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Section 1: 10-Q (10-Q)

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Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form 10-Q
_________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 001-34603
_________________________
Terreno Realty Corporation
(Exact Name of Registrant as Specified in Its Charter)
_________________________
Maryland
 
27-1262675
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
101 Montgomery Street,
Suite 200
 
94104
San Francisco,
CA
 
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (415655-4580
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value per share
 
TRNO
 
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      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      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 the 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
 
  
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   
The registrant had 65,543,892 shares of its common stock, $0.01 par value per share, outstanding as of July 26, 2019.
 
 
 
 
 


Table of Contents

Terreno Realty Corporation
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements of Terreno Realty Corporation
Terreno Realty Corporation
Consolidated Balance Sheets
(in thousands – except share and per share data)
 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments in real estate
 
 
 
Land
$
930,180

 
$
833,995

Buildings and improvements
869,907

 
837,816

Construction in progress
101,080

 
94,695

Intangible assets
86,183

 
79,270

Total investments in properties
1,987,350

 
1,845,776

Accumulated depreciation and amortization
(189,719
)
 
(169,772
)
Net investments in real estate
1,797,631

 
1,676,004

Cash and cash equivalents
117,188

 
31,004

Restricted cash
2,976

 
3,475

Senior secured loan, net
15,773

 
54,492

Other assets, net
33,990

 
31,529

Total assets
$
1,967,558

 
$
1,796,504

LIABILITIES AND EQUITY
 
 
 
Liabilities
 
 
 
Credit facility
$

 
$
19,000

Term loans payable, net
149,231

 
149,067

Senior unsecured notes, net
248,413

 
248,263

Mortgage loans payable, net
45,050

 
45,767

Security deposits
12,880

 
11,933

Intangible liabilities, net
27,496

 
23,093

Dividends payable
15,719

 
14,643

Performance share awards payable
8,979

 
12,048

Accounts payable and other liabilities
23,612

 
24,893

Total liabilities
531,380

 
548,707

Commitments and contingencies (Note 13)

 

Equity
 
 
 
Stockholders’ equity
 
 
 
Common stock: $0.01 par value, 400,000,000 shares authorized, and 65,495,713 and 61,013,711 shares issued and outstanding, respectively
656

 
610

Additional paid-in capital
1,426,860

 
1,233,763

Retained earnings
9,268

 
14,185

Accumulated other comprehensive loss
(606
)
 
(761
)
Total stockholders’ equity
1,436,178

 
1,247,797

Total liabilities and equity
$
1,967,558

 
$
1,796,504

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

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Terreno Realty Corporation
Consolidated Statements of Operations
(in thousands – except share and per share data)
(Unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
REVENUES
 
 
 
 
 
 
 
Rental revenues and tenant expense reimbursements
$
41,730

 
$
37,238

 
$
82,610

 
$
74,345

Total revenues
41,730

 
37,238

 
82,610

 
74,345

COSTS AND EXPENSES
 
 
 
 
 
 
 
Property operating expenses
10,709

 
10,313

 
21,402

 
20,206

Depreciation and amortization
10,648

 
9,774

 
21,063

 
20,509

General and administrative
6,757

 
5,007

 
12,720

 
10,085

Acquisition costs
1

 
5

 
1

 
7

Total costs and expenses
28,115

 
25,099

 
55,186

 
50,807

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest and other income
817

 
921

 
2,339

 
981

Interest expense, including amortization
(4,053
)
 
(4,626
)
 
(8,317
)
 
(9,311
)
Gain on sales of real estate investments

 
11,703

 
4,465

 
14,986

Total other income (expense)
(3,236
)
 
7,998

 
(1,513
)
 
6,656

Net income
10,379

 
20,137

 
25,911

 
30,194

Allocation to participating securities
(64
)
 
(125
)
 
(162
)
 
(190
)
Net income available to common stockholders
$
10,315

 
$
20,012

 
$
25,749

 
$
30,004

EARNINGS PER COMMON SHARE - BASIC AND DILUTED:
 
 
 
 
 
 
 
Net income available to common stockholders - basic
$
0.16

 
$
0.35

 
$
0.41

 
$
0.54

Net income available to common stockholders - diluted
$
0.16

 
$
0.35

 
$
0.41

 
$
0.54

BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
63,780,645

 
56,698,959

 
62,625,224

 
55,917,610

DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
64,075,215

 
56,698,959

 
62,919,794

 
55,917,610

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

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Terreno Realty Corporation
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
10,379

 
$
20,137

 
$
25,911

 
$
30,194

Other comprehensive income (loss):
 
 
 
 
 
 
 
Cash flow hedge adjustment
92

 
78

 
155

 
162

Comprehensive income
$
10,471

 
$
20,215

 
$
26,066

 
$
30,356

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

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Terreno Realty Corporation
Consolidated Statements of Equity
(in thousands – except share data)
(Unaudited)
Six months ended June 30, 2019:
 
Common Stock
 
Additional
Paid-
in Capital
 
 
 
Accumulated
Other Comprehensive
Loss
 
 
 
Number of
Shares
 
Amount
 
 
Retained
Earnings
 
 
Total
Balance as of December 31, 2018
61,013,711

 
$
610

 
$
1,233,763

 
$
14,185

 
$
(761
)
 
$
1,247,797

Net income

 

 

 
15,532

 

 
15,532

Issuance of common stock, net of issuance costs of $1,427
2,184,888

 
22

 
87,902

 

 

 
87,924

Repurchase of common stock related to employee awards
(99,999
)
 

 
(3,959
)
 

 

 
(3,959
)
Issuance of restricted stock
30,294

 

 

 

 

 

Stock-based compensation

 

 
928

 

 

 
928

Common stock dividends ($0.24 per share)

 

 

 
(15,109
)
 

 
(15,109
)
Other comprehensive income

 

 

 

 
63

 
63

Balance as of March 31, 2019
63,128,894

 
$
632

 
$
1,318,634

 
$
14,608

 
$
(698
)
 
$
1,333,176

Net income

 

 

 
10,379

 

 
10,379

Issuance of common stock, net of issuance costs of $1,718
2,386,470

 
24

 
106,958

 

 

 
106,982

Cancellation of common stock related to employee awards
(19,651
)
 

 

 

 

 

Stock-based compensation

 

 
1,268

 

 

 
1,268

Common stock dividends ($0.24 per share)

 

 

 
(15,719
)
 

 
(15,719
)
Other comprehensive income

 

 

 

 
92

 
92

Balance as of June 30, 2019
65,495,713

 
$
656

 
$
1,426,860

 
$
9,268

 
$
(606
)
 
$
1,436,178


Six months ended June 30, 2018:
 
Common Stock
 
Additional
Paid-
in Capital
 
 
 
Accumulated
Other Comprehensive
Loss
 
 
 
Number of
Shares
 
Amount
 
 
Retained
Earnings
 
 
Total
Balance as of December 31, 2017
55,368,737

 
$
553

 
$
1,023,184

 
$
4,803

 
$
(1,046
)
 
$
1,027,494

Net income

 

 

 
10,057

 

 
10,057

Issuance of common stock, net of issuance costs of $132
255,197

 
3

 
8,701

 

 

 
8,704

Repurchase of common stock related to employee awards
(107,267
)
 

 
(3,870
)
 

 

 
(3,870
)
Issuance of restricted stock
27,003

 

 

 

 

 

Stock-based compensation

 

 
463

 

 

 
463

Common stock dividends ($0.22 per share)

 

 

 
(12,220
)
 

 
(12,220
)
Other comprehensive income

 

 

 

 
84

 
84

Balance as of March 31, 2018
55,543,670

 
$
556

 
$
1,028,478

 
$
2,640

 
$
(962
)
 
$
1,030,712

Net income

 

 

 
20,137

 

 
20,137

Issuance of common stock, net of issuance costs of $1,717
2,835,823

 
28

 
104,170

 

 

 
104,198

Stock-based compensation

 

 
820

 

 

 
820

Common stock dividends ($0.22 per share)

 

 

 
(12,843
)
 

 
(12,843
)
Other comprehensive income

 

 

 

 
78

 
78

Balance as of June 30, 2018
58,379,493

 
$
584

 
$
1,133,468

 
$
9,934

 
$
(884
)
 
$
1,143,102


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

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Terreno Realty Corporation
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
For the Six Months Ended June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
25,911

 
$
30,194

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Straight-line rents
(1,685
)
 
(2,199
)
Amortization of lease intangibles
(1,888
)
 
(1,775
)
Depreciation and amortization
21,063

 
20,509

Gain on sales of real estate investments
(4,465
)
 
(14,986
)
Deferred financing cost amortization
779

 
715

Deferred senior secured loan fee amortization
(446
)
 
(98
)
Stock-based compensation
6,160

 
4,229

Changes in assets and liabilities
 
 
 
Other assets
(1,670
)
 
(2,092
)
Accounts payable and other liabilities
186

 
1,151

Net cash provided by operating activities
43,945

 
35,648

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Cash paid for property acquisitions
(73,210
)
 
(100,881
)
Proceeds from sales of real estate investments, net
11,980

 
42,991

Additions to construction in progress
(13,810
)
 
(2,469
)
Additions to buildings, improvements and leasing costs
(18,017
)
 
(13,327
)
Cash paid for senior secured loan

 
(55,000
)
Origination and other fees received on senior secured loan

 
900

Net cash used in investing activities
(93,057
)
 
(127,786
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Issuance of common stock
191,018

 
107,991

Issuance costs on issuance of common stock
(2,761
)
 
(1,566
)
Repurchase of common stock
(3,959
)
 
(3,870
)
Borrowings on credit facility
17,000

 
98,350

Payments on credit facility
(36,000
)
 
(93,000
)
Payments on mortgage loans payable
(749
)
 
(945
)
Payment of deferred financing costs

 
(10
)
Dividends paid to common stockholders
(29,752
)
 
(24,401
)
Net cash provided by financing activities
134,797

 
82,549

Net increase (decrease) in cash and cash equivalents and restricted cash
85,685

 
(9,589
)
Cash and cash equivalents and restricted cash at beginning of period
34,479

 
42,800

Cash and cash equivalents and restricted cash at end of period
$
120,164

 
$
33,211

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for interest, net of capitalized interest
$
9,763

 
$
9,364

Supplemental disclosures of non-cash transactions
 
 
 
Accounts payable related to capital improvements
$
9,575

 
$
6,704

Non-cash repayment of senior secured loan
(39,085
)
 

Lease liability arising from recognition of right-of-use asset
766

 

Reconciliation of cash paid for property acquisitions
 
 
 
Acquisition of properties
$
80,310

 
$
103,714

Assumption of other assets and liabilities
(7,100
)
 
(2,833
)
Net cash paid for property acquisitions
$
73,210

 
$
100,881

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

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Terreno Realty Corporation
Condensed Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Organization
Terreno Realty Corporation (“Terreno”, and together with its subsidiaries, the “Company”) acquires, owns and operates industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. All square feet, acres, occupancy and number of properties disclosed in these condensed notes to the consolidated financial statements are unaudited. As of June 30, 2019, the Company owned 209 buildings aggregating approximately 13.0 million square feet, 17 improved land parcels consisting of approximately 74.7 acres and four properties under redevelopment (including one property held for sale) expected to contain approximately 0.6 million square feet upon completion.
The Company is an internally managed Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2010.
Note 2. Significant Accounting Policies
Basis of Presentation. The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. In management’s opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The interim consolidated financial statements include all of the Company’s accounts and its subsidiaries and all intercompany balances and transactions have been eliminated in consolidation. The financial statements should be read in conjunction with the financial statements contained in the Company’s 2018 Annual Report on Form 10-K and the notes thereto, which was filed with the Securities and Exchange Commission on February 6, 2019.
Use of Estimates. The preparation of the interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Capitalization of Costs. The Company capitalizes costs directly related to the redevelopment, renovation and expansion of its investment in real estate. Costs associated with such projects are capitalized as incurred. If the project is abandoned, these costs are expensed during the period in which the redevelopment, renovation or expansion project is abandoned. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes and insurance, if appropriate. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress. In the event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. Costs incurred for maintaining and repairing properties, which do not extend their useful lives, are expensed as incurred.
Interest is capitalized based on actual capital expenditures from the period when redevelopment, renovation or expansion commences until the asset is ready for its intended use, at the weighted average borrowing rate during the period.
Investments in Real Estate. Investments in real estate, including tenant improvements, leasehold improvements and leasing costs, are stated at cost, less accumulated depreciation, unless circumstances indicate that the cost cannot be recovered, in which case, an adjustment to the carrying value of the property is made to reduce it to its estimated fair value. The Company also reviews the impact of above and below-market leases, in-place leases and lease origination costs for acquisitions and records an intangible asset or liability accordingly.
Impairment. Carrying values for financial reporting purposes are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of a property may not be fully recoverable. Examples of such events or changes in circumstances may include classifying an asset to be held for sale, changing the intended hold period or when an asset remains vacant significantly longer than expected. The intended use of an asset either held for sale or held for use can significantly impact how impairment is measured. If an asset is intended to be held for the long-term, the recoverability is based on the undiscounted future cash flows. If the asset carrying value is not supported on an

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undiscounted future cash flow basis, then the asset carrying value is measured against the lower of cost or the present value of expected cash flows over the expected hold period. An impairment charge to earnings is recognized for the excess of the asset’s carrying value over the lower of cost or the present values of expected cash flows over the expected hold period. If an asset is intended to be sold, impairment is determined using the estimated fair value less costs to sell. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions, among other things, regarding current and future economic and market conditions and the availability of capital. The Company determines the estimated fair values based on its assumptions regarding rental rates, lease-up and holding periods, as well as sales prices. When available, current market information is used to determine capitalization and rental growth rates. If available, current comparative sales values may also be used to establish fair value. When market information is not readily available, the inputs are based on the Company’s understanding of market conditions and the experience of the Company’s management team. Actual results could differ significantly from the Company’s estimates. The discount rates used in the fair value estimates represent a rate commensurate with the indicated holding period with a premium layered on for risk. There were no impairment charges recorded to the carrying values of the Company’s properties during the three or six months ended June 30, 2019 or 2018.
Loans Held-for-Investment. Loans that are held-for-investment are carried at cost, net of loan fees and origination costs, as applicable, unless the loans are deemed impaired. Impairment occurs when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of loans that are held-for-investment. The Company evaluates its senior secured loan (the “Senior Secured Loan”), which is classified as held-for-investment, for impairment quarterly. If the Senior Secured Loan is considered to be impaired, the Company records an allowance through the provision for Senior Secured Loan losses to reduce the carrying value of the Senior Secured Loan to the present value of expected future cash flows discounted at the Senior Secured Loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Actual losses, if any, could differ significantly from the Company’s estimates. There were no impairment charges recorded to the carrying value of the Senior Secured Loan during the three or six months ended June 30, 2019 or 2018.
Property Acquisitions. In accordance with Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not considered a business. To be a business, the set of acquired activities and assets must include inputs and one or more substantive processes that together contribute to the ability to create outputs. The Company has determined that its real estate property acquisitions will generally be accounted for as asset acquisitions under the clarified definition. Upon acquisition of a property the Company estimates the fair value of acquired tangible assets (consisting generally of land, buildings and improvements) and intangible assets and liabilities (consisting generally of the above and below-market leases and the origination value of all in-place leases). The Company determines fair values using Level 3 inputs such as replacement cost, estimated cash flow projections and other valuation techniques and applying appropriate discount and capitalization rates based on available market information. Mortgage loans assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the date of acquisition. Acquisition-related costs associated with asset acquisitions are capitalized to individual tangible and intangible assets and liabilities assumed on a relative fair value basis and acquisition-related costs associated with business combinations are expensed as incurred.
The fair value of the tangible assets is determined by valuing the property as if it were vacant. Land values are derived from current comparative sales values, when available, or management’s estimates of the fair value based on market conditions and the experience of the Company’s management team. Building and improvement values are calculated as replacement cost less depreciation, or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods. The fair value of the above and below-market leases is based on the present value of the difference between the contractual amounts to be received pursuant to the acquired leases (using a discount rate that reflects the risks associated with the acquired leases) and the Company’s estimate of the market lease rates measured over a period equal to the remaining term of the leases plus the term of any below-market fixed rate renewal options. The above and below-market lease values are amortized to rental revenues over the remaining initial term plus the term of any below-market fixed rate renewal options that are considered bargain renewal options of the respective leases. The total net impact to rental revenues due to the amortization of above and below-market leases was a net increase of approximately $1.0 million and $0.9 million for the three months ended June 30, 2019 and 2018, respectively, and approximately $1.9 million and $1.8 million, for the six months ended June 30, 2019 and 2018, respectively. The origination value of in-place leases is based on costs to execute similar leases, including commissions and other related costs. The origination value of in-place leases also includes real estate taxes, insurance and an estimate of lost rental revenue at market rates during the estimated time required to lease up the property from vacant to the occupancy level at the date of acquisition. The remaining weighted average lease term related to these intangible assets and liabilities as of June 30, 2019 is 8.4 years. As of June 30, 2019 and December 31, 2018, the Company’s intangible assets and liabilities, including properties held for sale (if any), consisted of the following (dollars in thousands):

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June 30, 2019
 
December 31, 2018
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
In-place leases
$
82,014

 
$
(55,614
)
 
$
26,400

 
$
75,101

 
$
(51,239
)
 
$
23,862

Above-market leases
4,169

 
(3,731
)
 
438

 
4,169

 
(3,610
)
 
559

Below-market leases
(40,806
)
 
13,310

 
(27,496
)
 
(34,485
)
 
11,392

 
(23,093
)
Total
$
45,377

 
$
(46,035
)
 
$
(658
)
 
$
44,785

 
$
(43,457
)
 
$
1,328


Depreciation and Useful Lives of Real Estate and Intangible Assets. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related assets or liabilities. The following table reflects the standard depreciable lives typically used to compute depreciation and amortization. However, such depreciable lives may be different based on the estimated useful life of such assets or liabilities.
Description
  
Standard Depreciable Life
Land
  
Not depreciated
Building
  
40 years
Building Improvements
  
5-40 years
Tenant Improvements
  
Shorter of lease term or useful life
Leasing Costs
  
Lease term
In-place Leases
  
Lease term
Above/Below-Market Leases
  
Lease term

Held for Sale Assets. The Company considers a property to be held for sale when it meets the criteria established under Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment (See “Note 5 - Held for Sale/Disposed Assets”). Properties held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale.
Cash and Cash Equivalents. Cash and cash equivalents consists of cash held in a major banking institution and other highly liquid short-term investments with original maturities of three months or less. Cash equivalents are generally invested in U.S. government securities, government agency securities or money market accounts.
Restricted Cash. Restricted cash includes cash held in escrow in connection with property acquisitions and reserves for certain capital improvements, leasing, interest and real estate tax and insurance payments as required by certain mortgage loan obligations.
The following summarizes the reconciliation of cash and cash equivalents and restricted cash as presented in the accompanying consolidated statements of cash flows (in thousands):
 
For the Six Months Ended June 30,
 
2019
 
2018
Beginning
 
 
 
Cash and cash equivalents at beginning of period
$
31,004

 
$
35,710

Restricted cash
3,475

 
7,090

Cash and cash equivalents and restricted cash
34,479

 
42,800

Ending
 
 
 
Cash and cash equivalents at end of period
117,188

 
27,701

Restricted cash
2,976

 
5,510

Cash and cash equivalents and restricted cash
120,164

 
33,211

Net increase (decrease) in cash and cash equivalents and restricted cash
$
85,685

 
$
(9,589
)


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Revenue Recognition. The Company records rental revenue from operating leases on a straight-line basis over the term of the leases and maintains an allowance for estimated losses that may result from the inability of its tenants to make required payments. If tenants fail to make contractual lease payments that are greater than the Company’s allowance for doubtful accounts, security deposits and letters of credit, then the Company may have to recognize additional doubtful account charges in future periods. The Company monitors the liquidity and creditworthiness of its tenants on an on-going basis by reviewing their financial condition periodically as appropriate. Each period the Company reviews its outstanding accounts receivable, including straight-line rents, for doubtful accounts and provides allowances as needed. The Company also records lease termination fees when a tenant has executed a definitive termination agreement with the Company and the payment of the termination fee is not subject to any conditions that must be met or waived before the fee is due to the Company. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination will be deferred and recognized over the term of such tenant’s occupancy. Tenant expense reimbursement income includes payments and amounts due from tenants pursuant to their leases for real estate taxes, insurance and other recoverable property operating expenses and is recognized as revenues during the same period the related expenses are incurred.
As of June 30, 2019 and December 31, 2018, approximately $25.8 million and $25.7 million of straight-line rent and accounts receivable, net of allowances of approximately $0.3 million and $0.2 million as of June 30, 2019 and December 31, 2018, respectively, were included as a component of other assets in the accompanying consolidated balance sheets.
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the Company’s adoption.  Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018.  A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. The Company elected to apply this standard only to contracts that were not completed as of January 1, 2018.  Based on the Company’s evaluation of contracts within the scope of ASU No. 2014-09, the guidance impacts revenue related to the sales of real estate, which is evaluated in conjunction with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”) (see below).
Effective January 1, 2018, the Company adopted the guidance of ASC 610-20, which applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business. Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20. ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09 (see above). Under ASC 610-20, if the Company determines it does not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company will derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. As a result of adoption of the standard, there was no material impact to the Company’s consolidated financial statements.
Deferred Financing Costs. Costs incurred in connection with financings are capitalized and amortized to interest expense using the effective interest method over the term of the related loan. Deferred financing costs associated with the Company’s revolving credit facility are classified as an asset and deferred financing costs associated with debt liabilities are reported as a direct deduction from the carrying amount of the debt liability in the accompanying consolidated balance sheets. Deferred financing costs related to the revolving credit facility and debt liabilities are shown at cost, net of accumulated amortization in the aggregate of approximately $7.5 million and $6.9 million as of June 30, 2019 and December 31, 2018, respectively.
Income Taxes. The Company elected to be taxed as a REIT under the Code and operates as such beginning with its taxable year ended December 31, 2010. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to its stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax to the extent it distributes qualifying dividends to its stockholders. If it fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS grants it relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes it is organized and operates in such a manner as to qualify for treatment as a REIT.

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ASC 740-10, Income Taxes (“ASC 740-10”), provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740-10 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold are recorded as a tax expense in the current year. As of June 30, 2019 and December 31, 2018, the Company did not have any unrecognized tax benefits and does not believe that there will be any material changes in unrecognized tax positions over the next 12 months. The Company’s tax returns are subject to examination by federal, state and local tax jurisdictions beginning with the 2010 calendar year.
Stock-Based Compensation and Other Long-Term Incentive Compensation. The Company follows the provisions of ASC 718, Compensation-Stock Compensation, to account for its stock-based compensation plan, which requires that the compensation cost relating to stock-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued. The Company’s 2019 Equity Incentive Plan (the “2019 Plan”) provides for the grant of restricted stock awards, performance share awards, unrestricted shares or any combination of the foregoing. Stock-based compensation is recognized as a general and administrative expense in the accompanying consolidated statements of operations and measured at the fair value of the award on the date of grant. The Company estimates the forfeiture rate based on historical experience as well as expected behavior. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the stock-based award.
In addition, the Company has awarded long-term incentive target awards (the “Performance Share awards”) under an Amended and Restated Long-Term Incentive Plan to its executives that may be payable in shares of the Company’s common stock after the conclusion of each pre-established performance measurement period, which is generally three years. The amount that may be earned is variable depending on the relative total shareholder return of the Company’s common stock as compared to the total shareholder return of the MSCI U.S. REIT Index (RMS) and the FTSE Nareit Equity Industrial Index over the pre-established performance measurement period. On January 8, 2019, the Company amended and restated its Amended and Restated Long-Term Incentive Plan (as amended and restated, the “Amended LTIP”). Under the Amended LTIP, each participant’s Performance Share award granted on or after January 1, 2019 will be expressed as a number of shares of common stock and settled in shares of common stock. Target awards were previously expressed as a dollar amount and settled in shares of common stock. Commencing with Performance Share awards granted on or after January 1, 2019, the grant date fair value of the Performance Share awards will be determined under current accounting treatment using a Monte Carlo simulation model on the date of grant and recognized on a straight-line basis over the performance period. For Performance Share awards granted prior to January 1, 2019, the Company estimates the fair value of the Performance Share awards using a Monte Carlo simulation model on the date of grant and at each reporting period. The Performance Share awards granted prior to January 1, 2019 are recognized as compensation expense over the requisite performance period based on the fair value of the Performance Share awards at the balance sheet date and vary quarter to quarter based on the Company’s relative share price performance.
Use of Derivative Financial Instruments. ASC 815, Derivatives and Hedging (See “Note 9 – Derivative Financial Instruments”), 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 the Company uses derivative instruments, (b) how the Company accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect the Company’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.
The Company records all derivatives on the accompanying consolidated balance sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has 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. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

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Fair Value of Financial Instruments. ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) (See “Note 10 - Fair Value Measurements”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also provides guidance for using fair value to measure financial assets and liabilities. ASC 820 requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).
New Accounting Standards. In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 was permitted. ASU No. 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Upon adoption of ASU No. 2016-02 on January 1, 2019, the Company adopted the package of practical expedients for all leases that commenced before the effective date of January 1, 2019. Accordingly, the Company did not 1) reassess whether any expired or existing contracts are or contain leases, 2) reassess the lease classification for any expired or existing lease, and 3) reassess initial direct costs for any existing leases. The Company did not elect the practical expedient related to using hindsight to reevaluate the lease term.

ASU No. 2016-02 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. ASU No. 2016-02 also requires lessees to classify leases as either a finance or operating lease 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 as a finance lease or on a straight-line basis over the term of the lease as an operating lease. The Company is the lessee of one office space, which was classified as an operating lease under Topic 840. As the Company elected the package of practical expedients as described above, the classification of existing leases was not reassessed and as such, this lease continues to be accounted for as an operating lease.

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (“ASU No. 2018-11”), which provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue recognition standard (Topic 606) and if certain conditions are met. Upon adoption of ASU No. 2016-02, the Company adopted this practical expedient, specifically related to its tenant reimbursements which would otherwise be accounted for under the new revenue recognition standard. The Company believes the two conditions have been met for tenant reimbursements as 1) the timing and pattern of transfer of the nonlease components and associated lease components are the same and 2) the non-lease component is not the predominant component in the arrangement. In addition, ASU No. 2018-11 provides an additional optional transition method to allow entities to apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. An entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease accounting standard will continue to be reported under the current lease accounting standards of Topic 840. The Company adopted this transition method upon adoption of ASU No. 2016-02 on January 1, 2019. There was no cumulative-effect adjustment to the opening balance of retained earnings upon adoption.

In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors (“ASU No. 2018-20”), which permits lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs and instead to account for these costs as if they were lessee costs. In addition, ASU No. 2018-20 requires lessors to 1) exclude lessor costs paid directly by lessees to third parties on the lessor’s behalf from variable payments and 2) include lessor costs that are reimbursed by the lessee in the measurement of variable lease revenue and the associated expense. The amendments also clarify that lessors are required to allocate the variable payments to the lease and non-lease components and follow the recognition guidance in Topic 842 for the lease component and other applicable guidance, such as ASU No. 2014-09, for the non-lease component.


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As a result of the adoption of ASU No. 2016-02, ASU No. 2018-11, and ASC No. 2018-20, there was no material impact to the Company’s consolidated financial statements as a lessor or lessee. In accordance with the guidance, the Company has combined rental revenues and tenant expense reimbursements on the Company’s consolidated statements of operations. The Company does not currently capitalize internal leasing costs. In addition, on January 1, 2019, the Company recognized a lease liability of approximately $0.9 million and a related ROU asset of approximately $0.8 million on its consolidated balance sheets, based on the present value of lease payments for the remaining term of the Company’s corporate office lease, which was approximately 3.5 years as of the adoption date. As the rate implicit in the lease was not readily determinate, the discount rate applied to measure the lease liability and ROU asset was based on the Company’s incremental borrowing rate of 2.70% as of the adoption date. Lease liability is included as a component of accounts payable and other liabilities and ROU asset is included as a component of other assets in the accompanying consolidated balance sheets. All operating lease expense is recognized on a straight-line basis over the lease term. As of June 30, 2019, the lease liability was approximately $0.8 million and the ROU asset was approximately $0.7 million.
Segment Disclosure. ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate are geographically diversified and the chief operating decision makers evaluate operating performance on an individual asset level. As each of the Company’s assets has similar economic characteristics, the assets have been aggregated into one reportable segment.
Note 3. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents. The Company may maintain deposits in federally insured financial institutions in excess of federally insured limits. However, the Company’s management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
As of June 30, 2019, the Company owned 59 buildings aggregating approximately 3.3 million square feet and eight land parcels consisting of approximately 46.7 acres located in Northern New Jersey/New York City, which accounted for a combined percentage of approximately 28.5% of its annualized base rent, and 35 buildings aggregating approximately 2.4 million square feet and five land parcels consisting of approximately 10.1 acres located in Los Angeles, which accounted for a combined percentage of approximately 16.3% of its annualized base rent. Such annualized base rent percentages are based on contractual base rent from leases in effect as of June 30, 2019, excluding any partial or full rent abatements.
Other real estate companies compete with the Company in its real estate markets. This results in competition for tenants to occupy space. The existence of competing properties could have a material impact on the Company’s ability to lease space and on the level of rent that can be achieved. The Company had no tenants that accounted for greater than 10% of its rental revenues for the six months ended June 30, 2019.
Note 4. Investments in Real Estate
During the three months ended June 30, 2019, the Company acquired two industrial buildings containing approximately 119,000 square feet. The total aggregate initial investment, including acquisition costs, was approximately $51.2 million, of which $34.8 million was recorded to land, $13.1 million to buildings and improvements, and $3.3 million to intangible assets. Additionally, the Company assumed $3.1 million in intangible liabilities.
During the six months ended June 30, 2019, the Company acquired four industrial buildings containing approximately 165,000 square feet and two improved land parcels containing approximately 19.7 acres. The total aggregate initial investment, including acquisition costs, was approximately $119.4 million, of which $94.4 million was recorded to land, $17.8 million to buildings and improvements, and $7.2 million to intangible assets. Additionally, the Company assumed $6.4 million in intangible liabilities.
The Company recorded revenues and net income for the three months ended June 30, 2019 of approximately $1.2 million and $0.6 million, respectively, and recorded revenues and net income for the six months ended June 30, 2019 of approximately $1.4 million and $0.7 million, respectively, related to the 2019 acquisitions.
During the three months ended June 30, 2018, the Company acquired two industrial buildings containing approximately 50,000 square feet and one improved land parcel containing approximately 3.5 acres. The total aggregate initial investment, including acquisition costs, was approximately $15.8 million, of which $10.8 million was recorded to land, $3.7 million to buildings and improvements, and $1.3 million to intangible assets. Additionally, the Company assumed $0.4 million in intangible liabilities.

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During the six months ended June 30, 2018, the Company acquired five industrial buildings containing approximately 468,000 square feet, including two buildings under redevelopment that upon completion will contain approximately 318,000 square feet, and one improved land parcel containing approximately 3.5 acres. The total aggregate initial investment, including acquisition costs, was approximately $103.7 million, of which $74.4 million was recorded to land, $25.4 million to buildings and improvements, and $3.9 million to intangible assets. Additionally, the Company assumed $2.7 million in intangible liabilities.
The Company recorded revenues and net income for the three months ended June 30, 2018 of approximately $0.8 million and $0.3 million, respectively, and recorded revenues and net income for the six months ended June 30, 2018 of approximately $1.1 million and $0.4 million, respectively, related to the 2018 acquisitions.
The above assets and liabilities were recorded at fair value, which uses Level 3 inputs. The properties were acquired from unrelated third parties using existing cash on hand, proceeds from property sales, issuance of common stock and borrowings on the revolving credit facility.
As of June 30, 2019, the Company has four properties under redevelopment (including one property held for sale) that upon completion will contain approximately 0.6 million square feet with a total expected investment of approximately $129.3 million, including redevelopment costs of approximately $51.3 million. As of June 30, 2019, one of the properties under redevelopment was under contract to sell for approximately $14.0 million (See “Note 5 - Held for Sale/Disposed Assets”). During the first quarter of 2019, the Company completed redevelopment of its 1775 NW 70th Avenue property in Miami, Florida, an approximately 65,000 square foot redevelopment property. The total investment was approximately $10.0 million. The Company capitalized interest associated with redevelopment and expansion activities of approximately $0.8 million and $0.6 million, respectively, during the three months ended June 30, 2019 and 2018 and approximately $1.6 million and $0.8 million, respectively, during the six months ended June 30, 2019 and 2018.
Note 5. Held for Sale/Disposed Assets
The Company considers a property to be held for sale when it meets the criteria established under ASC 360, Property, Plant, and Equipment. Properties held for sale are reported at the lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale. As of June 30, 2019, the Company has entered into an agreement with a third-party purchaser to sell one property located in the Miami market for a sales price of approximately $14.0 million (net book value of approximately $11.6 million). The sale of the property is subject to various closing conditions. The property is currently under redevelopment and its carrying amount is included as a component of construction in progress in the accompanying consolidated balance sheets.
The following summarizes the condensed results of operations of the property held for sale as of June 30, 2019 for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 
$

 
$
20

 
$
32

 
$
248

Property operating expenses
 
(34
)
 
(13
)
 
(32
)
 
(50
)
Depreciation and amortization
 

 
(6
)
 

 
(39
)
Income from operations
 
$
(34
)
 
$
1

 
$

 
$
159

During the six months ended June 30, 2019, the Company sold one property located in the Los Angeles market for a sales price of approximately $12.4 million, resulting in a gain of approximately $4.5 million.
During the six months ended June 30, 2018, the Company sold one property located in the Washington, D.C. market for a sales price of approximately $20.3 million, resulting in a gain of approximately $3.3 million, and one property located in the Miami market for a sales price of approximately $24.3 million, resulting in a gain of approximately $11.7 million.

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Note 6. Senior Secured Loan
As of June 30, 2019, the Company had a Senior Secured Loan outstanding to a borrower that bears interest at a fixed annual interest rate of 8.0% and matures in May 2020. The Senior Secured Loan is secured by a portfolio of seven improved land parcels primarily located in Newark, New Jersey. One of the properties securing the Senior Secured Loan may be put to the Company as partial or full repayment of the Senior Secured Loan at a previously agreed upon value. This property may be called by the Company as partial or full repayment of the Senior Secured Loan at a previously agreed upon value. In addition, per the terms of the Senior Secured Loan, the borrower may repay the loan at any time with either cash or deed in lieu, with the deed subject to the Company’s approval. During the six months ended June 30, 2019, the Company acquired two properties that were securing the Senior Secured Loan for a previously agreed upon aggregate purchase price which approximated their fair value of approximately $39.1 million, which resulted in an approximately $39.1 million reduction in the amount outstanding under the Senior Secured Loan. As of June 30, 2019 and December 31, 2018, there was approximately $15.8 million and $54.5 million, respectively, net of deferred loan fees of approximately $0.1 million and $0.5 million, respectively, outstanding on the Senior Secured Loan and approximately $0.3 million and $0.4 million, respectively, of interest receivable outstanding on the Senior Secured Loan. Interest receivable is included as a component of other assets in the accompanying consolidated balance sheets.
Note 7. Debt
As of June 30, 2019, the Company had $50.0 million of senior unsecured notes that mature in September 2022, $100.0 million of senior unsecured notes that mature in July 2024, $50.0 million of senior unsecured notes that mature in July 2026, $50.0 million of senior unsecured notes that mature in October 2027 (collectively, the “Senior Unsecured Notes”), and a credit facility (the “Facility”), which consists of a $250.0 million unsecured revolving credit facility that matures in October 2022, a $50.0 million term loan that matures in August 2021 and a $100.0 million term loan that matures in January 2022. As of June 30, 2019 and December 31, 2018, there was $0 and $19.0 million, respectively, of borrowings outstanding on the revolving credit facility and $150.0 million of borrowings outstanding on the term loans. As of June 30, 2019, the Company had two interest rate caps to hedge the variable cash flows associated with $100.0 million of its existing $150.0 million variable-rate term loans. As of December 31, 2018, the Company had three interest rate caps to hedge the variable cash flows associated with its existing $150.0 million variable-rate term loans. See “Note 9 - Derivative Financial Instruments” for more information regarding the Company’s interest rate caps.
The aggregate amount of the Facility may be increased to a total of up to $600.0 million, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. Outstanding borrowings under the Facility are limited to the lesser of (i) the sum of the $150.0 million of term loans and the $250.0 million revolving credit facility, or (ii) 60.0% of the value of the unencumbered properties. Interest on the Facility, including the term loans, is generally to be paid based upon, at the Company’s option, either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greatest of the administrative agent’s prime rate, 0.50% above the federal funds effective rate, or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Facility plus 1.25%. The applicable LIBOR margin will range from 1.05% to 1.50% (1.05% as of June 30, 2019) for the revolving credit facility and 1.20% to 1.70% (1.20% as of June 30, 2019) for the $50.0 million term loan that matures in August 2021 and the $100.0 million term loan that matures in January 2022, depending on the ratio of the Company’s outstanding consolidated indebtedness to the value of the Company’s consolidated gross asset value. The Facility requires quarterly payments of an annual facility fee in an amount ranging from 0.15% to 0.30%, depending on the ratio of the Company’s outstanding consolidated indebtedness to the value of the Company’s consolidated gross asset value.
The Facility and the Senior Unsecured Notes are guaranteed by the Company and by substantially all of the current and to-be-formed subsidiaries of the Company that own an unencumbered property. The Facility and the Senior Unsecured Notes are unsecured by the Company’s properties or by interests in the subsidiaries that hold such properties. The Facility and the Senior Unsecured Notes include a series of financial and other covenants with which the Company must comply. The Company was in compliance with the covenants under the Facility and the Senior Unsecured Notes as of June 30, 2019 and December 31, 2018.
The Company has mortgage loans payable which are collateralized by certain of the properties and require monthly interest and principal payments until maturity and are generally non-recourse. The mortgage loans mature between 2020 and 2021. As of June 30, 2019, the Company had two mortgage loans payable, net of deferred financing costs, totaling approximately $45.1 million, which bear interest at a weighted average fixed annual rate of 4.1%. As of December 31, 2018, the Company had two mortgage loans payable, net of deferred financing costs, totaling approximately $45.8 million, which bore interest at a weighted average fixed annual interest rate of 4.1%. As of June 30, 2019 and December 31, 2018, the total gross book value of the properties securing the debt was approximately $114.6 million and $114.5 million, respectively.

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The scheduled principal payments of the Company’s debt as of June 30, 2019 were as follows (dollars in thousands):
 
Credit
Facility
 
Term Loans
 
Senior
Unsecured
Notes
 
Mortgage
Loans
Payable
 
Total Debt
2019 (6 months)
$

 
$

 
$

 
$
764

 
$
764

2020

 

 

 
33,077

 
33,077

2021

 
50,000

 

 
11,271

 
61,271

2022

 
100,000

 
50,000

 

 
150,000

2023

 

 

 

 

Thereafter

 

 
200,000

 

 
200,000

Total debt

 
150,000

 
250,000

 
45,112

 
445,112

Deferred financing costs, net

 
(769
)
 
(1,587
)
 
(62
)
 
(2,418
)
Total debt, net
$

 
$
149,231

 
$
248,413

 
$
45,050

 
$
442,694

Weighted average interest rate
n/a

 
3.7
%
 
4.1
%
 
4.1
%
 
3.9
%

Note 8. Leasing
The following is a schedule of minimum future cash rentals on tenant operating leases in effect as of June 30, 2019. The schedule does not reflect future rental revenues from the renewal or replacement of existing leases and excludes property operating expense reimbursements (dollars in thousands):
2019 (6 months)
$
63,982

2020
117,081

2021
102,089

2022
84,177

2023
64,175

Thereafter
178,399

Total
$
609,903


Note 9. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters 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. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of its known or expected cash payments principally related to its borrowings.
Derivative Instruments
The Company’s 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, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps involve the receipt of variable amounts from a counterparty at the end of each period in which the interest rate exceeds the agreed fixed price. The Company does not use derivatives for trading or speculative purposes. The Company requires that hedging derivative instruments be highly effective in reducing the risk exposure that they are designated to hedge. As a result, there is no significant ineffectiveness from any of its derivative activities.

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The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative that is designated and that qualifies as a cash flow hedge, the effective portion of the change in fair value of the derivative is initially recorded in accumulated other comprehensive income (loss) (“AOCI”). Amounts recorded in AOCI are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.
As of June 30, 2019, the Company had two interest rate caps to hedge the variable cash flows associated with $100.0 million of its existing $150.0 million variable-rate term loans. The caps have an aggregate notional value of $100.0 million and will effectively cap the annual interest rate payable at 4.0% plus 1.20% to 1.70%, depending on leverage, with respect to $50.0 million for the period from December 1, 2014 (effective date) to May 4, 2021 and $50.0 million for the period from September 1, 2015 (effective date) to February 3, 2020. The Company previously had an interest rate cap with a notional value of $50.0 million (which expired on April 1, 2019) to hedge the variable cash flows associated with $50.0 million of its existing $150.0 million variable-rate term loans. The Company is required to make certain monthly variable rate payments on the term loans, while the applicable counterparty is obligated to make certain monthly floating rate payments based on LIBOR to the Company in the event LIBOR is greater than 4.0%, referencing the same notional amount.
The Company records all derivative instruments on a gross basis in other assets on the accompanying consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. The following table presents a summary of the Company’s derivative instruments designated as hedging instruments (dollars in thousands):
Derivative
Instrument
Effective
Date
 
Maturity
Date
 
Interest
Rate
Strike
 
Fair Value
 
Notional Amount
 
 
 
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate cap
12/1/2014
 
5/4/2021
 
4.0
%
 
$
5

 
$
25

 
$
50,000

 
$
50,000

Interest rate cap
9/1/2015
 
4/1/2019
 
4.0
%
 

 

 

 
50,000

Interest rate cap
9/1/2015
 
2/3/2020
 
4.0
%
 

 
1

 
50,000

 
50,000

Total
 
 
 
 
 
 
$
5

 
$
26

 
$
100,000

 
$
150,000


The effective portion of changes in the fair value of derivatives designated and qualified as cash flow hedges is recorded in AOCI and will be reclassified to interest expense in the period that the hedged forecasted transaction affects earnings on the Company’s variable rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings into interest expense.
The following table presents the effect of the Company’s derivative financial instruments on its accompanying consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Interest rate caps in cash flow hedging relationships:
 
 
 
 
 
 
 
Amount of gain recognized in AOCI on derivatives (effective portion)
$
89

 
$
76

 
$
176

 
$
131

Amount of gain reclassified from AOCI into interest expense (effective portion)
$
89

 
$
76

 
$
176

 
$
131


The Company estimates that approximately $0.3 million will be reclassified from AOCI as an increase to interest expense over the next twelve months.

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Note 10. Fair Value Measurements
ASC 820 requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).
Recurring Measurements – Interest Rate Contracts
Fair Value of Interest Rate Caps
Currently, the Company uses interest rate cap agreements to manage its 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 the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. As of June 30, 2019, the Company applied the provisions of this standard to the valuation of its interest rate caps.
The following sets forth the Company’s financial instruments that are accounted for at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 (dollars 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)
Assets
 
 
 
 
 
 
 
Interest rate caps at:
 
 
 
 
 
 
 
June 30, 2019
$
5

 
$

 
$
5

 
$

December 31, 2018
$
26

 
$

 
$
26

 
$


Financial Instruments Disclosed at Fair Value
As of June 30, 2019 and December 31, 2018, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these investments or liabilities based on Level 1 inputs. The fair values of the Company’s derivative instruments were evaluated based on Level 2 inputs. The fair values of the Company’s mortgage loans payable and Senior Unsecured Notes were estimated by calculating the present value of principal and interest payments, based on borrowing rates available to the Company, which are Level 2 inputs, adjusted with a credit spread, as applicable, and assuming the loans are outstanding through maturity. The fair value of the Company’s Facility approximated its carrying value because the variable interest rates approximate market borrowing rates available to the Company, which are Level 2 inputs. The fair value of the Company’s Senior Secured Loan approximated its carrying value because the interest rate approximates the market lending rate available to the borrower, which is a Level 2 input.

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