UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number 001-34603
Terreno Realty Corporation
(Exact Name of Registrant as Specified in Its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
101 Montgomery Street, Suite 200
San Francisco, CA
(Address of Principal Executive Offices)
27-1262675
(I.R.S. Employer
Identification Number)
94104
(Zip Code)
Registrant’s telephone number, including area code: (415) 655-4580
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value per share
Name of Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x
No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ¨
No x
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 x
No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x
No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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
Non-accelerated filer
x
¨
Accelerated filer
Smaller reporting company
Emerging growth company
¨
¨
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨
No x
Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price, as reported by the New York Stock
Exchange, at which the common equity was last sold, as of June 29, 2018 , the last business day of the Registrant’s most recently completed second fiscal quarter:
$2,146,590,859. (For this computation, the Registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and
directors of the Registrant).
The registrant had 61,118,804 shares of its common stock, $0.01 par value per share, outstanding as of February 6, 2019 .
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference portions of Terreno Realty Corporation’s Proxy Statement for its 2019 Annual Meeting of Stockholders,
which the registrant anticipates will be filed with the Securities and Exchange Commission no later than 120 days after the end of its 2018 fiscal year pursuant to Regulation
14A.
Terreno Realty Corporation
Annual Report on Form 10-K
for the Year Ended December 31, 2018
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part I:
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Part II:
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Part III:
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV:
Item 15
Exhibits and Financial Statement Schedules
Index to Financial Statements
Item 16
Form 10-K Summary
Exhibit Index
Signatures
2
6
24
24
27
27
28
30
31
55
55
55
56
58
58
58
58
58
58
59
59
59
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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”, “outlook”, “potential”, “enthusiastic”, “future” 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,
except as required by law. 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 in this Annual Report on Form 10-K, including those set forth under the headings “Risk Factors”, and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”;
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 existing 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, renovation and expansion strategies and activities;
our failure to qualify or maintain our status as a real estate investment trust (“REIT”) and possible adverse changes to tax laws;
uninsured or underinsured losses and costs 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.
1
PART I
Item 1.
Business.
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 (approximately 92.5% of our total portfolio square footage
as of December 31, 2018 ), flex (including light industrial and research and development, or R&D) (approximately 5.4% ) and transshipment (approximately 2.1%
). 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
December 31, 2018 , we owned a total of 205 buildings aggregating approximately 12.8 million square feet that were approximately 98.4% leased to 454
customers, the largest of which accounted for approximately 3.9% of our total annualized base rent, 16 improved land parcels consisting of approximately 55.2
acres and five properties under redevelopment expected to contain approximately 0.7 million square feet upon completion.
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.
Our Investment Strategy
We acquire, own and operate industrial properties 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.
As described in more detail below, we invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and
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.
Industrial
Facility
General
Characteristics
Warehouse / distribution (approximately 92.5% of our total portfolio square footage as of December 31, 2018 )
Single and multiple tenant facilities that typically serve tenants greater than 10,000 square feet of space
Generally less than 20% office space
Typical clear height from 18 feet to 36 feet
•
•
•
• May include production/manufacturing areas
•
•
Interior access via dock high and/or grade level doors
Truck court for large and small truck distribution options, possibly including staging for a high volume of truck activity and/or trailer storage
Flex (including light industrial and R&D, approximately 5.4% of our total portfolio square footage as of
December 31, 2018 )
Single and multiple tenant facilities that typically serve tenants less than 10,000 square feet of space
Facilities generally accommodate both office and warehouse/manufacturing activities
Typically has a larger amount of office space and shallower bay depths than warehouse/distribution facilities
Parking consistent with increased office use
Interior access via grade level and/or dock high doors
Staging for moderate truck activity
•
•
•
•
•
•
• May include a showroom, service center, or assembly/light manufacturing component
•
Enhanced landscaping
2
Transshipment (approximately 2.1% of our total portfolio square footage as of December 31, 2018 )
•
•
•
Includes truck terminals and other transshipment facilities, which serve both single and multiple tenants
Typically has a high number of dock high doors, shallow bay depth and lower clear height
Staging for a high volume of truck activity and trailer storage
In addition, we have approximately 55.2 acres of improved land. Such land is used for truck, trailer and container storage and/or car parking. In the future,
we may redevelop some or all of such land.
We selected our target markets by drawing upon the experience of our executive management investing and operating in over 50 global industrial markets
located in North America, Europe and Asia, the fundamentals of supply and demand, and in anticipation of trends in logistics patterns resulting from population
changes, regulatory and physical constraints, changes in technology, e-commerce, potential long term increases in carbon prices and other factors. We believe that
our target markets have attractive long-term investment attributes. We target assets with characteristics that include, but are not limited to, the following:
•
•
•
•
•
•
•
Located in high population coastal markets;
Close proximity to transportation infrastructure (such as sea ports, airports, highways and railways);
Situated in supply-constrained submarkets with barriers to new industrial development, as a result of physical and/or regulatory constraints;
Functional and flexible layout that can be modified to accommodate single and multiple tenants;
Acquisition price at a discount to the replacement cost of the property;
Potential for enhanced return through re-tenanting or operational or physical improvements; and
Opportunity for higher and better use of the property over time.
In general, we prefer to utilize local third-party property managers for day-to-day property management. We believe outsourcing property management is
cost effective and provides us with operational flexibility and is a source of acquisition opportunities. We may directly manage properties in the future if we
determine such direct property management is in our best interest.
We have no current intention to acquire undeveloped or unimproved industrial land or to pursue greenfield ground-up development. However, we may
pursue redevelopment, renovation and expansion opportunities of properties that we own, acquire properties and improved land parcels with the intent to redevelop
in the near-term, or acquire adjacent land to expand our existing facilities.
We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties, portfolios of properties or
improved industrial land parcels which may be rented without a building in place. We may also acquire industrial properties through the acquisition of other
corporations or entities that own industrial real estate. We will opportunistically target investments in debt secured by industrial real estate that would otherwise
meet our investment criteria with the intention of ultimately acquiring the underlying real estate. We currently do not intend to target specific percentages of
holdings of particular types of industrial properties. This expectation is based upon prevailing market conditions and may change over time in response to different
prevailing market conditions.
The properties we acquire may be stabilized (fully leased) or unstabilized (have near term lease expirations or be partially or fully vacant). During the period
from February 16, 2010 to December 31, 2018 , we have stabilized 69 properties.
We sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value or the market
value of the property is significantly greater than its estimated replacement cost. Capital from such sales is reinvested into properties that are expected to provide
better prospective returns or returned to shareholders. We have disposed of 15 properties since inception in 2010 for an aggregate sales price of approximately $
242.5 million and a total gain of approximately $ 83.7 million.
Competitive Strengths
We believe we distinguish ourselves from our competitors through the following competitive advantages:
•
Focused
Investment
Strategy.
We invest exclusively in six major coastal U.S. markets and focus on infill locations. We selected our six target markets
based upon the experience of our executive management investing and operating in over 50 global industrial markets located in North America, Europe
and Asia, the fundamentals of supply and demand, and in anticipation of trends in logistics patterns resulting from population changes, regulatory and
physical
3
constraints, changes in technology, e-commerce, potential long term increases in carbon prices and other factors. We have no current intention to acquire
undeveloped or unimproved land or pursue greenfield ground-up development, but we may pursue redevelopment, renovation and expansion activities.
• Highly
Aligned
Compensation
Structure.
We believe that executive compensation should be closely aligned with long-term stockholder value creation.
As a result, the long-term equity incentive compensation of our executive officers is based primarily on our total shareholder return exceeding the total
shareholder return of the MSCI U.S. REIT Index (RMS) or the FTSE National Association of Real Estate Investment Trusts (“Nareit”) Equity Industrial
Index.
•
Commitment
to
Strong
Corporate
Governance.
We are committed to strong corporate governance, as demonstrated by the following:
•
•
•
all members of our board of directors serve annual terms;
we have adopted a majority voting standard in non-contested director elections;
we have opted out of three Maryland anti-takeover provisions and, in the future, we may not opt back in to these provisions without stockholder
approval;
we designed our ownership limits solely to protect our status as a REIT and not for the purpose of serving as an anti-takeover device; and
we have no stockholder rights plan. In the future, we will not adopt a stockholder rights plan unless our stockholders approve in advance the
adoption of such a plan or, if adopted by our board of directors, we will submit the stockholder rights plan to our stockholders for a ratification vote
within 12 months of adoption or the plan will terminate.
•
•
Our Financing Strategy
The primary objective of our financing strategy is to maintain financial flexibility with a conservative capital structure using retained cash flows, proceeds
from dispositions of properties, 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 6.0x;
•
•
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, dispositions of properties, common stock
and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value.
Our Corporate Structure
We are a Maryland corporation formed on November 6, 2009 and have been publicly held and subject to U.S. Securities and Exchange Commission, or SEC,
reporting obligations since 2010. We are not structured as an Umbrella Partnership Real Estate Investment Trust, or UPREIT, although we could put in place a
similar structure to facilitate an acquisition if needed. We currently own our properties indirectly through subsidiaries and may utilize one or more taxable REIT
subsidiaries as appropriate.
4
Our Tax Status
We elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our taxable year ended December 31, 2010. We believe that
our organization and method of operation has enabled and will continue to enable us to meet the requirements for qualification and taxation as a REIT for federal
income tax purposes. To maintain REIT status we must meet a number of organizational and operational requirements, including a requirement that we annually
distribute at least 90% of our net taxable income to our stockholders, excluding net capital gains. As a REIT, we generally will not be subject to federal income tax
on REIT taxable income we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at
regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property and the
income of our taxable REIT subsidiaries, if any, will be subject to taxation at regular corporate rates. We do not currently own any taxable REIT subsidiaries but
may in the future.
Competition
We believe the current market for industrial real estate acquisitions to be competitive. We compete for real property investments with pension funds and their
advisors, bank and insurance company investment accounts, other public and private real estate investment companies, including other REITs, real estate limited
partnerships, owner-users, individuals and other entities engaged in real estate investment activities, some of which have greater financial resources than we do.
We believe the leasing of real estate to be highly competitive. We experience competition for customers from owners and managers of competing properties. As a
result, we may have to provide free rental periods, incur charges for tenant improvements or offer other inducements, all of which may have an adverse impact on
our results of operations.
Environmental Matters
The industrial properties that we own and will acquire are subject to various federal, state and local environmental laws. Under these laws, courts and
government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not
responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and therefore it is possible we could
incur these costs even after we sell some of our properties. In addition to the costs of cleanup, environmental contamination can affect the value of a property and,
therefore, an owner’s ability to borrow using the property as collateral or to sell the property. Under applicable environmental laws, courts and government
agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that
facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a
person exposed to asbestos at one of our properties may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental
laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals to manage them
carefully and to notify local officials that the chemicals are being used.
We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with
environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. We generally obtain “Phase I
environmental site assessments”, or ESAs, on each property prior to acquiring it. However, these ESAs may not reveal all environmental costs that might have a
material adverse effect on our business, assets, results of operations or liquidity and may not identify all potential environmental liabilities.
In general, we utilize local third-party property managers for day-to-day property management and will rely on these third parties to operate our industrial
properties in compliance with applicable federal, state and local environmental laws in their daily operation of the respective properties and to promptly notify us
of any environmental contaminations or similar issues. As a result, we may become subject to material environmental liabilities of which we are unaware. We can
make no assurances that (1) future laws or regulations will not impose material environmental liabilities on us, or (2) the environmental condition of our industrial
properties will not be affected by the condition of the properties in the vicinity of our industrial properties (such as the presence of leaking underground storage
tanks) or by third parties unrelated to us. We were not aware of any significant or material exposures as of December 31, 2018 and 2017 .
Employees
As of February 6, 2019 , we have 23 employees. None of our employees is a member of any union.
5
Available Information
We maintain an internet website at the following address: http://terreno.com . The information on our website is neither part of nor incorporated by reference
in this Annual Report on Form 10-K. We make available, free of charge, on or through our website certain reports and amendments to those reports that we file
with or furnish to the SEC in accordance with the Exchange Act. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and exhibits and amendments to these reports, and Section 16 filings. Our Code of Business Conduct and Ethics is also available on our
website. We intend to disclose any amendments or waivers to our Code of Business Conduct and Ethics that apply to any of our executive officers on our website.
We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it
to, the SEC. You may also obtain our reports by accessing the EDGAR database at the SEC’s website at http://www.sec.gov.
Item 1A.
Risk Factors.
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties
described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we may currently deem immaterial also
may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be adversely
affected. Investors should also refer to our quarterly reports on Form 10-Q and current reports on Form 8-K for any material updates to these risk factors.
Risks Related to Our Business and Our Properties
Our
long-term
growth
will
depend,
in
part,
upon
future
acquisitions
of
properties,
and
we
may
be
unable
to
consummate
acquisitions
on
advantageous
terms,
the
acquired
properties
may
not
perform
as
we
expect,
or
we
may
be
unable
to
quickly
and
efficiently
integrate
our
new
acquisitions
into
our
existing
operations.
We intend to continue to acquire industrial properties in our six target markets. The acquisition of properties entails various risks, including the risks that our
investments may not perform as well as we had expected, that we may be unable to quickly and efficiently integrate our new acquisitions into our existing
operations and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. In addition, we cannot assure you of the
availability of investment opportunities in our targeted markets at attractive pricing levels or at all. In the event that such opportunities are not available in our
targeted markets as we expect, our ability to execute our business plan and realize our projections for growth may be materially adversely affected. Further, we
face significant competition for attractive investment opportunities from other well-capitalized real estate investors, including pension funds and their advisors,
bank and insurance company investment accounts, other public and private real estate investment companies, including other REITs, real estate limited
partnerships, owner-users, individuals and other entities engaged in real estate investment activities, some of which have greater financial resources than we do and
a greater ability to borrow funds to acquire properties. This competition increases as investments in real estate become increasingly attractive relative to other
forms of investment. As a result of competition, we may be unable to acquire properties as we desire or the purchase price may be significantly elevated.
In addition, we expect to finance future acquisitions through a combination of borrowings under our revolving credit facility, term loans, unsecured debt,
debt secured by individual properties or pools of properties, the use of retained cash flows and the issuance of a combination of long-term debt and common and
perpetual preferred stock, which may not be available at all or on advantageous terms and which could adversely affect our cash flows. Any of the above risks
could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock and
our preferred stock.
We
may
make
acquisitions
that
pose
integration
and
other
risks
that
could
harm
our
business.
We may be required to incur debt and expenditures and issue additional shares of our common stock or issue shares of preferred stock to pay for industrial
properties that we may acquire, which may dilute our stockholders’ ownership interests and may reduce or eliminate our profitability. These acquisitions may also
expose us to risks such as:
•
•
•
•
the possibility that we may not be able to successfully integrate acquired properties into our operations;
the possibility that additional capital expenditures may be required;
the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired properties;
the possible loss or reduction in value of acquired properties;
6
•
•
•
the possibility of pre-existing undisclosed liabilities regarding acquired properties, including but not limited to environmental or asbestos liability, for
which our insurance may be insufficient or for which we may be unable to secure insurance coverage;
the possibility that a concentration of our industrial properties in Los Angeles, the San Francisco Bay Area and Seattle may increase our exposure to
seismic activity, especially if these industrial properties are located on or near fault zones; and
the possibility that we may not meet our estimated forecasts related to stabilized cap rates.
We expect acquisition costs, including capital expenditures required to render industrial properties operational, to increase in the future. If our revenue does
not keep pace with these potential acquisition costs, we may not be able to maintain our current or expected earnings as we absorb these additional expenses. There
is no assurance we would successfully overcome these risks or any other problems encountered with these acquisitions.
If
we
cannot
obtain
additional
financing,
our
growth
will
be
limited.
If adverse conditions in the credit markets — in particular with respect to real estate — materially deteriorate, our business could be materially and adversely
affected. Our long-term ability to grow through investments in industrial properties, including our ability to realize our projections for growth, will be limited if we
cannot obtain additional financing on favorable terms or at all. In the future, we will rely on equity and debt financing, including issuances of common and
perpetual preferred stock, borrowings under our revolving credit facility, term loans, issuances of unsecured debt securities and debt secured by individual
properties or pools of properties, to finance our acquisition, redevelopment, renovation and expansion activities and for working capital. If we are unable to obtain
equity or debt financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would
likely be adversely affected. Market conditions may make it difficult to obtain additional financing, and we cannot assure you that we will be able to obtain
additional debt or equity financing or that we will be able to obtain it on favorable terms.
In addition, to qualify as a REIT, we are required to distribute at least 90% of our taxable income (determined before the deduction for dividends paid and
excluding any net capital gains) each year to our stockholders, and we generally expect to make distributions in excess of such amount. As a result, our ability to
retain earnings to fund acquisitions, redevelopment, renovation and expansion, if any, or other capital expenditures will be limited.
The
availability
and
timing
of
cash
distributions
is
uncertain.
We have made regular quarterly cash distributions (which we also refer to as dividends, in this Annual Report on Form 10-K and in the other documents we
file with the SEC) to our stockholders, and we intend to continue to pay regular quarterly cash distributions. However, we bear all expenses incurred by our
operations, and the funds generated by our operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our
stockholders. In addition, our board of directors, in its discretion, may retain any portion of such cash for working capital. Our ability to make distributions to our
stockholders also will depend on our levels of retained cash flows, which we intend to use as a source of investment capital. We cannot assure our stockholders that
sufficient funds will be available to pay distributions. Our corporate strategy is to fund the payment of quarterly distributions to our stockholders entirely from
distributable cash flows. However, we may fund our quarterly distributions to our stockholders from a combination of available cash flows, net of recurring capital
expenditures, and proceeds from borrowings and property dispositions. In the event we are unable to consistently fund future quarterly distributions to our
stockholders entirely from distributable cash flows, the value of our shares may be negatively impacted.
We
depend
on
key
personnel.
Our success depends to a significant degree upon the contributions of certain key personnel, including but not limited to, our chairman and chief executive
officer and our president, each of whom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results could
suffer. Our ability to retain our senior management group or to attract suitable replacements should any members of the senior management group leave is
dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their
availability could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets. We have not
obtained and do not expect to obtain key man life insurance on any of our key personnel.
We also believe that, as we expand, our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, investment,
financial and operational personnel. Competition for such personnel is intense, and we cannot assure our stockholders that we will be successful in attracting and
retaining such skilled personnel.
7
Our
investments
are
concentrated
in
the
industrial
real
estate
sector,
and
our
business
would
be
adversely
affected
by
an
economic
downturn
in
that
sector.
Our investments in real estate assets are concentrated in the industrial real estate sector. This concentration may expose us to the risk of economic downturns
in this sector to a greater extent than if our business activities included a more significant portion of other sectors of the real estate industry.
Events
or
occurrences
that
affect
areas
in
which
our
properties
are
located
may
materially
adversely
impact
our
financial
results.
In addition to general, regional, national and international economic conditions that may materially adversely affect our business and financial results, our
operating performance will be materially adversely impacted by adverse economic conditions in the specific markets in which we operate and particularly in the
markets in which we have significant concentrations of properties. For example, as of December 31, 2018 , approximately 25.3% of our rentable square feet and
approximately 49.1% of our improved land parcels were located in Northern New Jersey/New York City, representing a combined percentage of approximately
27.0% of our total annualized base rent, and approximately 19.7% of our rentable square feet and approximately 18.3% of our improved land parcels were located
in Los Angeles, representing a combined percentage of approximately 17.6% of our total annualized base rent. See “Item 2 – Properties” in this Annual Report on
Form 10-K for additional information regarding our ownership of properties in our markets. Any downturn in the economy in the real estate market or any of our
markets and any failure to accurately predict the timing of any economic improvement in these markets could cause our operations and our revenue and cash
available for distribution, including cash available to pay distributions to our stockholders, to be materially adversely affected.
We
may
be
unable
to
renew
leases,
lease
vacant
space,
including
vacant
space
resulting
from
tenant
defaults,
or
re-lease
space
as
leases
expire.
We cannot assure you that leases at our properties will be renewed or that such properties will be re-leased at net effective rental rates equal to or above the
then current average net effective rental rates or at all. In addition, we may be required to grant concessions or fund improvements. If the rental rates for our
properties decrease, our tenants do not renew their leases or we do not re-lease a significant portion of our available space, including vacant space resulting from
tenant defaults, and space for which leases are scheduled to expire, our financial condition, results of operations, cash flows, cash available for distribution to
stockholders, per share trading price of our common stock and our ability to satisfy our debt service obligations could be materially adversely affected. In addition,
if we are unable to renew leases or re-lease a property, the resale value of that property could be diminished because the market value of a particular property will
depend in part upon the value of the leases of such property.
We
face
potential
adverse
effects
from
the
bankruptcies
or
insolvencies
of
tenants
or
from
tenant
defaults
generally.
We are dependent on tenants for our revenues, including certain significant tenants. Moreover, certain of our properties are occupied by a single tenant, and
the income produced by these properties depends on the financial stability of that tenant. The bankruptcy or insolvency of the tenants at our properties, or tenant
defaults generally, may adversely affect the income produced by our properties. The tenants, particularly those that are highly leveraged, could file for bankruptcy
protection or become insolvent in the future. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy. On the other hand, a bankrupt
tenant may reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap
that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full. This
shortfall could adversely affect our cash flows and results of operations and could cause us to reduce the amount of distributions to stockholders.
A default by a tenant on its lease payments could force us to find an alternative source of revenues to pay any mortgage loan or operating expenses on the
property. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs, including litigation and
related expenses, in protecting our investment and re-leasing our property.
Declining
real
estate
valuations
and
impairment
charges
could
adversely
affect
our
earnings
and
financial
condition.
We review the carrying value of our properties when circumstances, such as adverse market conditions, indicate potential impairment may exist. We base
our review on an estimate of the future cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. We
consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our evaluation
indicates that we
8
may be unable to recover the carrying value of a real estate investment, an impairment loss will be recorded to the extent that the carrying value exceeds the
estimated fair value of the property. These losses would have a direct impact on our net income because recording an impairment loss results in an immediate
negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy,
rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the
assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition, results of operations, cash available for
distribution, including cash available for us to pay distributions to our stockholders and per share trading price of our common stock.
We
utilize
local
third-party
managers
for
day-to-day
property
management
for
substantially
all
of
our
properties.
In general, we prefer to utilize local third-party managers for day-to-day property management, although we may directly manage other properties in the
future. To the extent we utilize third-party managers, our cash flows from our industrial properties may be adversely affected if our managers fail to provide quality
services. In addition, our managers or their affiliates may manage, and in some cases may own, invest in or provide credit support or operating guarantees to
industrial properties that compete with our industrial properties, which may result in conflicts of interest and decisions regarding the operation of our industrial
properties that are not in our best interests.
Our
real
estate
redevelopment,
renovation
or
expansion
strategies
may
not
be
successful.
In connection with our business strategy, we may pursue redevelopment opportunities or construct expansions or improvements of industrial properties that
we own. We will be subject to risks associated with our redevelopment, renovation and expansion activities that could adversely affect our financial condition,
results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock. Such risks include the expenditure of money and
time on projects that do not perform as expected; higher than estimated construction or operating costs, including labor and material costs; failure to obtain, or
delays in obtaining, any necessary permits and authorizations; permits and authorizations that are subject to stringent conditions; the inability to complete
construction on the timeframe we expect; occupancy and rental rates that may not meet expectations; and the inability to obtain financing on favorable terms or at
all to finance redevelopment, renovation and expansion projects.
We
may
be
required
to
fund
future
tenant
improvements,
and
we
may
not
have
funding
for
those
improvements.
When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings in the future, it is likely that, in order to
attract one or more new tenants, we will be required to expend funds to construct new tenant improvements in the vacated space. We may also be required to fund
tenant improvements to retain tenants. Although we intend to manage our cash position or financing availability to pay for any improvements required for re-
leasing, we cannot assure our stockholders that we will have adequate sources of funding available to us for such purposes in the future.
Debt
service
obligations
could
adversely
affect
our
overall
operating
results,
may
require
us
to
sell
industrial
properties
and
could
adversely
affect
our
ability
to
make
distributions
to
our
stockholders
and
the
market
price
of
our
shares
of
common
stock.
Our business strategy contemplates the use of both non-recourse secured debt and unsecured debt to finance long-term growth. As of December 31, 2018 ,
we had total debt, net of deferred financing costs, of approximately $ 462.1 million, which consisted of revolving credit facility borrowings, term loan borrowings,
senior unsecured note borrowings and mortgage loans payable. While 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 shares of preferred stock to less than 35% of our total enterprise value, our governing
documents contain no limitations on the amount of debt that we may incur, and our board of directors may change our financing policy at any time without
stockholder approval. Over the long-term, we also intend to maintain a fixed charge coverage ratio in excess of 2.0x and a debt-to-adjusted EBITDA ratio below
6.0x and limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness. Our board of directors may modify
or eliminate these limitations at any time without the approval of our stockholders. As a result, we may be able to incur substantial additional debt, including
secured debt, in the future. Our existing debt, and the incurrence of additional debt, could subject us to many risks, including the risks that:
•
•
our cash flows from operations will be insufficient to make required payments of principal and interest;
our debt may increase our vulnerability to adverse economic and industry conditions;
9
•
•
•
we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for
distribution to our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes;
the terms of any refinancing will not be as favorable as the terms of the debt being refinanced; and
the use of leverage could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock.
If we do not have sufficient funds to repay existing or future debt, including debt under our credit facility and senior unsecured notes, it may be necessary to
refinance the debt through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher
interest rates on refinancings, increases in interest expense would adversely affect our cash flows, and, consequently, cash available for distribution to our
stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of industrial properties on disadvantageous terms, potentially
resulting in losses. We may place mortgages on our properties that we own to secure a revolving credit facility or other debt. To the extent we cannot meet any
future debt service obligations, we will risk losing some or all of our industrial properties that may be pledged to secure our obligations to foreclosure. Also,
covenants applicable to any existing or future debt could impair our planned investment strategy and, if violated, result in a default.
Higher interest rates could increase debt service requirements on any floating rate debt that we incur and could reduce the amounts available for distribution
to our stockholders, as well as reduce funds available for our operations, future business opportunities, or other purposes. In addition, an increase in interest rates
could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in
economic or other conditions. Adverse economic conditions could cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or
more of our industrial properties in order to meet our debt service obligations at times which may not permit us to receive an attractive return on our investments.
Our
$250.0
million
revolving
credit
facility,
our
$150.0
million
of
term
loans,
our
$250.0
million
of
senior
unsecured
notes
and
certain
of
our
existing
mortgage
loans
payable
contain,
and
we
expect
that
our
future
indebtedness
will
contain,
covenants
that
could
limit
our
operations
and
our
ability
to
make
distributions
to
our
stockholders.
We have a credit facility, which consists of a $ 50.0 million term loan that matures in August 2021 , a $ 100.0 million term loan that matures in January
2022 and a $ 250.0 million revolving credit facility that matures in October 2022 . We also have $250.0 million of senior unsecured notes outstanding. We have
agreed to guarantee the obligations of the borrower (a wholly-owned subsidiary) under our revolving credit facility, our term loans and our senior unsecured notes.
Our revolving credit facility, our term loans, our senior unsecured notes and certain of our existing mortgage loans payable contain, and we expect that our future
indebtedness will contain, financial and operating covenants, such as fixed charge coverage and debt ratios and other limitations that will limit or restrict our ability
to make distributions or other payments to our stockholders and may restrict our investment activities. For example, our credit facility restricts distributions if we
are in default. The covenants in our debt agreements may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our
stockholders or obtain necessary funds. Given the restrictions in our debt covenants on these and other activities, we may be limited in our operating and financial
flexibility and in our ability to respond to changes in our business or competitive activities in the future.
Failure to meet our financial covenants could result from, among other things, changes in our results of operations, the incurrence of debt or changes in
general economic conditions. In addition, the failure of at least one of our chief executive officer and our president or any successors approved by the
administrative agent to continue to be active in our day-to-day management constitutes an event of default under our credit facility. We have 120 days under our
credit facility to hire a successor executive reasonably satisfactory to the administrative agent in the event that both our chief executive officer and our president or
any successors cease to be active in our management. If we violate covenants or if there is an event of default under our credit facility, our senior unsecured notes,
our existing mortgage loans payable or in our future agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when
we might be unable to arrange financing for such repayment on attractive terms, if at all which may have a material adverse effect on our cash flows, financial
condition and results of operations.
In addition, the note purchase agreements with respect to our existing senior unsecured notes contain, and any unsecured debt agreements we enter into in the
future may contain, specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we
are in default under other loans in some circumstances. Defaults under our debt agreements could materially and adversely affect our financial condition and results
of operations.
10
We
may
acquire
outstanding
debt
or
provide
a
loan,
in
each
case
secured
by
an
industrial
property,
which
will
expose
us
to
risks.
We may acquire outstanding debt secured by an industrial property from lenders and investors or provide a loan secured by industrial property if we believe
we can acquire ownership of the underlying property through foreclosure, deed-in-lieu of foreclosure or other means. For example, on May 7, 2018, we made a
senior secured loan of $55.0 million with a two-year term that bears interest at a fixed annual interest rate of 8.0% and matures in May 2020, which is secured by a
portfolio of nine improved land parcels. If we do acquire such debt or provide such a loan, borrowers may seek to assert various defenses to our foreclosure or
other actions and we may not be successful in acquiring the underlying property on a timely basis, or at all, in which event we could incur significant costs and
experience significant delays in acquiring such properties, all of which could adversely affect our financial performance and reduce our expected returns from such
investments. In addition, we may not earn a current return on such investments particularly if the loan that we acquire or provide is in, or goes into, default.
If
we
provide
debtor-in-possession
financing
or
provide
a
loan,
a
default
by
the
borrower
could
adversely
affect
our
cash
flows.
We may on a limited basis provide debtor-in-possession financing to a property owner that has filed for bankruptcy, or make a loan secured by real estate
that we might otherwise purchase directly. We expect that any such loans would be secured by one or more properties that we intend to acquire and that we would
have the option to acquire such property in lieu of the repayment of such loan. For example, on May 7, 2018, we made a senior secured loan of $55.0 million with
a two-year term that bears interest at a fixed annual interest rate of 8.0% and matures in May 2020, which is secured by a portfolio of nine improved land parcels.
Any default by the borrower under any such loan, including such senior secured loan, could negatively impact our cash flows and our ability to make cash
distributions to our stockholders and result in litigation and related expenses. Although we would expect to acquire the secured property upon a borrower’s default,
there is no assurance that we will successfully foreclose on a property, and any such foreclosure could result in significant expenses.
Adverse
changes
in
our
credit
rating
could
negatively
affect
our
financing
activity.
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. Our credit rating can affect the amount of capital we can access, as well as the terms
and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit rating, and in the event our credit rating is
downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit rating
may trigger additional payments or other negative consequences under our existing and future credit facilities and debt instruments. For example, if our credit
rating is downgraded to below investment grade levels, we may not be able to obtain or maintain extensions on certain of our existing debt. Adverse changes in our
credit rating could negatively impact our refinancing activities, our ability to manage our debt maturities, our future growth, our financial condition, the market
price of our stock and our acquisition activities.
Failure
to
hedge
effectively
against
interest
rate
changes
may
adversely
affect
results
of
operations.
We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap contracts and swap agreements. For
example, we have executed interest rate caps to hedge the variable cash flows associated with our $150.0 million of variable-rate term loans. These agreements
have costs and involve the risks that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such
agreements are not legally enforceable. Hedging may reduce overall returns on our investments. Failure to hedge effectively against interest rate changes may
materially adversely affect our results of operations.
Our
property
taxes
could
increase
due
to
property
tax
rate
changes
or
reassessment,
which
would
impact
our
cash
flows.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay some state and local taxes on our properties. The real property taxes
on our properties may increase as property tax rates change or as our properties are assessed or reassessed by taxing authorities. Therefore, the amount of property
taxes we pay in the future may increase substantially. If the property taxes we pay increase, our cash flows will be impacted, and our ability to pay expected
distributions to our stockholders could be adversely affected.
Actions
of
our
joint
venture
partners
could
negatively
impact
our
performance.
While we have no current intention to do so, we may acquire and/or redevelop properties through joint ventures, limited liability companies and partnerships
with other persons or entities when warranted by the circumstances. Such partners may
11
share certain approval rights over major decisions. Such investments may involve risks not otherwise present with other methods of investment in real estate. We
generally will seek to maintain sufficient control of our partnerships, limited liability companies and joint ventures to permit us to achieve our business objectives;
however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of
operations, cash flows and ability to pay distributions on, and the market price of, our common stock.
If
we
invest
in
a
limited
partnership
as
a
general
partner,
we
could
be
responsible
for
all
liabilities
of
such
partnership.
In some joint ventures or other investments we may make, if the entity in which we invest is a limited partnership, we may acquire all or a portion of our
interest in such partnership as a general partner. As a general partner, we could be liable for all the liabilities of such partnership. Additionally, we may be required
to take our interests in other investments as a non-managing general partner. Consequently, we would be potentially liable for all such liabilities without having the
same rights of management or control over the operation of the partnership as the managing general partner or partners may have. Therefore, we may be held
responsible for all of the liabilities of an entity in which we do not have full management rights or control, and our liability may far exceed the amount or value of
the investment we initially made or then had in the partnership.
The
conflict
of
interest
policies
we
have
adopted
may
not
adequately
address
all
of
the
conflicts
of
interest
that
may
arise
with
respect
to
our
activities.
In order to avoid any actual or perceived conflicts of interest with our directors, officers or employees, we have adopted certain policies to specifically
address some of the potential conflicts relating to our activities. In addition, our board of directors is subject to certain provisions of Maryland law, which are also
designed to eliminate or minimize conflicts. Although under these policies the approval of a majority of our disinterested directors is required to approve any
transaction, agreement or relationship in which any of our directors, officers or employees has an interest, there is no assurance that these policies will be adequate
to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us.
Our
business
could
be
adversely
impacted
if
we
have
deficiencies
in
our
disclosure
controls
and
procedures
or
internal
controls
over
financial
reporting.
The design and effectiveness of our disclosure controls and procedures and internal controls over financial reporting may not prevent all errors,
misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal controls
over financial reporting, there can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all control objectives all of
the time. Deficiencies, including any material weakness, in our internal controls over financial reporting which may occur in the future could result in
misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our
business, reputation, results of operations, financial condition or liquidity.
Volatility
in
the
capital
and
credit
markets
could
materially
and
adversely
impact
us.
The capital and credit markets have experienced extreme volatility and disruption from time to time, which has at times made it more difficult to borrow
money or raise equity capital. Market volatility and disruption could hinder our ability to obtain new debt financing or refinance our maturing debt on favorable
terms or at all. In addition, our future access to the equity markets could be limited. Any such financing or refinancing issues could materially and adversely affect
us. Market turmoil and tightening of credit, which have occurred in the past, can lead to an increased lack of consumer confidence and widespread reduction of
business activity generally, which also could materially and adversely impact us, including our ability to acquire and dispose of assets on favorable terms or at all.
Volatility in capital and credit markets may also have a material adverse effect on the market price of our common stock.
We
may
not
acquire
the
industrial
properties
that
we
have
entered
into
agreements
or
non-binding
letters
of
intent
to
acquire.
We have entered into agreements and non-binding letters of intent with third-party sellers to acquire properties as more fully described under the heading
“Contractual Obligations” in this Annual Report on Form 10-K. There is no assurance that we will acquire the properties under contract and non-binding letters of
intent because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions, and in the case of properties
under non-binding letters of intent, our entry into purchase and sale agreements with respect to the properties. There is no assurance that such proposed
acquisitions, if completed, will be completed on the timeframe or terms we expect. If we do not complete the acquisition of the properties under contract or non-
binding letters of intent, we will have incurred expenses without our stockholders realizing any benefit from the acquisition of such properties.
12
We
face
risks
associated
with
security
breaches
through
cyber-attacks,
cyber
intrusions
or
otherwise,
as
well
as
other
significant
disruptions
of
our
information
technology
(IT)
networks
and
related
systems.
We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments
to e-mails, people with access or who gain access to our systems and other significant disruptions of our IT networks and related systems. The risk of a security
breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally
increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related
systems are essential to the operation of our business and our ability to perform day-to-day operations and, in some cases, may be critical to the operations of
certain of our tenants. Although we make efforts to maintain the security and integrity of our IT networks and related systems, and we have implemented various
measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted
security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain
potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and
in some cases are designed to not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement
adequate security barriers or other preventative measures.
A security breach or other significant disruption involving our IT networks and related systems could significantly disrupt the proper functioning of our
networks and systems and significantly disrupt our operations, which could ultimately have a material adverse effect on our financial condition, results of
operations, cash flows and ability to pay distributions on, and the market price of, our common stock.
Risks Related to the Real Estate Industry
Our
performance
and
value
are
subject
to
general
economic
conditions
and
risks
associated
with
our
real
estate
assets.
The investment returns available from investments in real estate depend on the amount of income earned and capital appreciation generated by the properties,
as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt
service and capital expenditures, then our ability to pay distributions to our stockholders could be adversely affected. In addition, there are significant expenditures
associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances
reduce the income from the property. Income from and the value of our properties may be adversely affected by:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
downturns in national, regional and local economic conditions (particularly increases in unemployment);
the attractiveness of our properties to potential tenants and competition from other industrial properties;
changes in supply of or demand for similar or competing properties in an area;
bankruptcies, financial difficulties or lease defaults by the tenants of our properties;
adverse capital and credit market conditions, which may restrict our operating activities;
changes in interest rates, availability and terms of debt financing;
changes in operating costs and expenses and our ability to control rents;
changes in, or increased costs of compliance with, governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental
and zoning laws, and our potential liability thereunder;
our ability to provide adequate maintenance and insurance;
changes in the cost or availability of insurance, including coverage for mold or asbestos;
unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;
periods of high or rising interest rates;
tenant turnover;
re-leasing that may require concessions or reduced rental rates under the new leases due to reduced demand;
general overbuilding or excess supply in the market area;
disruptions in the global supply chain caused by political, regulatory or other factors including terrorism;
disruptions to political, governmental or regulatory systems, including shutdowns of the government and its agencies; and
the effects of deflation, including credit market dislocation, weakened consumer demand and a decline in general price levels.
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or public perception that any of these events
may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would materially adversely affect our
financial condition and results of operations. Future terrorist
13
attacks may result in declining economic activity, which could reduce the demand for, and the value of, our properties. To the extent that future attacks impact the
tenants of our properties, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases. For these and other
reasons, we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Investments
in
real
estate
properties
are
subject
to
risks
that
could
adversely
affect
our
business.
Investments in real estate properties are subject to varying degrees of risk. While we seek to minimize these risks through geographic diversification of our
portfolio, market research and our asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows
include:
•
•
•
•
•
•
•
local conditions, such as oversupply or a reduction in demand;
technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies;
the attractiveness of our properties to potential tenants and competition from other available properties;
increasing costs of maintaining, insuring, renovating and making improvements to our properties;
our ability to renovate and reposition our properties due to changes in the business and logistical needs of our tenants;
our ability to control rents and variable operating costs; and
government regulations and the associated liability under, and changes in, environmental, zoning, usage, tax tariffs and other laws.
Actions
by
our
competitors
may
decrease
or
prevent
increases
in
the
occupancy
and
rental
rates
of
our
properties.
We compete with other developers, owners and operators of real estate, some of which own properties similar to our properties in the same markets and
submarkets in which the properties we own are located. If our competitors offer space at rental rates below current market rates or below the rental rates we will
charge the tenants of our properties, we may lose existing or potential tenants, and we may be pressured to reduce our rental rates or offer tenant concessions or
favorable lease terms in order to retain tenants when such tenants’ leases expire or attract new tenants. In addition, if our competitors sell assets similar to assets we
intend to divest in the same markets and/or at valuations below our valuations for comparable assets, we may be unable to divest our assets at all or at favorable
pricing or on favorable terms. As a result of these actions by our competitors, our financial condition, cash flows, cash available for distribution, trading price of
our common stock and ability to satisfy our debt service obligations could be materially adversely affected.
Real
estate
investments
are
not
as
liquid
as
other
types
of
assets,
which
may
reduce
economic
returns
to
investors.
Real estate investments are not as liquid as other types of investments, and this lack of liquidity may limit our ability to react promptly to changes in
economic, financial, investment or other conditions. In addition, significant expenditures associated with real estate investments, such as mortgage payments, real
estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. In addition, we intend to
comply with the safe harbor rules relating to the number of properties that can be disposed of in a year, the tax bases and the costs of improvements made to these
properties, and meet other tests which enable a REIT to avoid punitive taxation on the sale of assets. Thus, our ability at any time to sell assets may be restricted.
This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic, financial, investment or other conditions and, as a
result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the market price of, our common
stock.
Uninsured
or
underinsured
losses
relating
to
real
property
may
adversely
affect
our
returns.
We will attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from
floods, hurricanes, fires, earthquakes and other natural disasters, acts of war, acts of terrorism or riots, that are not generally insured against or that are not
generally fully insured against because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could
expose us to uninsured casualty losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets
will be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in these properties
and could potentially remain obligated under any recourse debt associated with the property. Inflation, changes in building codes and ordinances, environmental
considerations and other factors might also keep us from using insurance proceeds to replace or renovate a property after it has been damaged or destroyed. Under
those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property. Any such
losses could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common
stock. In addition, we may have no source
14
of funding to repair or reconstruct the damaged property, and we cannot assure that any such sources of funding will be available to us for such purposes in the
future.
We own properties in Los Angeles, the San Francisco Bay Area and Seattle, which are located in areas that are known to be subject to earthquake activity.
Although we carry replacement-cost earthquake insurance on all of our properties located in areas historically subject to seismic activity, subject to coverage
limitations and deductibles that we believe are commercially reasonable, we may not be able to obtain coverage to cover all losses with respect to such properties
on economically favorable terms, which could expose us to uninsured casualty losses. We intend to evaluate our earthquake insurance coverage annually in light of
current industry practice.
We own properties located in areas which are known to be subject to hurricane and/or flood risk. Although we carry replacement-cost hurricane and/or flood
hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles that we believe are
commercially reasonable, we may not be able to obtain coverage to cover all losses with respect to such properties on economically favorable terms, which could
expose us to uninsured casualty losses. We intend to evaluate our insurance coverage annually in light of current industry practice.
If
any
of
our
insurance
carriers
becomes
insolvent,
we
could
be
adversely
affected.
We carry several different lines of insurance with several large insurance carriers. If any one of these large insurance carriers were to become insolvent, we
would be forced to replace the existing insurance coverage with another suitable carrier, and any outstanding claims would be at significant risk for collection. In
such an event, we cannot be certain that we would be able to replace the coverage at similar or otherwise favorable terms. Replacing insurance coverage at
unfavorable rates and the potential of uncollectible claims due to carrier insolvency would likely adversely affect us.
Contingent
or
unknown
liabilities
could
adversely
affect
our
financial
condition.
We may own or acquire properties that are subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities.
Additionally, many sellers of real estate are single-purpose entities without any other significant assets. As a result, if a liability were asserted against us based
upon ownership of any of these entities or properties, then we might have to pay substantial sums to settle it, which could adversely affect our cash flows.
Unknown liabilities with respect to entities or properties acquired might include:
•
•
•
•
liabilities for investigation, clean-up or remediation of adverse environmental conditions;
accrued but unpaid liabilities incurred in the ordinary course of business;
tax liabilities; and
claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of the properties.
We
may
from
time
to
time
be
subject
to
litigation
that
may
negatively
impact
our
cash
flow,
financial
condition,
results
of
operations
and
market
price
of
our
common
stock.
We may from time to time be a defendant in lawsuits and regulatory proceedings relating to our business. Such litigation and proceedings may result in
defense costs, settlements, fines or judgments against us, some of which may not be covered by insurance. Due to the inherent uncertainties of litigation and
regulatory proceedings, we cannot accurately predict the ultimate outcome of any such litigation or proceedings. An unfavorable outcome could negatively impact
our cash flow, financial condition, results of operations and trading price of our common stock.
Additionally, whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its
successful resolution (through litigation, settlement or otherwise), which would detract from our management’s ability to focus on our business. Any such
resolution could involve the payment of damages or expenses by us, which may be significant, or involve our agreement with terms that restrict the operation of
our business. Certain litigation or the resolution of certain litigation may also affect the availability or cost of some of our insurance coverage and could expose us
to increased risks that would be uninsured, and/or adversely impact our ability to attract directors, officers and other key employees.
Environmentally
hazardous
conditions
may
adversely
affect
our
operating
results.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of investigating,
removing or remediating hazardous or toxic substances on such property. Such laws often
15
impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one
person may have been responsible for the contamination, each person covered by applicable environmental laws may be held responsible for all of the clean-up
costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resource or property damage or other
costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our
properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the
contamination, or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may
impose restrictions on the manner in which property may be used or businesses may be operated. A property owner who violates environmental laws may be
subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and
ownership of our properties, we may be exposed to such costs. The cost of defending against environmental claims, of compliance with environmental regulatory
requirements or of remediating any contaminated property could materially adversely affect our business, assets or results of operations and, consequently,
amounts available for distribution to our stockholders.
Environmental laws in the U.S. also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately
inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos
is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these
requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our
properties may contain asbestos-containing building materials.
We invest in properties historically used for industrial, manufacturing and commercial purposes. Some of these properties contain, or may have contained,
underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of
petroleum products or other hazardous or toxic substances. Some of our properties may be adjacent to or near other properties that have contained or currently
contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties may be on or are
adjacent to or near other properties upon which others, including former owners or tenants of such properties, have engaged, or may in the future engage, in
activities that may release petroleum products or other hazardous or toxic substances. As needed, we may obtain environmental insurance policies on commercially
reasonable terms that provide coverage for potential environmental liabilities, subject to the policy’s coverage conditions and limitations. From time to time, we
may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with
these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we underwrite the costs of environmental
investigation, clean-up and monitoring into the cost. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost
of, remediating or monitoring certain environmental conditions on the properties.
We generally obtain Phase I environmental site assessments on each property prior to acquiring it and we generally anticipate that the properties that we may
acquire in the future may be subject to a Phase I or similar environmental assessment by independent environmental consultants at the time of acquisition. Phase I
assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. Phase I
assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and
issuance of a written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. Even if none of our
environmental assessments of our properties reveal an environmental liability that we believe would have a material adverse effect on our business, financial
condition or results of operations taken as a whole, we cannot give any assurance that such conditions do not exist or may not arise in the future. Material
environmental conditions, liabilities or compliance concerns may go undetected by the environmental assessment or arise after the environmental assessment has
been completed. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the
environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of such properties (such as releases
from underground storage tanks), or by third parties unrelated to us.
Costs
of
complying
with
governmental
laws
and
regulations
with
respect
to
our
properties
may
adversely
affect
our
income
and
the
cash
available
for
any
distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental
protection and human health and safety. Tenants’ ability to operate and to generate income to pay their lease obligations may be affected by permitting and
compliance obligations arising under such laws and regulations. Some of these laws and regulations may impose joint and several liability on tenants, owners or
operators for the costs to investigate
16
or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Leasing our properties to tenants that engage in
industrial, manufacturing, and commercial activities will cause us to be subject to the risk of liabilities under environmental laws and regulations. In addition, the
presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such
property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with
new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or
regulations may impose material environmental liability. Additionally, the operations of the tenants of our properties, the existing condition of the land, operations
in the vicinity of such properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect such properties. In addition,
there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to
liability in the form of fines or damages for noncompliance. Any material expenditures, fines or damages we must pay will reduce our ability to make distributions
and may reduce the value of our common stock. In addition, changes in these laws and governmental regulations, or their interpretation by agencies or the courts,
could occur.
The
impacts
of
climate-related
initiatives
at
the
U.S.
federal
and
state
levels
remain
uncertain
at
this
time
but
could
result
in
increased
operating
costs.
Government authorities and various interest groups are promoting laws and regulations that could limit greenhouse gas, or GHG, emissions due to concerns
over contributions to climate change. The United States Environmental Protection Agency, or EPA, has moved to regulate GHG emissions from large stationary
sources, including electricity producers, and mobile sources, through fuel efficiency and other requirements, using its existing authority under the Clean Air Act.
Moreover, certain state and regional programs are being implemented to require reductions in GHG emissions. Any additional taxation or regulation of energy use,
including as a result of (i) the regulations that EPA has proposed or may propose in the future, (ii) state programs and regulations, or (iii) renewed GHG legislative
efforts by future Congresses, could result in increased operating costs that we may not be able to effectively pass on to our tenants. In addition, any increased
regulation of GHG emissions could impose substantial costs on our tenants. These costs include, for example, an increase in the cost of the fuel and other energy
purchased by our tenants and capital costs associated with updating or replacing their trucks earlier than planned. Any such increased costs could impact the
financial condition of our tenants and their ability to meet their lease obligations and to lease or re-lease our properties.
We
are
exposed
to
the
potential
impacts
of
future
climate
change
and
climate-change
related
risks.
We may be exposed to potential physical risks from possible future changes in climate. Our properties may be exposed to rare catastrophic weather events,
such as severe storms or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase. Some of
our properties may be subject to risks from rising sea levels if such rising were to occur. In addition, many state and local governments are adopting or considering
adopting regulations requiring that property owners and developers include in their development or redevelopment plans resiliency measures to address climate-
change related risks. If such regulations apply to any of our properties, we may be required to incur substantial costs to address such regulations.
Compliance
or
failure
to
comply
with
the
Americans
with
Disabilities
Act
and
other
similar
regulations
could
result
in
substantial
costs.
Under the Americans with Disabilities Act and other similar regulations, places of public accommodation must meet certain requirements related to access
and use by disabled persons. Noncompliance could result in the imposition of fines or the award of damages to private litigants. If we are required to make
unanticipated expenditures to comply with the Americans with Disabilities Act and other similar regulations, including removing access barriers, then our cash
flows and the amounts available for distributions to our stockholders may be adversely affected. If we are required to make substantial modifications to our
properties, whether to comply with the Americans with Disabilities Act and other similar regulations, or other changes in governmental rules and regulations, our
financial condition, cash flows, results of operations, the market price of our shares of common stock and our ability to make distributions to our stockholders
could be adversely affected.
17
We
may
be
unable
to
sell
a
property
if
or
when
we
decide
to
do
so,
including
as
a
result
of
uncertain
market
conditions,
which
could
adversely
affect
the
return
on
an
investment
in
our
common
stock.
We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our
investment objectives. Our ability to dispose of properties on advantageous terms or at all depends on factors beyond our control, including competition from other
sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate
investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the future disposition of our
properties, we cannot assure our stockholders that we will be able to sell such properties at a profit or at all in the future. Accordingly, the extent to which our
stockholders will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions.
Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our
stockholders that we will have funds available to correct such defects or to make such improvements. In acquiring a property, we may agree to restrictions that
prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that
property. These provisions would restrict our ability to sell a property.
If
we
sell
properties
and
provide
financing
to
purchasers,
defaults
by
the
purchasers
would
adversely
affect
our
cash
flows.
If we decide to sell any of our properties, we presently intend to sell them for cash. However, if we provide financing to purchasers, we will bear the risk that
the purchaser may default, which could negatively impact our cash distributions to stockholders and result in litigation and related expenses. Even in the absence of
a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or
other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed of.
Risks Related to Our Organizational Structure
Our
board
of
directors
may
change
significant
corporate
policies
without
stockholder
approval.
Our investment, financing, borrowing and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and
operations, are determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of the board of
directors without a vote of our stockholders. In addition, the board of directors may change our policies with respect to conflicts of interest provided that such
changes are consistent with applicable legal and regulatory requirements, including the listing standards of the NYSE. A change in these policies could have an
adverse effect on our financial condition, results of operations, cash flows, per share trading price of our common stock and ability to satisfy our debt service
obligations and to pay distributions to our stockholders.
We
could
increase
the
number
of
authorized
shares
of
stock
and
issue
stock
without
stockholder
approval.
Subject to applicable legal and regulatory requirements, our charter authorizes our board of directors, without stockholder approval, to increase the aggregate
number of authorized shares of stock or the number of authorized shares of stock of any class or series, to issue authorized but unissued shares of our common
stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms
of such classified or unclassified shares. Our board of directors could establish a series of preferred stock that could, depending on the terms of such series, delay,
defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our
stockholders.
Certain
provisions
of
Maryland
law
could
inhibit
changes
in
control.
Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting or deterring a third-party from making a proposal
to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity
to realize a premium over the then-prevailing market price of such shares, including:
•
“Business
Combination”
provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder”
(defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time
within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting shares) or an affiliate of
an interested stockholder for five years after the most recent date on which the stockholder becomes an interested
18
•
stockholder, and thereafter may impose special appraisal rights and special stockholder voting requirements on these combinations; and
“Control
Share”
provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by
the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share
acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved
by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of our board of directors,
and in the case of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, in the future, only upon the approval of our
stockholders, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, only upon the approval of
our stockholders, by amendment to our bylaws, opt in to the control share provisions of the MGCL. Our board of directors has also adopted a resolution prohibiting
us from electing to be subject to the provisions of Title 3, Subtitle 8 of the MGCL that would permit our board of directors to classify the board without
stockholder approval. Such provisions of Title 3, Subtitle 8 of the MGCL could have an anti-takeover effect. We may only elect to be subject to the classified
board provisions of Title 3, Subtitle 8 after first obtaining the approval of our stockholders.
In addition, the provisions of our charter on removal of directors and the advance notice provisions of our bylaws could delay, defer or prevent a transaction
or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest. Likewise, if our
board of directors, with stockholder approval, as applicable, were to opt in to the business combination provisions of the MGCL or the provisions of Title 3,
Subtitle 8 of the MGCL, or if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded by our board of
directors and our stockholders, these provisions of the MGCL could have similar anti-takeover effects.
Our
rights
and
the
rights
of
our
stockholders
to
take
action
against
our
directors
and
officers
are
limited.
Maryland law provides that a director or officer has no liability in that capacity if he or she satisfies his or her duties to us and our stockholders. Our charter
limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.
In addition, our charter will authorize us to obligate our company, and our bylaws will require us, to indemnify our directors and officers for actions taken by
them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our
directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the
performance of our company, your ability to recover damages from such director or officer will be limited. In addition, we may be obligated to advance the defense
costs incurred by our directors and executive officers, and may, in the discretion of our board of directors, advance the defense costs incurred by our employees
and other agents in connection with legal proceedings.
Risks Related to Our Status as a REIT
Failure
to
qualify
as
a
REIT
would
cause
us
to
be
taxed
as
a
regular
corporation,
which
would
substantially
reduce
funds
available
for
distributions
to
stockholders.
We believe that our organization and method of operation has enabled and will continue to enable us to meet the requirements for qualification and taxation
as a REIT. However, we cannot assure you that we will qualify as such. This is because qualification as a REIT involves the application of highly technical and
complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and
circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax
laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such
qualification.
If we fail to qualify as a REIT in any taxable year, and are unable to obtain relief under certain statutory provisions, we will face serious tax consequences
that will substantially reduce the funds available for distributions to our stockholders because:
19
•
•
we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to federal and state
income tax at regular corporate rates; and
we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.
In addition, we would no longer be required to pay distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to
expand our business and raise capital, and it could adversely affect the value of our common stock.
Even
if
we
qualify
as
a
REIT,
we
may
face
other
tax
liabilities
that
reduce
our
cash
flows.
Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any
undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Any of these
taxes would decrease cash available for distributions to stockholders.
REIT
distribution
requirements
could
adversely
affect
our
liquidity
and
may
force
us
to
borrow
funds
or
sell
assets
during
unfavorable
market
conditions.
In order to maintain our REIT status and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even
if the then-prevailing market conditions are not favorable for these borrowings or sales. To qualify as a REIT, we generally must distribute to our stockholders at
least 90% of our net taxable income each year, excluding capital gains. In addition, we will be subject to corporate income tax to the extent we distribute less than
100% of our net taxable income including any net capital gain. We intend to make distributions to our stockholders to comply with the requirements of the Code
for REITs and to minimize or eliminate our corporate income tax obligation to the extent consistent with our business objectives. Our cash flows from operations
may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal
income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The
insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity
securities in order to fund distributions required to maintain our REIT status. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any,
by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our
undistributed income from prior years.
Dividends
payable
by
REITs
generally
do
not
qualify
for
reduced
tax
rates.
Currently, the maximum tax rate for qualified dividends payable to individual U.S. stockholders is 20%. Dividends payable by REITs, however, are
generally not eligible for such reduced rates. However, for taxable years beginning after December 31, 2017 and before January 1, 2026, new legislation provides
for a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends and certain trade or business income of non-corporate taxpayers.
Additionally, to the extent such dividends are attributable to certain dividends that we receive from a taxable REIT subsidiary (“TRS”), such dividends generally
will be eligible for the reduced rates that apply to qualified dividend income. While we currently do not own any interest in a TRS, we may own any such interest
in the future. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be
relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs,
including our common stock.
We
may
in
the
future
choose
to
pay
dividends
in
our
stock
instead
of
cash,
in
which
case
stockholders
may
be
required
to
pay
income
taxes
in
excess
of
the
cash
dividends
they
receive.
We may, in the future, distribute taxable dividends that are payable in cash and common stock at the election of each stockholder or distribute other forms of
taxable stock dividends. Taxable stockholders receiving such dividends or other forms of taxable stock dividends will be required to include the full amount of the
dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may
be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a
dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of
our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect
to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders
20
determine to sell common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
Complying
with
REIT
requirements
may
cause
us
to
forego
otherwise
attractive
opportunities
or
to
liquidate
otherwise
attractive
investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature
and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be
required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government
securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets)
generally cannot include more than 10% of the total voting power of the outstanding securities of any one issuer or more than 10% of the total value of the
outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real
estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by the securities of one or
more TRSs at the close of each calendar quarter. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within
30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax
consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and
amounts available for distribution to our stockholders.
Our
relationship
with
any
TRS
will
be
limited,
and
a
failure
to
comply
with
the
limits
would
jeopardize
our
REIT
qualification
and
may
result
in
the
application
of
a
100%
excise
tax.
A REIT may own up to 100% of the stock of one or more TRSs. While we currently do not own any interest in a TRS, we may own any such interest in the
future. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Overall, no more than 20% of the value of a REIT’s
assets may consist of stock or securities of one or more TRSs. A domestic TRS will pay federal, state and local income tax at regular corporate rates on any income
that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an
appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted
on an arm’s-length basis.
Any TRS of ours will pay federal, state and local income tax on its taxable income, and its after-tax net income will be available (but not required) to be
distributed to us. We anticipate that the aggregate value of any TRS stock and securities owned by us will be significantly less than 20% of the value of our total
assets (including the TRS stock and securities) at the close of each calendar quarter. Furthermore, we will monitor the value of our investments in TRSs for the
purpose of ensuring compliance with the foregoing rule. In addition, we will scrutinize all of our transactions with TRSs for the purpose of ensuring that they are
entered into on arm’s-length terms in order to avoid incurring the 100% excise tax described above. No assurance, however, can be given that we will be able to
comply with the 20% limitation on ownership of TRS stock and securities on an ongoing basis so as to maintain our REIT qualification or avoid application of the
100% excise tax imposed on certain non-arm’s-length transactions.
The
ability
of
our
board
of
directors
to
revoke
our
REIT
qualification
without
stockholder
approval
may
subject
us
to
federal
income
tax
and
reduce
distributions
to
our
stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it
determines that it is no longer in our best interest to continue to be qualified as a REIT. If we cease to be a REIT, we would become subject to federal income tax
on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our
total return to our stockholders and on the market price of our common stock.
Stockholders
and
prospective
investors
are
urged
to
consult
with
their
tax
advisors
regarding
the
effects
of
recently
enacted
tax
legislation
and
other
legislative,
regulatory
and
administrative
developments.
On December 22, 2017, President Trump signed into law H.R. 1, informally titled the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes major changes
to the Code, including a number of provisions of the Code that affect the taxation of REITs and their stockholders. Among the changes made by the TCJA are
permanently reducing the generally applicable
21
corporate tax rate, generally reducing the tax rate applicable to individuals and other non-corporate taxpayers for tax years beginning after December 31, 2017 and
before January 1, 2026, eliminating or modifying certain previously allowed deductions (including substantially limiting interest deductibility and, for individuals,
the deduction for non-business state and local taxes), and, for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for
preferential rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends and certain trade or business
income of non-corporate taxpayers. The TCJA also imposes new limitations on the deduction of net operating losses, which may result in us having to make
additional taxable distributions to our stockholders in order to comply with REIT distribution requirements or avoid taxes on retained income and gains. The effect
of the significant changes made by the TCJA is highly uncertain, and administrative guidance will be required in order to fully evaluate the effect of many
provisions. The effect of any technical corrections with respect to the TCJA could have an adverse effect on us or our stockholders. Stockholders and prospective
investors should consult their tax advisors regarding the implications of the TCJA on their investment in our common stock.
We
may
be
subject
to
adverse
legislative
or
regulatory
tax
changes
that
could
reduce
the
market
price
of
our
common
stock.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if
any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative
interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our
stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
Risks Related to Our Common Stock
Level
of
cash
distributions,
market
interest
rates
and
other
factors
may
affect
the
value
of
our
common
stock.
The market value of the equity securities of a REIT is based upon the market’s perception of the REIT’s growth potential and its current and potential future
cash distributions, whether from operations, sales or refinancings, and upon the real estate market value of the underlying assets. Our common stock may trade at
prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flows for investment purposes, working capital reserves or
other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock.
Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common
stock. In addition, the price of our common stock will be influenced by the dividend yield on the common stock relative to market interest rates and the dividend
yields of other REITs. An increase in market interest rates, which are currently at low levels relative to historical rates but have increased recently, could cause the
market price of our common stock to go down. The trading price of the shares of common stock will also depend on many other factors, which may change from
time to time, including:
•
•
•
•
•
•
•
the market for similar securities;
the attractiveness of REIT securities in comparison to the securities of other companies, taking into account, among other things, the higher tax rates
imposed on dividends paid by REITs;
government legislation, action or regulation;
our issuance of debt or preferred equity securities;
changes in earnings estimates by analysts and our ability to meet analysts’ earnings estimates;
general economic conditions; and
our financial condition, performance and prospects.
The
number
of
shares
of
our
common
stock
available
for
future
sale
could
adversely
affect
the
market
price
of
our
common
stock
and
have
a
dilutive
effect
to
our
existing
stockholders.
Sales of substantial amounts of shares of our common stock in the public market or the perception that such sales might occur could adversely affect the
market price of the shares of our common stock. The issuance and vesting of any restricted stock granted to certain directors, executive officers and other
employees under our Amended and Restated 2010 Equity Incentive Plan, the issuance of our common stock upon the vesting of awards under our Amended and
Restated Long-Term Incentive Plan, the issuance of our common stock in connection with property, portfolio or business acquisitions and other issuances of our
common stock could have an adverse effect on the market price of our common stock. Future sales of shares of our common stock may be dilutive to existing
stockholders.
22
The
market
price
and
trading
volume
of
our
common
stock
may
be
volatile.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price
variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the price you paid for such
shares. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our financial condition, performance, liquidity and prospects;
actual or anticipated variations in our quarterly operating results or distributions;
changes in our funds from operations (as defined by Nareit and discussed in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” elsewhere in this Annual Report on Form 10-K) or earnings;
publication of research reports about us or the real estate industry;
changes in earnings estimates by analysts;
our ability to meet analysts’ earnings estimates;
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we incur in the future;
additions or departures of key management personnel;
the market for similar securities issued by REITs;
actions by institutional stockholders;
speculation in the press or investment community;
our compliance with generally accepted accounting principles;
our compliance with applicable laws and regulations and the listing requirements of the New York Stock Exchange;
the realization of any of the other risk factors presented in this Annual Report on Form 10-K; and
general market, including capital market and real estate market and economic conditions.
Future
offerings
of
debt
securities
and
the
incurrence
of
other
future
indebtedness,
which
would
be
senior
to
our
common
stock
upon
liquidation,
and/or
preferred
stock
which
may
be
senior
to
our
common
stock
for
purposes
of
dividend
distributions
or
upon
liquidation,
may
adversely
affect
the
market
price
of
our
common
stock.
Upon liquidation, holders of our debt securities and any shares of preferred stock, and lenders with respect to other borrowings, including our existing credit
facility and mortgage loans payable, will receive distributions of our available assets prior to the holders of our common stock. In the future we may attempt to
increase our capital resources by making additional offerings of debt and equity securities. Additional equity offerings may dilute the holdings of our existing
stockholders and/or reduce the market price of our common stock. In addition, future offerings of debt securities or the incurrence of additional other indebtedness
may reduce the market price of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our
preferred stock, if issued in the future, could have a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay
a dividend or make another distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market
conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the
risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.
We
may
be
unable
to
generate
sufficient
cash
flows
from
our
operations
to
make
distributions
to
our
stockholders
at
any
time
in
the
future.
Our ability to make distributions to our stockholders may be adversely affected by the risk factors described in this Annual Report on Form 10-K. We may
not generate sufficient income to make distributions to our stockholders. Our board of directors has the sole discretion to determine the timing, form and amount of
any distributions to our stockholders. Our board of directors will make determinations regarding distributions based upon, among other factors, our financial
performance, any debt service obligations, any debt covenants, and capital expenditure requirements. Among the factors that could impair our ability to make
distributions to our stockholders are:
•
•
•
•
our inability to realize attractive returns on our investments;
unanticipated expenses or reduced revenues that reduce our cash flow or non-cash earnings;
our debt service obligations; and
decreases in the value of our industrial properties that we own.
23
As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any
distributions we do make to our stockholders will increase or even be maintained over time, any of which could materially and adversely affect the market price of
our shares of common stock.
Our
ability
to
pay
dividends
is
limited
by
the
requirements
of
Maryland
law.
Our ability to pay dividends on our stock is limited by the laws of the State of Maryland. Under applicable Maryland law, a Maryland corporation generally
may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course
of business, or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter provides otherwise, the amount
that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose
preferential rights are superior to those receiving the distribution. Accordingly, we generally may not make a distribution on our stock if, after giving effect to the
distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total
liabilities plus, unless the
terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any
class or series of preferred stock then outstanding, if any, with preferences senior to those of our outstanding stock.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
As of December 31, 2018 , we owned 205 buildings aggregating approximately 12.8 million square feet and 16 improved land parcels consisting of
approximately 55.2 acres. The properties are located in Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and
Washington, D.C. As of December 31, 2018 , our properties were approximately 98.4% leased to 454 customers, the largest of which accounted for approximately
3.9% of our total annualized base rent. We own several types of industrial real estate, including warehouse/distribution (approximately 92.5% of our total portfolio
square footage as of December 31, 2018 ), flex (including light industrial and R&D) (approximately 5.4% ) and transshipment (approximately 2.1% ). See “Item
1 – Our Investment Strategy – Industrial Facility General Characteristics” in this Annual Report on Form 10-K for a general description of these types of industrial
real estate. 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. See our “Consolidated Financial Statements, Schedule III-Real Estate Investments and Accumulated Depreciation” in this Annual
Report on Form 10-K, for a detailed listing of our properties.
The following table summarizes by market our investments in real estate as of December 31, 2018 :
24
Number of
Buildings
Rentable
Square Feet
% of
Total
Occupancy % As
Of December 31,
2018
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
36
2,530,845
19.7%
98.3% $
20,072
17.3% $
8.07
7.4 $
386,809
57
3,252,854
25.3%
99.2%
30,331
26.3%
9.40
4.2
461,783
37
25
27
23
1,816,636
1,665,625
1,497,904
2,059,480
14.2%
13.0%
11.7%
16.1%
95.8%
99.4%
100.0%
97.4%
19,580
13,828
12,858
19,127
16.9%
11.9%
11.1%
16.5%
11.25
8.35
8.58
9.54
3.7
3.9
3.8
4.2
287,160
263,815
175,384
270,825
205
12,823,344
100.0%
98.4% $
115,796
100.0% $
9.18
4.7 $
1,845,776
Market
Los Angeles
Northern New
Jersey/New York
City
San Francisco Bay
Area
Seattle
Miami
Washington, D.C.
Total/Weighted
Average
1 Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2018 ,
multiplied by 12.
2 Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of December 31, 2018 , weighted by the
3
respective square footage.
Includes approximately 55.2 acres of improved land and five properties under redevelopment expected to contain approximately 0.7 million square feet
upon completion as discussed below.
We also own 16 improved land parcels totaling approximately 55.2 acres that are approximately 76.5% leased to 16 tenants. Such land is used for truck,
trailer and container storage and/or car parking. In the future, we may redevelop some or all of such land. As of December 31, 2018 , we own five properties under
redevelopment expected to contain approximately 0.7 million square feet upon completion with a total expected investment of approximately $ 136.3 million,
including redevelopment costs of approximately $ 49.9 million.
The following table summarizes by market our investments in improved land as of December 31, 2018 :
Number of
Parcels
Acres
% of
Total
Occupancy % As
Of December 31,
2018
Annualized
Base Rent
(000’s) 1
% of
Total
Annualized
Base Rent
Per
Occupied
Square
Foot
Weighted
Average
Remaining
Lease Term
(Years) 2
5
10.1
18.3%
68.1% $
1,122
24.4% $
3.82
6
2
—
2
1
16
27.1
49.1%
1.4
—
3.2
2.5%
0%
5.8%
13.4
24.3%
63.5%
100.0%
—
100.0%
100.0%
2,130
46.3%
202
—
393
749
4.4%
0%
8.6%
16.3%
2.96
3.21
—
2.85
1.29
55.2
100.0%
76.5% $
4,596
100.0% $
2.56
2.1
6.8
1.3
—
3.7
1.0
3.7
Market
Los Angeles
Northern New Jersey/New
York City
San Francisco Bay Area
Seattle
Miami
Washington, D.C.
Total/Weighted
Average
1 Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2018 ,
multiplied by 12.
2 Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of December 31, 2018 , weighted by the
respective square footage.
25
The following table summarizes our capital expenditures incurred during the three months and years ended December 31, 2018 and 2017 (dollars in
thousands):
Building improvements
Tenant improvements
Leasing commissions
Redevelopment and expansion
Total capital expenditures 1
For the Three Months Ended December 31,
For the Year Ended December 31,
2018
2017
2018
2017
6,855 $
2,742 $
17,953 $
2,336
3,174
6,026
2,147
2,790
—
4,312
7,937
11,639
18,391
$
7,679
$
41,841
$
11,626
7,083
7,537
—
26,246
$
$
1
Includes approximately $13.7 million and $3.7 million for the three months ended December 31, 2018 and 2017 , respectively, and approximately
$27.5 million and $13.3 million for the years ended December 31, 2018 and 2017 , respectively, related to leasing acquired vacancy, redevelopment
construction in progress and renovation and expansion projects (stabilization capital) at 13 and 12 properties for the three months ended December 31,
2018 and 2017 , respectively, and 21 and 18 properties for the years ended December 31, 2018 and 2017 , respectively.
The following table summarizes the anticipated lease expirations for leases in place at December 31, 2018 , without giving effect to renewal options or
termination rights, if any, at or prior to the scheduled expirations:
Year
2019 1, 2
2020
2021
2022
2023
Thereafter
Total
Rentable
Square Feet
% of Total
Rentable
Square Feet
Annualized
Base Rent
(000’s) 3
% of Total
Annualized
Base Rent
1,162,296
2,091,594
2,333,720
1,675,108
1,573,489
3,778,829
9.1% $
16.3%
18.2%
13.1%
12.3%
29.4%
10,419
18,268
20,630
16,459
18,177
46,558
12,615,036
98.4%
$
130,511
8.0%
14.0%
15.8%
12.6%
13.9%
35.7%
100.0%
Includes leases that expire on or after December 31, 2018 and month-to-month leases totaling approximately 60,880 square feet.
1
2 Approximately 1.1 million square feet of leases that were expiring in 2019 were renewed in 2018.
3 Annualized base rent is calculated as monthly base rent per the leases at expiration, excluding any partial or full rent abatements, as of December 31, 2018
, 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
December 31, 2018 , leases representing approximately 9.1% of the total rentable square footage of our portfolio are scheduled to expire during the year ending
December 31, 2019. We currently expect that on average, the rental rates we are likely to achieve on any new (re-leased) or renewed leases for our 2019
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 feet
commencing during the three months ended December 31, 2018 were approximately 28.6% higher as compared to the previous rental rates for that same space,
and rent changes on new and renewed leases totaling approximately 1.4 million square feet commencing during the year ended December 31, 2018 were
approximately 19.2% 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 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.
26
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
91.6% 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.
Our top 20 customers based on annualized base rent as of December 31, 2018 are as follows:
Customer
1 United States Government
2 FedEx Corporation
3 Amazon.com
4 Danaher
5 Northrop Grumman Systems
6 AmerisourceBergen
7 XPO Logistics
8 District of Columbia
9 Z Gallerie Inc.
10 YRC
11 O'Neill Logistics
12 Miami International Freight Systems
13 Bar Logistics
14 Saia Motor Freight Line LLC
15 L3 Technologies, Inc.
16 JAM'N Logistics
17 Space Systems/Loral LLC
18 McKinstry Co., LLC
19 Exquisite Apparel Corporation
20 Home Depot USA Inc.
Total
Leases
Rentable
Square Feet
% of Total
Rentable
Square Feet
Annualized
Base Rent
(000’s) 1
% of Total
Annualized
Base Rent
9
7
2
3
2
1
2
3
1
2
2
1
2
1
1
1
2
4
1
1
381,431
490,779
241,462
171,707
199,866
211,418
180,717
149,203
230,891
61,252
237,692
192,454
203,263
52,086
135,579
110,336
107,060
67,160
114,061
192,000
3.0% $
3.7%
1.9%
1.3%
1.6%
1.6%
1.4%
1.2%
1.8%
0.5%
1.9%
1.5%
1.6%
0.4%
1.1%
0.9%
0.8%
0.5%
0.9%
1.5%
4,696
4,657
3,210
2,961
2,270
2,260
1,649
1,600
1,512
1,337
1,323
1,245
1,220
1,212
1,180
1,159
1,107
1,092
985
930
3.9%
3.9%
2.7%
2.5%
1.9%
1.9%
1.4%
1.3%
1.3%
1.1%
1.1%
1.0%
1.0%
1.0%
1.0%
1.0%
0.9%
0.9%
0.7%
0.7%
48
3,730,417
29.1% $
37,605
31.2%
1 Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2018 ,
multiplied by 12.
As of December 31, 2018 , four properties with a gross investment book value of approximately $ 114.5 million were encumbered by mortgage loans
payable, net of deferred financing costs, totaling approximately $ 45.8 million, which bear interest at a weighted average fixed annual rate of 4.1% .
Item 3.
Legal Proceedings.
We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.
Item 4.
Mine Safety Disclosures.
Not Applicable.
27
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “TRNO”. As of January 30, 2019, there were approximately
18,814 holders of record of shares of our common stock. This number does not include stockholders for which shares are held in “nominee” or “street” name.
Distribution Policy
We intend to pay regular quarterly distributions when, as and if authorized by our board of directors and declared by us. Our ability to make distributions to
our stockholders also will depend on our levels of retained cash flows, which we intend to use as a source of investment capital. In order to qualify for taxation as a
REIT, we must distribute to our stockholders an amount at least equal to:
(i) 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain); plus
(ii) 90% of the excess of our after-tax net income, if any, from foreclosure property over the tax imposed on such income by the Code; less
(iii) the sum of certain items of non-cash income.
Generally, we expect to distribute 100% of our REIT taxable income so as to avoid the income and excise tax on undistributed REIT taxable income.
However, we cannot assure you as to our ability to sustain those distributions.
The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including:
•
•
•
•
•
•
•
•
•
•
actual results of operations;
our level of retained cash flows;
any debt service requirements;
capital expenditure requirements for our properties;
our property dispositions;
our taxable income;
the annual distribution requirement under the REIT provisions of the Code;
our operating expenses;
restrictions on the availability of funds under Maryland law; and
other factors that our board of directors may deem relevant.
To the extent that, in respect of any calendar year, cash available for distribution is less than our REIT taxable income, we could be required to sell assets or
borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable share distribution or distribution of debt securities.
Income as computed for purposes of the tax rules described above will not necessarily correspond to our income as determined for financial reporting purposes.
Distributions to our stockholders generally are taxable to our stockholders as ordinary income; however, because a significant portion of our investments are
equity ownership interests in industrial properties, which generate depreciation and other non-cash charges against our income, a portion of our distributions may
constitute a tax-free return of capital, although our current intention is to limit the level of such return of capital.
The following table sets forth the cash dividends paid or payable during the years ended December 31, 2018 and 2017 :
28
For the Three
Months Ended
March 31, 2018
June 30, 2018
Security
Common stock
Common stock
September 30, 2018
Common stock
December 31, 2018
Common stock
For the Three
Months Ended
March 31, 2017
March 31, 2017
June 30, 2017
June 30, 2017
Security
Common stock
Preferred stock
Common stock
Preferred stock
September 30, 2017
Common stock
December 31, 2017
Common stock
Performance Graph
Dividend
per Share
Declaration Date
Record Date
Date Paid
0.220000 February 6, 2018
March 28, 2018
0.220000 May 1, 2018
July 6, 2018
April 12, 2018
July 20, 2018
0.240000 August 1, 2018
October 5, 2018
October 19, 2018
0.240000 October 31, 2018
December 18, 2018
January 11, 2019
Dividend
per Share
Declaration Date
Record Date
Date Paid
0.200000 February 7, 2017
March 28, 2017
0.484375 February 7, 2017
March 10, 2017
0.200000 May 2, 2017
0.484375 May 2, 2017
July 7, 2017
June 9, 2017
April 12, 2017
March 31, 2017
July 21, 2017
June 30, 2017
0.220000 August 1, 2017
October 6, 2017
October 21, 2017
0.220000 October 31, 2017
December 29, 2017
January 12, 2018
$
$
$
$
$
$
$
$
$
$
The following graph compares the change in the cumulative total stockholder return on our common stock during the period from December 31, 2013 to
December 31, 2018 with the cumulative total return of the Standard and Poor’s 500 Stock Index, the MSCI U.S. REIT Index (RMS) and the FTSE Nareit Equity
Industrial Index. The return shown on the graph is not necessarily indicative of future performance. The comparison assumes that $100 was invested on
December 31, 2013 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.
The performance graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such information
be incorporated by reference into any future filing, except to the extent that the company specifically incorporates it by reference into such filing.
29
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 6.
Selected Financial Data.
The following table sets forth selected financial data derived from our audited consolidated financial statements as of and for the years ended December 31,
2018 , 2017 , 2016 , 2015 , and 2014 , should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on
Form 10-K beginning on page F-1 and with Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (dollars in
thousands, except share and per share amounts):
30
Operating Data
Total revenues
Total costs and expenses
Gain on sales of real estate investments
Income from operations
Net income available to common
stockholders, net of redemption of preferred
stock and preferred stock dividends
Earnings per Common Share - Basic and
Diluted:
Net income available to common
stockholders, net of redemption of preferred
stock and preferred stock dividends
Dividends declared per common share
Dividends declared per preferred share
Basic and Diluted Weighted Average
Common Shares Outstanding
Other Data
Funds from operations 1
Basic and diluted FFO per common share 1
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Balance Sheet Data
Investments in real estate at cost 2
Total assets
Total debt
Total stockholders’ equity
2018
2017
2016
2015
2014
For the Year Ended December 31,
$
151,657 $
132,484 $
108,418 $
95,895 $
102,431
28,610
63,289
93,435
30,654
53,095
87,172
7,140
15,118
82,240
10,567
14,601
68,875
51,567
—
10,718
62,888
49,015
11,458
10,958
7,126
$
$
$
$
$
1.09 $
0.92 $
—
0.95 $
0.84 $
0.97
0.26 $
0.76 $
1.94
0.26 $
0.66 $
1.94
0.23
0.57
1.94
57,486,399
51,357,719
44,725,936
42,861,276
30,433,017
74,904 $
1.30
56,070 $
1.09
38,391 $
0.86
36,172 $
0.84
77,599 $
69,498 $
49,241 $
42,068 $
(234,957)
149,037
(249,118)
203,942
(149,629)
93,758
(259,664)
45,140
1,845,776 $
1,636,930 $
1,343,038 $
1,179,920 $
1,796,504
462,097
1,247,797
1,567,871
461,683
1,027,494
1,278,981
1,152,138
415,327
811,805
381,475
733,082
26,097
0.86
29,321
(245,526)
404,207
901,273
1,074,735
302,470
747,036
1 See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures,” in this
Annual Report on Form 10-K for a reconciliation to net income, net of redemption of preferred stock and preferred stock dividends and a discussion of
why we believe funds from operations, or FFO, is a useful supplemental measure of operating performance, ways in which investors might use FFO when
assessing our financial performance, and FFO’s limitations as a measurement tool.
2 Excludes one property held for sale with a gross book value of approximately $6.3 million as of December 31, 2015 and one property held for sale with a
gross book value of approximately $6.9 million as of December 31, 2014.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with the sections of this Annual Report on Form 10-K entitled “Risk Factors”, “Forward-Looking
Statements”, “Business” and our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.
This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events
may differ materially
31
from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere
in this Annual Report on Form 10-K.
Overview
We acquire, own and operate 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 (approximately 92.5% of our total
portfolio square footage as of December 31, 2018 ), flex (including light industrial and R&D) (approximately 5.4% ) and transshipment (approximately 2.1% ). 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. As of December 31, 2018 , we owned 205 buildings aggregating approximately 12.8 million square feet, 16 improved land parcels consisting of
approximately 55.2 acres and five properties under redevelopment expected to contain approximately 0.7 million square feet upon completion. As of December 31,
2018 , our properties were approximately 98.4% leased to 454 customers, the largest of which accounted for approximately 3.9% of our total annualized base rent.
We are an internally managed Maryland corporation and elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable
year ended December 31, 2010.
Our Investment Strategy
We acquire, own and operate industrial properties 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 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.
We selected our target markets by drawing upon the experience of our executive management investing and operating in over 50 global industrial markets
located in North America, Europe and Asia, the fundamentals of supply and demand, and in anticipation of trends in logistics patterns resulting from population
changes, regulatory and physical constraints, changes in technology, e-commerce, potential long term increases in carbon prices and other factors. We believe that
our target markets have attractive long term investment attributes. We target assets with characteristics that include, but are not limited to, the following:
•
•
•
•
•
•
•
Located in high population coastal markets;
Close proximity to transportation infrastructure (such as sea ports, airports, highways and railways);
Situated in supply-constrained submarkets with barriers to new industrial development, as a result of physical and/or regulatory constraints;
Functional and flexible layout that can be modified to accommodate single and multiple tenants;
Acquisition price at a discount to the replacement cost of the property;
Potential for enhanced return through re-tenanting or operational and physical improvements; and
Opportunity for higher and better use of the property over time.
In general, we prefer to utilize local third-party property managers for day-to-day property management and as a source of acquisition opportunities. We
believe outsourcing property management is cost effective and provides us with operational flexibility. We may directly manage properties in the future if we
determine such direct property management is in our best interest.
We have no current intention to acquire undeveloped or unimproved industrial land or to pursue greenfield ground up development. However, we may
pursue redevelopment, renovation and expansion opportunities of properties that we own, acquire properties and improved land parcels with the intent to redevelop
in the near-term, or acquire adjacent land to expand our existing facilities.
We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties, portfolios of properties or
improved industrial land parcels which may be rented without a building in place. We may also acquire industrial properties through the acquisition of other
corporations or entities that own industrial real estate. We will opportunistically target investments in debt secured by industrial real estate that would otherwise
meet our investment criteria with the intention of ultimately acquiring the underlying real estate. We currently do not intend to target specific percentages of
holdings of particular types of industrial properties. This expectation is based upon prevailing market conditions and may change over time in response to different
prevailing market conditions.
32
The properties we acquire may be stabilized (fully leased) or unstabilized (have near term lease expirations, be partially or fully vacant and may require
physical repositioning). During the period from February 16, 2010 to December 31, 2018 , we have stabilized 69 properties.
We sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value and/or the
market value of the property is significantly greater than its estimated replacement cost. Capital from such sales is reinvested into properties that are expected to
provide better prospective returns or returned to shareholders. We have disposed of 15 properties since inception in 2010 for an aggregate sales price of
approximately $ 242.5 million and a total gain of approximately $ 83.7 million.
2018 Developments
Acquisition
Activity
During 2018 , we acquired 17 industrial buildings containing approximately 1.0 million square feet and five improved land parcels consisting of
approximately 19.9 acres for a total purchase price of approximately $ 219.5 million. The properties and improved land parcels were acquired from unrelated third
parties using existing cash on hand, net proceeds from dispositions, net proceeds from the issuance of common stock, and proceeds from borrowings on our
revolving credit facility. The following table sets forth the industrial properties and improved land parcels we acquired during 2018 :
Property Name
Location
Acquisition Date
Number of
Buildings
Square
Feet
Purchase Price
(in thousands) 1
Stabilized
Cap Rate 2
Vermont
Woodside
1st Avenue South
Wicks Blvd
85 Doremus 3
East Valley
Merced 4
San Clemente
Whitney 5
Commerce
Kent 192 6
6th Ave
Walnut II
Shoemaker 7
Hotchkiss II
Total/Weighted
Average
Torrance, CA
Queens, NY
Seattle, WA
San Leandro, CA
Newark, NJ
Renton, WA
San Leandro, CA
Hayward, CA
San Leandro, CA
Carlstadt, NJ
Seattle, WA
Seattle, WA
Compton, CA
Santa Fe Springs, CA
Fremont, CA
January 31, 2018
March 6, 2018
March 6, 2018
April 27, 2018
May 7, 2018
May 7, 2018
August 2, 2018
September 7, 2018
September 17, 2018
October 17, 2018
October 24, 2018
October 31, 2018
November 7, 2018
November 14, 2018
December 20, 2018
1
1
1
1
—
1
4
1
3
1
—
1
1
—
1
17
99,629 $
83,294
234,720
11,300
—
39,005
225,344
54,000
128,073
24,000
—
50,270
60,040
—
29,214
17,500
25,170
42,000
2,600
6,300
5,950
36,000
9,000
22,790
3,480
12,434
12,558
11,108
6,400
6,200
1,038,889
$
219,490
3.3%
5.7%
5.1%
5.2%
5.1%
5.2%
5.2%
4.6%
4.8%
5.2%
5.6%
5.1%
4.8%
5.4%
5.2%
5.0%
1 Excludes intangible liabilities and mortgage premiums, if any. The total aggregate investment was approximately $ 227.1 million, including $ 2.9
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 this Annual Report on Form 10-K.
3 Represents an improved land parcel containing approximately 3.5 acres.
4 Also includes an improved land parcel containing approximately 1.2 acres.
5 Also includes an improved land parcel containing approximately 0.2 acres.
6 Represents an improved land parcel containing approximately 12.7 acres that is under redevelopment and upon completion is expected to contain an
approximately 220,000 square foot industrial building. The total expected investment will be approximately $33.9 million .
33
7 Represents an improved land parcel containing approximately 2.3 acres.
Redevelopment
Activity
As of December 31, 2018, we have five properties under redevelopment that will contain approximately 0.7 million square feet upon completion with a total
expected investment of approximately $ 136.3 million, including redevelopment costs, capitalized interest and other costs of approximately $ 49.9 million as
follows:
Property Name
1775 NW 70th Avenue
1st Avenue South
10100 NW 25th Street
6th Avenue South
Kent 192
Total Expected
Investment (in
thousands) 1
Amount Spent to Date
(in thousands)
Estimated Amount
Remaining to Spend
(in thousands)
Estimated Stabilized
Cap Rate 2
$
10,181
$
9,779
$
63,675
13,231
15,302
33,875
47,704
11,251
12,784
13,177
402
15,971
1,980
2,518
20,698
41,569
Estimated
Completion Quarter
Q1 2019
Q3 2020
Q2 2019
Q4 2019
Q4 2020
5.3%
5.1%
5.3%
5.1%
5.6%
5.3%
Total/Weighted Average
$
136,264
$
94,695
$
1 Total expected investment for the property includes the initial purchase price, buyer’s due diligence and closing costs, estimated near-term redevelopment
expenditures, capitalized interest and leasing costs necessary to achieve stabilization.
2 Estimated stabilized cap rates are calculated 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. We define cash basis net operating income for the property as net operating income excluding
straight-line rents and amortization of lease intangibles. These estimated 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 this Annual Report
on Form 10-K.
During 2018 , we completed redevelopment of our Woodside property in Queens, New York. We executed a ten-year lease with a leading e-commerce firm
stabilizing the approximately 83,000 square foot redevelopment property. The total expected investment was approximately $32.1 million with an estimated
stabilized cap rate of 6.3%.
Disposition
Activity
During the year ended December 31, 2018 , we sold four properties for an aggregate sales price of approximately $ 82.1 million, resulting in a total gain of
approximately $ 28.6 million. We sold one property located in the Washington, D.C. market for a sales price of approximately $ 20.3 million, resulting in a gain
of approximately $ 3.3 million, two properties located in the Miami market for an aggregate sales price of approximately $ 28.6 million, resulting in an aggregate
gain of approximately $ 13.1 million, and one property located in the Los Angeles market for a sales price of approximately $ 33.2 million, resulting in a gain of
approximately $ 12.2 million.
The following summarizes the condensed results of operations of the properties sold during the year ended December 31, 2018 for the years ended
December 31, 2018 , 2017 and 2016 (in thousands):
Rental revenues
Tenant expense reimbursements
Property operating expenses
Depreciation and amortization
Income from operations
For the Year Ended December 31,
2018
2017
2016
2,495 $
4,127 $
346
(613)
(737)
574
(1,075)
(1,513)
1,491
$
2,113
$
4,532
738
(1,083)
(1,732)
2,455
$
$
34
ATM
Program
We have an at-the-market equity offering program (the “$250 Million ATM Program”) pursuant to which we may issue and sell shares of our common stock
having an aggregate offering price of up to $250.0 million in amounts and at times as we determine from time to time. Prior to the implementation of the $250
Million ATM Program, we had a $200.0 million ATM program (the “$200 Million ATM Program”) which was substantially utilized as of June 30, 2018 and
which is no longer active, and a $150.0 million ATM program, which was fully utilized as of June 30, 2017. We intend to use the net proceeds from the offering of
the shares under the $250 Million ATM Program, if any, for general corporate purposes, which may include future acquisitions and repayment of indebtedness,
including borrowings under our revolving credit facility. During 2018 , we issued an aggregate of 5,492,707 shares of common stock at a weighted average
offering price of $ 38.04 per share under the $250 Million ATM Program and the $200 Million ATM Program, resulting in net proceeds of approximately $ 205.9
million and paying total compensation to the applicable sales agents of approximately $ 3.0 million. As of December 31, 2018 , we had shares of common stock
having an aggregate offering price of up to $ 129.9 million available for issuance under the $250 Million ATM Program.
Senior
Secured
Loan
On May 7, 2018, we made a senior secured loan of $ 55.0 million with a two -year term that bears interest at a fixed annual interest rate of 8.0% and matures
in May 2020 (the “Senior Secured Loan”). The Senior Secured Loan is secured by a portfolio of nine improved land parcels primarily located in Newark and
Kearny, New Jersey. One of the properties securing the Senior Secured Loan may be put to us as partial repayment of the Senior Secured Loan. This property, and
two of the other properties, may be called by us as partial or full repayment of the Senior Secured Loan at previously agreed upon values. In addition, per the terms
of the Senior Secured Loan, the borrower may repay the loan at any time with either cash or deeds in lieu, with the deeds subject to our approval. As of
December 31, 2018 , the borrower has offered repayment with deeds in lieu on two of the three option properties for an aggregate purchase price of approximately
$ 39.1 million. As of February 6, 2019 , we have one outstanding contract to acquire one of the option properties for approximately $ 25.0 million and one non-
binding letter of intent to acquire one of the option properties for approximately $14.1 million. 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, and with respect to the
property under non-binding letter of intent, our entry into a purchase and sale agreement. As of December 31, 2018 , there was approximately $ 54.5 million, net of
deferred loan fees of approximately $ 0.5 million, outstanding on the Senior Secured Loan and approximately $ 0.4 million of interest receivable outstanding on
the Senior Secured Loan.
Share
Repurchase
Program
On October 31, 2018, our Board of Directors approved an extension of the share repurchase program authorizing us to repurchase up to 3,000,000 shares
(previously 2,000,000 shares) of our outstanding common stock from time to time through December 31, 2020 . 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 December 31, 2018 , we have not repurchased
any shares of stock pursuant to our share repurchase authorization.
Dividend
and
Distribution
Activity
The following table sets forth the cash dividends paid or payable per share during the year ended December 31, 2018 :
For the Three
Months Ended
March 31, 2018
June 30, 2018
Security
Common stock
Common stock
September 30, 2018
Common stock
December 31, 2018
Common stock
$
$
$
$
Dividend
per Share
Declaration Date
Record Date
Date Paid
0.22 February 6, 2018
March 28, 2018
0.22 May 1, 2018
July 6, 2018
April 12, 2018
July 20, 2018
0.24 August 1, 2018
October 5, 2018
October 19, 2018
0.24 October 31, 2018
December 18, 2018
January 11, 2019
35
Recent Developments
Contractual
Commitments
As of February 6, 2019 , we have two outstanding contracts with third-party sellers to acquire two industrial properties and one non-binding letter of intent
with a third party seller to acquire one industrial property as further described under the heading “Contractual Obligations” in this Annual Report on Form 10-K.
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, and with respect to the property under non-binding letter of intent, our entry into a purchase and sale agreement.
Outlook
Current operating conditions in our six markets are excellent, the best we have seen since our initial public offering. We believe that on average, the rental
rates we are likely to achieve on new or renewed leases for our 2019 expirations will be above the rates currently being paid for the same space. However, new
speculative development continues. This new development will slow potential rent growth from what it would be without such new development. Macroeconomic
conditions, while uncertain and impossible to accurately predict, appear less favorable to us than last year.
We see attractive acquisition opportunities today; however, our acquisition volume will be dependent on both the quality and pricing of the opportunity set
and the price of our stock relative to our net asset value (NAV). Those conditions, not knowable in advance, will determine our results. We entered 2019 with our
balance sheet well positioned for potential growth.
Over the intermediate term of the next three to four years, although there can be no assurance, we expect to grow our portfolio to approximately $4.0 billion
of assets up from approximately $2.6 billion as of December 31, 2018 as measured by our total market capitalization. We expect, although there can be no
assurance, that this will utilize approximately $3.0 billion of equity up from approximately $2.1 billion as of December 31, 2018. We expect this to enhance our
operating efficiency, increase our shareholder liquidity and maintain our investment grade credit rating. We remain mindful, however, that it is per share, rather
than aggregate, results that matter.
We believe in the long-term operating prospects of our functional, infill coastal assets. We believe in sound balance sheet management. We believe in the
benefits of our market-leading corporate governance and exceptionally aligned executive management compensation. As a result, we are enthusiastic about the
future and our ability to potentially produce superior results for our shareholders over time.
We contribute positively to the environment by owning and operating facilities in infill locations close to population centers thereby minimizing vehicle
miles traveled and the concomitant use of fuel and production of airborne particulate matter pollution. Further, we do no greenfield development of properties;
sustainability for us means never building on a site that has not previously been commercially developed. During redevelopment of our facilities, we recycle the
majority of the building materials from existing buildings and focus on modern design solutions to reduce our impact on the environment. When releasing vacant
space, we seek to reduce our carbon footprint by upgrading existing facilities with energy efficient lighting and heating.
Our outlook is subject to the risks set forth in this Annual Report on Form 10-K, including the risks set form in “Item 1A - Risk Factors”.
Inflation
Although the U.S. economy has been experiencing relatively modest inflation rates recently, and a wide variety of industries and sectors are affected
differently by changing commodity prices, inflation has increased construction costs but has not had a significant impact on our operating costs. Most of our leases
require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to
increases in costs and operating expenses resulting from inflation. In addition, approximately 69.0% of our total rentable square feet expire within five years which
enables us to seek to replace existing leases with new leases at the then-existing market rate.
Supplemental
Material
U.S.
Federal
Income
Tax
Considerations
The following discussion updates the disclosures under “Material U.S. Federal Income Tax Considerations” in the prospectus dated February 9, 2018
contained in our Registration Statement on Form S-3 filed with the SEC on February 9, 2018 and contained in the prospectus supplement dated May 31, 2018, as
previously updated by the disclosures under “Supplemental Material U.S. Federal Income Tax Considerations” in our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2018 filed with the SEC on November 1, 2018.
36
On December 13, 2018, the Department of the Treasury and the Internal Revenue Service issued proposed regulations under Sections 1471-1474 of the Code
(commonly referred to as FATCA), which proposed regulations eliminate FATCA withholding on gross proceeds and thus implicate certain tax-related disclosures
contained in the prospectus. While these regulations have not yet been finalized, taxpayers are generally entitled to rely on the proposed regulations (subject to
certain limited exceptions). Accordingly, the discussion under “Material U.S. Federal Income Tax Considerations-Additional U.S. Federal Income Tax
Withholding Rules” on pages 36 and 37 of the prospectus is replaced with the following paragraph:
The Foreign Account Tax Compliance Act, or FATCA, imposes withholding taxes on dividends made to “foreign financial institutions” and certain other
non-U.S. entities unless (i) the foreign financial institution undertakes certain diligence and reporting obligations or (ii) the foreign non-financial entity either
certifies it does not have any substantial United States owners or furnishes identifying information regarding each substantial United States owner. If the payee is a
foreign financial institution, it must enter into an agreement with the United States Treasury requiring, among other things, that it undertakes to identify accounts
held by certain United States persons or United States-owned foreign entities, annually report certain information about such accounts, and withhold 30% on
payments to account holders whose actions prevent them from complying with these reporting and other requirements. Investors in jurisdictions that have entered
into “intergovernmental agreements” may, in lieu of the foregoing requirements, be required to report such information to their home jurisdictions. Prospective
investors should consult their tax advisors regarding this legislation.
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 91.6% 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 following analysis of our results below for the years ended December 31, 2018 and 2017 includes the changes attributable to same store properties. The
same store pool for the comparison of the 2018 and 2017 fiscal years includes all properties that were owned and in operation as of December 31, 2018 and since
January 1, 2017 and excludes properties that were either disposed of prior to, held for sale to a third-party or in redevelopment as of December 31, 2018 . As of
December 31, 2018 , the same store pool consisted of 156 buildings aggregating approximately 10.4 million square feet representing approximately 81.3% of our
total square feet owned and six improved land parcels consisting of approximately 23.0 acres. As of December 31, 2018 , the non-same store properties, which we
acquired or sold during 2017 and 2018 , were held for sale or in redevelopment as of December 31, 2018 , consisted of 49 buildings aggregating approximately 2.4
million square feet, ten improved land parcels consisting of approximately 32.2 acres and five properties under redevelopment expected to contain approximately
0.7 million square feet upon completion. As of December 31, 2018 and 2017 , our consolidated same store pool occupancy was approximately 99.1% and 98.1% ,
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.
37
Comparison of the Year Ended December 31, 2018 , to the Year Ended December 31, 2017 :
Rental revenues
Same store
Non-same store operating properties 1
Total rental revenues
Tenant expense reimbursements
Same store
Non-same store operating properties 1
Total tenant expense reimbursements
Total revenues
Property operating expenses
Same store
Non-same store operating properties 1
Total property operating expenses
Net operating income 2
Same store
Non-same store operating properties 1
Total net operating income
Other costs and expenses
Depreciation and amortization
General and administrative
Acquisition costs
Total other costs and expenses
Other income (expense)
Interest and other income
Interest expense, including amortization
Gain on sales of real estate investments
Total other income and (expenses)
Net income
For the Year Ended December 31,
2018
2017
$ Change
% Change
(Dollars in thousands)
$
94,937 $
23,246
118,183
90,273 $
13,056
103,329
27,866
5,608
33,474
151,657
31,871
8,117
39,988
90,932
20,737
$
111,669
$
40,816
21,503
124
62,443
3,664
(18,211)
28,610
14,063
26,556
2,599
29,155
132,484
31,795
4,079
35,874
85,034
11,576
96,610
$
37,870
19,681
10
57,561
169
(16,777)
30,654
14,046
$
63,289 $
53,095 $
4,664
10,190
14,854
1,310
3,009
4,319
19,173
76
4,038
4,114
5,898
9,161
15,059
2,946
1,822
114
4,882
3,495
(1,434)
(2,044)
17
10,194
5.2 %
78.0 %
14.4 %
4.9 %
115.8 %
14.8 %
14.5 %
0.2 %
99.0 %
11.5 %
6.9 %
79.1 %
15.6 %
7.8 %
9.3 %
1,140.0 %
8.5 %
2,068.0 %
8.5 %
(6.7)%
0.1 %
19.2 %
1
2
Includes 2017 and 2018 acquisitions and dispositions, ten improved land parcels, five properties under redevelopment and one completed redevelopment
property with a gross book value of approximately $29.3 million as of December 31, 2018 .
Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a
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 $ 19.2 million for the year ended December 31, 2018 compared to the prior year due primarily to
property acquisitions during 2017 and 2018 , increased revenue on new and renewed leases and lease termination income of approximately $0.7 million. Same
store rental revenues and tenant expense reimbursement revenues increased primarily due to new lease agreements at our West 140th, Airgate, Denver Avenue, and
S. River Drive properties. For the quarter and year ended December 31, 2018 , approximately $0.4 million and $2.9 million, respectively, was recorded in straight-
line rental revenues related to contractual rent abatements given to certain tenants.
38
Property
operating
expenses.
Total property operating expenses increased approximately $ 4.1 million during the year ended December 31, 2018 compared
to the prior year. The increase in total property operating expenses was due primarily to an increase of approximately $ 4.0 million attributable to property
acquisitions during 2017 and 2018 .
Depreciation
and
amortization.
Depreciation and amortization increased approximately $ 2.9 million during the year ended December 31, 2018 compared to
the prior year due to property acquisitions during 2017 and 2018 .
General
and
administrative
expenses.
General and administrative expenses increased approximately $ 1.8 million for the year ended December 31, 2018
compared to the prior year due primarily to increased compensation expense, bonus expense, accounting service fees and performance share award expense, which
varies quarter to quarter based on our relative share price performance. Performance share award expense for the year ended December 31, 2018 was
approximately $ 7.1 million as compared to approximately $ 6.7 million for the prior year. See “Note 11 —Stockholder’s Equity” in our notes to the consolidated
financial statements for more information regarding our performance share awards.
Acquisition
costs.
Acquisition costs increased by approximately $ 0.1 million for the year ended December 31, 2018 compared to the year ended December
31, 2017.
Interest
and
other
income.
Interest and other income increased approximately $ 3.5 million for the year ended December 31, 2018 compared to the prior
year primarily due to approximately $3.3 million in interest and fees earned on our Senior Secured Loan, which we made in May 2018.
Interest
expense,
including
amortization.
Interest expense increased approximately $ 1.4 million for the year ended December 31, 2018 compared to the
prior year due primarily to an increase in our average outstanding borrowings on our credit facility and senior unsecured debt and higher interest rates, partially
offset by an increase of $2.5 million in capitalized interest compared to the prior year.
Gain
on
sales
of
real
estate
investments
. Gain on sale of real estate investments decreased approximately $ 2.0 million for the year ended December 31,
2018 compared to the prior year period due to property sales. The aggregate sales price for property sales for the year ended December 31, 2018 was approximately
$ 82.1 million as compared to approximately $77.3 million for the prior year.
The following analysis of our results below for the years ended December 31, 2017 and 2016 includes the changes attributable to same store properties. The
same store pool for the comparison of the 2017 and 2016 fiscal years includes all properties that were owned and in operation as of December 31, 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 December 31, 2017 . As of
December 31, 2017, the same store pool consisted of 140 buildings aggregating approximately 10.2 million square feet representing approximately 78.3% of our
total square feet owned and three improved land parcels consisting of approximately 4.9 acres. As of December 31, 2017, the non-same store properties, which we
acquired or sold during 2016 and 2017, were held for sale or in redevelopment as of December 31, 2017, consisted of 56 buildings aggregating approximately 2.8
million square feet and seven improved land parcels consisting of approximately 43.0 acres. As of December 31, 2017 and 2016, our consolidated same store pool
occupancy was approximately 97.5% and 98.9%, respectively.
39
Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 :
For the Year Ended December 31,
2017
2016
$ Change
% Change
Rental revenues
Same store
Non-same store operating properties 1
Total rental revenues
Tenant expense reimbursements
Same store
Non-same store operating properties 1
Total tenant expense reimbursements
Total revenues
Property operating expenses
Same store
Non-same store operating properties 1
Total property operating expenses
Net operating income 2
Same store
Non-same store operating properties 1
Total net operating income
Other costs and expenses
Depreciation and amortization
General and administrative
Acquisition costs
Total other costs and expenses
Other income (expense)
Interest and other income
Interest expense, including amortization
Loss on extinguishment of debt
Gain on sales of real estate investments
Total other income and expenses
Net income
$
$
(Dollars in thousands)
83,464 $
19,865
103,329
76,305 $
8,713
85,018
24,951
4,204
29,155
132,484
29,456
6,418
35,874
21,441
1,959
23,400
108,418
27,755
2,570
30,325
78,959
17,651
96,610
$
69,991
8,102
78,093
$
37,870
19,681
10
57,561
169
(16,777)
—
30,654
14,046
34,399
19,319
3,129
56,847
24
(13,053)
(239)
7,140
(6,128)
$
53,095 $
15,118 $
7,159
11,152
18,311
3,510
2,245
5,755
24,066
1,701
3,848
5,549
8,968
9,549
18,517
3,471
362
(3,119)
714
145
(3,724)
239
23,514
20,174
37,977
9.4 %
128.0 %
21.5 %
16.4 %
114.6 %
24.6 %
22.2 %
6.1 %
149.7 %
18.3 %
12.8 %
117.9 %
23.7 %
10.1 %
1.9 %
(99.7)%
1.3 %
604.2 %
28.5 %
n/a
329.3 %
n/a
251.2 %
1
2
Includes 2016 and 2017 acquisitions and dispositions and seven improved land parcels as of December 31, 2017.
Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a
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 $24.1 million for the year ended December 31, 2017 compared to the prior year due primarily to property
acquisitions during 2016 and 2017 and increased revenue on new and renewed leases. Same store rental revenues and tenant expense reimbursement revenues
increased primarily due to new lease agreements at our V Street, Interstate 130, Hamilton, Airgate, Kent 202, and 180 Manor properties. For the quarter and year
ended December 31, 2017, approximately $0.9 million and $3.1 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 $5.5 million during the year ended December 31, 2017 compared to
the prior year. The increase in total property operating expenses was due primarily to an increase of approximately $3.8 million attributable to property acquisitions
during 2016 and 2017, an increase of approximately $1.4 million in same store real estate tax expense primarily due to increased taxes on our V Street, Hamilton,
and Pennsy
40
properties, and an increase of approximately $0.2 million in expenses related to Hurricane Irma, of which approximately $0.2 million was incurred at our same
store operating properties.
Depreciation
and
amortization.
Depreciation and amortization increased approximately $3.5 million during the year ended December 31, 2017 compared
to the prior year due to property acquisitions during 2016 and 2017.
General
and
administrative
expenses.
General and administrative expenses increased approximately $0.4 million for the year ended December 31, 2017
compared to the prior year due primarily to increased compensation expense, bonus expense, and accounting service fees, offset by a decrease of approximately
$0.6 million in performance share award expense, which varies quarter to quarter based on our relative share price performance. Performance share award expense
for the year ended December 31, 2017 was approximately $6.7 million as compared to approximately $7.3 million for the prior year. See “Note 11 - Stockholder’s
Equity” in our notes to the consolidated financial statements for more information regarding our performance share awards.
Acquisition
costs.
Acquisition costs decreased by approximately $3.1 million for the year ended December 31, 2017 from the prior year due to the
adoption of Accounting Standards Update (“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 year ended December 31, 2017 as
compared to expensing as incurred in the prior year.
Interest
and
other
income.
Interest and other income increased approximately $0.1 million for the year ended December 31, 2017 compared to the prior
year.
Interest
expense,
including
amortization.
Interest expense increased approximately $3.7 million for the year ended December 31, 2017 compared to the
prior year due primarily to an increase in our average outstanding borrowings.
Gain
on
sales
of
real
estate
investments
. Gain on sale of real estate investments increased approximately $23.5 million for the year ended December 31,
2017 compared to the prior year due to property sales. The aggregate sales price for property sales for the year ended December 31, 2017 was approximately $77.3
million as compared to approximately $22.5 million for the prior year.
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 of properties, 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 6.0x;
•
•
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, dispositions of properties, common stock
and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value.
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
41
REIT requirements of the federal income tax laws. In the near-term, we intend to fund future investments in properties with cash on hand, 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, property
redevelopments, renovations and expansions 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 certain information regarding our current at-the-market common stock offering program as of December 31, 2018 :
ATM Stock Offering Program
$250 Million ATM Program
Date Implemented
May 31, 2018
$
Maximum Aggregate
Offering Price
(in thousands)
Aggregate Common Stock Available as
of December 31, 2018 (in thousands)
129,877
250,000 $
The table below sets forth the activity under our at-the-market common stock offering programs during the years ended December 31, 2018 and 2017 ,
respectively (in thousands, except share and price per share data):
For the Year Ended
December 31, 2018
December 31, 2017
Shares Sold
Weighted Average
Price Per Share
Net Proceeds
Sales Commissions
5,492,707 $
7,859,929 $
38.04 $
32.48 $
205,919 $
251,585 $
3,030
3,709
On May 7, 2018, we made a Senior Secured Loan of $ 55.0 million with a two -year term that bears interest at a fixed annual interest rate of 8.0% and
matures in May 2020 . The Senior Secured Loan is secured by a portfolio of nine improved land parcels primarily located in Newark and Kearny, New Jersey. One
of the properties securing the Senior Secured Loan may be put to us as partial repayment of the Senior Secured Loan. This property, and two of the other
properties, may be called by us as partial or full repayment of the Senior Secured Loan at previously agreed upon values. In addition, per the terms of the Senior
Secured Loan, the borrower may repay the loan at any time with either cash or deeds in lieu, with the deeds subject to our approval. As of December 31, 2018 , the
borrower has offered repayment with deeds in lieu on two of the three option properties for an aggregate purchase price of approximately $ 39.1 million. As of
February 6, 2019 , we have one outstanding contract to acquire one of the option properties for approximately $ 25.0 million and one non-binding letter of intent to
acquire of the option properties for approximately $14.1 million. 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, and with respect to the property under non-binding letter of
intent, our entry into a purchase and sale agreement. As of December 31, 2018 and 2017 , there was approximately $ 54.5 million and $ 0 , respectively, net of
deferred loan fees of approximately $ 0.5 million and $ 0 , respectively, outstanding on the Senior Secured Loan and approximately $ 0.4 million and $ 0 ,
respectively, of interest receivable outstanding on the Senior Secured Loan.
On October 19, 2018, we entered into a Fifth Amended and Restated Senior Credit Agreement (the “Facility”). The Facility consists of a $ 250.0 million
unsecured revolving credit facility (increased from $ 200.0 million) that matures in October 2022 (previously 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 . The amount and maturity dates of the outstanding term loans remain
unchanged under the Facility. 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 $ 250.0 million revolving credit facility (previously $ 200.0 million), the $ 50.0 million term loan maturing in August 2021 and the $
100.0 million term loan maturing in January 2022 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 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 with respect to the revolving credit facility under the Facility has been reduced to a range of 1.05% to
1.50% (previously 1.35% to 1.90% ; 1.05% as of December 31, 2018 ) and the applicable LIBOR margin with respect to the outstanding term loans under the
Facility has been reduced to a range of 1.20% to 1.70% (previously 1.30% to 1.85% ; 1.20% as of December 31, 2018 ), in each case 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 facility fee in an
amount
42
ranging from 0.15% to 0.30% (previously there was no annual facility fee) depending on the ratio of our outstanding consolidated indebtedness to the value of our
consolidated gross asset value. There is no unused facility fee under the Facility (previously 0.20% or 0.25% depending on the unused portion of the revolving
credit facility).
As of December 31, 2018 , we also had $ 50.0 million of senior unsecured notes that mature in September 2022 , $ 100.0 million of senior unsecured notes
that mature in July 2024 , $ 50.0 million of senior unsecured notes that mature in July 2026 , and $ 50.0 million of senior unsecured notes that mature in October
2027 (collectively, the “Senior Unsecured Notes”). As of December 31, 2018 and 2017 , there was $ 19.0 million and $ 0 , 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 9-Derivative Financial Instruments” in
our notes to consolidated financial statements for more information regarding our interest rate caps.
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 December 31, 2018 and 2017 .
As of December 31, 2018 and 2017 , we had outstanding mortgage loans payable, net of deferred financing costs, of approximately $ 45.8 million and $ 64.8
million, respectively, and held cash and cash equivalents totaling approximately $ 31.0 million and $ 35.7 million, respectively.
The following table summarizes our debt maturities and principal payments as of and for the year ended December 31, 2018 , and market capitalization,
capitalization ratios, Adjusted EBITDA, interest coverage, fixed charge coverage and debt ratios as of and for the years ended December 31, 2018 and 2017
(dollars in thousands – except per share data):
2019
2020
2021
2022
2023
Thereafter
Subtotal
Unamortized net premiums
Total Debt
Deferred financing costs, net
Total Debt, net
Weighted average interest rate
Credit
Facility
Term
Loans
Senior
Unsecured
Notes
Mortgage
Loans
Payable
Total Debt
$
— $
—
—
19,000
—
—
19,000
—
19,000
—
— $
—
50,000
100,000
—
—
150,000
—
150,000
(933)
— $
—
—
50,000
—
200,000
250,000
—
250,000
(1,737)
1,514
$
33,077
11,271
—
—
—
45,862
—
45,862
(95)
$
19,000
$
149,067
$
248,263
$
45,767
$
1,514
33,077
61,271
169,000
—
200,000
464,862
—
464,862
(2,765)
462,097
3.6%
3.6%
4.1%
4.1%
3.9%
43
Total Debt, net
Equity
Common Stock
Shares Outstanding 1
Market Price 2
Total Equity
Total Market Capitalization
Total Debt-to-Total Investments in Properties 3
Total Debt-to-Total Investments in Properties and Senior Secured Loan 4
Total Debt-to-Total Market Capitalization 5
Floating Rate Debt as a % of Total Debt 6
Unhedged Floating Rate Debt as a % of Total Debt 7
Mortgage Loans Payable as a % of Total Debt 8
Mortgage Loans Payable as a % of Total Investments in Properties 9
Adjusted EBITDA 10
Interest Coverage 11
Fixed Charge Coverage 12
Total Debt-to-Adjusted EBITDA 13
Weighted Average Maturity of Total Debt (years)
$
$
$
$
As of December 31, 2018
As of December 31, 2017
462,097
$
461,683
61,013,711
35.17
$
2,145,852
2,607,949
$
25.0%
24.5%
17.7%
36.4%
4.1%
9.9%
2.5%
103,100
$
5.7x
5.0x
4.2x
4.6
55,368,737
35.06
1,941,228
2,402,911
28.2%
28.2%
19.2%
32.3%
0%
14.0%
4.0%
85,830
5.1x
4.6x
5.3x
5.4
Includes 383,930 and 357,183 shares of unvested restricted stock outstanding as of December 31, 2018 and 2017 , respectively.
1
2 Closing price of our shares of common stock on the New York Stock Exchange on December 31, 2018 and December 29, 2017 , respectively, in dollars
per share.
3 Total debt-to-total investments in properties is calculated as total debt, net of deferred financing costs, divided by total investments in properties as of
December 31, 2018 and 2017 , respectively.
4 Total debt-to-total investments in properties and Senior Secured Loan is calculated as total debt, net of deferred financing costs, divided by total
investments in properties and total Senior Secured Loan, net of deferred loan fees of approximately $ 0.5 million and $ 0 , as of December 31, 2018 and
2017 , respectively.
5 Total debt-to-total market capitalization is calculated as total debt, net of deferred financing costs, divided by total market capitalization as of
December 31, 2018 and 2017 , respectively.
6 Floating rate debt as a percentage of total debt is calculated as floating rate debt, net of deferred financing costs, divided by total debt, 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 1.20%
to 1.70% , depending on leverage as of December 31, 2018 and 1.30% to 1.85% as of December 31, 2017 . See “Note 9 – Derivative Financial
Instruments” in our 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, net of deferred financing costs, divided by total debt,
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 1.20% to 1.70% , depending on leverage as of December 31, 2018 and 1.30% to 1.85% as of December 31, 2017 . See “Note 9 – Derivative Financial
Instruments” in our 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, net of deferred financing costs, divided by total debt, net of
deferred financing costs.
9 Mortgage loans payable as a percentage of total investments in properties is calculated as mortgage loans payable, net of deferred financing costs, divided
by total investments in properties.
10 Earnings before interest, taxes, gains (losses) from sales of property, depreciation and amortization, acquisition costs and stock-based compensation
(“Adjusted EBITDA”) for the years ended December 31, 2018 and 2017 , respectively. See “Non-GAAP Financial Measures” in this Annual Report on
Form 10-K for a definition and reconciliation of
44
11
Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating
performance.
Interest coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization. See “Non-GAAP Financial Measures” in this
Annual Report on Form 10-K 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, if any. See
“Non-GAAP Financial Measures” in this Annual Report on Form 10-K 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, net of deferred financing costs, divided by annualized Adjusted EBITDA. See “Non-GAAP
Financial Measures” in this Annual Report on Form 10-K 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.
The following table sets forth the cash dividends paid or payable per share during the years ended December 31, 2018 and 2017 :
For the Three
Months Ended
March 31, 2018
June 30, 2018
Security
Common stock
Common stock
September 30, 2018
Common stock
December 31, 2018
Common stock
For the Three
Months Ended
March 31, 2017
March 31, 2017
June 30, 2017
June 30, 2017
Security
Common stock
Preferred stock
Common stock
Preferred stock
September 30, 2017
Common stock
December 31, 2017
Common stock
Dividend
per Share
Declaration Date
Record Date
Date Paid
0.220000 February 6, 2018
March 28, 2018
0.220000 May 1, 2018
July 6, 2018
April 12, 2018
July 20, 2018
0.240000 August 1, 2018
October 5, 2018
October 19, 2018
0.240000 October 31, 2018
December 18, 2018
January 11, 2019
Dividend
per Share
Declaration Date
Record Date
Date Paid
0.200000 February 7, 2017
March 28, 2017
0.484375 February 7, 2017
March 10, 2017
0.200000 May 2, 2017
0.484375 May 2, 2017
July 7, 2017
June 9, 2017
April 12, 2017
March 31, 2017
July 21, 2017
June 30, 2017
0.220000 August 1, 2017
October 6, 2017
October 21, 2017
0.220000 October 31, 2017
December 29, 2017
January 12, 2018
$
$
$
$
$
$
$
$
$
$
On July 19, 2017, we redeemed all 1,840,000 outstanding shares of our 7.75% Series A Cumulative Redeemable Preferred Stock (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 $ 77.6 million for the year ended December 31, 2018
compared to approximately $ 69.5 million for the year ended December 31, 2017 . This increase in cash provided by operating activities is primarily attributable to
additional cash flows generated from properties acquired during 2018 and 2017 and same store properties.
Cash
From
Investing
Activities.
Net cash used in investing activities was approximately $ 235.0 million and $ 249.1 million, respectively, for the years
ended December 31, 2018 and 2017 , which consists primarily of cash paid for property acquisitions of $ 221.8 million and $ 297.1 million, respectively, net cash
paid for our Senior Secured Loan of approximately $54.1 million and $ 0 , respectively, and additions to capital improvements of approximately $ 38.6 million
and $ 27.4 million, respectively, offset by proceeds from sales of real estate investments of approximately $ 79.6 million and $ 75.4 million, respectively, for the
years ended December 31, 2018 and 2017 .
45
Cash
From
Financing
Activities.
Net cash provided by financing activities was approximately $149.0 million for the year ended December 31, 2018 , which
consists primarily of approximately $205.9 million in net common stock issuance proceeds and net borrowings of $19.0 million on our revolving credit facility,
offset by approximately $ 51.4 million in equity dividend payments and approximately $19.2 million in mortgage loan payments. Net cash provided by financing
activities was approximately $203.9 million for the year ended December 31, 2017 , which consists primarily of approximately $251.5 million in net common
stock issuance proceeds and $ 100.0 million in borrowings on senior unsecured notes, offset by approximately $43.9 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.
Critical Accounting Policies
Below is a discussion of the accounting policies that we believe are critical. We consider these policies critical because they require estimates about matters
that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and
evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or
assumptions may result in materially different amounts reported in our financial statements.
Capitalization
of
Costs.
We capitalize costs directly related to the redevelopment, renovation and expansion of our 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.
Property
Acquisitions.
Effective January 1, 2017, we adopted ASU 2017-01, 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. We have determined that our real estate property
acquisitions will generally be accounted for as asset acquisitions under the clarified definition. Prior to January 1, 2017, we generally accounted for property
acquisitions as business combinations, in accordance with Accounting Standards Codification (“ASC”) 805, Business
Combinations
. Upon acquisition of a
property we estimate 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). We determine 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 our 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 our 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 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,
46
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.
Impairment.
Carrying values for financial reporting purposes are reviewed for impairment on a property-by-property basis whenever events or changes in
circumstances indicate that the carrying value of a property may not be fully recoverable. Examples of such events or changes in circumstances may include
classifying an asset to be held for sale, changing the intended hold period or when an asset remains vacant significantly longer than expected. The intended use of
an asset either held for sale or held for use can significantly impact how impairment is measured. If an asset is intended to be held for the long-term, the
recoverability is based on the undiscounted future cash flows. If the asset carrying value is not supported on an 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. We
determine 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 our understanding of market conditions and the experience of our management
team. Actual results could differ significantly from our 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.
Revenue
Recognition.
We record rental revenue from operating leases on a straight-line basis over the term of the leases and maintain an allowance for
estimated losses that may result from the inability of our tenants to make required payments. If tenants fail to make contractual lease payments that are greater than
our allowance for doubtful accounts, security deposits and letters of credit, then we may have to recognize additional doubtful account charges in future periods.
We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing their financial condition periodically as appropriate. Each period
we review our outstanding accounts receivable, including straight-line rents, for doubtful accounts and provide allowances as needed. We also record lease
termination fees when a tenant has executed a definitive termination agreement with us 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 us. 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.
Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic 606) (“ASU No. 2014-09”), using the modified
retrospective approach, which requires a cumulative effect adjustment as of the date of our adoption. Under the modified retrospective approach, an entity may
also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018. A completed
contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application.
We elected to apply this standard only to contracts that were not completed as of January 1, 2018. Based on our evaluation of contracts within the scope of ASU
No. 2014-09, the guidance impacts revenue generated by sales of real estate, which is evaluated in conjunction with ASC 610-20, Other
Income
-
Gains
and
Losses
from
the
Derecognition
of
Nonfinancial
Assets
(see below).
Effective January 1, 2018, we adopted the guidance of ASC 610-20, Other
Income
-
Gains
and
Losses
from
the
Derecognition
of
Nonfinancial
Assets
,
which applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business.
Generally, our sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20. ASC 610-20 refers to the revenue recognition
principles under ASU 2014-09, Revenue
from
Contracts
with
Customers
(see above). Under ASC 610-20, if we determine that we do not have a controlling
financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we will derecognize the asset and
recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer.
Income
Taxes.
We elected to be taxed as a REIT under the Code and operate as such beginning with our taxable year ended December 31, 2010. To qualify
as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income
to our 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
47
accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we distribute qualifying dividends to our stockholders. If
we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our 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 us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for
distribution to stockholders. However, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT.
Stock-Based
Compensation
and
Other
Long-Term
Incentive
Compensation.
We follow the provisions of ASC 718, Compensation-Stock
Compensation,
to
account for our stock-based compensation plan, which requires that the compensation cost relating to stock-based payment transactions be recognized in the
financial statements and that the cost be measured on the fair value of the equity or liability instruments issued. We have 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 financial statements and measured at the fair value of the award on the date
of grant. We estimate 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, we have awarded long-term incentive target awards on an annual basis to our executives that are payable in shares of our common stock after the
conclusion of each pre-established performance measurement period. The amount that may be earned under the long-term incentive plan is variable depending on
the relative total shareholder return of our 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. We estimate the fair value of the long-term incentive target awards using a Monte
Carlo simulation model on the date of grant and at each reporting period. These awards are recognized as compensation expense over the requisite performance
period based on the fair value of the award at the balance sheet date.
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.
Contractual Obligations
As of February 6, 2019 , we have two outstanding contracts with third-party sellers to acquire two industrial properties. 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
Los Angeles
Northern New Jersey/New York City 1
San Francisco Bay Area
Seattle
Miami
Washington, D.C.
Total
Number of
Buildings
Square Feet
Purchase Price
(in thousands)
Assumed Debt
(in thousands)
—
1
—
—
—
—
1
— $
17,851
— $
49,017
—
—
—
—
—
—
—
—
17,851
$
49,017
$
—
—
—
—
—
—
—
1
Includes one improved land parcel containing approximately 16.8 acres.
As of February 6, 2019 , we have executed one non-binding letter of intent with a third-party seller to acquire one industrial property. The total anticipated
purchase price for this industrial property is approximately $14.1 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
48
into a purchase and sale agreement with respect to this property or otherwise complete any such prospective purchase on the terms described or at all.
The following table summarizes our contractual obligations due by period as of December 31, 2018 (dollars in thousands):
Contractual Obligations
Debt
Debt interest payments
Operating lease commitments
Redevelopment obligations
Purchase obligations
Total
Non-GAAP Financial Measures
Less than
1 Year
1-3 Years
3-5 Years
More than
5 Years
1,514 $
94,348 $
169,000 $
200,000 $
12,054
264
13,258
49,017
21,504
18,255
19,035
547
—
—
140
—
—
—
—
—
Total
464,862
70,848
951
13,258
49,017
76,107
$
116,399
$
187,395
$
219,035
$
598,936
$
$
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 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 (loss), net of redemption of preferred stock and preferred stock dividends for
the three months ended December 31, 2018 , 2017 and 2016 and for the years ended December 31, 2018 , 2017 and 2016 (dollars in thousands except per share
data):
49
For the Three Months Ended
December 31,
For the Three Months Ended
December 31,
2018
2017
$ Change
% Change
2017
2016
$ Change
% Change
$
22,972 $
10,836 $
12,136
112.0 % $
10,836 $
941 $
9,895
1,051.5%
(13,624)
(5,105)
(8,519)
166.9 %
(5,105)
—
(5,105)
n/a
10,250
10,015
235
2.3 %
10,015
9,185
830
9.0%
(27)
(31)
4
(12.9)%
(31)
(123)
(107)
(16)
15.0 %
(107)
(21)
(84)
(10)
(23)
19,448 $
15,608 $
3,840
24.6 % $
15,608 $
10,021 $
5,587
0.33 $
0.29 $
0.04
13.8 % $
0.29 $
0.22 $
0.07
59,689,965
54,563,353
54,563,353
46,277,521
47.6%
27.4%
55.8%
31.8%
For the Year Ended December 31,
For the Year Ended December 31,
2018
2017
$ Change
% Change
2017
2016
$ Change
% Change
$
63,289 $
49,367 $
13,922
28.2 % $
49,367 $
11,553 $
37,814
327.3%
(28,610)
(30,654)
2,044
(6.7)%
(30,654)
(7,140)
(23,514)
329.3%
40,816
37,870
2,946
7.8 %
37,870
34,399
3,471
10.1%
(113)
(478)
(109)
(404)
(4)
(74)
3.7 %
(109)
(86)
18.3 %
(404)
(335)
(23)
(69)
74,904 $
56,070 $
18,834
33.6 % $
56,070 $
38,391 $
17,679
1.30 $
1.09 $
0.21
19.3 % $
1.09 $
0.86 $
0.23
57,486,399
51,357,719
51,357,719
44,725,936
26.7%
20.6%
46.0%
26.7%
Net income, net of
redemption of preferred
stock and preferred stock
dividends
Gain on sales of real estate
investments
Depreciation and
amortization
Depreciation and
amortization
Non-real estate
depreciation
Allocation to participating
securities 1
Funds from operations
attributable to common
stockholders 2, 3
Basic and diluted FFO per
common share
Weighted average basic and
diluted common shares
$
$
Net income, net of
redemption of preferred
stock and preferred stock
dividends
Gain on sales of real estate
investments
Depreciation and
amortization
Depreciation and
amortization
Non-real estate
depreciation
Allocation to participating
securities 1
Funds from operations
attributable to common
stockholders 2, 3, 4
Basic and diluted FFO per
common share
Weighted average basic and
diluted common shares
$
$
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 383,930, 359,910, and 396,855 of weighted average unvested restricted shares outstanding for the three months ended
December 31, 2018 , 2017 and 2016 , respectively, and 368,912 , 375,924 , and 398,475 for the years ended December 31, 2018 , 2017 and 2016 ,
respectively.
50
2
3
4
Includes expensed acquisition costs of approximately $0, $0 and $1.0 million for the three months ended December 31, 2018 , 2017 and 2016 ,
respectively, and approximately $ 0.1 million, $ 0 and $ 3.1 million for the years ended December 31, 2018 , 2017 and 2016 , respectively.
Includes performance share award expense of approximately $2.7 million, $1.1 million and $3.0 million for the three months ended December 31, 2018 ,
2017 and 2016 , respectively, and approximately $ 7.1 million, $ 6.7 million and $ 7.3 million for the years ended December 31, 2018 , 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 11 – Stockholders’ Equity” in our notes to consolidated financial statements for more
information regarding our performance share awards.
Includes redemption charges of approximately $0, $1.8 million, and $0 during the years ended December 31, 2018 , 2017 , and 2016 , respectively,
representing the write-off of original issuance costs related to the redemption of our Series A Preferred Stock. See “Note 11 – Stockholders’ Equity” in
our notes to consolidated financial statements for more information regarding our Series A Preferred Stock redemption.
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 and other interim periods 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 months ended December 31, 2018 , 2017 and 2016
and for the years ended December 31, 2018 , 2017 and 2016 (dollars in thousands):
For the Three Months Ended
December 31,
For the Three Months Ended
December 31,
Net income
$
22,972 $
10,836 $
12,136
112.0 % $
10,836 $
1,832 $
9,004
491.5 %
2018
2017
$ Change
% Change
2017
2016
$ Change
% Change
Gain on sales of real
estate investments
Depreciation and
amortization from
continuing
operations
Interest expense,
including
amortization
Stock-based
compensation
Acquisition costs
(13,624)
(5,105)
(8,519)
166.9 %
(5,105)
—
(5,105)
n/a
10,250
10,015
235
2.3 %
10,015
9,185
830
9.0 %
4,494
4,691
(197)
(4.2)%
4,691
3,642
1,049
28.8 %
3,248
(5)
1,471
(1)
Adjusted EBITDA
$
27,335 $
21,907 $
1,777
(4)
5,428
120.8 %
400.0 %
1,471
(1)
3,474
990
24.8 % $
21,907 $
19,123 $
(2,003)
(991)
2,784
(57.7)%
n/a
14.6 %
51
Gain on sales of real
estate investments
Depreciation and
amortization from
continuing
operations
Interest expense,
including
amortization
Loss on
extinguishment of
debt
Stock-based
compensation
Acquisition costs
For the Year Ended December 31,
For the Year Ended December 31,
Net income
$
63,289 $
53,095 $
10,194
19.2 % $
53,095 $
15,118 $
37,977
251.2 %
2018
2017
$ Change
% Change
2017
2016
$ Change
% Change
(28,610)
(30,654)
2,044
(6.7)%
(30,654)
(7,140)
(23,514)
329.3 %
40,816
37,870
2,946
7.8 %
37,870
34,399
3,471
10.1 %
18,211
16,777
1,434
8.5 %
16,777
13,053
3,724
28.5 %
—
—
9,270
124
8,732
10
—
538
114
n/a
—
239
(239)
n/a
6.2 %
1,140.0 %
8,732
10
9,444
3,129
(712)
(3,119)
17,588
(7.5)%
(99.7)%
25.8 %
Adjusted EBITDA
$
103,100 $
85,830 $
17,270
20.1 % $
85,830 $
68,242 $
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, including amortization. We compute cash-basis same store NOI as same store NOI excluding
straight-line rents and amortization of lease intangibles. The same store pool for the comparison of the three months and years ended December 31, 2018 and 2017
includes all properties that were owned as of December 31, 2018 and since January 1, 2017 and excludes properties that were either disposed of prior to, held for
sale to a third-party or in redevelopment as of December 31, 2018 . As of December 31, 2018 , the same store pool consisted of 156 buildings aggregating
approximately 10.4 million square feet representing approximately 81.3% of our total square feet owned and six improved land parcels containing approximately
23.0 acres. The same store pool for the comparison of the three months and years ended December 31, 2017 and 2016 includes all properties that were owned as of
December 31, 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
December 31, 2017 . As of December 31, 2017 , the same store pool consisted of 140 buildings aggregating approximately 10.2 million square feet representing
approximately 78.3% of our total square feet owned and three improved land parcels containing approximately 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 months and the
years ended December 31, 2018 , 2017 and 2016 (dollars in thousands):
52
For the Three Months Ended
December 31,
For the Three Months Ended
December 31,
2018
22,972 $
2017
10,836 $
$
$ Change
% Change
12,136
112.0 % $
2017
10,836 $
2016
$ Change
% Change
1,832 $
9,004
491.5 %
Net income 1
Depreciation and
amortization from
continuing operations
Acquisition costs
Total other income and
expenses
Net operating income
Less non same store NOI
Same store NOI 1
Less straight-line rents and
amortization of lease
intangibles 2
Cash-basis same store
NOI 1
General and administrative
6,371
4,431
1,940
43.8 %
4,431
10,250
10,015
235
2.3 %
10,015
(5)
(1)
(4)
400.0 %
(1)
9,185
6,015
990
830
(1,584)
(991)
9.0 %
(26.3)%
n/a
n/a
(10,471)
(508)
(9,963)
1,961.2 %
(508)
3,637
(4,145)
29,117
24,773
4,344
17.5 %
24,773
21,659
3,114
14.4 %
3
3
4
4
(5,983)
(3,261)
(2,722)
83.5 %
(5,003)
(3,004)
(1,999)
$
23,134 $
21,512 $
1,622
7.5 % $
19,770 $
18,655 $
1,115
66.5 %
6.0 %
(233)
(847)
614
(72.5)%
(507)
(1,033)
526
(50.9)%
$
22,901 $
20,665 $
2,236
10.8 % $
19,263 $
17,622 $
1,641
9.3 %
1
2
3
4
Includes $0 of lease termination income for the three months ended December 31, 2018 , 2017 and 2016 .
Includes straight-line rents and amortization of lease intangibles for the same store pool only.
Includes 2017 and 2018 acquisitions, ten improved land parcels, five properties under redevelopment and one completed redevelopment property with a
gross book value of approximately $29.3 million as of December 31, 2018.
Includes 2016 and 2017 acquisitions and one completed redevelopment property with a gross book value of approximately $40.3 million and accumulated
depreciation of approximately $4.2 million as of December 31, 2016.
For the Year Ended December
31,
For the Year Ended December
31,
2018
63,289 $
2017
53,095 $
$
$ Change
% Change
10,194
19.2 % $
2017
53,095 $
2016
15,118 $
$ Change
% Change
37,977
251.2 %
40,816
37,870
General and administrative
21,503
19,681
Acquisition costs
124
10
2,946
1,822
114
7.8 %
9.3 %
37,870
34,399
3,471
19,681
19,319
362
1,140.0 %
10
3,129
(3,119)
Total other income and
expenses
(14,063)
(14,046)
(17)
0.1 %
(14,046)
6,128
(20,174)
Net operating income
111,669
96,610
15,059
15.6 %
96,610
78,093
18,517
3
3
4
4
(20,737)
(11,576)
(9,161)
79.1 %
(17,651)
(8,102)
(9,549)
$
90,932 $
85,034 $
5,898
6.9 % $
78,959 $
69,991 $
8,968
10.1 %
1.9 %
(99.7)%
n/a
23.7 %
117.9 %
12.8 %
Net income 1
Depreciation and
amortization from
continuing operations
Less non same store NOI
Same store NOI 1
Less straight-line rents and
amortization of lease
intangibles 2
Cash-basis same store NOI
1
(2,737)
(4,161)
1,424
(34.2)%
(2,739)
(4,564)
1,825
(40.0)%
$
88,195 $
80,873 $
7,322
9.1 % $
76,220 $
65,427 $
10,793
16.5 %
1
Includes approximately $0.7 million, $0.1 million and $0 of lease termination income for the years ended December 31, 2018 , 2017 and 2016 ,
respectively.
53
2
3
4
Includes straight-line rents and amortization of lease intangibles for the same store pool only.
Includes 2017 and 2018 acquisitions and one completed redevelopment property with a gross book value of approximately $29.3 million as of
December 31, 2018.
Includes 2016 and 2017 acquisitions and one completed redevelopment property with a gross book value of approximately $40.3 million and accumulated
depreciation of approximately $4.2 million as of December 31, 2017 .
Cash-basis same store NOI increased by approximately $ 2.2 million for the three months ended December 31, 2018 compared to the same period from the
prior year primarily due to increased rental revenue and tenant reimbursement revenue on new and renewed leases. For the three months ended December 31, 2018
and 2017 , approximately $0.1 million and $0.5 million, respectively, of contractual rent abatements were given to certain tenants in the same-store pool. In
addition, approximately $0.3 million of the increase in cash-basis same store NOI for the three months ended December 31, 2018 compared to the three months
ended December 31, 2017 related to properties that were acquired vacant or with near term expirations in 2017.
Cash-basis same store NOI increased by approximately $ 7.3 million for the year ended December 31, 2018 compared to the prior year primarily due to
increased rental revenue and tenant reimbursement revenue on new and renewed leases and approximately $0.7 million in lease termination income, offset by
approximately $0.6 million in rent abatements provided to the tenant at our Belleville property. The vacant space at our Hart property was re-leased in March 2018
with cash rent increasing by approximately 27.8% in the year ended December 31, 2018 compared to the year ended December 31, 2017. In addition,
approximately $0.2 million in bad debt expense was recovered at our 221 Michele property in 2017. For the years ended December 31, 2018 and 2017 ,
approximately $2.0 million and $2.1 million, respectively, of contractual rent abatements were given to certain tenants in the same-store pool. Approximately $1.8
million of the increase in cash-basis same store NOI for the year ended December 31, 2018 compared to the year ended December 31, 2017 related to properties
that were acquired vacant or with near term expirations in 2017.
54
Item 7A.
Quantitative And Qualitative Disclosures 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 December 31, 2018 , we had $ 169.0 million of borrowings outstanding under our Facility. Of the $ 169.0 million outstanding on the Facility, $ 150.0
million is subject to interest rate caps. See “Note 9 – Derivative Financial Instruments” in our 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 3.61% as of December 31, 2018 . If the LIBOR rate were to fluctuate 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 December 31, 2018 .
Item 8.
Financial Statements And Supplementary Data.
See Part IV, Item 15 – “Exhibits and Financial Statement Schedules” beginning on page F-1 of this Annual Report on Form 10-K.
Item 9.
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.
None.
55
Item 9A.
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, President 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 SEC’s
rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer, President and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
Terreno Realty Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal
control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation
of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Terreno Realty Corporation’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2018 . In making this
assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework (2013 framework). Based on its assessment, management of Terreno Realty Corporation believes that, as of December 31, 2018 , the company’s
internal control over financial reporting is effective based on those criteria. Terreno Realty Corporation’s independent auditors have issued an audit report on the
effectiveness of the company’s internal control over financial reporting, as stated in their report included in this Annual Report on Form 10-K, (which expresses an
unqualified opinion on the effectiveness of the company’s internal control over financial reporting as of December 31, 2018 ).
56
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Terreno Realty Corporation
Opinion on Internal Control over Financial Reporting
We have audited Terreno Realty Corporation’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, Terreno Realty Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31,
2018, based on the COSO criteria .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, equity and cash
flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15 of
the Company and our report dated February 6, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, CA
February 6, 2019
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2018 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
57
Item 9B.
Other Information.
None.
Part III
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by Item 10 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be
filed no later than 120 days after the end of our fiscal year ended December 31, 2018 and is incorporated herein by reference.
Item 11.
Executive Compensation.
The information required by Item 11 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be
filed no later than 120 days after the end of our fiscal year ended December 31, 2018 and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be
filed no later than 120 days after the end of our fiscal year ended December 31, 2018 and is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be
filed no later than 120 days after the end of our fiscal year ended December 31, 2018 and is incorporated herein by reference.
Item 14.
Principal Accounting Fees and Services.
The information required by Item 14 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be
filed no later than 120 days after the end of our fiscal year ended December 31, 2018 and is incorporated herein by reference.
58
Item 15.
Exhibits and Financial Statement Schedules.
(a)1. and 2. Financial
Statements
and
Schedules
Part IV
The following consolidated financial information is included as a separate section of this Annual Report on Form 10-K beginning on page F-1 as follows:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Schedule III – Real Estate Investments and Accumulated Depreciation
Page
F-1
F-2
F-3
F-4
F-5
F-6
F-8
S-1
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted, or the required information is included in the consolidated financial statements and
notes thereto.
3.
Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index at the end of this Annual Report on Form 10-K immediately
preceding the signature page, which is incorporated by reference herein.
Item 16.
Form 10-K Summary.
None.
59
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Terreno Realty Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Terreno Realty Corporation (the Company) as of December 31, 2018 and 2017, and the
related consolidated statements of operations, comprehensive income , equity and cash flows for each of the three years in the period ended December 31, 2018,
and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 6, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2017-01
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for real estate property acquisitions effective
January 1, 2017 due to the adoption of Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2012.
San Francisco, California
February 6, 2019
F-1
Terreno Realty Corporation
Consolidated Balance Sheets
(in thousands – except share and per share data)
ASSETS
Investments in real estate
Land
Buildings and improvements
Construction in progress
Intangible assets
Total investments in properties
Accumulated depreciation and amortization
Net investments in real estate
Cash and cash equivalents
Restricted cash
Senior secured loan, net
Other assets, net
Total assets
LIABILITIES AND EQUITY
Liabilities
Credit facility
Term loans payable, net
Senior unsecured notes, net
Mortgage loans payable, net
Security deposits
Intangible liabilities, net
Dividends payable
Performance share awards payable
Accounts payable and other liabilities
Total liabilities
Commitments and contingencies (Note 14)
Equity
Stockholders’ equity
Common stock: $0.01 par value, 400,000,000 shares authorized, and 61,013,711 and 55,368,737
shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and equity
December 31, 2018
December 31, 2017
$
833,995 $
837,816
94,695
79,270
1,845,776
(169,772)
1,676,004
31,004
3,475
54,492
31,529
759,659
801,242
—
76,029
1,636,930
(139,814)
1,497,116
35,710
7,090
—
27,955
$
$
$
1,796,504 $
1,567,871
19,000 $
149,067
248,263
45,767
11,933
23,093
14,643
12,048
24,893
548,707
610
1,233,763
14,185
(761)
1,247,797
1,796,504 $
—
148,897
247,955
64,831
11,058
22,361
12,181
11,824
21,270
540,377
553
1,023,184
4,803
(1,046)
1,027,494
1,567,871
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Terreno Realty Corporation
Consolidated Statements of Operations
(in thousands – except share and per share data)
REVENUES
Rental revenues
Tenant expense reimbursements
Total revenues
COSTS AND EXPENSES
Property operating expenses
Depreciation and amortization
General and administrative
Acquisition costs
Total costs and expenses
OTHER INCOME (EXPENSE)
Interest and other income
Interest expense, including amortization
Loss on extinguishment of debt
Gain on sales of real estate investments
Total other income (expense)
Net income
Redemption of preferred stock
Preferred stock dividends
Net income, net of redemption of preferred stock and preferred stock dividends
Allocation to participating securities
Net income available to common stockholders, net of redemption of preferred
stock and preferred stock dividends
EARNINGS PER COMMON SHARE – BASIC AND DILUTED:
Net income available to common stockholders, net of redemption of preferred
stock and preferred stock dividends
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
For the Year Ended December 31,
2018
2017
2016
118,183 $
33,474
151,657
103,329 $
29,155
132,484
39,988
40,816
21,503
124
102,431
3,664
(18,211)
—
28,610
14,063
63,289
—
—
63,289
(401)
35,874
37,870
19,681
10
93,435
169
(16,777)
—
30,654
14,046
53,095
(1,767)
(1,961)
49,367
(352)
62,888 $
49,015 $
85,018
23,400
108,418
30,325
34,399
19,319
3,129
87,172
24
(13,053)
(239)
7,140
(6,128)
15,118
—
(3,565)
11,553
(95)
11,458
1.09 $
0.95 $
0.26
57,486,399
51,357,719
44,725,936
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Terreno Realty Corporation
Consolidated Statements of Comprehensive Income
(in thousands)
Net income
Other comprehensive income (loss): cash flow hedge adjustment
Comprehensive income
For the Year Ended December 31,
2018
2017
2016
$
$
63,289 $
285
63,574 $
53,095 $
(148)
52,947 $
15,118
(102)
15,016
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Terreno Realty Corporation
Consolidated Statements of Equity
(in thousands – except share data)
Common Stock
Preferred
Stock
Number of
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Balance as of December 31, 2015
$
46,000
43,310,272 $
430 $
687,448 $
— $
Net income
Issuance of common stock, net of
issuance costs of $2,813
Repurchase of common stock
Issuance of restricted stock
Stock-based compensation
Common stock dividends
Preferred stock dividends
Other comprehensive loss
—
—
—
—
—
—
—
—
—
4,139,224
(67,928)
32,797
—
—
—
—
Balance as of December 31, 2016
46,000
47,414,365
—
8,066,150
(144,025)
—
32,247
—
—
—
—
Net income
Issuance of common stock, net of
issuance costs of $4,202
Repurchase of common stock
—
—
—
Redemption of preferred stock
(46,000)
Issuance of restricted stock
Stock-based compensation
Common stock dividends
Preferred stock dividends
Other comprehensive loss
Balance as of December 31, 2017
Net income
Issuance of common stock, net of
issuance costs of $3,489
Repurchase of common stock
Issuance of restricted stock
Stock-based compensation
Common stock dividends
Other comprehensive income
Balance as of December 31, 2018
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
44
—
—
—
—
—
—
474
—
79
—
—
—
—
—
—
—
Accumulated
Other
Comprehensive
(Loss) Income
Total
(796)
$
733,082
—
15,118
—
—
—
—
—
—
(102)
(898)
—
—
—
—
—
—
—
—
(148)
(1,046)
101,461
(1,551)
—
2,231
(34,869)
(3,565)
(102)
811,805
53,095
256,724
(3,436)
(46,038)
—
2,017
(44,564)
(1,961)
(148)
1,027,494
—
63,289
—
—
—
—
—
285
212,221
(3,870)
—
2,285
(53,907)
285
—
15,118
101,417
(1,551)
—
2,231
—
—
—
—
(23,316)
(11,553)
—
—
766,229
(3,565)
—
—
—
53,095
256,645
(3,436)
1,729
—
2,017
—
—
—
212,164
(3,870)
—
2,285
—
—
(1,767)
—
—
(44,564)
(1,961)
—
4,803
63,289
—
—
—
—
—
—
(53,907)
—
55,368,737
—
553
—
1,023,184
—
5,698,326
(107,267)
53,915
—
—
—
57
—
—
—
—
—
61,013,711 $
610 $
1,233,763 $
14,185 $
(761)
$ 1,247,797
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Terreno Realty Corporation
Consolidated Statements of Cash Flows
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities
Straight-line rents
Amortization of lease intangibles
Depreciation and amortization
Loss on extinguishment of debt
Gain on sales of real estate investments
Deferred financing cost amortization
Deferred senior secured loan fee amortization
Stock-based compensation
Changes in assets and liabilities
Other assets
Accounts payable and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for property acquisitions
Proceeds from sales of real estate investments, net
Additions to construction in progress
Additions to buildings, improvements and leasing costs
Cash paid for senior secured loan
Origination and other fees received on senior secured loan
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock
Issuance costs on issuance of common stock
Repurchase of common stock
Repurchase of preferred stock
Borrowings on credit facility
Payments on credit facility
Payments on term loans payable
Borrowings on senior unsecured notes
Payments on mortgage loans payable
Payment of deferred financing costs
Dividends paid to common stockholders
Dividends paid to preferred stockholders
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of year
For the Year Ended December 31,
2018
2017
2016
$
63,289 $
53,095 $
15,118
(3,459)
(3,694)
40,816
—
(28,610)
1,442
(392)
9,270
(1,531)
468
77,599
(221,806)
79,594
(9,668)
(28,977)
(55,000)
900
(3,657)
(2,161)
37,870
—
(30,654)
1,193
—
8,732
584
4,496
69,498
(297,109)
75,396
—
(27,405)
—
—
(4,740)
(1,338)
34,399
239
(7,140)
766
—
9,444
(3,174)
5,667
49,241
(128,495)
21,379
(15,577)
(26,936)
—
—
(234,957)
(249,118)
(149,629)
208,949
(3,030)
(3,870)
—
204,000
(185,000)
—
—
(19,201)
(1,366)
(51,445)
—
149,037
(8,321)
42,800
255,295
(3,764)
(3,436)
(46,000)
93,000
(144,500)
—
100,000
(1,916)
(872)
(41,866)
(1,999)
203,942
24,322
18,478
101,432
(1,506)
(1,551)
—
95,500
(44,000)
(50,000)
50,000
(16,871)
(2,499)
(33,182)
(3,565)
93,758
(6,630)
25,108
18,478
Cash and cash equivalents and restricted cash at end of year
$
34,479 $
42,800 $
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
F-6
Cash paid for interest, net of capitalized interest
Supplemental disclosures of non-cash transactions
Accounts payable related to capital improvements
Redemption of preferred stock
Reconciliation of cash paid for property acquisitions
Acquisition of properties
Assumption of other assets and liabilities
Net cash paid for property acquisitions
$
$
$
$
19,787 $
13,839 $
11,888
10,712 $
—
6,996 $
1,729
227,058 $
(5,252)
221,806 $
319,666 $
(22,557)
297,109 $
7,955
—
130,944
(2,449)
128,495
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Terreno Realty Corporation
Notes to Consolidated Financial Statements
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 and improved land parcels disclosed in these notes to the consolidated financial statements are unaudited. As of December 31,
2018 , the Company owned 205 buildings aggregating approximately 12.8 million square feet, 16 improved land parcels consisting of approximately 55.2 acres and
five properties under redevelopment expected to contain approximately 0.7 million square feet upon completion.
The Company is an internally managed Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2010.
Note 2. Significant Accounting Policies
Basis
of
Presentation.
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include all of the Company’s accounts and its
subsidiaries and all intercompany balances and transactions have been eliminated in consolidation.
Use
of
Estimates.
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual
results could differ from those estimates.
Capitalization
of
Costs.
The Company capitalizes costs directly related to the redevelopment, renovation and expansion of its investment in real estate. Costs
associated with such projects are capitalized as incurred. If the project is abandoned, these costs are expensed during the period in which the redevelopment,
renovation or expansion project is abandoned. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes and
insurance, if appropriate. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress. In the
event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. Costs incurred for
maintaining and repairing properties, which do not extend their useful lives, are expensed as incurred.
Interest is capitalized based on actual capital expenditures from the period when redevelopment, renovation or expansion commences until the asset is ready for its
intended use, at the weighted average borrowing rate during the period.
Investments
in
Real
Estate.
Investments in real estate, including tenant improvements, leasehold improvements and leasing costs, are stated at cost, less
accumulated depreciation, unless circumstances indicate that the cost cannot be recovered, in which case, an adjustment to the carrying value of the property is
made to reduce it to its estimated fair value. The Company also reviews the impact of above and below-market leases, in-place leases and lease origination costs
for acquisitions and records an intangible asset or liability accordingly.
Impairment.
Carrying values for financial reporting purposes are reviewed for impairment on a property-by-property basis whenever events or changes in
circumstances indicate that the carrying value of a property may not be fully recoverable. Examples of such events or changes in circumstances may include
classifying an asset to be held for sale, changing the intended hold period or when an asset remains vacant significantly longer than expected. The intended use of
an asset either held for sale or held for use can significantly impact how impairment is measured. If an asset is intended to be held for the long-term, the
recoverability is based on the undiscounted future cash flows. If the asset carrying value is not supported on an 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
F-8
be used to establish fair value. When market information is not readily available, the inputs are based on the Company’s understanding of market conditions and
the experience of the Company’s management team. Actual results could differ significantly from the Company’s estimates. The discount rates used in the fair
value estimates represent a rate commensurate with the indicated holding period with a premium layered on for risk. There were no impairment charges recorded to
the carrying values of the Company’s properties during the years ended December 31, 2018 , 2017 or 2016 .
Loans
Held-for-Investment.
Loans that are held-for-investment are carried at cost, net of loan fees and origination costs, as applicable, unless the loans are
deemed impaired. Impairment occurs when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of
loans that are held-for-investment. The Company evaluates its senior secured loan (the “Senior Secured Loan”), which is classified as held-for-investment, for
impairment quarterly. If the Senior Secured Loan is considered to be impaired, the Company records an allowance through the provision for Senior Secured Loan
losses to reduce the carrying value of the Senior Secured Loan to the present value of expected future cash flows discounted at the Senior Secured Loan’s
contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Actual losses, if any, could differ significantly from
the Company’s estimates. There were no impairment charges recorded to the carrying value of the Senior Secured Loan during the year ended December 31, 2018 .
Property
Acquisitions
Effective January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2017-01, 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 $3.7 million , $2.2 million and $1.3 million , respectively, for the years ended December 31, 2018 , 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 December 31, 2018
is 9.2 years. As of December 31, 2018 and 2017 , the Company’s intangible assets and liabilities, including properties held for sale (if any), consisted of the
following (dollars in thousands):
F-9
December 31, 2018
Accumulated
Amortization
Gross
Net
Gross
December 31, 2017
Accumulated
Amortization
In-place leases
Above-market leases
Below-market leases
Total
$
$
75,101 $
(51,239) $
23,862 $
71,502 $
(45,885) $
4,169
(34,485)
(3,610)
11,392
559
(23,093)
4,527
(30,386)
(3,695)
8,025
44,785 $
(43,457) $
1,328 $
45,643 $
(41,555) $
Net
25,617
832
(22,361)
4,088
Projected net amortization of the intangible assets and liabilities for the next five years and thereafter as of December 31, 2018 is as follows (dollars in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
5,104
2,451
1,667
855
159
(8,908)
1,328
Depreciation
and
Useful
Lives
of
Real
Estate
and
Intangible
Assets.
Depreciation and amortization are computed on a straight-line basis over the estimated
useful lives of the related assets or liabilities. The following table reflects the standard depreciable lives typically used to compute depreciation and amortization.
However, such depreciable lives may be different based on the estimated useful life of such assets or liabilities.
Description
Land
Building
Building Improvements
Tenant Improvements
Leasing Costs
In-place leases
Above/Below-Market Leases
Standard Depreciable Life
Not depreciated
40 years
5-40 years
Shorter of lease term or useful life
Lease term
Lease term
Lease term
Discontinued
Operations.
The Company considers a property or a portfolio of properties 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
(See “Note 5 – Held for Sale/Disposed Assets”). Properties held for sale are reported at the lower of the carrying amount or fair value less estimated
costs to sell and are not depreciated while they are held for sale.
Cash
and
Cash
Equivalents.
Cash and cash equivalents consists of cash held in a major banking institution and other highly liquid short-term investments
with original maturities of three months or less. Cash equivalents are generally invested in U.S. government securities, government agency securities or money
market accounts.
Restricted
Cash.
Restricted cash includes cash held in escrow in connection with property acquisitions and reserves for certain capital improvements,
leasing, interest and real estate tax and insurance payments as required by certain mortgage loan obligations.
F-10
The following summarizes the reconciliation of cash and cash equivalents and restricted cash as presented in the accompanying consolidated statements of cash
flows:
Beginning
Cash and cash equivalents at beginning of year
$
Restricted cash
Cash and cash equivalents and restricted cash
Ending
Cash and cash equivalents at end of year
Restricted cash
Cash and cash equivalents and restricted cash
For the Year Ended December 31,
2018
2017
2016
35,710 $
7,090
42,800
31,004
3,475
34,479
14,208 $
4,270
18,478
35,710
7,090
42,800
Net (decrease) increase in cash and cash equivalents and restricted cash
$
(8,321) $
24,322 $
22,450
2,658
25,108
14,208
4,270
18,478
(6,630)
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 December 31, 2018 and 2017 , approximately $25.7 million and $23.0 million , respectively, of straight-line rent and accounts receivable, net of allowances
of approximately $0.2 million and $0.1 million as of December 31, 2018 and 2017 , respectively, were included as a component of other assets in the
accompanying consolidated balance sheets.
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue
from
Contracts
with
Customers
(Topic 606) (“ASU No. 2014-09”), using the
modified retrospective approach, which requires a cumulative effect adjustment as of the date of our adoption. Under the modified retrospective approach, an
entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018. A
completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial
application. The Company elected to apply this standard only to contracts that were not completed as of January 1, 2018. Based on the Company’s evaluation of
contracts within the scope of ASU No. 2014-09, the guidance impacts revenue related to the sales of real estate, which is evaluated in conjunction with ASC 610-
20, Other
Income
-
Gains
and
Losses
from
the
Derecognition
of
Nonfinancial
Assets
(see below).
Effective January 1, 2018, the Company adopted the guidance of ASC 610-20, Other
Income
-
Gains
and
Losses
from
the
Derecognition
of
Nonfinancial
Assets
,
which applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business.
Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20. ASC 610-20 refers to the revenue
recognition principles under ASU 2014-09, Revenue
from
Contracts
with
Customers
(see above). Under ASC 610-20, if the Company determines it does not have
a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company will
derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. As a result of adoption of
the standard, there was no material impact to the Company’s consolidated financial statements.
F-11
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 $6.9 million and $5.7 million as of December 31, 2018 and 2017 , 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 December 31, 2018 and 2017 , 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 December 31, 2018 and 2017, the Company did not have any unrecognized tax benefits and does not believe
that there will be any material changes in unrecognized tax positions over the next 12 months. The Company’s tax returns are subject to examination by federal,
state and local tax jurisdictions beginning with the 2010 calendar year.
Stock-Based
Compensation
and
Other
Long-Term
Incentive
Compensation.
The Company follows the provisions of ASC 718, Compensation-Stock
Compensation,
to account for its stock-based compensation plan, which requires that the compensation cost relating to stock-based payment transactions be
recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued. The Company 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
(See “Note 9 – Derivative Financial Instruments”) ,
provides the disclosure
requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why the
Company uses derivative instruments, (b) how the Company accounts for derivative instruments and related hedged items, and (c) how derivative instruments and
related hedged items affect the Company’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the
Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments.
F-12
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 December 31, 2018 , 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 1.20% to 1.70% , depending on leverage,
with respect to $50.0 million for the period from December 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 December 31, 2018 and 2017 , the fair value of the interest rate caps was approximately $26,000 and $30,000 , respectively.
Fair
Value
of
Financial
Instruments
. ASC 820, Fair
Value
Measurements
and
Disclosures
(See “Note 10 – Fair Value Measurements”), defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC
820 also provides guidance for using fair value to measure financial assets and liabilities. ASC 820 requires disclosure of the level within the fair value hierarchy in
which the fair value measurements fall, including measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices for
similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level 2), and significant valuation
assumptions that are not readily observable in the market (Level 3).
New
Accounting
Standards.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 ,
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, 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. 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 clarified 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 clarified 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 were 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 made 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 made 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 allowed 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”). Based on the
Company’s evaluation of contracts within the scope of ASU 2014-09, the guidance impacted revenue related to the sales of real estate, which is evaluated in
conjunction with ASC 610-20, Other
Income
-
Gains
and
Losses
from
the
Derecognition
of
Nonfinancial
Assets
(see below). The Company’s rental revenues and
recoveries earned from leasing operating properties are excluded from this standard and will be assessed with the adoption of ASU 2016-02, Leases
(see below).
The Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective method. As a result of adoption of the standard, there was no material
impact to the Company’s consolidated financial statements.
F-13
Effective January 1, 2018, the Company adopted the guidance of ASC 610-20, Other
Income
-
Gains
and
Losses
from
the
Derecognition
of
Nonfinancial
Assets
(“ASC 610-20”), which applied to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a
business. Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20. ASC 610-20 refers to the
revenue recognition principles under ASU 2014-09, Revenue
from
Contracts
with
Customers
(see above). Under ASC 610-20, if the Company determines it does
not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company
would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. As a result of
adoption of the standard, there was no material impact to the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic
842)
(“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing
accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor
accounting. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early
adoption of ASU No. 2016-02 as of its issuance is permitted. ASU No. 2016-02 requires a modified retrospective transition approach for all leases existing at, or
entered into after, the date of initial application, with an option to use certain transition relief. Upon adoption of ASU No. 2016-02 on January 1, 2019, the
Company adopted the package of practical expedients for all leases that commenced before the effective date of January 1, 2019. Accordingly, the Company did 1)
not reassess whether any expired or existing contracts are or contain leases, 2) not reassess the lease classification for any expired or existing lease, and 3) not
reassess initial direct costs for any existing leases. The Company did not elect the practical expedient related to using hindsight to reevaluate the lease term.
In July 2018, the FASB issued ASU No. 2018-11, Leases
(Topic
842),
Targeted
Improvements
(“ASU No. 2018-11”), which provides lessors with a practical
expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead to account for those components as
a single component if the nonlease components otherwise would be accounted for under the new revenue recognition standard (Topic 606) and if certain conditions
are met. Upon adoption of the lease accounting standard under Topic 842, the Company adopted this practical expedient, specifically related to its tenant
reimbursements which would otherwise be accounted for under the new revenue recognition standard. The Company believes the two conditions have been met for
tenant reimbursements as 1) the timing and pattern of transfer of the nonlease components and associated lease components are the same and 2) the non-lease
component is not the predominant component in the arrangement. In addition, ASU No. 2018-11, provides an additional optional transition method to allow
entities to apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings.
An entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease accounting standard will continue to be
reported under the current lease accounting standards of Topic 840. The Company adopted this transition method upon adoption of the lease accounting standard of
Topic 842 on January 1, 2019.
In December 2018, the FASB issued ASU No. 2018-20, Leases
(Topic
842),
Narrow-Scope
Improvements
for
Lessors
(“ASU No. 2018-20”), which permits
lessors, as an accounting policy election, to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs and instead to account
for these costs as if they were lessee costs. In addition, ASU No. 2018-20 requires lessors to 1) exclude lessor costs paid directly by lessees to third parties on the
lessor’s behalf from variable payments and 2) include lessor costs that are reimbursed by the lessee in the measurement of variable lease revenue and the associated
expense. The amendments also clarify that lessors are required to allocate the variable payments to the lease and non-lease components and follow the recognition
guidance in Topic 842 for the lease component and other applicable guidance, such as ASC 606, for the non-lease component.
The Company created an inventory of its leases where the Company may be a lessee to assess the potential impact to the Company’s financial statements. From a
lessee perspective, the adoption of the new lease accounting standard is not expected to have a material impact to the Company’s financial statements on January 1,
2019. The Company has assessed the potential impact to the Company’s financial statements as a lessor and the new lease standard is not expected to have a
material impact to the Company’s financial statements on January 1, 2019. The Company does not currently capitalize internal leasing costs.
In May 2017, the FASB issued ASU 2017-09, Compensation
-
Stock
Compensation
(Topic 718): Scope
of
Modification
Accounting
, which provides clarified
guidance regarding when changes to the terms or conditions of a share-based payment must be accounted for as a modification. The guidance will be applied
prospectively to awards modified on or after the adoption date. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years and early adoption was permitted. The Company adopted ASU 2017-09 as of January 1, 2018. As a result of adoption of the standard,
there was no material impact to the Company’s consolidated financial statements.
F-14
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 December 31, 2018 , the Company owned 57 buildings aggregating approximately 3.3 million square feet and six improved land parcels consisting of
approximately 27.1 acres located in Northern New Jersey/New York City, which accounted for a combined percentage of approximately 27.0% of its annualized
base rent, and 36 buildings aggregating approximately 2.5 million square feet and five improved land parcels consisting of approximately 10.1 acres located in Los
Angeles, which accounted for a combined percentage of approximately 17.6% of its annualized base rent. Such annualized base rent percentages are based on
contractual base rent from leases in effect as of December 31, 2018 , 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 years ended December 31, 2018 , 2017 and 2016 .
Note 4. Investments in Real Estate
During the year ended December 31, 2018 , the Company acquired 17 industrial buildings containing approximately 1.0 million square feet and five
improved land parcels containing approximately 19.9 acres, including two buildings and one improved land parcel under redevelopment that upon completion will
contain approximately 0.5 million square feet with a total expected investment of approximately $ 112.9 million (unaudited), including redevelopment costs of
approximately $ 36.8 million . The total aggregate initial investment, including acquisition costs, was approximately $227.1 million , of which $154.5 million was
recorded to land, $64.0 million to buildings and improvements, $8.6 million to intangible assets and $4.7 million to intangible liabilities.
The following table sets forth the wholly-owned industrial properties the Company acquired during the year ended December 31, 2018 :
F-15
Property Name
Vermont
Woodside
1st Avenue South
Wicks Blvd
85 Doremus 2
East Valley
Merced 3
San Clemente
Whitney 4
Commerce
Kent 192 5
6th Ave
Walnut II
Shoemaker 6
Hotchkiss II
Total
Location
Acquisition Date
Number of
Buildings
Torrance, CA
Queens, NY
Seattle, WA
San Leandro, CA
Newark, NJ
Renton, WA
January 31, 2018
March 6, 2018
March 6, 2018
April 27, 2018
May 7, 2018
May 7, 2018
San Leandro, CA
August 2, 2018
Hayward, CA
San Leandro, CA
Carlstadt, NJ
Seattle, WA
Seattle, WA
Compton, CA
September 7, 2018
September 17, 2018
October 17, 2018
October 24, 2018
October 31, 2018
November 7, 2018
Santa Fe Springs, CA
November 14, 2018
Fremont, CA
December 20, 2018
Square Feet
99,629 $
83,294
234,720
11,300
—
39,005
225,344
54,000
128,073
24,000
—
50,270
60,040
—
29,214
Purchase Price
(in thousands) 1
17,500
25,170
42,000
2,600
6,300
5,950
36,000
9,000
22,790
3,480
12,434
12,558
11,108
6,400
6,200
1,038,889 $
219,490
1
1
1
1
—
1
4
1
3
1
—
1
1
—
1
17
1 Excludes intangible liabilities and assumed mortgage premiums, if any. The total aggregate investment was approximately $227.1 million , including $2.9
million in closing costs and acquisition costs.
2 Represents an improved land parcel containing approximately 3.5 acres.
3 Also includes an improved land parcel containing approximately 1.2 acres.
4 Also includes an improved land parcel containing approximately 0.2 acres.
5 Represents an improved land parcel containing approximately 12.7 acres.
6 Represents an improved land parcel containing approximately 2.3 acres.
The Company recorded revenues and net income for the year ended December 31, 2018 of approximately $4.8 million and $1.7 million , respectively, related to
the 2018 acquisitions.
During the year ended December 31, 2017 , the Company acquired 35 industrial buildings containing approximately 1.7 million square feet and five improved land
parcels containing approximately 25.2 acres. The total aggregate initial investment, including acquisition costs, was approximately $319.7 million , of which
$211.2 million was recorded to land, $92.6 million to buildings and improvements, $15.9 million to intangible assets and $21.5 million to intangible liabilities.
The following table sets forth the wholly-owned industrial properties the Company acquired during the year ended December 31, 2017 :
F-16
Property Name
Acacia
637 S. Lucile
Lynwood 2
West Side Ave
Hanford
2920 V Street
Avenue A
South Main III
Frelinghuysen 3
Stockton 4
Telegraph
Dawson
Walnut
NW 70th IV
Kero Road 5
Hotchkiss
104th St
NW 94th Ave
NW 70th V 6
2315 E Dominguez 7
1855 W 139th St
Hawthorne
New Dutch
Total
Location
Acquisition Date
Number of
Buildings
Compton, CA
Seattle, WA
Lynwood, CA
North Bergen, NJ
Seattle, WA
Washington, D.C.
Carlstadt, NJ
Gardena, CA
Newark, NJ
Newark, NJ
Santa Fe Springs, CA
Seattle, WA
Compton, CA
Miami, FL
Carlstadt, NJ
Fremont, CA
Los Angeles, CA
Doral, FL
Miami, FL
Los Angeles, CA
Carson, CA
Hawthorne, CA
Fairfield, NJ
January 25, 2017
February 3, 2017
April 20, 2017
April 20, 2017
April 21, 2017
May 10, 2017
May 10, 2017
June 2, 2017
June 29, 2017
June 30, 2017
July 6, 2017
July 7, 2017
July 21, 2017
August 4, 2017
September 1, 2017
September 28, 2017
October 19, 2017
October 23, 2017
October 30, 2017
November 30, 2017
December 15, 2017
December 19, 2017
December 20, 2017
Square Feet
45,776 $
45,320
477,153
126,491
34,983
21,666
32,676
114,061
—
—
86,814
13,176
57,520
15,965
43,407
40,830
20,055
38,430
59,400
—
230,891
152,025
50,400
Purchase Price
(in thousands) 1
7,103
7,750
31,378
14,000
5,940
3,727
12,000
24,700
16,250
13,200
14,930
4,000
9,352
2,515
13,500
7,275
4,750
6,759
8,400
12,860
37,550
27,600
7,200
1,707,039 $
292,739
1
1
3
1
1
1
4
1
—
—
2
1
1
1
2
1
1
1
1
—
2
8
1
35
1 Excludes intangible liabilities and assumed mortgage premiums, if any. The total aggregate investment was approximately $319.7 million , including $5.5
2
million in closing costs and acquisition costs.
Includes approximately one million square feet of land, which is 100% ground leased on a long-term basis to two tenants, and contains two industrial
distribution buildings and one rail transshipment facility.
3 Represents an improved land parcel containing approximately 10.6 acres.
4 Represents an improved land parcel containing approximately 7.2 acres.
5 Also includes an improved land parcel containing approximately 1.1 acres.
6 Also includes an improved land parcel containing approximately 0.9 acres.
7 Represents an improved land parcel containing approximately 5.4 acres.
The Company recorded revenues and net income for the year ended December 31, 2017 of approximately $7.3 million and $3.0 million , respectively, related to
the 2017 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.
As of December 31, 2018 , the Company has five properties under redevelopment that upon completion will contain approximately 0.7 million square feet with a
total expected investment of approximately $136.3 million , including redevelopment costs of approximately $49.9 million . During 2018 , the Company completed
redevelopment of its Woodside property in Queens, New York, an existing approximately 83,000 square foot office building. The total expected investment is
approximately $32.1 million . The Company capitalized interest associated with redevelopment and expansion activities of approximately $2.5 million , $0 and
$0.6 million , respectively, during the years ended December 31, 2018 , 2017 and 2016 .
F-17
Pro Forma Financial Information:
The following supplementary pro forma financial information presents the results of operations of the Company for the years ended December 31, 2018 and
2017 as if all of the Company’s acquisitions during the year ended December 31, 2018 occurred on January 1, 2017 . The following pro forma results for the years
ended December 31, 2018 and 2017 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, 2017 , or of future results of operations (dollars in thousands, except per share data).
For the Year Ended December 31,
2018
2017
Total revenues
$
(Unaudited)
156,484 $
Net income available to common stockholders, net of redemption of preferred stock and preferred stock
dividends
Basic and diluted net income available to common stockholders per share, net of redemption of preferred
stock and preferred stock dividends
$
64,299
1.12 $
142,065
51,905
1.01
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
December 31, 2018 , the Company did not have any properties held for sale.
During the year ended December 31, 2018 , the Company sold one property located in the Washington, D.C. market for a sales price of approximately $20.3
million , resulting in a gain of approximately $3.3 million , two properties in the Miami market for an aggregate sales price of approximately $28.6 million ,
resulting in an aggregate gain of approximately $13.1 million and one property in the Los Angeles market for a sales price of approximately $33.2 million ,
resulting in a gain of approximately $12.2 million . During the year ended December 31, 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 three properties in the Washington, D.C. market for an
aggregate sales price of approximately $52.0 million , resulting in an aggregate gain of approximately $20.5 million .
Note 6. Senior Secured Loan
On May 7, 2018, the Company made a Senior Secured Loan of $55.0 million with a two -year term that bears interest at a fixed annual interest rate of
8.0% and matures in May 2020 . The Senior Secured Loan is secured by a portfolio of nine improved land parcels primarily located in Newark and Kearny, New
Jersey. One of the properties securing the Senior Secured Loan may be put to the Company as partial repayment of the Senior Secured Loan. This property, and
two of the other properties, may be called by the Company as partial or full repayment of the Senior Secured Loan at previously agreed upon values. In addition,
per the terms of the Senior Secured Loan, the borrower may repay the loan at any time with either cash or deeds in lieu, with the deeds subject to the Company’s
approval. As of December 31, 2018 , the borrower has offered repayment with deeds in lieu on two of the three option properties for an aggregate purchase price of
approximately $ 39.1 million. As of February 6, 2019 , the Company has one outstanding contract to acquire one of the option properties for approximately $ 25.0
million and one non-binding letter of intent to acquire one of the option properties for approximately $14.1 million. 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,
and with respect to the property under non-binding letter of intent, the Company’s entry into a purchase and sale agreement. As of December 31, 2018 and
December 31, 2017 , there was approximately $ 54.5 million and $ 0 , respectively, net of deferred loan fees of approximately $ 0.5 million and $ 0 , respectively,
outstanding on the Senior Secured Loan and approximately $ 0.4 million and $ 0 , respectively, of interest receivable outstanding on the Senior Secured Loan.
Interest receivable is included as a component of other assets in the accompanying consolidated balance sheets.
F-18
Note 7. Debt
On October 19, 2018, the Company entered into a Fifth Amended and Restated Senior Credit Agreement (the “Facility”). The Facility consists of a $250.0
million unsecured revolving credit facility (increased from $200.0 million ) that matures in October 2022 (previously 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 . The amount and maturity dates of the outstanding term loans remain
unchanged under the Facility. 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 $250.0 million revolving credit facility (previously $200.0 million ), the $50.0 million term loan maturing in August 2021 and the
$100.0 million term loan maturing in January 2022 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 with respect to the revolving credit facility under the Facility has been reduced to a range of
1.05% to 1.50% (previously 1.35% to 1.90% ; 1.05% as of December 31, 2018) and the applicable LIBOR margin with respect to the outstanding term loans under
the Facility has been reduced to a range of 1.20% to 1.70% (previously 1.30% to 1.85% ; 1.20% as of December 31, 2018), in each case depending on the ratio of
the Company’s outstanding consolidated indebtedness to the value of the Company’s consolidated gross asset value. The Facility requires quarterly payments of an
annual facility fee in an amount ranging from 0.15% to 0.30% (previously there was no annual facility fee) depending on the ratio of the Company’s outstanding
consolidated indebtedness to the value of the Company’s consolidated gross asset value. There is no unused facility fee under the Facility (previously 0.20% or
0.25% depending on the unused portion of the revolving credit facility).
As of December 31, 2018 , the Company also had $50.0 million of senior unsecured notes that mature in September 2022 , $100.0 million of senior unsecured
notes that mature in July 2024 , $50.0 million of senior unsecured notes that mature in July 2026 , and $50.0 million of senior unsecured notes that mature in
October 2027 (collectively the “Senior Unsecured Notes”). As of December 31, 2018 and 2017 , there was $19.0 million and $0 , 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
December 31, 2018 and 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. See “Note 9-Derivative Financial Instruments” for more information regarding the Company’s interest rate caps.
The Facility and the Senior Unsecured Notes are guaranteed by the Company and by substantially all of the current and to-be-formed subsidiaries of the Company
that own an unencumbered property. The Facility and the Senior Unsecured Notes are unsecured by the Company’s properties or by interests in the subsidiaries
that hold such properties. The Facility and the Senior Unsecured Notes include a series of financial and other covenants with which the Company must comply.
The Company was in compliance with the covenants under the Facility and the Senior Unsecured Notes as of December 31, 2018 and 2017 .
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 December 31, 2018 , the Company had two mortgage loans payable,
net of deferred financing costs, totaling approximately $45.8 million , which bear interest at a weighted average fixed annual rate of 4.1% . As of December 31,
2017 , the Company had three mortgage loans payable, net of deferred financing costs, totaling approximately $64.8 million , which bore interest at a weighted
average fixed annual interest rate of 4.0% . As of December 31, 2018 and 2017 , the total gross book value of the properties securing the debt was approximately
$114.5 million and $153.7 million , respectively.
F-19
The scheduled principal payments of the Company’s debt as of December 31, 2018 were as follows (dollars in thousands):
2019
2020
2021
2022
2023
Thereafter
Subtotal
Unamortized net premiums
Total Debt
Deferred financing costs, net
Total Debt, net
Weighted Average Interest Rate
Note 8. Leasing
Credit
Facility
Term
Loans
Senior
Unsecured
Notes
Mortgage
Loans
Payable
Total Debt
$
— $
—
—
19,000
—
—
19,000
—
19,000
—
— $
—
50,000
100,000
—
—
150,000
—
150,000
(933)
— $
—
—
50,000
—
200,000
250,000
—
250,000
(1,737)
1,514
$
33,077
11,271
—
—
—
45,862
—
45,862
(95)
$
19,000
$
149,067
$
248,263
$
45,767
$
1,514
33,077
61,271
169,000
—
200,000
464,862
—
464,862
(2,765)
462,097
3.6%
3.6%
4.1%
4.1%
3.9%
The following is a schedule of minimum future cash rentals on tenant operating leases in effect as of December 31, 2018 . The schedule does not reflect
future rental revenues from the renewal or replacement of existing leases and excludes property operating expense reimbursements (dollars in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
116,270
103,428
88,251
71,541
52,089
152,890
584,469
Note 9. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures
to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest
rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial
instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the
payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are
used to manage differences in the amount, timing, and duration of its known or expected cash payments principally related to its borrowings.
Derivative Instruments
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To
accomplish this objective, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps involve the receipt
of variable amounts from a counterparty at the end of each period in which the interest rate exceeds the agreed fixed price. The Company does not use derivatives
for trading or speculative purposes. The Company requires that hedging derivative instruments be highly effective in reducing the risk exposure that they are
designated to hedge. As a result, there is no significant ineffectiveness from any of its derivative activities.
F-20
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 December 31, 2018 and 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 1.20% to 1.70% ,
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 accompanying consolidated balance sheets, and accordingly, there are no
offsetting amounts that net assets against liabilities. The following table presents a summary of the Company’s derivative instruments designated as hedging
instruments (dollars in thousands):
Effective
Date
Maturity
Date
Interest
Rate
Strike
Fair Value
December 31, 2018
December 31, 2017
Notional Amount
December 31, 2018 December 31, 2017
Derivative Instrument
Assets:
Interest Rate Cap
Interest Rate Cap
Interest Rate Cap
Total
12/1/2014
5/4/2021
9/1/2015
9/1/2015
4/1/2019
2/3/2020
4.0% $
4.0%
4.0%
$
25 $
—
1
26 $
26 $
50,000 $
1
3
50,000
50,000
30 $
150,000 $
50,000
50,000
50,000
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 years
ended December 31, 2018 and 2017 (in thousands):
For the Year Ended December 31,
2018
2017
2016
Interest rate caps in cash flow hedging relationships:
Amount of gain recognized in AOCI on derivatives (effective portion)
Amount of gain reclassified from AOCI into interest expense (effective portion)
$
$
289 $
289 $
103 $
103 $
—
—
The Company estimates that approximately $0.3 million will be reclassified from AOCI as an increase to interest expense over the next twelve months.
Note 10. Fair Value Measurements
ASC 820 requires disclosure of the level within the fair value hierarchy in which the fair value measurements fall, including measurements using quoted
prices in active markets for identical assets or liabilities (Level 1), quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in markets that are not active (Level 2), and significant valuation assumptions that are not readily observable in the market (Level 3).
F-21
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 December 31, 2018 and 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 December 31, 2018 and 2017 (dollars in
thousands):
Assets
Interest rate caps at:
December 31, 2018
December 31, 2017
Fair Value Measurement Using
Quoted Price in
Active Markets for
Identical Assets and
Liabilities
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Fair Value
$
$
26 $
30 $
— $
— $
26 $
30 $
—
—
Financial
Instruments
Disclosed
at
Fair
Value
As of December 31, 2018 and 2017 , the fair values of cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying
values because of the short-term nature of these investments or liabilities based on Level 1 inputs. The fair values of the Company’s derivative instruments were
evaluated based on Level 2 inputs. The fair values of the Company’s mortgage loans payable and Senior Unsecured Notes were estimated by calculating the
present value of principal and interest payments, based on borrowing rates available to the Company, which are Level 2 inputs, adjusted with a credit spread, as
applicable, and assuming the loans are outstanding through maturity. The fair value of the Company’s Facility approximated its carrying value because the variable
interest rates approximate market borrowing rates available to the Company, which are Level 2 inputs. The fair value of the Company’s Senior Secured Loan
approximated its carrying value because the interest rate approximates the market lending rate available to the borrower, which is a Level 2 input.
The following table sets forth the carrying value and the estimated fair value of the Company’s Senior Secured Loan and debt as of December 31, 2018 and 2017
(dollars in thousands):
Assets
Senior Secured Loan at:
December 31, 2018
December 31, 2017
Liabilities
Debt at:
December 31, 2018
December 31, 2017
Note 11. Stockholders’ Equity
Total Fair Value
$
$
$
$
55,000 $
— $
455,159 $
459,048 $
Fair Value Measurement Using
Quoted Price in
Active Markets
for Identical
Assets and
Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying Value
— $
— $
55,000 $
— $
— $
— $
54,492
—
— $
— $
455,159 $
459,048 $
— $
— $
462,097
461,683
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
F-22
(the “ $250 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
$250.0 million in amounts and at times to be determined by the Company from time to time. Prior to the implementation of the $250 Million ATM Program, the
Company had a $200.0 million ATM program (the “ $200 Million ATM Program”), which was substantially utilized as of June 30, 2018 and is no longer active,
and a $150.0 million ATM program (the “ $150 Million ATM Program”), which was fully utilized as of June 30, 2017. Actual sales under the $250 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 $250 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 year ended
December 31, 2018 , the Company issued an aggregate of 5,492,707 shares of common stock at a weighted average offering price of $38.04 per share under the
$250 Million ATM Program and the $200 Million ATM Program, resulting in net proceeds of approximately $205.9 million and paying total compensation to the
applicable sales agents of approximately $3.0 million . During the year ended December 31, 2017 , the Company issued an aggregate of 7,859,929 shares of
common stock at a weighted average offering price of $32.48 per share under the $200 Million ATM Program and the $150 Million ATM program, resulting in net
proceeds of approximately $251.6 million and paying total compensation to the applicable sales agents of approximately $3.7 million . As of December 31, 2018
and 2017 , the Company had shares of common stock having an aggregate offering price of up to $129.9 million available for issuance under the $250 Million
ATM Program and $90.1 million available for issuance under the $200 Million ATM Program, respectively.
On October 31, 2018, the Company’s board of directors approved an extension of the share repurchase program authorizing the Company to repurchase up to
3,000,000 shares (previously 2,000,000 shares) of its outstanding common stock from time to time through December 31, 2020 . 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 December 31, 2018 , the Company
has no t repurchased any shares of stock pursuant to its share repurchase authorization.
In connection with the annual meeting of stockholders on May 1, 2018, the Company granted a total of 9,656 shares of unrestricted common stock to its
independent directors under the Company’s Amended and Restated 2010 Equity Incentive Plan (the “Plan”) with a grant date fair value per share of $37.29 . 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 $0.4 million in compensation costs for the year ended December 31, 2018 related to this issuance.
On July 19, 2017 , the Company redeemed all 1,840,000 outstanding shares of the 7.75% Series A Cumulative Redeemable Preferred Stock (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 year ended December 31,
2017 representing the write-off of original issuance costs related to the redemption of the Series A Preferred Stock.
As of December 31, 2018 , 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 335,490 were remaining and available
for issuance. The grant date fair value per share of restricted stock awards issued during the period from February 16, 2010 (commencement of operations) to
December 31, 2018 ranged from $14.20 to $37.16 . The fair value of the restricted stock that was granted during the year ended December 31, 2018 was
approximately $1.9 million and the vesting period for the restricted stock is five years. As of December 31, 2018 , the Company had approximately $4.5 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 2.8 years . The Company recognized compensation costs of approximately $1.9 million , $1.7 million and $1.9 million , respectively, for the years
ended December 31, 2018 , 2017 and 2016 related to the restricted stock issuances.
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 years ended December 31, 2018 , 2017 and 2016 .
F-23
Restricted Stock Activity:
Non-vested shares outstanding as of December 31, 2015
Granted
Forfeited
Vested
Non-vested shares outstanding as of December 31, 2016
Granted
Forfeited
Vested
Non-vested shares outstanding as of December 31, 2017
Granted
Forfeited
Vested
Non-vested shares outstanding as of December 31, 2018
Shares
403,468 $
Weighted
Average Grant
Date Fair Value
32,797
(16,489)
(24,495)
395,281
32,247
(50,008)
(20,337)
357,183
53,915
(11,830)
(15,338)
383,930 $
20.08
21.50
17.53
17.26
20.48
26.52
21.60
18.06
21.01
34.63
20.30
20.21
22.98
The following is a vesting schedule of the total non-vested shares of restricted stock outstanding as of December 31, 2018 :
Non-vested Shares Vesting Schedule
2019
2020
2021
2022
2023
Thereafter
Total Non-vested Shares
Long-Term Incentive Plan:
Number of Shares
24,372
303,433
13,750
10,068
32,307
—
383,930
As of December 31, 2018 , there are three open performance measurement periods for the Performance Share awards: January 1, 2016 to December 31, 2018 ,
January 1, 2017 to December 31, 2019 and January 1, 2018 to December 31, 2020 . During the year ended December 31, 2018 , the Company issued 195,963
shares of common stock at a price of $34.50 per share related to the Performance Share awards for the performance period from January 1, 2015 to December 31,
2017 . The Company recorded compensation expense of approximately $7.1 million , $6.7 million and $7.3 million , respectively, for the years ended
December 31, 2018 , 2017 and 2016 , related to the Performance Share awards. As of December 31, 2018 , 2017 and 2016 , approximately $12.0 million , $11.8
million , and $10.7 million , respectively, of compensation costs related to the Performance Share awards were accrued.
The following table summarizes certain information with respect to the Performance Share awards (dollars in thousands):
Fair Value
Accrual
For the Year Ended December 31, 2018
Expense
Performance Share Period
January 1, 2018 - December 31, 2020
January 1, 2017 - December 31, 2019
January 1, 2016 - December 31, 2018 1
January 1, 2015 - December 31, 2017
January 1, 2014 - December 31, 2016
Total
December 31, 2018 December 31, 2018
$
3,409 $
1,135 $
6,109
6,840
—
—
4,073
6,840
—
—
2018
2017
2016
1,135 $
— $
2,540
3,388
—
—
1,532
2,189
2,994
—
$
16,358 $
12,048 $
7,063 $
6,715 $
F-24
—
—
1,262
2,589
3,471
7,322
1 Subsequent to December 31, 2018, the compensation committee determined that approximately $6.8 million was earned under the Long-Term Incentive Plan
with respect to the performance period that ended on December 31, 2018 and a total of 196,087 shares of common stock were issued to the executives.
Dividends:
The following table sets forth the cash dividends paid or payable per share during the years ended December 31, 2018 and 2017 :
For the Three
Months Ended
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
For the Three
Months Ended
March 31, 2017
March 31, 2017
June 30, 2017
June 30, 2017
September 30, 2017
December 31, 2017
Dividend
per Share
Security
Common stock $
Common stock $
Common stock $
Common stock $
Declaration Date
Record Date
Date Paid
0.22 February 6, 2018
0.22 May 1, 2018
0.24 August 1, 2018
March 28, 2018
July 6, 2018
October 5, 2018
0.24 October 31, 2018
December 18, 2018
April 12, 2018
July 20, 2018
October 19, 2018
January 11, 2019
Security
Dividend
per Share
Declaration Date
Record Date
Date Paid
Common stock $
Preferred stock $
Common stock $
Preferred stock $
Common stock $
Common stock $
0.200000 February 7, 2017
0.484375 February 7, 2017
0.200000 May 2, 2017
0.484375 May 2, 2017
March 28, 2017
March 10, 2017
July 7, 2017
June 9, 2017
0.220000 August 1, 2017
October 6, 2017
0.220000 October 31, 2017
December 29, 2017
April 12, 2017
March 31, 2017
July 21, 2017
June 30, 2017
October 21, 2017
January 12, 2018
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 12. 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 the years ended December 31, 2018 , 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 368,912 , 375,924 and 398,475 of weighted average unvested restricted shares outstanding for the years ended December 31,
2018 , 2017 and 2016 , respectively.
F-25
Note 13. Quarterly Results of Operations – Unaudited
The following tables summarize the Company’s quarterly financial information.
Total revenues
Total costs and expenses
Total other income and (expenses)
Net income
Net income available to common stockholders, net of
redemption of preferred stock and preferred stock dividends
Earnings per Common Share – Basic and Diluted:
Net income available to common stockholders, net of
redemption of preferred stock and preferred stock dividends 1
Basic and Diluted Weighted Average Common Shares
Outstanding
Total revenues
Total costs and expenses
Total other income and (expenses)
Net income
Net income available to common stockholders, net of
redemption of preferred stock and preferred stock dividends
Earnings per Common Share – Basic and Diluted:
Net income available to common stockholders, net of
redemption of preferred stock and preferred stock dividends 1
Basic and Diluted Weighted Average Common Shares
Outstanding
2018 Quarter Ended
March 31
June 30
September 30
December 31
(in thousands, except share and per share data)
37,107 $
37,238 $
37,899 $
(25,708)
(1,342)
10,057
(25,099)
7,998
20,137
(24,712)
(3,065)
10,122
39,413
(26,912)
10,471
22,972
9,992 $
20,012 $
10,056 $
22,827
0.18 $
0.35 $
0.17 $
0.38
55,127,580
56,698,959
58,369,252
59,689,965
2017 Quarter Ended
March 31
June 30
September 30
December 31
(in thousands, except share and per share data)
31,441 $
32,778 $
33,640 $
(21,911)
(3,731)
5,799
(23,568)
6,317
15,527
(23,659)
10,952
20,933
34,625
(24,297)
508
10,836
4,874 $
14,529 $
18,852 $
10,761
0.10 $
0.29 $
0.36 $
0.20
47,645,321
50,325,668
52,804,611
54,563,353
$
$
$
$
$
$
1 The above quarterly income per share calculations are based on the weighted average number of common shares outstanding during each quarter. The
income per share calculation for the years ended December 31, 2018 and 2017 in the consolidated statements of operations is based on the weighted
average number of common shares outstanding for the years ended December 31, 2018 and 2017 . The sum of the quarterly financial data may vary from
the years ended December 31, 2018 and 2017 data due to rounding.
Note 14. Commitments and Contingencies
Litigation
. The Company is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against it. In the normal course
of business, from time to time, the Company may be involved in legal actions relating to the ownership and operations of its properties. Management does not
expect that the liabilities, if any, that may ultimately result from such legal actions will have a material effect on the consolidated financial position, results of
operations or cash flows of the Company.
F-26
Environmental
Matters.
The industrial properties that the Company owns and will acquire are subject to various federal, state and local environmental laws.
Under these laws, courts and government agencies have the authority to require the Company, as owner of a contaminated property, to clean up the property, even
if it did not know of or was not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and
therefore it is possible the Company could incur these costs even after the Company sells some of the properties it acquires. In addition to the costs of cleanup,
environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow using the property as collateral or to sell the property.
Under applicable environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility,
such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person
exposed to asbestos at one of the Company’s properties may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these
environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals to
manage them carefully and to notify local officials that the chemicals are being used.
The Company could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply
with environmental laws could be material and could adversely affect the funds available for distribution to its stockholders. The Company generally obtains
“Phase I environmental site assessments”, or ESAs, on each property prior to acquiring it. However, these ESAs may not reveal all environmental costs that might
have a material adverse effect on the Company’s business, assets, results of operations or liquidity and may not identify all potential environmental liabilities.
The Company utilizes local third-party property managers for day-to-day property management and will rely on these third parties to operate its industrial
properties in compliance with applicable federal, state and local environmental laws in their daily operation of the respective properties and to promptly notify the
Company of any environmental contaminations or similar issues.
As a result, the Company may become subject to material environmental liabilities of which it is unaware. The Company can make no assurances that (1) future
laws or regulations will not impose material environmental liabilities on it, or (2) the environmental condition of the Company’s industrial properties will not be
affected by the condition of the properties in the vicinity of its industrial properties (such as the presence of leaking underground storage tanks) or by third parties
unrelated to the Company. The Company was not aware of any significant or material exposures as of December 31, 2018 or 2017 .
General
Uninsured
Losses.
The Company carries property and rental loss, liability and terrorism insurance. The Company believes that the policy terms,
conditions, limits and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current
industry practice. In addition, the Company’s properties are located, or may in the future be located, in areas that are subject to earthquake and flood activity. As a
result, the Company has obtained, as applicable, limited earthquake and flood insurance on those properties. There are, however, certain types of extraordinary
losses, such as those due to acts of war that may be either uninsurable or not economically insurable. Although the Company has obtained coverage for certain acts
of terrorism, with policy specifications and insured limits that it believes are commercially reasonable, there can be no assurance that the Company will be able to
collect under such policies. Should an uninsured loss occur, the Company could lose its investment in, and anticipated profits and cash flows from, a property. The
Company was not aware of any significant or material exposures as of December 31, 2018 or 2017 .
Contractual
Commitments.
As of February 6, 2019 , the Company had two outstanding contracts with third-party sellers to acquire two industrial properties
consisting of approximately 18,000 square feet and one improved land parcel containing 16.8 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:
F-27
Market
Los Angeles
Northern New Jersey/New York City 1
San Francisco Bay Area
Seattle
Miami
Washington, D.C.
Total
Number of
Buildings
Square Feet
Purchase Price
(in thousands)
Assumed Debt
(in thousands)
—
1
—
—
—
—
1
— $
17,851
— $
49,017
—
—
—
—
—
—
—
—
17,851 $
49,017 $
—
—
—
—
—
—
—
1
Includes one improved land parcel containing approximately 16.8 acres.
As of February 6, 2019 , the Company has executed one non-binding letter of intent with a third-party seller to acquire one industrial property consisting of
approximately 28,000 square feet. The anticipated purchase price for this industrial property is approximately $14.1 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 a purchase and sale agreement with respect to this property or otherwise complete any such
prospective purchase on the terms described or at all.
Note 15. Subsequent Events
On January 8, 2019 , the Company amended and restated its Amended and Restated Long-Term Incentive Plan (as amended and restated, the “Amended
LTIP”). Under the Amended LTIP, each participant’s performance share target award for target awards granted on or after January 1, 2019 will be expressed as a
number of shares of common stock and settled in shares of common stock. Target awards were previously expressed as a dollar amount and settled in shares of
common stock. Commencing with performance share awards granted on or after January 1, 2019, the grant date fair value of the performance share awards will be
determined under current accounting treatment using a Monte Carlo simulation model on the date of grant and amortized over the performance period.
On February 5, 2019 , the Company’s board of directors declared a cash dividend in the amount of $0.24 per share of its common stock payable on April 12, 2019
to the stockholders of record as of the close of business on March 29, 2019 .
F-28
Terreno Realty Corporation
Schedule III
Real Estate Investments and Accumulated Depreciation
As of December 31, 2018
(in thousands)
Property
Name
Los Angeles
No. of
Bldgs.
Location
Encumbrances
Land
Buildings &
Improvements
Initial Cost
to Company
Costs
Capitalized
Subsequent
to
Acquisition
Gross Amount Carried
at December 31, 2018
Land
Buildings &
Improvements
Total
Depreciation
Year
Acquired
Year
Constructed
Accumulated
1
Los Angeles,
CA
$
— $ 3,701 $
976 $
— $ 3,701 $
976 $ 4,677 $
2 Carson, CA
— 21,236
15,783
2 21,236
15,785
37,021
104th
Street
139th
Street
630
Glasgow
747
Glasgow
14611
Broadway
19601
Hamilton
709 Hindry
Acacia
California
Dominguez
Garfield
Hawthorne
Las
Hermanas
Lynwood
Manhattan
Beach
Shoemaker
South Main
South Main
III
Telegraph
Springs
Vermont
1215
Walnut
Walnut II
Northern New
Jersey/
New York City
1 Dodge
Drive
17
Madison
20 Pulaski
22
Madison
50 Kero
74th North
Bergen
85
Doremus
1 Inglewood, CA
1 Inglewood, CA
1 Gardena, CA
1 Torrance, CA
1 Inglewood, CA
1 Compton, CA
1 Corona, CA
Los Angeles,
CA
—
5 Commerce, CA
Hawthorne,
CA
8
1 Compton, CA
3 Lynwood, CA
Redondo
Beach, CA
1
Santa Fe
—
Springs, CA
2 Carson, CA
1 Gardena, CA
Santa Fe
2
Springs, CA
1 Torrance, CA
1 Compton, CA
1 Compton, CA
1
West Caldwell,
NJ
1 Fairfield, NJ
1 Bayonne, NJ
1 Fairfield, NJ
2 Carlstadt, NJ
North Bergen,
NJ
1
— Newark, NJ
32
432
578
292
767
935
187
295
648
76
6,257
323
198
—
515
295
178
103
16
400
2,245
2,255
4,500
225
1,759
1,780
3,539
974
4,757
2,217
6,974
744
168
625
464
7,409
2,105
5,143
3,225
55 11,370
3,612 27,539
4,816
3,140
2,610
4,880
1,590
26,306
12,225
5,245
7,753
8,105
12,960
53,845
1,264 17,226
11,333
28,559
3,330
221
— 43,885
972
—
4,302
43,885
—
2,245
—
1,759
—
4,757
—
—
—
—
7,409
2,105
5,143
3,225
— 11,370
22,040 27,539
— 17,226
3,330
—
— 43,885
—
7,874
4,759
—
— 16,371
1,855
1,555
1,243
4,072
2,972
1,985
4,416
1,535
22,694
10,069
751
—
5,641
1,099
7,045
443
7,874
6,084
13,958
1,118
—
4,759
17,028 16,371
1,099
24,073
5,858
40,444
5
2018
5,462 2012/2014
— 11,521
12,467
— 11,521
12,467
23,988
7,063
—
— 10,173
—
—
6,130
6,097
—
3,819
—
—
974
4,003
—
1,365
— 10,343
—
2,933
—
5,918
7,236
7,105
2,522
5,069
2,982
1,647
4,946
1,607
3,876
1,817
513
S-1
7,063
160
— 10,173
10
39
6,130
6,097
7,396
7,105
2,532
5,108
14,459
17,278
8,662
11,205
1,439
3,819
4,421
8,240
1,183
468
1,207
974
4,003
104
1,365
2,517 10,343
2,115
6,153
1,711
6,393
3,089
10,156
3,076
16,736
353
2,933
2,170
5,103
—
5,918
513
6,431
480
987
175
194
163
11
2017
2017
2011
2014
2013
2011
2016
2017
2014
2017
2012
2017
2014
2017
2012
2017
2017
2018
2017
2018
2013
2013
2014
2015
2017
2016
2018
1951
1965/2003
1988
1981
1962
1985
1984
1972
1994
—
2002
1952/1986
1970
1988
1963/1970
1986/1997
2016
2016
2007
1978
1969/1990
1969
1985
1979
1965
1979
1970
1973
—
Property Name
341 Michele
422
Frelinghuysen
465 Meadow
550 Delancy
620 Division
7777 West
Side
No. of
Bldgs.
Location
1 Carlstadt, NJ
— Newark, NJ
1 Carlstadt, NJ
1 Newark, NJ
1 Elizabeth, NJ
North Bergen,
NJ
1
900 Hart
901 North
Avenue A
Belleville
Commerce
Dell
Ethel
Interstate
JFK Airgate
Manor
Melanie Lane
Middlebrook
New Dutch
Paterson
Plank
Schoolhouse
Stockton
Terminal
Way
Wilson
Woodside
San Francisco
Bay Area
238/242
Lawrence
240 Littlefield
299 Lawrence
631 Brennan
Ahern
Ahern II
Burroughs
Caribbean
Carlton Court
Clawiter
Piscataway,
NJ
1
— Elizabeth, NJ
4 Carlstadt, NJ
1 Kearny, NJ
1 Carlstadt, NJ
1 Carlstadt, NJ
Piscataway,
NJ
2
South
Brunswick,
NJ
2
4 Queens, NY
East
Rutherford,
NJ
East Hanover,
NJ
1
3
Bound Brook,
NJ
18
1 Fairfield, NJ
1 Carlstadt, NJ
1 Somerset, NJ
— Newark, NJ
2 Avenel, NJ
1 Newark, NJ
1 Queens, NY
2
1
South San
Francisco, CA
South San
Francisco, CA
South San
1
Francisco, CA
1 San Jose, CA
Union City,
CA
2
Union City,
CA
San Leandro,
CA
Sunnyvale,
CA
1
3
3
South San
1
Francisco, CA
1 Hayward, CA
Initial Cost
to Company
Gross Amount Carried
at December 31, 2018
Encumbrances
Land
2,372
—
Buildings &
Improvements
4,798
—
1,618
4,855
3,568
8,856
3,866
913
4,660
18,041
1,544
771
3,801
12,135
32,933
5,262
13,178
10,241
2,004
455
5,705
1,282
3,598
484
3,796
2,655
3,293
1,198
2,245
2,749
4,527
7,092
— 16,728
713
—
9,230
—
6,491
—
—
4,525
—
—
—
3,202
8,035
7,516
12,161 12,845
1,656
6,641
—
—
—
2,748
— 13,686
— 18,282
—
4,076
—
5,931
— 16,442
4,773
—
4,127
—
—
2,375
— 12,327
3,537
—
—
2,016
— 23,987
—
6,674
—
5,107
—
—
1,352
1,932
—
3,246
—
2,467
—
5,400
Costs
Capitalized
Subsequent
to
Acquisition
640
Land
2,372
3,253 16,728
713
9,230
6,491
229
1,970
3,130
Buildings &
Improvements
Total
5,438
7,810
3,253
1,847
6,825
6,698
19,981
2,560
16,055
13,189
—
4,525
8,856
13,381
1,200
829
262
3,202
8,035
7,516
1,332 12,845
1,656
6,641
111
170
5,066
1,742
4,922
19,373
1,655
941
8,268
9,777
12,438
32,218
3,311
7,582
1,297
2,748
5,098
7,846
Accumulated
Depreciation
806
Year
Acquired
2013
34
300
928
2,406
389
679
249
286
3,712
8
182
985
2017
2013
2013
2011
2017
2014
2016
2017
2011
2018
2011
2013
Year
Constructed
1973
—
1972
1987
1980
1967
1983
2016
1951/1957
2006
1969
1972
1981/1984
11,103 13,686
4,878 18,282
23,238
37,811
36,924
56,093
4,691 2010/2013
2013
5,950
1999/2014
1986/1991
1,669
4,076
6,931
11,007
2,500
5,931
15,678
21,609
11,069 16,442
4,773
—
4,127
88
283
2,375
222 12,327
38
813
3,537
2,016
1,557 23,987
21,310
2,004
37,752
6,777
543
5,988
1,504
3,636
1,297
5,353
4,670
8,363
13,831
7,173
3,313
29,340
645
2,661
6,785
82
45
382
150
400
159
5
1,494
6,674
4,149
10,823
1,199
2,852
5,107
6,145
11,252
423
484
1,352
1,932
1,621
2,729
2,973
4,661
733
3,246
3,482
6,728
201
2,467
4,728
7,195
659
5,400
7,751
13,151
850
549
582
1,025
549
1,008
3,170
358
212
2015
2013
2010
2017
2016
2016
2017
2014
2016
2018
2010
2013
2010
2012
2010
2015
2014
2012
2012
2011
1968
1980/1998
1958/1976
1976
1998
2009
—
1950/1968
1970
2018
1986
2013
1968
1975
1986
1997
1966
1980/1981
1981
1967
— 17,483
14,493
1,721 17,483
16,214
33,697
—
4,179
2,036
5,964
1,475
1,159
162
148
2,036
5,964
1,637
1,307
3,673
7,271
S-2
Property
Name
Hotchkiss
Hotchkiss
II
Merced
221
Michele
San
Clemente
West
140th
Whitney
Wicks
Central
Pacific
Business
Park I
Central
Pacific
Business
Park II
Seattle
79 Ave
South
3401
Lind
4225 2nd
Avenue
4930 3rd
Avenue
South
17600
West
Valley
Highway
Auburn
1307
Dawson
Denver
East
Valley
Hanford
Kent 188
Kent 190
Kent 202
Kent 216
Kent
Corporate
Park
Lucile
Lund
Olympic
SeaTac
8th
Avenue
SW 34th
Valley
Corporate
Miami
26th
Street
48th
Avenue
60th
Avenue
No. of
Bldgs.
Encumbrances
Location
1 Fremont, CA
1 Fremont, CA
San Leandro,
CA
4
1
South San
Francisco, CA
1 Hayward, CA
San Leandro,
CA
2
3
1
San Leandro,
CA
San Leandro,
CA
3
Union City,
CA
4
Union City,
CA
1 Kent, WA
1 Renton, WA
1 Seattle, WA
Initial Cost
to Company
Land
4,163
—
—
3,042
— 25,621
—
2,710
—
5,126
—
9,578
— 13,821
—
2,224
Buildings &
Improvements
3,152
3,081
9,318
2,540
3,938
6,297
9,016
298
Costs
Capitalized
Subsequent
to
Acquisition
807
Gross Amount Carried
at December 31, 2018
Land
4,163
Buildings &
Improvements
3,959
Total
8,122
Depreciation
136
Year
Acquired
2017
Accumulated
—
3,042
3,081
6,123
—
25,621
9,318
34,939
659
2,710
3,199
5,909
—
5,126
3,938
9,064
3,745
9,578
10,042
19,620
602
13,821
9,618
23,439
—
2,224
298
2,522
3
98
200
31
630
74
6
2018
2018
2016
2018
2016
2018
2018
Year
Constructed
1997
1997
1958
1979
1982
1959
1974
1976
—
8,468
14,165
874
8,468
15,039
23,507
1,826
2014
1989
— 13,642
23,658
5,219
13,642
28,877
42,519
3,363
2015
2015
—
1,267
—
2,999
—
4,236
1,503
6,707
4,049
387
1,267
1,890
3,157
436
2,999
7,143
10,142
2,012
4,236
6,061
10,297
327
805
574
2014
2014
2015
1 Seattle, WA
—
3,984
2,424
772
3,984
3,196
7,180
220
2016
1 Tukwila, WA
—
3,361
1 Auburn, WA
1 Seattle, WA
1 Seattle, WA
1 Renton, WA
1 Seattle, WA
1 Kent, WA
1 Kent, WA
1 Kent, WA
1 Kent, WA
4 Kent, WA
1 Seattle, WA
1 Auburn, WA
1 Tukwila, WA
1 Burien, WA
1 Renton, WA
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,253
3,902
3,203
2,693
3,821
3,251
4,560
5,761
3,672
5,032
4,498
2,573
1,499
2,501
2,912
2 Kent, WA
7,482
5,264
1 Miami, FL
Miami
Gardens, FL
Miami Lakes,
FL
1
2
—
3,444
—
4,322
—
6,203
5,260
5,034
278
1,345
2,959
2,250
4,719
5,561
9,114
5,408
6,916
3,504
4,399
1,431
4,020
3,289
9,096
4,558
2,187
1,567
1,188
3,361
6,448
9,809
1,374
249
114
480
—
215
1,248
300
2,806
663
1,341
1,342
82
536
4,253
3,902
3,203
2,693
3,821
3,251
4,560
5,761
3,672
5,032
4,498
2,573
1,499
5,283
392
1,825
2,959
2,465
5,967
5,861
11,920
6,071
8,257
4,846
4,481
1,967
9,536
4,294
5,028
5,652
6,286
9,218
10,421
17,681
9,743
13,289
9,344
7,054
3,466
617
498
2,501
2,912
4,637
3,787
7,138
6,699
682
13
174
48
110
1,537
629
1,176
911
946
356
339
310
943
489
1,779
5,264
10,875
16,139
2,135
672
3,444
5,230
8,674
470
4,322
2,657
6,979
777
470
6,665
6,203
8,232
14,435
2,689
S-3
2012
2014
2017
2016
2018
2017
2010
2015
2015
2014
2015
2017
2016
2015
2013
2014
2011
2012
2011
2010
2000
1984/2012
1957
1964
1986
2002
1964
1953
1991
1952
1979
1992/1999
1981
1996
1980/1981
1976
1999
1978
1988
1996/2010
1987
1973
1987
1971/2011
Property Name
70th Avenue
70th Avenue
II
70th Avenue
III
70th Avenue
IV
74th Avenue
78th Avenue
81st Street
94th Avenue
107th
Avenue
101st Road
131st Street
12950 SW
South River
Americas
Gateway
Miami
International
Trade Center
Washington,
D.C.
75th Ave
2920 V
Street
3601 Pennsy
4230 Forbes
8215 Dorsey
9070
Junction
Business
Parkway
Hampton
Overlook
Junction
New Ridge
Parkway
Troy Hill
V Street
Subtotal
Unamortized
net
premiums
Unamortized
net deferred
financing
costs
Intangible
assets
Total
Initial Cost
to Company
No. of
Bldgs.
Location
1 Miami, FL
Encumbrances
—
Land
1,434
Buildings &
Improvements
2,333
Costs
Capitalized
Subsequent
to
Acquisition
198
Gross Amount Carried
at December 31, 2018
Land
1,434
Buildings &
Improvements
2,531
Accumulated
Depreciation
518
Year
Acquired
2011
1 Miami, FL
1 Miami, FL
1 Miami, FL
1 Miami, FL
1 Doral, FL
2 Medley, FL
1 Doral, FL
1 Medley, FL
1 Medley, FL
1 Medley, FL
1 Medley, FL
6 Doral, FL
—
2,152
—
2,543
—
—
—
—
—
—
—
—
1,119
2,327
2,445
2,938
3,000
2,787
2,647
2,903
—
1,971
3,418
3,167
1,456
3,538
1,755
5,242
3,580
2,036
3,258
5,729
4,029
467
694
129
441
2,442
787
336
500
399
444
402
2,152
2,543
1,119
2,327
2,445
2,938
3,000
2,787
2,647
2,903
1,971
3,885
3,861
1,585
3,979
4,197
6,029
3,916
2,536
3,657
6,173
4,431
Total
3,965
6,037
6,404
2,704
6,306
6,642
8,967
6,916
5,323
6,304
9,076
6,402
261
187
64
213
935
801
130
500
606
797
379
—
11,152
11,721
2,863
11,152
14,584
25,736
2,696
4 Medley, FL
—
5,063
10,958
1,169
5,063
12,127
17,190
1,216
2015
1996
—
10,658
18,615
3,232
10,658
21,847
32,505
2,682
1 Lanham, MD
—
3,038
5 Landover, MD
Washington,
D.C.
1
1 Landover, MD
1 Lanham, MD
1 Jessup, MD
Annapolis
Junction, MD
1
3
Capitol
Heights, MD
Annapolis
1
Junction, MD
— Hanover, MD
1 Hanover, MD
1 Elkridge, MD
Washington,
D.C.
6
205
—
—
—
—
2,248
2,331
1,736
2,263
—
3,538
—
4,602
2,526
5,689
4,543
1,409
—
—
—
—
—
45,862
1,670
4,375
2,395
3,200
6,670
3,007
7,521
10,419
1,567
12,094
5,033
1,499
755
807
937
2,248
2,331
1,736
2,263
3,169
5,130
3,202
4,137
5,417
7,461
4,938
6,400
111
763
383
538
2,736
3,538
9,406
12,944
1,538
—
3,038
3,007
6,045
855
815
—
372
228
4,602
2,526
5,689
4,543
1,409
8,376
12,978
11,234
1,567
12,466
5,261
13,760
7,256
17,009
6,670
175
623
1,209
125
1,669
977
67,132
833,995
41,299
677,854
9,635
159,962
67,132
833,995
50,934
837,816
118,066
1,671,811
6,100
114,923
—
—
—
205
—
—
—
—
—
—
—
—
(95)
—
—
—
$
45,767
$ 833,995 $
—
—
677,854 $
—
—
—
—
—
—
—
79,270
159,962 $ 833,995 $
837,816 $1,751,081 $
—
54,849
169,772
S-4
Year
Constructed
1999
1969
1974
1969
1986
1977
1996/2003
1989
2001
2012
1999
2000
1978/1982
2016
2016
2017
2016
2012
2015
2017
2013
2013
2014
2016
2013
2014
2017
2013
2013
2013
2015
2016
2016
2014
2016
2014
2012
2015
1987/1990
1958
1996
2003
1965/1981
1997
2002
1989/1990
1989/2012
—
1968/2012
2003
1955/1963
Terreno Realty Corporation
Schedule III
Real Estate Investments and Accumulated Depreciation – (Continued)
As of December 31, 2018
(in thousands)
A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2018 and 2017 is as follows:
Investment in Properties
Balance at beginning of year
Acquisition of properties
Disposition of properties
Construction in progress
Improvements, net of write-offs
Balance at end of year
Accumulated Depreciation
Balance at beginning of year
Amortization of lease intangible assets
Depreciation expense
Disposition of properties and write-offs
Balance at end of year
S-5
2018
2017
$
1,636,930 $
1,343,038
227,058
(56,985)
7,434
31,339
319,666
(49,471)
—
23,697
1,845,776 $
1,636,930
2018
2017
139,814 $
109,357
5,269
30,442
(5,753)
8,597
27,241
(5,381)
169,772 $
139,814
$
$
$
Exhibit
Number
3.1
3.2
3.3
3.4
3.5
4.1
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
Exhibit Index
Exhibit Description
Articles of Amendment and Restatement of Registrant, as amended (previously filed as Exhibit 3.1 to Amendment No. 2 to
the Registrant’s Registration Statement on Form S-11 on January 6, 2010 and incorporated herein by reference).
Articles Supplementary for Registrant’s 7.75% Series A Cumulative Redeemable Preferred Stock (previously filed as Exhibit
3.1 to the Registrant’s Current Report on Form 8-K on July 19, 2012 and incorporated herein by reference).
Articles Supplementary (previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K on February 9, 2017
and incorporated herein by reference).
Amended and Restated Bylaws of Registrant (previously filed as Exhibit 3.2 to Amendment No. 2 to the Registrant’s
Registration Statement on Form S-11 on January 6, 2010 and incorporated herein by reference).
First Amendment to Amended and Restated Bylaws of Registrant (previously filed as Exhibit 3.2 to the Registrant’s Current
Report on Form 8-K on February 9, 2017 and incorporated herein by reference).
Specimen Common Stock Certificate of Registrant (previously filed as Exhibit 4.1 to Amendment No. 3 to the Registrant’s
Registration Statement on Form S-11 on January 15, 2010 and incorporated herein by reference).
Amended and Restated Severance Agreement between Registrant and W. Blake Baird, dated as of February 18, 2014
(previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K on February 19, 2014 and incorporated
herein by reference).
Amended and Restated Severance Agreement between Registrant and Michael A. Coke dated as of February 18, 2014
(previously filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K on February 19, 2014 and incorporated
herein by reference).
Severance Agreement between Registrant and Jaime J. Cannon dated as of February 18, 2014 (previously filed as Exhibit
10.3 to the Registrant’s Current Report on Form 8-K on February 19, 2014 and incorporated herein by reference).
Amended and Restated 2010 Equity Incentive Plan of Registrant (previously filed as Appendix A to the Registrant’s
Definitive Proxy Statement on Schedule 14A on March 19, 2014 and incorporated herein by reference).
Form of Restricted Stock Award Agreement for Executive Officers and Employees (previously filed as Exhibit 10.4 to
Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 on January 6, 2010 and incorporated herein by
reference).
Form of Restricted Stock Award Agreement for Non-Employee Directors (previously filed as Exhibit 10.5 to Amendment
No. 2 to the Registrant’s Registration Statement on Form S-11 on January 6, 2010 and incorporated herein by reference).
Form of Indemnification Agreement between Registrant and its Directors and Executive Officers (previously filed as Exhibit
10.6 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-11 on January 6, 2010 and incorporated
herein by reference).
10.8+
10.9+*
10.10+
10.11+
10.12
10.13
10.14
10.15
10.16+
10.17+
21*
23*
24.1*
31.1*
Amended and Restated Long-Term Incentive Plan of Registrant (previously filed as Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K on January 14, 2019 and incorporated by reference herein).
Form of Award Notice under the Amended and Restated Long-Term Incentive Plan of Registrant.
Amended and Restated Long-Term Incentive Plan of Registrant (previously filed as Exhibit 10.4 to the Registrant’s Current
Report on Form 8-K on February 19, 2014 and incorporated by reference herein).
Form of Award Notice under the Long-Term Incentive Plan of Registrant (previously filed as Exhibit 10.8 to Amendment No.
2 to the Registrant’s Registration Statement on Form S-11 on January 6, 2010 and incorporated by reference herein).
Fifth Amended and Restated Senior Credit Agreement, dated as of October 19, 2018, among Terreno Realty LLC, KeyBank
National Association, both individually as a “Lender” and as “Administrative Agent”, KeyBanc Capital Markets, as joint lead
arranger, MUFG Union Bank, N.A., as co-syndication agent and joint lead arranger, PNC Bank, National Association, as co-
syndication agent, PNC Capital Markets LLC, as joint lead arranger, Regions Bank, as co-syndication agent, Regions Capital
Markets, as joint lead arranger and the several banks, financial institutions and other entities which may from time to time
become parties as additional “Lenders” (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K on
October 25, 2018 and incorporated herein by reference).
Note Purchase Agreement, dated as of June 7, 2017, among Terreno Realty LLC and the institutions named in Schedule B
thereto as purchasers (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K on June 12, 2017 and
incorporated herein by reference).
Note Purchase Agreement, dated as of June 2, 2016, among Terreno Realty LLC and the institutions named in Schedule B
thereto as purchasers (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K on June 7, 2016 and
incorporated herein by reference).
Note Purchase Agreement, dated as of September 1, 2015, among Terreno Realty LLC and the institutions named in Schedule
B thereto as purchasers (previously filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K on September 8,
2015 and incorporated herein by reference).
Severance Agreement between the Registrant and Andrew T. Burke, dated as of February 18, 2014 (previously filed as
Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K on February 8, 2017 and incorporated herein by reference).
Severance Agreement between the Registrant and John T. Meyer, dated as of February 18, 2014 (previously filed as Exhibit
10.14 to the Registrant’s Annual Report on Form 10-K on February 8, 2017 and incorporated herein by reference).
Subsidiaries of Registrant.
Consent of Independent Registered Public Accounting Firm.
Power of Attorney (included on the signature page to this Annual Report on Form 10-K).
Certification of Chief Executive Officer, pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2*
31.3*
32.1**
32.2**
32.3**
101*
*
**
+
Certification of Chief Financial Officer, pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of President, pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of President, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
The following materials from Terreno Realty Corporation’s Annual Report on Form 10-K for the year ended December 31,
2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated
Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Equity,
(v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements and (vii) Schedule III-Real
Estate Investments and Accumulated Depreciation.
Filed herewith.
Furnished herewith.
Exhibit is a management contract or compensatory plan or arrangement.
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of San Francisco, State of California, on February 6, 2019 .
SIGNATURES
Terreno Realty Corporation
By:
/s/ W. Blake Baird
W. Blake Baird
Chairman and Chief Executive Officer
Power of Attorney
We, the undersigned directors of Terreno Realty Corporation hereby severally constitute and appoint W. Blake Baird and Michael A. Coke, and each of them
singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments
to this report, and generally to do all things in our names and on our behalf in such capacities to enable Terreno Realty Corporation to comply with the provisions
of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature
Title
Date
Chairman, Chief Executive Officer
and Director
(principal executive officer)
February 6, 2019
President and Director
February 6, 2019
Executive Vice President and Chief
Financial Officer
(principal financial and accounting
officer)
Director
Director
Director
Director
Director
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
/s/ W. Blake Baird
W. Blake Baird
/s/ Michael A. Coke
Michael A. Coke
/s/ Jaime J. Cannon
Jaime J. Cannon
/s/ LeRoy E. Carlson
LeRoy E. Carlson
/s/ David M. Lee
David M. Lee
/s/ Gabriela F. Parcella
Gabriela F. Parcella
/s/ Douglas M. Pasquale
Douglas M. Pasquale
/s/ Dennis Polk
Dennis Polk
TERRENO REALTY CORPORATION
[Date]
Exhibit 10.9
[Participant]
[Address]
[Address]
Re: Terreno Realty Corporation Long-Term Incentive Plan
Dear [Participant]:
The Compensation Committee (the “Committee”) of the Board of Directors of Terreno Realty Corporation has selected you as a Participant in the
Company’s Long-Term Incentive Plan (the “Plan”). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Plan. This
Award Notice shall be subject to and governed by all the terms and conditions of the Plan. A copy of the Plan is attached as Exhibit I to this Award Letter.
For the Performance Measurement Period ending December 31, 20___ during which you are a Participant under the Plan, your Target Award as measured in
shares of Terreno Realty Corporation common stock per benchmark shall be:
MSCI U.S. REIT Index: [______] shares
FTSE NAREIT Industrial Index: [______] shares
This Award Notice together with the Plan (the terms of which are hereby incorporated by reference) are intended to be a final expression of the agreement
between you and the Company and are intended to be a complete and exclusive statement of the agreement and understanding between you and the Company with
respect to the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings relating to such subject
matter other than those referred to herein and in the Plan.
This Award Notice shall not be construed as creating any contract for continued services between you and the Company or any of its subsidiaries and nothing
herein contained shall give you the right to be retained as an employee of the Company or any of its subsidiaries.
Please acknowledge your receipt of this Award Notice and your agreement to the terms and conditions of the Plan by countersigning in the space provided
below and returning this Award Notice to the Company.
TERRENO REALTY CORPORATION
By:
Name:
Title:
AGREED TO AND ACCEPTED
___________________________
[Participant]
List of Subsidiaries of Terreno Realty Corporation:
Name of Subsidiary
Terreno Realty LLC
Terreno Fortune/Qume LLC
Terreno Warm Springs I/II LLC
Terreno 238 Lawrence LLC
Terreno Rialto LLC
Terreno Maltese LLC
Terreno Middlebrook LLC
Terreno Interstate LLC
Terreno 299 Lawrence LLC
Terreno Kent 188 LLC
Terreno Ahern LLC
Terreno 10 th Avenue LLC
Terreno 60 th Avenue LLC
Terreno Dorsey Run LLC
Terreno Belleville LLC
Terreno 630 Glasgow LLC
Terreno 8730 Bollman LLC
Terreno Dell LLC
Terreno 70 th Avenue LLC
Terreno 19601 Hamilton LLC
Terreno 39 th Street LLC
Terreno 620 Division LLC
Terreno 48 th Avenue LLC
Terreno Clawiter LLC
Terreno Valley Corporate LLC
Terreno Global Plaza LLC
Terreno Garfield LLC
Terreno Whittier LLC
Terreno Caribbean LLC
Terreno 78 th Avenue LLC
Terreno Manhattan Beach LLC
Terreno Carlton Court LLC
Terreno Troy Hill LLC
Terreno 26 th Street LLC
Terreno Sweitzer LLC
Terreno 17600 WVH LLC
Terreno 631 Brennan LLC
Terreno South Main LLC
Terreno 1 Dodge Drive LLC
Terreno 101st Road LLC
Terreno 107th Ave LLC
Terreno 14611 Broadway LLC
Terreno 17 Madison LLC
Terreno 240 Littlefield LLC
Terreno 341 Michele LLC
Exhibit 21
Jurisdiction of Organization or Incorporation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Terreno 3601 Pennsy LLC
Terreno 4230 Forbes LLC
Terreno 465 Meadow LLC
Terreno 550 Delancy LLC
Terreno 60 Ethel LLC
Terreno 8215 Dorsey LLC
Terreno Airgate LLC
Terreno America’s Gateway LLC
Terreno Melanie I LLC and Terreno Melanie II LLC
Terreno Route 100 LLC
Terreno SeaTac 8th Avenue LLC
Terreno 14605 Miller LLC
Terreno 20 Pulaski LLC
Terreno 3401 Lind LLC
Terreno 747 Glasgow LLC
Terreno 75th Ave LLC
Terreno 79th Ave South LLC
Terreno 900 Hart LLC
Terreno Auburn 1307 LLC
Terreno Burroughs LLC
Terreno California LLC
Terreno Hampton LLC
Terreno Junction LLC
Terreno Kent 216th LLC
Terreno Las Hermanas LLC
Terreno NW 131st Street LLC
Terreno Park Union City LLC
Terreno Parkway LLC
Terreno SW 34th LLC
Terreno Terminal Way LLC
Terreno 10100 NW 25th LLC
Terreno 180 Manor LLC
Terreno 22 Madison LLC
Terreno 4225 2nd Avenue South LLC
Terreno 9070 Junction LLC
Terreno Ahern II LLC
Terreno Kent 190th LLC
Terreno Kent Corporate Park LLC
Terreno MITC LLC
Terreno NW 81st LLC
Terreno Olympic LLC
Terreno V Street LLC
Terreno 12950 River LLC
Terreno 221 Michele LLC
Terreno 445 Wilson LLC
Terreno 4930 3rd Avenue South LLC
Terreno 709 Hindry LLC
Terreno 7120 NW 74th Ave LLC
Terreno 74th North Bergen LLC
Terreno Business Parkway LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Terreno Denver Ave LLC
Terreno Hampton Overlook, LLC
Terreno Lund LLC
Terreno New Ridge LLC
Terreno NW 70th Ave III LLC
Terreno NW 70th Avenue II LLC
Terreno Paterson Plank LLC
Terreno Schoolhouse LLC
Terreno West 140th LLC
Terreno 50 Kero LLC
Terreno 139th LLC
Terreno 422 Frelinghuysen LLC
Terreno 1215 Walnut LLC
Terreno 2920 V Street LLC
Terreno 7777 West Side LLC
Terreno Acacia LLC
Terreno Avenue A LLC
Terreno Dawson LLC
Terreno Dominguez LLC
Terreno Hanford LLC
Terreno Hawthorne LLC
Terreno Lucile LLC
Terreno Lynwood LLC
Terreno New Dutch LLC
Terreno NW 70th IV LLC
Terreno Stockton LLC
Terreno Telegraph Springs LLC
Terreno 1st Avenue South, LLC
Terreno 1100 Walnut LLC
Terremo 130 Commerce LLC
Terreno 6th Ave LLC
Terreno 85 Doremus LLC
Terreno East Valley LLC
Terreno Kent 192 LLC
Terreno Merced LLC
Terreno Newark Loan LLC
Terreno San Clemente LLC
Terreno Shoemaker LLC
Terreno Wicks LLC
Terreno Woodside LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Consent of Independent Registered Public Accounting Firm
Exhibit 23
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-164895) pertaining to Terreno Realty Corporation’s 2010 Equity Incentive Plan, as amended,
(2) Registration Statement (Form S-8 No. 333-202059) pertaining to Terreno Realty Corporation’s 2010 Equity Incentive Plan, as amended, and
(3) Registration Statement (Form S-3ASR No. 333-222960) and related Prospectus of Terreno Realty Corporation;
our reports dated February 6, 2019, with respect to the consolidated financial statements and schedule of Terreno Realty Corporation and the effectiveness of
internal control over financial reporting of Terreno Realty Corporation included in this Annual Report (Form 10-K) of Terreno Realty Corporation for the year
ended December 31, 2018.
/s/ Ernst & Young LLP
San Francisco, California
February 6, 2019
Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, W. Blake Baird, certify that:
I have reviewed this Annual Report on Form 10-K of Terreno Realty Corporation;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: February 6, 2019
/s/ W. Blake Baird
Chairman and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jaime J. Cannon, certify that:
I have reviewed this Annual Report on Form 10-K of Terreno Realty Corporation;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: February 6, 2019
/s/ Jaime J. Cannon
Chief Financial Officer
(Principal Financial Officer)
Exhibit 31.3
I, Michael A. Coke, certify that:
Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I have reviewed this Annual Report on Form 10-K of Terreno Realty Corporation;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: February 6, 2019
/s/ Michael A. Coke
President
Certification of Chief Executive Officer
Exhibit 32.1
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Terreno Realty Corporation (the
“Company”), hereby certifies, to his knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2018 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 6, 2019
/s/ W. Blake Baird
Chairman and Chief Executive Officer
(Principal Executive Officer)
Certification of Chief Financial Officer
Exhibit 32.2
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Terreno Realty Corporation (the
“Company”), hereby certifies, to his knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2018 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 6, 2019
/s/ Jaime J. Cannon
Chief Financial Officer
(Principal Financial Officer)
Certification of President
Exhibit 32.3
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Terreno Realty Corporation (the
“Company”), hereby certifies, to his knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2018 (the “Report”) fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 6, 2019
/s/ Michael A. Coke
President