operating industrial properties in Southern California infill markets. We were formed as a Maryland corporation on January 18, 2013, and Rexford Industrial Realty, L.P. (the “Operating Partnership”), of which we are the sole general partner, was formed as a Maryland limited partnership on January 18, 2013. Through our controlling interest in our Operating Partnership and its subsidiaries, we own, manage, lease, acquire and develop industrial real estate principally located in Southern California infill markets, and, from time to time, acquire or provide mortgage debt secured by industrial property.  As of September 30, 2017, our consolidated portfolio consisted of 146 properties with approximately 18.0 million rentable square feet. In addition, we currently manage 19 properties with approximately 1.2 million rentable square feet.  
The terms “us,” “we,” “our,” and the “Company” as used in these financial statements refer to Rexford Industrial Realty, Inc. and its subsidiaries (including our Operating Partnership).
Basis of Presentation
As of September 30, 2017, and December 31, 2016, and for the three and nine months ended September 30, 2017 and 2016, the financial statements presented are the consolidated financial statements of Rexford Industrial Realty, Inc. and its subsidiaries, including our Operating Partnership. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2016 Annual Report on Form 10-K and the notes thereto. Any references to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.  
We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entity and we are the primary beneficiary through consideration of the substantive terms of the arrangement to identify which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities in which we do not control but over which we have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that we do not control and over which we do not exercise significant influence are carried at the lower of cost or fair value, as appropriate. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in our consolidated financial statements.
 


9



 2.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an initial maturity of three months or less. The carrying amount approximates fair value due to the short-term maturity of these investments.
Restricted Cash
Restricted cash is generally comprised of cash proceeds from property sales that are being held by qualified intermediaries for purposes of facilitating tax-deferred like-kind exchanges under Section 1031 of the Internal Revenue Code (“1031 Exchange”). As of September 30, 2017, and December 31, 2016, we did not have a balance in restricted cash.
Notes Receivable
We record notes receivable at the unpaid principal balance, net of any deferred origination fees, purchase discounts or premiums and valuation allowances, as applicable. We amortize net deferred origination fees, which are comprised of loan fees collected from the borrower, and purchase discounts or premiums over the contractual life of the loan using the effective interest method and immediately recognize in income any unamortized balances if the loan is repaid before its contractual maturity.
On July 1, 2016, we made a $6.0 million mortgage loan secured by a 64,965 rentable square foot industrial property located in Rancho Cucamonga, California, that was subsequently repaid by the borrower on June 23, 2017. In connection with this origination, we collected a $0.3 million loan fee from the borrower. The loan bore interest at 10% per annum and had a stated maturity date of June 30, 2017. Additionally, the borrower had the option to defer up to $14 thousand of interest, otherwise payable per month, to be added to the principal to be paid in full on the maturity date. At the time of repayment, the outstanding principal balance on the loan was $6.2 million.    
Investments in Real Estate
Acquisitions
On January 5, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations - Clarifying the Definition of a Business (“ASU 2017-01’), which provides a new framework for determining whether transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 clarifies that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar assets, the set of assets and activities is not a business. ASU 2017-01 also revises the definition of a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted.
Effective January 1, 2017, we early adopted ASU 2017-01. We evaluated the acquisitions that we completed during the nine months ended September 30, 2017, and determined that under the new framework these transactions should be accounted for as asset acquisitions. See Note 3.
We evaluate each of our property acquisitions to determine whether the acquired set of assets and activities (collectively referred to as a “set”) meets the definition of a business and will need to be accounted for as a business combination. A set would fail to qualify as a business if either (i) substantially all of the fair value of the gross assets acquired is concentrated in either a single identifiable asset or a group of similar identifiable assets or (ii) the set is lacking, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. An acquired process is considered substantive if (i) the process includes an organized workforce (or includes an acquired contract that provides access to an organized workforce), that is skilled, knowledgeable, and experienced in performing the process, (ii) the process cannot be replaced without significant cost, effort, or delay or (iii) the process is considered unique or scarce.
We expect that most of our property acquisitions will generally not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets or because the acquisition does not include a substantive process.
When we acquire a property that meets the business combination accounting criteria, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component on the acquisition date. The components

10



typically include land, building and improvements, tenant improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. Acquisition related costs are expensed as incurred. Because of the timing or complexity of completing certain fair value adjustments, the initial purchase price allocation may be incomplete at the end of a reporting period, in which case we may record provisional purchase price allocation amounts based on information available at the acquisition date. Subsequent adjustments to provisional amounts are recognized during the measurement period, which cannot exceed one year from the date of acquisition.
For acquisitions that do not meet the business combination accounting criteria, we allocate the cost of the acquisition, which includes any associated acquisition costs, to the individual assets and liabilities assumed on a relative fair value basis. As there is no measurement period concept for an asset acquisition, the allocated cost of the acquired assets should be finalized in the period in which the acquisition occurred.
We determine the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant.  This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company’s assumptions about the assumptions a market participant would use.  These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties.  Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions.  In determining the “as-if-vacant” value for the properties we acquired during the nine months ended September 30, 2017, we used discount rates ranging from 6.00% to 9.50% and capitalization rates ranging from of 4.75% to 7.50%.
In determining the fair value of intangible lease assets or liabilities, we also consider Level 3 inputs.  Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable.  The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. In determining the fair value of acquisitions completed during the nine months ended September 30, 2017, we used an estimated average lease-up period ranging from six to eighteen months.
The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
Capitalization of Costs
We capitalize direct costs incurred in developing, renovating, rehabilitating and improving real estate assets as part of the investment basis. This includes certain general and administrative costs, including payroll, bonus and non-cash equity compensation of the personnel performing development, renovations and rehabilitation if such costs are identifiable to a specific activity to get the real estate asset ready for its intended use. During the development and construction periods of a project, we also capitalize interest, real estate taxes and insurance costs. We cease capitalization of costs upon substantial completion of the project, but no later than one year from cessation of major construction activity. If some portions of a project are substantially complete and ready for use and other portions have not yet reached that stage, we cease capitalizing costs on the completed portion of the project but continue to capitalize for the incomplete portion of the project. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred.
We capitalized interest costs of $0.4 million and $0.4 million during the three months ended September 30, 2017 and 2016, respectively, and $1.3 million and $1.3 million during the nine months ended September 30, 2017 and 2016, respectively. We capitalized real estate taxes and insurance costs aggregating $0.3 million and $0.2 million during the three months ended September 30, 2017 and 2016, respectively, and $0.9 million and $0.6 million during the nine months ended September 30, 2017 and 2016, respectively. We capitalized compensation costs for employees who provide construction services of $0.5 million and $0.3 million during the three months ended September 30, 2017 and 2016, respectively, and $1.3 million and $0.8 million during the nine months ended September 30, 2017 and 2016, respectively.

11



Depreciation and Amortization
Real estate, including land, building and land improvements, tenant improvements, furniture, fixtures and equipment and intangible lease assets and liabilities are stated at historical cost less accumulated depreciation and amortization, unless circumstances indicate that the cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value as discussed below in our policy with regards to impairment of long-lived assets. We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense.
The values allocated to buildings, site improvements, in-place lease intangibles and tenant improvements are depreciated on a straight-line basis using an estimated remaining life of 10-30 years for buildings, 5-20 years for site improvements, and the shorter of the estimated useful life or respective lease term for in-place lease intangibles and tenant improvements.
As discussed above in—Investments in Real Estate—Acquisitions, in connection with property acquisitions, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an acquired lease intangible asset or liability and amortized to “rental income” over the remaining term of the related leases.
Our estimate of the useful life of our assets is evaluated upon acquisition and when circumstances indicate a change in the useful life has occurred, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets.
Deferred Leasing Costs
We capitalize costs directly related to the successful origination of a lease. These costs include leasing commissions paid to third parties for new leases or lease renewals, as well as an allocation of compensation costs, including payroll, bonus and non-cash equity compensation of employees who spend time on lease origination activities. In determining the amount of compensation costs to be capitalized for these employees, allocations are made based on estimates of the actual amount of time spent working on successful leases in comparison to time spent on unsuccessful origination efforts. We capitalized compensation costs for these employees of $0.3 million and $0.1 million during the three months ended September 30, 2017 and 2016, respectively, and $0.8 million and $0.4 million during the nine months ended September 30, 2017 and 2016, respectively.
Impairment of Long-Lived Assets
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC Topic 360: Property, Plant, and Equipment, we assess the carrying values of our respective long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review real estate assets for recoverability, we consider current market conditions as well as our intent with respect to holding or disposing of the asset. The intent with regards to the underlying assets might change as market conditions and other factors change. Fair value is determined through various valuation techniques; including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third-party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with estimates of future expectations and the strategic plan used to manage our underlying business. If our analysis indicates that the carrying value of the real estate asset is not recoverable on an undiscounted cash flow basis, we will recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
Assumptions and estimates used in the recoverability analyses for future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with respect to our investment that occur subsequent to our impairment analyses could impact these assumptions and result in future impairment of our real estate properties.
Investment in Unconsolidated Real Estate Entities
Investment in unconsolidated real estate entities in which we have the ability to exercise significant influence (but not control) are accounted for under the equity method of investment.  Under the equity method, we initially record our investment at cost, and subsequently adjust for equity in earnings or losses and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet and the underlying equity in net assets is amortized as

12



an adjustment to equity in income (loss) from unconsolidated real estate entities over the life of the related asset. Under the equity method of accounting, our net equity investment is reflected within the consolidated balance sheets, and our share of net income or loss from the joint venture is included within the consolidated statements of operations.  Furthermore, distributions received from equity method investments are classified as either operating cash inflows or investing cash inflows in the consolidated statements of cash flows using the “nature of the distribution approach,” in which each distribution is evaluated on the basis of the source of the payment.  See Note 11.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our initial taxable year ended December 31, 2013. To qualify as a REIT, we are required (among other things) to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and were unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.
In addition, we are subject to taxation by various state and local jurisdictions, including those in which we transact business or reside. Our non-taxable REIT subsidiaries, including our Operating Partnership, are either partnerships or disregarded entities for federal income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss from disregarded entities and flow-through entities such as partnerships is reportable in the income tax returns of the respective equity holders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements for the three and nine months ended September 30, 2017 and 2016.
We periodically evaluate our tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of September 30, 2017, and December 31, 2016, we have not established a liability for uncertain tax positions.
Derivative Instruments and Hedging Activities
FASB ASC Topic 815: Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, we record all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.  See Note 7.
Revenue Recognition
We recognize revenue from rent, tenant reimbursements and other revenue sources once all of the following criteria are met: persuasive evidence of an arrangement exists, the delivery has occurred or services rendered, the fee is fixed and determinable and collectability is reasonably assured. Minimum annual rental revenues are recognized in rental revenues on a

13



straight-line basis over the term of the related lease. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space.
Estimated reimbursements from tenants for real estate taxes, common area maintenance and other recoverable operating expenses are recognized as revenues in the period that the expenses are incurred. Subsequent to year-end, we perform final reconciliations on a lease-by-lease basis and bill or credit each tenant for any cumulative annual adjustments. Lease termination fees, which are included in rental income in the accompanying consolidated statements of operations, are recognized when the related lease is canceled and we have no continuing obligation to provide services to such former tenant.
Revenues from management, leasing and development services are recognized when the related services have been provided and earned.
The recognition of gains on sales of real estate requires us to measure the timing of a sale against various criteria related to the terms of the transaction, as well as any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the finance, profit-sharing or leasing method. If the sales criteria have been met, we further analyze whether profit recognition is appropriate using the full accrual method. If the criteria to recognize profit using the full accrual method have not been met, we defer the gain and recognize it when the criteria are met or use the installment or cost recovery method as appropriate under the circumstances.
Valuation of Receivables
We may be subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, we perform credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired. We specifically analyze aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. As a result of our periodic analysis, we maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. This estimate requires significant judgment related to the lessees’ ability to fulfill their obligations under the leases. We believe our allowance for doubtful accounts is adequate for our outstanding receivables for the periods presented. If a tenant is insolvent or files for bankruptcy protection and fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances, which include amounts recognized as straight-line revenue not realizable until future periods.
Rents and other receivables, net and deferred rent receivable, net consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
December 31, 2016
Rents and other receivables
$
5,262

 
$
5,565

Allowance for doubtful accounts
(2,222
)
 
(2,816
)
Rents and other receivables, net
$
3,040

 
$
2,749

 
 
 
 
Deferred rent receivable
$
14,992

 
$
11,903

Allowance for doubtful accounts
(63
)
 
(30
)
Deferred rent receivable, net
$
14,929

 
$
11,873

    
We recorded the following provision for doubtful accounts, including amounts related to deferred rents, as a reduction to rental revenues in our consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Provision for doubtful accounts
$
231

 
$
228

 
$
897

 
$
1,061


14



Equity Based Compensation
We account for equity based compensation in accordance with ASC Topic 718 Compensation - Stock Compensation.  Total compensation cost for all share-based awards is based on the estimated fair market value on the grant date. For share-based awards that vest based solely on a service condition, we recognize compensation cost on a straight-line basis over the total requisite service period for the entire award.  For share-based awards that vest based on a market or performance condition, we recognize compensation cost on a straight-line basis over the requisite service period of each separately vesting tranche. Forfeitures are recognized in the period in which they occur. See Note 12.
Equity Offering Costs
Underwriting commissions and offering costs related to our common stock issuances have been reflected as a reduction of additional paid-in capital. Underwriting commissions and offering costs related to our preferred stock issuance have been reflected as a direct reduction of the preferred stock balance.
Earnings Per Share
We calculate earnings per share (“EPS”) in accordance with ASC 260 - Earnings Per Share (“ASC 260”). Under ASC 260, nonvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the computation of basic EPS pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings.
Basic EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.
Diluted EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding determined for the basic EPS computation plus the effect of any dilutive securities. We include unvested shares of restricted stock and unvested LTIP units in the computation of diluted EPS by using the more dilutive of the two-class method or treasury stock method. We include unvested performance units as contingently issuable shares in the computation of diluted EPS once the market criteria are met, assuming that the end of the reporting period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted EPS calculation. See Note 13.
Segment Reporting
Management views the Company as a single reportable segment based on its method of internal reporting in addition to its allocation of capital and resources.
Recently Issued Accounting Pronouncements
Changes to GAAP are established by the FASB in the form of ASUs to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs.
Stock Compensation
On May 10, 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which clarifies the scope of modification accounting for share-based compensation arrangements by providing guidance on the types of changes to the terms and conditions of share-based compensation awards to which an entity would be required to apply modification accounting under ASC 718. ASU 2017-09 is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. We are currently assessing the impact of the guidance on our consolidated financial statements and notes to our consolidated financial statements.
Leases
On February 25, 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which sets out the principals for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
ASC 842 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured

15



on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASC 842 also requires lessees to classify leases as either finance or operating leases based on whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification is used to evaluate whether the lease expense should be recognized based on an effective interest method or on a straight-line basis over the term of the lease. ASC 842 will impact the accounting and disclosure requirements for our ground lease and other operating leases, where we are the lessee. See Note 10 for a summary of rent expense and remaining contractual payments under our ground lease and corporate offices leases.
ASC 842 requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. ASC 842 specifies that payments for certain lease-related services (for example, maintenance services, including common area maintenance), which are often included in lease agreements, represent "non-lease" components that will become subject to the guidance in ASC 2014-09, Revenue from Contracts with Customers, when ASC 842 becomes effective. Additionally, ASC 842 requires lessors to capitalize, as initial direct costs, only these costs that are incurred due to the execution of a lease. As a result, compensation costs related to employees who spend time on lease origination activities, regardless of whether their time leads to a successful lease, will no longer be capitalized as initial direct costs and instead will be expensed as incurred. See “Deferred Leasing Costs” above for a summary of employee related compensation costs capitalized during the three and nine months ended September 30, 2017 and 2016.
ASC 842 is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. ASC 842 requires the use of a modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest period presented in the consolidated financial statements, with certain practical expedients available. We are currently assessing the impact of the guidance on our consolidated financial statements and notes to our consolidated financial statements.
Revenue Recognition
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”). ASC 606 establishes principles for reporting the nature, amount, timing and uncertainty of revenues and cash flows arising from an entity’s contracts with customers. The core principle of the new standard is that an entity recognizes revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 does not apply to lease contracts within the scope of Leases (Topic 840) except to the extent that a lease contract contains “non-lease” components, once ASC 842 becomes effective, as noted above. For public entities, ASC 606 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2017. Early application is permitted for annual periods beginning after December 15, 2016. ASC 606 permits the use of either the full retrospective transition method or a modified retrospective transition method. We have formed an implementation project team and are continuing to work on the evaluation and implementation of the guidance as it relates to property management and leasing services revenue and other property-related revenues that may fall under the scope of ASC 606. We expect to adopt ASC 606 on January 1, 2018, using the modified retrospective transition method.
Adoption of New Accounting Pronouncements
On November 17, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash (“ASU 2016-18”), which requires an entity’s reconciliation of the beginning of period and end of period amounts shown in the statement of cash flows to include with cash and cash equivalents, amounts generally described as restricted cash and restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We early adopted ASU 2016-18, effective January 1, 2017, with retrospective application to our consolidated statements of cash flows. Accordingly, we have included restricted cash with cash and cash equivalents in our reconciliation of beginning of period and end of period amounts shown in our consolidated statements of cash flows for all periods presented. As a result of the adoption of ASU 2016-18, changes in restricted cash are no longer presented as a separate line item within cash flows from investing activities in our consolidated statements of cash flows since we have included restricted cash with cash and cash equivalents in our reconciliation of beginning and end of period amounts shown in our consolidated statements of cash flows. The adoption of ASU 2016-18 did not affect our statement of cash flows presentation for the nine months ended September 30, 2017 and September 30, 2016, as we did not have any restricted cash.

On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses certain classification issues related to the statement of
cash flows, including: (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a

16



business combination and (iii) distributions received from equity method investees. ASU 2016-15 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted,
including adoption in an interim period. We early adopted ASU 2016-15, effective July 1, 2016, and elected, as part of the adoption, to classify distributions received from equity method investees under the “nature of the distribution approach,” in which each distribution is evaluated on the basis of the source of the payment and classified as either operating cash inflows or investing cash inflows. The adoption of ASU 2016-15 did not affect have a material impact on our consolidated statements of cash flows.

3.
Investments in Real Estate
Acquisitions
The following table summarizes the wholly-owned industrial properties we acquired during the nine months ended September 30, 2017
Property
 
Submarket
 
Date of Acquisition
 
Rentable Square Feet
 
Number of Buildings
 
Contractual Purchase Price(1)
(in thousands)
28903 Avenue Paine(2)
 
Los Angeles - San Fernando Valley
 
2/17/2017
 
111,346

 
1
 
$
17,060

2390 Ward Avenue(3)
 
Ventura
 
4/28/2017
 
138,700

 
1
 
16,499

Safari Business Center(4)
 
Inland Empire - West
 
5/24/2017
 
1,138,090

 
16
 
141,200

4175 Conant Street(5)
 
Los Angeles - South Bay
 
6/14/2017
 
142,593

 
1
 
30,600

5421 Argosy Avenue(5)
 
Orange County - West
 
6/15/2017
 
35,321

 
1
 
5,300

14820-14830 Carmenita Road(2)
 
Los Angeles - Mid-counties
 
6/30/2017
 
198,062

 
3
 
30,650

3002-3072 Inland Empire Blvd(2)
 
Inland Empire - West
 
7/3/2017
 
218,407

 
4
 
26,900

17000 Kingsview Avenue(2)
 
Los Angeles - South Bay
 
7/11/2017
 
100,121

 
1
 
13,986

Rancho Pacifica Park(6)
 
Los Angeles - South Bay
 
7/18/2017
 
1,170,806

 
6
 
210,500

11190 White Birch Drive(2)
 
Inland Empire - West
 
7/20/2017
 
201,035

 
1
 
19,810

4832-4850 Azusa Canyon Road(2)
 
Los Angeles - San Gabriel Valley
 
7/28/2017
 
87,421

 
1
 
14,550

1825 Soto Street(5)
 
Los Angeles - Central
 
9/8/2017
 
25,040

 
2
 
3,475

19402 Susana Road(5)
 
Los Angeles - South Bay
 
9/13/2017
 
15,433

 
1
 
3,942

Total 2017 Wholly-Owned Property Acquisitions
 
 
 
3,582,375

 
39
 
$
534,472

(1)
Represents the gross contractual purchase price before prorations and closing costs. Does not include capitalized acquisition costs totaling $1.4 million.
(2)
This acquisition was funded with available cash on hand and borrowings under our unsecured revolving credit facility.
(3)
This acquisition was partially funded through a 1031 Exchange using $6.5 million of net cash proceeds from the sale of our property located at 9375 Archibald Avenue and borrowings under our unsecured revolving credit facility.
(4)
This acquisition was partially funded through a 1031 Exchange using $39.7 million of net cash proceeds from the sale of our property located at 2535 Midway Drive, borrowings under our unsecured revolving credit facility and available cash on hand.
(5)
This acquisition was funded with available cash on hand.
(6)
This acquisition was partially funded with net cash proceeds from the issuance of $125.0 million of senior unsecured guaranteed notes and borrowings under our unsecured revolving credit facility.

17



The following table summarizes the fair value of amounts allocated to each major class of asset and liability for the acquisitions noted in the table above, as of the date of each acquisition (in thousands):
 
 
Rancho Pacifica Park
 
Other 2017 Acquisitions
 
Total 2017 Acquisitions
Assets:
 
 
 
 
 
Land
$
121,329

 
$
147,757

 
$
269,086

Buildings and improvements
85,336

 
159,905

 
245,241

Tenant improvements
1,440

 
4,662

 
6,102

Acquired lease intangible assets(1)
8,852

 
17,144

 
25,996

Other acquired assets(2)
5

 
144

 
149

Total assets acquired
216,962

 
329,612

 
546,574

Liabilities:
 
 
 
 
 
Acquired lease intangible liabilities(3)
6,264

 
5,032

 
11,296

Other assumed liabilities(2)
1,126

 
2,044

 
3,170

Total liabilities assumed
7,390

 
7,076

 
14,466

Net assets acquired
$
209,572

 
$
322,536

 
$
532,108

(1)
For Rancho Pacifica Park, acquired lease intangible assets is comprised of in-place lease intangibles with weighted average amortization period of 3.2 years. For the other 2017 acquisitions, acquired lease intangible assets is comprised of $15.8 million of in-place lease intangibles with a weighted average amortization period of 4.6 years and $1.3 million of above-market lease intangibles with a weighted average amortization period of 11.1 years.
(2)
Includes other working capital assets acquired and liabilities assumed, at the time of acquisition.
(3)
Represents below-market lease intangibles with a weighted average amortization period of 3.5 years and 3.3 years for Rancho Pacifica Park and the other 2017 acquisitions, respectively.

The following table sets forth the results of operations for the three and nine months ended September 30, 2017, for the properties acquired during the nine months ended September 30, 2017, included in the consolidated statements of operations from the date of acquisition (in thousands):
 
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Total revenues
 
$
8,084

 
$
9,475

Net income
 
$
951

 
$
729

     The following table sets forth unaudited pro-forma financial information (in thousands) as if the closing of our acquisitions during the nine months ended September 30, 2017, had occurred on January 1, 2016. These unaudited pro-forma results have been prepared for comparative purposes only and include certain adjustments, such as (i) increased rental revenues for the amortization of the net amount of above- and below-market rents acquired in the acquisitions, (ii) increased depreciation and amortization expenses as a result of tangible and intangible assets acquired in the acquisitions and (iii) increased interest expense for borrowings associated with these acquisitions. These pro-forma results have not been adjusted for property sales completed during the nine months ended September 30, 2017. These unaudited pro-forma results do not purport to be indicative of what operating results would have been had the acquisitions actually occurred on January 1, 2016, and may not be indicative of future operating results.

18



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total revenues
$
43,936

 
$
41,109

 
$
130,645

 
$
113,954

Net income attributable to common stockholders
$
738

 
$
1,173

 
$
22,340

 
$
11,082

Net income attributable to common stockholders per share - basic
$
0.01

 
$
0.02

 
$
0.32

 
$
0.18

Net income attributable to common stockholders per share - diluted
$
0.01

 
$
0.02

 
$
0.32

 
$
0.18

Dispositions
The following table summarizes the properties we sold during the nine months ended September 30, 2017:
Property
 
Submarket
 
Date of Disposition
 
Rentable Square Feet
 
Contractual Sales Price(1)
(in thousands)
 
Gain Recorded
(in thousands)
9375 Archibald Avenue
 
Inland Empire West
 
3/31/2017
 
62,677

 
$
6,875

 
$
2,668

2535 Midway Drive
 
San Diego - Central
 
5/17/2017
 
373,744

 
$
40,050

 
$
15,974

2811 Harbor Boulevard
 
Orange County - Airport
 
6/28/2017
 
126,796

 
$
18,700

 
$
595

Total
 
 
 
 
 
563,217

 
$
65,625

 
$
19,237

(1)
Represents the gross contractual sales price before commissions, prorations and other closing costs.

4.
Intangible Assets  

The following table summarizes our acquired lease intangible assets, including the value of in-place leases and above-market tenant leases, and our acquired lease intangible liabilities, including below-market tenant leases and above-market ground leases (in thousands): 
 
September 30, 2017
 
December 31, 2016
Acquired Lease Intangible Assets:
 
 
 
In-place lease intangibles
$
91,760

 
$
68,234

Accumulated amortization
(48,126
)
 
(37,648
)
In-place lease intangibles, net
43,634

 
30,586

Above-market tenant leases
10,896

 
10,191

Accumulated amortization
(5,383
)
 
(4,412
)
Above-market tenant leases, net
5,513

 
5,779

Acquired lease intangible assets, net
$
49,147

 
$
36,365

Acquired Lease Intangible Liabilities:
 

 
 

Below-market tenant leases
$
(23,594
)
 
$
(12,426
)
Accumulated accretion
5,604

 
3,477

Below-market tenant leases, net
(17,990
)
 
(8,949
)
Above-market ground lease
(290
)
 
(290
)
Accumulated accretion
133

 
109

Above-market ground lease, net
(157
)
 
(181
)
Acquired lease intangible liabilities, net
$
(18,147
)
 
$
(9,130
)
 

19



The following table summarizes the amortization related to our acquired lease intangible assets and liabilities for the reported periods noted below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
In-place lease intangibles(1)
$
4,708

 
$
3,561

 
$
10,812

 
$
9,849

Net above (below)-market tenant leases(2)
$
(877
)
 
$
(31
)
 
$
(1,179
)
 
$
41

Above-market ground lease(3)
$
(8
)
 
$
(8
)
 
$
(24
)
 
$
(24
)
 
(1)
The amortization of in-place lease intangibles is recorded to depreciation and amortization expense in the consolidated statements of operations for the periods presented.
(2)
The amortization of net above (below)-market tenant leases is recorded as a decrease (increase) to rental revenues in the consolidated statements of operations for the periods presented.
(3)
The accretion of the above-market ground lease is recorded as a decrease to property expenses in the consolidated statements of operations for the periods presented.

5.
Notes Payable
The following table summarizes the balance of our indebtedness as of September 30, 2017 and December 31, 2016 (in thousands): 
 
 
September 30, 2017
 
December 31, 2016
Principal amount
 
$
666,979

 
$
502,476

Less: unamortized discount and debt issuance costs(1)
 
(2,770
)
 
(2,292
)
Carrying value
 
$
664,209

 
$
500,184

(1)
Excludes unamortized debt issuance costs related to our unsecured revolving credit facility, which are presented in the line item “Deferred loan costs, net” in the consolidated balance sheets.

20



The following table summarizes the components and significant terms of our indebtedness as of September 30, 2017, and December 31, 2016 (dollars in thousands):
 
September 30, 2017
 
December 31, 2016
 
 
  
 
  
 
  
 
Principal Amount
 
Unamortized Discount and Debt Issuance Costs
 
Principal Amount
 
Unamortized Discount and Debt Issuance Costs
 
Contractual
Maturity Date
  
Stated
Interest
Rate(1)
  
Effective Interest Rate (2)
  
Secured Debt
 
 
 
 
 
 
 
 
 
  
 

  
 

  
$60M Term Loan(3)
$
59,087

 
$
(145
)
 
$
59,674

 
$
(204
)
 
8/1/2019
(4) 
LIBOR+1.90%

  
3.95
%
 
Gilbert/La Palma(5)
2,803

 
(139
)
 
2,909

 
(145
)
 
3/1/2031
 
5.125
%
 
5.41
%
 
12907 Imperial Highway(6)
5,089

 
82

 
5,182

 
180

 
4/1/2018
 
5.950
%
 
3.32
%
 
1065 Walnut Street

 

 
9,711

 
192

 
2/1/2019
 
N/A


N/A

 
Unsecured Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$100M Term Loan Facility
100,000

 
(364
)
 
100,000

 

 
2/14/2022
 
LIBOR+1.20%

(7) 
3.18
%
(8) 
Revolving Credit Facility
50,000

 

 

 

 
2/12/2021
(9) 
LIBOR+1.10%

(7)(10) 
2.33
%
 
$225M Term Loan Facility
225,000

 
(1,469
)
 
225,000

 
(1,680
)
 
1/14/2023
 
LIBOR+1.50%

(7) 
2.86
%
 
$100M Notes
100,000

 
(595
)
 
100,000

 
(635
)
 
8/6/2025
 
4.290
%
  
4.37
%
 
$125M Notes
125,000

 
(140
)
 

 

 
7/13/2027
 
3.930
%
 
3.94
%
 
Total
$
666,979

 
$
(2,770
)
 
$
502,476

 
$
(2,292
)
 
 
  
 
  
 
 
(1)
Reflects the contractual interest rate under the terms of the loan, as of September 30, 2017.
(2)
Reflects the effective interest rate as of September 30, 2017, which includes the effect of the amortization of discounts/premiums and debt issuance costs and the effect of interest rate swaps that are effective as of September 30, 2017.  
(3)
This term loan is secured by six properties. Beginning August 15, 2016, monthly payments of interest and principal are based on a 30-year amortization table. As of September 30, 2017, the interest rate on this variable-rate term loan has been effectively fixed through the use of two interest rate swaps, one of which is an amortizing swap. See Note 7 for details.
(4)
One additional one-year extension available at the borrower’s option.
(5)
Monthly payments of interest and principal are based on a 20-year amortization table.
(6)
Monthly payments of interest and principal are based on a 30-year amortization table, with a balloon payment at maturity.
(7)
The LIBOR margin will range from 1.20% to 1.70% for the $100.0 million term loan facility, 1.10% to 1.50% for the revolving credit facility and 1.50% to 2.25% for the $225.0 million term loan facility depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value, or leverage ratio, which is measured on a quarterly basis.
(8)
As of September 30, 2017, the interest on the $100.0 million term loan facility has been effectively fixed through the use of two interest rate swaps. See Note 7 for details.
(9)
Two additional six-month extensions available at the borrower’s option.
(10)
The unsecured revolving credit facility is subject to an applicable facility fee which is calculated as a percentage of the total lenders’ commitment amount, regardless of usage. The applicable facility fee will range from 0.15% to 0.30% depending upon our leverage ratio.

21



The following table summarizes the contractual debt maturities and scheduled amortization payments, excluding debt discounts/premiums and debt issuance costs, as of September 30, 2017, and does not consider extension options available to us as noted in the table above (in thousands):
 
October 1, 2017 - December 31, 2017
$
263

2018
5,991

2019
58,266

2020
166

2021
50,175

Thereafter
552,118

Total
$
666,979

Loan Repayment
On March 20, 2017, we repaid the $9.7 million outstanding balance on the 1065 Walnut Street mortgage loan in advance of the February 1, 2019 maturity date. In connection with the repayment, we incurred prepayment fees of $0.2 million which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations. The loss on extinguishment of debt also includes the write-off of the unamortized debt premium of $0.2 million.
Amended Credit Agreement
On February 14, 2017, we amended our $300.0 million senior unsecured credit facility by entering into a second amended and restated credit agreement (the “Amended Credit Agreement”), which provides for a $450.0 million senior unsecured credit facility, comprised of a $350.0 million unsecured revolving credit facility (the "Amended Revolver") and a $100.0 million unsecured term loan facility (the "Amended $100 Million Term Loan"). The Amended Revolver is scheduled to mature on February 12, 2021, and has two six-month extension options available, and the Amended $100 Million Term Loan is scheduled to mature on February 14, 2022. Under the terms of the Amended Credit Agreement, we may request additional lender commitments up to an additional aggregate $550.0 million, which may be comprised of additional revolving commitments under the Amended Revolver, an increase to the Amended $100 Million Term Loan, additional term loan tranches or any combination of the foregoing.
     Interest on the Amended Credit Agreement, is generally to be paid based upon, at our option, either (i) LIBOR plus an applicable margin that is based upon our leverage ratio or (ii) the Base Rate (which is defined as the highest of (a) the federal funds rate plus 0.50%, (b) the administrative agent’s prime rate or (c) the Eurodollar Rate plus 1.00%) plus an applicable margin that is based on our leverage ratio. The margins for the Amended Revolver range in amount from 1.10% to 1.50% for LIBOR-based loans and 0.10% to 0.50% for Base Rate-based loans, depending on our leverage ratio. The margins for the Amended $100 Million Term Loan range in amount from 1.20% to 1.70% for LIBOR-based loans and 0.20% to 0.70% for Base Rate-based loans, depending on our leverage ratio.
     If we attain one additional investment grade rating by one or more of Standard & Poor’s or Moody’s Investor Services to complement our current investment grade Fitch rating, we may elect to convert the pricing structure under the Amended Credit Agreement to be based on such rating. In that event, the margins for the Amended Revolver will range in amount from 0.825% to 1.55% for LIBOR-based loans and 0.00% to 0.55% for Base Rate-based loans, depending on such rating, and the margins for the Amended $100 Million Term Loan will range in amount from 0.90% to 1.75% for LIBOR-based loans and 0.00% to 0.75% for Base Rate-based loans, depending on such rating.
     In addition to the interest payable on amounts outstanding under the Amended Revolver, we are required to pay an applicable facility fee, based upon our leverage ratio, on each lender's commitment amount under the Amended Revolver, regardless of usage. The applicable facility fee will range in amount from 0.15% to 0.30%, depending on our leverage ratio. In the event that we convert the pricing structure to be based on an investment-grade rating, the applicable facility fee will range in amount from 0.125% to 0.30%, depending on such rating.
The Amended Credit Agreement is guaranteed by the Company and by substantially all of the current and to-be-formed subsidiaries of the Operating Partnership that own an unencumbered property. The Amended Credit Agreement is not secured by the Company’s properties or by equity interests in the subsidiaries that hold such properties.

22



The Amended Revolver and the Amended $100 Million Term Loan may be voluntarily prepaid in whole or in part at any time without premium or penalty.  Amounts borrowed under the Amended $100 Million Term Loan and repaid or prepaid may not be reborrowed.
The Amended Credit Agreement contains usual and customary events of default including defaults in the payment of principal, interest or fees, defaults in compliance with the covenants set forth in the Amended Credit Agreement and other loan documentation, cross-defaults to certain other indebtedness, and bankruptcy and other insolvency defaults. If an event of default occurs and is continuing under the Amended Credit Agreement, the unpaid principal amount of all outstanding loans, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable. 
On September 30, 2017, we had $50.0 million outstanding under the Amended Revolver, leaving $300.0 million available for additional borrowings.  
Note Purchase Agreement
On July 13, 2017, we entered into a Note Purchase and Guarantee Agreement (the “NPGA”) for the private placement of $125.0 million of senior unsecured guaranteed notes, maturing on July 13, 2027, with a fixed annual interest rate of 3.93% (the “$125 Million Notes”). On July 13, 2017, we completed the issuance of the $125 Million Notes.
Interest on the $125 Million Notes will be payable quarterly on the thirteenth day of January, April, July and October in each year, commencing on October 13, 2017. We may prepay at any time all or, from time to time, any part of the $125 Million Notes, in amounts not less than $2.5 million of the $125 Million Notes then outstanding at (i) 100% of the principal amount so prepaid and (ii) the Make-Whole Amount (as defined in the NPGA).     Our obligations under the $125 Million Notes are fully and unconditionally guaranteed by us and certain of our subsidiaries.
Debt Covenants
The Amended Credit Agreement, the $225 million unsecured term loan facility (the “$225 Million Term Loan Facility”), the $100 million unsecured guaranteed senior notes (the “$100 Million Notes”), and the $125 Million Notes all include a series of financial and other covenants that we must comply with, including the following covenants which are tested on a quarterly basis:
Maintaining a ratio of total indebtedness to total asset value of not more than 60%;
For the Amended Credit Agreement and the $225 Million Term Loan Facility, maintaining a ratio of secured debt to total asset value of not more than 45%;
For the $100 Million Notes and the $125 Million Notes, maintaining a ratio of secured debt to total asset value of not more than 40%;
Maintaining a ratio of total secured recourse debt to total asset value of not more than 15%;
Maintaining a minimum tangible net worth of at least the sum of (i) $760,740,750, and (ii) an amount equal to at least 75% of the net equity proceeds received by the Company after September 30, 2016;
Maintaining a ratio of adjusted EBITDA (as defined in each of the loan agreements) to fixed charges of at least 1.50 to 1.0
Maintaining a ratio of total unsecured debt to total unencumbered asset value of not more than 60%; and
Maintaining a ratio of unencumbered NOI (as defined in each of the loan agreements) to unsecured interest expense of at least 1.75 to 1.0
The Amended Credit Agreement, the $225 Million Term Loan Facility, the $100 Million Notes and the $125 Million Notes also provide that our distributions may not exceed the greater of (i) 95.0% of our funds from operations or (ii) the amount required for us to qualify and maintain our status as a REIT and avoid the payment of federal or state income or excise tax in any 12-month period.
Additionally, subject to the terms of the $100 Million Notes and the $125 Million Notes (together the “Notes”), upon certain events of default, including, but not limited to, (i) a default in the payment of any principal, make-whole payment amount, or interest under the Notes, (ii) a default in the payment of certain of our other indebtedness, (iii) a default in compliance with the covenants set forth in the Notes agreement, and (iv) bankruptcy and other insolvency defaults, the principal and accrued and unpaid interest and the make-whole payment amount on the outstanding Notes will become due and payable at the option of the purchasers.

23



Our $60.0 million term loan contains a financial covenant that is tested on a quarterly basis, which requires us to maintain a minimum Debt Service Coverage Ratio (as defined in the term loan agreement) of at least 1.10 to 1.00.  
We were in compliance with all of our required quarterly debt covenants as of September 30, 2017. 
 
6.
Operating Leases

We lease space to tenants primarily under non-cancelable operating leases that generally contain provisions for a base rent plus reimbursement for certain operating expenses. Operating expense reimbursements are reflected in the consolidated statements of operations as tenant reimbursements.
Future minimum base rent under operating leases as of September 30, 2017, is summarized as follows (in thousands):
  
Twelve months ended September 30,
 
2018
$
135,149

2019
118,231

2020
96,181

2021
66,766

2022
40,994

Thereafter
106,225

Total
$
563,546

The future minimum base rent in the table above excludes tenant reimbursements, amortization of adjustments for deferred rent receivables and the amortization of above/below-market lease intangibles.
 
7.
Interest Rate Swaps
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions.  We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial instruments.  Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  Our derivative financial instruments are used to manage differences in the amount, timing and duration of our known or expected cash payments principally related to our borrowings.  
Derivative Instruments
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional value. We do not use derivatives for trading or speculative purposes.  
The effective portion of the change in fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income/(loss) (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is immediately recognized in earnings. 
On August 11, 2017, we entered into an interest rate swap transaction to manage our exposure to fluctuations in variable interest rate associated with the Amended $100 Million Term Loan. The interest rate swap has a notional value of $100.0 million with an effective date of December 14, 2018, and a maturity date of August 14, 2021 (the “New Swap”). The effective date coincides with the termination date of our two in-place interest rate swaps, each of which has a notional value of $50 million, that currently fix the annual interest rate payable on the Amended $100 Million Term Loan at 1.8975% plus an applicable margin under the terms of the Amended Credit Agreement. Under the terms of the New Swap, we are required to

24



make certain monthly fixed rate payments calculated on a notional value of $100 million, while the counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional value. Upon termination of the two in-place swaps, the New Swap will effectively fix the annual interest rate payable on the Amended $100 Million Term Loan at 1.764% plus an applicable margin under the terms of the Amended Credit Agreement.
The following table sets forth a summary of our interest rate swaps at September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
 
 
 
 
 
Fair Value
 
Current Notional Value(1)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Assets(2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
2/14/2018
 
1/14/2022
 
1.349
%
 
$
2,521

 
$
3,245

 
$

 
$

Interest Rate Swap
 
8/14/2018
 
1/14/2022
 
1.406
%
 
$
1,763

 
$
2,349

 
$

 
$

Interest Rate Swap
 
12/14/2018
 
8/14/2021
 
1.764
%
 
$
468

 
$

 
$

 
$

Liabilities(3):
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Interest Rate Swap
 
1/15/2015
 
2/15/2019
 
1.826
%
 
$
121

 
$
338

 
$
30,000

 
$
30,000

Interest Rate Swap
 
7/15/2015
 
2/15/2019
 
2.010
%
 
$
187

 
$
440

 
$
29,087

 
$
29,674

Interest Rate Swap
 
8/14/2015
 
12/14/2018
 
1.790
%
 
$
174

 
$
529

 
$
50,000

 
$
50,000

Interest Rate Swap
 
2/16/2016
 
12/14/2018
 
2.005
%
 
$
303

 
$
738

 
$
50,000

 
$
50,000

 
(1)
 Represents the notional value of swaps that are effective as of the balance sheet date presented. 
(2)
The fair value of these interest rate swaps is included in the line item “Interest rate swap asset” in the accompanying consolidated balance sheets.
(3)
The fair value of these interest rate swaps is included in the line item “Interest rate swap liability” in the accompanying consolidated balance sheets.
Derivative instruments that are subject to master netting arrangements and qualify for net presentation in the consolidated balance sheets are presented on a gross basis in the consolidated balance sheets as of September 30, 2017 and December 31, 2016.  As of September 30, 2017, if we had recognized these derivative instruments on a net basis, we would have reported an interest rate swap asset of $4.0 million and an interest rate swap liability of zero, which represent the net balances after the effect of offsetting with counterparties where we had both derivative assets and derivative liabilities.
The following table sets forth the impact of our interest rate swaps on our consolidated statements of operations for the periods presented (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest Rate Swaps in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
Amount of gain (loss) recognized in AOCI on derivatives (effective portion)
$
382

 
$
1,036

 
$
(672
)
 
$
(4,465
)
Amount of loss reclassified from AOCI into earnings under “Interest expense” (effective portion)
$
(280
)
 
$
(577
)
 
$
(1,090
)
 
$
(1,671
)
Amount of gain (loss) recognized in earnings under “Interest expense” (ineffective portion and amount excluded from effectiveness testing)
$

 
$

 
$

 
$

     During the next twelve months, we estimate that an additional $0.5 million will be reclassified from AOCI into earnings as an increase to interest expense.

25



Credit-risk-related Contingent Features
Certain of our agreements with our derivative counterparties contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then we could also be declared in default on its derivative obligations.
Certain of our agreements with our derivative counterparties contain provisions where if a merger or acquisition occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

8.
Fair Value Measurements
We have adopted FASB Accounting Standards Codification Topic 820: Fair Value Measurements and Disclosure (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. 
ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Recurring Measurements – Interest Rate Swaps
Currently, we use interest rate swap agreements to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. 
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties.  However, as of September 30, 2017, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, we have determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

26



The table below sets forth the estimated fair value of our interest rate swaps as of September 30, 2017 and December 31, 2016, which we measure on a recurring basis by level within the fair value hierarchy (in thousands).  
 
 
 
Fair Value Measurement Using
 
 
Total Fair Value
 
Quoted Price in Active
Markets for Identical
Assets and Liabilities
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
September 30, 2017
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
4,752

 
$

 
$
4,752

 
$

Interest Rate Swap Liability
 
$
(785
)
 
$

 
$
(785
)
 
$

December 31, 2016
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
5,594

 
$

 
$
5,594

 
$

Interest Rate Swap Liability
 
$
(2,045
)
 
$

 
$
(2,045
)
 
$

     Financial Instruments Disclosed at Fair Value
The carrying amounts of cash and cash equivalents, rents and other receivables, other assets, accounts payable, accrued expenses and other liabilities, and tenant security deposits approximate fair value because of their short-term nature.
The fair value of our notes payable was estimated by calculating the present value of principal and interest payments, using currently available market rates, adjusted with a credit spread, and assuming the loans are outstanding through contractual maturity date.
The table below sets forth the carrying value and the estimated fair value of our notes payable as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
 
Fair Value Measurement Using
 
 
Liabilities
 
Total Fair Value
 
Quoted Price in Active
Markets for Identical
Assets and Liabilities
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Carrying Value
Notes Payable at:
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
$
670,134

 
$

 
$

 
$
670,134

 
$
664,209

December 31, 2016
 
$
507,733

 
$

 
$

 
$
507,733

 
$
500,184

 

9.
Related Party Transactions
Howard Schwimmer
We engage in transactions with Howard Schwimmer, our Co-Chief Executive Officer, earning management fees and leasing commissions from entities controlled individually by Mr. Schwimmer. Fees and commissions earned from these entities are included in “Management, leasing and development services” in the consolidated statements of operations.  We recorded $0.1 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.3 million and $0.2 million for the nine months ended in September 30, 2017 and 2016, respectively, in management, leasing and development services revenue.
 


27



10.
Commitments and Contingencies
Legal
From time to time, we are party to various lawsuits, claims and legal proceedings that arise in the ordinary course of business. We are not currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.
Environmental
We generally will perform environmental site assessments at properties we are considering acquiring.  After the acquisition of such properties, we continue to monitor the properties for the presence of hazardous or toxic substances. From time to time, we acquire properties with known adverse environmental conditions.  If at the time of acquisition, losses associated with environmental remediation obligations are probable and can be reasonably estimated, we record a liability.
On February 25, 2014, we acquired the property located at West 228th Street.  Before purchasing the property during the due diligence phase, we engaged a third party environmental consultant to perform various environmental site assessments to determine the presence of any environmental contaminants that might warrant remediation efforts. Based on their investigation, they determined that hazardous substances existed at the property and that additional assessment and remediation work would likely be required to satisfy regulatory requirements.  The total remediation costs were estimated to be $1.3 million, which includes remediation, processing and oversight costs.
To address the estimated costs associated with the environmental issues at the West 228th Street property, we entered into an Environmental Holdback Escrow Agreement (the “Holdback Agreement”) with the former owner, whereby $1.4 million was placed into an escrow account to be used to pay remediation costs.  To fund the $1.4 million, the escrow holder withheld $1.3 million of the purchase price, which would have otherwise been paid to the seller at closing, and the Company funded an additional $0.1 million. According to the Holdback Agreement, the seller has no liability or responsibility to pay for remediation costs in excess of $1.3 million.
As of September 30, 2017, and December 31, 2016, we had a $1.1 million and $1.1 million contingent liability recorded in our consolidated balance sheets included in the line item “Accounts payable and accrued expenses,” reflecting the estimated remaining cost to remediate environmental liabilities at West 228th Street that existed prior to the acquisition date.  As of September 30, 2017, and December 31, 2016, we also had a $1.1 million and $1.1 million corresponding indemnification asset recorded in our consolidated balance sheets included in the line item “Other assets,” reflecting the estimated costs we expect the former owner to cover pursuant to the Holdback Agreement.  
We expect that the resolution of the environmental matters relating to the above will not have a material impact on our consolidated financial condition, results of operations or cash flows.  However, we cannot assure you that we have identified all environmental liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that such environmental liabilities arise.  Furthermore, we cannot assure you that future changes to environmental laws or regulations and their application will not give rise to loss contingencies for future environmental remediation.
Rent Expense
As of September 30, 2017, we lease a parcel of land that is currently being sub-leased to a tenant for a parking lot.  The ground lease is scheduled to expire on June 1, 2062. We recognized rental expense for our ground lease in the amount of $36 thousand and $36 thousand for the three months ended September 30, 2017 and 2016, respectively, and $0.1 million and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively. As part of conducting our day-to-day business, we also lease office space under operating leases. We recognized rental expense for our corporate and satellite office leases in the amount of $0.1 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.3 million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.  

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The future minimum commitment under our ground lease and corporate and satellite office leases as of September 30, 2017, is as follows (in thousands):   
 
 
Office Leases
 
Ground Lease
October 1, 2017 - December 31, 2017
 
$
185

 
$
36

2018
 
783

 
144

2019
 
569

 
144

2020
 
164

 
144

2021
 
120

 
144

Thereafter
 

 
5,820

Total
 
$
1,821

 
$
6,432

     On September 14, 2016 (the “Effective Date”), we entered into a ground lease for approximately 1.58 million square feet of land located in Corona, California, with the intention to develop buildings on the site. Under the terms of the ground lease, we had up to 420 days from the Effective Date, subject to certain conditions, to satisfy and waive certain contingencies, or terminate the ground lease for any reason. On March 13, 2017, we terminated the ground lease. As a result of the termination, we wrote-off $0.3 million of previously incurred transaction costs to the line item “Acquisition expenses” in the consolidated statements of operations.
Tenant and Construction Related Commitments
As of September 30, 2017, we had commitments of approximately $20.4 million for tenant improvement and construction work under the terms of leases with certain of our tenants and contractual agreements with our construction vendors.
Concentrations of Credit Risk
We have deposited cash with financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000 per institution.  Although we have deposits at institutions in excess of federally insured limits as of September 30, 2017, we do not believe we are exposed to significant credit risk due to the financial position of the institutions in which those deposits are held.
As of September 30, 2017, all of our properties are located in the Southern California infill markets.  The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate.
During the nine months ended September 30, 2017, no single tenant accounted for more than 5% of our total consolidated rental revenues. 

11.
Investment in Unconsolidated Real Estate Entities
    
On July 6, 2016, we acquired the property located at 3233 Mission Oaks Boulevard (the “JV Property”) from our joint venture (the “JV”) for a contract price of $25.7 million. Prior to the acquisition, our ownership interest in the JV property was 15.0%. As a result of the acquisition, we own 100% of the JV property and are accounting for it on a consolidated basis.

Following the sale of the JV property, the JV distributed all of its available cash, with the exception of a small amount of working capital which was retained to cover any residual costs associated with the winding down of the JV. During the nine months ended September 30, 2017, the remaining assets were liquidated by the JV and we received a final distribution in the amount of $11 thousand which is reported in the line item “Equity in income from unconsolidated real estate entities” in the consolidated statements of operations.
Management Services
During the time that the JV owned the JV Property, we performed property and construction management services for the JV Property. We earned fees and commissions for these services totaling zero and zero for the three months ended

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September 30, 2017 and 2016, respectively, and zero and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively, which are included in the line item “Management, leasing and development services” in the consolidated statements of operations.

12.
Equity
Common Stock
On September 21, 2017, we established a new at-the-market equity offering program (the “$300 Million ATM Program”) pursuant to which we may sell from time to time up to an aggregate of $300.0 million of our common stock through sales agents.  The $300 Million ATM Program replaces our previous $150.0 million at-the-market equity offering program, which was established on June 12, 2017 (the “$150 Million ATM Program”). As of September 30, 2017, all $150.0 million of shares of our common stock under the $150 Million Program have been sold. In addition, we previously established a $125.0 million at-the-market program on April 17, 2015, of which all $125.0 million of shares of our common stock have been sold as of September 30, 2017.
During the nine months ended September 30, 2017, we sold a total of 11,043,880 shares of our common stock under our various at-the-market equity offering programs, at a weighted average price of $27.99 per share, for gross proceeds of $309.1 million, and net proceeds of $304.5 million, after deducting the sales agents’ fee. As of September 30, 2017, we had the capacity to issue up to an additional $256.6 million of common stock under the $300 Million ATM Program. Actual sales going forward, if any, will depend on a variety of factors, including among others, market conditions, the trading price of our common stock, determinations by us of the appropriate sources of funding for us and potential uses of funding available to us.
      Noncontrolling Interests
Noncontrolling interests in our Operating Partnership relate to interests in the Operating Partnership that are not owned by us. As of September 30, 2017, no