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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 June 30, 2018
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 July 30, 2018 was 91,291,549.




REXFORD INDUSTRIAL REALTY, INC.
QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018
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)
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Land
$
1,199,633

 
$
997,588

Buildings and improvements
1,229,100

 
1,079,746

Tenant improvements
53,531

 
49,692

Furniture, fixtures and equipment
151

 
167

Construction in progress
44,631

 
34,772

Total real estate held for investment
2,527,046

 
2,161,965

Accumulated depreciation
(200,006
)
 
(173,541
)
Investments in real estate, net
2,327,040

 
1,988,424

Cash and cash equivalents
162,704

 
6,620

Restricted cash

 
250

Rents and other receivables, net
3,920

 
3,664

Deferred rent receivable, net
19,432

 
15,826

Deferred leasing costs, net
12,600

 
12,014

Deferred loan costs, net
1,621

 
1,930

Acquired lease intangible assets, net
57,054

 
49,239

Acquired indefinite-lived intangible
5,156

 
5,156

Interest rate swap asset
13,036

 
7,193

Other assets
8,216

 
6,146

Acquisition related deposits
1,600

 
2,475

Assets associated with real estate held for sale

 
12,436

Total Assets
$
2,612,379

 
$
2,111,373

LIABILITIES & EQUITY
 
 
 
Liabilities
 
 
 
Notes payable
$
757,064

 
$
668,941

Interest rate swap liability

 
219

Accounts payable, accrued expenses and other liabilities
19,683

 
21,134

Dividends payable
14,952

 
11,727

Acquired lease intangible liabilities, net
53,939

 
18,067

Tenant security deposits
20,534

 
19,521

Prepaid rents
6,374

 
6,267

Liabilities associated with real estate held for sale

 
243

Total Liabilities
872,546

 
746,119

Equity
 
 
 
Rexford Industrial Realty, Inc. stockholders’ equity
 
 
 
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized,
 
 
 
5.875% series A cumulative redeemable preferred stock, 3,600,000 shares outstanding at June 30, 2018 and December 31, 2017 ($90,000 liquidation preference)
86,651

 
86,651

5.875% series B cumulative redeemable preferred stock, 3,000,000 shares outstanding at June 30, 2018 and December 31, 2017 ($75,000 liquidation preference)
72,443

 
73,062

Common Stock, $0.01 par value per share, 490,000,000 authorized and 91,062,065 and 78,495,882 shares outstanding at June 30, 2018 and December 31, 2017, respectively
908

 
782

Additional paid in capital
1,614,650

 
1,239,810

Cumulative distributions in excess of earnings
(76,926
)
 
(67,058
)
Accumulated other comprehensive income
12,753

 
6,799

Total stockholders’ equity
1,710,479

 
1,340,046

Noncontrolling interests
29,354

 
25,208

Total Equity
1,739,833


1,365,254

Total Liabilities and Equity
$
2,612,379

 
$
2,111,373

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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
RENTAL REVENUES
 
 
 
 
 
 
 
Rental income
$
43,567

 
$
31,132

 
$
84,478

 
$
60,746

Tenant reimbursements
7,932

 
5,172

 
15,225

 
10,327

Other income
117

 
115

 
346

 
347

TOTAL RENTAL REVENUES
51,616

 
36,419

 
100,049

 
71,420

Management, leasing and development services
140

 
145

 
243

 
271

Interest income

 
218

 

 
445

TOTAL REVENUES
51,756

 
36,782

 
100,292

 
72,136

OPERATING EXPENSES
 
 

 
 
 
 
Property expenses
12,775

 
9,536

 
24,735

 
18,758

General and administrative
6,506

 
5,123

 
12,668

 
10,209

Depreciation and amortization
19,775

 
14,515

 
39,227

 
28,114

TOTAL OPERATING EXPENSES
39,056

 
29,174

 
76,630

 
57,081

OTHER EXPENSES
 
 
 
 
 
 
 
Acquisition expenses
37

 
20

 
46

 
405

Interest expense
6,452

 
4,302

 
12,304

 
8,300

TOTAL OTHER EXPENSES
6,489

 
4,322

 
12,350

 
8,705

TOTAL EXPENSES
45,545

 
33,496

 
88,980

 
65,786

Equity in income from unconsolidated real estate entities

 

 

 
11

Loss on extinguishment of debt

 

 

 
(22
)
Gains on sale of real estate
1,608

 
16,569

 
11,591

 
19,237

NET INCOME
7,819

 
19,855

 
22,903

 
25,576

 Less: net income attributable to noncontrolling interest
(129
)
 
(531
)
 
(447
)
 
(663
)
NET INCOME ATTRIBUTABLE TO REXFORD INDUSTRIAL REALTY, INC.
7,690

 
19,324

 
22,456

 
24,913

 Less: preferred stock dividends
(2,424
)
 
(1,322
)
 
(4,847
)
 
(2,644
)
 Less: earnings allocated to participating securities
(94
)
 
(156
)
 
(191
)
 
(247
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
5,172

 
$
17,846

 
$
17,418

 
$
22,022

Net income attributable to common stockholders per share - basic
$
0.06

 
$
0.26

 
$
0.22

 
$
0.33

Net income attributable to common stockholders per share - diluted
$
0.06

 
$
0.26

 
$
0.21

 
$
0.33

Weighted average shares of common stock outstanding - basic
82,924,208

 
67,920,773

 
80,820,870

 
67,135,319

Weighted average shares of common stock outstanding - diluted
83,494,825

 
68,331,234

 
81,357,129

 
67,483,100

Dividends declared per common share
$
0.160

 
$
0.145

 
$
0.320

 
$
0.290

 
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
7,819

 
$
19,855

 
$
22,903

 
$
25,576

Other comprehensive income (loss): cash flow hedge adjustment
1,742

 
(996
)
 
6,062

 
(244
)
Comprehensive income
9,561

 
18,859

 
28,965

 
25,332

Comprehensive income attributable to noncontrolling interests
(132
)
 
(495
)
 
(555
)
 
(648
)
Comprehensive income attributable to Rexford Industrial Realty, Inc.
$
9,429

 
$
18,364

 
$
28,410

 
$
24,684

 
 
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, 2018
$
159,713

 
78,495,882

 
$
782

 
$
1,239,810

 
$
(67,058
)
 
$
6,799

 
$
1,340,046

 
$
25,208

 
$
1,365,254

Issuance of common stock

 
12,443,919

 
125

 
380,173

 

 

 
380,298

 

 
380,298

Offering costs
(32
)
 

 

 
(6,161
)
 

 

 
(6,193
)
 

 
(6,193
)
Share-based compensation

 
92,247

 
1

 
906

 

 

 
907

 
4,826

 
5,733

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

 
(19,698
)
 

 
(543
)
 

 

 
(543
)
 

 
(543
)
Conversion of units to common stock

 
49,715

 

 
465

 

 

 
465

 
(465
)
 

Net income
4,847

 

 

 

 
17,609

 

 
22,456

 
447

 
22,903

Other comprehensive income

 

 

 

 

 
5,954

 
5,954

 
108

 
6,062

Preferred stock dividends
(5,434
)
 

 

 

 

 

 
(5,434
)
 

 
(5,434
)
Common stock dividends

 

 

 

 
(27,477
)
 

 
(27,477
)
 

 
(27,477
)
Distributions

 

 

 

 

 

 

 
(770
)
 
(770
)
Balance at June 30, 2018
$
159,094

 
91,062,065

 
$
908

 
$
1,614,650

 
$
(76,926
)
 
$
12,753

 
$
1,710,479

 
$
29,354

 
$
1,739,833

 
 

6



 
Preferred Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
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

 
4,567,161

 
45

 
120,490

 

 

 
120,535

 

 
120,535

Offering costs

 

 

 
(2,181
)
 

 

 
(2,181
)
 

 
(2,181
)
Share-based compensation

 
84,439

 
1

 
1,197

 

 

 
1,198

 
1,655

 
2,853

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

 
(17,253
)
 

 
(404
)
 

 

 
(404
)
 

 
(404
)
Conversion of units to common stock

 
34,180

 

 
346

 

 

 
346

 
(346
)
 

Net income
2,644

 

 

 

 
22,269

 

 
24,913

 
663

 
25,576

Other comprehensive loss

 

 

 

 

 
(229
)
 
(229
)
 
(15
)
 
(244
)
Preferred stock dividends
(2,644
)
 

 

 

 

 

 
(2,644
)
 

 
(2,644
)
Common stock dividends

 

 

 

 
(19,984
)
 

 
(19,984
)
 

 
(19,984
)
Distributions

 

 

 

 

 

 

 
(669
)
 
(669
)
Balance at June 30, 2017
$
86,651

 
71,122,902

 
$
708

 
$
1,027,282

 
$
(56,992
)
 
$
3,216

 
$
1,060,865

 
$
24,113

 
$
1,084,978

 
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)
 
Six Months Ended June 30,
  
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
22,903

 
$
25,576

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Equity in income from unconsolidated real estate entities

 
(11
)
Provision for doubtful accounts
411

 
629

Depreciation and amortization
39,227

 
28,114

Amortization of (below) above market lease intangibles, net
(2,732
)
 
(318
)
Accretion of loan origination fees

 
(150
)
Deferred interest income on notes receivable

 
84

Loss on extinguishment of debt

 
22

Gain on sale of real estate
(11,591
)
 
(19,237
)
Amortization of debt issuance costs
643

 
563

Amortization of discount (premium) on notes payable
3

 
(94
)
Equity based compensation expense
5,623

 
2,740

Straight-line rent
(3,642
)
 
(1,952
)
Change in working capital components:
 
 
 
Rents and other receivables
(636
)
 
(524
)
Deferred leasing costs
(2,996
)
 
(2,069
)
Other assets
(2,377
)
 
(2,364
)
Accounts payable, accrued expenses and other liabilities
337

 
(1,768
)
Tenant security deposits
597

 
680

Prepaid rents
(646
)
 
1,359

Net cash provided by operating activities
45,124

 
31,280

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of investments in real estate
(329,763
)
 
(240,447
)
Capital expenditures
(26,471
)
 
(16,883
)
Acquisition related deposits
875

 
(2,250
)
Distributions from unconsolidated real estate entities

 
11

Principal repayments of note receivable

 
6,000

Proceeds from sale of real estate
35,177

 
64,406

Net cash used in investing activities
(320,182
)
 
(189,163
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Issuance of stock, net
374,105

 
118,354

Proceeds from notes payable
401,000

 
265,000

Repayment of notes payable
(311,466
)
 
(203,234
)
Debt issuance costs
(1,748
)
 
(2,110
)
Debt extinguishment costs

 
(193
)
Dividends paid to preferred stockholders
(5,434
)
 
(2,644
)
Dividends paid to common stockholders
(24,289
)
 
(18,643
)
Distributions paid to common unitholders
(733
)
 
(650
)
Repurchase of common shares to satisfy employee tax withholding requirements
(543
)
 
(404
)
Net cash provided by financing activities
430,892

 
155,476

Increase (decrease) in cash, cash equivalents and restricted cash
155,834

 
(2,407
)
Cash, cash equivalents and restricted cash, beginning of period
6,870

 
15,525

Cash, cash equivalents and restricted cash, end of period
$
162,704

 
$
13,118

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of capitalized interest of $934 and $924 for the six months ended June 30, 2018 and 2017, respectively)
$
11,359

 
$
8,073

Supplemental disclosure of noncash investing and financing transactions:
 
 
 
(Decrease) increase in capital expenditure accrual
$
(847
)
 
$
2,363

Accrual of dividends
$
14,952

 
$
10,642

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 June 30, 2018, our consolidated portfolio consisted of 164 properties with approximately 20.2 million rentable square feet. In addition, we currently manage 20 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).
 

 2.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
As of June 30, 2018, and December 31, 2017, and for the three and six months ended June 30, 2018 and 2017, 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.
Under consolidation guidance, we have determined that our Operating Partnership is a variable interest entity because the holders of limited partnership interests do not have substantive kick-out rights or participating rights. Furthermore, we are the primary beneficiary of the Operating Partnership because we have the obligation to absorb losses and the right to receive benefits from the Operating Partnership and the exclusive power to direct the activities of the Operating Partnership. As of June 30, 2018 and December 31, 2017, the assets and liabilities of the Company and the Operating Partnership are substantially the same, as the Company does not have any significant assets other than its investment in the Operating Partnership.
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, 2018. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2017 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.
Use of Estimates
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.  

9



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 June 30, 2018, we did not have a balance in restricted cash. As of December 31, 2017, the $250,000 included in restricted cash was related to a non-refundable deposit we received in connection with the execution of a contract to sell our property located at 700 Allen Avenue.
Restricted cash balances are included with cash and cash equivalents balances as of the beginning and ending of each period presented in the consolidated statements of cash flows. The following table provides a reconciliation of our cash and cash equivalents and restricted cash as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
162,704

 
$
6,620

Restricted cash

 
250

Cash, cash equivalents and restricted cash
$
162,704

 
$
6,870

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.
Investments in Real Estate
Acquisitions
Effective January 1, 2017, we adopted 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.
We evaluated the acquisitions that we completed during the six months ended June 30, 2018 and determined that under this framework these transactions should be accounted for as asset acquisitions. 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.
For acquisitions that are accounted for as asset acquisitions, because they do not meet the business combination accounting criteria, we allocate the cost of the acquisition, which includes the purchase price and associated acquisition transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis. These individual assets and liabilities typically include land, building and improvements, tenant improvements, intangible assets and liabilities related to above and below market leases, intangible assets related to in-place leases, and from time to time, assumed debt. As there is no measurement period concept for an asset acquisition, the allocated cost of the acquired assets is finalized in the period in which the acquisition occurs.
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

10



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 six months ended June 30, 2018, we used discount rates ranging from 5.50% to 7.25% and capitalization rates ranging from 4.25% to 6.25%.
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 to its occupancy level at the time of its acquisition. In determining the fair value of acquisitions completed during the six months ended June 30, 2018, we used an estimated average lease-up period ranging from six to 12 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 $0.6 million and $0.5 million during the three months ended June 30, 2018 and 2017, respectively, and $0.9 million and $0.9 million during the six months ended June 30, 2018 and 2017, respectively. We capitalized real estate taxes and insurance costs aggregating $0.3 million and $0.3 million during the three months ended June 30, 2018 and 2017, respectively, and $0.5 million and $0.6 million during the six months ended June 30, 2018 and 2017, respectively. We capitalized compensation costs for employees who provide construction services of $0.5 million and $0.5 million during the three months ended June 30, 2018 and 2017, respectively, and $1.0 million and $0.8 million during the six months ended June 30, 2018 and 2017, respectively.
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.

11



Assets Held for Sale
We classify a property as held for sale when all of the criteria set forth in ASC Topic 360: Property, Plant and Equipment (“ASC 360”) have been met. The criteria are as follows: (i) management, having the authority to approve the action, commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale of the property is probable and is expected to be completed within one year; (v) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. At the time we classify a property as held for sale, we cease recording depreciation and amortization. A property classified as held for sale is measured and reported at the lower of its carrying amount or its estimated fair value less cost to sell. See Note 11.
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 $0.2 million and $0.2 million during the three months ended June 30, 2018 and 2017, respectively, and $0.4 million and $0.4 million during the six months ended June 30, 2018 and 2017, 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 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.

12



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 six months ended June 30, 2018 and 2017.
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 June 30, 2018, and December 31, 2017, 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
Our primary sources of revenue are rental income, tenant reimbursements, other income, management, leasing and development services and gains on sale of real estate.
Rental Income
Minimum annual rental revenues are recognized in rental income on a straight-line basis over the term of the related lease, regardless of when payments are contractually due. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space. Lease termination fees, which are included in rental income, are recognized when the related lease is canceled and we have no continuing obligation to provide services to such former tenant.
Tenant Reimbursements
Our lease agreements with tenants generally contain provisions that require tenants to reimburse us for certain property expenses. Estimated reimbursements from tenants for real estate taxes, common area maintenance and other recoverable

13



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.
Other Income
Other income primarily consists of late payment fees and other miscellaneous tenant related revenues.
Management, leasing and development services
We provide property management services and leasing services to related party and third-party property owners, the customer, in exchange for fees and commissions. Property management services include performing property inspections, monitoring repairs and maintenance, negotiating vendor contracts, maintaining tenant relations and providing financial and accounting oversight. For these services, we earn monthly management fees, which are based on a fixed percentage of each managed property’s monthly tenant cash receipts. We have determined that control over the services is passed to the customer simultaneously as performance occurs. Accordingly, management fee revenue is earned as the services are provided to our customers.
Leasing commissions are earned when we provide leasing services that result in an executed lease with a tenant. We have determined that control over the services is transferred to the customer upon execution of each lease agreement. We earn leasing commissions based on a fixed percentage of rental income generated for each executed lease agreement and there is no variable income component.
Gain or Loss on Sale of Real Estate
We account for dispositions of real estate properties, which are considered nonfinancial assets, in accordance with ASC 610-20: Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets and recognize a gain or loss on sale of real estate upon transferring control of the nonfinancial asset to the purchaser, which is generally satisfied at the time of sale. If we were to conduct a partial sale of real estate by transferring a controlling interest in a nonfinancial asset, while retaining a noncontrolling ownership interest, we would measure any noncontrolling interest received or retained at fair value, and recognize a full gain or loss. If we receive consideration before transferring control of a nonfinancial asset, we recognize a contract liability. If we transfer control of the asset before consideration is received, we recognize a contract asset.
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 June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Rents and other receivables
$
5,651

 
$
5,369

Allowance for doubtful accounts
(1,731
)
 
(1,705
)
Rents and other receivables, net
$
3,920

 
$
3,664

 
 
 
 
Deferred rent receivable
$
19,451

 
$
15,912

Allowance for doubtful accounts
(19
)
 
(86
)
Deferred rent receivable, net
$
19,432

 
$
15,826

    
We recorded the following provision for doubtful accounts, including amounts related to deferred rents, as a reduction

14



to rental revenues in our consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Provision for doubtful accounts
$
118

 
$
340

 
$
343

 
$
666

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 issuances 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.
Adoption of New Accounting Pronouncements
Revenue Recognition
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and subsequently issued additional ASUs which provide practical expedients, technical corrections and clarification of the new standard (collectively “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.

15



Effective January 1, 2018, we adopted ASC 606 using the modified retrospective approach. We evaluated each of our revenue streams to determine the sources of revenue that are impacted by ASC 606 and concluded that management services and leasing services fall within the scope of ASC 606. We evaluated the impact of ASC 606 on the timing and pattern of revenue recognition for our management and leasing services contracts and determined there was no change in the timing or pattern of revenue recognition for these contracts as compared to prior accounting practice. Accordingly, the adoption of ASC 606 did not have an impact on our consolidated financial statements. See “Revenue Recognition” above for further details.
Derecognition of Non-Financial Assets
On February 22, 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05). ASU 2017-05 clarifies the scope of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. Effective January 1, 2018, we adopted ASU 2017-05 using the modified retrospective approach. There was no cumulative effect adjustment recorded to retained earnings as of January 1, 2018 as a result of adoption of ASU 2017-05.
Derivatives
On August 28, 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 simplifies hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. For cash flow hedges, ASU 2017-12 requires all changes in the fair value of the hedging instrument to be deferred in other comprehensive income and recognized in earnings at the same time that the hedged item affects earnings. ASU 2017-12 also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. ASU 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. Effective January 1, 2018, we early adopted ASU 2017-12 using the modified retrospective approach. We did not record a cumulative effect adjustment to eliminate ineffectiveness amounts as we did not have any ineffectiveness in our historical consolidated financial statements. In addition, certain provisions of ASU 2017-12 require modifications to existing presentation and disclosure requirements on a prospective basis. See Note 7 for disclosures relating to our derivative instruments.
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, with early adoption permitted. Effective January 1, 2018, we early adopted ASU 2017-09. There was no change to our consolidated financial statements or notes to our consolidated financial statements as a result of the adoption of ASU 2017-09.
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.
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 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. As of June 30, 2018, we are the lessee on one ground lease and multiple office space leases. We currently

16



expect that upon the adoption of ASC 842, we will be required to record a lease liability and a right-of-use asset for these leases on our consolidated balance sheets. See Note 10 for a summary of rent expense and remaining contractual payments under our ground lease and office space 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 606 when ASC 842 becomes effective. In July 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, which provides lessors with an optional practical expedient to not separate lease and non-lease components if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease, if it were accounted for separately. We anticipate the majority of our leases will qualify for the practical expedient and as such, we expect to adopt the practical expedient.
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 six months ended June 30, 2018 and 2017.
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.


17



3.
Investments in Real Estate
Acquisitions
The following table summarizes the wholly-owned industrial properties we acquired during the six months ended June 30, 2018
Property
 
Submarket
 
Date of Acquisition
 
Rentable Square Feet
 
Number of Buildings
 
Contractual Purchase Price(1)
(in thousands)
13971 Norton Avenue(2)
 
Inland Empire - West
 
1/17/2018
 
103,208

 
1

 
$
11,364

Ontario Airport Commerce Center(3)
 
Inland Empire - West
 
2/23/2018
 
213,603

 
3

 
24,122

16010 Shoemaker Avenue(4)
 
Los Angeles - Mid-Counties
 
3/13/2018
 
115,600

 
1

 
17,218

4039 Calle Platino(5)
 
Oceanside
 
4/4/2018
 
143,274

 
1

 
20,000

851 Lawrence Drive(6)
 
Thousand Oaks
 
4/5/2018
 
49,976

 
1

 
6,600

1581 North Main Street(6)
 
Orange
 
4/6/2018
 
39,661

 
1

 
7,150

1580 West Carson Street(7)
 
Long Beach
 
4/26/2018
 
43,787

 
1

 
7,500

660 & 664 North Twin Oaks Valley Road(6)
 
San Marcos
 
4/26/2018
 
96,993

 
2

 
14,000

1190 Stanford Court(6)
 
North Orange County
 
5/8/2018
 
34,494

 
1

 
6,080

5300 Sheila Street(6)
 
Central LA
 
5/9/2018
 
695,120

 
1

 
121,000

15777 Gateway Circle(4)
 
OC Airport
 
5/17/2018
 
37,592

 
1

 
8,050

1998 Surveyor Avenue(4)(8)
 
Ventura
 
5/18/2018
 

(8) 

(8) 
5,821

3100 Fujita Street(4)
 
South Bay
 
5/31/2018
 
91,516

 
1

 
14,037

4416 Azusa Canyon Road(4)
 
San Gabriel Valley
 
6/8/2018
 
70,510

 
1

 
12,000

1420 Mckinley Avenue(4)
 
South Bay
 
6/12/2018
 
136,685

 
1

 
30,000

12154 Montague Street(4)
 
Greater San Fernando Valley
 
6/29/2018
 
122,868

 
1

 
22,525

Total 2018 Wholly-Owned Property Acquisitions
 
 
 
1,994,887

 
18

 
$
327,467

(1)
Represents the gross contractual purchase price before prorations, closing costs and other acquisition related costs.
(2)
This acquisition was partially funded through a 1031 Exchange using $10.7 million of net cash proceeds from the sale of our property located at 8900-8980 Benson Avenue and 5637 Arrow Highway and borrowings under our unsecured revolving credit facility.
(3)
The Ontario Airport Commerce Center is an industrial park which includes two properties located at 1900 Proforma Avenue and 1910-1920 Archibald Avenue. This acquisition was partially funded through a 1031 Exchange using $10.3 million of net cash proceeds from the sale of our property located at 700 Allen Avenue and 1851 Flower Street, borrowings under our unsecured revolving credit facility and available cash on hand. On May 9, 2018, we sold the property located at 1910-1920 Archibald Avenue (see Note 11).
(4)
This acquisition was funded with available cash on hand.
(5)
This acquisition was partially funded through a 1031 Exchange using $4.2 million of net cash proceeds from the sale of our property located at 200-220 South Grand Avenue and borrowings under our unsecured revolving credit facility.
(6)
This acquisition was funded with available cash on hand and borrowings under our unsecured revolving credit facility.
(7)
This acquisition was partially funded through a 1031 Exchange using $1.6 million of net cash proceeds from the sale of our property located at 6770 Central Avenue—Building B and borrowings under our unsecured revolving credit facility.
(8)
We acquired 1998 Surveyor Avenue as an under-construction building for a cost of $5.8 million and the assumption of the seller’s fixed-price construction contracts with approximately $4.4 million of remaining costs. At completion, the property will be one single-tenant building containing 56,306 rentable square feet.


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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):
 
 
2018 Acquisitions
Assets:
 
 
Land
 
$
210,578

Buildings and improvements
 
139,507

Tenant improvements
 
1,410

Acquired lease intangible assets(1)
 
18,704

Other acquired assets(2)
 
103

Total assets acquired
 
370,302

Liabilities:
 
 
Acquired lease intangible liabilities(3)
 
39,256

Other assumed liabilities(2)
 
1,283

Total liabilities assumed
 
40,539

Net assets acquired
 
$
329,763

(1)
Acquired lease intangible assets is comprised of $18.6 million of in-place lease intangibles with a weighted average amortization period of 18.8 years and $0.1 million of above-market lease intangibles with a weighted average amortization period of 3.7 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 27.8 years.

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): 
 
June 30, 2018
 
December 31, 2017
Acquired Lease Intangible Assets:
 
 
 
In-place lease intangibles
$
112,919

 
$
95,750

Accumulated amortization
(60,557
)
 
(51,735
)
In-place lease intangibles, net
$
52,362

 
$
44,015

 
 
 
 
Above-market tenant leases
$
10,705

 
$
10,718

Accumulated amortization
(6,013
)
 
(5,494
)
Above-market tenant leases, net
$
4,692

 
$
5,224

Acquired lease intangible assets, net
$
57,054

 
$
49,239

Acquired Lease Intangible Liabilities:
 

 
 

Below-market tenant leases
$
(63,898
)
 
$
(24,843
)
Accumulated accretion
10,092

 
6,925

Below-market tenant leases, net
$
(53,806
)
 
$
(17,918
)
 
 
 
 
Above-market ground lease
$
(290
)
 
$
(290
)
Accumulated accretion
157

 
141

Above-market ground lease, net
$
(133
)
 
$
(149
)
Acquired lease intangible liabilities, net
$
(53,939
)
 
$
(18,067
)
 

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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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
In-place lease intangibles(1)
$
4,676

 
$
3,149

 
$
9,867

 
$
6,105

Net below-market tenant leases(2)
$
(1,608
)
 
$
(193
)
 
$
(2,716
)
 
$
(302
)
Above-market ground lease(3)
$
(8
)
 
$
(8
)
 
$
(16
)
 
$
(16
)
 
(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 below-market tenant leases is recorded as an 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 June 30, 2018 and December 31, 2017 (in thousands): 
 
 
June 30, 2018
 
December 31, 2017
Principal amount
 
$
761,192

 
$
671,658

Less: unamortized discount and debt issuance costs(1)
 
(4,128
)
 
(2,717
)
Carrying value
 
$
757,064

 
$
668,941

(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 June 30, 2018, and December 31, 2017 (dollars in thousands):
 
June 30, 2018
 
December 31, 2017
 
 
  
 
  
 
  
 
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)
$
58,499

 
$
(255
)
 
$
58,891

 
$
(125
)
 
8/1/2023
(4) 
LIBOR+1.70%

 
3.75
%
 
Gilbert/La Palma(5)
2,693

 
(133
)
 
2,767

 
(138
)
 
3/1/2031
 
5.125
%
 
5.43
%
 
Unsecured Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$100M Term Loan Facility
100,000

 
(301
)
 
100,000

 
(343
)
 
2/14/2022
 
LIBOR+1.20%

(6) 
3.18
%
(7) 
Revolving Credit Facility

 

 
60,000

 

 
2/12/2021
(8) 
LIBOR+1.10%

(6)(9) 
3.19
%
 
$225M Term Loan Facility
225,000

 
(1,662
)
 
225,000

 
(1,398
)
 
1/14/2023
 
LIBOR+1.20%

(6) 
3.04
%
(10) 
$150M Term Loan Facility
150,000

 
(1,109
)
 

 

 
5/22/2025
 
LIBOR + 1.50%

(6) 
3.70
%
 
$100M Notes
100,000

 
(538
)
 
100,000

 
(576
)
 
8/6/2025
 
4.290
%
  
4.37
%
 
$125M Notes
125,000

 
(130
)
 
125,000

 
(137
)
 
7/13/2027
 
3.930
%
 
3.94
%
 
Total
$
761,192

 
$
(4,128
)
 
$
671,658

 
$
(2,717
)
 
 
  
 
  
 
 
(1)
Reflects the contractual interest rate under the terms of the loan, as of June 30, 2018.
(2)
Reflects the effective interest rate as of June 30, 2018, which includes the effect of the amortization of discounts and debt issuance costs and the effect of interest rate swaps that are effective as of June 30, 2018.  
(3)
This term loan was modified on June 27, 2018, as further described below under “Modification of $60 Million Term Loan”. This term loan is secured by six properties. As of June 30, 2018, the interest rate on this variable-rate term loan has been effectively fixed through the use of two interest rate swaps. See Note 7 for details.
(4)
One 24-month extension available at the borrower’s option.
(5)
Monthly payments of interest and principal are based on a 20-year amortization table.
(6)
The LIBOR margin will range from 1.20% to 1.70% per annum for the $100.0 million term loan facility, 1.10% to 1.50% per annum for the unsecured revolving credit facility, 1.20% to 1.70% per annum for the $225.0 million term loan facility and 1.50% to 2.20% per annum for the $150.0 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.
(7)
As of June 30, 2018, 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.
(8)
Two additional six-month extensions are available at the borrower’s option.
(9)
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% per annum depending upon our leverage ratio.
(10)
As of June 30, 2018, interest on $125.0 million of this $225.0 million term loan facility has been effectively fixed through the use of an interest rate swap. See Note 7 for details.
The following table summarizes the contractual debt maturities and scheduled amortization payments, excluding debt discounts and debt issuance costs, as of June 30, 2018, and does not consider extension options available to us as noted in the table above (in thousands):

21



 
July 1, 2018 - December 31, 2018
$
76

2019
158

2020
166

2021
566

2022
100,967

Thereafter
659,259

Total
$
761,192

Fourth Amendment to Credit Agreement
On January 16, 2018, we entered into the Fourth Amendment to Credit Agreement (the “Fourth Amendment”) to amend our Credit Agreement, dated as of January 14, 2016 (as amended from time to time) for our $225.0 million unsecured term loan facility (the “$225 Million Term Loan Facility”).
Amounts outstanding under the $225 Million Term Loan Facility bear interest at a rate equal to, at our option, either (i) LIBOR plus an applicable margin that is based upon our leverage ratio or (ii) the Base Rate, as defined in the $225 Million Term Loan Facility, plus an applicable margin that is based on our leverage ratio. The Fourth Amendment decreases the applicable margin for LIBOR-based borrowings from a range of 1.50% to 2.25% per annum to a range of 1.20% to 1.70% per annum and decreases the applicable margin for Base Rate-based borrowings from a range of 0.50% to 1.25% per annum to a range of 0.20% to 0.70% per annum.
If we obtain one additional investment grade rating by one or more of Standard & Poor's Financial Services (“S&P”) or Moody's Investor Services (“Moody’s”) to complement our current investment grade Fitch rating, we may elect to convert the pricing structure under the $225 Million Term Loan Facility to be based on such rating. Under this pricing structure, the Fourth Amendment decreases the applicable margin for LIBOR-based borrowings from a range of 1.40% to 2.35% per annum to a range of 0.90% to 1.75% per annum and decreases the applicable margin for Base Rate-based borrowings from a range of 0.40% to 1.35% per annum to a range of 0.00% to 0.75% per annum.
$150 Million Term Loan Facility
On May 22, 2018, we entered into a credit agreement for a senior unsecured term loan facility (the “$150 Million Term Loan Facility”) that initially permits aggregate borrowings of up to $150.0 million, the total of which we borrowed the same day at closing. Under the terms of the $150 Million Term Loan Facility, we may request additional incremental term loans in an aggregate amount not to exceed $100.0 million. Any increase in borrowings is subject to the satisfaction of specified conditions and the identification of lenders willing to make available such additional amounts. The maturity date of the $150 Million Term Loan Facility is May 22, 2025.    
Interest on the $150 Million Term Loan Facility is generally to be paid based upon, at our option, either (i) LIBOR plus an applicable Eurodollar rate margin 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 base rate margin. The applicable Eurodollar rate margin will range from 1.50% to 2.20% per annum for LIBOR-based borrowings and the applicable base rate margin will range from 0.50% to 1.20% per annum for Base Rate-based loans, depending on our leverage ratio.
If we obtain one additional investment grade rating from one or more of S&P or Moody's to complement our current investment grade Fitch rating, we may elect to convert the pricing structure under the $150 Million Term Loan Facility to be based on such rating. Under this pricing structure, the applicable Eurodollar rate margin will range from 1.40% to 2.35% per annum and the applicable base rate margin will range from 0.40% to 1.35% per annum.
    We have the option to voluntarily prepay any amounts borrowed under the $150 Million Term Loan Facility in whole or in part at any time, subject to certain notice requirements. To the extent that we prepay all or any portion of a loan prior to May 22, 2020, we will pay a prepayment premium equal to (i) if such prepayment occurs prior to May 22, 2019, 2.00% of the principal amount so prepaid, and (ii) if such prepayment occurs on or after May 22, 2019, but prior to May 22, 2020, 1.00% of the principal amount so prepaid. Amounts borrowed under the $150 Million Term Loan Facility and repaid or prepaid may not be reborrowed.

22



The $150 Million Term Loan Facility 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 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 $150 Million Term Loan Facility, all outstanding principal amounts, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable.
Modification of $60 Million Term Loan
On June 27, 2018, we entered into the Second Modification Agreement (the “Modification Agreement”) to amend our Term Loan Agreement, dated as of July 24, 2013 (as amended from time to time) for our $60.0 million term loan (the “$60 Million Term Loan”)
The Modification Agreement, among other things, (i) extends the maturity date of the $60 Million Term Loan from August 1, 2019, to August 1, 2023, (ii) decreases the interest rate from LIBOR plus 1.90% per annum to LIBOR plus 1.70% per annum, (iii) provides for one 24-month extension option, subject to certain terms and conditions, and (iv) amends the repayment schedule of the $60 Million Term Loan by adding 36 months of interest only payments, followed by equal monthly payments of principal ($65,250), plus accrued interest until maturity.
Credit Facility
We have a $450.0 million senior unsecured credit facility (the “Credit Facility”), comprised of a $350.0 million unsecured revolving credit facility (the “Revolver”) and a $100.0 million unsecured term loan facility (the “$100 Million Term Loan Facility”). The Revolver is scheduled to mature on February 12, 2021, and has two six-month extension options available, and the $100 Million Term Loan Facility is scheduled to mature on February 14, 2022. Under the terms of the Credit Facility, we may request additional lender commitments up to an additional aggregate $550.0 million, which may be comprised of additional revolving commitments under the Revolver, an increase to the $100 Million Term Loan Facility, additional term loan tranches or any combination of the foregoing.
     Interest on the Credit Facility 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 Revolver range in amount from 1.10% to 1.50% per annum for LIBOR-based loans and 0.10% to 0.50% per annum for Base Rate-based loans, depending on our leverage ratio. The margins for the $100 Million Term Facility range in amount from 1.20% to 1.70% per annum for LIBOR-based loans and 0.20% to 0.70% per annum for Base Rate-based loans, depending on our leverage ratio.
     If we attain one additional investment grade rating by one or more of S&P or Moody’s to complement our current investment grade Fitch rating, we may elect to convert the pricing structure under the Credit Facility to be based on such rating. In that event, the margins for the Revolver will range in amount from 0.825% to 1.55% per annum for LIBOR-based loans and 0.00% to 0.55% per annum for Base Rate-based loans, depending on such rating, and the margins for the $100 Million Term Loan Facility will range in amount from 0.90% to 1.75% per annum for LIBOR-based loans and 0.00% to 0.75% per annum for Base Rate-based loans, depending on such rating.
     In addition to the interest payable on amounts outstanding under the Revolver, we are required to pay an applicable facility fee, based upon our leverage ratio, on each lender's commitment amount under the Revolver, regardless of usage. The applicable facility fee will range in amount from 0.15% to 0.30% per annum, 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% per annum, depending on such rating.
The Credit Facility 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 Credit Facility is not secured by the Company’s properties or by equity interests in the subsidiaries that hold such properties.
The Revolver and the $100 Million Term Loan Facility may be voluntarily prepaid in whole or in part at any time without premium or penalty.  Amounts borrowed under the $100 Million Term Loan Facility and repaid or prepaid may not be reborrowed.
The Credit Facility 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 Credit Facility and other loan documentation, cross-defaults to certain other indebtedness, and bankruptcy and other insolvency defaults. If an event of default occurs and is

23



continuing under the Credit Facility, 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 June 30, 2018, we did not have any borrowings outstanding under the Revolver, leaving $350.0 million available for future borrowings.  
Debt Covenants
The Credit Facility, the $225 Million Term Loan Facility, the $150 Million Term Loan Facility, the $100 million unsecured guaranteed senior notes (the “$100 Million Notes”) and the $125 million unsecured guaranteed senior notes (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 Credit Facility, the $225 Million Term Loan Facility and the $150 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 1.5 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 1.00
The Credit Facility, the $225 Million Term Loan Facility, the $150 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.
The $60 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 June 30, 2018. 
 
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 June 30, 2018, is summarized as follows (in thousands):
  

24



 Twelve months ended June 30:
 
2019
$
161,922

2020
142,644

2021
109,804

2022
74,455

2023
55,140

Thereafter
215,383

Total
$
759,348

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 through 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 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 from AOCI into earnings in the period that the hedged forecasted transaction affects earnings.
The following table sets forth a summary of our interest rate swaps at June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
 
 
 
 
 
Current Notional Value(1)
 
Fair Value of Interest Rate
Derivative Assets /(Derivative Liabilities)(2)
Derivative Instrument
 
Effective Date
 
Maturity Date
 
LIBOR Interest Strike Rate
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Interest Rate Swap
 
1/15/2015
 
2/15/2019
 
1.826
%
 
$
30,000

 
$
30,000

 
$
83

 
$
(11
)
Interest Rate Swap
 
7/15/2015
 
2/15/2019
 
2.010
%
 
$
28,499

 
$
28,891

 
$
45

 
$
(70
)
Interest Rate Swap
 
8/14/2015
 
12/14/2018
 
1.790
%
 
$
50,000

 
$
50,000

 
$
92

 
$
(18
)
Interest Rate Swap
 
2/16/2016
 
12/14/2018
 
2.005
%
 
$
50,000

 
$
50,000

 
$
42

 
$
(120
)
Interest Rate Swap
 
2/14/2018
 
1/14/2022
 
1.349
%
 
$
125,000

 
$

 
$
5,789

 
$
3,582

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

 
$

 
$
4,372

 
$
2,521

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

 
$

 
$
2,613

 
$
1,090

 
(1)
Represents the notional value of swaps that are effective as of the balance sheet date presented. 

25



(2)
The fair value of derivative assets are included in the line item “Interest rate swap asset” in the accompanying consolidated balance sheets and the fair value of (derivative liabilities) are included in the line item “Interest rate swap liability” in the accompanying consolidated balance sheets.

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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest Rate Swaps in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
Amount of gain (loss) recognized in AOCI on derivatives
$
1,924

 
$
(1,358
)
 
$
6,170

 
$
(1,054
)
Amount of gain (loss) reclassified from AOCI into earnings under “Interest expense”
$
182

 
$
(362
)
 
$
108

 
$
(810
)
Total interest expense presented in the Consolidated Statement of Operations in which the effects of cash flow hedges are recorded (line item “Interest expense”)
$
6,452

 
$
4,302

 
$
12,304

 
$
8,300

     During the next twelve months, we estimate that an additional $2.9 million will be reclassified from AOCI into earnings as a decrease to interest expense.
Offsetting Derivatives
We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. 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 June 30, 2018 and December 31, 2017.
The following tables present information about the potential effects of netting if we were to offset our interest rate swap assets and interest rate swap liabilities in the accompanying consolidated balance sheets as of June 30, 2018 and December 31, 2017 (in thousands).
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
Offsetting of Derivative Assets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts of Assets Presented in the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
13,036

 

 
13,036

 

 

 
13,036

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
7,193

 

 
7,193

 
(219
)
 

 
6,974


26



 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Balance Sheet
 
 
Offsetting of Derivative Liabilities
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts of Assets Presented in the Balance Sheet
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 

 

 

 

 

 

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
219

 

 
219

 
(219
)
 

 

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. 

27



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 June 30, 2018, 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.
The table below sets forth the estimated fair value of our interest rate swaps as of June 30, 2018 and December 31, 2017, 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)
June 30, 2018
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
13,036

 
$

 
$
13,036

 
$

Interest Rate Swap Liability
 
$

 
$

 
$

 
$

December 31, 2017
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
7,193

 
$

 
$
7,193

 
$

Interest Rate Swap Liability
 
$
(219
)
 
$

 
$
(219
)
 
$

     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 discount rates that best reflect current market rates for financings with similar characteristics and credit quality, and assuming each loan is outstanding through its respective contractual maturity date.
The table below sets forth the carrying value and the estimated fair value of our notes payable as of June 30, 2018 and December 31, 2017 (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:
 
 
 
 
 
 
 
 
 
 
June 30, 2018
 
$
756,697

 
$

 
$

 
$
756,697

 
$
757,064

December 31, 2017
 
$
673,377

 
$

 
$

 
$
673,377

 
$
668,941

 


28



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 June 30, 2018 and 2017, respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2018 and 2017, respectively, in management, leasing and development services revenue.
 

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 June 30, 2018, and December 31, 2017, 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 June 30, 2018, and December 31, 2017, 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.

29



Rent Expense
As of June 30, 2018, 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 June 30, 2018 and 2017, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2018 and 2017, respectively. As part of conducting our day-to-day business, we also lease office space under operating leases. We recognized rental expense for our office space leases in the amount of $0.2 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively, and $0.3 million and $0.2 million for the six months ended June 30, 2018 and 2017, respectively.
The future minimum commitment under our ground lease and office space leases as of June 30, 2018, is as follows (in thousands):   
 
 
Office Leases
 
Ground Lease
July 1, 2018 - December 31, 2018
 
$
443

 
$
72

2019
 
660

 
144

2020
 
257

 
144

2021
 
167

 
144

2022
 

 
144

Thereafter
 

 
5,676

Total
 
$
1,527

 
$
6,324

Tenant and Construction Related Commitments
As of June 30, 2018, we had commitments of approximately $33.1 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 June 30, 2018, 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 June 30, 2018, 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 six months ended June 30, 2018, no single tenant accounted for more than 5% of our total consolidated rental revenues.


30



11.
Dispositions and Real Estate Held for Sale
Dispositions
The following table summarizes the properties we sold during the six months ended June 30, 2018:
Property
 
Submarket
 
Date of Disposition
 
Rentable Square Feet
 
Contractual Sales Price(1)
(in thousands)
 
Gain Recorded
(in thousands)
8900-8980 Benson Avenue and 5637 Arrow Highway
 
Inland Empire West
 
1/2/2018
 
88,016

 
$
11,440

 
$
4,029

700 Allen Avenue and 1851 Flower Street
 
Los Angeles - San Fernando Valley
 
1/17/2018</