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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 March 31, 2019
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbols
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
REXR
 
New York Stock Exchange
5.875% Series A Cumulative Redeemable Preferred Stock
 
REXR-PA
 
New York Stock Exchange
5.875% Series B Cumulative Redeemable Preferred Stock
 
REXR-PB
 
New York Stock Exchange
 
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 every Interactive Data File required to be submitted 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 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 April 30, 2019 was 104,026,858.




REXFORD INDUSTRIAL REALTY, INC.
QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2019
TABLE OF CONTENTS
 
PART I.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION
 
Item 1.        Financial Statements


3



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands – except share and per share data)
 
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Land
$
1,364,738

 
$
1,298,957

Buildings and improvements
1,422,684

 
1,332,438

Tenant improvements
62,908

 
60,024

Furniture, fixtures and equipment
149

 
149

Construction in progress
20,331

 
24,515

Total real estate held for investment
2,870,810

 
2,716,083

Accumulated depreciation
(245,033
)
 
(228,742
)
Investments in real estate, net
2,625,777

 
2,487,341

Cash and cash equivalents
276,575

 
180,601

Rents and other receivables, net
4,548

 
4,944

Deferred rent receivable, net
24,290

 
22,228

Deferred leasing costs, net
14,139

 
14,002

Deferred loan costs, net
1,158

 
1,312

Acquired lease intangible assets, net
56,122

 
55,683

Acquired indefinite-lived intangible
5,156

 
5,156

Interest rate swap asset
5,896

 
8,770

Other assets
12,580

 
6,723

Acquisition related deposits
10,875

 
925

Total Assets
$
3,037,116

 
$
2,787,685

LIABILITIES & EQUITY
 
 
 
Liabilities
 
 
 
Notes payable
$
757,524

 
$
757,371

Interest rate swap liability
4,604

 
2,351

Accounts payable, accrued expenses and other liabilities
33,728

 
21,074

Dividends payable
19,774

 
15,938

Acquired lease intangible liabilities, net
52,426

 
52,727

Tenant security deposits
24,396

 
23,262

Prepaid rents
6,828

 
6,539

Total Liabilities
899,280

 
879,262

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 March 31, 2019 and December 31, 2018 ($90,000 liquidation preference)
86,651

 
86,651

5.875% series B cumulative redeemable preferred stock, 3,000,000 shares outstanding at March 31, 2019 and December 31, 2018 ($75,000 liquidation preference)
72,443

 
72,443

Common Stock, $0.01 par value per share, 490,000,000 authorized and 104,028,046 and 96,810,504 shares outstanding at March 31, 2019 and December 31, 2018, respectively
1,038

 
966

Additional paid in capital
2,042,218

 
1,798,113

Cumulative distributions in excess of earnings
(99,715
)
 
(88,341
)
Accumulated other comprehensive income
1,261

 
6,262

Total stockholders’ equity
2,103,896

 
1,876,094

Noncontrolling interests
33,940

 
32,329

Total Equity
2,137,836


1,908,423

Total Liabilities and Equity
$
3,037,116

 
$
2,787,685

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

4



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands – except share and per share data)

 
 
Three Months Ended
March 31,
 
 
2019
 
2018
REVENUES
 
 
 
 
Rental income
 
$
59,604

 
$
48,433

Management, leasing and development services
 
102

 
103

Interest income
 
657

 

TOTAL REVENUES
 
60,363

 
48,536

OPERATING EXPENSES
 
 
 
 
Property expenses
 
13,812

 
11,960

General and administrative
 
7,344

 
6,162

Depreciation and amortization
 
21,996

 
19,452

TOTAL OPERATING EXPENSES
 
43,152

 
37,574

OTHER EXPENSES
 
 
 
 
Acquisition expenses
 
23

 
9

Interest expense
 
6,471

 
5,852

TOTAL EXPENSES
 
49,646

 
43,435

Gains on sale of real estate
 

 
9,983

NET INCOME
 
10,717

 
15,084

 Less: net income attributable to noncontrolling interest
 
(201
)
 
(318
)
NET INCOME ATTRIBUTABLE TO REXFORD INDUSTRIAL REALTY, INC.
 
10,516

 
14,766

 Less: preferred stock dividends
 
(2,423
)
 
(2,423
)
 Less: earnings allocated to participating securities
 
(114
)
 
(97
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
 
$
7,979

 
$
12,246

Net income attributable to common stockholders per share - basic
 
$
0.08

 
$
0.16

Net income attributable to common stockholders per share - diluted
 
$
0.08

 
$
0.15

Weighted average shares of common stock outstanding - basic
 
98,342,677

 
78,694,161

Weighted average shares of common stock outstanding - diluted
 
98,607,786

 
79,196,060

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

5



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
 
 
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
10,717

 
$
15,084

Other comprehensive (loss) income: cash flow hedge adjustment
(5,127
)
 
4,320

Comprehensive income
5,590

 
19,404

Comprehensive income attributable to noncontrolling interests
(75
)
 
(423
)
Comprehensive income attributable to Rexford Industrial Realty, Inc.
$
5,515

 
$
18,981

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

6



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 (Loss)
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at January 1, 2019
$
159,094

 
96,810,504

 
$
966

 
$
1,798,113

 
$
(88,341
)
 
$
6,262

 
$
1,876,094

 
$
32,329

 
$
1,908,423

Cumulative effect of adoption of ASC 842

 

 

 

 
(222
)
 

 
(222
)
 

 
(222
)
Issuance of common stock

 
7,148,746

 
71

 
248,323

 

 

 
248,394

 

 
248,394

Offering costs

 

 

 
(3,974
)
 

 

 
(3,974
)
 

 
(3,974
)
Share-based compensation

 
86,919

 
1

 
510

 

 

 
511

 
2,102

 
2,613

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

 
(23,090
)
 

 
(791
)
 

 

 
(791
)
 

 
(791
)
Conversion of units to common stock

 
4,967

 

 
37

 

 

 
37

 
(37
)
 

Net income
2,423

 

 

 

 
8,093

 

 
10,516

 
201

 
10,717

Other comprehensive loss

 

 

 

 

 
(5,001
)
 
(5,001
)
 
(126
)
 
(5,127
)
Preferred stock dividends
(2,423
)
 

 

 

 

 

 
(2,423
)
 

 
(2,423
)
Common stock dividends ($0.185 per common share)

 

 

 

 
(19,245
)
 

 
(19,245
)
 

 
(19,245
)
Distributions

 

 

 

 

 

 

 
(529
)
 
(529
)
Balance at March 31, 2019
$
159,094

 
104,028,046

 
$
1,038

 
$
2,042,218

 
$
(99,715
)
 
$
1,261

 
$
2,103,896

 
$
33,940

 
$
2,137,836

 
 

7



 
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

 
2,085,663

 
21

 
58,430

 

 

 
58,451

 

 
58,451

Offering costs
(32
)
 

 

 
(1,048
)
 

 

 
(1,080
)
 

 
(1,080
)
Share-based compensation

 
79,427

 
1

 
409

 

 

 
410

 
2,604

 
3,014

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

 
(15,287
)
 

 
(418
)
 

 

 
(418
)
 

 
(418
)
Conversion of units to common stock

 
22,104

 

 
208

 

 

 
208

 
(208
)
 

Net income
2,423

 

 

 

 
12,343

 

 
14,766

 
318

 
15,084

Other comprehensive income

 

 

 

 

 
4,215

 
4,215

 
105

 
4,320

Preferred stock dividends
(3,010
)
 

 

 

 

 

 
(3,010
)
 

 
(3,010
)
Common stock dividends ($0.160 per common share)

 

 

 

 
(12,907
)
 

 
(12,907
)
 

 
(12,907
)
Distributions

 

 

 

 

 

 

 
(387
)
 
(387
)
Balance at March 31, 2018
$
159,094

 
80,667,789

 
$
804

 
$
1,297,391

 
$
(67,622
)
 
$
11,014

 
$
1,400,681

 
$
27,640

 
$
1,428,321

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


8



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 
Three Months Ended March 31,
  
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
10,717

 
$
15,084

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for doubtful accounts
177

 
221

Depreciation and amortization
21,996

 
19,452

Amortization of (below) above market lease intangibles, net
(1,751
)
 
(1,116
)
Gain on sale of real estate

 
(9,983
)
Amortization of debt issuance costs
344

 
312

Amortization of discount on notes payable
1

 
1

Equity based compensation expense
2,579

 
2,963

Straight-line rent
(2,067
)
 
(1,969
)
Change in working capital components:
 
 
 
Rents and other receivables
219

 
128

Deferred leasing costs
(1,413
)
 
(1,843
)
Other assets
533

 
59

Accounts payable, accrued expenses and other liabilities
3,936

 
2,529

Tenant security deposits
753

 
179

Prepaid rents
160

 
(817
)
Net cash provided by operating activities
36,184

 
25,200

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of investments in real estate
(145,253
)
 
(52,753
)
Capital expenditures
(9,712
)
 
(14,861
)
Payments for deposits on real estate acquisitions
(10,475
)
 
(2,050
)
Proceeds from sale of real estate

 
24,896

Net cash used in investing activities
(165,440
)
 
(44,768
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Issuance of stock, net
244,420

 
57,371

Proceeds from notes payable

 
59,000

Repayment of notes payable
(38
)
 
(68,232
)
Debt issuance costs

 
(450
)
Dividends paid to preferred stockholders
(2,423
)
 
(3,010
)
Dividends paid to common stockholders
(15,490
)
 
(11,382
)
Distributions paid to common unitholders
(448
)
 
(345
)
Repurchase of common shares to satisfy employee tax withholding requirements
(791
)
 
(418
)
Net cash provided by financing activities
225,230

 
32,534

Increase in cash, cash equivalents and restricted cash
95,974

 
12,966

Cash, cash equivalents and restricted cash, beginning of period
180,601

 
6,870

Cash, cash equivalents and restricted cash, end of period
$
276,575

 
$
19,836

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of capitalized interest of $629 and $371 for the three months ended March 31, 2019 and 2018, respectively)
$
6,940

 
$
6,663

Supplemental disclosure of noncash investing and financing transactions:
 
 
 
Operating lease right-of-use assets obtained in exchange for lease liabilities upon adoption of ASC 842 on January 1, 2019
$
3,262

 
$

Operating lease right-of-use assets obtained in exchange for lease liabilities subsequent to January 1, 2019
$
3,457

 
$

Accrual for capital expenditures
$
5,481

 
$
2,455

Accrual of dividends
$
19,774

 
$
13,294

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


9


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 March 31, 2019, our consolidated portfolio consisted of 181 properties with approximately 22.1 million rentable square feet. In addition, we currently manage 19 properties with approximately 1.0 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 March 31, 2019, and December 31, 2018, and for the three months ended March 31, 2019 and 2018, 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 March 31, 2019 and December 31, 2018, 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, 2019. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2018 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.  
Reclassifications
In connection with the adoption of the new lease accounting standard on January 1, 2019, as further described below under “Adoption of New Accounting Pronouncements,” tenant reimbursements and other income related to leases have been reclassified to “Rental income” in the consolidated statement of operations for the three months ended March 31, 2018, to conform to the 2019 financial statement presentation.

10



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. We include restricted cash with cash and cash equivalents in the consolidated statements of cash flows and provide a reconciliation between the balance sheet and the statement of cash flows provided that we have outstanding restricted cash balances. At March 31, 2019 and December 31, 2018, we did not have a balance in restricted cash.    
Investments in Real Estate
Acquisitions
We account for acquisitions of properties under Accounting Standards Update (“ASU”) 2017-01, Business Combinations - Clarifying the Definition of a Business (“ASU 2017-01”), which provides a framework for determining whether transactions should be accounted for as acquisitions of assets or businesses and further revises the definition of a business. Our acquisitions of properties generally no longer meet the revised definition of a business and accordingly are accounted for as asset acquisitions.
For asset acquisitions, 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 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 three months ended March 31, 2019, we used discount rates ranging from 6.00% to 7.00% and capitalization rates ranging from 4.75% to 5.75%.
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 estimated costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. We consider estimated costs such as 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 three months ended March 31, 2019, we used an estimated average lease-up period of six months.
The difference between the fair value and the face value of debt assumed, if any, 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

11



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 $0.4 million during the three months ended March 31, 2019 and 2018, respectively. We capitalized real estate taxes and insurance costs aggregating $0.2 million and $0.2 million during the three months ended March 31, 2019 and 2018, respectively. We capitalized compensation costs for employees who provide construction services of $0.7 million and $0.5 million during the three months ended March 31, 2019 and 2018, 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 that a change in the useful life has occurred, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets.
Assets Held for Sale
We classify a property as held for sale when all of the criteria set forth in the Accounting Standards Codification (“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. As of March 31, 2019 and December 31, 2018, we did not have any properties classified as held for sale.
Deferred Leasing Costs
Subsequent to the adoption of the new lease accounting standard on January 1, 2019, we only capitalize incremental direct costs of a lease that would not have been incurred had the lease not been executed. As a result, deferred leasing costs on a go-forward basis, will generally only include third-party broker commissions. Prior to January 1, 2019, under prior lease accounting guidance, we capitalized incremental direct costs which included an allocation of internal compensation costs of employees who spent time on successful lease origination activities, in addition to third-party broker commissions. During the three months ended March 31, 2018, we capitalized compensation costs for these employees of $0.2 million.
Impairment of Long-Lived Assets
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC 360, 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.

12



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.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our initial taxable year ended December 31, 2013. To qualify as a REIT, we are required (among other things) to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and were unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.
In addition, we are subject to taxation by various state and local jurisdictions, including those in which we transact business or reside. Our non-taxable REIT subsidiaries, including our Operating Partnership, are either partnerships or disregarded entities for federal income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss from disregarded entities and flow-through entities such as partnerships is reportable in the income tax returns of the respective equity holders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements for the three months ended March 31, 2019 and 2018.
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 March 31, 2019, and December 31, 2018, we have not established a liability for uncertain tax positions.
Derivative Instruments and Hedging Activities
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.

13



Revenue Recognition
Our primary sources of revenue are rental income, management, leasing and development services and gains on sale of real estate.
Rental Income
Total minimum annual lease payments 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 leases are canceled and we have no continuing obligation to provide services to such former tenants.
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 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.
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.

14



Valuation of Receivables
We may be subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables related to our operating leases. 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. On a quarterly basis, we perform an assessment of the collectability of operating lease receivables on a tenant-by-tenant basis, which includes reviewing the age and nature of our receivables, the payment history and financial condition of the tenant, our assessment of the tenant’s ability to meet its lease obligations and the status of negotiations of any disputes with the tenant. Any changes in the collectability assessment for an operating lease is recognized as an adjustment to rental income in the consolidated statements of operations. During the three month ended March 31, 2019 and 2018, we recognized credit losses of $0.1 million and $0.2 million, respectively, as a reduction of rental income in the consolidated statements of operations.
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 11.
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 12.
Segment Reporting
Management views the Company as a single reportable segment based on its method of internal reporting in addition to its allocation of capital and resources.
Recently Issued Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of ASUs to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs. Other than the ASUs discussed below, the FASB has not recently issued any other ASUs that we expect to be applicable and have a material impact on our financial statements.

15



Adoption of New Accounting Pronouncements
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.
Leases
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which sets out the principals for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 was subsequently amended by the following updates: (i) ASU 2018-10, Leases: Codification Improvements to Topic 842, (ii) ASU 2018-11, Leases: Targeted Improvements, (iii) ASU 2018-20, Leases: Narrow-Scope Improvements for Lessors and (iv) ASU 2019-01, Leases: Codification Improvements (collectively referred to as “ASC 842”). ASC 842 supersedes prior lease accounting guidance contained in ASC Topic 840, Leases (“ASC 840”).
On January 1, 2019, we adopted ASC 842 using the modified retrospective approach and elected to apply the provisions as of the date of adoption on a prospective basis. In making this election, we have continued to apply ASC 840 to comparative periods, including providing disclosures required by ASC 840 for these periods, and we recognized the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of January 1, 2019, as described below under “Lessor”.
Upon adoption of ASC 842, we elected the “package of practical expedients” which allowed us to not reassess (a) whether expired or existing contracts as of January 1, 2019 are or contain leases, (b) the lease classification for any expired or existing leases as of January 1, 2019, and (c) the treatment of initial direct costs relating to any existing leases as of January 1, 2019. The package of practical expedients was made as a single election and was consistently applied to all leases that commenced before January 1, 2019.
Lessor
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. As we elected the package of practical expedients, our existing leases as of January 1, 2019, continue to be accounted for as operating leases.
Upon adoption of ASC 842, we elected the practical expedient permitting lessors to elect by class of underlying asset to not separate non-lease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) 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. If both criteria are met, the combined component is accounted for in accordance with ASC 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. We assessed the criteria above with respect to our operating leases and determined that they qualify for the non-separation practical expedient. As a result, we have accounted for and presented all rental income earned pursuant to operating leases, including tenant reimbursements, as a single line item “Rental income” in the consolidated statement of operations for the three months ended March 31, 2019. Prior to the adoption of ASC 842, we presented rental income, tenant reimbursements and other income related to leases separately in our consolidated statements of operations. For comparability, we have adjusted our comparative consolidated statement of operations for the three months ended March 31, 2018, to conform to the 2019 financial statement presentation.

16



Under ASC 842, lessors are required to record revenues and expenses on a gross basis for lessor costs (which include real estate taxes) when these costs are reimbursed by a lessee. Conversely, lessors are required to record revenues and expenses on a net basis for lessor costs when they are paid by a lessee directly to a third party on behalf of the lessor. Prior to the adoption of ASC 842, we recorded revenues and expenses on a gross basis for real estate taxes whether they were reimbursed to us by a tenant or paid directly by a tenant to the taxing authorities on our behalf. Effective January 1, 2019, we are recording these costs in accordance with ASC 842.
ASC 842 only allows lessors to capitalize the incremental direct costs of originating a lease that would not have been incurred had the lease not been executed. As a result, deferred leasing costs will generally only include third-party broker commissions. Prior to January 1, 2019, under ASC 840, we capitalized incremental direct costs, which included an allocation of internal compensation costs of employees who spent time on successful lease origination activities. Effective January 1, 2019, such costs will no longer be capitalized as initial direct costs and instead will be expensed as incurred.
For leases that commenced prior to January 1, 2019, capitalized internal compensation costs will continue to be amortized over the remaining life of the lease. For leases that were executed but had not commenced prior to January 1, 2019, we recognized a cumulative-effect adjustment to “Cumulative distributions in excess of earnings” of $0.2 million to write off these capitalized internal compensation costs, as these costs were capitalized in accordance with ASC 840, as noted above, and do not qualify for capitalization under ASC 842.
See Note 6 for additional lessor disclosures required under ASC 842.
Lessee
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 (“ROU 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.
We are the lessee on one ground lease and multiple office space leases, which were classified as operating leases under ASC 840. As we elected the package of practical expedients, we were not required to reassess the classification of these existing leases and as such, these leases continue to be accounted for as operating leases. In the event we modify our existing ground lease or enter into new ground leases in the future, such leases may be classified as finance leases.
On January 1, 2019, we recognized ROU assets and lease liabilities for these leases on our consolidated balance sheets, and on a go-forward basis, lease expense will be recognized on a straight-line basis over the remaining term of the lease.
Upon adoption of ASC 842, we also elected the practical expedient to not separate non-lease components, such as common area maintenance, from associated lease components for our ground and office space leases.
See Note 6 for additional lessee disclosures required under ASC 842.


17



3.
Investments in Real Estate
Acquisitions
The following table summarizes the wholly-owned industrial properties we acquired during the three months ended March 31, 2019
Property
 
Submarket
 
Date of Acquisition
 
Rentable Square Feet
 
Number of Buildings
 
Contractual Purchase Price(1)
(in thousands)
12821 Knott Street(2)
 
Orange County - West
 
1/15/2019
 
120,800

 
1

 
$
19,800

28510 Industry Drive(2)
 
Los Angeles - San Fernando Valley
 
1/17/2019
 
46,778

 
1

 
7,765

Conejo Spectrum Business Park(2)
 
Ventura
 
1/28/2019
 
531,378

 
9

 
106,250

2455 Ash Street(2)
 
San Diego - North County
 
3/5/2019
 
42,508

 
1

 
6,680

25413 Rye Canyon Road(2)
 
Los Angeles - San Fernando Valley
 
3/12/2019
 
48,075

 
1

 
5,529

Total 2019 Wholly-Owned Property Acquisitions
 
 
 
789,539

 
13

 
$
146,024

(1)
Represents the gross contractual purchase price before prorations, closing costs and other acquisition related costs.
(2)
This acquisition was funded with available cash on hand.
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):
 
 
2019 Acquisitions
Assets:
 
 
Land
 
$
65,781

Buildings and improvements
 
76,403

Tenant improvements
 
926

Acquired lease intangible assets(1)
 
5,051

Other acquired assets(2)
 
99

Total assets acquired
 
148,260

 
 
 
Liabilities:
 
 
Acquired lease intangible liabilities(3)
 
1,840

Other assumed liabilities(2)
 
642

Total liabilities assumed
 
2,482

Net assets acquired
 
$
145,778

(1)
Acquired lease intangible assets is comprised of $4.0 million of in-place lease intangibles with a weighted average amortization period of 7.7 years and $1.0 million of above-market lease intangibles with a weighted average amortization period of 5.6 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 14.3 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): 

18



 
March 31, 2019
 
December 31, 2018
Acquired Lease Intangible Assets:
 
 
 
In-place lease intangibles
$
123,533

 
$
119,517

Accumulated amortization
(72,821
)
 
(68,481
)
In-place lease intangibles, net
$
50,712

 
$
51,036

 
 
 
 
Above-market tenant leases
$
12,161

 
$
11,125

Accumulated amortization
(6,751
)
 
(6,478
)
Above-market tenant leases, net
$
5,410

 
$
4,647

Acquired lease intangible assets, net
$
56,122

 
$
55,683

Acquired Lease Intangible Liabilities:
 

 
 

Below-market tenant leases
$
(68,228
)
 
$
(66,388
)
Accumulated accretion
15,802

 
13,778

Below-market tenant leases, net
$
(52,426
)
 
$
(52,610
)
 
 
 
 
Above-market ground lease(1)
$

 
$
(290
)
Accumulated accretion(1)

 
173

Above-market ground lease, net(1)
$

 
$
(117
)
Acquired lease intangible liabilities, net
$
(52,426
)
 
$
(52,727
)
 
(1)
In connection with the adoption of ASC 842 on January 1, 2019, we derecognized the net above-market ground lease intangible liability of $0.1 million and adjusted the carrying amount of the ground lease right-of-use asset by a corresponding amount. See Note 2 for additional details related to the adoption of ASC 842.
The following table summarizes the amortization related to our acquired lease intangible assets and liabilities for the three months ended March 31, 2019 and 2018 (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
In-place lease intangibles(1)
$
4,339

 
$
5,191

Net below-market tenant leases(2)
$
(1,751
)
 
$
(1,108
)
Above-market ground lease(3)
$

 
$
(8
)
(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 income 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 March 31, 2019 and December 31, 2018 (in thousands): 
 
 
March 31, 2019
 
December 31, 2018
Principal amount
 
$
761,077

 
$
761,116

Less: unamortized discount and debt issuance costs(1)
 
(3,553
)
 
(3,745
)
Carrying value
 
$
757,524

 
$
757,371

(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.

19



The following table summarizes the components and significant terms of our indebtedness as of March 31, 2019, and December 31, 2018 (dollars in thousands):
 
March 31, 2019
 
December 31, 2018
 
 
  
 
  
 
  
 
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
$
58,499

 
$
(217
)
 
$
58,499

 
$
(230
)
 
8/1/2023
(3) 
LIBOR+1.70%

 
4.28
%
 
Gilbert/La Palma(4)
2,578

 
(127
)
 
2,617

 
(129
)
 
3/1/2031
 
5.125
%
 
5.45
%
 
Unsecured Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$100M Term Loan Facility
100,000

 
(239
)
 
100,000

 
(260
)
 
2/14/2022
 
LIBOR+1.20%

(5) 
3.05
%
(6) 
Revolving Credit Facility

 

 

 

 
2/12/2021
(7) 
LIBOR+1.10%

(5)(8) 
3.59
%
 
$225M Term Loan Facility
225,000

 
(1,383
)
 
225,000

 
(1,476
)
 
1/14/2023
 
LIBOR+1.20%

(5) 
2.74
%
(9) 
$150M Term Loan Facility
150,000

 
(987
)
 
150,000

 
(1,028
)
 
5/22/2025
 
LIBOR+1.50%

(5) 
4.10
%
 
$100M Notes
100,000

 
(481
)
 
100,000

 
(500
)
 
8/6/2025
 
4.290
%
  
4.37
%
 
$125M Notes
125,000

 
(119
)
 
125,000

 
(122
)
 
7/13/2027
 
3.930
%
 
3.94
%
 
Total
$
761,077

 
$
(3,553
)
 
$
761,116

 
$
(3,745
)
 
 
  
 
  
 
 
(1)
Reflects the contractual interest rate under the terms of the loan, as of March 31, 2019.
(2)
Reflects the effective interest rate as of March 31, 2019, 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 March 31, 2019.  
(3)
One 24-month extension is available at the borrower’s option, subject to certain terms and conditions.
(4)
Monthly payments of interest and principal are based on a 20-year amortization table.
(5)
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 million term loan facility, depending on the leverage ratio, which is the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value which is measured on a quarterly basis.
(6)
As of March 31, 2019, interest on the $100.0 million term loan facility has been effectively fixed through the use of an interest rate swap. See Note 7 for details.
(7)
Two additional six-month extensions are available at the borrower’s option, subject to certain terms and conditions.
(8)
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.
(9)
As of March 31, 2019, interest on the $225.0 million term loan facility has been effectively fixed through the use of two interest rate swaps. See Note 7 for details.
Contractual Debt Maturities    
The following table summarizes the contractual debt maturities and scheduled amortization payments, excluding debt discounts and debt issuance costs, as of March 31, 2019, and does not consider extension options available to us as noted in the table above (in thousands):

20



April 1, 2019 - December 31, 2019
$
119

2020
166

2021
566

2022
100,967

2023
282,518

Thereafter
376,741

Total
$
761,077

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 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 March 31, 2019, we did not have any borrowings outstanding under the Revolver, leaving $350.0 million available for future borrowings.  

21



Debt Covenants
The Credit Facility, our $225 million unsecured term loan facility (the “$225 Million Term Loan Facility”), our $150 million unsecured term loan facility (the “$150 Million Term Loan Facility”), our $100 million unsecured guaranteed senior notes (the “$100 Million Notes”) and our $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. In addition, we are required to maintain at all times a credit rating on the Notes from either S&P, Moody’s or Fitch. In October 2018, Fitch upgraded the investment grade rating of the Notes to BBB from BBB- with a stable outlook.
Our $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 March 31, 2019. 
 
6.
Operating Leases
Lessor
We lease industrial space to tenants primarily under non-cancelable operating leases that generally contain provisions for minimum base rents plus reimbursement for certain operating expenses. Total minimum lease payments are recognized in rental income on a straight-line basis over the term of the related lease and estimated reimbursements from tenants for real estate taxes, insurance, common area maintenance and other recoverable operating expenses are recognized in rental income in the period that the expenses are incurred.
We recognized $57.9 million of rental income related to operating lease payments of which $9.3 million was for variable lease payments for the three months ended March 31, 2019.

22



The following table sets forth the undiscounted cash flows for future minimum base rents to be received under operating leases as of March 31, 2019 (in thousands):
Twelve months ended March 31,
 
2020
$
188,034

2021
158,386

2022
118,320

2023
88,179

2024
62,055

Thereafter
214,439

Total
$
829,413

The future minimum base rents in the table above excludes tenant reimbursements of operating expenses, amortization of adjustments for deferred rent receivables and the amortization of above/below-market lease intangibles.
Lessee
We lease a parcel of land that is currently being sub-leased to a tenant as a parking lot and we lease office space as part of conducting our day-to-day business. These lease arrangements are classified as operating leases. As of March 31, 2019, we have not entered into any lease arrangements classified as a finance lease. The ground lease, which expires on June 1, 2062, has a remaining lease term of 43 years and no option to renew. Every 10 years, rent adjusts to 8.0% of the fair market value of the land, subject to a minimum monthly rent of $12,000. The office space leases have remaining lease terms ranging from 1 to 6 years and some include options to renew. These renewal terms can extend the lease term from 3 to 5 years and are included in the lease term when it is reasonably certain that we will exercise the option.
Upon the adoption of ASC 842 on January 1, 2019, we recognized lease liabilities of $3.6 million (in “Accounts payable, accrued expenses and other liabilities”) and related ROU assets of $3.3 million (in “Other assets”) on our consolidated balance sheets, based on the present value of lease payments for the remaining term of our existing leases. Operating lease ROU assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of March 31, 2019, total ROU assets and lease liabilities were approximately $6.5 million and $6.8 million, respectively. All operating lease expense is recognized on a straight-line basis over the lease term.
The tables below present financial information associated with our leases. This information is only presented as of, and for the three months ended March 31, 2019 because, as previously noted, we adopted ASC 842 on a prospective basis which does not require application to periods prior to adoption.
Lease Cost (in thousands)
Three Months Ended March 31, 2019
Operating lease cost(1)
$
260

Variable lease cost(1)
13

Sublease income(2)
(79
)
Total lease cost
$
194

(1)
Amounts are included in “General and administrative” and “Property expenses” in the accompanying consolidated statement of operations.
(2)
Amount is included in “Rental income” in the accompanying consolidated statement of operations.

23



Other Information (in thousands)
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of operating lease liabilities
$
239

Right-of-use assets obtained in exchange for new operating lease liabilities(1)
$
6,720

(1)
Includes $3.3 million for operating leases existing on January 1, 2019 and $3.5 million for operating lease modifications that occurred during the three months ended March 31, 2019.
Lease Term and Discount Rate
March 31, 2019
Weighted-average remaining lease term
19 years

Weighted-average discount rate(1)
4.59
%
(1)
Because the rate implicit in each of our leases was not readily determinable, we used our incremental borrowing rate. In determining our incremental borrowing rate for each lease, we considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to our creditworthiness, the impact of collateralization and the term of each of our lease agreements.

Maturities of lease liabilities as of March 31, 2019 were as follows (in thousands):
April 1, 2019 - December 31, 2019
$
772

2020
949

2021
1,032

2022
923

2023
951

Thereafter
6,426

Total undiscounted lease payments
$
11,053

Less imputed interest
(4,237
)
Total lease liabilities
$
6,816

As we elected to apply the provisions of ASC 842 on a prospective basis, the following comparative period disclosure is being presented in accordance with ASC 840. The future minimum commitments under our office space leases and ground lease as of December 31, 2018, were as follows (in thousands):   
 
 
Office Leases
 
Ground Lease
2019
 
$
668

 
$
144

2020
 
257

 
144

2021
 
167

 
144

2022
 

 
144

2023
 

 
144

Thereafter
 

 
5,532

Total
 
$
1,092

 
$
6,252

2018 Rent Expense
We recognized rental expense for our ground lease and office space leases of $36 thousand and $0.1 million, respectively, for the three months ended March 31, 2018.


24



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 March 31, 2019 and December 31, 2018 (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
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Interest Rate Swap
 
1/15/2015
 
2/15/2019
 
1.8260
%
 
$

 
$
30,000

 
$

 
$
25

Interest Rate Swap
 
7/15/2015
 
2/15/2019
 
2.0100
%
 
$

 
$
28,108

 
$

 
$
17

Interest Rate Swap
 
2/14/2018
 
1/14/2022
 
1.3490
%
 
$
125,000

 
$
125,000

 
$
2,797

 
$
3,974

Interest Rate Swap
 
8/14/2018
 
1/14/2022
 
1.4060
%
 
$
100,000

 
$
100,000

 
$
2,089

 
$
3,023

Interest Rate Swap
 
12/14/2018
 
8/14/2021
 
1.7640
%
 
$
100,000

 
$
100,000

 
$
1,010

 
$
1,731

Interest Rate Swap(3)
 
7/22/2019
 
11/22/2024
 
2.7625
%
 
$

 
$

 
$
(4,604
)
 
$
(2,351
)
(1)
Represents the notional value of swaps that are effective as of the balance sheet date presented. 
(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.
(3)
On December 6, 2018, we entered into this interest rate swap to hedge the variable-rate interest payments associated with the $150 Million Term Loan Facility. This interest rate swap has a notional value of $150.0 million with an effective date of July 22, 2019, and a maturity date of November 22, 2024.


25



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 March 31,
 
2019
 
2018
Interest Rate Swaps in Cash Flow Hedging Relationships:
 
 
 
Amount of gain (loss) recognized in AOCI on derivatives
$
(4,275
)
 
$
4,246

Amount of gain (loss) reclassified from AOCI into earnings under “Interest expense”
$
852

 
$
(74
)
Total interest expense presented in the Consolidated Statement of Operations in which the effects of cash flow hedges are recorded (line item “Interest expense”)
$
6,471

 
$
5,852

     During the next twelve months, we estimate that an additional $2.5 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 March 31, 2019 and December 31, 2018.
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 March 31, 2019 and December 31, 2018 (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
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
5,896

 

 
5,896

 

 

 
5,896

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
8,770

 

 
8,770

 

 

 
8,770

 
 
 
 
 
 
 
 
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
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
(4,604
)
 

 
(4,604
)
 

 

 
(4,604
)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
(2,351
)
 

 
(2,351
)
 

 

 
(2,351
)

26



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

8.
Fair Value Measurements
We have adopted FASB Accounting Standards Codification Topic 820: Fair Value Measurements and Disclosure (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. 
ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Recurring Measurements – Interest Rate Swaps
Currently, we use interest rate swap agreements to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. 
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties.  However, as of March 31, 2019, 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.

27



The table below sets forth the estimated fair value of our interest rate swaps as of March 31, 2019 and December 31, 2018, 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)
March 31, 2019
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
5,896

 
$

 
$
5,896

 
$

Interest Rate Swap Liability
 
$
(4,604
)
 
$

 
$
(4,604
)
 
$

December 31, 2018
 
 
 
 
 
 
 
 
Interest Rate Swap Asset
 
$
8,770

 
$

 
$
8,770

 
$

Interest Rate Swap Liability
 
$
(2,351
)
 
$

 
$
(2,351
)
 
$

     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 March 31, 2019 and December 31, 2018 (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:
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
$
766,181

 
$

 
$

 
$
766,181

 
$
757,524

December 31, 2018
 
$
759,491

 
$

 
$

 
$
759,491

 
$
757,371

 

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 March 31, 2019 and 2018, respectively, in management, leasing and development services revenue.
 


28



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 will generally 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 March 31, 2019, and December 31, 2018, we had a $0.8 million and $1.0 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 March 31, 2019, and December 31, 2018, we also had a $0.8 million and $1.0 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.
Tenant and Construction Related Commitments
As of March 31, 2019, we had commitments of approximately $11.8 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 March 31, 2019, 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 March 31, 2019, 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 three months ended March 31, 2019, no single tenant accounted for more than 5% of our total consolidated rental income.

29




11.
Equity
Common Stock
On February 19, 2019, we established a new at-the-market equity offering program (the “$450 Million ATM Program”) pursuant to which we may sell from time to time up to an aggregate of $450.0 million of our common stock through sales agents. The $450 Million ATM Program replaces our previous $400.0 million at-the-market equity offering program which was established on June 13, 2018 (the “Prior ATM Program”). As of February 19, 2019, approximately $336.6 million of shares of our common stock under the Prior ATM Program had been sold.
During the three months ended March 31, 2019, we sold a total of 7,148,746 shares of our common stock under the $450 Million ATM Program at a weighted average price of $34.75 per share, for gross proceeds of $248.4 million, and net proceeds of $244.7 million, after deducting the sales agents’ fee. As of March 31, 2019, we had the capacity to issue up to an additional $201.6 million of common stock under the $450 Million ATM Program. Actual sales going forward, if any, will depend on a variety of factors, including among others, market conditions, the trading price of our common stock, determinations by us of the appropriate sources of funding for us and potential uses of funding available to us.
Noncontrolling Interests
Noncontrolling interests in our Operating Partnership relate to interests in the Operating Partnership that are not owned by us. As of March 31, 2019, noncontrolling interests consisted of 1,923,319 OP Units and 539,910 fully-vested LTIP units and performance units and represented approximately 2.3% of our Operating Partnership. OP Units and shares of our common stock have essentially the same economic characteristics, as they share equally in the total net income or loss and distributions of our Operating Partnership. Investors who own OP Units have the right to cause our Operating Partnership to redeem any or all of their units in our Operating Partnership for an amount of cash per unit equal to the then current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis.
During the three months ended March 31, 2019, 4,967 OP Units were converted into an equivalent number of shares of common stock, resulting in the reclassification of $37 thousand of noncontrolling interest to Rexford Industrial Realty, Inc.’s stockholders’ equity.
Amended and Restated 2013 Incentive Award Plan
On June 11, 2018, our stockholders approved the Amended and Restated Rexford Industrial Realty, Inc. and Rexford Industrial Realty, L.P. 2013 Incentive Award Plan (the “Plan”), superseding and replacing the Rexford Industrial Realty, Inc. and Rexford Industrial Realty, L.P. 2013 Incentive Award Plan (the “Prior Plan”). Pursuant to the Plan, we may continue to make grants of stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, performance shares, LTIP units of partnership interest in our Operating Partnership (“LTIP Units”), performance units in our Operating Partnership (“Performance Units”), and other stock based and cash awards to our non-employee directors, employees and consultants.
The aggregate number of shares of our common stock, LTIP Units and Performance Units that may be issued or transferred pursuant to the Plan is 1,770,000, plus any shares that have not been issued under the Prior Plan, including shares subject to outstanding awards under the Prior Plan that are not issued or delivered to a participant for any reason or that are forfeited by a participant prior to vesting. As of March 31, 2019, a total of 1,685,946 shares of common stock, LTIP Units and Performance Units remain available for issuance. Shares and units granted under the Plan may be authorized but unissued shares or units, or, if authorized by the board of directors, shares purchased in the open market. If an award under the Plan is forfeited, expires, or is settled for cash, any shares or units subject to such award will generally be available for future awards.
LTIP Units and Performance Units
LTIP Units and Performance Units are each a class of limited partnership units in the Operating Partnership. Initially, LTIP Units and Performance Units do not have full parity with OP Units with respect to liquidating distributions. However, upon the occurrence of certain events described in the Operating Partnership’s partnership agreement, the LTIP Units and Performance Units can over time achieve full parity with the OP Units for all purposes. If such parity is reached, vested LTIP Units and vested Performance Units may be converted into an equal number of OP Units, and, upon conversion, enjoy all rights of OP Units. LTIP Units, whether vested or not, receive the same quarterly per-unit distributions as OP Units, which equal the

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per-share distributions on shares of our common stock. Performance Units that have not vested receive a quarterly per-unit distribution equal to 10% of the distributions paid on OP Units.
Share-Based Award Activity    
The following table sets forth our share-based award activity for the three months ended March 31, 2019
 
Unvested Awards
 
Restricted
Common Stock
 
LTIP Units
 
Performance Units
Balance at January 1, 2019
200,398

 
327,048

 
591,767

Granted
93,809

 
59,515

 

Forfeited
(6,890
)
 

 

Vested(1)
(63,841
)
 
(52,385
)
 

Balance at March 31, 2019
223,476

 
334,178

 
591,767

(1)
During the three months ended March 31, 2019, 23,090 shares of the Company’s common stock were tendered in accordance with the terms of the Plan to satisfy minimum statutory tax withholding requirements associated with the vesting of restricted shares of common stock.  
The following table sets forth the vesting schedule of all unvested share-based awards outstanding as of March 31, 2019:  
 
Unvested Awards
 
Restricted
Common Stock
 
LTIP Units
 
Performance Units(1)
April 1, 2019 - December 31, 2019
18,240

 
156,009

 
199,000

2020
77,263

 
120,001

 
188,250

2021
61,033

 
49,950

 
204,517

2022
44,053

 
5,660

 

2023
22,887

 
2,558

 

Total
223,476

 
334,178

 
591,767

(1)
Represents the maximum number of Performance Units that would become earned and vested on December 28, 2019 and December 14, 2020, in the event that the specified maximum total shareholder return (“TSR”) hurdles are achieved over the three-year performance period from December 29, 2016 through December 28, 2019 and the three-year performance period from December 15, 2017 through December 14, 2020, respectively, and the maximum number of Performance Units that would become earned and vested on December 31, 2021 in the event that the specified maximum TSR and FFO per share growth hurdles are achieved over the three-year performance period from January 1, 2019 through December 31, 2021.

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Compensation Expense
The following table sets forth the amounts expensed and capitalized for all share-based awards for the reported periods presented below (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Expensed share-based compensation(1)
 
$
2,579

 
$
2,963

Capitalized share-based compensation(2)
 
34

 
51

Total share-based compensation
 
$
2,613

 
$
3,014

(1)
Amounts expensed are included in “General and administrative” and “Property expenses” in the accompanying consolidated statements of operations.
(2)
For the three months ended March 31, 2018, amounts capitalized relate to employees who provide construction and leasing services, and are included in “Building and improvements” and “Deferred leasing costs, net” in the consolidated balance sheets. For the three months ended March 31, 2019, amounts capitalized only relate to employees who provide construction services, and are included in “Building and improvements” in the consolidated balance sheets.
As of March 31, 2019, total unrecognized compensation cost related to all unvested share-based awards was $16.2 million and is expected to be recognized over a weighted average remaining period of 29 months.
Changes in Accumulated Other Comprehensive Income
The following table summarizes the changes in our AOCI balance for the three months ended March 31, 2019 and 2018, which consists solely of adjustments related to our cash flow hedges (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Accumulated other comprehensive income - beginning balance
 
$
6,262

 
$
6,799

Other comprehensive (loss) income before reclassifications
 
(4,275
)
 
4,246

Amounts reclassified from accumulated other comprehensive income to interest expense
 
(852
)
 
74

Net current period other comprehensive (loss) income
 
(5,127
)
 
4,320

Less other comprehensive loss (income) attributable to noncontrolling interests
 
126

 
(105
)
Other comprehensive (loss) income attributable to common stockholders
 
(5,001
)
 
4,215

Accumulated other comprehensive income - ending balance
 
$
1,261

 
$
11,014



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12.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share amounts): 
 
Three Months Ended March 31,
 
2019
 
2018
Numerator:
 
 
 
Net income
$
10,717

 
$
15,084

Less: Preferred stock dividends
(2,423
)
 
(2,423
)
Less: Net income attributable to noncontrolling interests
(201
)
 
(318
)
Less: Net income attributable to participating securities
(114
)
 
(97
)
Net income attributable to common stockholders
$
7,979

 
$
12,246

 
 
 
 
Denominator:
 
 
 
Weighted average shares of common stock outstanding – basic
98,342,677

 
78,694,161

Effect of dilutive securities - performance units
265,109

 
501,899

Weighted average shares of common stock outstanding – diluted
98,607,786

 
79,196,060

 
 
 
 
Earnings per share  Basic
 
 
 

Net income attributable to common stockholders
$
0.08

 
$
0.16

Earnings per share  Diluted
 
 
 
Net income attributable to common stockholders
$
0.08

 
$
0.15

Unvested share-based payment awards that contain non-forfeitable rights to dividends, whether paid or unpaid, are accounted for as participating securities. As such, unvested shares of restricted stock, unvested LTIP Units and unvested Performance Units are considered participating securities. Participating securities 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 each participating security according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings. Participating securities are also included in the computation of diluted EPS using the more dilutive of the two-class method or treasury stock method for unvested shares of restricted stock and LTIP Units, and by determining if certain market conditions have been met at the reporting date for unvested Performance Units.
The effect of including unvested shares of restricted stock and unvested LTIP Units using the treasury stock method was excluded from our calculation of weighted average shares of common stock outstanding – diluted, as their inclusion would have been anti-dilutive. 
Performance Units, which are subject to vesting based on the Company achieving certain TSR levels over a three-year performance period, are included as contingently issuable shares in the calculation of diluted EPS when TSR has been achieved at or above the threshold levels specified in the award agreements, assuming the reporting period is the end of the performance period, and the effect is dilutive.
We also consider the effect of other potentially dilutive securities, including OP Units, which may be redeemed for shares of our common stock under certain circumstances, and include them in our computation of diluted EPS when their inclusion is dilutive.
 

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13.
Subsequent Events
Acquisition of 1515 East 15th Street and Issuance of Series 1 CPOP Units
On April 10, 2019, we acquired from an unaffiliated seller (the “Seller”) the property located at 1515 15th Street in Los Angeles, California (the “Property”) in exchange for 593,960 newly issued 4.43937%Cumulative Redeemable Convertible Preferred Units of partnership interest in the Operating Partnership (“Series 1 CPOP Units”) plus the payment of certain closing costs, including $0.7 million of closing costs typically attributable to the Seller. The Property consists of one single-tenant building with 238,015 rentable square feet.
The transaction was priced based upon a common stock price of $31.56, equal to the trailing 30-day average closing price of our common stock as of the letter of intent date (the “Average Value”).
Holders of Series 1 CPOP Units, when and as authorized by the Company as general partner of the Operating Partnership, are entitled to cumulative cash distributions at the rate of 4.43937% per annum of the $45.50952 per unit liquidation preference (a 44.2% conversion premium to the Average Value described above), payable quarterly in arrears on or about the last day of March, June, September and December of each year, beginning on or about June 28, 2019. The holders of Series 1 CPOP Units are entitled to receive the liquidation preference, which is $45.50952 per unit and approximately $27.0 million in the aggregate for all of the Series 1 CPOP Units, before the holders of OP Units in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Operating Partnership.
The Series 1 CPOP Units are convertible (i) at the option of the holder anytime from time to time, or (ii) at the option of the Operating Partnership, at any time on or after April 10, 2024, in each case, into OP Units on a one-for-one basis, subject to adjustment to eliminate fractional units or to the extent that there are any accrued and unpaid distributions on the Series 1 CPOP Units. Investors who own OP Units have the right to cause our Operating Partnership to redeem any or all of their units in our Operating Partnership for an amount of cash per unit equal to the then current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis.
The Series 1 CPOP Units rank senior to the Operating Partnership’s OP Units, on parity with the Operating Partnership’s 5.875% series A cumulative redeemable preferred units, the Operating Partnership’s 5.875% series B cumulative redeemable preferred units and with any future class or series of partnership interest of the Operating Partnership expressly designated as ranking on parity with the Series 1 CPOP Units, and junior to any other class or series of partnership interest of the Operating Partnership expressly designated as ranking senior to the Series 1 CPOP Units.
Other Acquisitions
On April 12, 2019, we acquired the property located at 13890 Nelson Avenue in City of Industry, California for a contract price of $41.8 million. The property consists of one single-tenant building with 256,993 rentable square feet.
On April 12, 2019, we acquired the property located at 445-449 West Freedom Avenue in Orange, California for a contract price of $18.0 million. The property consists of one single-tenant building with 92,647 rentable square feet.
On April 12, 2019, we acquired the property located at 2270 Camino Vida Roble in Carlsbad, California for a contract price of $16.8 million. The property consists of one single-tenant building with 106,311 rentable square feet.
On April 16, 2019, we acquired the property located at 980 Rancheros Drive in San Marcos, California for a contract price of $7.9 million. The property consists of one single-tenant building with 48,878 rentable square feet.
On April 25, 2019, we acquired the property located at 10015 Waples Court in Central San Diego, California for a contract price of $21.3 million. The property consists of one single-tenant building with 106,412 rentable square feet.
On April 25, 2019, we acquired the San Fernando Business Center in San Fernando, California for a contract price of $118.1 million. The property consists of five buildings with a combined 591,660 rentable square feet.
On April 30, 2019, we acquired the property located at 19100 Susana Road in South Bay, California for a contract price of $13.5 million. The property consists of one single-tenant building with 52,714 rentable square feet.

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Dividends Declared
On April 30, 2019, our board of directors declared a quarterly cash dividend of $0.185 per share of common stock and a quarterly cash distribution of $0.185 per OP Unit, to be paid on July 15, 2019, to holders of record as of June 28, 2019. Also, on April 30, 2019, our board of directors declared a quarterly cash dividend of $0.367188 per share of our 5.875% Series A Cumulative Redeemable Preferred Stock, a quarterly cash dividend of $0.367188 per share of our 5.875% Series B Cumulative Redeemable Preferred Stock and a prorated cash distribution of $0.454576 per Series 1 CPOP Unit to be paid on June 28, 2019, to holders of record as of June 14, 2019.


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Item  2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations  

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto that appear in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q. The terms “Company,” “we,” “us,” and “our” refer to Rexford Industrial Realty, Inc. and its consolidated subsidiaries except where the context otherwise requires.
Forward-Looking Statements
We make statements in this quarterly report that are forward-looking statements, which are usually identified by the use of words such as “anticipates,” “believes,” “expects,” “intends,” “may,” “might,” “plans,” “estimates,” “projects,” “seeks,” “should,” “will,” “result” and variations of such words or similar expressions. Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:
the competitive environment in which we operate;
real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;
decreased rental rates or increasing vacancy rates;
potential defaults on or non-renewal of leases by tenants;
potential bankruptcy or insolvency of tenants;
acquisition risks, including failure of such acquisitions to perform in accordance with expectations;
the timing of acquisitions and dispositions;
potential natural disasters such as earthquakes, wildfires or floods;
the consequence of any future security alerts and/or terrorist attacks;
national, international, regional and local economic conditions;
the general level of interest rates;
potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or real estate investment trust (“REIT”) tax laws, and potential increases in real property tax rates;
financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;
lack of or insufficient amounts of insurance;
our failure to complete acquisitions;  
our failure to successfully integrate acquired properties;
our ability to qualify and maintain our qualification as a REIT;
our ability to maintain our current investment grade rating by Fitch;
litigation, including costs associated with prosecuting or defending pending or threatened claims and any adverse outcomes; and
possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us.
Accordingly, there is no assurance that our expectations will be realized.  Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The reader should review carefully our financial statements and the notes thereto, as well as the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

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Company Overview
Rexford Industrial Realty, Inc. is a self-administered and self-managed full-service 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 acquire, own, improve, develop, lease and manage industrial real estate principally located in Southern California infill markets, and, from time to time, acquire or provide mortgage debt secured by industrial property. We are organized and conduct our operations to qualify as a REIT under the Internal Revenue Code of 1986 (the “Code”), as amended, and generally are not subject to federal taxes on our income to the extent we distribute our income to our shareholders and maintain our qualification as a REIT.
As of March 31, 2019, our consolidated portfolio consisted of 181 properties with approximately 22.1 million rentable square feet. In addition, we currently manage an additional 19 properties with approximately 1.0 million rentable square feet.  
Our goal is to generate attractive risk-adjusted returns for our stockholders by providing superior access to industrial property investments and mortgage debt secured by industrial property in high-barrier Southern California infill markets. Our target markets provide us with opportunities to acquire both stabilized properties generating favorable cash flow, as well as properties where we can enhance returns through value-add renovations and redevelopment. Scarcity of available space and high barriers limiting new construction of for-lease product all contribute to create superior long-term supply/demand fundamentals within our target infill Southern California industrial property markets. With our vertically integrated operating platform and extensive value-add investment and management capabilities, we believe we are positioned to capitalize upon the opportunities in our markets to achieve our objectives.
2019 Year to Date Highlights
Acquisitions
During the first quarter of 2019, we completed the acquisition of five properties with a combined 0.8 million rentable square feet, for an aggregate purchase price of $146.0 million.
Subsequent to March 31, 2019, we completed the acquisition of 12 properties with a combined 1.5 million rentable square feet, for an aggregate purchase price of $265.5 million.
Repositioning
During the first quarter of 2019, we stabilized four of our properties located at 1998 Surveyor Avenue, 14748-14750 Nelson Avenue, 15401 Figueroa Street and 1332-1340 Rocky Point, with a combined 0.4 million rentable square feet.
Equity
During the first quarter of 2019, we sold 7,148,746 shares of common stock under our at-the-market equity offering program for gross proceeds of $248.4 million, or approximately $34.75 per share.
During the first quarter of 2019, we declared a common stock dividend of $0.185 per share, up 15.6% over the prior period.
Factors That May Influence Future Results of Operations    
Market Fundamentals
Our operating results depend upon the infill Southern California industrial real estate market.
The infill Southern California industrial real estate sector has continued to exhibit strong fundamentals. These high-barrier infill markets are characterized by a relative scarcity of available product, generally operating at above 98% occupancy, coupled with limited ability to introduce new supply due to high land and development costs and a dearth of developable land in markets experiencing a net reduction in supply as more industrial property is converted to non-industrial uses than can be delivered. Consequently, available industrial supply continues to decrease in many of our target infill submarkets, landlord concessions are at cyclically low levels and construction deliveries are falling short of demand. Meanwhile, underlying tenant demand within our infill target markets continues to demonstrate growth, illustrated or driven by strong re-leasing spreads, an expanding regional economy, substantial growth in e-commerce transaction and delivery volumes, as well as further compression of delivery time-frames to consumers and to businesses, increasing the significance of last-mile facilities for timely fulfillment. Despite potential concerns related to global growth, tax reform and changes to trade and tariff policies and the impact of rising interest rates, we continue to observe a number of positive trends within our target infill markets. Based on

37



current observations within the Southern California industrial property market and within our property portfolio, we expect these positive trends will continue through the remainder of 2019.
In Los Angeles County, market fundamentals were strong during the first quarter of 2019. High tenant demand kept vacancy at historically low levels and average asking lease rates increased quarter-over-quarter. Current market conditions indicate rents are likely to continue their upward trend through the remainder of 2019, as occupancy remains at near capacity levels and new development is limited by a lack of land availability and an increase in land and development costs.
In Orange County, market fundamentals were favorable during the first quarter of 2019. With steady tenant demand and a continued low availability of industrial product in this region, average asking lease rents remained high despite a slight increase in vacancy quarter-over-quarter. Current regional market conditions indicate the potential for continued rental growth through the remainder of 2019.
In San Diego, although there was increase in vacancy quarter-over-quarter, demand remained steady and average asking lease rates increased quarter-over-quarter.
In Ventura County, vacancy decreased quarter-over-quarter and asking lease rates increased slightly quarter-over-quarter.
Lastly, in the Inland Empire, new industrial product continues to be absorbed well in the market.  In the Inland Empire West, which contains the infill markets in which we operate, vacancy remained at historically low levels and average asking lease rates increased slightly quarter-over-quarter. We expect the outlook for the Inland Empire West to be positive through the remainder of 2019. We generally do not focus on properties located within the Inland Empire East sub-market where available land and the development and construction pipeline for new supply is substantial.
Acquisitions and Value-Add Repositioning of Properties
The Company’s growth strategy comprises acquiring leased, stabilized properties as well as properties with value-add opportunities to improve functionality and to deploy our value-driven asset management programs in order to increase cash flow and value. Additionally, from time to time, we may acquire land parcels or properties with excess land where we may construct new buildings, although we don’t anticipate this to be a substantial part of our operations. Acquisitions may comprise single property investments as well as the purchase of portfolios of properties, with transaction values ranging from sub-$10 million dollar single-property investments to portfolios potentially valued in the billions of dollars. The Company’s geographic focus remains infill Southern California. However, from time-to-time, portfolios could be acquired comprising a critical mass of infill Southern California industrial property that could include some assets located in markets outside of infill Southern California. In general, to the extent non-infill-Southern California assets were to be acquired as part of a larger portfolio, the Company may underwrite such investments with the potential to dispose such assets over a certain period of time in order to maximize its core focus on infill Southern California, while endeavoring to take appropriate steps to satisfy REIT safe harbor requirements to avoid prohibited transactions under REIT tax laws.
A key component of our growth strategy is to acquire properties through off-market and lightly marketed transactions that are often operating at below-market occupancy or below-market rent at the time of acquisition or that have near-term lease roll-over or that provide opportunities to add value through functional or physical repositioning and improvements.  Through various redevelopment, repositioning, and professional leasing and marketing strategies, we seek to increase the properties’ functionality and attractiveness to prospective tenants and, over time, to stabilize the properties at occupancy rates that meet or exceed market rates.  
A repositioning can consist of a range of improvements to a property.  This may include a complete structural renovation of a property whereby we convert large underutilized spaces into a series of smaller and more functional spaces, or it may include the creation of additional square footage, the modernization of the property site, the elimination of functional obsolescence, the addition or enhancement of loading areas and truck access, the enhancement of fire-life-safety systems or other accretive improvements.  Because each repositioning effort is unique and determined based on the property, targeted tenants and overall trends in the general market and specific submarket, the timing and effect of the repositioning on our rental revenue and occupancy levels will vary, and, as a result, will affect the comparison of our results of operations from period to period with limited predictability.
As of March 31, 2019, nine of our properties were in various stages of repositioning or development and two of our properties were in the lease-up stage. In addition, we anticipate beginning repositioning work on one additional property in the near future. The table below sets forth a summary of these properties, as well the four properties that were stabilized during the first quarter of 2019 and the four properties that were stabilized during 2018, as the timing of these 2018 stabilizations have a direct impact on our current and comparative results of operations. In addition to the properties in the table below, we also have a range of smaller spaces in value-add repositioning or renovation, that due to their smaller size and relatively nominal amount of down-time, are not presented below, however, in the aggregate, may be substantial.

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