10-Q
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 September 30, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-34603

 

 

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

San Francisco, CA

  94104
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (415) 655-4580

 

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    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   ☐  (Do not check if a smaller reporting company)    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 54,551,579 shares of its common stock, $0.01 par value per share, outstanding as of October 31, 2017.

 

 

 


Table of Contents

Terreno Realty Corporation

Table of Contents

 

PART I. FINANCIAL INFORMATION       

Item 1.

  Financial Statements of Terreno Realty Corporation (unaudited)   
 

Consolidated Balance Sheets as of September 30, 2017 and December  31, 2016

     2  
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016

     3  
 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017 and 2016

     4  
 

Consolidated Statement of Equity for the nine months ended September  30, 2017

     5  
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

     6  
 

Condensed Notes to Consolidated Financial Statements

     7  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      23  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      42  

Item 4.

  Controls and Procedures      42  
PART II. OTHER INFORMATION       

Item 1.

  Legal Proceedings      43  

Item 1A.

  Risk Factors      43  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      43  

Item 3.

  Defaults Upon Senior Securities      43  

Item 4.

  Mine Safety Disclosures      43  

Item 5.

  Other Information      43  

Item 6.

  Exhibits      43  

SIGNATURES

  

 

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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)

 

     September 30, 2017     December 31, 2016  
ASSETS    (Unaudited)        

Investments in real estate

    

Land

   $ 693,316     $ 570,181  

Buildings and improvements

     756,443       710,277  

Intangible assets

     70,407       62,580  
  

 

 

   

 

 

 

Total investments in properties

     1,520,166       1,343,038  

Accumulated depreciation and amortization

     (130,611     (109,357
  

 

 

   

 

 

 

Net investments in properties

     1,389,555       1,233,681  

Properties held for sale, net

     6,050       —    
  

 

 

   

 

 

 

Net investments in real estate

     1,395,605       1,233,681  

Cash and cash equivalents

     109,058       14,208  

Restricted cash

     4,265       4,270  

Other assets, net

     27,079       26,822  
  

 

 

   

 

 

 

Total assets

   $ 1,536,007     $ 1,278,981  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities

    

Credit facility

   $ —       $ 51,500  

Term loans payable, net

     148,827       148,616  

Senior unsecured notes, net

     247,880       148,594  

Mortgage loans payable, net

     65,264       66,617  

Security deposits

     10,494       9,922  

Intangible liabilities, net

     20,289       3,485  

Dividends payable

     12,005       9,483  

Performance share awards payable

     10,677       10,739  

Accounts payable and other liabilities

     22,387       18,220  
  

 

 

   

 

 

 

Total liabilities

     537,823       467,176  

Commitments and contingencies (Note 11)

    

Equity

    

Stockholders’ equity

    

Preferred stock: $0.01 par value, 100,000,000 shares authorized, and 0 and 1,840,000 shares (liquidation preference of $25.00 per share) issued and outstanding, respectively

     —         46,000  

Common stock: $0.01 par value, 400,000,000 shares authorized, and 54,569,238 and 47,414,365 shares issued and outstanding, respectively

     546       474

Additional paid-in capital

     992,570       766,229  

Retained earnings

     6,148       —    

Accumulated other comprehensive loss

     (1,080     (898
  

 

 

   

 

 

 

Total stockholders’ equity

     998,184       811,805  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,536,007     $ 1,278,981  
  

 

 

   

 

 

 

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
September 30,
    For the Nine Months Ended
September 30,
 
     2017     2016     2017     2016  

REVENUES

        

Rental revenues

   $ 26,452     $ 21,288     $ 76,629     $ 61,801  

Tenant expense reimbursements

     7,188       5,816       21,230       16,777  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     33,640       27,104       97,859       78,578  
  

 

 

   

 

 

   

 

 

   

 

 

 

COSTS AND EXPENSES

        

Property operating expenses

     9,023       7,288       26,022       22,144  

Depreciation and amortization

     9,595       8,872       27,855       25,214  

General and administrative

     5,041       5,566       15,250       13,304  

Acquisition costs

     —         696     11     2,139  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     23,659       22,422       69,138       62,801  
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER INCOME (EXPENSE)

        

Interest and other income

     17     —         75     19

Interest expense, including amortization

     (4,514     (3,265     (12,086     (9,411

Loss on extinguishment of debt

     —         (239     —         (239

Gain on sales of real estate investments

     15,449       1,892       25,549       7,140  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and expenses

     10,952       (1,612     13,538       (2,491
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20,933       3,070       42,259       13,286  

Redemption of preferred stock

     (1,767     —         (1,767     —    

Preferred stock dividends

     (178     (891     (1,961     (2,674
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income, net of redemption of preferred stock and preferred stock dividends

     18,988       2,179       38,531       10,612  

Allocation to participating securities

     (136     (18     (277     (90
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders, net of redemption of preferred stock and preferred stock dividends

   $ 18,852     $ 2,161     $ 38,254     $ 10,522  
  

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER COMMON SHARE—BASIC AND DILUTED:

        

Net income available to common stockholders, net of redemption of preferred stock and preferred stock dividends

   $ 0.36       0.05     $ 0.76     $ 0.24  
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

     52,804,611       45,762,761       50,277,432       44,204,965  
  

 

 

   

 

 

   

 

 

   

 

 

 

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
September 30,
     For the Nine Months Ended
September 30,
 
     2017      2016      2017     2016  

Net income

   $ 20,933      $ 3,070      $ 42,259     $ 13,286  

Other comprehensive income (loss): cash flow hedge adjustment

     8      4      (182     (310
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 20,941      $ 3,074      $ 42,077     $ 12,976  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

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Terreno Realty Corporation

Consolidated Statement of Equity

(in thousands – except share data)

(Unaudited)

 

                                    Accumulated        
           Common Stock      Additional           Other        
     Preferred     Number of            Paid-     Retained     Comprehensive        
     Stock     Shares     Amount      in Capital     Earnings     Loss     Total  

Balance as of December 31, 2016

   $ 46,000       47,414,365     $ 474      $ 766,229     $ —       $ (898   $ 811,805  

Net income

     —         —         —          —         42,259       —         42,259  

Issuance of common stock, net of issuance costs of $3,673

     —         7,248,992       72      226,355       —         —         226,427  

Repurchase of common stock

     —         (126,366     —          (3,436     —         —         (3,436

Redemption of preferred stock

     (46,000     —         —          1,729       (1,767     —         (46,038

Issuance of restricted stock

     —         32,247       —          —         —         —         —    

Stock-based compensation

     —         —         —          1,693       —         —         1,693  

Common stock dividends

     —         —         —          —         (32,383     —         (32,383

Preferred stock dividends

     —         —         —          —         (1,961     —         (1,961

Other comprehensive loss

     —         —         —          —         —         (182     (182
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2017

   $ —         54,569,238     $ 546      $ 992,570     $ 6,148     $ (1,080   $ 998,184  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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 Nine Months Ended September 30,  
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 42,259     $ 13,286  

Adjustments to reconcile net income to net cash provided by operating activities

    

Straight-line rents

     (2,865     (3,124

Amortization of lease intangibles

     (1,521     (992

Depreciation and amortization

     27,855       25,214  

Loss on extinguishment of debt

     —         239

Gain on sales of real estate investments

     (25,549     (7,140

Deferred financing cost and mortgage premium amortization

     866     508

Stock-based compensation

     7,261       5,970  

Changes in assets and liabilities

    

Other assets

     937       (1,960

Accounts payable and other liabilities

     4,408       5,153  
  

 

 

   

 

 

 

Net cash provided by operating activities

     53,651       37,154  

CASH FLOWS FROM INVESTING ACTIVITIES

    

Cash paid for property acquisitions

     (190,108     (84,016

Proceeds from sales of real estate investments, net

     64,183       21,379  

Additions to construction in progress

     —         (11,668

Additions to buildings, improvements and leasing costs

     (18,936     (18,154
  

 

 

   

 

 

 

Net cash used in investing activities

     (144,861     (92,459

CASH FLOWS FROM FINANCING ACTIVITIES

    

Issuance of common stock

     224,469       72,711  

Issuance costs on issuance of common stock

     (3,295     (1,088

Repurchase of common stock

     (3,436     (1,551

Repurchase of preferred stock

     (46,000     —    

Borrowings on credit facility

     93,000       54,000  

Payments on credit facility

     (144,500     (34,000

Payments on term loans payable

     —         (50,000

Borrowings on senior unsecured notes

     100,000       50,000  

Payments on mortgage loans payable

     (1,451     (16,343

Payment of deferred financing costs

     (872     (2,489

Dividends paid to common stockholders

     (29,861     (23,900

Dividends paid to preferred stockholders

     (1,999     (2,674
  

 

 

   

 

 

 

Net cash provided by financing activities

     186,055       44,666  

Net increase (decrease) in cash and cash equivalents and restricted cash

     94,845       (10,639

Cash and cash equivalents and restricted cash at beginning of period

     18,478       25,108  
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash at end of period

   $ 113,323     $ 14,469  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid for interest, net of capitalized interest

   $ 10,917     $ 9,059  

Supplemental disclosures of non-cash transactions

    

Accounts payable related to capital improvements

   $ 7,770     $ 12,025  

Redemption of preferred stock

     1,729       —    

Reconciliation of cash paid for property acquisitions

    

Acquisition of properties

   $ 209,738     $ 86,038  

Assumption of other assets and liabilities

     (19,630     (2,022
  

 

 

   

 

 

 

Net cash paid for property acquisitions

   $ 190,108     $ 84,016  

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 notes to the consolidated financial statements are unaudited. As of September 30, 2017, the Company owned 183 buildings (including one building held for sale) aggregating approximately 12.5 million square feet and eight improved land parcels consisting of approximately 41.6 acres.

The Company commenced operations upon completion of an initial public offering and a concurrent private placement of common stock purchased by the Company’s executive management on February 16, 2010. 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 2016 Annual Report on Form 10-K and the notes thereto, which was filed with the Securities and Exchange Commission on February 8, 2017.

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 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,

 

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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 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 during the three or nine months ended September 30, 2017 or 2016.

Property Acquisitions. Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business which requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar 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. Prior to January 1, 2017 the Company generally accounted for property acquisitions as business combinations, in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. 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 $0.7 million and $0.3 million, respectively, for the three months ended September 30, 2017 and 2016, and approximately $1.5 million and $1.0 million, respectively, for the nine months ended September 30, 2017 and 2016. 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 September 30, 2017 is 9.4 years. As of September 30, 2017 and December 31, 2016, 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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     September 30, 2017     December 31, 2016  
     Gross     Accumulated
Amortization
    Net     Gross     Accumulated
Amortization
    Net  

In-place leases

   $ 65,880     $ (43,741   $ 22,139     $ 58,112     $ (37,664   $ 20,448  

Above-market leases

   $ 4,527     $ (3,612   $ 915     $ 4,468     $ (3,319   $ 1,149  

Below-market leases

   $ (27,591   $ 7,302     $ (20,289   $ (9,133   $ 5,648     $ (3,485

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

Discontinued Operations. The Company considers a property to be classified as discontinued operations when it meets the criteria established under ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Disposals that represent a strategic shift that should have or will have a major effect on the Company’s operations and financial results qualify as discontinued operations.

Held for Sale Assets. The Company considers a property to be held for sale when it meets the criteria established under ASC 360, Property, Plant and Equipment (Note 5). 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:

 

     For the Nine Months Ended September 30,  
     2017      2016  

Beginning

     

Cash and cash equivalents at beginning of period

   $ 14,208      $ 22,450  

Restricted cash

     4,270        2,658  
  

 

 

    

 

 

 

Cash and cash equivalents and restricted cash

     18,478        25,108  

Ending

     

Cash and cash equivalents at end of period

     109,058        10,919  

Restricted cash

     4,265        3,550  
  

 

 

    

 

 

 

Cash and cash equivalents and restricted cash

     113,323        14,469  
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents and restricted cash

   $ 94,845      $ (10,639
  

 

 

    

 

 

 

 

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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 September 30, 2017 and December 31, 2016, approximately $21.2 million and $21.6 million, respectively, of straight-line rent and accounts receivable, net of allowances of approximately $0.2 million and $0.4 million as of September 30, 2017 and December 31, 2016, respectively, were included as a component of other assets in the accompanying consolidated balance sheets.

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 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 $5.4 million and $4.5 million as of September 30, 2017 and December 31, 2016, respectively.

Mortgage Premiums. Mortgage premiums represent the excess of the fair value of debt assumed over the principal value of debt assumed in connection with property acquisitions. The mortgage premiums are being amortized to interest expense over the term of the related debt instrument using the effective interest method. As of September 30, 2017 and December 31, 2016, the mortgage premiums were fully amortized.

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.

ASC 740-10, Income Taxes, 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 September 30, 2017 and December 31, 2016, 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

 

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measured on the fair value of the equity or liability instruments issued. The Company has adopted the Amended and Restated 2010 Equity Incentive Plan, which 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”) 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 under the Performance Share awards 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. 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 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 (Note 7), 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.

As of September 30, 2017, the Company had three interest rate caps to hedge the variable cash flows associated with its existing $150.0 million of variable-rate term loans. The caps have a notional value of $150.0 million and will effectively cap the annual interest rate at 4.0% plus 1.30% to 1.85%, depending on leverage, with respect to $50.0 million for the period from December 1, 2014 (effective date) to May 1, 2021, $50.0 million for the period from September 1, 2015 (effective date) to April 1, 2019, and $50.0 million for the period from September 1, 2015 (effective date) to February 3, 2020. 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. As of September 30, 2017 and December 31, 2016, the fair value of the interest rate caps was approximately $37,000 and $0.3 million, respectively.

Fair Value of Financial Instruments. ASC 820, Fair Value Measurements and Disclosures (Note 8), 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, which created ASC Topic 606, Revenue from Contracts with Customers, which is their final standard on revenue from contracts with customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. The effective date of ASU 2014-09 was deferred by the issuance of ASU 2015-14,

 

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Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, by one year to make the guidance of ASU 2014-09 effective for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early adoption is permitted but not prior to the original effective date, which was for annual reporting periods beginning after December 15, 2016. The Company will adopt the guidance effective January 1, 2018. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how to apply the implementation guidance on principal versus agent considerations related to the sale of goods or services to a customer as updated by ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies two aspects of Topic 606: (1) identifying performance obligations and (2) the licensing implementation guidance, while retaining the related principles for those areas. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements in ASU 2015-14. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which makes narrow scope amendments to Topic 606 including implementation issues on collectability, non-cash consideration and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which make additional narrow scope amendments to Topic 606 including loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production-type contracts. The FASB allows two adoption methods under ASU 2014-09. Under one method, a company will apply the rules to contracts in all reporting periods presented, subject to certain allowable exceptions. Under the other method, a company will apply the rules to all contracts existing as of January 1, 2018, recognizing in beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosures comparing results to previous rules (“modified retrospective method”). The Company will adopt these updates beginning with the first quarter of its fiscal year 2018 and anticipates doing so using the modified retrospective method. Currently, the Company is in the process of evaluating the impact of the adoption of ASU 2014-09. The Company’s assessment efforts to date have included reviewing current accounting policies and processes, as well assigning internal resources to assist in the process. Additionally, the Company is in the process of reviewing historical contracts and other arrangements to identify potential differences that could arise from the adoption of ASU 2014-09. The Company believes the effects on its existing accounting policies will be associated with the amount and timing of historical real estate sales contracts and associated gain recognitions. As the Company progresses further in its analysis, the scope of this assessment could be expanded to include other contract elements that could have an accounting impact under the new standard. The Company is also continuing to assess the potential effects that this new standard is expected to have on its consolidated financial statements as it relates to its leasing arrangements with its tenants and in concert with its assessment and anticipated adoption of the new leasing guidance under ASU 2016-02, Leases (see below). The Company does not expect that this change will have a material effect on its financial position or results of operations. The Company continues to evaluate other areas of the standard and is currently assessing the impact on its consolidated financial statements and condensed notes to its consolidated financial statements and cannot reasonably estimate quantitative information related to the impact of the new standard on its consolidated financial statements at this time.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. The standard requires that non-lease components, such as tenant expense reimbursement revenues, be accounted for in accordance with ASU 2014-09, Revenue from Contracts with Customers (see above), which could change the classification and timing of its non-lease components. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, which for the Company would be the first quarter of 2019, and early adoption is permitted. The Company is currently assessing the potential changes to its accounting and whether such changes will have a material impact on its consolidated financial statements and condensed notes to its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides clarified guidance on the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years after December 15, 2017, and interim periods within those fiscal years and early adoption is permitted. The Company is currently assessing the impact of adopting ASU 2016-15 on its consolidated financial statements and condensed notes to its consolidated financial statements, but does not expect the adoption of ASU 2016-15 to have a material impact.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of

 

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restricted cash or restricted cash equivalents. The Company elected to early adopt the provisions of ASU 2016-18 as of March 31, 2017, and has revised its consolidated statements of cash flows for the period ended September 30, 2016 to reflect amounts described as restricted cash and restricted cash equivalents included with cash and cash equivalents in the reconciliation of beginning of period and end of period total amounts shown on the consolidated statements of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. A reconciliation of cash and cash equivalents and restricted cash as presented on the consolidated balance sheets to the consolidated statements of cash flows is included in the significant accounting policies above.

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 September 30, 2017, the Company owned 54 buildings aggregating approximately 3.1 million square feet and four land parcels consisting of approximately 23.3 acres located in Northern New Jersey/New York City, which accounted for a combined percentage of approximately 26.2% of its annualized base rent, and 25 buildings aggregating approximately 2.3 million square feet and one land parcel consisting of approximately 13.4 acres located in Washington, D.C., which accounted for a combined percentage of approximately 19.2% of its annualized base rent. Such annualized base rent percentages are based on contractual base rent from leases in effect as of September 30, 2017, 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 nine months ended September 30, 2017.

Note 4. Investments in Real Estate

During the three months ended September 30, 2017, the Company acquired eight industrial buildings containing approximately 258,000 square feet and one land parcel containing approximately 1.1 acres. The total aggregate initial investment, including acquisition costs, was approximately $53.9 million, of which $32.6 million was recorded to land, $18.5 million to buildings and improvements, $2.8 million to intangible assets and $1.4 million to intangible liabilities.

During the nine months ended September 30, 2017, the company acquired 21 industrial buildings containing approximately 1,156,000 square feet and three land parcels containing approximately 18.9 acres. The total aggregate initial investment, including acquisition costs, was approximately $209.8 million, of which $144.9 million was recorded to land, $55.2 million to buildings and improvements, $9.7 million to intangible assets and $18.7 million to intangible liabilities.

The Company recorded revenues and net income for the three months ended September 30, 2017 of approximately $2.6 million and $1.0 million, respectively, and recorded revenues and net income for the nine months ended September 30, 2017 of approximately $3.9 million and $1.6 million, respectively, related to the 2017 acquisitions.

During the three months ended September 30, 2016, the Company acquired five industrial buildings containing approximately 244,000 square feet and one improved land parcel containing approximately 13.4 acres. The total aggregate initial investment was approximately $36.7 million, of which $14.8 million was recorded to land, $17.7 million to buildings and improvements, $4.2 million to intangible assets and $0.2 million to intangible liabilities.

 

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During the nine months ended September 30, 2016, the Company acquired 12 industrial buildings containing approximately 531,000 square feet and two improved land parcels containing approximately 17.9 acres. The total aggregate initial investment was approximately $86.0 million, of which $41.4 million was recorded to land, $37.3 million to buildings and improvements, $7.3 million to intangible assets and $1.4 million to intangible liabilities.

The Company recorded revenues and net income for the three months ended September 30, 2016 of approximately $1.4 million and $0.5 million, respectively, and recorded revenues and net income for the nine months ended September 30, 2016 of approximately $2.3 million and $0.7 million, respectively, related to the 2016 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. Effective January 1, 2017, the Company adopted ASU 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business under which property acquisitions are generally accounted for as asset acquisitions resulting in the capitalization of acquisition costs as part of the purchase price of the acquisition, instead of being expensed as incurred. Prior to January 1, 2017 the Company accounted for property acquisitions as business combinations, in accordance with ASC 805, Business Combinations, resulting in the expense of acquisition costs as incurred.

During 2016, the Company completed redevelopment of its South Main Street property in Carson, California. The Company demolished three buildings totaling approximately 186,000 square feet, constructed a new front-load industrial distribution building containing approximately 210,000 square foot and renovated an existing approximately 34,000 square foot office building. The Company capitalized interest associated with redevelopment and expansion activities of approximately $0 and $0.2 million, respectively, during the three months ended September 30, 2017 and 2016 and $0 and $0.6 million, respectively, during the nine months ended September 30, 2017 and 2016. The redevelopment cost was approximately $17.8 million for a total investment of approximately $39.3 million, excluding approximately $2.3 million of intangible liabilities.

Pro Forma Financial Information:

The following supplementary pro forma financial information presents the results of operations of the Company for the three and nine months ended September 30, 2017 and 2016 as if all of the Company’s acquisitions during the nine months ended September 30, 2017 occurred on January 1, 2016. The following pro forma results for the three and nine months ended September 30, 2017 and 2016 have been presented for comparative purposes only and are not necessarily indicative of the results of operations that would have actually occurred had all transactions taken place on January 1, 2016, or of future results of operations (dollars in thousands, except per share data).

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2017      2016      2017      2016  

Total revenues

   $ 33,907      $ 29,190      $ 102,302      $ 86,921  

Net income available to common stockholders, net of redemption of preferred stock and preferred stock dividends

     18,817        2,769        39,454        13,317  

Basic and diluted net income available to common stockholders per share, net of redemption of preferred stock and preferred stock dividends

   $ 0.36      $ 0.06      $ 0.78      $ 0.30  

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 September 30, 2017, the Company has entered into an agreement with a third-party purchaser to sell one property located in the Washington, D.C. market for a sales price of approximately $11.5 million (net book value of approximately $6.1 million). The sale of the property is subject to the purchaser’s completion of satisfactory due diligence and various closing conditions.

 

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The following summarizes the condensed results of operations of the property held for sale as of September 30, 2017, for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended September 30,  
     2017      2016      2017      2016  

Rental revenues

   $ 146      $ 143      $ 434      $ 431  

Tenant expense reimbursements

     64      83      194      207

Property operating expenses

     (64      (84      (197      (217

Depreciation and amortization

     (39      (39      (116      (119
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

   $ 107      $ 103      $ 315      $ 302  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2017, the Company sold one property located in the Los Angeles market for a sales price of approximately $25.3 million, resulting in a gain of approximately $10.1 million, and two properties located in the Washington, D.C. market for an aggregate sales price of approximately $40.5 million, resulting in an aggregate gain of approximately $15.4 million.

During the nine months ended September 30, 2016, the Company sold one property located in the San Francisco Bay Area market for a sales price of approximately $8.2 million, resulting in a gain of approximately $2.7 million, one property in the Washington D.C./Baltimore market for a sales price of approximately $8.2 million, resulting in a gain of approximately $2.5 million, and one property located in the Miami market for a sales price of approximately $6.1 million, resulting in a gain of approximately $1.9 million.

Note 6. Debt

On July 14, 2017, the Company issued in a private placement $100.0 million of senior unsecured notes with a seven-year term that bear interest at a fixed annual interest rate of 3.75% and mature in July 2024 (the “July 2024 Senior Unsecured Notes”). Net proceeds from the issuance were used to redeem all 1,840,000 outstanding shares of 7.75% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”), to repay the outstanding borrowings on the Company’s revolving credit facility, and for property acquisitions. As of September 30, 2017, the Company also had $50.0 million of senior unsecured notes that mature in September 2022, $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, with the July 2024 Senior Unsecured Notes, the “Senior Unsecured Notes”), and a credit facility (the “Facility”), which consists of a $200.0 million unsecured revolving credit facility that matures in August 2020, 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 September 30, 2017 and December 31, 2016, there was $0 and $51.5 million, respectively, of borrowings outstanding on the revolving credit facility and $150.0 million and $150.0 million, respectively, of borrowings outstanding on the term loans. As of both September 30, 2017 and December 31, 2016, the Company had three interest rate caps to hedge the variable cash flows associated with its existing $150.0 million of variable-rate term loans. See “Note 7-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 $200.0 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 1.35% to 1.90% (1.35% as of September 30, 2017) for the revolving credit facility and 1.30% to 1.85% (1.30% as of September 30, 2017) 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 unused facility fee in an amount equal to 0.20% or 0.25% depending on the unused portion of the Facility.

 

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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 borrower 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 September 30, 2017 and December 31, 2016.

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 2019 and 2021. As of September 30, 2017, the Company had three mortgage loans payable, net of deferred financings costs, totaling approximately $65.3 million, which bear interest at a weighted average fixed annual rate of 4.0%. As of December 31, 2016, the Company had four mortgage loans payable, net of deferred financing costs, totaling approximately $66.6 million, which bore interest at a weighted average fixed annual interest rate of 4.0%. As of September 30, 2017 and December 31, 2016, the total gross book value of the properties securing the debt was approximately $153.3 million and $163.1 million, respectively.

The scheduled principal payments of the Company’s debt as of September 30, 2017 were as follows (dollars in thousands):

 

     Credit
Facility
     Term
Loans
    Senior
Unsecured
Notes
    Mortgage
Loans
Payable
    Total Debt  

2017 (3 months)

   $ —        $ —       $ —       $ 466     $ 466  

2018

     —          —         —         1,910       1,910  

2019

     —          —         —         18,805       18,805  

2020

     —          —         —         33,077       33,077  

2021

     —          50,000       —         11,271       61,271  

Thereafter

     —          100,000       250,000       —         350,000  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     —          150,000       250,000       65,529       465,529  

Unamortized net premiums

     —          —         —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt

     —          150,000       250,000       65,529       465,529  

Deferred financing costs, net

     —          (1,173     (2,120     (265     (3,558
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt, net

   $ —        $ 148,827     $ 247,880     $ 65,264     $ 461,971  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Interest Rate

     n/a        2.5     4.1     4.0     3.6

Note 7. 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 September 30, 2017, the Company had three interest rate caps to hedge the variable cash flows associated with its existing $150.0 million of variable-rate term loans. The caps have a notional value of $150.0 million and will effectively cap the annual interest rate payable at 4.0% plus 1.30% to 1.85%, depending on leverage, with respect to $50.0 million for the period from December 1, 2014 (effective date) to May 1, 2021, $50.0 million for the period from September 1, 2015 (effective date) to April 1, 2019 and $50.0 million for the period from September 1, 2015 (effective date) to February 3, 2020. 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 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):

 

                         Fair Value      Notional Amount  

Derivative

Instrument

   Effective
Date
     Maturity
Date
     Interest
Rate
Strike
    September 30,
2017
     December 31,
2016
     September 30,
2017
     December 31,
2016
 

Assets:

                   

Interest Rate Cap

     12/1/2014        5/1/2021        4.0   $ 33      $ 204      $ 50,000      $ 50,000  

Interest Rate Cap

     9/1/2015        4/1/2019        4.0     —          14      50,000        50,000  

Interest Rate Cap

     9/1/2015        2/3/2020        4.0     3        63      50,000        50,000  
          

 

 

    

 

 

    

 

 

    

 

 

 

Total

           $ 36      $ 281      $ 150,000      $ 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 nine months ended September 30, 2017 and 2016 (in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2017      2016      2017      2016  

Interest rate caps in cash flow hedging relationships:

           

Amount of gain recognized in AOCI on derivatives (effective portion)

   $ 29      $ —        $ 63      $ —    

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

   $ 29      $ —        $ 63      $ —    

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 8. 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 September 30, 2017, 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 September 30, 2017 and December 31, 2016 (dollars in thousands):

 

     Fair Value Measurement Using  
            Quoted Price in
Active Markets for
Identical Assets
and Liabilities
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
Assets    Total Fair Value      (Level 1)      (Level 2)      (Level 3)  

Interest rate caps at:

           

September 30, 2017

   $ 36      $ —        $ 36      $ —    

December 31, 2016

   $ 281      $ —        $ 281      $ —    

Financial Instruments Disclosed at Fair Value

As of September 30, 2017 and December 31, 2016, 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 following table sets forth the carrying value and the estimated fair value of the Company’s debt as of September 30, 2017 and December 31, 2016 (dollars in thousands):

 

     Fair Value Measurement Using         
            Quoted Price in
Active Markets
for Identical
Assets and
Liabilities
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
        
Liabilities    Total Fair Value      (Level 1)      (Level 2)      (Level 3)      Carrying Value  

Debt at:

              

September 30, 2017

   $ 461,226      $ —        $ 461,226      $ —        $ 461,971  

December 31, 2016

   $ 417,219      $ —        $ 417,219      $ —        $ 415,327  

 

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Table of Contents

Note 9. Stockholders’ Equity

The Company’s authorized capital stock consists of 400,000,000 shares of common stock, $0.01 par value per share, and 100,000,000 shares of preferred stock, $0.01 par value per share. The Company has an at-the-market equity offering program (the “$200 Million ATM Program”) pursuant to which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $200.0 million ($120.9 million remaining as of September 30, 2017) in amounts and at times to be determined by the Company from time to time. Prior to the implementation of the $200 Million ATM Program, the Company had a $150.0 million ATM program (the “$150 Million ATM Program”), which was fully utilized as of June 30, 2017, and a $100.0 million ATM program (the “$100 Million ATM Program”), which was fully utilized as of December 31, 2016. Actual sales under the $200 Million ATM Program, if any, will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the Company’s common stock, determinations by the Company of the appropriate sources of funding for the Company and potential uses of funding available to the Company. The Company intends to use the net proceeds from the offering of the shares under the $200 Million ATM Program, if any, for general corporate purposes, which may include future acquisitions and repayment of indebtedness, including borrowings under the Facility. During the three and nine months ended September 30, 2017, the Company issued an aggregate of 2,206,685 and 7,042,771 shares, respectively, of common stock at a weighted average offering price of $35.84 and $31.87 per share, respectively, under the $200 Million ATM Program and the $150 Million ATM Program, resulting in net proceeds of approximately $77.9 million and $221.2 million, respectively, and paying total compensation to the applicable sales agents of approximately $1.1 million and $3.3 million, respectively. During the three and nine months ended September 30, 2016, the Company issued an aggregate of 361,351 and 2,990,959 shares, respectively, of common stock at a weighted average offering price of $27.44 and $24.64 per share, respectively, under the $100 Million ATM Program, resulting in net proceeds of approximately $9.8 million and $72.6 million, respectively, and paying total compensation to the applicable sales agents of approximately $0.1 million and $1.1 million, respectively.

The Company has a share repurchase program authorizing the Company to repurchase up to 2,000,000 shares of its outstanding common stock from time to time through December 31, 2018. Purchases made pursuant to the program will be made in either the open market or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. As of September 30, 2017, the Company has not repurchased any shares of stock pursuant to its share repurchase authorization.

In connection with the annual meeting of stockholders on May 2, 2017, the Company granted a total of 10,988 shares of unrestricted common stock to its independent directors under the Company’s Amended and Restated 2010 Equity Incentive Plan with a grant date fair value per share of $30.95. The grant date fair value of the unrestricted common stock was determined using the closing price of the Company’s common stock on the date of the grant. The Company recognized approximately $0 and $0.3 million in compensation costs for the three and nine months ended September 30, 2017, respectively, related to this issuance.

As of September 30, 2017 and December 31, 2016, respectively, 0 and 1,840,000 shares of Series A Preferred Stock were issued and outstanding.

On July 19, 2017, the Company redeemed all 1,840,000 outstanding shares of the Series A Preferred Stock for cash at a redemption price of $25.00 per share, plus an amount per share of $0.096875 representing all accrued and unpaid dividends per share from July 1, 2017 to, but excluding, July 19, 2017. The Company recognized a charge of approximately $1.8 million during the three months ended September 30, 2017 representing the write-off of original issuance costs related to the redemption of the Series A Preferred Stock.

As of September 30, 2017, there were 1,705,000 shares of common stock authorized for issuance as restricted stock grants, unrestricted stock awards or Performance Share awards under the Company’s Amended and Restated 2010 Equity Incentive Plan (the “Plan”), of which 577,365 were remaining. The grant date fair value per share of restricted stock awards issued during the period from February 16, 2010 (commencement of operations) to September 30, 2017 ranged from $14.20 to $26.52. The fair value of the restricted stock that was granted during the nine months ended September 30, 2017 was approximately $0.9 million and the vesting period for the restricted stock is five years. As of September 30, 2017, the Company had approximately $5.2 million of total unrecognized compensation costs related to restricted stock issuances, which is expected to be recognized over a remaining weighted average period of approximately 3.0 years. The Company recognized compensation costs of approximately $0.5 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $1.4 million for both the nine months ended September 30, 2017 and 2016 related to the restricted stock issuances.

 

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The following is a summary of the total restricted shares granted to the Company’s executive officers and employees with the related weighted average grant date fair value share prices for the nine months ended September 30, 2017:

Restricted Stock Activity:

 

     Shares      Weighted Average Grant
Date Fair Value
 

Non-vested shares outstanding as of December 31, 2016

     395,281      $ 20.48  

Granted

     32,247        26.52  

Forfeited

     (32,349      19.59  

Vested

     (20,337      18.06  
  

 

 

    

 

 

 

Non-vested shares outstanding as of September 30, 2017

     374,842      $ 21.21  
  

 

 

    

 

 

 

The following is a vesting schedule of the total non-vested shares of restricted stock outstanding as of September 30, 2017:

 

Non-vested Shares Vesting Schedule

   Number of Shares  

2017 (3 months)

     —    

2018

     32,358  

2019

     23,686  

2020

     301,877  

2021

     11,045  

Thereafter

     5,876  
  

 

 

 

Total Non-vested Shares

     374,842  
  

 

 

 

Long-Term Incentive Plan:

As of September 30, 2017, there are three open performance measurement periods for the Performance Share awards: January 1, 2015 to December 31, 2017, January 1, 2016 to December 31, 2018 and January 1, 2017 to December 31, 2019. During the three and nine months ended September 30, 2017, the Company issued 0 and 195,233 shares, respectively, of common stock at a price of $28.84 per share related to the Performance Share awards for the performance period from January 1, 2014 to December 31, 2016. The expense related to the open Performance Share awards varies quarter to quarter based on the Company’s relative share price performance.

The following table summarizes certain information with respect to the Performance Share awards (dollars in thousands):

 

                   Expense      Expense  
     Fair Value      Accrual      For the Three Months
Ended September
30,
     For the Nine Months
Ended September

30,
 

Performance Share Period

   September 30,
2017
     September 30,
2017
     2017      2016      2017      2016  

January 1, 2017 - December 31, 2019

   $ 4,785      $ 1,193      $ 518      $ —        $ 1,193      $ —    

January 1, 2016 - December 31, 2018

     5,575        3,250        633        336        1,988        749  

January 1, 2015 - December 31, 2017

     6,805        6,234        784        752        2,387        1,451  

January 1, 2014 - December 31, 2016

     —          —          —          1,512        —          2,116  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,165      $ 10,677      $ 1,935      $ 2,600      $ 5,568      $ 4,316  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Dividends:

The following table sets forth the cash dividends paid or payable per share during the nine months ended September 30, 2017:

 

For the Three Months

Ended

   Security    Dividend per
Share
     Declaration Date    Record Date    Date Paid

March 31, 2017

   Common stock    $ 0.200000      February 7, 2017    March 28, 2017    April 12, 2017

March 31, 2017

   Preferred stock    $ 0.484375      February 7, 2017    March 10, 2017    March 31, 2017

June 30, 2017

   Common stock    $ 0.200000      May 2, 2017    July 7, 2017    July 21, 2017

June 30, 2017

   Preferred stock    $ 0.484375      May 2, 2017    June 9, 2017    June 30, 2017

September 30, 2017

   Common stock    $ 0.220000      August 1, 2017    October 6, 2017    October 21, 2017

On July 19, 2017, the Company redeemed all 1,840,000 outstanding shares of the Series A Preferred Stock for cash at a redemption price of $25.00 per share, plus an amount per share of $0.096875 representing all accrued and unpaid dividends per share from July 1, 2017 to, but excluding, July 19, 2017.

Note 10. Net Income (Loss) Per Share

Pursuant to ASC 260-10-45, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The two-class method of computing earnings per share allocates earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. The Company’s non-vested shares of restricted stock are considered participating securities since these share-based awards contain non-forfeitable rights to dividends irrespective of whether the awards ultimately vest or expire. The Company had no dilutive restricted stock awards outstanding for both the three and nine months ended September 30, 2017 and 2016.

In accordance with the Company’s policies of determining whether instruments granted in share-based payment transactions are participating securities and accounting for earnings per share, the net income (loss) per common share is adjusted for earnings distributed through declared dividends (if any) and allocated to all participating securities (weighted average common shares outstanding and unvested restricted shares outstanding) under the two-class method. Under this method, allocations were made to 374,842 and 397,114 of weighted average unvested restricted shares outstanding for the three months ended September 30, 2017 and 2016, respectively, and 381,321 and 399,019 of weighted average unvested restricted shares outstanding for the nine months ended September 30, 2017 and 2016, respectively.

Note 11. Commitments and Contingencies

Contractual Commitments. As of November 1, 2017, the Company has four outstanding contracts with third-party sellers to acquire three industrial properties consisting of approximately 591,000 square feet and one improved land parcel containing approximately 5.4 acres. There is no assurance that the Company will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions.

The following table summarizes certain information with respect to the properties the Company has under contract:

 

Market

   Number of
Buildings
     Square Feet      Purchase Price
(in thousands)
     Assumed Debt
(in thousands)
 

Los Angeles 1

     10        382,916      $ 78,810      $ —    

Northern New Jersey/New York City

     —          —          —          —    

San Francisco Bay Area

     —          —          —          —    

Seattle

     1        208,000        25,410        —    

Miami

     —          —          —          —    

Washington, D.C.

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11        590,916      $ 104,220      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1  Includes one improved land parcel containing approximately 5.4 acres.

 

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As of November 1, 2017, the Company has executed three non-binding letters of intent with third-party sellers to acquire four industrial properties consisting of approximately 237,000 square feet. The total purchase price for these industrial properties is approximately $47.3 million. In the normal course of its business, the Company enters into non-binding letters of intent to purchase properties from third parties that may obligate the Company to make payments or perform other obligations upon the occurrence of certain events, including the execution of a purchase and sale agreement and satisfactory completion of various due diligence matters. There can be no assurance that the Company will enter into purchase and sale agreement with respect to these properties or otherwise complete any such prospective purchases on the terms described or at all.

As of November 1, 2017, the Company has one outstanding contract with a third-party purchaser to sell one property, consisting of approximately 135,000 square feet, located in the Washington, D.C. market for a sales price of approximately $11.5 million (net book value of approximately $6.1 million). There is no assurance the Company will sell the property under contract because the proposed disposition is subject to the purchaser’s completion of satisfactory due diligence and various closing conditions.

Note 12. Subsequent Events

On October 19, 2017, the Company acquired one industrial building located in Los Angeles, CA containing approximately 20,000 square feet for a total purchase price of approximately $4.8 million. The property was acquired from an unrelated third party using existing cash on hand.

On October 23, 2017, the Company acquired one industrial building located in Doral, FL containing approximately 38,000 square feet for a total purchase price of approximately $6.8 million. The property was acquired from an unrelated third party using existing cash on hand.

On October 30, 2017, the Company acquired one industrial building located in Miami, FL containing approximately 59,000 square feet for a total purchase price of approximately $8.4 million. The property was acquired from an unrelated third party using existing cash on hand.

On October 31, 2017, the Company’s board of directors declared a cash dividend in the amount of $0.22 per share of its common stock payable on January 12, 2018 to the stockholders of record as of the close of business on December 29, 2017.

 

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We caution investors that forward-looking statements are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “project”, “result”, “should”, “will”, “seek”, “target”, “see”, “likely”, “position”, “opportunity” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events, or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

    the factors included under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016, which was filed with the Securities and Exchange Commission on February 8, 2017 and in our other public filings;

 

    our ability to identify and acquire industrial properties on terms favorable to us;

 

    general volatility of the capital markets and the market price of our common stock;

 

    adverse economic or real estate conditions or developments in the industrial real estate sector and/or in the markets in which we acquire properties;

 

    our dependence on key personnel and our reliance on third-party property managers;

 

    our inability to comply with the laws, rules and regulations applicable to companies, and in particular, public companies;

 

    our ability to manage our growth effectively;

 

    tenant bankruptcies and defaults on or non-renewal of leases by tenants;

 

    decreased rental rates or increased vacancy rates;

 

    increased interest rates and operating costs;

 

    declining real estate valuations and impairment charges;

 

    our expected leverage, our failure to obtain necessary outside financing, and future debt service obligations;

 

    our ability to make distributions to our stockholders;

 

    our failure to successfully hedge against interest rate increases;

 

    our failure to successfully operate acquired properties;

 

    risks relating to our real estate redevelopment and expansion strategies and activities;

 

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Table of Contents
    our failure to qualify or maintain our status as a real estate investment trust, or REIT, and possible adverse changes to tax laws;

 

    uninsured or underinsured losses relating to our properties or that otherwise result from future litigation;

 

    environmental uncertainties and risks related to natural disasters;

 

    financial market fluctuations; and

 

    changes in real estate and zoning laws and increases in real property tax rates.

Overview

Terreno Realty Corporation (“Terreno”, and together with its subsidiaries, “we”, “us”, “our”, “our Company”, or “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. We invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and research and development, or R&D) and transshipment. We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. Infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings. As of September 30, 2017, we owned a total of 183 buildings (including one building held for sale) aggregating approximately 12.5 million square feet that were approximately 96.7% leased to 399 customers, the largest of which accounted for approximately 5.4% of our total annualized base rent and eight improved land parcels consisting of 41.6 acres. We are an internally managed Maryland corporation and elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Code, commencing with our taxable year ended December 31, 2010.

The following table summarizes by market our investments in real estate as of September 30, 2017:

 

Market

  Number of
Buildings
    Rentable
Square Feet
    % of
Total
    Occupancy
% as of
September

30, 2017
    Annualized
Base Rent
(000’s) 1
    % of
Total
    Annualized
Base Rent Per
Occupied
Square Foot
    Weighted
Average
Remaining
Lease Term
(Years) 2
    Gross
Book
Value
(000’s)3
 

Los Angeles

    24       2,234,626       17.8     100.0   $ 16,349       16.3   $ 7.32       8.3     $ 284,314  

Northern New Jersey/New York City

    54       3,095,107       24.7     98.6     25,517       25.4     8.36       4.1       403,342  

San Francisco Bay Area

    27       1,368,607       10.8     91.8     13,781       13.7     10.97       4.9       203,527  

Seattle

    24       1,626,620       13.0     99.4     11,789       11.8     7.29       3.7       178,912  

Miami

    29       1,890,549       15.1     96.0     13,777       13.7     7.59       3.9       167,815  

Washington, D.C. 4

    25       2,332,961       18.6     92.7     19,168       19.1     8.86       4.1       289,179  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/Weighted Average

    183       12,548,470       100.0     96.7   $ 100,381       100.0   $ 8.27       4.9     $ 1,527,089  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of September 30, 2017, multiplied by 12.
2 Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of September 30, 2017, weighted by the respective square footage.
3 Includes 41.6 acres of improved land as discussed below.
4 Includes one property held for sale with a gross book value of approximately $6.9 million and accumulated depreciation and amortization of approximately $0.8 million as of September 30, 2017.

We also own eight improved land parcels totaling approximately 41.6 acres that are 74.7% leased to eight tenants. Such land is used for truck, trailer and container storage and/or car parking. In the future, we may consider redeveloping such land.

 

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The following table summarizes by market our investments in improved land as of September 30, 2017:

 

Market

  Number of
Parcels
    Acres     % of
Total
    Occupancy %
as of
September

30, 2017
    Annualized Base
Rent (000’s) 1
    % of
Total
    Annualized Base
Rent Per
Occupied Square
Foot
    Weighted Average
Remaining Lease
Term (Years) 2
 

Los Angeles

    2       2.6       6.3     100.0   $ 466       15.7   $ 4.08       3.4  

Northern New Jersey/New York City

    4       23.3       56.0     54.8     1,588       53.3     2.85       6.2  

San Francisco Bay Area

    —         —         0.0     —         —         0.0     —         —    

Seattle

    —         —         0.0     —         —         0.0     —         —    

Miami

    1       2.3       5.5     100.0     202       6.8     2.02       1.7  

Washington, D.C.

    1       13.4       32.2     100.0     720       24.2     1.24       2.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/Weighted Average

    8       41.6       100.0     74.7   $ 2,976       100.0   $ 2.20       3.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1 Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of September 30, 2017, multiplied by 12.
2 Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of September 30, 2017, weighted by the respective square footage.

The following table summarizes our capital expenditures incurred during the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2017      2016      2017      2016  

Building improvements

   $ 2,866      $ 4,575      $ 8,884      $ 8,759  

Tenant improvements

     1,623        2,549        4,936        5,277  

Leasing commissions

     1,464        2,497        4,747        6,975  

Redevelopment and expansion

     —          5,700        —          15,641  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures1

   $ 5,953      $ 15,321      $ 18,567      $ 36,652  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Includes approximately $3.1 million and $13.4 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $9.6 million and $30.0 million for the nine months ended September 30, 2017 and 2016, respectively, related to leasing acquired vacancy, redevelopment construction in progress and renovation and expansion projects (stabilization capital) at nine and thirteen properties for the three months ended September 30, 2017 and 2016, respectively, and thirteen and twenty properties for the nine months ended September 30, 2017 and 2016, respectively.

Our industrial properties are typically subject to leases on a “triple net basis,” in which tenants pay their proportionate share of real estate taxes, insurance and operating costs, or are subject to leases on a “modified gross basis,” in which tenants pay expenses over certain threshold levels. In addition, approximately 91.3% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years. We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing outstanding accounts receivable balances, and as provided under the respective lease agreements, review the tenant’s financial condition periodically as appropriate. As needed, we hold discussions with the tenant’s management about their business and we conduct site visits of the tenant’s operations.

 

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Our top 20 customers based on annualized base rent as of September 30, 2017 are as follows:

 

Customer    Leases      Rentable
Square Feet
     % of Total
Rentable
Square Feet
     Annualized
Base Rent
(000’s) 1
     % of Total
Annualized
Base Rent
 
1    FedEx Corporation      7      538,975        4.3    $ 5,447        5.4
2    United States Government      10      398,932        3.2      4,819        4.8
3    Danaher      3      171,707        1.4      2,961        2.9
4    Northrop Grumman Systems      2      199,866        1.6      2,310        2.3
5    H.D. Smith Wholesale Drug Company      1      211,418        1.7      2,260        2.3
6    District of Columbia      3      149,203        1.2      1,600        1.6
7    XPO Logistics      2      180,717        1.4      1,497        1.5
8    Synergy Custom Fixtures      1      301,983        2.4      1,478        1.5
9    West Coast Warehouse      1      265,500        2.1      1,468        1.5
10    YRC      2      61,252        0.5      1,337        1.4
11    O’Neill Logistics      2      237,692        1.9      1,323        1.3
12    Miami International Freight Systems      1      192,454        1.5      1,245        1.3
13    Bar Logistics      2      203,263        1.6      1,220        1.2
14    Avborne Accessory Group      1      137,594        1.1      1,113        1.1
15    Space Systems/Loral LLC      2      107,060        0.9      1,107        1.1
16    Amazon.com      1      158,168        1.3      1,044        1.0
17    Exquisite Apparel Corporation      1      114,061        0.9      985      1.0
18    JAM’N Logistics      1      110,336        0.9      936      0.9
19    Home Depot      1      192,000        1.5      930      0.9
20    Service West Inc.      1      129,279        1.0      820      0.8
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       Total      45      4,061,460        32.4    $ 35,900        35.8
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of September 30, 2017, multiplied by 12.

The following table summarizes the anticipated lease expirations for leases in place as of September 30, 2017, without giving effect to the exercise of unexercised renewal options or termination rights, if any, at or prior to the scheduled expirations:

 

Year

   Rentable Square Feet      % of Total Rentable
Square Feet
    Annualized Base Rent
(000’s) 2
     % of Total Annualized
Base Rent
 

2017 (3 months)1

     237,197        1.9   $ 2,663        2.4

2018

     1,313,693        10.5     11,169        10.0

2019

     2,015,852        16.1     16,004        14.3

2020

     1,695,403        13.5     15,103        13.5

2021

     2,099,932        16.8     17,857        15.9

Thereafter

     4,755,870        38.0     49,178        43.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     12,117,947        96.8   $ 111,974        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

1 Includes leases that expire on or after September 30, 2017 and month-to-month leases totaling approximately 17,784 square feet.
2  Annualized base rent is calculated as contractual monthly base rent per the leases at expiration, excluding any partial or full rent abatements, as of September 30, 2017, multiplied by 12.

Our ability to re-lease or renew expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. As of September 30, 2017, leases representing approximately 12.4% of the total rentable square footage of our portfolio are scheduled to expire through December 31, 2018. We currently expect that, on average, the rental rates we are likely to achieve on new (re-leased) or renewed leases for 2017 and 2018 expirations will be above the rates currently being paid for the same space. Rent changes on new and renewed leases totaling approximately 0.2 million square

 

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feet commencing during the three months ended September 30, 2017 were approximately 14.7% higher as compared to the previous rental rates for that same space, and rent changes on new and renewed leases totaling approximately 1.2 million square feet commencing during the nine months ended September 30, 2017 were approximately 12.5% higher as compared to the previous rental rates for that same space. Our past performance may not be indicative of future results, and we cannot assure you that leases will be renewed or that our properties will be re-leased at all or at rental rates equal to or above the current average rental rates. Further, re-leased/renewed rental rates in a particular market may not be consistent with rental rates across our portfolio as a whole and re-leased/renewed rental rates for particular properties within a market may not be consistent with rental rates across our portfolio within a particular market, in each case due to a number of factors, including local real estate conditions, local supply and demand for industrial space, the condition of the property, the impact of leasing incentives, including free rent and tenant improvements and whether the property, or space within the property, has been redeveloped.

Recent Developments

Acquisition Activity

During the three months ended September 30, 2017, we acquired eight industrial buildings containing approximately 258,000 square feet and one land parcel containing approximately 1.1 acres for a total purchase price of approximately $51.6 million. The properties were acquired from unrelated third parties using existing cash on hand, net proceeds from the issuance of common stock and senior unsecured notes, and proceeds from borrowings on our revolving credit facility. The following table sets forth the industrial properties we acquired during the three months ended September 30, 2017:

 

Property Name

   Location    Acquisition Date      Number of
Buildings
     Square
Feet
     Purchase Price
(in thousands) 1
     Stabilized
Cap Rate 2
 

Telegraph

   Santa Fe Springs, CA      July 6, 2017        2        86,814      $ 14,930        4.7

Dawson

   Seattle, WA      July 7, 2017        1        13,176        4,000        2.8

Walnut

   Compton, CA      July 21, 2017        1        57,520        9,352        5.2

NW 70th IV

   Miami, FL      August 4, 2017        1        15,965        2,515        6.1

Kero Road 3

   Newark, NJ      September 1, 2017        2        43,407        13,500        5.2

Hotchkiss

   Fremont, CA      September 28, 2017        1        40,830        7,275        5.2
        

 

 

    

 

 

    

 

 

    

 

 

 

Total/Weighted Average

           8        257,712      $ 51,572        4.9
        

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Excludes intangible liabilities and mortgage premiums, if any. The total aggregate investment was approximately $53.9 million, including $0.9 million in closing costs and acquisition costs.
2 Stabilized cap rates are calculated, at the time of acquisition, as annualized cash basis net operating income for the property stabilized to market occupancy (generally 95%) divided by the total acquisition cost for the property. Total acquisition cost basis for the property includes the initial purchase price, the effects of marking assumed debt to market, buyer’s due diligence and closing costs, estimated near-term capital expenditures and leasing costs necessary to achieve stabilization. We define cash basis net operating income for the property as net operating income excluding straight-line rents and amortization of lease intangibles. These stabilized cap rates are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2016.
3  Also includes one improved land parcel totaling approximately 1.1 acres.

Subsequent to September 30, 2017, we acquired three industrial buildings for a total purchase price of approximately $19.9 million. The properties were acquired from unrelated third parties using existing cash on hand. The following table sets forth the industrial properties we acquired subsequent to September 30, 2017:

 

Property Name

   Location    Acquisition Date    Number of
Buildings
     Square
Feet
     Purchase Price
(in thousands) 
     Stabilized
Cap Rate 
 

104th St.

   Los Angeles, CA    October 19, 2017      1        20,055      $ 4,750        4.5

NW 94th

   Doral, FL    October 23, 2017      1        38,430        6,759        5.4

NW 70th V

   Miami, FL    October 30, 2017      1        59,400        8,400        5.4
        

 

 

    

 

 

    

 

 

    

 

 

 

Total/Weighted Average

           3        117,885      $ 19,909        5.2
        

 

 

    

 

 

    

 

 

    

 

 

 

 

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Disposition Activity

During the nine months ended September 30, 2017, we sold one property located in the Los Angeles market for a sales price of approximately $25.3 million, resulting in a gain of approximately $10.1 million, and two properties located in the Washington, D.C. market for an aggregate sales price of approximately $40.5 million, resulting in an aggregate gain of approximately $15.4 million.

The following summarizes the condensed results of operations of the properties sold during the nine months ended September 30, 2017, for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

     For the Three Months Ended
September 30,
     For the Nine Months Ended
September 30,
 
     2017      2016      2017      2016  

Rental revenues

   $ 261      $ 758      $ 1,838      $ 2,328  

Tenant expense reimbursements

     66      205      444      610

Property operating expenses

     (87      (213      (503      (682

Depreciation and amortization

     —          (246      (356      (715
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

   $ 240      $ 504      $ 1,423      $ 1,541  
  

 

 

    

 

 

    

 

 

    

 

 

 

ATM Program

We have an at-the-market equity offering program (the “$200 Million ATM Program”) pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $200.0 million ($120.9 million remaining as of September 30, 2017) in amounts and at times as we determine from time to time. Prior to the implementation of the $200 Million ATM Program, we had a $150.0 million ATM program (the “$150 Million ATM Program”), which was fully utilized as of June 30, 2017, and a $100.0 million ATM program (the “$100 Million ATM Program”), which was fully utilized as of December 31, 2016. During the three and nine months ended September 30, 2017, we issued an aggregate of 2,206,685 and 7,042,771 shares, respectively, of common stock at a weighted average offering price of $35.84 and $31.87 per share, respectively, under the $200 Million ATM Program and the $150 Million ATM Program, resulting in net proceeds of approximately $77.9 million and $221.2 million, respectively, and paying total compensation to the applicable sales agents of approximately $1.1 million and $3.3 million, respectively.

Senior Unsecured Notes

On July 14, 2017, we issued in a private placement $100.0 million of senior unsecured notes with a seven-year term that bear interest at a fixed annual interest rate of 3.75% and mature in July 2024 (the “July 2024 Senior Unsecured Notes”). The net proceeds from the issuance were used to redeem all 1,840,000 outstanding shares of 7.75% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”), to repay the outstanding borrowings on our revolving credit facility, and for property acquisitions.

Share Repurchase Program

On November 1, 2016, our Board of Directors approved an extension of the share repurchase program authorizing us to repurchase up to 2,000,000 shares of our outstanding common stock from time to time through December 31, 2018. Purchases made pursuant to the program, if any, will be made in either the open market or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. As of September 30, 2017, we have not repurchased any shares of stock pursuant to our share repurchase authorization.

Dividend and Distribution Activity

On October 31, 2017, our board of directors declared a cash dividend in the amount of $0.22 per share of our common stock payable on January 12, 2018 to the stockholders of record as of the close of business on December 29, 2017.

 

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Preferred Stock Redemption

On July 19, 2017, we redeemed all 1,840,000 outstanding shares of our Series A Preferred Stock for cash at a redemption price of $25.00 per share, plus an amount per share of $0.096875 representing all accrued and unpaid dividends per share from July 1, 2017 to, but excluding, July 19, 2017. We recognized a charge of approximately $1.8 million during the three months ended September 30, 2017 representing the write-off of original issuance costs related to the redemption of the Series A Preferred Stock.

Contractual Commitments

As of November 1, 2017, we have four outstanding contracts with third-party sellers to acquire three industrial properties and one improved land parcel, three non-binding letters of intent with third-party sellers to acquire four industrial properties, and one outstanding contract with a third-party purchaser to sell one property as described under the heading “Contractual Obligations” in this Quarterly Report on Form 10-Q. There is no assurance that we will acquire or sell the properties under contract because the proposed acquisitions and dispositions are subject to the completion of satisfactory due diligence and various closing conditions and, in addition, with respect to the properties under non-binding letters of intent, our entry into purchase and sale agreements.

Financial Condition and Results of Operations

We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants. Approximately 91.3% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years.

Our primary cash expenses consist of our property operating expenses, which include: real estate taxes, repairs and maintenance, management expenses, insurance, utilities, general and administrative expenses, which include compensation costs, office expenses, professional fees and other administrative expenses, acquisition costs, which include third-party costs paid to brokers and consultants, and interest expense, primarily on our mortgage loans, revolving credit facility, term loans and senior unsecured notes.

Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions at various times during the course of such periods. The results of operations of any acquired property are included in our financial statements as of the date of its acquisition.

The analysis of our results below for the three and nine months ended September 30, 2017 and 2016 includes the changes attributable to same store properties. The same store pool for the comparison of the three and nine months ended September 30, 2017 and 2016 includes all properties that were owned and in operation as of September 30, 2017 and since January 1, 2016 and excludes properties that were either disposed of prior to, held for sale to a third party or in redevelopment as of September 30, 2017. As of September 30, 2017, the same store pool consisted of 140 buildings aggregating approximately 10.2 million square feet representing approximately 80.9% of our total square feet owned and three improved land parcels consisting of 4.9 acres. As of September 30, 2017, the non-same store properties, which we acquired, redeveloped, or sold during 2016 and 2017 or were held for sale as of September 30, 2017, consisted of 43 buildings aggregating approximately 2.3 million square feet and five improved land parcels consisting of 36.7 acres. As of September 30, 2017 and 2016, the consolidated same store pool occupancy was approximately 97.5% and 96.1%, respectively.

Our future financial condition and results of operations, including rental revenues, straight-line rents and amortization of lease intangibles, may be impacted by the acquisitions of additional properties, and expenses may vary materially from historical results.

 

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Comparison of the Three Months Ended September 30, 2017 to the Three Months Ended September 30, 2016:

 

     For the Three Months Ended September 30,         
     2017      2016      $ Change      % Change  
     (Dollars in thousands)         

Rental revenues

           

Same store

   $ 20,932      $ 18,979      $ 1,953        10.3

Non-same store operating properties 1

     5,520        2,309        3,211        139.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental revenues

     26,452        21,288        5,164        24.3

Tenant expense reimbursements

           

Same store

     5,958        5,289        669      12.6

Non-same store operating properties 1

     1,230        527      703      133.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Total tenant expense reimbursements

     7,188        5,816        1,372        23.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     33,640        27,104        6,536        24.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Property operating expenses

           

Same store

     7,177        6,740        437      6.5

Non-same store operating properties 1

     1,846        548      1,298        236.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total property operating expenses

     9,023        7,288        1,735        23.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating income 2

           

Same store

     19,713        17,528        2,185        12.5

Non-same store operating properties 1

     4,904        2,288        2,616        114.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net operating income

   $ 24,617      $ 19,816      $ 4,801        24.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Other costs and expenses

           

Depreciation and amortization

     9,595        8,872        723      8.1

General and administrative

     5,041        5,566        (525      (9.4 )% 

Acquisition costs

     —          696      (696      (100.0 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other costs and expenses

     14,636        15,134        (498      (3.3 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income (expense)

           

Interest and other income

     17      —          17      n/a  

Interest expense, including amortization

     (4,514      (3,265      (1,249      38.3

Loss on extinguishment of debt

     —          (239      239      (100.0 )% 

Gain on sales of real estate investments

     15,449        1,892        13,557        716.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income and (expenses)

     10,952        (1,612      12,564        n/a  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 20,933      $ 3,070      $ 17,863        581.9
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Includes 2016 and 2017 acquisitions and dispositions, one property held for sale to a third party with a gross book value of approximately $6.9 million and accumulated depreciation and amortization of approximately $0.8 million and five improved land parcels as of September 30, 2017.
2 Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a definition and reconciliation of net operating income and same store net operating income from net income and a discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance.

Revenues. Total revenues increased approximately $6.5 million for the three months ended September 30, 2017 compared to the same period from the prior year due primarily to property acquisitions during 2016 and 2017, increased revenue on new and renewed leases, and increased average occupancy in the same store pool portfolio. Same store rental revenues and tenant expense reimbursement revenues increased primarily due to new lease agreements at our V Street, Interstate 130, Airgate, Kent 202, and 180 Manor properties. For the three months ended September 30, 2017 and 2016, approximately $0.7 million and $0.5 million, respectively, was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants.

 

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Property operating expenses. Total property operating expenses increased approximately $1.7 million during the three months ended September 30, 2017 compared to the same period from the prior year. The increase in total property operating expenses was primarily due to an increase of approximately $1.3 million attributable to property acquisitions during 2016 and 2017 and approximately $0.1 million in expenses related to Hurricane Irma, of which approximately $0.1 million was incurred at our same store operating properties.

Depreciation and amortization. Depreciation and amortization increased approximately $0.7 million during the three months ended September 30, 2017 compared to the same period from the prior year due to property acquisitions during 2016 and 2017.

General and administrative expenses. General and administrative expenses decreased approximately $0.5 million for the three months ended September 30, 2017 compared to the same period from the prior year due primarily to a decrease of approximately $0.7 million in performance share award expense, which varies quarter to quarter based on our relative share price performance. Performance share award expense for the three months ended September 30, 2017 was approximately $1.9 million as compared to approximately $2.6 million for the prior year period. See “Note 9 – Stockholders’ Equity” in our condensed notes to consolidated financial statements for more information regarding our performance share awards.

Acquisition costs. Acquisition costs decreased by approximately $0.7 million for the three months ended September 30, 2017 compared to the same period from the prior year due to the adoption of ASU 2017-1 effective January 1, 2017 under which our real estate property acquisitions are accounted for as asset acquisitions. Acquisition costs were capitalized to individual assets and liabilities acquired on a relative fair value basis for the three months ended September 30, 2017 as compared to expensing as incurred in the prior year period.

Interest and other income. Interest and other income increased approximately $17,000 for the three months ended September 30, 2017 compared to the same period from the prior year.

Interest expense, including amortization. Interest expense increased approximately $1.2 million for the three months ended September 30, 2017 compared to the same period from the prior year due primarily to an increase in our average outstanding borrowings.

Gain on sales of real estate investments. Gain on sales of real estate investments increased approximately $13.6 million as of September 30, 2017 compared to the same period from the prior year due to property sales. The aggregate sales price for property sales for the three months ended September 30, 2017 was approximately $40.5 million as compared to approximately $6.1 million for the prior year period.

 

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Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016:

 

     For the Nine Months Ended September 30,                
     2017      2016      $ Change      % Change  
     (Dollars in thousands)         

Rental revenues

           

Same store

   $ 62,563      $ 56,445      $ 6,118        10.8

Non-same store operating properties 1

     14,066        5,356        8,710        162.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental revenues

     76,629        61,801        14,828        24.0

Tenant expense reimbursements

           

Same store

     18,173        15,517        2,656        17.1

Non-same store operating properties 1

     3,057        1,260        1,797        142.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total tenant expense reimbursements

     21,230        16,777        4,453        26.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     97,859        78,578        19,281        24.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Property operating expenses

           

Same store

     21,547        20,626        921      4.5

Non-same store operating properties 1

     4,475        1,518        2,957        194.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total property operating expenses

     26,022        22,144        3,878        17.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating income 2

           

Same store

     59,189        51,336        7,853        15.3

Non-same store operating properties 1

     12,648        5,098        7,550        148.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net operating income

   $ 71,837      $ 56,434      $ 15,403        27.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Other costs and expenses

           

Depreciation and amortization

     27,855        25,214        2,641        10.5

General and administrative

     15,250        13,304        1,946        14.6

Acquisition costs

     11      2,139        (2,128      (99.5 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other costs and expenses

     43,116        40,657        2,459        6.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Other income (expense)

           

Interest and other income

     75      19      56      294.7

Interest expense, including amortization

     (12,086      (9,411      (2,675      28.4

Loss on extinguishment of debt

     —          (239      239      (100.0 )% 

Gain on sales of real estate investments

     25,549        7,140        18,409        257.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income and (expenses)

     13,538        (2,491      16,029        n/a  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 42,259      $ 13,286      $ 28,973        218.1
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 Includes 2016 and 2017 acquisitions and dispositions, one property held for sale to a third party with a gross book value of approximately $6.9 million and accumulated depreciation and amortization of approximately $0.8 million and five improved land parcels as of September 30, 2017.
2 Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a definition and reconciliation of net operating income and same store net operating income from net income and a discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance.

Revenues. Total revenues increased approximately $19.3 million for the nine months ended September 30, 2017 compared to the same period from the prior year due primarily to property acquisitions during 2016 and 2017, increased revenue on new and renewed leases, and increased average occupancy in the same store pool portfolio. Same store rental revenues and tenant expense reimbursement revenues primarily increased due to new lease agreements at our V Street, Interstate 130, Airgate, Kent 202, and 180 Manor properties. For the nine months ended September 30, 2017 and 2016, approximately $2.2 million and $2.5 million, respectively, was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants.

Property operating expenses. Total property operating expenses increased approximately $3.9 million during the nine months ended September 30, 2017 compared to the same period from the prior year. The increase in total property operating expenses was primarily due to an increase of approximately $3.0 million attributable to property acquisitions during 2016 and 2017.

 

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Depreciation and amortization. Depreciation and amortization increased approximately $2.6 million during the nine months ended September 30, 2017 compared to the same period from the prior year due to property acquisitions during 2016 and 2017.

General and administrative expenses. General and administrative expenses increased approximately $1.9 million for the nine months ended September 30, 2017 compared to the same period from the prior year due primarily to an increase of approximately $1.3 million in performance share award expense, which varies quarter to quarter based on our relative share price performance. Performance share award expense for the nine months ended September 30, 2017 was approximately $5.6 million as compared to approximately $4.3 million for the prior year period. See “Note 9 – Stockholders’ Equity” in our condensed notes to consolidated financial statements for more information regarding our performance share awards.

Acquisition costs. Acquisition costs decreased by approximately $2.1 million for the nine months ended September 30, 2017 compared to the same period from the prior year due to the adoption of ASU 2017-1 effective January 1, 2017 under which our real estate property acquisitions are accounted for as asset acquisitions. Acquisition costs were capitalized to individual assets and liabilities acquired on a relative fair value basis for the nine months ended September 30, 2017 as compared to expensing as incurred in the prior year period.

Interest and other income. Interest and other income increased approximately $56,000 for the nine months ended September 30, 2017 compared to the same period from the prior year due primarily to insurance proceeds received in 2017.

Interest expense, including amortization. Interest expense increased approximately $2.7 million for the nine months ended September 30, 2017 compared to the same period from the prior year due primarily to an increase in our average outstanding borrowings.

Gain on sales of real estate investments. Gain on sales of real estate investments increased approximately $18.4 million as of September 30, 2017 compared to the same period from the prior year due to property sales. The aggregate sales price for property sales for the nine months ended September 30, 2017 was approximately $65.8 million as compared to approximately $22.5 million for the prior year period.

Liquidity and Capital Resources

The primary objective of our financing strategy is to maintain financial flexibility with a conservative capital structure using retained cash flows, proceeds from dispositions, long-term debt and the issuance of common and perpetual preferred stock to finance our growth. Over the long-term, we intend to:

 

    limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 35% of our total enterprise value;

 

    maintain a fixed charge coverage ratio in excess of 2.0x;

 

    maintain a debt-to-adjusted EBITDA ratio below 6.5x;

 

    limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness; and

 

    have staggered debt maturities that are aligned to our expected average lease term (5-7 years), positioning us to re-price parts of our capital structure as our rental rates change with market conditions.

We intend to preserve a flexible capital structure with a long-term goal to maintain our investment grade rating and be in a position to issue additional unsecured debt and additional perpetual preferred stock. Fitch Ratings assigned us an issuer rating of BBB- with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. There can be no assurance that we will be able to maintain our current credit rating. Our credit rating can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. In the event our current credit rating is downgraded, it may become difficult or expensive to obtain additional financing or refinance existing obligations and commitments. We intend to primarily utilize senior unsecured notes, term loans, credit facilities, common stock and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value.

 

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We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our credit facility. We believe that our net cash provided by operations will be adequate to fund operating requirements, pay interest on any borrowings and fund distributions in accordance with the REIT requirements of the federal income tax laws. In the near-term, we intend to fund future investments in properties with term loans, senior unsecured notes, mortgages, borrowings under our credit facility, perpetual preferred and common stock issuances and, from time to time, property dispositions. We expect to meet our long-term liquidity requirements, including with respect to other investments in industrial properties, property acquisitions and scheduled debt maturities, through borrowings under our credit facility, periodic issuances of common stock, perpetual preferred stock, and long-term secured and unsecured debt, and with proceeds from the disposition of properties. The success of our acquisition strategy may depend, in part, on our ability to obtain and borrow under our credit facility and to access additional capital through issuances of equity and debt securities.

The following sets forth our at-the-market common stock offering program as of September 30, 2017:

 

ATM Stock Offering Program

   Date      Maximum Aggregate
Offering Price (in
thousands)
     Aggregate Common
Stock Available as of
September 30, 2017

(in thousands)
 

$200 Million ATM Program

     August 4, 2017      $ 200,000      $ 120,919  

The table below sets forth the activity under the at-the-market common stock offering programs during the three and nine months ended September 30, 2017 and 2016, respectively (in thousands, except share data):

 

For the Three Months Ended

   Shares Sold      Weighted Average
Price Per Share
     Net Proceeds (in
thousands)
     Sales Commissions
(in thousands)
 

September 30, 2017

     2,206,685      $ 35.84      $ 77,935      $ 1,147  

September 30, 2016

     361,351        27.44        9,771        145

For the Nine Months Ended

   Shares Sold      Weighted Average
Price Per Share
     Net Proceeds (in
thousands)
     Sales Commissions
(in thousands)
 

September 30, 2017

     7,042,771      $ 31.87      $ 221,207      $ 3,262  

September 30, 2016

     2,990,959        24.64        72,599        1,102  

On July 14, 2017, we issued in a private placement $100.0 million of senior unsecured notes with a seven-year term that bear interest at a fixed annual interest rate of 3.75% and mature in July 2024. Net proceeds from the issuance were used to redeem all 1,840,000 outstanding shares of Series A Preferred Stock, to repay the outstanding borrowings on our revolving credit facility, and for property acquisitions. As of September 30, 2017, we also had $50.0 million of senior unsecured notes that mature in September 2022, $50.0 million of senior unsecured notes that mature in July 2026, and $50.0 million of senior unsecured notes that mature in October 2027 (collectively, with the July 2024 Senior Unsecured Notes, the “Senior Unsecured Notes”), and a credit facility (the “Facility”), which consists of a $200.0 million revolving credit facility that matures in August 2020, 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 September 30, 2017 and December 31, 2016, there was $0 and $51.5 million, respectively, of borrowings outstanding on our revolving credit facility and $150.0 million and $150.0 million, respectively, of borrowings outstanding on our term loans. We have three interest rate caps to hedge the variable cash flows associated with our existing $150.0 million of variable-rate term loans. See “Note 7-Derivative Financial Instruments” in our condensed notes to consolidated financial statements for more information regarding our 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 term loans and the $200.0 million revolving credit facility, or (ii) 60.0% of the value of the unencumbered properties. Interest on the Facility, including the term

 

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loans, is generally to be paid based upon, at our 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 1.35% to 1.90% (1.35% as of September 30, 2017) for the revolving credit facility and 1.30% to 1.85% (1.30% as of September 30, 2017) 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 our outstanding consolidated indebtedness to the value of our consolidated gross asset value. The Facility requires quarterly payments of an annual unused facility fee in an amount equal to 0.20% or 0.25% depending on the unused portion of the Facility.

The Facility and the Senior Unsecured Notes are guaranteed by us and by substantially all of the current and to-be-formed subsidiaries of the borrower that own an unencumbered property. The Facility and the Senior Unsecured Notes are unsecured by our 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 we must comply. We were in compliance with the covenants under the Facility and the Senior Unsecured Notes as of September 30, 2017 and December 31, 2016.

On July 19, 2017, we redeemed all 1,840,000 outstanding shares of our Series A Preferred Stock for cash at a redemption price of $25.00 per share, plus an amount per share of $0.096875 representing all accrued and unpaid dividends per share from July 1, 2017 to, but excluding, July 19, 2017. We recognized a charge of approximately $1.8 million during the three months ended September 30, 2017 representing the write-off of original issuance costs related to the redemption of the Series A Preferred Stock.

As of September 30, 2017 and December 31, 2016, we had outstanding mortgage loans payable, net of deferred financing costs, of approximately $65.3 million and $66.6 million, respectively, and held cash and cash equivalents totaling approximately $109.1 million and $14.2 million, respectively.

The following table summarizes our debt maturities, principal payments and market capitalization, capitalization ratios, Adjusted EBITDA, interest coverage, fixed charge coverage and debt ratios as of and for the three months ended September 30, 2017 and 2016 (dollars in thousands - except per share data):

 

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     Credit
Facility
     Term
Loans
    Senior
Unsecured
Notes
    Mortgage
Loans
Payable
    Total Debt  

2017 (3 months)

   $ —        $ —       $ —       $ 466     $ 466  

2018

     —          —         —         1,910       1,910  

2019

     —          —         —         18,805       18,805  

2020

     —          —         —         33,077       33,077  

2021

     —          50,000       —         11,271       61,271  

Thereafter

     —          100,000       250,000       —         350,000  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     —          150,000       250,000       65,529       465,529  

Unamortized net premiums

     —          —         —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt

     —          150,000       250,000       65,529       465,529  

Deferred financing costs, net

     —          (1,173     (2,120     (265     (3,558
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt, net

   $ —        $ 148,827     $ 247,880     $ 65,264     $ 461,971  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Interest Rate

     n/a        2.5     4.1     4.0     3.6

 

     As of
September

30, 2017
    As of
September

30, 2016
 

Total Debt, net

   $ 461,971     $ 384,208  

Equity

    

Common Stock

    

Shares Outstanding 1

     54,569,238       46,415,327  

Market Price 2

   $ 36.18     $ 27.51  
  

 

 

   

 

 

 

Market Value

     1,974,315       1,276,886  

Preferred Stock ($25.00 per share liquidation preference)

     —         46,000  
  

 

 

   

 

 

 

Total Equity

     1,974,315       1,322,886  
  

 

 

   

 

 

 

Total Market Capitalization

   $ 2,436,286     $ 1,707,094  
  

 

 

   

 

 

 

Total Debt-to-Total Investments in Properties 3

     30.3     29.8

Total Debt-to-Total Market Capitalization 4

     19.0     22.5

Total Debt and Preferred Stock-to-Total Market Capitalization 5

     19.0     25.2

Floating Rate Debt as a % of Total Debt 6

     32.2     43.9

Unhedged Floating Rate Debt as a % of Total Debt 7

     0.0     5.2

Mortgage Loans Payable as a % of Total Debt 8

     14.1     17.5

Mortgage Loans Payable as a % of Total Investments in Properties 9

     4.3     5.2

Adjusted EBITDA 10

   $ 63,923     $ 49,119  

Interest Coverage 11

     5.3     5.2

Fixed Charge Coverage 12

     4.6     3.9

Total Debt-to-Adjusted EBITDA 13

     5.2     5.6

Total Debt and Preferred Stock-to-Adjusted EBITDA 14

     5.2     6.2

Weighted Average Maturity of Total Debt (years)

     5.7       6.2  

 

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1 Includes 374,842 and 397,114 shares of unvested restricted stock outstanding as of September 30, 2017 and 2016, respectively.
2 Closing price of our shares of common stock on the New York Stock Exchange on September 30, 2017 and 2016, respectively, in dollars per share.
3 Total debt-to-total investments in properties is calculated as total debt, including premiums and net of deferred financing costs, divided by total investments in properties, including the property held for sale with a gross book value of approximately $6.9 million and $0, as of September 30, 2017 and 2016, respectively.
4 Total debt-to-total market capitalization is calculated as total debt, including premiums and net of deferred financing costs, divided by total market capitalization as of September 30, 2017 and 2016, respectively.
5 Total debt and preferred stock-to-total market capitalization is calculated as total debt, including premiums and net of deferred financing costs, plus preferred stock at liquidation preference, if any, divided by total market capitalization as of September 30, 2017 and 2016, respectively.
6 Floating rate debt as a percentage of total debt is calculated as floating rate debt, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing costs. Floating rate debt includes our existing $150.0 million of variable-rate term loan borrowings with interest rate caps of 4.0% plus 1.30% to 1.85%, depending on leverage as of September 30, 2017 and 2016. See “Note 7-Derivative Financial Instruments” in our condensed notes to consolidated financial statements for more information regarding our interest rate caps.
7 Unhedged floating rate debt as a percentage of total debt is calculated as unhedged floating rate debt, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing costs. Hedged debt includes our existing $150.0 million of variable-rate term loan borrowings with interest rate caps of 4.0% plus 1.30% to 1.85%, depending on leverage as of September 30, 2017 and 2016. See “Note 7-Derivative Financial Instruments” in our condensed notes to consolidated financial statements for more information regarding our interest rate caps.
8 Mortgage loans payable as a percentage of total debt is calculated as mortgage loans payable, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing costs.
9 Mortgage loans payable as a percentage of investments in properties is calculated as mortgage loans payable, including premiums and net of deferred financing costs, divided by total investments in properties, including properties held for sale with aggregate gross book values of approximately $6.1 million and $0, as of September 30, 2017 and 2016, respectively.
10 Earnings before interest, taxes, gains (losses) from sales of property, depreciation and amortization, acquisition costs and stock-based compensation (“Adjusted EBITDA”) for the nine months ended September 30, 2017 and 2016, respectively. See “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
11 Interest coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization. See “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
12 Fixed charge coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization plus preferred stock dividends. See “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
13 Total debt-to-Adjusted EBITDA is calculated as total debt, including premiums and net of deferred financing costs, divided by annualized Adjusted EBITDA. See “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
14 Total debt and preferred stock-to-Adjusted EBITDA is calculated as total debt, including premiums and net of deferred financing costs, plus preferred stock divided by annualized Adjusted EBITDA. See “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.

 

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The following table sets forth the cash dividends paid or payable per share during the nine months ended September 30, 2017:

 

For the Three Months Ended

   Security    Dividend
per Share
     Declaration Date    Record Date    Date Paid

March 31, 2017

   Common stock    $ 0.200000      February 7, 2017    March 28, 2017    April 12, 2017

March 31, 2017

   Preferred stock    $ 0.484375      February 7, 2017    March 10, 2017    March 31, 2017

June 30, 2017

   Common stock    $ 0.200000      May 2, 2017    July 7, 2017    July 21, 2017

June 30, 2017

   Preferred stock    $ 0.484375      May 2, 2017    June 9, 2017    June 30, 2017

September 30, 2017

   Common stock    $ 0.220000      August 1, 2017    October 6, 2017    October 21, 2017

On July 19, 2017, the Company redeemed all 1,840,000 outstanding shares of the Series A Preferred Stock for cash at a redemption price of $25.00 per share, plus an amount per share of $0.096875 representing all accrued and unpaid dividends per share from July 1, 2017 to, but excluding, July 19, 2017.

Sources and Uses of Cash

Our principal sources of cash are cash from operations, borrowings under loans payable, draws on our Facility, common and preferred stock issuances, proceeds from property dispositions and issuances of unsecured notes. Our principal uses of cash are asset acquisitions, debt service, capital expenditures, operating costs, corporate overhead costs and common and preferred stock dividends.

Cash From Operating Activities. Net cash provided by operating activities totaled approximately $53.7 million for the nine months ended September 30, 2017 compared to approximately $37.2 million for the nine months ended September 30, 2016. This increase in cash provided by operating activities is primarily attributable to additional cash flows generated from properties acquired during 2016 and 2017. The same store pool also provided additional cash flows due to an increase in occupancy during the nine months ended September 30, 2017 compared to the same period from the prior year.

Cash From Investing Activities. Net cash used in investing activities was approximately $144.9 million and $92.5 million, respectively, for the nine months ended September 30, 2017 and 2016, which consists primarily of cash paid for property acquisitions of approximately $190.1 million and $84.0 million, respectively, and additions to capital improvements of approximately $18.9 million and $29.8 million, respectively, offset by net proceeds from sales of real estate investments of approximately $64.2 million and $21.4 million, respectively.

Cash From Financing Activities. Net cash provided by financing activities was approximately $186.1 million for the nine months ended September 30, 2017, which consists primarily of approximately $221.2 million in net common stock issuance proceeds and $100.0 million in borrowings on senior unsecured notes offset by approximately $31.9 million in equity dividend payments, the repurchase of approximately $46.0 million in preferred stock, and net payments on our revolving credit facility of approximately $51.5 million. Net cash provided by financing activities was approximately $44.7 million for the nine months ended September 30, 2016, which consists primarily of approximately $71.6 million in net common stock issuance proceeds and net borrowings on our revolving credit facility of $20.0 million offset by approximately $26.6 million in equity dividend payments and payments on mortgage loans payable of approximately $16.3 million.

Critical Accounting Policies

A summary of our critical accounting policies is set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 and in the condensed notes to our consolidated financial statements in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

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Contractual Obligations

As of November 1, 2017, we have four outstanding contracts with third-party sellers to acquire three industrial properties and one improved land parcel. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions.

The following table summarizes certain information with respect to the properties we have under contract:

 

Market

   Number of
Buildings
     Square Feet      Purchase Price (in
thousands)
     Assumed Debt (in
thousands)
 

Los Angeles 1

     10        382,916      $ 78,810      $ —    

Northern New Jersey/New York City

     —          —          —          —    

San Francisco Bay Area

     —          —          —          —    

Seattle

     1        208,000        25,410        —    

Miami

     —          —          —          —    

Washington, D.C.

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11        590,916      $ 104,220      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1  Includes one improved land parcel containing approximately 5.4 acres.

As of November 1, 2017, we have executed three non-binding letters of intent with third-party sellers to acquire four industrial properties. The total purchase price for these industrial properties is approximately $47.3 million. In the normal course of business, we enter into non-binding letters of intent to purchase properties from third parties that may obligate us to make payments or perform other obligations upon the occurrence of certain events, including the execution of a purchase and sale agreement and satisfactory completion of various due diligence matters. There can be no assurance that we will enter into purchase and sale agreements with respect to these properties or otherwise complete any such prospective purchases on the terms described or at all.

As of November 1, 2017, we have one outstanding contract with a third-party purchaser to sell one property for a sales price of approximately $11.5 million (net book value of approximately $6.1 million). There is no assurance we will sell the property under contract because the proposed disposition is subject to the purchaser’s completion of satisfactory due diligence and various closing conditions.

The following table summarizes our contractual obligations due by period as of September 30, 2017 (dollars in thousands):

 

Contractual Obligations

   Less than 1
Year
     1-3 Years      3-5 Years      More than 5
Years
     Total  

Debt

   $ 1,891      $ 52,250      $ 211,388      $ 200,000      $ 465,529  

Debt interest payments

     12,800        23,763        20,731        28,268        85,562  

Operating lease commitments

     256      531      485      —          1,272  

Purchase obligations

     104,220        —          —          —          104,220  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 119,167      $ 76,544      $ 232,604      $ 228,268      $ 656,583  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Financial Measures

We use the following non-GAAP financial measures that we believe are useful to investors as key supplemental measures of our operating performance: funds from operations, or FFO, Adjusted EBITDA, net operating income, or NOI, same store NOI and cash-basis same store NOI. FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. Further, our computation of FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI may not be comparable to FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI reported by other companies.

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property and impairment write-downs of depreciable real estate, plus depreciation and amortization on

 

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real estate assets and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We believe that presenting FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets.

We believe that FFO is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, we believe that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our operating performance.

The following table reflects the calculation of FFO reconciled from net income, net of preferred stock dividends for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands except per share data):

 

    For the Three Months
Ended September 30,
                For the Nine Months
Ended September 30,
             
    2017     2016     $ Change     % Change     2017     2016     $ Change     % Change  

Net income, net of redemption of preferred stock and preferred stock dividends

  $ 18,988     $ 2,179     $ 16,809       771.4   $ 38,531     $ 10,612     $ 27,919       263.1

Gain on sales of real estate investments

    (15,449     (1,892     (13,557     716.5     (25,549     (7,140     (18,409     257.8

Depreciation and amortization

               

Depreciation and amortization from continuing operations

    9,595       8,872       723       8.1     27,855       25,214       2,641       10.5

Non-real estate depreciation

    (30     (22     (8     36.4     (78     (65     (13     20.0

Allocation to participating securities 1

    (90     (78     (12     15.4     (297     (251     (46     18.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Funds from operations attributable to common stockholders 2, 3   $ 13,014     $ 9,059     $ 3,955       43.7   $ 40,462     $ 28,370     $ 12,092       42.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Basic and diluted FFO per common share   $ 0.25     $ 0.20     $ 0.05       25.0   $ 0.80     $ 0.64     $ 0.16       25.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average basic and diluted common shares

    52,804,611       45,762,761           50,277,432       44,204,965      
 

 

 

   

 

 

       

 

 

   

 

 

     

 

1 To be consistent with our policies of determining whether instruments granted in share-based payment transactions are participating securities and accounting for earnings per share, the FFO per common share is adjusted for FFO distributed through declared dividends (if any) and allocated to all participating securities (weighted average common shares outstanding and unvested restricted shares outstanding) under the two-class method. Under this method, allocations were made to 374,842 and 397,114 of weighted average unvested restricted shares outstanding for the three months ended September 30, 2017 and 2016, respectively, and to 381,321 and 399,019 of weighted average unvested restricted shares outstanding for the nine months ended September 30, 2017 and 2016, respectively.
2 Includes expensed acquisition costs of approximately $0 and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $11,000 and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively.
3 Includes performance share award expense of approximately $1.9 million and $2.6 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $5.6 million and $4.6 million for the nine months ended September 30, 2017 and 2016, respectively, which varies quarter to quarter based our total shareholder return outperforming the MSCI U.S. REIT Index (RMS) and the FTSE NAREIT Equity Industrial Index over the prior three year period. See “Note 9 – Stockholders’ Equity” in our condensed notes to consolidated financial statements for more information regarding our performance share awards.

FFO increased by approximately $4.0 million and $12.1 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods from the prior year due primarily to same store NOI growth of approximately $2.2 million and $7.9 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods from the prior year. In addition, we adopted ASU 2017-1 effective January 1, 2017 under which our real estate property acquisitions are accounted for as asset acquisitions and acquisition costs were capitalized to individual assets and liabilities acquired on a relative fair value basis for the three and nine months ended September 30, 2017, respectively, as compared to expensing as incurred in the prior year periods. The FFO increase was partially offset by approximately $0.1 million in expenses related to Hurricane Irma and by performance share award expense of approximately $5.6 million for the nine months ended September 30, 2017 compared to approximately $4.3 million for the nine months ended September 30, 2016, which varies quarter to quarter based on our relative share price performance.

 

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We compute Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, gain on sales of real estate investments, acquisition costs and stock-based compensation. We believe that presenting Adjusted EBITDA provides useful information to investors regarding our operating performance because it is a measure of our operations on an unleveraged basis before the effects of tax, gain (loss) on sales of real estate investments, non-cash depreciation and amortization expense, acquisition costs and stock-based compensation. By excluding interest expense, Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allows for more meaningful comparison of our operating performance between quarters as well as annual periods and for the comparison of our operating performance to that of other companies, both in the real estate industry and in other industries. As we are currently in a growth phase, acquisition costs are excluded from Adjusted EBITDA to allow for the comparison of our operating performance to that of stabilized companies.

The following table reflects the calculation of Adjusted EBITDA reconciled from net income for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

    For the Three Months
Ended September 30,
                For the Nine Months
Ended September 30,
             
    2017     2016     $ Change     % Change     2017     2016     $ Change     % Change  

Net income

  $ 20,933     $ 3,070     $ 17,863       581.9   $ 42,259     $ 13,286     $ 28,973       218.1

Gain on sales of real estate investments

    (15,449     (1,892     (13,557     716.5     (25,549     (7,140     (18,409     257.8

Depreciation and amortization from continuing operations

    9,595       8,872       723       8.1     27,855       25,214       2,641       10.5

Interest expense, including amortization

    4,514       3,265       1,249       38.3     12,086       9,411       2,675       28.4

Loss on extinguishment of debt

    —         239       (239     n/a       —         239       (239     n/a  

Stock-based compensation

    2,411       3,037       (626     (20.6 )%      7,261       5,970       1,291       21.6

Acquisition costs

    —         696       (696     n/a       11       2,139       (2,128     (99.5 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 22,004     $ 17,287     $ 4,717       27.3   $ 63,923     $ 49,119     $ 14,804       30.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We compute NOI as rental revenues, including tenant expense reimbursements, less property operating expenses. We compute same store NOI as rental revenues, including tenant expense reimbursements, less property operating expenses on a same store basis. NOI excludes depreciation, amortization, general and administrative expenses, acquisition costs and interest expense. We compute cash-basis same store NOI as same store NOI excluding straight-line rents and amortization of lease intangibles. The same store pool includes all properties that were owned as of September 30, 2017 and since January 1, 2016 and excludes properties that were either disposed of prior to, held for sale to a third party or in redevelopment as of September 30, 2017. As of September 30, 2017, the same store pool consisted of 140 buildings aggregating approximately 10.2 million square feet representing approximately 80.9% of our total square feet owned and three improved land parcels containing 4.9 acres. We believe that presenting NOI, same store NOI and cash-basis same store NOI provides useful information to investors regarding the operating performance of our properties because NOI excludes certain items that are not considered to be controllable in connection with the management of the properties, such as depreciation, amortization, general and administrative expenses, acquisition costs and interest expense. By presenting same store NOI and cash-basis same store NOI, the operating results on a same store basis are directly comparable from period to period.

The following table reflects the calculation of NOI, same store NOI and cash-basis same store NOI reconciled from net income for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

    For the Three Months
Ended September 30,
                For the Nine Months Ended
September 30,
             
    2017     2016     $ Change     % Change     2017     2016     $ Change     % Change  

Net income 1

  $ 20,933     $ 3,070     $ 17,863       581.9   $ 42,259     $ 13,286     $ 28,973       218.1

Depreciation and amortization from continuing operations

    9,595       8,872       723       8.1     27,855       25,214       2,641       10.5

General and administrative

    5,041       5,566       (525     (9.4 )%      15,250       13,304       1,946       14.6

Acquisition costs

    —         696       (696     n/a       11       2,139       (2,128     (99.5 )% 

Total other income and expenses

    (10,952     1,612       (12,564     n/a       (13,538     2,491       (16,029     n/a  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

    24,617       19,816       4,801       24.2     71,837       56,434       15,403       27.3

Less non-same store NOI 2

    (4,904     (2,288     (2,616     114.3     (12,648     (5,098     (7,550     148.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Same store NOI 3

  $ 19,713     $ 17,528     $ 2,185       12.5   $ 59,189     $ 51,336     $ 7,853       15.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less straight-line rents and amortization of lease intangibles 4

    (387     (660     273       (41.4 )%      (2,232     (3,531     1,299       (36.8 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash-basis same store NOI 3

  $ 19,326     $ 16,868     $ 2,458       14.6   $ 56,957     $ 47,805     $ 9,152       19.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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1 Includes approximately $0.1 million and $0 of lease termination income for the three months ended September 30, 2017 and 2016, respectively, and approximately $0.1 million and $29,000 of lease termination income for the nine months ended September 30, 2017 and 2016, respectively.
2 Includes 2016 and 2017 acquisitions and dispositions and one property held for sale to a third party with a gross book value of approximately $6.9 million and accumulated depreciation and amortization of approximately $0.8 million.
3 Includes approximately $0.1 million and $0 of lease termination income for the three months ended September 30, 2017 and 2016, respectively, and approximately $0.1 million and $29,000 of lease termination income for the nine months ended September 30, 2017 and 2016.
4 Includes straight-line rents and amortization of lease intangibles for the same store pool only.

Cash-basis same store NOI increased by approximately $2.5 million and $9.2 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods from the prior year due primarily to increased average occupancy in the same store pool portfolio and increased rental revenue and tenant reimbursement revenue on new and renewed leases. Same store rental revenues and tenant reimbursements primarily increased due to new leases at our V Street, Interstate 130, Airgate, Kent 202, and 180 Manor properties. Contractual rent abatements of approximately $0.2 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $1.4 million and $2.6 million for the nine months ended September 30, 2017 and 2016, respectively, were given to certain tenants in the same-store pool, and approximately $0.1 million in same store property operating expenses were incurred related to Hurricane Irma.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk which we are exposed to is interest rate risk. We are exposed to interest rate changes primarily as a result of debt used to maintain liquidity, fund capital expenditures and expand our investment portfolio and operations. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. As described below, some of our outstanding debt bears interest at variable rates, and we expect that some of our future outstanding debt will have variable interest rates. We may use interest rate caps and/or swap agreements to manage our interest rate risks relating to our variable rate debt. We expect to replace variable rate debt on a regular basis with fixed rate, long-term debt to finance our assets and operations.

As of September 30, 2017, we had $150.0 million of borrowings outstanding under our Facility. Of the $150.0 million outstanding on the Facility, $150.0 million is subject to interest rate caps. See “Note 7-Derivative Financial Instruments” in our condensed notes to consolidated financial statements for more information regarding our interest rate caps. Amounts borrowed under our Facility bear interest at a variable rate based on LIBOR plus an applicable LIBOR margin. The weighted average interest rate on borrowings outstanding under our Facility was 2.53% as of September 30, 2017. If the LIBOR rate fluctuates by 0.25%, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows by approximately $0.4 million annually on the total of the outstanding balances on our Facility as of September 30, 2017.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), and has concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to give reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

Item 1A. Risk Factors

Except to the extent updated below or previously updated or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors (including, without limitation, the matters discussed in Part I, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there have been no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

(a) Not Applicable.

(b) Not Applicable.

(c) Not Applicable.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

 

Exhibit

Number

  

Exhibit Description

31.1*    Rule 13a-14(a)/15d-14(a) Certification dated November 1, 2017.
31.2*    Rule 13a-14(a)/15d-14(a) Certification dated November 1, 2017.
31.3*    Rule 13a-14(a)/15d-14(a) Certification dated November 1, 2017.
32.1**    18 U.S.C. § 1350 Certification dated November 1, 2017.
32.2**    18 U.S.C. § 1350 Certification dated November 1, 2017.
32.3**    18 U.S.C. § 1350 Certification dated November 1, 2017.
101*    The following materials from Terreno Realty Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Equity, (v) Consolidated Statements of Cash Flows and (vi) Condensed Notes to Consolidated Financial Statements.

 

* Filed herewith.
** Furnished herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Terreno Realty Corporation
November 1, 2017     By:  

/s/ W. Blake Baird

      W. Blake Baird
      Chairman and Chief Executive Officer
November 1, 2017     By:  

/s/ Michael A. Coke

      Michael A. Coke
      President
November 1, 2017     By:  

/s/ Jaime J. Cannon

      Jaime J. Cannon
      Chief Financial Officer

 

 

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