S-11/A 1 d496387ds11a.htm AMENDMENT NO. 2 TO FORM S-11 Amendment No. 2 to Form S-11
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As filed with the Securities and Exchange Commission on July 9, 2013

Registration Statement No. 333-188806

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 TO

FORM S-11

FOR REGISTRATION UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

Rexford Industrial Realty, Inc.

(Exact name of registrant as specified in its governing instruments)

 

 

11620 Wilshire Boulevard, Suite 300

Los Angeles, CA 90025

(310) 966-1680

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

Howard Schwimmer

Michael S. Frankel

Co-Chief Executive Officers

Rexford Industrial Realty, Inc.

11620 Wilshire Boulevard, Suite 300

Los Angeles, CA 90025

(310) 966-1680

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

Julian T.H. Kleindorfer, Esq.

Bradley A. Helms, Esq.

Latham & Watkins LLP

355 South Grand Avenue

Los Angeles, California 90071

Tel: (213) 485-1234

Fax: (213) 891-8763

 

David C. Wright, Esq.

Christopher C. Green, Esq.

Hunton & Williams LLP

Riverfront Plaza, East Tower

951 E. Byrd Street

Richmond, Virginia 23219

Tel: (804) 788-8200

Fax: (804) 788-8218

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and is not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated July 9, 2013

PROSPECTUS

16,000,000 Shares

 

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Common Stock

 

 

Rexford Industrial Realty, Inc. is a newly formed Maryland corporation that will operate as a self-administered and self-managed real estate investment trust (“REIT”) focused on owning and operating industrial properties in Southern California infill markets. Upon completion of our formation transactions and this offering, we will own interests in and operate 61 properties with approximately 6.7 million rentable square feet, including two properties that we currently have under contract to purchase, which we refer to as our initial portfolio, and we will manage an additional 20 properties with approximately 1.2 million rentable square feet.

This is our initial public offering. We are selling 16,000,000 shares of our common stock, $0.01 par value per share.

We expect the public offering price to be between $13.00 and $15.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol “REXR.”

We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2013. To assist us in qualifying as a REIT, stockholders are generally restricted from beneficially or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our stock. Our charter contains additional restrictions on the ownership and transfer of shares of our common stock. See “Description of Stock—Restrictions on Ownership and Transfer.”

We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012. Investing in our common stock involves significant risks. You should read the section entitled “Risk Factors” beginning on page 31 of this prospectus for a discussion of certain risk factors that you should consider before investing in our common stock.

 

 

 

      

Per share

      

Total

 

Public offering price

     $           $     

Underwriting discount (1)

     $           $     

Proceeds, before expenses, to us

     $           $     

 

  (1) See “Underwriting” for additional disclosure regarding the underwriting discounts and expenses payable to the underwriters by us.

The underwriters also may exercise their option to purchase up to an additional 2,400,000 shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus to cover over-allotments of shares, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2013.

 

 

 

BofA Merrill Lynch   Wells Fargo Securities   FBR   J.P. Morgan

 

 

 

PNC Capital Markets LLC   RBS

 

The date of this prospectus is                     , 2013.


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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     31   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     66   

USE OF PROCEEDS

     68   

DISTRIBUTION POLICY

     70   

CAPITALIZATION

     73   

DILUTION

     75   

SELECTED FINANCIAL INFORMATION

     77   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     81   

MARKET OVERVIEW

     106   

BUSINESS

     116   

MANAGEMENT

     145   

EXECUTIVE COMPENSATION

     155   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     163   

STRUCTURE AND FORMATION OF OUR COMPANY

     168   

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     176   

PRICING SENSITIVITY ANALYSIS

     182   

PRINCIPAL STOCKHOLDERS

     184   

DESCRIPTION OF STOCK

     186   

MATERIAL PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS

     192   

SHARES ELIGIBLE FOR FUTURE SALE

     198   

DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF REXFORD INDUSTRIAL REALTY, L.P.

     201   

U.S. FEDERAL INCOME TAX CONSIDERATIONS

     215   

UNDERWRITING

     238   

LEGAL MATTERS

     245   

EXPERTS

     245   

WHERE YOU CAN FIND MORE INFORMATION

     245   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any free writing prospectus prepared by us is accurate only as of their respective dates or on the date or dates which are specified in those documents. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

 

We use market data and industry forecasts and projections in this prospectus. We have obtained substantially all of the information under “Prospectus Summary—Market Overview” and under “Market Overview” from market research prepared or obtained by DAUM Commercial Real Estate Services (“DAUM”) in connection with this offering. Such information is included herein in reliance on DAUM’s authority as an expert on such matters. See “Experts.” In addition, DAUM in some cases has obtained market data and industry forecasts and projections from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on

 

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industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projections or forecasts will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently verified this information.

This prospectus includes certain information regarding total return to investors achieved by Arden Realty, Inc. during the period in which Richard Ziman, our Chairman, served as the Founding Chairman and Chief Executive Officer of Arden Realty, Inc. The information regarding total return is not a guarantee or prediction of the returns that we may achieve in the future, and we can offer no assurance that we will replicate these returns.

 

 

In this prospectus:

 

   

“Rexford,” “our company,” “we,” “us” and “our” refer to Rexford Industrial Realty, Inc., a Maryland corporation, and its consolidated subsidiaries after giving effect to the formation transactions described elsewhere in this prospectus, except where it is clear from the context that the term only means the issuer of the shares of common stock in this offering;

 

   

“annualized rent” means the monthly base rent for the applicable property or properties as of March 31, 2013, but not including billboard and antenna revenue or rent abatements, multiplied by 12 and then multiplied by our percentage ownership interest for such property, and “total annualized rent” means the annualized rent for all of our properties;

 

   

“capitalization rate” is the ratio of a property’s annual net operating income to its purchase price;

 

   

“concurrent private placement” refers to a private placement of approximately $47 million of our common stock concurrently with the completion of this offering with certain accredited investors in the Rexford Funds and certain members of the Rexford management team in connection with the formation transactions at a price per share equal to the public offering price in this offering and without payment of any fees, discounts or selling commissions;

 

   

“debt yields” means for the last 12 months, net operating income divided by period-ending debt for the referenced properties;

 

   

“net operating income” or “NOI” means total revenue (including rental revenue, tenant reimbursements, management, leasing and development services revenue and other income) less property-level operating expenses including allocated overhead. NOI excludes depreciation and amortization, general and administrative expenses, impairments, gain/loss on sale of real estate, interest expense and other non-operating expenses;

 

   

“on a fully diluted basis,” when used in reference to shares of our common stock, means all outstanding shares of common stock at such time plus all outstanding shares of restricted stock, shares of common stock issuable upon the exercise of outstanding options that have vested and shares of common stock exchangeable, at our discretion, for common units of partnership interest in our operating partnership, or “common units,” on a one-for-one basis, including common units issuable upon conversion of LTIP units in our operating partnership, which is not the same as the meaning of “fully-diluted” under generally accepted accounting principles in the United States (“GAAP”);

 

   

“on a pro forma basis” means after completion of (i) this offering at an assumed price per share equal to the mid-point of the price range set forth on the front cover of this prospectus, (ii) the formation transactions described herein and (iii) the concurrent private placement described

 

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elsewhere in this prospectus, including the contribution of our predecessor business to our operating partnership and the application of the proceeds of this offering and the concurrent private placement as described under “Use of Proceeds”;

 

   

“our operating partnership” means Rexford Industrial Realty, L.P., a Maryland limited partnership, and the subsidiary through which we will conduct substantially all of our business;

 

   

“our predecessor business” or “Rexford Industrial Realty, Inc. Predecessor” means the entities and properties to be contributed to or purchased by our operating partnership and certain of its subsidiaries pursuant to our formation transactions described elsewhere in this prospectus;

 

   

“prior investors” refer to the prior investors in the Rexford Funds and the management companies, including certain of our directors and executive officers and certain of their affiliates;

 

   

“Rexford Funds” refer to the five private equity real estate funds: Rexford Industrial Fund I, LLC (“Fund I”), Rexford Industrial Fund II, LLC (“Fund II”), Rexford Industrial Fund III, LLC (“Fund III”), Rexford Industrial Fund IV, LLC (“Fund IV”), Rexford Industrial Fund V, LP (“Fund V”) and its parent, Rexford Industrial Fund V REIT, LLC (“Fund V REIT”), which are a part of our predecessor business. We were formed to acquire the assets and operations of the Rexford Funds and to succeed the business of the Rexford Funds and related management companies and the services company.

 

   

“the management companies” means Rexford Industrial, LLC (“RI, LLC”), Rexford Sponsor V LLC (“Sponsor”) and Rexford Fund V Manager LLC, which are part of our predecessor business and provide management services to the Rexford Funds; and

 

   

“the services company” means Rexford Industrial Realty and Management, Inc., a wholly owned subsidiary of RI, LLC.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more detailed explanations of NOI, EBITDA and FFO, and reconciliations of NOI, EBITDA and FFO to net income computed in accordance with GAAP.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus. You should read carefully the entire prospectus, including “Risk Factors,” our financial statements, pro forma financial information, and related notes appearing elsewhere in this prospectus, before making a decision to invest in our common stock.

Unless indicated otherwise, the information included in this prospectus assumes (i) no exercise of the underwriters’ option to purchase up to 2,400,000 additional shares of our common stock to cover over-allotments, if any, (ii) the completion of the formation transactions and concurrent private placement described in this prospectus, (iii) the shares of common stock to be sold in this offering are sold at $14.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus and (iv) the initial value of a common unit to be issued in the formation transactions is $14.00 per unit. Each common unit is redeemable at the option of the holder for cash equal to the then-current market value of one share of our common stock or, at our option, one share of our common stock, commencing 14 months following the completion of this offering.

The historical operations described in this prospectus refer to the historical operations of our predecessor business. We have generally described the business operations in this prospectus as if the historical operations of our predecessor business were conducted by us.

Overview

Rexford Industrial Realty, Inc. is a newly organized Maryland corporation formed to operate as a self-administered and self-managed REIT focused on owning and operating industrial properties in Southern California infill markets. We were formed to succeed our predecessor business, which is controlled and operated by our principals, Richard Ziman, Howard Schwimmer and Michael Frankel, who collectively have decades of experience acquiring, owning and operating industrial properties in Southern California infill markets. Upon completion of our formation transactions, our initial portfolio will consist of 61 properties with approximately 6.7 million rentable square feet, including two properties that we currently have under contract to purchase, and we will manage an additional 20 properties with approximately 1.2 million rentable square feet.

Our goal is to generate attractive risk-adjusted returns for our stockholders by providing superior access to industrial property investments in Southern California infill markets. Our target markets provide us with opportunities to acquire both stabilized properties generating favorable cash flow, as well as properties where we can enhance returns through value-add renovations and redevelopment. We believe that Southern California infill markets are among the most attractive industrial real estate markets for investment in the United States. Significant fragmentation, scarcity of available space and high barriers limiting new construction all contribute to create superior long-term supply/demand fundamentals. We built our company from the ground up as an institutional quality, vertically integrated platform with extensive value-add investment and management capabilities to focus on this specific market opportunity.

We own both multi-tenant and single-tenant properties comprising approximately 60% and 40% of our portfolio, respectively. Our properties are highly adaptable and appeal to a wide range of potential tenants and uses, which, in our experience, reduces re-tenanting costs, time and risk, thereby enhancing our return on investment. Our tenants generally are small and medium sized businesses that are structurally tied to the Southern California economy and therefore find that locating within our target markets is critical to the ongoing operations of their business. Our initial portfolio is highly diversified by tenant and industry. Of our 693 tenants, no single tenant accounted for more than 2.3% of our total annualized rent and no single industry accounted for more than 11.6% of our total annualized rent, as of March 31, 2013. Our average tenant size is approximately 9,000 square feet, with nearly 70% of tenants occupying less than 50,000 square feet each.

 

 

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We benefit from our management team’s extensive market knowledge, long-standing business and personal relationships and research- and relationship-driven origination methods developed over more than 30 years to generate attractive investment opportunities. In our view, the fragmented and complex nature of our target markets generally makes it difficult for less experienced or less focused investors to access comparable opportunities on a consistent basis.

We plan to grow our business through disciplined acquisitions of additional industrial properties in Southern California infill markets, and believe that there are substantial and attractive acquisition opportunities available to us in our target markets. According to DAUM, the Southern California infill industrial property market consists of approximately 1.73 billion square feet of industrial properties. Our initial portfolio represents substantially less than 1.0% of this target market. Through our proprietary origination methods, we are actively monitoring, as of June 4, 2013, approximately 31.6 million square feet of properties in our markets that we believe represent attractive potential investment opportunities, including properties containing approximately 2.9 million square feet on which we have submitted non-binding offers that remain outstanding. In addition, we currently have two properties totaling 123,676 square feet under contract to purchase with the purchase expected to close before July 31, 2013. The closings are subject to satisfactory completion of our due diligence and customary closing conditions. As such, we cannot assure you that we will complete these acquisitions on the current terms or at all. Our predecessor’s most recent investment fund has acquired in excess of 3.1 million square feet in our target markets with over 2.3 million square feet acquired since 2012 alone, sourced primarily through a combination of off-market and lightly marketed transactions, sale lease-backs and related transactions from illiquid owners and short sales and discounted note purchases from financial institutions. We believe the current market environment represents an attractive time in the real estate cycle to invest in our target properties as the many small and medium sized businesses that our properties seek to serve are just beginning to participate in the economic recovery. Despite being consistently one of the highest occupied markets in the United States with occupancy rates approaching 95% in recent years, particularly for multi-tenant properties, rental rates in our target markets have only recently begun to recover from their recessionary lows.

We intend to elect and qualify to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the year ending December 31, 2013, and generally will not be subject to U.S. federal taxes on our income to the extent we annually distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid, to our stockholders and otherwise maintain our qualification as a REIT. We are structured as an umbrella partnership REIT (“UPREIT”) and will own substantially all of our assets and conduct substantially all of our business through our operating partnership. We will serve as the sole general partner and expect to own an approximately 86.8% interest in our operating partnership upon completion of this offering.

Experienced Management and Vertically Integrated Team

Our predecessor business was founded in 2001 by our Chairman Richard Ziman, and our Co-Chief Executive Officer, Howard Schwimmer, to take advantage of what they believed to be a particularly attractive opportunity to invest in industrial properties in Southern California infill markets. Messrs. Ziman and Schwimmer were joined by Michael Frankel, our Co-Chief Executive Officer, in 2004. These three members of our senior executive management team have worked together for nearly a decade, and each has substantial experience investing in and managing Southern California industrial properties.

Mr. Ziman contributes over 40 years of experience owning and managing industrial real estate and a successful public company track record as the founding chairman and chief executive officer of Arden Realty, Inc. (“Arden”), a REIT, which at the time of its sale to GE Real Estate in 2006 was the largest publicly traded owner of office properties in Southern California. An investment in the common stock of Arden at the time of its initial public offering until its final sale generated a total return to stockholders of approximately 338% per share for each share purchased at the initial public offering price of $20.00 per share (assuming reinvestment of all

 

 

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cash dividends since the initial public offering in 1996) compared to a total return of 248% for the MSCI US REIT Index over the same period. Mr. Schwimmer has focused exclusively on owning, operating and creating value in infill Southern California industrial property throughout his 30 year career. Mr. Schwimmer has 12 years of experience managing and co-managing our predecessor business, with expertise including the acquisition, value-add improvement, development, management, leasing and disposition of industrial property. Prior to establishing our predecessor business, from 1983 until 2001, Mr. Schwimmer held various positions including stockholder, board member, manager, executive vice president and broker of record for DAUM, California’s oldest industrial brokerage company. Mr. Frankel’s 28 year career has focused on real estate and private equity investment and senior management operating roles, including nine years co-managing our predecessor business, which almost exclusively focused on investing in industrial properties in Southern California infill markets.

Rexford’s vertically integrated company and team provides an entrepreneurial set of processes and personnel experienced in virtually every facet of industrial property investment and management, from originations, finance and underwriting, to asset, construction and property management.

Market Overview

Unless otherwise indicated, all information contained in this Market Overview section is derived from market materials prepared by DAUM as of March 31, 2013, citing CoStar Property Database, CBRE and other sources.

Southern California Infill Industrial Market

The Southern California industrial real estate market is the largest in the U.S., with approximately 2.0 billion square feet of space, approximately 1.7 times larger than the next largest industrial real estate market (Chicago, Illinois), as illustrated below:

 

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Source: DAUM market materials, citing CoStar Property Database as of March 2013

Note: Southern California market comprised of Los Angeles, Orange, Ventura, San Bernardino, Riverside, and San Diego Counties

Southern California is generally segmented into infill and non-infill industrial markets. Infill markets are considered high-barrier to-entry markets and have characteristics that tend to limit new construction.

Our investment strategy focuses on the 1.73 billion square foot infill market comprised of Los Angeles County, Orange County, West Inland Empire, San Diego County and Ventura County. In 2012, over $5.9 billion of industrial property was sold in Southern California. We believe the market trends and conditions discussed below have created favorable investment opportunities that we are competitively positioned to capitalize upon.

 

 

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Limited, Diminishing Supply with Substantial Barriers to Entry

Southern California is generally considered to be nearly fully developed and is characterized by a scarcity of vacant or developable land. Further, lease rates typically do not justify development of new industrial properties for lease in infill markets, which presents an economic barrier for those seeking to develop new industrial properties. Consequently, there has been a dearth of new multi-tenant industrial properties built for lease since 1999, with infill development generally limited to relatively few owner-user and build-to-suit developments. Multi-tenant development represented only 0.6% of total new industrial property construction in Southern California markets during 2012. Further, as a majority of infill product is multi-tenant, substantially all new construction occurred in the Inland Empire, much of which is non-infill and generally outside of Rexford’s primary target markets.

 

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Source: DAUM market materials, citing CoStar Property Database as of March 2013

Industrial use is not typically considered the “highest and best” economic use for the few development or redevelopment sites available within our target markets. As a result, the stock of infill industrial property in our target markets generally has diminished over time, as existing properties have converted to alternate uses, primarily multi-family housing and related development. Since 2001, Los Angeles and Orange Counties have seen more than 24.2 million and 5.8 million square feet of industrial property, respectively, demolished for redevelopment.

 

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Source: DAUM market materials, citing CoStar Property Database as of March 2013

 

 

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High Current Occupancy and High Rental Rates

The Southern California infill industrial market has consistently out-performed other national markets on the basis of occupancy and asking rents. As of March 31, 2013, occupancy was 95.0% and 94.7% for Los Angeles and Orange Counties, respectively, versus the national average of 91.3%. Since 2001, average Los Angeles and Orange County asking rents were 65% higher than the average of the next nine largest markets in the nation over the same twelve-year period. As shown in the charts below, the occupancy rates for Los Angeles and Orange County have consistently been above the other large markets in the United States since the fourth quarter of 2001 and the occupancy rates never dipped below 90%, even during the most recent recession.

 

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Source: DAUM market report, citing CoStar Property Database and data provided by CBRE as of March 2013

 

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Source: DAUM market report, citing CoStar Property Database and data provided by CBRE as of March 2013

Diverse Tenant Demand Base

Southern California is home to the nation’s largest and most diverse manufacturing and distribution sector, as well as the largest number of high-tech jobs. We draw our tenants from over 17 industry sectors. The trend of off-shoring domestic manufacturing to Asia further fuels Southern California industrial tenant demand,

 

 

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as Asian goods pass through the Los Angeles-area ports and require regional warehousing and distribution to access the broader U.S. market. As of March 31, 2013, approximately 21.3% of our tenants imported product from outside the U.S. Additionally, the emergence of e-commerce and the growth of Internet retailers and wholesalers are expanding the universe of tenants seeking industrial space in our target markets. Forrester Research Inc. projects that online shoppers in the United States will spend $327 billion in 2016, up 45% from the $226 billion spent in 2012, increasing to an estimated 9.0% of total retail sales by 2016. As of March 31, 2013, approximately 17.4% of our tenants cited e-commerce as a component of their business.

Large and Growing Regional Population

Southern California represents the largest regional population in the U.S., with over 21 million residents, comprising over 57% of California residents. The population has increased by approximately 2 million since 2000 and is projected to increase to over 25 million residents by 2030. Our infill tenant base tends to disproportionately serve the direct consumption needs of this growing regional Southern California population.

Older Properties Tend To Outperform Newer Properties

Over one billion square feet of infill industrial space in our target market was built prior to 1980. These buildings are generally more centrally located, which reduces commuting time for our tenants’ employees and distribution times to the end consumers of the product. These locations are also typically more densely populated areas than locations that feature a greater proportion of newer construction. These factors have driven higher occupancy rates in pre-1980 buildings compared to post-1980 buildings. As of March 31, 2013, occupancy for pre-1980 buildings was 95.1% versus 92.9% for newer buildings. Pre-1980 buildings have maintained occupancy levels between 94.4% and 97.4% since 2001, while occupancy for post-1980 buildings has ranged from 89.6% to 94.5%.

Smaller Spaces and Multi-Tenant Properties Tend to Outperform Larger, Single-Tenant Properties

Our target infill markets feature a majority of properties valued below $25 million or sized below 300,000 square feet. We believe smaller spaces, generally under 40,000 square feet, are positioned for rental rate recovery as economic conditions improve for smaller- and mid-sized tenants in the face of ongoing scarcity of supply of these spaces. Occupancy as of March 31, 2013 for “big-box” buildings containing 100,000 square feet or more was 93.2%, while occupancy in buildings containing less than 40,000 square feet was 94.9%. Further, rental rates for larger, single-tenant spaces have recovered nearly to their pre-recession levels. Conversely, rental rates for small- and mid-sized tenants remain at cyclically low levels and have lagged in recovery compared to larger spaces. Consequently, we believe the potential for rental rates to increase in the smaller- and medium-sized spaces and buildings may be substantially greater in the near- to medium-term than for larger spaces fueled, in part, by improving liquidity and access to working capital for small and medium sized businesses as the economy continues to stabilize.

 

 

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As shown in the charts below, occupancy and rental rates in the Southern California industrial infill market are projected to increase over the next three years. Moreover, multi-tenant space under 40,000 square feet, which has been slower to recover from the recent financial crisis, is projected to outperform single-tenant space containing 100,000 or more square feet according to DAUM, utilizing data provided by CBRE.

 

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Source: DAUM market materials, citing CoStar Property Database and data provided by CBRE as of March 2013

Source: DAUM market materials, citing CoStar Property Database and data provided by CBRE as of March 2013

 

 

Competitive Strengths

In addition to our infill Southern California target market and asset focus, we believe that our investment strategy and operating model distinguish us from other owners, operators and acquirers of industrial real estate in several important ways, including the following:

Attractive Existing Portfolio with Diversified Tenant Mix: We have built a difficult-to-replicate portfolio of interests in 61 properties totaling over 6.7 million square feet, including two properties that we currently have under contract to purchase, almost all of which is located in Southern California infill markets. We will own 100% of the interests in 58 of these properties and will own a 15% interest in the remaining three properties. We believe our initial portfolio is attractively positioned to participate in a recovery in rental rates in our markets. Additionally, our portfolio is leased to a broad tenant base, drawn from diverse industry sectors. We believe that this diversification reduces our exposure to tenant default risk and earnings volatility. As of March 31, 2013, we had 693 individual tenants, with no single tenant accounting for more than 2.3% of our total annualized rent.

Superior Access to Deal Flow: We believe that we enjoy superior access to distressed, off-market and lightly marketed acquisition opportunities, many of which are difficult for competing investors to access. Approximately half of the acquisitions by deal count completed by our predecessor business since its inception were off-market or lightly-marketed transactions. Off-market and lightly marketed transactions are characterized by a lack of a formal marketing process and a lack of widely disseminated marketing materials. As we are principally focused on the Southern California market, our executive management and acquisition teams have developed and maintain a deep, broad network of relationships among key market participants, including property brokers, lenders, owners and tenants. We employ an extensive broker marketing, incentives and loyalty program. We also utilize data-driven and event-driven analytics and primary research to identify and pursue

 

 

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events and circumstances, including financial distress, related to owners, lenders, and tenants that tend to generate early access to emerging investment opportunities. We believe that our relationship network, creative sourcing approach and research-driven originations methods contribute to a superior level of attractive investment opportunities.

Experienced Management Team: Members of our senior management team contribute over 64 years of prior public company experience, and collectively have been involved with over $25 billion of real estate acquisitions over multiple cycles. Members of our senior management team have been working together for nearly a decade and together bring 130 years of experience focused on creating value by investing in infill Southern California industrial property.

Ability to Execute Opportunistic Transactions: The combination of our proprietary origination methods and the experience and relationships of our management team grant us access to and allow us to capitalize on unique transaction opportunities.

Vertically Integrated Platform: We are a full-service real estate operating company, with in-house capabilities in all aspects of our business. Our platform includes experienced in-house teams focused on acquisitions, analytics and underwriting, asset management and repositioning, property management, leasing, and construction management, as well as finance, accounting, legal and human relations departments.

Growth-Oriented Capital Structure: We believe that a public company capital structure will enable us to capitalize effectively on the substantial volume of opportunities generated by our origination platform. Upon completion of this offering, our pro forma debt to total market capitalization will be approximately 24.2%. We expect to enter into a new approximately $60 million term loan, which will be used at the completion of this offering to repay a portion of our outstanding mortgage debt. In addition, we have negotiated a proposed revolving credit facility with a borrowing capacity of $200 million that we expect to have in place at the completion of this offering. This facility is expected to have an accordion feature that may provide for up to an additional $200 million borrowing capacity as our company grows. We expect to use the proposed revolving credit facility for property acquisitions, working capital requirements and other general corporate purposes.

Value-Add Repositioning and Redevelopment Expertise: Our in-house redevelopment and construction management team collectively has over 75 years of industrial property redevelopment experience. Our in-house team employs an entrepreneurial approach to redevelopment and repositioning activities that are designed to increase the functionality and cash flow of our properties. These activities include converting large underutilized spaces into a series of smaller and more functional spaces, adding additional square footage and modernizing properties by, among other things, modernizing fire, life-safety and building operating systems, resolving functional obsolescence, adding or enhancing loading areas and truck access and making certain other accretive improvements.

Our Business and Growth Strategies

Our primary objective is to generate attractive risk-adjusted returns for our stockholders through dividends and capital appreciation. We believe that pursuing the following strategies will enable us to achieve this objective:

External Growth through Acquisitions

We intend to grow our initial portfolio through disciplined acquisitions in prime Southern California infill markets. We believe that our relationship-, data- and event-driven research allows us to identify and exploit asset mispricing and market inefficiencies. Through these proprietary origination methods, we are actively

 

 

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monitoring, as of June 4, 2013, approximately 31.6 million square feet of properties in our markets that we believe represent attractive potential investment opportunities, including properties containing approximately 2.9 million square feet on which we have submitted non-binding offers that remain outstanding. In addition, we currently have two properties totaling 123,676 square feet under contract to purchase with the purchase expected to close before July 31, 2013. The closings are subject to satisfactory completion of our due diligence and customary closing conditions. As such, we cannot assure you that we will complete these acquisitions on the current terms or at all. Our predecessor’s most recent investment fund has acquired in excess of 3.1 million square feet in our target markets with over 2.3 million square feet acquired since 2012 alone, sourced primarily through a combination of off-market and lightly marketed transactions, sale lease-backs and related transactions, short sales and discounted note purchases from financial institutions.

We believe there are a large number of over-leveraged industrial properties within our target markets facing loan maturities over the next several years. We seek to source transactions from owners facing pressing liquidity needs or financial distress, including maturities of loans that lack economical refinancing options. We also seek to transact with lenders, which, following the recent financial crisis, face a heightened need to divest or resolve underperforming loans in order to meet capital and regulatory requirements.

Internal Growth through Intensive, Value-Added Asset Management

We employ an intensive asset management strategy that is designed to increase cash flow and occupancy from our properties. Our strategy includes repositioning industrial property by renovating, modernizing or increasing functionality to increase cash flow and value. For example, we sometimes convert formerly single-tenant properties to multi-tenant occupancy to capitalize upon the higher per square foot rents generated by smaller spaces in our target markets. We believe that by undertaking such conversions or other functional enhancements, we can position our properties to attract a larger universe of potential tenants, increase occupancy, tenant quality and rental rates. We also believe that multi-tenant properties help to limit our exposure to tenant default risk and diversify our sources of cash flow.

 

 

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Our proactive approach to leasing and asset management is driven by our in-house team of portfolio and property managers, which maintains direct, day-to-day relationships and dialogue with our tenants. In addition, we motivate listing brokers through leasing incentives combined with highly entrepreneurial leasing plans that we develop for each of our properties. We believe our proactive approach to leasing and asset management enhances recurring cash flow and reduces periods of vacancy. Our properties have successfully outperformed the overall infill Southern California market in leasing up vacant space. As illustrated in the chart below, over the course of the last five years, we have demonstrated an ability to consistently increase occupancy, even during the depth of the recent “Great Recession” when our target markets experienced a net reduction in occupancy.

LOGO

Source: DAUM market materials, citing CoStar Property Database as of March 2013.

We believe that our initial portfolio contains the potential for imbedded growth through the lease-up of currently available space. As of March 31, 2013, our initial portfolio was 89.4% leased. We believe three factors will contribute to increased cash flow from leasing in the near term:

 

   

a number of our properties are in their final lease-up stage after being repositioned through our value-add activities,

 

   

we expect the firming up of supply and demand in certain markets, such as San Diego, that has generally lagged the infill markets of Los Angeles County and Orange County through the 2010 to 2012 recovery, and are now experiencing net positive absorption, and

 

   

expected market rental rate increases in the multi-tenant industrial market, as smaller and medium sized business tenants begin to gain access to increased liquidity and available credit as the economy recovers.

Financing Strategy

We intend to maintain a flexible and growth-oriented capital structure. Upon completion of this offering, we will have an initial debt-to-market capitalization of approximately 24.2%. To facilitate our

 

 

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acquisition strategy, we have negotiated a proposed revolving credit facility with a borrowing capacity of $200 million that we expect to have in place at the completion of this offering. This facility is expected to have an accordion feature that may provide for up to an additional $200 million borrowing capacity as our company grows. The proposed revolving credit facility will be used for property acquisitions, working capital requirements and other general corporate purposes. We also expect to enter into a new approximately $60 million term loan, which will be used at the completion of this offering to repay a portion of our outstanding mortgage debt. For more information regarding our proposed revolving credit facility and our new term loan, see “Business—Description of Certain Debt.”

We expect to fund property acquisitions through borrowings under our proposed revolving credit facility and traditional mortgage financing, as well as from any remaining cash available from the proceeds of this offering and the concurrent private placement after repayment of certain indebtedness as described under “Use of Proceeds.” We may place longer term mortgage debt on certain properties. We also anticipate using common units to acquire properties from existing owners interested in tax-deferred transactions.

Our Properties

Upon completion of our formation transactions, our initial portfolio will consist of 61 properties with approximately 6.7 million rentable square feet, including two properties that we currently have under contract to purchase, and we will manage an additional 20 properties with approximately 1.2 million rentable square feet. We will own 100% of 58 of these properties and own 15% of the remaining three properties. Our initial portfolio has a stable and diversified tenant base. As of March 31, 2013, the properties comprising our initial portfolio were 89.4% leased to 693 tenants, with no single tenant accounting for more than 2.3% and no single industry accounting for more than 11.6% of our total annualized rent. Our average tenant size is approximately 9,000 square feet, with nearly 70% of tenants occupying less than 50,000 square feet each. Our ten largest tenants account for 13.7% of our total annualized rent as of March 31, 2013. We intend to continue to maintain a diversified mix of tenants to limit our exposure to any single tenant or industry. We will also own one non-recourse mortgage loan with an estimated outstanding balance of approximately $14.3 million as of March 31, 2013, secured by a first mortgage on an industrial property located in San Juan Capistrano, California, which is scheduled to mature on May 1, 2017.

The following tables portray the property type, geographic and industry diversity, respectively, of the properties and tenants comprising our initial portfolio as of March 31, 2013:

 

Property Type

 

Number of
Properties

   

Occupancy(1)

   

Rentable
Square Feet

   

Ownership
Interest in
Rentable
Square Feet(2)

   

Percentage of
Total Rentable
Square Feet

   

Annualized
Base
Rent(3)

   

Percentage of
Total
Annualized
Base Rent(4)

   

Annualized
Base Rent
per Square
Foot(5)

 

Warehouse / Light Manufacturing(6)

    34        87.0     2,764,624        2,764,624        48.8   $ 19,585,430        46.4   $ 8.14   

Warehouse / Distribution

    14        88.6     3,035,471        2,025,325        35.7   $ 13,684,037        32.4   $ 7.63   

Light Manufacturing / Flex

    6        74.5     466,319        466,319        8.2   $ 4,910,808        11.6   $ 14.14   

Light Industrial / Office

    7        72.1     411,549        411,549        7.3   $ 4,024,596        9.5   $ 13.56   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total / Weighted Average(7)

    61        85.5     6,677,963        5,667,817        100.0   $ 42,204,871        100.0   $ 8.71   
 

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) Calculated as the average occupancy at such properties as of March 31, 2013, weighted by ownership interest in the properties’ rentable square feet. These properties were 89.4% leased as of March 31, 2013, weighted by ownership interest in the properties’ rentable square feet.
(2) Calculated for each property as rentable square feet for such property multiplied by our ownership interest for such property, and then aggregated by property type.
(3) Calculated for each property as the monthly contracted base rent per the terms of the lease(s) at such property, as of March 31, 2013, multiplied by 12 and then multiplied by our ownership interest for such property, and then aggregated by property type. Excludes billboard and antenna revenue and rent abatements. Total rent abatements with respect to our initial portfolio for leases in effect as of March 31, 2013 for the 12 months ending March 31, 2014 are $980,117, of which our proportionate share, based on our ownership interest in the applicable properties, is $980,117. Annualized base rent includes rent from triple net leases, modified gross leases and gross leases. See “Business—Leases.”

 

 

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(4) Calculated for each property type as annualized base rent for such property type divided by annualized base rent for the total portfolio as of March 31, 2013.
(5) Calculated for each property type as annualized base rent for such property type divided by our ownership interest in leased square feet for such property type as of March 31, 2013. Total annualized base rent per square foot, net of our proportionate share of rent abatements, for our properties is $8.51.
(6) Excluding our pending acquisitions of the 18310 - 18330 Oxnard St. and 8101 - 8117 Orion Ave. properties, which we refer to as Oxnard and Orion, respectively, and which we have under contract to purchase, occupancy was 87.3%, annualized base rent was $18,472,886 and total annualized base rent per square foot was $8.01.
(7) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $41,092,327 and total annualized base rent per square foot was $8.66.

 

Market

  

Number
of
Properties

    

Occupancy(1)

   

Rentable
Square
Feet

    

Ownership
Interest in
Rentable
Square
Feet(2)

    

Percentage
of Total
Rentable
Square
Feet

   

Annualized
Base
Rent(3)

    

Percentage
of Total
Annualized
Base
Rent(4)

   

Annualized
Base Rent
per Square
Foot(5)

 

Los Angeles County

                    

Greater San Fernando Valley

     14         91.2     1,360,719         1,360,719         24.0   $ 12,226,117         29.0   $ 9.85   

San Gabriel Valley

     6         97.6     612,482         612,482         10.8   $ 5,674,423         13.4   $ 9.49   

Central

     1         100.0     190,663         190,663         3.4   $ 1,257,912         3.0   $ 6.60   

Mid-Counties

     4         82.2     522,490         522,490         9.2   $ 3,015,480         7.1   $ 7.02   

South Bay

     6         77.7     335,258         335,258         5.9   $ 1,959,024         4.6   $ 7.52   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal / Weighted Average(6)

     31         90.0     3,021,612         3,021,612         53.3   $ 24,132,956         57.2   $ 8.87   

Orange County

                    

North Orange County

     2         97.6     223,681         223,681         3.9   $ 1,801,800         4.3   $ 8.26   

Airport

     4         91.2     289,040         289,040         5.1   $ 2,083,716         4.9   $ 7.90   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal / Weighted Average

     6         94.0     512,721         512,721         9.0   $ 3,885,516         9.2   $ 8.06   

San Bernardino County

                    

Inland Empire West

     5         80.4     495,561         495,561         8.7   $ 3,753,372         8.9   $ 9.42   

Inland Empire East

     2         94.9     85,282         85,282         1.5   $ 447,288         1.1   $ 5.53   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal / Weighted Average

     7         82.5     580,843         580,843         10.2   $ 4,200,660         10.0   $ 8.77   

Ventura County

                    

Camarillo / Oxnard

     6         91.5     1,598,940         588,794         10.4   $ 3,849,365         9.1   $ 7.14   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal / Weighted Average

     6         91.5     1,598,940         588,794         10.4   $ 3,849,365         9.1   $ 7.14   

San Diego County

                    

North County

     7         60.3     709,251         709,251         12.5   $ 3,868,734         9.2   $ 9.05   

Central

     2         93.6     137,989         137,989         2.4   $ 1,516,164         3.6   $ 11.74   

South County

     1         49.0     78,615         78,615         1.4   $ 364,452         0.9   $ 9.46   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal / Weighted Average

     10         64.3     925,855         925,855         16.3   $ 5,749,350         13.6   $ 9.66   

Other(7)

     1         75.6     37,992         37,992         0.7   $ 387,024         0.9   $ 13.48   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Portfolio—Total / Weighted Average(8)

     61         85.5     6,677,963         5,667,817         100.0   $ 42,204,871         100.0   $ 8.71   
  

 

 

      

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

(1) Calculated as the average occupancy at such properties as of March 31, 2013, weighted by our ownership interest in the properties’ rentable square feet. As of June 4, 2013, we have entered into 53 new leases and 58 renewal leases, totaling 111 leases or renewals that had not yet commenced as of March 31, 2013 (“the uncommenced leases”). The table below sets forth pro forma data reflecting the uncommenced leases.

 

 

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Market

 

Leased Square
Feet Under
Uncommenced
Leases(a)

   

Ownership
Interest in
Leased
Square
Feet(b)

   

Pro Forma
Occupancy(c)

   

Annualized
Base Rent
Under
Uncommenced
Leases(d)

   

Total Pro
Forma
Annualized
Base
Rent(e)

   

Total Pro
Forma
Annualized
Base Rent
per Square
Foot(f)

 

Los Angeles County(g)

    188,956        188,956        91.6   $ 1,897,926      $ 24,579,655      $ 8.88   

Orange County

    57,408        57,408        93.7   $ 509,913      $ 3,859,976      $ 8.04   

San Bernardino County

    79,047        79,047        87.5   $ 656,229      $ 4,445,504      $ 8.74   

Ventura County

    14,714        14,714        89.0   $ 123,904      $ 3,714,313      $ 7.09   

San Diego County

    223,807        223,807        86.4   $ 1,574,494      $ 7,159,806      $ 8.95   

Other

    3,381        3,381        75.6   $ 51,312      $ 387,024      $ 13.48   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total/Weighted Average(h)

    567,313        567,313        90.1   $ 4,813,778      $ 44,146,278      $ 8.64   
 

 

 

   

 

 

     

 

 

   

 

 

   

 

  (a) The uncommenced leases include: 103,629 square feet being renewed and 85,327 square feet of new leases for Los Angeles County; 37,092 square feet being renewed and 20,316 square feet of new leases for Orange County; 28,289 square feet being renewed and 50,758 square feet of new leases for San Bernardino County; 14,714 square feet being renewed and no new leases for Ventura County; 19,145 square feet being renewed and 204,662 square feet of new leases for San Diego County; and 3,381 square feet being renewed and no new leases for Other.
  (b) Ownership interest in leased square feet is calculated as square feet subject to the uncommenced leases multiplied by our ownership interest in the relevant properties and then aggregated by market.
  (c) Pro forma occupancy is calculated as (i) square footage under lease as of March 31, 2013 weighted by our ownership interest in rentable square feet plus additional square footage leased pursuant to uncommenced leases (net of renewal space) as of June 4, 2013 weighted by our ownership interest minus square footage vacated between March 31, 2013 and June 4, 2013, weighted by our ownership interest in rentable square feet, divided by (ii) total rentable square feet (including new uncommenced leases) weighted by our ownership interest.
  (d) Annualized base rent under uncommenced leases is calculated by multiplying the first full month of contractual rents (before rent abatements) to be received under uncommenced leases, by 12 and then multiplying by our ownership interest in the relevant properties and then aggregating by market. Total rent abatements under leases entered into as of June 4, 2013 but that had not commenced as of March 31, 2013 for the 12 months ending March 31, 2014 are $727,840. This figure includes $688,799 of rent abatements for new leases and $39,041 for renewal leases.
  (e) Total pro forma annualized base rent is calculated by adding annualized base rent as of March 31, 2013 and annualized base rent under uncommenced leases (net of renewals) and subtracting annualized base rent contributed by tenants that had vacated their applicable properties between March 31, 2013 and June 4, 2013. To avoid double counting, total pro forma annualized rent does not include annualized rent on space under lease as of March 31, 2013 that is being renewed pursuant to an uncommenced lease. Excludes billboard and antenna revenue.
  (f) Annualized base rent per square foot under uncommenced leases is calculated as (i) annualized rent base under leases entered into as of June 4, 2013 but that had not commenced as of March 31, 2013, divided by (ii) ownership interest in leased square feet under uncommenced leases.
  (g) Excluding our pending acquisitions of Oxnard and Orion, occupancy was 92.0%, annualized base rent under uncommenced leases was $1,844,142, total pro forma annualized base rent was $23,441,563 and total annualized base rent per square foot was $8.80.
  (h) Excluding our pending acquisitions of Oxnard and Orion, occupancy was 90.3%, annualized base rent under uncommenced leases was $4,759,995, total pro forma annualized base rent was $43,008,186 and total annualized base rent per square foot was $8.59.
(2) Calculated for each property as rentable square feet for such property multiplied by our ownership interest for such property, and then aggregated by market.
(3) Calculated for each property as monthly contracted base rent per the terms of the lease(s) at such property, as of March 31, 2013, multiplied by 12 and then multiplied by our ownership interest for such property, and then aggregated by market. Excludes billboard and antenna revenue and rent abatements. Total rent abatements with respect to our initial portfolio for leases in effect as of March 31, 2013 for the 12 months ending March 31, 2014 are $980,117, of which our proportionate share, based on our ownership interest in the applicable properties, is $980,117. Annualized base rent includes rent from triple net leases, modified gross leases and gross leases. See “Business—Leases.”
(4) Calculated as annualized base rent for such market divided by annualized base rent for the total portfolio as of March 31, 2013.
(5) Calculated as annualized base rent for such market divided by our ownership interest in leased square feet for such market as of March 31, 2013. Total annualized base rent per square foot, net of our proportionate share of rent abatements, for our properties is $8.51.
(6) Excluding our pending acquisitions of Oxnard and Orion, occupancy was 90.4%, annualized base rent was $23,020,412, percentage of total annualized base rent was 56.0% and total annualized base rent per square foot was $8.79.
(7) Includes one property in Glenview, Illinois.
(8) Excluding our pending acquisitions of Oxnard and Orion, occupancy was 85.6%, annualized base rent was $41,092,327 and total annualized base rent per square foot was $8.66.

 

 

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Industry

 

Number of
Leases(1)

   

Leased
Square
Feet

   

Ownership
Interest in
Leased
Square
Feet(2)

   

Percentage of
Total Leased
Square Feet

   

Annualized Base
Rent(3)

   

Percentage of
Total
Annualized
Base Rent(4)

   

Annualized
Base Rent per
Square
Foot(5)

 

Wholesale/Retail(6)

    79        580,350        580,350        12.0   $ 4,883,172        11.6   $ 8.41   

Business Services(7)

    96        339,542        339,542        7.0   $ 3,931,812        9.3   $ 11.58   

Light Manufacturing(8)

    46        478,085        478,085        9.9   $ 3,549,504        8.4   $ 7.42   

Apparel(9)

    27        720,684        465,684        9.6   $ 3,077,760        7.3   $ 6.61   

Technology & Electronics(10)

    48        427,331        304,938        6.3   $ 3,042,102        7.2   $ 9.98   

Industrial Equipment & Components

    46        326,241        326,241        6.7   $ 2,647,950        6.3   $ 8.12   

Construction(11)

    53        329,807        329,807        6.8   $ 2,556,960        6.1   $ 7.75   

Automotive(12)

    56        298,032        298,032        6.2   $ 2,546,904        6.0   $ 8.55   

Paper & Printing

    14        324,607        324,607        6.7   $ 2,382,036        5.6   $ 7.34   

Warehousing & Storage(13)

    48        659,743        300,103        6.2   $ 2,231,347        5.3   $ 7.44   

Pharmaceuticals

    13        172,419        172,419        3.6   $ 2,116,128        5.0   $ 12.27   

Food & Beverage(14)

    42        200,589        200,589        4.1   $ 1,885,128        4.5   $ 9.40   

Sporting & Recreational Goods

    26        163,077        163,077        3.4   $ 1,381,476        3.3   $ 8.47   

Logistics & Transportation

    22        159,385        159,385        3.3   $ 1,236,624        2.9   $ 7.76   

Healthcare

    28        120,609        120,609        2.5   $ 1,221,444        2.9   $ 10.13   

Government

    2        60,881        60,881        1.3   $ 1,071,936        2.5   $ 17.61   

Financial Services

    18        31,345        31,345        0.6   $ 415,512        1.0   $ 13.26   

Other(15)

    29        188,156        188,156        3.9   $ 2,027,076        4.8   $ 10.77   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total / Weighted Average(16)

    693        5,580,883        4,843,850        100.0   $ 42,204,871        100.0   $ 8.71   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1) A single lease may cover space in more than one building.
(2) Calculated for each lease as leased square feet multiplied by our ownership interest for the applicable property, and then aggregated by industry.
(3) Calculated for each lease as the monthly contracted base rent per the terms of such lease, as of March 31, 2013, multiplied by 12 and then multiplied by our ownership interest for the applicable property, and then aggregated by industry. Excludes billboard and antenna revenue and rent abatements. Total rent abatements with respect to our initial portfolio for leases in effect as of March 31, 2013 for the 12 months ending March 31, 2014 are $980,117, of which our proportionate share, based on our ownership interest in the applicable properties, is $980,117. Annualized base rent includes rent from triple net leases, modified gross leases and gross leases. See “Business—Leases.”
(4) Calculated as annualized base rent for tenants in such industry divided by annualized base rent for the total portfolio as of March 31, 2013.
(5) Calculated as annualized base rent for tenants in such industry divided by our ownership interest in leased square feet for tenants in such industry as of March 31, 2013. Total annualized base rent per square foot, net of our proportionate share of rent abatements, for our properties is $8.51.
(6) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $4,714,152, percentage of total annualized base rent was 11.5% and total annualized base rent per square foot was $8.36.
(7) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $3,770,700, percentage of total annualized base rent was 9.2% and total annualized base rent per square foot was $11.60.
(8) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $3,523,116, percentage of total annualized base rent was 8.6% and total annualized base rent per square foot was $7.41.
(9) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $3,027,348, percentage of total annualized base rent was 7.4% and total annualized base rent per square foot was $6.56.
(10) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $2,938,062, percentage of total annualized base rent was 7.1% and total annualized base rent per square foot was $9.94.
(11) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $2,523,816, percentage of total annualized base rent was 6.1% and total annualized base rent per square foot was $7.71.
(12) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $2,508,372, percentage of total annualized base rent was 6.1% and total annualized base rent per square foot was $8.51.
(13) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $1,875,535, percentage of total annualized base rent was 4.6% and total annualized base rent per square foot was $7.00.
(14) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $1,742,340, percentage of total annualized base rent was 4.2% and total annualized base rent per square foot was $9.22.

 

 

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(15) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $1,995,780, percentage of total annualized base rent was 4.9% and total annualized base rent per square foot was $10.76.
(16) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $41,092,327 and total annualized base rent per square foot was $8.66.

The following table sets forth information about the 10 largest tenants in our portfolio based on total annualized rent as of March 31, 2013.

 

Tenant

 

Submarket

  Number of
Properties
    Leased
Square
Feet
    Ownership
Interest in
Leased
Square Feet(1)
    Percentage of
Total Leased
Square Feet
    Annualized
Base  Rent(2)
    Percentage
of Total
Annualized
Base
Rent(3)
    Annualized
Base Rent
per Square
Foot(4)
    Lease
Expirations
 
Biosense   San Gabriel Valley     1        76,000        76,000        1.6   $ 967,824        2.3   $ 12.73        10/31/2020   
Towne Inc   OC Airport     1        122,060        122,060        2.5   $ 678,900        1.6   $ 5.56        7/31/2014   
Deckers Outdoor Corporation   Ventura     2        723,106        108,466        2.2   $ 592,223        1.4   $ 5.46        11/30/2018   
Royal Printex   Central LA     1        78,928        78,928        1.6   $ 540,384        1.3   $ 6.85        1/31/2017   
Sonic Electronix   Greater San Fernando Valley     1        71,268        71,268        1.5   $ 534,516        1.3   $ 7.50        8/31/2014   
PureTek   Greater San Fernando Valley     1        76,993        76,993        1.6   $ 526,632        1.2   $ 6.84        11/30/2015   
Circor Aerospace   Greater San Fernando Valley     1        77,118        77,118        1.6   $ 524,256        1.2   $ 6.80        12/31/2014   
Perfect Fit Industries   Mid Counties     1        96,758        96,758        2.0   $ 522,492        1.2   $ 5.40        7/31/2013   
Plastics Research
Corporation
  Inland Empire West     1        107,861        107,861        2.2   $ 440,076        1.0   $ 4.08        2/28/2022   
Genie Air   Greater San Fernando Valley     1        81,282        81,282        1.7   $ 438,924        1.0   $ 5.40        5/31/2016   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Top 10 Tenants

      11        1,511,374        896,734        18.5   $ 5,766,227        13.7   $ 6.43     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

All Other Tenants(5)

      50        4,069,509        3,947,116        81.5   $ 36,438,644        86.3   $ 9.23     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total Initial Portfolio(6)

      61        5,580,883        4,843,850        100.0   $ 42,204,871        100.0   $ 8.71     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

(1) Calculated for each tenant as leased square feet multiplied by our ownership interest for the applicable property.
(2) Calculated for each tenant as the monthly contracted base rent per the terms of such tenant’s lease, as of March 31, 2013, multiplied by 12 and then multiplied by our ownership interest for the applicable property. Excludes billboard and antenna revenue and rent abatements. Total rent abatements with respect to our initial portfolio for leases in effect as of March 31, 2013 for the 12 months ending March 31, 2014 are $980,117, of which our proportionate share, based on our ownership interest in the applicable properties, is $980,117. Annualized base rent includes rent from triple net leases, modified gross leases and gross leases. See “Business—Leases.”
(3) Calculated as annualized base rent for such tenant divided by annualized base rent for the total portfolio as of March 31, 2013.
(4) Calculated as annualized base rent for such tenant divided by our ownership interest in leased square feet for such tenant as of March 31, 2013. Total annualized base rent per square foot, net of our proportionate share of rent abatements, for our properties is $8.51.
(5) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $35,326,100, percentage of total annualized base rent was 86.0% and total annualized base rent per square foot was $9.18.
(6) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $41,092,327 and total annualized base rent per square foot was $8.66.

 

 

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As of March 31, 2013, our weighted average in-place remaining lease term was 2.57 years. The following table sets forth a summary schedule of lease expirations for leases in place as of March 31, 2013, plus available space, for each of the ten full and partial calendar years commencing March 31, 2013 and thereafter in our portfolio. The information set forth in the table assumes that tenants exercise no renewal options and no early termination rights.

 

Year of Lease Expiration

  

Number
of
Leases
Expiring

    

Total
Rentable
Square
Feet(1)

    

Ownership
Interest in
Rentable
Square Feet(2)

    

Percentage
of Total
Owned
Square Feet

   

Annualized
Base
Rent(3)

    

Percentage
of Total
Annualized
Base Rent(4)

   

Annualized
Base Rent per
Square Foot(5)

 

MTM Tenants(6)(7)

     49         113,339         113,339         2.0   $ 1,039,740         2.5   $ 9.17   

Available(8)

     0         1,097,080         823,967         14.5   $ 0         0.0   $ 0.00   

2013(9)

     202         812,859         812,859         14.3   $ 7,322,400         17.3   $ 9.01   

2014(10)

     215         1,355,875         1,355,875         23.9   $ 11,164,975         26.5   $ 8.23   

2015(11)

     140         1,102,780         980,387         17.3   $ 7,833,558         18.6   $ 7.99   

2016(12)

     44         526,443         526,443         9.3   $ 4,630,512         11.0   $ 8.80   

2017(13)

     17         342,615         342,615         6.0   $ 2,873,539         6.8   $ 8.39   

2018(14)

     15         938,080         323,440         5.7   $ 2,749,691         6.5   $ 8.50   

2019

     3         55,787         55,787         1.0   $ 582,672         1.4   $ 10.44   

2020

     4         154,526         154,526         2.7   $ 2,571,192         6.1   $ 16.64   

2021

     1         1,680         1,680         0.0   $ 29,028         0.1   $ 17.28   

2022

     1         107,861         107,861         1.9   $ 440,076         1.0   $ 4.08   

Thereafter

     2         69,038         69,038         1.2   $ 967,488         2.3   $ 14.01   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Initial Portfolio(15)

     693         6,677,963         5,667,817         100.0   $ 42,204,871         100.0   $ 8.71   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

(1) Represents the contracted square footage upon expiration.
(2) Calculated as rentable square feet for such property multiplied by our ownership interest in such property.
(3) Calculated as monthly contracted base rent per the terms of such lease, as of March 31, 2013, multiplied by 12 and then multiplied by our ownership interest in such property. Excludes billboard and antenna revenue and rent abatements. Total rent abatements with respect to our initial portfolio for leases in effect as of March 31, 2013 for the 12 months ending March 31, 2014 are $980,117, of which our proportionate share, based on our ownership interest in the applicable properties, is $980,117. Annualized base rent includes rent from triple net leases, modified gross leases and gross leases. See “Business—Leases.”
(4) Calculated as annualized base rent set forth in this table divided by annualized base rent for the total portfolio as of March 31, 2013.
(5) Calculated as annualized base rent for such leases divided by our ownership interest in leased square feet for such leases at each of the properties so impacted by the lease expirations as of March 31, 2013. Total annualized base rent per square foot, net of our proportionate share of rent abatements, for our properties is $8.51.
(6) Represents tenants under month-to-month leases.
(7) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $924,552, percentage of total annualized base rent was 2.2% and total annualized base rent per square foot was $8.84.
(8) Excluding our pending acquisitions of Oxnard and Orion, percentage of total owned square feet was 14.4%.
(9) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $7,161,912, percentage of total annualized base rent was 17.4% and total annualized base rent per square foot was $8.96.
(10) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $10,942,555, percentage of total annualized base rent was 26.6% and total annualized base rent per square foot was $8.18.
(11) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $7,379,442, percentage of total annualized base rent was 18.0% and total annualized base rent per square foot was $7.87.
(12) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $4,593,252, percentage of total annualized base rent was 11.2% and total annualized base rent per square foot was $8.78.
(13) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $2,860,146, percentage of total annualized base rent was 7.0% and total annualized base rent per square foot was $8.38.
(14) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $2,640,011, percentage of total annualized base rent was 6.4% and total annualized base rent per square foot was $8.48.
(15) Excluding our pending acquisitions of Oxnard and Orion, annualized base rent was $41,092,327 and total annualized base rent per square foot was $8.66.

 

 

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Summary Risk Factors

An investment in our common stock involves material risks. You should consider carefully the risks described below and under “Risk Factors” before purchasing shares of our common stock in this offering:

 

   

Our portfolio of properties is concentrated in the industrial real estate sector, and our business would be adversely affected by an economic downturn in that sector.

 

   

Our portfolio of properties is dependent upon regional and local economic conditions and is geographically concentrated in Southern California infill markets, which causes us to be especially susceptible to adverse developments in those markets.

 

   

We may be unable to renew leases, lease vacant space or re-lease space as leases expire.

 

   

We may be unable to identify and complete acquisitions of properties that meet our criteria, which may impede our growth.

 

   

Our success depends on key personnel, including Richard Ziman, our Chairman, and Howard Schwimmer and Michael S. Frankel, our Co-Chief Executive Officers, whose continued service is not guaranteed, and the loss of one or more of our key personnel could adversely affect our ability to manage our business and to implement our growth strategies, or could create a negative perception in the capital markets.

 

   

Our charter and bylaws, the partnership agreement of our operating partnership and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

 

   

The tax matters agreement we have entered into in connection with the formation transactions, or the Tax Matters Agreement, limits our ability to sell or otherwise dispose of certain properties and could require us to maintain levels of debt that are higher than we otherwise need.

 

   

Failure to qualify or maintain our qualification as a REIT would have significant adverse consequences to us and the value of our common stock.

 

   

There are restrictions on ownership and transfer of our common stock.

 

   

Potential losses, including from adverse weather conditions, natural disasters, including earthquakes and wildfires, and title claims, may not be covered by insurance.

Structure and Formation of Our Company

Our Operating Partnership

Following the completion of this offering, the formation transactions and the concurrent private placement, substantially all of our assets will be held by, and our operations will be conducted through, our operating partnership. We will contribute the net proceeds from this offering and the concurrent private placement to our operating partnership in exchange for common units therein. Our interest in our operating partnership will generally entitle us to share in cash distributions from, and in the profits and losses of, our operating partnership in proportion to our percentage ownership. As the sole general partner of our operating partnership, we will generally have the exclusive power under the partnership agreement to manage and conduct its business and affairs, subject to certain limited approval and voting rights of the limited partners, which are described more fully below in “Description of the Partnership Agreement of Rexford Industrial Realty, L.P.” Our board of directors will manage our business and affairs.

 

 

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Beginning on or after the date which is 14 months after the later of the completion of this offering or the date on which a person first became a holder of common units, each limited partner of our operating partnership will have the right to require our operating partnership to redeem part or all of its common units for cash, based upon the value of an equivalent number of shares of our common stock at the time of the redemption, or, at our election, shares of our common stock on a one-for-one basis, subject to certain adjustments and the restrictions on ownership and transfer of our stock set forth in our charter and described under the section entitled “Description of Stock—Restrictions on Ownership and Transfer.” With each redemption of common units, our percentage ownership interest in our operating partnership and our share of our operating partnership’s cash distributions and profits and losses will increase. See “Description of the Partnership Agreement of Rexford Industrial Realty, L.P.”

Our Services Company

As part of the formation transactions, we will acquire Rexford Industrial Realty and Management, Inc., which we refer to as the services company. The services company will be wholly owned, indirectly, by our operating partnership. We will elect with our services company to treat it as a taxable REIT subsidiary for federal income tax purposes.

Formation Transactions

Each property that will be owned by us through our operating partnership upon the completion of this offering, the formation transactions and the concurrent private placement is currently owned indirectly by the Rexford Funds through property owning subsidiaries. We refer to these property owning subsidiaries and the Rexford Funds collectively as the “ownership entities.” The Rexford Funds have (1) entered into contribution agreements with our operating partnership, pursuant to which they will contribute their interests in their property owning subsidiaries to our operating partnership, (2) entered into merger agreements pursuant to which they will merge with and into our operating partnership, or (3) in the case of Rexford Industrial Fund V REIT, LLC (“Fund V REIT”), entered into a merger agreement pursuant to which it will merge with and into us, in each case substantially concurrently with the completion of this offering. In addition, each management company will merge with and into a subsidiary of our operating partnership, with such management company as the surviving entity. Prior investors will receive cash, shares of our common stock and/or common units in exchange for their interests in the Rexford Funds or the management companies.

Concurrent Private Placement

In connection with the formation transactions, we made available to accredited investors in the Rexford Funds and the Rexford management team the opportunity to acquire for cash additional shares of our common stock at the public offering price per share in this offering concurrently with the completion of the formation transactions and this offering. We refer to the shares issued pursuant to this opportunity as the concurrent private placement. No fees, discounts or selling commissions will be paid to the underwriters in connection with any sale of our common stock through the concurrent private placement. Rexford Fund investors and the Rexford management team have irrevocably committed to invest approximately $47 million in the concurrent private placement, at a price per share equal to the public offering price in this offering. The shares that will be issued in the concurrent private placement will be in addition to the shares sold in this offering.

 

 

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Corporate Structure

The chart below reflects our organization immediately following completion of this offering, the formation transactions and the concurrent private placement.

 

LOGO

 

(1) On a fully diluted basis, our public stockholders will own 55.3% of our outstanding common stock, our directors and executive officers and their affiliates will own 10.8% of our outstanding common stock and the other prior investors in the Rexford Funds and the management companies as a group will own 33.9% of our outstanding common stock.
(2) If the underwriters exercise their over-allotment option in full, on a fully diluted basis, our public stockholders will own 58.7% of our outstanding common stock, our directors and executive officers and their affiliates will own 10.0% of our outstanding common stock and the other prior investors in the Rexford Funds and the management companies as a group will own 31.3% of our outstanding common stock.
(3)

If the underwriters exercise their over-allotment option in full, our public stockholders, our directors and executive officers and their affiliates and the other prior investors in the Rexford Funds and the management companies will own 66.6%, 3.5% and 29.9%, respectively, of our outstanding common stock, and we, our

 

 

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  directors and executive officers and their affiliates and the other prior investors in the Rexford Funds and the management companies will own 87.8%, 7.1%, and 5.1%, respectively, of the outstanding common units.

Benefits of the Formation Transactions to Related Parties

In connection with this offering, certain of our directors and executive officers will receive material benefits described in “Certain Relationships and Related Transactions,” including the following. All amounts are based on the mid-point of the price range set forth on the cover page of this prospectus. For a discussion of amounts based on other prices within the range, see “Pricing Sensitivity Analysis.”

 

   

Mr. Ziman, our Chairman, and his affiliates will receive 265,936 shares of our common stock and 643,446 common units in connection with the formation transactions and will purchase 40,690 shares of our common stock in the concurrent private placement, which together have an aggregate value of approximately $13.3 million. As a result, Mr. Ziman and his affiliates will own approximately 3.3% of our outstanding common stock on a fully diluted basis (or 3.0% if the underwriters’ over-allotment option is exercised in full).

 

   

Mr. Schwimmer, our Co-Chief Executive Officer and director, and his affiliates will receive 296,244 shares of our common stock and 852,890 common units in connection with the formation transactions and will purchase 24,209 shares of our common stock in the concurrent private placement, which together have an aggregate value of approximately $16.4 million. As a result, Mr. Schwimmer and his affiliates will own approximately 4.1% of our outstanding common stock on a fully diluted basis (or 3.7% if the underwriters’ over-allotment option is exercised in full).

 

   

Mr. Frankel, our Co-Chief Executive Officer and director, and his affiliates will receive 287,818 shares of our common stock and 670,923 common units in connection with the formation transactions and will purchase 14,754 shares of our common stock in the concurrent private placement, which together have an aggregate value of approximately $13.6 million. As a result, Mr. Frankel and his affiliates will own approximately 3.4% of our outstanding common stock on a fully diluted basis (or 3.1% if the underwriters’ over-allotment option is exercised in full).

 

   

To the extent that an ownership entity or any of the management companies has excess net working capital as determined by us within 45 days prior to the date of the preliminary prospectus in connection with this offering, the amount of such excess shall be due to the prior owners of such ownership entity or management company, as applicable, immediately prior to the completion of the offering, including our directors and executive officers who are prior investors. To the extent not distributed or paid by such ownership entity or management company prior to the completion of this offering, our operating partnership shall pay such amounts on behalf of each such ownership entity or management company, as applicable, promptly after the completion of this offering. The Rexford Funds and the management companies, in the aggregate, are expected to contribute approximately $2.0 million of cash to us and our operating partnership in connection with the formation transactions.

 

   

We will enter into a Tax Matters Agreement with certain limited partners of our operating partnership, pursuant to which our operating partnership will agree to indemnify such limited partners against adverse tax consequences in connection with: (1) our sale of certain specified properties in a taxable transaction prior to the seventh anniversary of the completion of the formation transactions; and (2) our failure to provide certain limited partners the opportunity to

 

 

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guarantee certain debt of our operating partnership during the period ending on the twelfth anniversary of the completion of the formation transactions, or following such period, our failure to use commercially reasonable efforts to provide such opportunities; provided that, subject to certain exceptions and limitations, such indemnification rights will terminate for any such protected partner that sells, exchanges or otherwise disposes of more than 50% of his or her common units during such period. It is anticipated that the total amount of protected built-in gain on the protected properties will be approximately $38.9 million of which $4.0 million, $8.8 million, and $4.7 million is attributable to Messrs. Ziman, Schwimmer and Frankel, respectively. In addition, our operating partnership will be required to offer certain limited partners the opportunity to guarantee, in the aggregate, up to approximately $19 million of our debt, of which Messrs. Ziman, Schwimmer and Frankel will have the opportunity to guarantee up to approximately $2.4 million, $6.5 million, and $3.5 million, respectively, of our outstanding indebtedness respectively pursuant to the Tax Matters Agreement.

 

   

In connection with the completion of this offering, we will enter into a registration rights agreement with the various persons receiving shares of our common stock and/or common units in the formation transactions and the concurrent private placement, including certain of our directors and executive officers and their affiliates. Under the registration rights agreement, subject to certain limitations, commencing not later than 14 months after the date of the completion of this offering, we will file one or more registration statements covering the resale of the shares of our common stock issued in the formation transactions and the concurrent private placement and the resale of the shares of our common stock issued or issuable, at our option, in exchange for common units issued in the formation transactions. We may, at our option, satisfy our obligation to prepare and file a resale registration statement by filing a registration statement registering the issuance by us of shares of our common stock under the Securities Act in lieu of our operating partnership’s obligation to pay cash for such units. We will agree to pay all of the expenses relating to the securities registrations described above. See “Certain Relationships and Related Transactions—Registration Rights” and “Shares Eligible for Future Sale—Registration Rights.”

 

   

We intend to enter into employment agreements with certain of our executive officers that would become effective as of the completion of this offering, which we expect will provide for salary, bonus and other benefits, including severance upon a termination of employment under certain circumstances. The material terms of these agreements are described under “Executive Compensation—Executive Compensation Arrangements.”

 

   

We intend to enter into indemnification agreements with directors and executive officers at the completion of this offering, providing for procedures for indemnification by us to the fullest extent permitted by law and advancements by us of certain expenses and costs relating to claims, suits or proceedings arising from their service to us or, at our request, service to other entities, as officers or directors.

 

   

We intend to adopt our 2013 Incentive Award Plan, under which we may grant cash or equity incentive awards to our directors, officers, employees and consultants. See “Executive Compensation—2013 Incentive Award Plan.”

Conflicts of Interest

Following the completion of this offering, conflicts of interest may arise between the holders of common units and our stockholders with respect to certain transactions. In particular, the consummation of certain business combinations, the sale of any properties or a reduction of indebtedness could have adverse tax consequences to holders of common units, which would make those transactions less desirable to certain holders of such common units.

 

 

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Certain of our directors and executive officers own interests, directly or indirectly, in the ownership entities that own the properties included in our initial portfolio and that we will acquire in the formation transactions and as such have interests in the contribution and/or merger agreements that we will enter into with the Rexford Funds and the management companies, as applicable. In addition, we expect that certain of our executive officers will enter into employment agreements with us. We may choose not to enforce, or to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationships with members of our senior management or our board of directors and their affiliates, with possible negative impact on stockholders. Moreover, these agreements were not negotiated at arm’s length and in the course of structuring the formation transactions, certain of our directors and executive officers had the ability to influence the types and level of benefits that they will receive from us under these agreements.

Messrs. Ziman, Schwimmer and Frankel have entered into a representation, warranty and indemnity agreement with us, pursuant to which they made certain representations and warranties to us regarding the entities and assets being acquired in the formation transactions and agreed to indemnify us and our operating partnership for breaches of such representations and warranties for one year after the completion of this offering. For purposes of satisfying any indemnification claims, Messrs. Ziman, Schwimmer and Frankel will deposit into escrow shares of our common stock and common units with an aggregate value equal to ten percent of the consideration payable to Messrs. Ziman, Schwimmer and Frankel in the formation transactions. Messrs. Ziman, Schwimmer and Frankel have no obligation to increase the amount of common stock and/or common units in the escrow in the event the trading price of our common stock declines below the initial public offering price. Any and all amounts remaining in the escrow one year from the completion of the formation transactions will be distributed to Messrs. Ziman, Schwimmer and Frankel to the extent that indemnity claims have not been made against such amounts. This indemnification is subject to a one-time aggregate deductible equal to one percent of the consideration payable to Messrs. Ziman, Schwimmer and Frankel in the formation transactions and a cap equal to the value of the consideration deposited in the escrow. Other than Messrs. Ziman, Schwimmer and Frankel, none of the prior investors or the entities that we are acquiring in the formation transactions will provide us with any indemnification. We may choose not to enforce, or to enforce less vigorously, our rights under this agreement due to our ongoing relationship with Messrs. Ziman, Schwimmer and Frankel.

In addition, pursuant to a Tax Matters Agreement, our operating partnership has agreed to indemnify certain limited partners of our operating partnership, including certain of our directors and executive officers, against adverse tax consequences to them in the event that we sell, exchange or otherwise dispose of any interest in certain specified properties in a taxable transaction prior to the seventh anniversary of the completion of the formation transactions. It is anticipated that the total amount of protected built-in gain on the protected properties will be approximately $38.9 million. Furthermore, our operating partnership will also be required to indemnify certain limited partners of our operating partnership against any resulting taxes to them if we fail to offer them an opportunity to guarantee, in the aggregate, up to approximately $19 million of certain of our outstanding indebtedness during the period ending on the twelfth anniversary of the completion of the formation transactions or if we fail to use commercially reasonable efforts to provide such debt guarantee opportunities to such continuing limited partners following such time period. Subject to certain exceptions and limitations, such indemnification rights will terminate for any protected partner that sells, exchanges or otherwise disposes of more than 50% of his or her common units.

Prior to the formation transactions, the services company and RI, LLC provided management services to the Rexford Funds. As part of the formation transactions, the services company and RI, LLC will become wholly owned subsidiaries of our operating partnership. Mr. Schwimmer owns interests in 19 properties representing approximately 1.0 million square feet that are not part of the Rexford Funds portfolio. Mr. Schwimmer’s investments in these properties are more than a decade old and pre-date the formation of the Rexford Funds. Mr. Schwimmer is the general partner, or co-general partner, of each of the entities that owns these properties. These properties are currently managed by RI, LLC, and will be managed by our services company after

 

 

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completion of this offering. In 2013, these property management agreements are expected to generate revenues of approximately $117,000 for the services company. In addition, three of these properties are held as tenancies-in-common with other parties, and are subject to tenancy-in-common agreements, which appoint RI, LLC as manager of the properties, in charge of providing day-to-day business operations and leasing services, in return for a property management fee. Following the completion of this offering, the services company and RI, LLC will continue to provide management services to these properties. Conflicts of interest may exist or could arise in the future in connection with considering whether to extend, terminate or re-negotiate these property management agreements.

Mr. Ziman currently serves as chairman of the board of directors of AVP Advisors, LLC and AVP Capital, LLC (“AVP”), a position he has held since June 2006. In connection with his AVP board service, Mr. Ziman has been involved in significant business matters of AVP, including raising $500 million for a fund investing in third-party real estate investment funds targeting investments in a range of property types across a diverse range of U.S. property markets. AVP has deployed its capital and is not currently investing additional capital. Conflicts of interest may exist or could arise in the future as a result of Mr. Ziman’s service on the board of AVP.

We have not obtained any third-party appraisals of the properties and other assets to be acquired by us from the Rexford Funds and the management companies in connection with the formation transactions. As a result, the price to be paid by us to the prior investors for the acquisition of the properties and assets in the formation transactions may exceed the fair market value of those properties and assets.

Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to our company under Maryland law in connection with their management of our company. At the same time, we, as the general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its limited partners under Maryland law and the partnership agreement of our operating partnership in connection with the management of our operating partnership. Our fiduciary duties and obligations as the general partner of our operating partnership may come into conflict with the duties of our directors and officers to our company. We have adopted policies that are designed to eliminate or minimize certain potential conflicts of interests, and the limited partners of our operating partnership have agreed that, in the event of a conflict between the interests of us or our stockholders and the interests of our operating partnership or any of its limited partners, we may give priority to the separate interests of our company or our stockholders, including with respect to tax consequences to limited partners, assignees or our stockholders. See “Policies With Respect to Certain Activities—Conflict of Interest Policy” and “Description of the Partnership Agreement of Rexford Industrial Realty, L.P.”

Tax Status

We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2013. We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT. To maintain REIT qualification, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax on our 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. In addition, the income of any taxable REIT subsidiary that we own will be subject to taxation at regular corporate rates. See “U.S. Federal Income Tax Considerations.”

 

 

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Distribution Policy

We are a newly formed company that has not commenced operations, and as a result, we have not paid any distributions as of the date of this prospectus. U.S. federal income tax laws generally require that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to make quarterly distributions of all or substantially all of our REIT taxable income, determined without regard to the deduction for dividends paid, to holders of our common stock out of assets legally available therefor. We intend to pay a pro rata initial distribution with respect to the period commencing on the completion of this offering and ending at the last day of the then-current fiscal quarter, based on a distribution of $0.123 per share for a full quarter. On an annualized basis, this would be $0.49 per share, or an annual distribution rate of approximately 3.5% based on the initial public offering price. We estimate this initial annual distribution rate will represent approximately 82.0% of estimated cash available for distribution to our common stockholders for the 12 months ending March 31, 2014. We intend to maintain our initial distribution rate for the 12-month period following completion of this offering unless our actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. These distributions and any future distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, maintenance of REIT qualification, applicable restrictions contained in the Maryland General Corporation Law (“MGCL”) and such other factors as our board may determine in its sole discretion. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and may need to use the proceeds from future equity and debt offerings, sell assets or borrow funds to make some distributions. We have no intention to use the net proceeds of this offering to make distributions nor do we intend to make distributions using shares of common stock. We cannot assure you that our distribution policy will not change in the future.

Restrictions on Transfer

Under our partnership agreement, holders of common units do not have redemption or exchange rights, except under limited circumstances, and may not otherwise transfer their common units, except under certain limited circumstances, for a period of 14 months from the later of completion of this offering or the date on which a person first became a holder of common units. After the expiration of this 14-month period, transfers of common units by limited partners and their assignees are subject to various conditions, including our right of first refusal, described under “Description of the Partnership Agreement of Rexford Industrial Realty, L.P.—Transfers and Withdrawals.” In addition, each of our executive officers, directors and director nominees and their affiliates has agreed not to sell or otherwise transfer or encumber any shares of our common stock or securities convertible or exchangeable into our common stock (including common units) owned by them at the completion of this offering or thereafter acquired by them for a period of 360 days after the date of this prospectus without the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and FBR Capital Markets & Co. We and the other participants in the formation transactions and the concurrent private placement have agreed not to sell or otherwise transfer or encumber any shares of our common stock or securities convertible or exchangeable into our common stock (including common units) owned by them at the completion of this offering or thereafter acquired by them for a period of 180 days after the date of this prospectus without the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and FBR Capital Markets & Co.

Restrictions on Ownership

Due to limitations on the concentration of ownership of REIT stock imposed by the Code, our charter generally prohibits any person from actually, beneficially or constructively owning more than 9.8% in value or

 

 

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number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our stock. We refer to these restrictions as the “ownership limits.” Our charter permits our board of directors, in its sole and absolute discretion, to exempt a person, prospectively or retroactively, from one or both of the ownership limits if, among other conditions, the person’s ownership of our stock in excess of the ownership limits could not cause us to fail to qualify as a REIT.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Although these exemptions will be available to us, they will not have a material impact on our public reporting and disclosure.

We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1.0 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (iv) the date on which we are deemed a “large accelerated filer” under the Exchange Act.

Under the JOBS Act, emerging growth companies can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period and, as a result, we will comply with any such new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

 

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The Offering

 

Common stock offered by us

16,000,000 shares of common stock (plus up to an additional 2,400,000 shares of common stock that we may issue and sell upon the exercise of the underwriters’ over-allotment option).

 

Common stock and common units to be outstanding after completion of the formation transactions, the concurrent private placement and this offering

25,239,339 shares of common stock and 3,714,419 units(1)(2)(3)(4)

 

Use of proceeds

We estimate that the net proceeds we will receive from the sale of shares of our common stock in this offering will be approximately $201.8 million (or approximately $233.1 million if the underwriters exercise their over-allotment option in full), in each case assuming a public offering price of $14.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus. In addition, we expect the net proceeds of the concurrent private placement will be approximately $47.0 million, resulting in total net proceeds of $248.8 million. We will contribute the net proceeds we receive from this offering and the concurrent private placement to our operating partnership in exchange for common units in our operating partnership.

 

  We expect our operating partnership will use the net proceeds from this offering and the concurrent private placement, together with the proceeds from a new approximately $60 million term loan, borrowings under our proposed revolving credit facility and contributions to our operating partnership of approximately $2.0 million of cash working capital in connection with the formation transactions, as described below:

 

   

approximately $301.6 million to repay in full certain outstanding indebtedness, and approximately $2.8 million to pay related prepayment costs, exit fees and unpaid extension fees;

 

   

approximately $1.5 million to pay fees associated with our proposed revolving credit facility and the new term loan;

 

   

approximately $6.5 million to fund the excess working capital distribution;

 

   

$0.7 million to pay non-accredited investors in connection with the formation transactions;

 

   

approximately $0.6 million to pay transfer taxes and fees associated with the contribution of our properties to us; and

 

   

the remaining amounts to acquire and manage industrial properties and for general corporate purposes.

 

 

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  Prior to the full deployment of the net proceeds as described above, we intend to invest the undeployed net proceeds in interest-bearing short-term investment grade securities or money-market accounts that are consistent with our intention to qualify as a REIT, including, for example, government and government agency certificates, certificates of deposit and interest-bearing bank deposits. We expect that these initial investments will provide a lower net return than we expect to receive from investments in industrial properties. If the underwriters exercise their over-allotment option in full, we expect to use the additional $31.2 million of net proceeds for general corporate purposes. See “Use of Proceeds” and “Business—Description of Certain Debt.”

 

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” beginning on page 30 and the other information included in this prospectus before investing in our common stock.

 

Proposed New York Stock Exchange symbol

“REXR”

 

(1) Assumes the underwriters’ over-allotment option to purchase up to an additional 2,400,000 shares of common stock is not exercised.
(2) Includes 3,358,311 shares of our common stock issuable pursuant to the concurrent private placement and 4,957,099 shares of common stock issuable to prior investors in the formation transactions.
(3) Does not include 1,348,760 shares of our common stock or LTIP units reserved for issuance under our 2013 Incentive Award Plan following the grant of equity awards upon the completion of this offering. Includes 923,929 shares of common stock issuable pursuant to awards to be granted under our 2013 Incentive Award Plan to our directors, executive officers and non-executive employees upon completion of this offering. See “Executive Compensation—2013 Incentive Award Plan” for additional information.
(4) Represents common units held by limited partners (other than common units held by our company) expected to be outstanding following completion of our formation transactions.

Summary Financial Information

The following table sets forth selected financial and operating data on (i) a pro forma basis for our company and (ii) a historical basis for “Rexford Industrial Realty, Inc. Predecessor.” Rexford Industrial Realty, Inc. Predecessor consists of RI, LLC, Sponsor, Fund V REIT and their consolidated subsidiaries, which consist of one limited partnership and four limited liability companies and their subsidiaries. Each of the entities comprising Rexford Industrial Realty, Inc. Predecessor is owned, managed, and controlled (individually or jointly as discussed in more detail elsewhere in the prospectus) by our predecessor principals. As such, we have combined these entities on the basis of common ownership and common management. Upon completion of our formation transactions, the concurrent private placement and this offering, we will acquire the interests in 61 industrial properties owned directly or indirectly by Rexford Industrial Realty, Inc. Predecessor, including two properties that we currently have under contract to purchase.

We have not presented historical information for Rexford Industrial Realty, Inc. because we have not had any corporate activity since our formation and because we believe that a discussion of the results of Rexford Industrial Realty, Inc. would not be meaningful.

 

 

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You should read the following summary financial and operating data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” our unaudited pro forma consolidated financial statements and related notes, and the historical combined financial statements and related notes of Rexford Industrial Realty, Inc. Predecessor included elsewhere in the prospectus.

The unaudited pro forma condensed consolidated balance sheet data is presented as if our formation transactions, the concurrent private placement and this offering had occurred on March 31, 2013, and the unaudited pro forma statements of operations and other data for the three months ended March 31, 2013 and the year ended December 31, 2012, is presented as if our formation transactions, the concurrent private placement and this offering had occurred on January 1, 2012. The unaudited pro forma condensed consolidated financial statements include the effects of the contribution of the entities that comprise Rexford Industrial Realty, Inc. Predecessor, including (i) RI, LLC and its consolidated subsidiaries, (ii) Sponsor and Fund V REIT and their consolidated subsidiaries and (iii) other contributions or acquisitions of non-predecessor entities. The contribution of Sponsor and Fund V REIT and their consolidated subsidiaries and the other contributions or acquisitions of non-predecessor entities has been accounted for using the acquisition method of accounting as discussed in more detail elsewhere in the prospectus. The pro forma financial information is not necessarily indicative of what our actual financial condition would have been as of March 31, 2013 or what our actual results of operations would have been assuming our formation transactions, the concurrent private placement and this offering had been completed as of January 1, 2012, nor does it purport to represent our future financial position or results of operations.

 

 

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The unaudited summary historical combined balance sheet information as of March 31, 2013 and statement of operations data for the three months ended March 31, 2013 and 2012 have been derived from the unaudited combined financial statements of Rexford Industrial Realty, Inc. Predecessor included elsewhere in this prospectus. The summary historical combined balance sheet information as of December 31, 2012 and 2011, and the historical combined statement of operations data for the years ended December 31, 2012 and 2011 have been derived from the combined financial statements of Rexford Industrial Realty, Inc. Predecessor, which were audited by Ernst & Young LLP, independent registered public accountants, and are included elsewhere in this prospectus.

 

    

Three Months Ended March 31,

   

Year Ended December 31,

 
    

Company
Pro Forma
Consolidated

    

Rexford Predecessor
Historical Combined

   

Company
Pro Forma
Consolidated

    

Rexford Predecessor
Historical Combined

 
     2013      2013     2012     2012      2012     2011  
   (Unaudited)      (Unaudited)     (Unaudited)    

(Unaudited)

              
     (In Thousands)     (In Thousands)  

Statement of Operations Data:

              

Revenue

              

Rental revenues

   $ 9,592       $ 7,902      $ 7,039      $ 35,500       $ 28,586      $ 23,696   

Tenant reimbursements

     1,095         904        789        4,085         3,262        2,438   

Management, leasing and development services

     261         261        64        519         519        316   

Other income

     119         118        17        115         124        149   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total rental revenues

     11,067         9,185        7,909        40,219         32,491        26,599   

Interest income

     248         311        337        1,011         1,577        1,578   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     11,315         9,496        8,246        41,230         34,068        28,177   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Expenses

              

Property expenses

     2,801         2,171        1,987        10,734         8,328        6,865   

General and administrative

     2,040         1,153        983        8,683         5,146        3,729   

Depreciation and amortization

     7,273         3,208        3,526        17,822         12,727        9,874   

Other property expenses

     349         341        276        1,324         1,302        1,030   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     12,463         6,873        6,772        38,563         27,503        21,498   

Other (income) expense

              

Acquisition expenses

     —           93        68        —           599        1,022   

Interest expense

     939         3,906        4,209        3,754         17,452        17,970   

Gain on mark-to-market interest rate swaps

     —           (49     (612     —           (2,361     (4,185
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other (income) expense

     939         3,950        3,665        3,754         15,690        14,807   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses

     13,402         10,823        10,437        42,317         43,193        36,305   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

 

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Three Months Ended March 31,

   

Year Ended December 31,

 
    

Company
Pro Forma
Consolidated

   

Rexford Predecessor
Historical Combined

   

Company
Pro Forma
Consolidated

   

Rexford Predecessor
Historical Combined

 
     2013     2013     2012     2012     2012     2011  
   (Unaudited)    

(Unaudited)

(In Thousands)

    (Unaudited)    

(Unaudited)

    (In Thousands)        

Equity in income (loss) of unconsolidated real estate entities

     61        (212     57        (105     122        185   

Gain from early repayment of note receivable

     —          1,365        —          —          —          —     

Loss on extinguishment of debt

     —          (37     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (2,026     (211     (2,134     (1,192     (9,003     (7,943
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations

            

Income (loss) from discontinued operations before gains (losses) on settlement of debt and sale of real estate

     —          64        34        —          (9     (897

Loss on extinguishment of debt

       (209     —            —          —     

Gain on sale of real estate

     —          2,409        —          —          55        2,503   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —          2,264        34        —          46        1,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (2,026   $ 2,053      $ (2,100   $ (1,192   $ (8,957   $ (6,337
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data

            

(End of Period):

            

Rental property, before accumulated depreciation

   $ 466,217      $ 383,944          $ 383,316      $ 358,995   

Rental property, after accumulated depreciation

   $ 418,867      $ 324,196          $ 326,139      $ 311,734   

Total assets

   $ 456,549      $ 420,390          $ 420,496      $ 383,215   

Notes payable

   $ 129,290      $ 313,118          $ 308,991      $ 297,000   

Total liabilities

   $ 138,340      $ 325,483          $ 324,248      $ 315,535   

Total equity

   $ 318,209      $ 94,907          $ 96,248      $ 67,680   

Other Data:

            

NOI(1)

   $ 7,917      $ 6,673      $ 5,646      $ 28,161      $ 22,861      $ 18,704   

EBITDA(1)

   $ 6,186      $ 9,167      $ 5,635      $ 20,384      $ 21,222      $ 21,507   

FFO(1)

   $ 5,344      $ 3,646      $ 1,596      $ 16,896      $ 4,614      $ 1,973   

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more detailed explanations of NOI, EBITDA and FFO, and reconciliations of NOI, EBITDA and FFO to net income computed in accordance with GAAP.

 

 

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RISK FACTORS

An investment in our common stock involves risks. In addition to other information in this prospectus, you should carefully consider the following risks before investing in our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and our ability to make cash distributions to our stockholders, which could cause you to lose all or a significant portion of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Operations

Our portfolio of properties is concentrated in the industrial real estate sector, and our business would be adversely affected by an economic downturn in that sector.

Our properties 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. This concentration risk could adversely affect our results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Our portfolio of properties is dependent upon regional and local economic conditions and is geographically concentrated in Southern California infill markets, which causes us to be especially susceptible to adverse developments in those markets.

Substantially all of our properties (60 out of the total 61) are located in Southern California, which exposes us to greater economic risks than if we owned a more geographically diverse portfolio. We are particularly susceptible to adverse economic or other conditions in Southern California (such as periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes and the cost of complying with governmental regulations or increased regulation), as well as to natural disasters that occur in this market (such as earthquakes, wild fires and other events). The Southern California market has experienced downturns within recent years. A further downturn in the Southern California economy could impact our tenants’ ability to continue to meet its rental obligations or otherwise adversely affect the size of our tenant base, which could materially adversely affect our operations and our revenue and cash available for distribution, including cash available to pay distributions to our stockholders. We cannot assure you that the Southern California market will grow or that underlying real estate fundamentals will be favorable to owners and operators of industrial properties. Our operations may also be affected if competing properties are built in the Southern California market. In addition, the State of California continues to suffer from severe budgetary constraints and is regarded as more litigious and more highly regulated and taxed than many other states, all of which may reduce demand for industrial space in California and may make it more costly to operate our business. Any adverse economic or real estate developments in the Southern California market, or any decrease in demand for industrial space resulting from the regulatory environment, business climate or energy or fiscal problems, could adversely impact our financial condition, results of operations, cash flow, our ability to satisfy our debt service obligations and our ability to pay distributions to our stockholders.

Our properties are concentrated in certain industries that make us susceptible to adverse events with respect to those industries.

Our properties are concentrated in certain industries, which, as of March 31, 2013, included the following (and accounted for the percentage of our total annualized rent indicated): Wholesale/Retail (11.6%); Business Services (9.3%); and Light Manufacturing (8.4%). Any downturn in one or more of these industries, or in any other industry in which we may have a significant concentration now or in the future, could adversely

 

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affect our tenants who are involved in such industries. If any of these tenants is unable to withstand such downturn or is otherwise unable to compete effectively in its business, it may be forced to declare bankruptcy, fail to meet its rental obligations, seek rental concessions or be unable to enter into new leases, which could materially and adversely affect us.

We expect to have approximately $129.3 million of indebtedness outstanding following this offering, which may expose us to the risk of default under our debt obligations.

Upon completion of this offering, we anticipate that our total consolidated indebtedness will consist of approximately $129.3 million of indebtedness, including approximately $21.2 million outstanding under our proposed revolving credit facility,(1) $60.0 million in principal amount of mortgage debt under our new term loan, and approximately $48.1 million in principal amount of mortgage debt that we will assume as part of the formation transactions. Additionally, we will have approximately $6.2 million of secured indebtedness allocable to our 15% joint venture interest in the three properties owned indirectly by the JV (as further described in this section below). A substantial portion of this indebtedness will be guaranteed by our operating partnership. We may incur significant additional debt to finance future acquisition and development activities.

Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties or to pay the dividends currently contemplated or necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse consequences, including the following:

 

   

our cash flow may be insufficient to meet our required principal and interest payments;

 

   

we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to meet operational needs;

 

   

we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

   

we may be forced to dispose of one or more of our properties, possibly on unfavorable terms or in violation of certain covenants to which we may be subject;

 

   

we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our debt obligations; and

 

   

our default under any loan with cross default provisions could result in a default on other indebtedness.

If any one of these events were to occur, our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Consolidated Indebtedness to be Outstanding After this Offering.”

We may be unable to renew leases, lease vacant space or re-lease space as leases expire.

As of March 31, 2013, leases representing 16.3% and 23.9% of the rentable square footage of the properties in our initial portfolio will expire in the remainder of 2013 and 2014 respectively, and an additional

 

(1) Assumes borrowings of approximately $7.0 million we expect to borrow under our proposed revolving credit facility at the completion of this offering and an additional $14.2 million which we expect to borrow under our proposed revolving credit facility to acquire 8101-8117 Orion Avenue and 18310-18330 Oxnard Street shortly following the completion of this offering.

 

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10.6% of the rentable square footage of the properties in our initial portfolio was available (taking into account leases signed as of March 31, 2013 that had not yet commenced on that date). We cannot assure you that our leases will be renewed or that our properties will be re-leased at rental rates equal to or above the current average rental rates or that we will not offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options to attract new tenants or retain existing tenants. If the rental rates for our properties decrease, or if our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock could be adversely affected.

We may be unable to identify and complete acquisitions of properties that meet our criteria, which may impede our growth.

Our business strategy involves the acquisition of industrial properties meeting certain investment criteria in our target markets. These activities require us to identify suitable acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth strategies. We may be unable to acquire properties identified as potential acquisition opportunities. Our ability to acquire properties on favorable terms, or at all, may expose us to the following significant risks:

 

   

we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete;

 

   

even if we enter into agreements for the acquisition of properties, these agreements are subject to conditions to closing, which we may be unable to satisfy; and

 

   

we may be unable to finance any given acquisition on favorable terms or at all.

If we are unable to finance property acquisitions or acquire properties on favorable terms, or at all, our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock could be adversely affected. In addition, failure to identify or complete acquisitions of suitable properties could slow our growth.

Our acquisition activities may pose risks that could harm our business.

As a result of our acquisitions, we may be required to incur debt and expenditures and issue additional common stock or common units to pay for the acquired properties. These acquisitions may dilute our stockholders’ ownership interest, delay or prevent our profitability and may also expose us to risks such as:

 

   

the possibility that we may not be able to successfully integrate acquired properties into our existing portfolio or achieve the level of quality with respect to such properties to which tenants of our existing properties are accustomed;

 

   

the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired properties, diverting their attention from our other objectives;

 

   

the possibility that we may overpay for a property;

 

   

the possible loss or reduction in value of acquired properties; and

 

   

the possibility of pre-existing undisclosed liabilities regarding acquired properties, including environmental or asbestos liability, for which our insurance may be insufficient or for which we may be unable to secure insurance coverage.

 

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We cannot assure you that the price for any future acquisitions will be similar to prior acquisitions. If our revenue does not keep pace with these potential acquisition and expansion costs, we may incur net losses. There is no assurance that we will successfully overcome these risks or other problems encountered with acquisitions.

We may obtain limited or no warranties when we purchase a property, which increases the risk that we may lose invested capital in or rental income from such property.

The seller of a property will often sell such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Also, many sellers of real estate are single-purpose entities without any other significant assets. The purchase of properties with limited warranties or from undercapitalized sellers increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from such property.

We may be subject to litigation or threatened litigation, which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business.

We may be subject to litigation or threatened litigation, including existing claims relating to the entities that own the properties and operate the businesses described in this prospectus and otherwise in the ordinary course of business. In particular, we are subject to the risk of complaints by our tenants involving premises liability claims and alleged violations of landlord-tenant laws, which may give rise to litigation or governmental investigations, as well as claims and litigation relating to real estate rights or uses of our properties. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. 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. We generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate outcomes of currently asserted claims or of those that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock. Certain litigation or the resolution of certain litigation may 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 officers and directors, which could adversely impact our results of operations, cash flows and our ability to pay distributions on, and the value of, our common stock.

We face significant competition for acquisitions of real properties, which may reduce the number of acquisition opportunities available to us and increase the costs of these acquisitions.

The current market for acquisitions of industrial properties in Southern California continues to be extremely competitive. This competition may increase the demand for our target properties and, therefore, reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such acquisition properties. We also face significant competition for attractive acquisition opportunities from an indeterminate number of investors, including publicly traded and privately held REITs, private equity investors and institutional investment funds, some of which have greater financial resources than we do, a greater ability to borrow funds to acquire properties and the ability to accept more risk than we can prudently manage, including risks with respect to the geographic proximity of investments and the payment of higher acquisition prices. This competition will increase if investments in real estate become more attractive relative to other forms of investment. Competition

 

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for investments may reduce the number of suitable investment opportunities available to us and may have the effect of increasing prices paid for such acquisition properties and/or reducing the rents we can charge and, as a result, adversely affecting our operating results.

We may be unable to source “limited marketing” deal flow in the future.

As of March 31, 2013, approximately half of the acquisitions by deal count completed by our predecessor business since inception, were acquired in off-market or lightly marketed transactions, which are transactions that are characterized by a lack of a formal marketing process and lack of widely disseminated marketing materials. We sometimes refer to these transactions as “limited marketing” transactions. Properties that are acquired by “limited marketing” transactions are typically more attractive to us as a purchaser because of the absence of a formal or extended marketing/bidding period, the presence of which could lead to higher prices. If we cannot obtain “limited marketing” deal flow in the future, our ability to locate and acquire additional properties at attractive prices may be adversely affected.

Our future acquisitions may not yield the returns we expect.

Our future acquisitions and our ability to successfully operate the properties we acquire in such acquisitions may be exposed to the following significant risks:

 

   

even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price;

 

   

we may acquire properties that are not accretive to our results upon acquisition, and we may not successfully manage and lease those properties to meet our expectations;

 

   

our cash flow may be insufficient to meet our required principal and interest payments;

 

   

we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;

 

   

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into our existing operations, and as a result our results of operations and financial condition could be adversely affected;

 

   

market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and

 

   

we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties, liabilities incurred in the ordinary course of business and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

If we cannot operate acquired properties to meet our financial expectations, our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock could be adversely affected.

We may not be able to control our operating costs or our expenses may remain constant or increase, even if our revenues do not increase, causing our results of operations to be adversely affected.

Factors that may adversely affect our ability to control operating costs include the need to pay for insurance and other operating costs, including real estate taxes, which could increase over time, the need

 

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periodically to repair, renovate and re-lease space, the cost of compliance with governmental regulation, including zoning and tax laws, the potential for liability under applicable laws, interest rate levels and the availability of financing. If our operating costs increase as a result of any of the foregoing factors, our results of operations may be adversely affected.

The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property. As a result, if revenues decline, we may not be able to reduce our expenses accordingly. Costs associated with real estate investments, such as real estate taxes, insurance, loan payments and maintenance, generally will not be reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease. If we are unable to decrease operating costs when demand for our properties decreases and our revenues decline, our financial condition, results of operations and our ability to make distributions to our stockholders may be adversely affected.

High mortgage rates and/or unavailability of mortgage debt may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.

If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we may be unable to refinance the properties when the loans become due, or to refinance on favorable terms. If interest rates are higher when we refinance our properties, our income could be reduced. If any of these events occur, our cash flow could be reduced. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money. In addition, to the extent we are unable to refinance the properties when the loans become due, we will have fewer debt guarantee opportunities available to offer under our Tax Matters Agreement. See “Certain Relationships and Related Transactions—Tax Matters Agreement.”

Mortgage and other secured debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a property or group of properties subject to mortgage debt.

Incurring mortgage and other secured debt obligations increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the overall value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.

Some of our financing arrangements involve balloon payment obligations, which may adversely affect our financial condition and our ability to make distributions.

Some of our financing arrangements require us to make a lump-sum or “balloon” payment at maturity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Consolidated Indebtedness to be Outstanding After this Offering.” Our ability to satisfy a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the property. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on terms as favorable as the original loan or sell the property at a price sufficient to satisfy the balloon payment. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.

 

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Some of our existing indebtedness contains, our proposed revolving credit facility and new term loan will contain, and any other future indebtedness we incur may contain, various covenants, and the failure to comply with those covenants could materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

Some of our properties in redevelopment or acquisitions have been, and may in the future be, made by borrowing a portion of the purchase price or redevelopment cost of the properties and securing the loan with a mortgage on the property. Some of our loan documents contain, our proposed revolving credit facility and new term loan will contain, and any other future indebtedness we incur may contain, certain covenants, which, among other things, restrict our activities, including, as applicable, our ability to sell the underlying property without the consent of the holder of such indebtedness, to repay or defease such indebtedness or to engage in mergers or consolidations that result in a change in control of our company. We may also be subject to financial and operating covenants. Failure to comply with any of these covenants would likely result in a default under the applicable indebtedness that would permit the acceleration of amounts due thereunder and under other indebtedness and foreclosure of properties, if any, serving as collateral therefor.

Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Subject to the rules related to maintaining our qualification as a REIT, we may enter into hedging transactions to protect us from the effects of interest rate fluctuations on floating rate debt. Our hedging transactions may include entering into interest rate cap agreements or interest rate swap agreements. These agreements involve risks, such as the risk that such arrangements would not be effective in reducing our exposure to interest rate changes or that a court could rule that such an agreement is not legally enforceable. In addition, interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates. Hedging could reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes could materially adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock. In addition, while such agreements would be intended to lessen the impact of rising interest rates on us, they could also expose us to the risk that the other parties to the agreements would not perform, we could incur significant costs associated with the settlement of the agreements or that the underlying transactions could fail to qualify as highly effective cash flow hedges under Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 815, Derivatives and Hedging.

Our proposed revolving credit facility and new term loan will restrict our ability to engage in some business activities.

We anticipate that our proposed revolving credit facility will contain customary negative covenants and other financial and operating covenants that, among other things:

 

   

restrict our ability to incur additional indebtedness;

 

   

restrict our ability to make certain investments;

 

   

limit our ability to make capital expenditures;

 

   

restrict our ability to merge with another company;

 

   

restrict our ability to make distributions to stockholders; and

 

   

require us to maintain financial coverage ratios.

 

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These limitations will restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock. In addition, our proposed revolving credit facility and new term loan may contain specific cross-default provisions with respect to specified other indebtedness, giving the lenders the right to declare a default if we are in default under other loans in some circumstances.

Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole, such as the dislocations in the credit markets and general global economic downturn caused by the financial crisis of 2008. These conditions, or similar conditions existing in the future, may adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock as a result of the following potential consequences, among others:

 

   

decreased demand for industrial space, which would cause market rental rates and property values to be negatively impacted;

 

   

reduced values of our properties may limit our ability to dispose of assets at attractive prices, or at all, or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans;

 

   

our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and redevelopment opportunities and refinance existing debt, reduce our returns from our acquisition and redevelopment activities and increase our future interest expense; and

 

   

one or more lenders under our proposed revolving credit facility or our new term loan could refuse to fund their financing commitments to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.

In addition, the economic downturn has adversely affected, and may continue to adversely affect, the businesses of many of our tenants. As a result, we may see increases in bankruptcies of our tenants and increased defaults by tenants, and we may experience higher vacancy rates and delays in re-leasing vacant space, which could negatively impact our business and results of operations.

We have no operating history as a publicly traded company and may not be able to successfully operate our business or generate sufficient cash flows to make or sustain distributions to our stockholders as a publicly traded company or maintain our qualification as a REIT.

We were organized in January 2013, and we will only commence operations upon completion of this offering. We have no operating history as a publicly traded company and may not be able to successfully operate our business or implement our operating policies and investment strategy as described in this prospectus. We cannot assure you that the past experience of our senior management team will be sufficient to successfully operate our company as a REIT or a publicly traded company, including the requirements to timely meet disclosure requirements of the SEC, and comply with the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Upon completion of this offering, we will be required to develop and implement control systems and procedures in order to qualify and maintain our qualification as a REIT, to satisfy our periodic and current reporting requirements under applicable SEC regulations, to comply with the requirements of the Sarbanes-Oxley Act and to comply with New York Stock Exchange, or NYSE, listing standards, and this transition could place a

 

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significant strain on our management systems, infrastructure and other resources. Failure to operate successfully as a publicly traded company, to develop and implement appropriate control systems and procedures in accordance with the Sarbanes-Oxley Act or maintain our qualification as a REIT would have an adverse effect on our financial condition, results of operations, cash flow and per share trading price of our common stock. See “—Risks Related to Our Status as a REIT—Failure to qualify or maintain our qualification as a REIT would have significant adverse consequences to us and the per share trading price of our common stock.” Furthermore, we may not be able to generate sufficient cash flows to pay our operating expenses, service any debt we may incur in the future and make distributions to our stockholders. Our ability to successfully operate our business and implement our operating policies and investment strategy will depend on many factors, including:

 

   

the availability of, and our ability to identify, attractive acquisition opportunities consistent with our investment strategy;

 

   

our ability to contain renovation, maintenance, marketing and other operating costs for our properties;

 

   

our ability to maintain high occupancy rates and target rent levels;

 

   

costs that are beyond our control, including title litigation, litigation with tenants, legal compliance, real estate taxes and insurance;

 

   

interest rate levels and volatility, such as the accessibility of short- and long-term financing on desirable terms; and

 

   

economic conditions in our target markets as well as the condition of the financial and real estate markets and the economy generally.

Upon completion of this offering, even though we will be an “emerging growth company” as defined in the JOBS Act and therefore may take advantage of various exemptions to public reporting requirements (see “—We are an ‘emerging growth company,’ and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors”), we will still be required to implement substantial control systems and procedures in order to maintain our qualification as a REIT, satisfy our periodic and current reporting requirements under applicable SEC regulations and comply with the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or Dodd Frank, and NYSE or other relevant listing standards. As a result, we will incur significant legal, accounting and other expenses that we have not previously incurred, particularly after we are no longer an “emerging growth company,” and our management and other personnel will need to devote a substantial amount of time to comply with these rules and regulations and establish the corporate infrastructure and control systems and procedures demanded of a publicly traded REIT. These costs and time commitments could be substantially more than we currently expect.

We face significant competition in the leasing market, which may decrease or prevent increases of the occupancy and rental rates of our properties.

We compete with numerous developers, owners and operators of real estate, many of which own properties similar to ours in the same submarkets in which our properties are located. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain tenants when our tenants’ leases expire. As a result, our financial condition, results of operations, cash flows and our ability to pay distributions on, and the value of, our common stock could be adversely affected.

 

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We may be required to make rent or other concessions and/or significant capital expenditures to improve our properties in order to retain and attract tenants, causing our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock to be adversely affected.

In order to attract and retain tenants, we may be required to make rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. Additionally, when a tenant at one of our properties does not renew its lease or otherwise vacates its space, it is likely that, in order to attract one or more new tenants, we will be required to expend funds for improvements in the vacated space. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make such expenditures. If we are unable to do so or if capital is otherwise unavailable, we may be unable to make the required expenditures. This could result in non-renewals by tenants upon expiration of their leases, which could have an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the value of, our common stock.

A substantial majority of the leases at our initial properties are with tenants who have non-investment grade credit ratings, which may result in our leasing to tenants that are more likely to default in their obligations to us than an entity with an investment grade credit rating.

A substantial majority of the leases at our initial properties are with tenants who have non-investment grade credit ratings. The ability of a non-investment grade tenant to meet its obligations to us cannot be considered as well assured as that of an investment grade tenant. All of our tenants may face exposure to adverse business or economic conditions which could lead to an inability to meet their obligations to us. However, non-investment grade tenants may not have the financial capacity or liquidity to adapt to these conditions or may have less diversified businesses, which may exacerbate the effects of adverse conditions on their businesses. Moreover, the fact that so many of our tenants are not investment grade may cause investors or lenders to view our cash flows as less stable, which may increase our cost of capital, limit our financing options or adversely affect the trading price of our common stock.

The actual rents we receive for the properties in our portfolio may be less than our asking rents, and we may experience lease roll down from time to time.

As a result of various factors, including competitive pricing pressure in our submarkets, adverse conditions in the Southern California real estate market, a general economic downturn and a decline in the desirability of our properties compared to other properties in our submarkets, we may be unable to realize the asking rents for properties in our portfolio. In addition, the degree of discrepancy between our asking rents and the actual rents we are able to obtain may vary both from property to property and among different leased spaces within a single property. If we are unable to obtain rental rates comparable to our asking rents for properties in our portfolio, our ability to generate cash flow growth will be negatively impacted. In addition, depending on fluctuations in asking rental rates at any given time, from time to time rental rates for expiring leases in our portfolio may be higher than starting rental rates for new leases.

We may acquire properties or portfolios of properties through tax-deferred contribution transactions, which could result in stockholder dilution and limit our ability to sell such assets.

In the future we may acquire properties or portfolios of properties through tax-deferred contribution transactions in exchange for partnership interests in our operating partnership, which may result in stockholder dilution. This acquisition structure may have the effect of, among other things, reducing the amount of tax depreciation we are able to deduct over the tax life of the acquired properties, and may require that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions limit our ability to sell an asset at a time, or on terms, that would be favorable absent such restrictions.

 

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Our real estate development and re-development activities are subject to risks particular to development and re-development.

We may engage in development and redevelopment activities with respect to certain of our properties. To the extent that we do so, we will be subject to the following risks associated with such development and redevelopment activities:

 

   

unsuccessful development or redevelopment opportunities could result in direct expenses to us;

 

   

construction or redevelopment costs of a project may exceed original estimates, possibly making the project less profitable than originally estimated, or unprofitable;

 

   

time required to complete the construction or redevelopment of a project or to lease up the completed project may be greater than originally anticipated, thereby adversely affecting our cash flow and liquidity;

 

   

contractor and subcontractor disputes, strikes, labor disputes or supply disruptions;

 

   

failure to achieve expected occupancy and/or rent levels within the projected time frame, if at all;

 

   

delays with respect to obtaining or the inability to obtain necessary zoning, occupancy, land use and other governmental permits, and changes in zoning and land use laws;

 

   

occupancy rates and rents of a completed project may not be sufficient to make the project profitable;

 

   

our ability to dispose of properties developed or redeveloped with the intent to sell could be impacted by the ability of prospective buyers to obtain financing given the current state of the credit markets; and

 

   

the availability and pricing of financing to fund our development activities on favorable terms or at all.

These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development or redevelopment activities once undertaken, any of which could have an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Our success depends on key personnel whose continued service is not guaranteed, and the loss of one or more of our key personnel could adversely affect our ability to manage our business and to implement our growth strategies, or could create a negative perception in the capital markets.

Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of key personnel, particularly Messrs. Ziman, Schwimmer and Frankel, who have extensive market knowledge and relationships and exercise substantial influence over our operational, financing, acquisition and disposition activity.

Our ability to retain our senior management, particularly Messrs. Ziman, Schwimmer and Frankel, or to attract suitable replacements should any members of our senior management leave, is dependent on the competitive nature of the employment market. We have not obtained and do not expect to obtain key man life insurance on any of our key personnel. The loss of services of one or more members of our senior management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our relationships with lenders, business partners, existing and

 

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prospective tenants and industry participants. Further, the loss of a member of our senior management team could be negatively perceived in the capital markets. Any of these developments could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the value of, our common stock.

Potential losses, including from adverse weather conditions and natural disasters, may not be covered by insurance.

We will carry commercial property, liability and terrorism coverage on all the properties in our initial portfolio under a blanket insurance policy, in addition to other coverages that may be appropriate for certain of our properties. We will select policy specifications and insured limits that we believe to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. Some of our policies will be insured subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses, which could affect certain of our properties that are located in areas particularly susceptible to natural disasters. In addition, we may discontinue terrorism or other insurance on some or all of our properties in the future if the cost of premiums for any such policies exceeds, in our judgment, the value of the coverage discounted for the risk of loss. We will not carry insurance for certain types of extraordinary losses, such as loss from riots, war, earthquakes and wildfires because such coverage may not be available or is cost prohibitive or available at a disproportionately high cost. As a result, we may incur significant costs in the event of loss from riots, war, earthquakes, wildfires and other uninsured losses.

If we or one or more of our tenants experiences a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable costs in the future as the costs associated with property and casualty renewals may be higher than anticipated.

Substantially all of the properties in our initial portfolio are located in areas that are prone to earthquake activity and we are not insured against such an event.

Substantially all of the properties in our initial portfolio are located in Southern California, an area that is prone to earthquake activity. We do not carry insurance for losses resulting from earthquakes because such coverage is not available, is cost prohibitive or is available at a disproportionately high cost. A severe earthquake in the Southern California region could result in uninsured damage to a substantial portion of our portfolio and significant reduction in our cash flow. We will continue to monitor third-party earthquake insurance pricing and conditions and may consider obtaining third-party coverage in the future if we deem it cost effective. However, until such time as we obtain such coverage, we would be required to bear all losses, including loss of invested capital and anticipated future cash flows, occurring at these properties as a result of an earthquake.

We may not be able to rebuild our existing properties to their existing specifications if we experience a substantial or comprehensive loss of such properties.

In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications. Further, reconstruction or improvement of such a property would likely require significant upgrades to meet zoning and building code requirements. Environmental and legal restrictions could also restrict the rebuilding of our properties.

Existing conditions at some of our properties may expose us to liability related to environmental matters.

Independent environmental consultants conducted a Phase I or similar environmental site assessment on most of our properties at the time of their acquisition or in connection with subsequent financings. Such Phase Is or similar environmental site assessments are limited in scope and may not include or identify all potential

 

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environmental liabilities or risks associated with the relevant properties. We have not obtained and do not intend to obtain new or updated Phase Is or similar environmental site assessments in connection with this offering and the formation transactions, which may expose us to liability related to unknown or unanticipated environmental matters. Unless required by applicable laws or regulations, we may not further investigate, remedy or ameliorate the liabilities disclosed in the existing Phase Is or similar environmental site assessments and this failure may expose us to liability in the future.

We may be unable to sell a property if or when we decide to do so.

We expect to hold the various real properties until such time as we decide that a sale or other disposition is appropriate. Our ability to dispose of properties on advantageous terms 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 the industrial real estate market 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 you that we will be able to sell our properties at a profit in the future, which could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the value of, our common stock.

Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.

We currently co-invest, and may co-invest in the future, with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In such event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives, and they may have competing interests in our markets that could create conflict of interest issues. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. In addition, prior consent of our joint venture partners may be required for a sale or transfer to a third party of our interests in the joint venture, which would restrict our ability to dispose of our interest in the joint venture. If we become a limited partner or non-managing member in any partnership or limited liability company and such entity takes or expects to take actions that could jeopardize our company’s status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers. Our joint ventures may be subject to debt and, in the current volatile credit market, the refinancing of such debt may require equity capital calls.

We currently hold a 15% interest in a joint venture (the “JV”) that indirectly owns three properties located in Ventura County, California. In addition to the general risks described above with respect to joint ventures, specifically with respect to the JV, at any time that less than two of Messrs. Ziman, Schwimmer and Frankel remain as executive officers with involvement in the day-to-day operations of our company and its subsidiaries, our joint venture partner may have the ability to remove us as a co-manager of the JV, offset against

 

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distributions to which we would otherwise be entitled, and/or force the sale of our 15% interest in the JV to our joint venture partner. Additionally, under the terms of our joint venture agreement with, until the earlier of (i) the sale of the Mission Oaks properties owned indirectly by the JV and (ii) the date upon which the property located at 3233 E. Mission Oaks Boulevard achieves 85% pre-leasing/leasing or occupancy (as applicable) for two consecutive calendar months, prior to purchasing, investing in or acquiring a direct or indirect interest in any debt or equity associated with any property located in Ventura County, California with industrial tenant space (or which is intended to have industrial tenant space) larger than 30,000 square feet and meets certain other investment criteria, we are obligated to offer our joint venture partner the opportunity to invest in such investment opportunity on substantially the same terms and conditions offered to us or our affiliates.

If we fail to implement and maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.

As a new publicly traded company, we will be required to comply with the applicable provisions of the Sarbanes-Oxley Act, which requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting and effective disclosure controls and procedures for making required filings with the SEC. Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed.

The process for designing and implementing an effective system of integrated internal controls is a continuous effort that requires significant resources and devotion of time. As part of the ongoing monitoring of internal controls required of publicly traded companies, we may discover material weaknesses in our internal controls. As a result of weaknesses that may be identified in our internal controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure controls. However, there is no assurance that we will be successful. In addition, as an “emerging growth company,” our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC and the date we are no longer an “emerging growth company,” which may be up to a full five fiscal years following the offering.

Any failure to maintain effective controls or timely effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting obligations, which could affect our ability to remain listed with the NYSE. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the per share trading price of, our common stock.

Our growth depends on external sources of capital that are outside of our control and may not be available to us on commercially reasonable terms or at all.

In order to qualify and maintain our qualification as a REIT, we are required under the Code, among other things, to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our REIT taxable income (determined without regard to the deduction for dividends paid), including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we intend to rely on third-party sources to fund our capital needs. We may not be able to obtain such financing on favorable terms or at all and any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources of capital depends, in part, on:

 

   

general market conditions;

 

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the market’s perception of our growth potential;

 

   

our current debt levels;

 

   

our current and expected future earnings;

 

   

our cash flow and cash distributions; and

 

   

the market price per share of our common stock.

In recent years, the capital markets have been subject to significant disruptions. If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.

We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of:

 

   

the last day of the fiscal year during which our total annual revenue equals or exceeds $1 billion (subject to adjustment for inflation),

 

   

the last day of the fiscal year following the fifth anniversary of this offering,

 

   

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt, or

 

   

the date on which we are deemed to be a “large accelerated filer” under the Exchange Act.

We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our per share trading price may be adversely affected and more volatile.

Risks Related to the Real Estate Industry

Our performance and value are subject to risks associated with real estate assets and the real estate industry.

Our ability to pay expected dividends to our stockholders depends on our ability to generate revenues in excess of expenses, scheduled principal payments on debt and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties. These events include many of the risks set forth above under “—Risks Related to Our Business and Operations,” as well as the following:

 

   

local oversupply or reduction in demand for industrial space;

 

   

adverse changes in financial conditions of buyers, sellers and tenants of properties;

 

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vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants rent abatements, tenant improvements, early termination rights or below-market renewal options, and the need to periodically repair, renovate and re-lease space;

 

   

increased operating costs, including insurance premiums, utilities, real estate taxes and state and local taxes;

 

   

civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes, floods and wildfires, which may result in uninsured or underinsured losses;

 

   

decreases in the underlying value of our real estate;

 

   

changing submarket demographics; and

 

   

changing traffic patterns.

In addition, periods of economic downturn or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of defaults under existing leases, which would adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

The real estate investments made, and to be made, by us are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited. Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the underlying property. We may be unable to realize our investment objectives by sale, other disposition or refinancing at attractive prices within any given period of time or may otherwise be unable to complete any exit strategy. In particular, our ability to dispose of one or more properties within a specific time period is subject to certain limitations imposed by our Tax Matters Agreement, as well as weakness in or even the lack of an established market for a property, changes in the financial condition or prospects of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations or fiscal policies of jurisdictions in which the property is located.

In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to vary our initial portfolio in response to economic or other conditions promptly or on favorable terms, which may adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Declining real estate valuations and impairment charges could materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

We intend to review the carrying value of our properties when circumstances, such as adverse market conditions, indicate a potential impairment may exist. We intend to base our review on an estimate of the future cash flows (excluding interest charges) expected to result from the property’s use and eventual disposition on an undiscounted basis. We intend to 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 may be unable

 

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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.

Impairment losses have a direct impact on our operating results because recording an impairment loss results in an immediate negative adjustment to our operating results. 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 materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

Adverse economic conditions and the dislocation in the credit markets could materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

Ongoing economic conditions have negatively impacted the lending and capital markets, particularly for real estate. The capital markets have witnessed significant adverse conditions in recent years, including a substantial reduction in the availability of, and access to, capital. The risk premium demanded by lenders has increased markedly, as they are demanding greater compensation for risk, and underwriting standards have been tightened. In addition, failures and consolidations of certain financial institutions have decreased the number of potential lenders, resulting in reduced lending sources available to the market. These conditions may limit the amount of indebtedness we are able to obtain and our ability to refinance our indebtedness, and may impede our ability to develop new properties and to replace construction financing with permanent financing, which could result in our having to sell properties at inopportune times and on unfavorable terms. If these conditions continue, our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock could be materially adversely affected.

The lack of availability of debt financing may require us to rely more heavily on additional equity issuances, which may be dilutive to our current stockholders, or on less efficient forms of debt financing. Additionally, the limited amount of financing currently available may reduce the value of our properties and limit our ability to borrow against such properties, which could materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

We face potential material adverse effects on our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock from the bankruptcies or insolvencies of tenants.

Our tenants could file for bankruptcy protection or become insolvent. We cannot assure you that any tenant that files for bankruptcy protection will continue to pay us rent. A bankruptcy filing by or relating to one of our tenants would bar all efforts by us to collect pre-bankruptcy debts from that tenant unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases and could ultimately preclude collection of these sums. 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, we would have only a general unsecured claim for damages. Any unsecured claim we hold may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims, and there are restrictions under bankruptcy laws that limit the amount of the claim we can make if a lease is rejected. As a result, it is likely that we will recover substantially less than the full value of any unsecured claims we hold. This shortfall could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

 

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New rules relating to the accounting of leases could materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

The FASB has proposed accounting rules that may take effect in 2013 and would require companies to capitalize all leases on their balance sheets by recognizing a lessee’s rights and obligations. If the proposal is adopted in its current form, many companies that account for certain leases on an “off balance sheet” basis would be required to account for such leases “on balance sheet.” This could cause our tenants to be in default under certain covenants and cause their credit quality to be viewed more negatively. Since this change would remove many of the differences in the way companies account for owned property and leased property, it could cause companies to favor owning as opposed to leasing properties. If the proposal is adopted in its current form it could cause companies that lease properties to prefer shorter term leases, in an effort to reduce the leasing liability required to be recorded on the balance sheet. The proposal could also make lease renewal options less attractive, as, under certain circumstances, the rules would require a tenant to assume that a renewal right was exercised and accrue a liability relating to the longer lease term.

Acquired properties may be located in new markets where we may face risks associated with investing in an unfamiliar market.

We have acquired, and may continue to acquire, properties in markets that are new to us. For example, our predecessor business acquired properties in Arizona and Illinois as part of an acquisition of a portfolio of properties that included four other properties located in our target markets. When we acquire properties located in new markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures.

We may choose not to distribute the proceeds of any sales of real estate to our stockholders, which may reduce the amount of our cash distributions to stockholders.

We may choose not to distribute any proceeds from the sale of real estate investments to our stockholders. Instead, we may elect to use such proceeds to:

 

   

acquire additional real estate investments;

 

   

repay debt;

 

   

buy out interests of any partners in any joint venture in which we are a party;

 

   

create working capital reserves; or

 

   

make repairs, maintenance, tenant improvements or other capital improvements or expenditures on our other properties.

Any decision to retain or invest the proceeds of any sales, rather than distribute such proceeds to our stockholders may reduce the amount of cash distributions you receive on your common stock.

Uninsured losses relating to real property may adversely affect your returns.

We attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, earthquakes, wildfires, 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

 

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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 revenue in these properties and could potentially remain obligated under any recourse debt associated with the property. Moreover, we, as the general partner of our operating partnership, generally will be liable for all of our operating partnership’s unsatisfied recourse obligations, including any obligations incurred by our operating partnership as the general partner of joint ventures. Any such losses could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock. In addition, we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.

If any of our insurance carriers becomes insolvent, we could be adversely affected.

We carry several different lines of insurance, placed 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 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 could adversely affect our results of operations and cash flows.

Our property taxes could increase due to property tax rate changes or reassessment, which could adversely 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. All of the properties in our initial portfolio that are located in California will be reassessed as a result of our formation transactions, the concurrent private placement and this offering. Therefore, the amount of property taxes we pay in the future may increase substantially from what we have paid in the past. If the property taxes we pay increase, our cash flow would be adversely impacted to the extent that we are not reimbursed by tenants for those taxes, and our ability to pay any expected dividends to our stockholders could be adversely affected.

We could incur significant costs related to government regulation and litigation over environmental matters.

Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under or migrating to or from such property, including costs to investigate, clean up such contamination and liability for harm to natural resources. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required remediation, removal, fines or other costs could exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal, property, or natural resources damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures.

Some of our properties have been or may be impacted by contamination arising from current or prior uses of the property, or adjacent properties, for commercial or industrial purposes. Such contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials.

 

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Contamination is known or suspected to exist at a number of our properties which may result in further investigation, remediation, or deed restrictions. From time to time, we may acquire 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. We usually perform a Phase I environmental site assessment at any property we are considering acquiring. In connection with certain financing transactions our lenders have commissioned independent environmental consultants to conduct Phase I environmental site assessments on certain of the properties in our initial portfolio. However, we have not always received copies of the Phase I environmental site assessment reports commissioned by our lenders and, as such, may not be aware of all potential or existing environmental contamination liabilities at the properties in our initial portfolio. In addition, Phase I environmental site assessments are limited in scope and do not involve sampling of soil, soil vapor, or groundwater, and these assessments may not include or identify all potential environmental liabilities or risks associated with the property. Even where subsurface investigation is performed, it can be very difficult to ascertain the full extent of environmental contamination or the costs that are likely to flow from such contamination. We cannot assure you that the Phase I environmental site assessment or other environmental studies identified all potential environmental liabilities, or that we will not face significant remediation costs or other environmental contamination that makes it difficult to sell any affected properties. Also, we have not always implemented actions recommended by these assessments, and recommended investigation and remediation of known or suspected contamination has not always been performed. As a result, we could potentially incur material liability for these issues, which could adversely impact our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock.

Environmental laws also govern the presence, maintenance and removal of asbestos-containing building materials, or ACBM, and may impose fines and penalties for failure to comply with these requirements. Such laws require that owners or operators of buildings containing ACBM (and employers in such buildings) properly manage and maintain the asbestos, adequately notify or train those who may come into contact with asbestos, and undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. In addition, the presence of ACBM in our properties may expose us to third-party liability (e.g., liability for personal injury associated with exposure to asbestos).

In addition, the properties in our portfolio also are subject to various federal, state and local environmental and health and safety requirements, such as state and local fire requirements. Moreover, some of our tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or our tenants to liability resulting from these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to us. In addition, changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which could in turn have an adverse effect on us.

We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make distributions to you or that such costs or other remedial measures will not have an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell any affected properties.

Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for adverse health effects and costs of remediation.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a

 

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variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury is alleged to have occurred.

We may incur significant costs complying with various federal, state and local laws, regulations and covenants that are applicable to our properties.

The properties in our initial portfolio are subject to various covenants and federal, state and local laws and regulatory requirements, including permitting and licensing requirements. Local regulations, including municipal or local ordinances and zoning restrictions may restrict our use of our properties and may require us to obtain approval from local officials or restrict our use of our properties and may require us to obtain approval from local officials of community standards organizations at any time with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among other things, these restrictions may relate to fire and safety, seismic or hazardous material abatement requirements. There can be no assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future acquisitions or renovations, or that additional regulations will not be adopted that increase such delays or result in additional costs. Our growth strategy may be affected by our ability to obtain permits, licenses and zoning relief. Our failure to obtain such permits, licenses and zoning relief or to comply with applicable laws could have an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

In addition, federal and state laws and regulations, including laws such as the Americans with Disabilities Act, or ADA, and the Fair Housing Amendment Act of 1988, or FHAA, impose further restrictions on our properties and operations. Under the ADA and the FHAA, all public accommodations must meet federal requirements related to access and use by disabled persons. Some of our properties may currently be in non-compliance with the ADA or the FHAA. If one or more of the properties in our initial portfolio is not in compliance with the ADA, the FHAA or any other regulatory requirements, we may be required to incur additional costs to bring the property into compliance, including the removal of access barriers, and we might incur governmental fines or the award of damages to private litigants. In addition, we do not know whether existing requirements will change or whether future requirements will require us to make significant unanticipated expenditures that will adversely impact our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Risks Related to Our Organizational Structure and Our Formation Transactions

Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of holders of common units, which may impede business decisions that could benefit our stockholders.

Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to our company under Maryland law in connection with their management of our company. At the same time, we, as the general partner of our operating partnership, have fiduciary duties and obligations to our operating partnership and its limited partners under Maryland law and the partnership agreement of our operating partnership in connection with the management of our operating partnership. Our fiduciary duties and obligations as the general partner of our operating partnership may come into conflict with the duties of our directors and officers to our company.

Under Maryland law, a general partner of a Maryland limited partnership has fiduciary duties of loyalty and care to the partnership and its partners and must discharge its duties and exercise its rights as general partner

 

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under the partnership agreement or Maryland law consistent with the obligation of good faith and fair dealing. The partnership agreement provides that, in the event of a conflict between the interests of our operating partnership or any partner, on the one hand, and the separate interests of our company or our stockholders, on the other hand, we, in our capacity as the general partner of our operating partnership, may give priority to the separate interests of our company or our stockholders (including with respect to tax consequences to limited partners, assignees or our stockholders), and, in the event of such a conflict, any action or failure to act on our part or on the part of our directors that gives priority to the separate interests of our company or our stockholders that does not result in a violation of the contract rights of the limited partners of our operating partnership under its partnership agreement does not violate the duty of loyalty or any other duty that we, in our capacity as the general partner of our operating partnership, owe to our operating partnership and its partners or violate the obligation of good faith and fair dealing.

Additionally, the partnership agreement provides that we generally will not be liable to our operating partnership or any partner for any action or omission taken in our capacity as general partner, for the debts or liabilities of our operating partnership or for the obligations of the operating partnership under the partnership agreement, except for liability for our fraud, willful misconduct or gross negligence, pursuant to any express indemnity we may give to our operating partnership or in connection with a redemption as described in “Description of the Partnership Agreement of Rexford Industrial Realty, L.P.—Redemption Rights of Qualifying Parties.” Our operating partnership must indemnify us, our directors and officers, officers of our operating partnership and our designees from and against any and all claims that relate to the operations of our operating partnership, unless (1) an act or omission of the person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active and deliberate dishonesty, (2) the person actually received an improper personal benefit in violation or breach of the partnership agreement or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful. Our operating partnership must also pay or reimburse the reasonable expenses of any such person in advance of a final disposition of the proceeding upon its receipt of a written affirmation of the person’s good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification. Our operating partnership is not required to indemnify or advance funds to any person with respect to any action initiated by the person seeking indemnification without our approval (except for any proceeding brought to enforce such person’s right to indemnification under the partnership agreement) or if the person is found to be liable to our operating partnership on any portion of any claim in the action. No reported decision of a Maryland appellate court has interpreted provisions similar to the provisions of the partnership agreement of our operating partnership that modify and reduce our fiduciary duties or obligations as the general partner or reduce or eliminate our liability to our operating partnership and its partners, and we have not obtained an opinion of counsel as to the enforceability of the provisions set forth in the partnership agreement that purport to modify or reduce the fiduciary duties and obligations that would be in effect were it not for the partnership agreement.

Some of our directors and executive officers have outside business interests, including interests in real estate-related businesses, and, therefore, may have conflicts of interest with us.

Certain of our executive officers and directors have outside business interests, including interests in real estate-related businesses, and may own equity securities of public and private real estate companies. Our executive officers’ and directors’ interests in these entities could create a conflict of interest, especially when making determinations regarding our renewal of leases with tenants subject to these leases. Our executive officers’ involvement in other businesses and real estate-related activities could divert their attention from our day-to-day operations, and state law may limit our ability to enforce any non-compete agreements. See “Prospectus Summary—Conflicts of Interests” and “Policies With Respect to Certain Activities—Conflict of Interest Policy.”

 

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We may assume unknown liabilities in connection with our formation transactions.

As part of our formation transactions, we will acquire entities and assets that are subject to existing liabilities, some of which may be unknown or unquantifiable at the time this offering is completed. These liabilities might include liabilities for cleanup or remediation of undisclosed environmental conditions, claims by tenants, vendors or other persons dealing with our predecessor entities (that had not been asserted or threatened prior to this offering), tax liabilities and accrued but unpaid liabilities incurred in the ordinary course of business. While in some instances we may have the right to seek reimbursement against an insurer, any recourse against the prior investors in the Rexford Funds (other than Messrs. Ziman, Schwimmer and Frankel) will be limited. There can be no assurance that we will be entitled to any such reimbursement or that ultimately we will be able to recover in respect of such rights for any of these historical liabilities.

In addition, we have not obtained and do not intend to obtain new or additional title insurance in connection with this offering and the formation transactions, including any so-called date down endorsements or other modifications to our existing title insurance policies. As a result, we may acquire properties from the Rexford Funds with unknown material title defects or developments and our title insurance policies may not provide coverage against such defects or developments or insure for the current aggregate market value of our portfolio. There can be no assurance that our current title insurance policies will adequately protect us against any losses resulting from such title defects or adverse developments.

We have not obtained recent appraisals of the properties and other assets in our initial portfolio, and the consideration paid by us to certain of our officers and directors in our formation transactions was not negotiated at arm’s length and may exceed their fair market value or the value that would be determined by third-party appraisals.

We have not obtained as part of our formation transactions any recent third-party appraisals of our initial properties, nor any independent third-party valuations or fairness opinions regarding the merits of the formation transactions. The amount of consideration to be paid by us to certain of our officers and directors in our formation transactions was based upon management’s estimates of the fair market value of these properties and interests on an aggregate basis. However, the consideration to be paid by us to certain of our officers and directors was not based on arm’s-length negotiations and was not approved by any independent directors. In addition, certain of our executive officers and directors, who had significant influence in structuring the formation transactions, had pre-existing ownership interests in those properties and assets and will receive             common units as a result of the formation transactions. These common units will have an initial value of approximately $52 million, based on the initial public offering price of $14.00 per share (the mid-point of the price range set forth on the front cover of this prospectus), and will represent 12.8% of the outstanding equity interests of our company (on a fully diluted basis) upon completion of this offering, the formation transactions and concurrent private placement. It is possible that the consideration we will pay for the properties and assets may exceed their fair market value and that we could realize less value from these assets than we would have if the assets had been acquired after arms-length negotiation or if we had obtained independent appraisals for these assets. See “Certain Relationships and Related Transactions.”

The agreements relating to our formation transactions will be subject to certain closing and other conditions.

The agreements relating to our formation transactions whereby we will acquire the properties in our initial portfolio will be subject to certain closing and other conditions, including obtaining lender consents with regard to the mergers that are part of the formation transactions and satisfaction of certain deadlines. We may determine to delay the completion of our formation transactions in order to satisfy these conditions precedent.

 

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Our charter and bylaws, the partnership agreement of our operating partnership and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

Our charter contains certain ownership limits with respect to our stock. Our charter authorizes our board of directors to take such actions as it determines are advisable, in its sole and absolute discretion, to preserve our qualification as a REIT. Our charter also prohibits the actual, beneficial or constructive ownership by any person of more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or more than 9.8% in value of the aggregate outstanding shares of all classes and series of our stock, in each case excluding any shares that are not treated as outstanding for federal income tax purposes. Our board of directors, in its sole and absolute discretion, may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. The restrictions on ownership and transfer of our stock may:

 

   

discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interests; or

 

   

result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.

We could increase the number of authorized shares of stock, classify and reclassify unissued stock and issue stock without stockholder approval. Our board of directors, without stockholder approval, has the power under our charter to amend our charter to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue, to authorize us 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 into one or more classes or series of stock and set the terms of such newly classified or reclassified shares. See “Description of Stock—Power to Increase or Decrease Authorized Shares of Common Stock and Issue Additional Shares of Common and Preferred Stock.” As a result, we may issue classes or series of common stock or preferred stock with preferences, powers and rights, voting or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our common stock. Although our board of directors has no such intention at the present time, it could establish a class or 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 that our stockholders otherwise believe to be in their best interest.

Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that could involve a premium price for our common stock or that our stockholders otherwise believe to be in their best interest. Certain provisions of the MGCL, may have the effect of inhibiting 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 certain exceptions, 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 thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose fair price or supermajority stockholder voting requirements on these combinations; and

 

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“control share” provisions that provide that holders of “control shares” of our company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise voting power in the election of directors within one of three increasing ranges) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of the voting power of issued and outstanding “control shares,” subject to certain exceptions) have no voting rights with respect to their control shares, 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.

As permitted by the MGCL, our bylaws provide that we will not be subject to the control share provisions of the MGCL and our board of directors has, by resolution, exempted us from the business combination between us and any other person. However, we cannot assure you that our board of directors will not revise the bylaws or such resolution in order to be subject to such business combination and control share provisions in the future. Notwithstanding the foregoing, an alteration or repeal of the board resolution exempting such business combinations will not have any effect on any business combinations that have been consummated or upon any agreements existing at the time of such modification or repeal.

Certain provisions of the MGCL permit the board of directors of a Maryland corporation with at least three independent directors and a class of stock registered under the Exchange Act without stockholder approval and regardless of what is currently provided in its charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) are not currently applicable to us. These provisions may have the effect of limiting or precluding a third party from making an unsolicited acquisition proposal for our company or of delaying, deferring or preventing a change in control under circumstances that otherwise could provide the holders of shares of our stock with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby it elects, at such time as it becomes eligible to do so (which we expect will be upon the completion of this offering), to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on the board of directors. See “Material Provisions of Maryland Law and of Our Charter and Bylaws—Subtitle 8.”

Certain provisions in the partnership agreement of our operating partnership may delay or prevent unsolicited acquisitions of us. Provisions of the partnership agreement of our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders or limited partners might consider such proposals, if made, desirable. These provisions include, among others:

 

   

redemption rights of qualifying parties;

 

   

a requirement that we may not be removed as the general partner of our operating partnership without our consent;

 

   

transfer restrictions on common units;

 

   

our ability, as general partner, in some cases, to amend the partnership agreement and to cause our operating partnership to issue additional partnership interests with terms that could delay, defer or prevent a merger or other change of control of us or our operating partnership without the consent of our stockholders or the limited partners; and

 

   

the right of the limited partners to consent to certain transfers of our general partnership interest (whether by sale, disposition, statutory merger or consolidation, liquidation or otherwise).

Our charter and bylaws, the partnership agreement of our operating partnership and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a

 

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premium price for our common stock or that our stockholders otherwise believe to be in their best interest. See “Description of the Partnership Agreement of Rexford Industrial Realty, L.P.—Transfers and Withdrawals—Restrictions on Transfers by the General Partner,” “Material Provisions of Maryland Law and of Our Charter and Bylaws—Removal of Directors,” “—Control Share Acquisitions,” “—Advance Notice of Director Nominations and New Business” and “Description of the Partnership Agreement of Rexford Industrial Realty, L.P.”

The Tax Matters Agreement limits our ability to sell or otherwise dispose of certain properties, even though a sale or disposition may otherwise be in our stockholders’ best interest.

In connection with the formation transactions, we will enter into a Tax Matters Agreement with certain limited partners of our operating partnership, including Messrs. Ziman, Schwimmer and Frankel, that provides that if we dispose of any interest with respect to certain properties in our initial portfolio in a taxable transaction during the period from the completion of the offering through the seventh anniversary of such completion, our operating partnership will indemnify such limited partners for their tax liabilities attributable to their share of the built-in gain that exists with respect to such property interest as of the time of this offering and tax liabilities incurred as a result of the indemnification payment; provided that, subject to certain exceptions and limitations, such indemnification rights will terminate for any such protected partner that sells, exchanges or otherwise disposes of more than 50% of his or her common units. We have no present intention to sell or otherwise dispose of these properties or interest therein in taxable transactions during the restriction period. If we were to trigger the tax protection provisions under this agreement, our operating partnership would be required to pay damages in the amount of the taxes owed by these limited partners (plus additional damages in the amount of the taxes incurred as a result of such payment). As a result, although it may otherwise be in our stockholders’ best interest that we sell one of these properties, it may be economically prohibitive for us to do so because of these obligations.

The Tax Matters Agreement may require our operating partnership to maintain certain debt levels that otherwise would not be required to operate our business.

The Tax Matters Agreement will provide that, during the period from the completion of this offering through the period ending on the twelfth anniversary of the completion of this offering, our operating partnership will offer certain limited partners the opportunity to guarantee its debt, and following such period, our operating partnership will use commercially reasonable efforts to provide such limited partners who continue to own at least 50% of the common units they originally received in the formation transactions with debt guarantee opportunities. Our operating partnership will be required to indemnify such limited partners for their tax liabilities resulting from our failure to make such opportunities available to them (plus an additional amount equal to the taxes incurred as a result of such indemnity payment). See “Certain Relationships and Related Transactions—Tax Matters Agreement.” Among other things, this opportunity to guarantee debt is intended to allow the participating limited partners to defer the recognition of gain in connection with the formation transactions. These obligations may require us to maintain more or different indebtedness than we would otherwise require for our business.

We may choose not to enforce, or to pursue less vigorous enforcement of, our rights under the contribution and/or merger and other agreements with members of our senior management and our affiliates because of our dependence on them and conflicts of interest.

Each of Richard Ziman, Howard Schwimmer and Michael S. Frankel, are parties to or have interests in contribution and/or merger agreements with us pursuant to which we have acquired or will acquire interests in our properties and assets. None of these merger or contribution agreements was negotiated on an arm’s length basis and Messrs. Ziman, Schwimmer and Frankel faced conflicts in negotiating these agreements, including the amount of consideration to be received by them in connection with our formation transactions. In addition, certain of our executive officers may become parties to employment agreements with us, and Messrs. Ziman, Schwimmer and Frankel have entered into a representation, warranty and indemnity agreement with us pursuant to which they made certain representations and warranties to us regarding the entities and assets being acquired

 

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in the formation transactions and agreed to indemnify us and our operating partnership, subject to certain conditions, in an amount equal to up to ten percent of the consideration payable to Messrs. Ziman, Schwimmer and Frankel in the formation transaction for breaches of such representations and warranties for one year after the completion of this offering, the formation transactions and the concurrent private placement. We may choose not to enforce, or to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationships with members of our senior management and their affiliates, with possible negative impact on stockholders.

Our board of directors may change our investment and financing policies without stockholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

Our investment and financing policies are exclusively determined by our board of directors. Accordingly, our stockholders do not control these policies. Further, our charter and bylaws do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Our board of directors may alter or eliminate our current policy on borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged which could result in an increase in our debt service. Higher leverage also increases the risk of default on our obligations. In addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations and liquidity risk. Changes to our policies with regards to the foregoing could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

As permitted by Maryland law, our charter eliminates 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

 

   

active and deliberate dishonesty by the director or officer that was established by a final judgment and was material to the cause of action adjudicated.

In addition, our charter authorizes us to obligate our company, and our bylaws require us, to indemnify our directors and officers for actions taken by them in those and certain other capacities to the maximum extent permitted by Maryland law in effect from time to time. Generally, Maryland law permits a Maryland corporation to indemnify its present and former directors and officers except in instances where the person seeking indemnification acted in bad faith or with active and deliberate dishonesty, actually received an improper personal benefit in money, property or services or, in the case of a criminal proceeding, had reasonable cause to believe that his or her actions were unlawful. Under Maryland law, a Maryland corporation also may not indemnify a director or officer in a suit by or on behalf of the corporation in which the director or officer was adjudged liable to the corporation or for a judgment of liability on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct; however, indemnification for an adverse judgment in a suit by us or on our behalf, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses. 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. See “Material Provisions of Maryland Law and of Our Charter and Bylaws—Indemnification and Limitation of Directors’ and Officers’ Liability.”

 

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We are a holding company with no direct operations and, as such, we will rely on funds received from our operating partnership to pay liabilities, and the interests of our stockholders will be structurally subordinated to all liabilities and obligations of our operating partnership and its subsidiaries.

We are a holding company and will conduct substantially all of our operations through our operating partnership. We do not have, apart from an interest in our operating partnership, any independent operations. As a result, we will rely on distributions from our operating partnership to pay any dividends we might declare on shares of our common stock. We will also rely on distributions from our operating partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from our operating partnership. In addition, because we are a holding company, your claims as stockholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be available to satisfy the claims of our stockholders only after all of our and our operating partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

Our operating partnership may issue additional common units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our operating partnership and would have a dilutive effect on the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders.

After giving effect to this offering, we will own 86.8% of the outstanding common units and we may, in connection with our acquisition of properties or otherwise, cause our operating partnership to issue additional common units to third parties. Such issuances would reduce our ownership percentage in our operating partnership and affect the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders. Because you will not directly own common units, you will not have any voting rights with respect to any such issuances or other partnership level activities of our operating partnership.

Risks Related to Our Status as a REIT

Failure to qualify or maintain our qualification as a REIT would have significant adverse consequences to us and the per share trading price of our common stock.

We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes commencing with our taxable year ending December 31, 2013. We have not requested and do not plan to request a ruling from the Internal Revenue Service, or IRS, that we qualify as a REIT, and the statements in this prospectus are not binding on the IRS or any court. Therefore, we cannot assure you that we will qualify as a REIT, or that we will remain qualified as such in the future. If we lose our REIT qualification, we will face serious tax consequences that would substantially reduce the funds available for distribution to you for each of the years involved because:

 

   

we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

   

we also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

   

unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

Any such corporate tax liability could be substantial and would reduce our cash available for, among other things, our operations and distributions to stockholders. In addition, if we fail to qualify as a REIT, we will

 

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not be required to make distributions to our stockholders. As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could materially and adversely affect the per share trading price of our common stock.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code, or the Treasury Regulations, is greater in the case of a REIT that, like us, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. In order to qualify as a REIT, we must satisfy a number of requirements, including requirements regarding the ownership of our stock, requirements regarding the composition of our assets and a requirement that at least 95% of our gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially adversely affect our investors, our ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.

Even if we qualify as a REIT for federal income tax purposes, we may be subject to some federal, state and local income, property and excise taxes on our income or property and, in certain cases, a 100% penalty tax, in the event we sell property as a dealer. In addition, our taxable REIT subsidiary will be subject to tax as a regular corporation in the jurisdictions it operates.

If our operating partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

We believe that our operating partnership will be treated as a partnership for federal income tax purposes. As a partnership, our operating partnership will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of our operating partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of our operating partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership or any such other subsidiary partnership as an entity taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

Our taxable REIT subsidiaries will be subject to federal income tax, and we will be required to pay a 100% penalty tax on certain income or deductions if our transactions with our taxable REIT subsidiaries are not conducted on arm’s length terms.

We will own an interest in one or more taxable REIT subsidiaries, and may acquire securities in additional taxable REIT subsidiaries in the future. A taxable REIT subsidiary is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a taxable REIT subsidiary. If a taxable REIT subsidiary owns more than 35% of the total voting power or value of the outstanding securities of another corporation, such other corporation will also be treated as a taxable REIT subsidiary. Other than some activities relating to lodging and health care facilities, a taxable REIT subsidiary may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A taxable REIT subsidiary is subject to federal income tax as a regular C corporation. In addition, a 100% excise tax will be imposed on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s length basis.

 

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To maintain our REIT qualification, we may be forced to borrow funds during unfavorable market conditions.

To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each year, determined without regard to the dividends paid deduction and excluding net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less than 100% of our REIT taxable income (determined without regard to the deduction for dividends paid) each year. 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. Accordingly, we may not be able to retain sufficient cash flow from operations to meet our debt service requirements and repay our debt. Therefore, we may need to raise additional capital for these purposes, and we cannot assure you that a sufficient amount of capital will be available to us on favorable terms, or at all, when needed, which would materially adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the per share trading price of, our common stock. Further, in order to maintain our REIT qualification and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from, among other things, differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments. These sources, however, may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt levels, the per share trading price of our common stock, and our current and potential future earnings. We cannot assure you that we will have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment activities and/or to dispose of assets at inopportune times, and could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. Although these rules do not adversely affect the taxation of REITs or dividends payable by REITs, investors who are individuals, trusts and estates may 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 shares of REITs, including the per share trading price of our common stock.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

Complying with REIT requirements may affect our profitability and may force us to liquidate or forgo otherwise attractive investments.

To qualify as a REIT, we must continually satisfy tests concerning, among other things, the nature and diversification of our assets, the sources of our income and the amounts we distribute to our stockholders. We may be required to liquidate or forgo otherwise attractive investments in order to satisfy the asset and income tests or to qualify under certain statutory relief provisions. We also may be required to make distributions to

 

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stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, having to comply with the distribution requirement could cause us to: (1) sell assets in adverse market conditions; (2) borrow on unfavorable terms; or (3) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt. Accordingly, satisfying the REIT requirements could have an adverse effect on our business results, profitability and ability to execute our business plan. Moreover, if we are compelled to liquidate our investments to meet any of these asset, income or distribution tests, or to repay obligations to our lenders, we may be unable to comply with one or more of the requirements applicable to REITs or may be subject to a 100% tax on any resulting gain if such sales constitute prohibited transactions.

Legislative or other actions affecting REITs could have a negative effect on us.

The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

Risks Related to this Offering

There has been no public market for our common stock prior to this offering and an active trading market for our common stock may not develop following this offering.

Prior to this offering, there has not been any public market for our common stock, and there can be no assurance that an active trading market will develop or be sustained or that shares of our common stock will be resold at or above the initial public offering price. We have applied to have our common stock listed on the NYSE under the symbol “REXR.” The initial public offering price of our common stock will be determined by agreement among us and the underwriters, but there can be no assurance that our common stock will not trade below the initial public offering price following the completion of this offering. See “Underwriting.” The per share trading price of our common stock could be substantially affected by general market conditions, including the extent to which a secondary market develops for our common stock following the completion of this offering, the extent of institutional investor interest in us, the general reputation of REITs and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate-based companies), our financial performance and general stock and bond market conditions.

We may be unable to make distributions at expected levels, and we may be required to borrow funds to make distributions.

Our estimated initial annual distributions represent 82.0% of our estimated initial cash available for distribution for the 12 months ending March 31, 2014 as calculated in “Distribution Policy.” Accordingly, we may be unable to pay our estimated initial annual distribution to stockholders out of cash available for distribution. If sufficient cash is not available for distribution from our operations, we may have to fund distributions from working capital, borrow to provide funds for such distributions, or reduce the amount of such distributions. If cash available for distribution generated by our assets is less than our current estimate, or if such cash available for distribution decreases in future periods from expected levels, our inability to make the expected distributions could result in a decrease in the market price of our common stock. In the event the underwriters’ over-allotment option is exercised, pending investment of the proceeds therefrom, our ability to pay such distributions out of cash from our operations may be further materially adversely affected.

Our ability to make distributions may also be limited by our proposed revolving credit facility. Under the anticipated terms of our proposed revolving credit facility, our distributions may not exceed the greater of (i) 95.0% of our FFO or (ii) the amount required for us to qualify and maintain our status as a REIT and avoid the

 

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payment of federal or state income or excise tax. Additionally, if a default or event of default occurs and is continuing, we may be precluded from making certain distributions (other than those required to allow us to qualify and maintain our status as a REIT).

All distributions will be made at the discretion of our board of directors and will be based upon, among other factors, our earnings and financial condition, maintenance of REIT qualification, the applicable restrictions contained in the MGCL and such other factors as our board may determine in its sole discretion. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in its shares, and thereafter as gain on a sale or exchange of such shares. See “U.S. Federal Income Tax Considerations—U.S. Federal Income Tax Considerations for Holders of Our Common Stock.” If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

Messrs. Ziman, Schwimmer and Frankel will receive benefits in connection with this offering, which create a conflict of interest because they have interests in the successful completion of this offering that may influence their decisions affecting the terms and circumstances under which the offering and formation transactions are completed.

In connection with our formation transactions, the concurrent private placement and this offering, Messrs. Ziman, Schwimmer and Frankel will own approximately 929,651 shares of our common stock and 2,167,259 common units, representing a 10.7% beneficial interest in our company on a fully diluted basis. These transactions create a conflict of interest because Messrs. Ziman, Schwimmer and Frankel have interests in the successful completion of this offering. These interests may influence their decisions, affecting the terms and circumstances under which our formation transactions and this offering are completed. In addition, we expect that, in connection with this offering, Messrs. Ziman, Schwimmer and Frankel will enter into employment agreements that provide for compensation and benefits and will receive certain compensatory equity grants that may further influence such decisions. For more information concerning benefits to be received by Messrs. Ziman, Schwimmer and Frankel in connection with this offering, see “Structure and Formation of Our Company—Benefits of the Formation Transactions to Related Parties,” “Certain Relationships and Related Transactions” and “Executive Compensation.”

The market price and trading volume of our common stock may be volatile following this offering.

Even if an active trading market develops for our common stock, the per share trading 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 per share trading price of our common stock declines significantly, you may be unable to resell your shares at or above the initial public offering price. We cannot assure you that the per share trading 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:

 

   

actual or anticipated variations in our quarterly operating results or dividends;

 

   

changes in our funds from operations or earnings estimates;

 

   

publication of research reports about us or the real estate industry;

 

   

increases in market interest rates that lead purchasers of our shares to demand a higher yield;

 

   

changes in market valuations of similar companies;

 

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adverse market reaction to any additional debt we incur in the future;

 

   

additions or departures of key management personnel;

 

   

actions by institutional stockholders;

 

   

speculation in the press or investment community;

 

   

the realization of any of the other risk factors presented in this prospectus;

 

   

the extent of investor interest in our securities;

 

   

the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;

 

   

our underlying asset value;

 

   

investor confidence in the stock and bond markets, generally;

 

   

changes in tax laws;

 

   

future equity issuances;

 

   

failure to meet earnings estimates;

 

   

failure to qualify and maintain our qualification as a REIT;

 

   

changes in our credit ratings; and

 

   

general market and economic conditions.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which could have an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

Differences between the book value of the assets to be acquired in the formation transactions and the price paid for our common stock will result in an immediate and material dilution of the book value of our common stock.

As of March 31, 2013, the aggregate historical combined net tangible book value of the interests and assets to be transferred to our operating partnership was approximately $84.9 million, or $9.79 per share of our common stock held by the prior investors, assuming the exchange of common units into shares of our common stock on a one-for-one basis. As a result, the pro forma net tangible book value per share of our common stock after the completion of our formation transactions and this offering will be less than the initial public offering price. The purchasers of shares of our common stock offered hereby will experience immediate and substantial dilution of $3.71 per share in the pro forma net tangible book value per share of our common stock.

Market interest rates may have an effect on the per share trading price of our common stock.

One of the factors that will influence the price of our common stock will be the dividend yield on the common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in

 

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market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a higher dividend yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decrease.

The number of shares of our common stock available for future issuance or sale could adversely affect the per share trading price of our common stock.

We are offering 16,000,000 shares of our common stock as described in this prospectus. Upon completion of this offering, the formation transactions and the concurrent private placement, we will have outstanding approximately 25,239,339 shares of our common stock. Of these shares, the 16,000,000 shares sold in this offering will be freely tradable, except for any shares purchased in this offering by our affiliates, as that term is defined by Rule 144 under the Securities Act. Upon completion of this offering, our directors and management and their affiliates, together with third party prior investors in the Rexford Funds, will beneficially own 12,953,758 shares of our common stock. In connection with this offering, we have entered into a lock-up agreement that prevents us from offering additional common stock until 180 days after the date of this prospectus, as described in “Underwriting.” Our executive officers, directors and participants in the formation transactions and the concurrent private placement may sell the shares of our common stock that they acquire in the formation transactions and the concurrent private placement or are granted in connection with the offering at any time following the expiration of the lock-up period for such shares, which expires 360 days after the completion of this offering for our executive officers and directors and 180 days for the other participants in the formation transactions and the concurrent private placement, or earlier with the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and FBR Capital Markets & Co. These lock-up provisions, at any time and without notice, may be waived by Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and FBR Capital Markets & Co. If the restrictions under the lock-up agreements are waived, our common stock may become available for resale into the market, subject to applicable law, which could reduce the per share trading price for our common stock.

We cannot predict whether future issuances or sales of shares of our common stock or the availability of shares for resale in the open market will decrease the per share trading price per share of our common stock. The per share trading price of our common stock may decline significantly when the restrictions on resale by certain of our stockholders lapse or upon the registration of additional shares of our common stock pursuant to registration rights granted in connection with the formation transactions and the concurrent private placement.

The issuance of substantial numbers of shares of our common stock in the public market, or upon exchange of common units, or the perception that such issuances might occur could adversely affect the per share trading price of the shares of our common stock.

The exercise of the underwriters’ over-allotment option, the exchange of common units for common stock or the vesting of any stock awards granted to certain directors, executive officers and other employees under our 2013 Incentive Award Plan, the issuance of our common stock or common units in connection with future property, portfolio or business acquisitions and other issuances of our common stock could have an adverse effect on the per share trading price of our common stock, and the authorization of grants of awards covering common units or shares of our common stock under our 2013 Incentive Award Plan, may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. In addition, future issuances of shares of our common stock may be dilutive to existing stockholders.

Future offerings of debt securities, which would be senior to our common stock upon liquidation, and/or preferred equity securities which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the per share trading price of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities (or causing our operating partnership to issue debt or equity securities), including medium-term

 

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notes, senior or subordinated notes and classes or series of preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners 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, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability pay dividends 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.

Future sales of shares of our common stock by insiders may depress the per share trading price of our common stock.

Any sales of a substantial number of shares of our common stock, or the perception that those sales might occur, may cause the per share trading price of the common stock to decline. Based on the mid-point of the price range set forth on the cover page of this prospectus, after this offering and the expiration of any applicable transfer restrictions imposed in connection with this offering and our partnership agreement, our directors and our executive officers will have the ability to sell approximately 10.8% of our common stock on a fully diluted basis. Although our directors and executive officers have agreed not to sell the common stock they hold for 360 days after this offering, they may sell a significant number of shares after that time, which could depress the per share trading price of our common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make statements in this prospectus that are forward-looking statements, which are usually identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:

 

   

the factors included in this prospectus, including those set forth under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business”;

 

   

the competitive environment in which we operate;

 

   

real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;

 

   

decreased rental rates or increasing vacancy rates;

 

   

potential defaults on or non-renewal of leases by tenants;

 

   

potential bankruptcy or insolvency of tenants;

 

   

acquisition risks, including failure of such acquisitions to perform in accordance with projections;

 

   

the timing of acquisitions and dispositions;

 

   

potential natural disasters such as earthquakes, wildfires or floods;

 

   

national, international, regional and local economic conditions;

 

   

the general level of interest rates;

 

   

potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or REIT tax laws, and potential increases in real property tax rates;

 

   

financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;

 

   

lack of or insufficient amounts of insurance;

 

   

our ability to qualify and maintain our qualification as a REIT;

 

   

litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and

 

   

possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us.

 

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Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Market data and industry forecasts and projections used in this prospectus have been obtained from DAUM or other independent industry sources. Forecasts, projections and other forward-looking information obtained from DAUM or other sources are subject to similar qualifications and uncertainties as other forward-looking statements in this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of shares of our common stock in this offering will be approximately $201.8 million (or approximately $233.1 million if the underwriters exercise their over-allotment option in full), in each case assuming an initial public offering price of $14.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus, and after deducting underwriting discounts and commissions of approximately $15.7 million (or approximately $18.0 million if the underwriters exercise their over-allotment option in full) and estimated offering expenses of approximately $7.5 million (including $1.0 million which has been prepaid) payable by us. In addition, concurrently with the completion of this offering, we will issue 3,358,311 shares of our common stock to accredited investors in the Rexford Funds and certain members of the Rexford management team pursuant to the concurrent private placement. In addition, we estimate the incremental net proceeds from the concurrent private placement will be approximately $47.0 million, resulting in total net proceeds of $248.8 million.

We will contribute the net proceeds we receive from this offering and the concurrent private placement to our operating partnership in exchange for common units in our operating partnership.

We expect our operating partnership will use the net proceeds, together with the proceeds from our new $60 million term loan, borrowings under our proposed revolving credit facility and contributions to our operating partnership of approximately $2.0 million of cash working capital in connection with the formation transactions, as described below:

 

   

approximately $76.4 million (including principal and related accrued interest) to repay mortgage debt secured by certain of the properties we will acquire in our formation transactions, which bears interest at a weighted average rate of 3.7% per annum and has a weighted average remaining years to maturity of 1.3 years;

 

   

approximately $46.3 million (including principal and related accrued interest) to repay a loan to Fund I that is secured by certain of the properties we will acquire in our formation transactions, which bears interest at a weighted average rate of 5.3% per annum. The $46.3 million loan is scheduled to mature on May 31, 2014;

 

   

approximately $40.0 million (including principal and related accrued interest) to repay a loan to Fund II that is secured by certain of the properties we will acquire in our formation transactions, which bears interest at a fixed rate of 6% and is scheduled to mature on October 1, 2013;

 

   

approximately $74.4 million (including principal and related accrued interest) to repay both tranches of a loan to Fund III that are secured by certain of the properties we will acquire in our formation transactions. These tranches bear interest at a fixed rate of 5.6% and 12.0% per annum. Both tranches of this loan are scheduled to mature on August 31, 2014;

 

   

approximately $64.5 million (including principal and related accrued interest) to repay a loan to Fund IV that is secured by certain of the properties we will acquire in our formation transactions, which bears interest at a fixed rate of 6% and is scheduled to mature on October 1, 2013;

 

   

approximately $2.8 million to pay prepayment costs, exit fees, unpaid expenses or fees and assumption fees in connection with the retirement of indebtedness and the attainment of lender consents on existing indebtedness;

 

   

approximately $1.5 million in fees associated with the proposed revolving credit facility and the new term loan;

 

   

approximately $0.6 million to pay transfer taxes and fees associated with the contribution of properties to us;

 

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approximately $0.7 million to pay non-accredited investors in connection with the formation transactions;

 

   

approximately $6.5 million to fund the excess working capital distribution; and

 

   

the remaining amounts to acquire and manage industrial properties and for general corporate purposes.

Prior to the full deployment of the net proceeds as described above, we intend to invest the undeployed net proceeds in interest-bearing short-term investment grade securities or money-market accounts that are consistent with our intention to qualify as a REIT, including, for example, government and government agency certificates, certificates of deposit and interest-bearing bank deposits. We expect that these initial investments will provide a lower net return than we expect to receive from investments in industrial properties.

If the underwriters exercise their over-allotment option in full, we expect to use the additional approximately $31.2 million of net proceeds for general corporate purposes, including acquisitions of real estate assets.

The debt repayment described above is an estimate based on principal and related accrued interest outstanding as of March 31, 2013. The actual amounts of the debt repayments will depend on the principal and related accrued interest outstanding at the time of payment and may be greater than or less than our estimates above.

 

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DISTRIBUTION POLICY

We are a newly formed company that has not commenced operations, and as a result, we have not paid any distributions as of the date of this prospectus. U.S. federal income tax laws generally require that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax, we intend to make quarterly distributions of all or substantially all of our REIT taxable income, determined without regard to the deduction for dividends paid, to holders of our common stock out of assets legally available therefor. We intend to pay a pro rata initial distribution with respect to the period commencing on the completion of this offering and ending at the last day of the then-current fiscal quarter, based on a distribution of $0.123 per share for a full quarter. On an annualized basis, this would be $0.49 per share, or an annual distribution rate of approximately 3.5% based on the mid-point of the price range set forth on the front cover of this prospectus. We estimate this initial annual distribution rate will represent approximately 82.0% of estimated cash available for distribution to our common stockholders for the 12 months ending March 31, 2014. We intend to maintain our initial distribution rate for the 12-month period following completion of this offering unless our actual results of operations, economic conditions or other factors differ materially from the assumptions used in our estimate. These distributions and any future distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, maintenance of REIT qualification, the applicable restrictions contained in the MGCL and such other factors as our board may determine in its sole discretion. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs. However, under some circumstances, we may be required to pay distributions in excess of cash available for distribution in order to meet these distribution requirements and may need to use the proceeds from future equity and debt offerings, sell assets or borrow funds to make some distributions. We have no intention to use the net proceeds of this offering to make distributions nor do we intend to make distributions using shares of common stock.

We do not intend this estimate to be a projection or forecast of our actual results of operations or our liquidity, and have estimated cash available for distribution for the sole purpose of determining the amount of our initial annual distribution rate. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to pay dividends or make other distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for determining future dividends or other distributions. We cannot assure you that our distribution policy will not change in the future.

 

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The following table describes our pro forma net income (loss) before non-controlling interest for the year ended December 31, 2012, and the adjustments we have made thereto in order to estimate our initial cash available for distribution to the holders or our common stock for the 12 months ending March 31, 2014 (dollars in thousands, except per share data). The table reflects our condensed consolidated information, including common units in our operating partnership.

 

Pro forma net loss before non-controlling interest for the 12 months ended December 31, 2012

   $ (1,192

Less: pro forma net loss before non-controlling interest for the three months ended March 31, 2012

     2,922   

Add: pro forma net loss before non-controlling interest for the three months ended March 31, 2013

     (2,026
  

 

 

 

Pro forma net income (loss) before non-controlling interest for the 12 months ended March 31, 2013

   $ (296

Add: Pro forma real estate depreciation and amortization

     18,222   

Add: Amortization of deferred financing costs(1)

     514   

Less: Net effects of straight-line rents and amortization of acquired above/below market lease intangibles

     (471

Add: Equity in earnings of unconsolidated real estate entities

     45   

Less: Note Receivable discount amortization.

     (123

Less: Note Payable premium amortization

     (45

Add: Non-cash compensation expense

     3,234   

Add: Net increases in contractual rent income and related revenue(2)

     1,344   

Less: Net decreases in contractual rental and related revenue due to lease expirations, assuming renewals consistent with 2011, 2012 and Q1’13 historical data(3)

     (1,965
  

 

 

 

Estimated cash flows provided by operations for the 12 months ending December 31, 2014

   $ 20,545   

Estimated cash flows used in investing activities

  

Less: Provision for tenant improvements and leasing commissions(4)

     (2,830

Less: Estimated annual provision for recurring capital expenditures(5)

     (273
  

 

 

 

Total estimated cash flows used in investing activities

   $ (3,103

Estimated cash flows used in financing activities—scheduled debt principal payments(6)

     (121
  

 

 

 

Estimated cash available for distribution for the 12 months ending December 31, 2014

   $ 17,321   
  

 

 

 

Estimated distribution to non-controlling interests

     1,820   

Estimated distribution to common shareholders(7)

     12,367   

Total estimated distribution to common stock and common unit holders

   $ 14,187   

Estimated distribution per share and unit(8)

   $ 0.49   

Payout ratio based on estimated cash available for distribution to our holders of common stock(9)

     82

 

(1) Represents one year of amortization of deferred financing costs associated with our new term loan, our debt on Glendale Commerce Center and our debt on 10700 Jersey Blvd.
(2) Represents the sum of (i) rent income from contractual rent increases and renewals of $826,464, less (ii) rent abatements of $980,117 associated with in-place leases, plus (iii) contractual rent income from uncommenced leases of $2,185,979, less (iv) net of rent abatements totaling $688,799 associated with uncommenced leases, all for the period from April 1, 2013 through March 31, 2014. On an annualized basis, contractual rent income from uncommenced leases equals $4,813,779 less rent abatements equal to $727,840.
(3) Represents estimated net decreases in contractual rent revenue during the 12 months ending March 31, 2014 due to lease expirations, assuming a renewal rate of 63.21% based on expiring square feet, which was our full year 2011 and 2012 combined with the first quarter of 2013 renewal rate, and rental rates on renewed leases equal to the in-place rates for such leases at expiration. This adjustment gives effect only to expirations net of estimated renewals, and does not take into account new leasing. During 2011, 2012 and the first quarter of 2013, we leased approximately 3.7 million square feet, representing approximately $31.0 million of annualized base rents. Of these amounts, approximately 1.8 million square feet related to renewals, representing approximately $16.4 million of annualized base rents, and approximately 1.8 million square feet related to new leases, representing approximately $14.6 million of annualized base rents.

 

                    Gross Leasing Activity  
     Expiring Leases      Renewals      Renewal Retention %     New Leases  
     Number of
leases
     Rentable
square feet
     Number of
leases
     Rentable
square feet
     Number of
leases
    Rentable
square feet
    Number of
leases
     Rentable
square feet
 

Q1-2013

     93         425,011         59         337,887         63.44     79.50     38         283,507   

Q4-2012

     69         291,409         49         231,655         71.01     79.49     37         201,942   

Q3-2012

     88         367,803         55         228,677         62.50     62.17     44         316,567   

Q2-2012

     91         600,994         60         447,337         65.93     74.43     50         183,158   

Q1-2012

     48         304,793         30         148,889         62.50     48.85     41         132,087   

Q4-2011

     40         289,516         21         121,930         52.50     42.12     22         136,209   

Q3-2011

     29         79,106         18         44,881         62.07     56.74     22         147,636   

Q2-2011

     39         401,583         15         154,907         38.46     38.57     22         253,185   

Q1-2011

     31         126,238         22         108,258         70.97     85.76     33         172,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

     528         2,886,453         329         1,824,421         63.21     63.21     309         1,826,339   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(4)

Provision for tenant improvements and leasing commissions includes (i) any contractually committed tenant improvement or leasing commission costs to be paid or incurred in the 12 months ending March 31, 2014 related to any new leases or lease renewals entered into as of March 31, 2013 and (ii) an estimate of tenant improvements and leasing commissions for the estimated lease renewals described in footnote (3) above based on tenant improvements and leasing commissions for renewal leases across our portfolio in the years ended December 31, 2011 and 2012 and the three

 

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  months ended March 31, 2013. During the 12 months ending March 31, 2014, we expect to have additional tenant improvement and leasing commission expenditures related to new leasing that occurs after March 31, 2014. Any increases in such expenditures would be directly related to such new leasing in that such expenditures would only be committed to when a new lease is signed. Except for the estimate of tenant improvements and leasing commissions for the estimated lease renewals described in footnote (3) above, increases in expenditures for tenant improvements and leasing commissions for new and renewal leases are not included herein.

 

     Three
Months
Ended
March 31,
     Year Ended December 31,      Weighted Average
January 1, 2011—

March 31, 2013
 
     2013          2012              2011             

Tenant Improvements

           

Renewal leases

   $ 14,000       $ 525,000       $ 2,000      

Total square feet

     25,390         208,841         32,465      

Tenant improvements per square foot

   $ 0.55       $ 2.51       $ 0.06       $ 2.03   

Leasing Commissions

           

Renewal leases

   $ 50,000       $ 514,000       $ 201,000      

Total square feet

     66,200         352,484         218,778      

Leasing commissions per square foot

   $ 0.76       $ 1.46       $ 0.92       $ 1.20   

 

(5) Estimated annual provision for recurring capital expenditures is based on $0.05 per leasable square foot of such expenditures for our consolidated portfolio. This estimate is based on the average per square foot recurring capital expenditures, for the years ended December 31, 2010, 2011 and 2012 and the three months ended March 31, 2013, multiplied by the square footage of our initial portfolio. Recurring capital expenditures is defined as expenditures made in respect of a property for maintenance of such property and replacement of items due to ordinary wear and tear including, but not limited to, expenditures made for maintenance or replacement of parking lot, roofing materials, mechanical systems, HVAC systems and other structural systems. Recurring capital expenditures shall not include any of the following: (a) improvements to the appearance of such property or any other major upgrade or renovation of such property not necessary for proper maintenance or marketability of such property; (b) capital expenditures for seismic upgrades; or (c) capital expenditures for deferred maintenance for such property existing at the time such property was acquired.

 

     Three
Months
Ended
March 31,
     Year Ended December 31,      Weighted Average
January 1, 2010—
March 31, 2013
 
     2013      2012      2011      2010         

Recurring capital expenditures

   $ 72,000       $ 367,000       $ 225,000       $ 240,228      

Total square feet

     5,014,382         5,093,752         4,562,842         3,993,092      

Recurring capital expenditures per square foot

   $ 0.01       $ 0.07       $ 0.05       $ 0.06       $ 0.05   

 

(6) Represents all scheduled debt repayments for the 12 months ending March 31, 2014, including both amortization and other principal repayments, excluding $301.6 million of debt that we intend to repay with net proceeds of this offering and the new term loan that we expect to have in place at the completion of this offering.
(7) Our estimated cash available for distribution and estimated cash distribution to our stockholders is based on an estimated ownership by us of approximately 86.8% partnership interest in our operating partnership.
(8) Estimated distribution per share for the 12 months ending March 31, 2014 is based on 25,239,339 shares outstanding following the completion of this offering and the concurrent private placement and estimated distribution per common unit for the 12 months ending March 31, 2014 is based on 3,714,419 common units outstanding following the completion of this offering (excluding common units held by our company).
(9) Calculated as estimated initial annual distribution per share divided by estimated cash available for distribution to common stockholders for the 12 months ending March 31, 2014.

 

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CAPITALIZATION

The following table sets forth as of March 31, 2013:

 

   

the actual capitalization of Rexford Industrial Realty, Inc. Predecessor; and

 

   

our pro forma capitalization, which gives effect to the completion of the formation transactions and the sale of 16,000,000 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share (the mid-point of the offering price range on the cover of this prospectus), net of the underwriting discounts and estimated organizational and offering expenses payable by us, the sale of 3,358,311 shares of common stock in the concurrent private placement at an assumed offering price of $14.00 per share (the mid-point of the offering price range on the cover of this prospectus), without payment of the underwriting discounts, and the grant of awards covering 923,929 shares of our common stock to our executive officers, certain employees and independent directors.

This table should be read in conjunction with “Use of Proceeds,” “Selected Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Rexford Industrial Realty, Inc. Predecessor’s historical audited financial statements and the unaudited pro forma financial information and related notes appearing elsewhere in this prospectus.

 

    

As of March 31, 2013

 
    

Rexford
Industrial
Realty, Inc.
Predecessor
Historical
($ in thousands)

    

Company

Pro  Forma(1)(2)(3)
($ in thousands)

 

Notes payable(4)

   $ 313,118       $ 129,290   

Equity

     94,907         —     

Stockholders’ equity:

     

Preferred stock, $0.01 par value per share, no shares authorized, issued and outstanding, actual, 10,000,000 shares authorized, no shares issued and outstanding, as adjusted

     —           —     

Common stock, $0.01 par value per share; 100,000 shares authorized, 100 shares issued and outstanding, actual and 490,000,000 shares authorized, 24,315,410 shares issued and outstanding, as adjusted

     —           243   

Additional paid-in capital

     —           275,798   

Non-controlling interest in our operating partnership

     —           42,168   
  

 

 

    

 

 

 

Total equity

     94,907         318,209   
  

 

 

    

 

 

 

Total capitalization

   $ 408,025       $ 447,499   
  

 

 

    

 

 

 

 

(1) Assumes 16,000,000 shares of common stock will be sold in this offering at an initial public offering price of $14.00 per share for net proceeds of approximately $201.8 million after deducting the underwriting discounts and estimated organizational and offering expenses of approximately $7.5 million (including $1.0 million which has been prepaid), and 3,358,311 shares of common stock will be issued in the concurrent private placement. See “Use of Proceeds.”
(2) Does not include exercise of the underwriters’ option to purchase up to 2,400,000 additional shares of common stock.
(3)

The common stock outstanding as adjusted includes (i) 4,957,099 shares of common stock issued to prior investors in the Rexford Funds and the management companies in connection with the formation transactions and (ii) 3,358,311 shares of common stock issued in the concurrent private placement. The common stock outstanding as adjusted does not include (i) shares issuable upon the exchange of

 

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  3,714,419 common units in our operating partnership to be issued to prior investors in the Rexford Funds or the management companies in connection with the formation transactions, which are redeemable at the option of the holder beginning 14 months after the later of the completion of this offering or the date on which a person first became a holder of common units and exchangeable, under certain circumstances and at our election, into an equal number of shares of our common stock, subject to certain adjustments and the restrictions on ownership and transfer of our stock set forth in our charter, (ii) 698,215 shares of our common stock to be granted to our executive officers and certain employees under our 2013 Incentive Award Plan upon the completion of this offering, (iii) 214,286 shares of our common stock to be granted to Mr. Ziman under our 2013 Incentive Award Plan, (iv) 11,428 shares of our common stock to be granted to our independent directors under our 2013 Incentive Award Plan upon the completion of this offering or (v) shares of our common stock or LTIP units reserved for issuance under our 2013 Incentive Award Plan (in addition to the shares covered by awards to be granted in connection with this offering). See “Executive Compensation—2013 Incentive Award Plan.”
(4) We expect to enter into a new $60 million term loan and borrow approximately $21.2 million on our $200 million revolving credit facility, which will be used at the completion of this offering to repay a portion of outstanding mortgage debt and acquire the Orion and Oxnard properties which we are currently under contract to purchase, assuming that this offering prices at the mid-point of the price range set forth on the cover page of this prospectus.

 

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DILUTION

Purchasers of our common stock offered in this prospectus will experience an immediate and substantial dilution of the net tangible book value per share of our common stock from the initial public offering price. As of March 31, 2013, we had a pro forma net tangible book value of approximately $84.9 million, or $9.79 per share of our common stock held by prior investors, assuming the exchange of 3,714,419 outstanding common units into shares of our common stock on a one-for-one basis. After giving effect to the sale of the shares of our common stock offered hereby and in the concurrent private placement, including the use of proceeds as described under “Use of Proceeds,” and our formation transactions, the deduction of underwriting discounts and commissions, and estimated formation transaction and offering expenses, the pro forma net tangible book value as of March 31, 2013 attributable to common stockholders, including the effects of the grants of awards covering shares of our common stock to our executive officers, directors and certain employees, would have been $297.9 million, or $10.29 per share of our common stock. This amount represents an immediate increase in net tangible book value of $0.50 per share to prior investors and an immediate dilution in pro forma net tangible book value of $3.71 per share from the assumed public offering price of $14.00 per share of our common stock to new public investors. See “Risk Factors—Risks Related to this Offering—Differences between the book value of the assets to be acquired in the formation transactions and the price paid for our common stock will result in an immediate and material dilution of the book value of our common stock.” The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

  $ 14.00   

Net tangible book value per share before our formation transactions, the concurrent private placement and this offering(1)

  $ 9.79   

Net increase in pro forma net tangible book value per share attributable to our formation transactions, the concurrent private placement and this offering

  $ 0.50   

Pro forma net tangible book value per share after our formation transactions, the concurrent private placement and this offering(2)

  $ 10.29   

Dilution in pro forma net tangible book value per shares to new investors(3)

  $ 3.71   

 

(1) Net tangible book value per share of our common stock before our formation transactions, the concurrent private placement and this offering is determined by dividing net tangible book value based on March 31, 2013 net book value of the tangible assets (consisting of total assets less intangible assets, which are comprised of goodwill (if applicable), deferred financing and leasing costs, acquired above-market leases and acquired in place lease value, net of liabilities to be assumed, excluding acquired below market leases) of our predecessor business by the number of shares of our common stock held by prior investors after this offering, assuming the exchange for shares of our common stock on a one-for-one basis of the common units to be issued to our prior investors in connection with our formation transactions.
(2) Based on pro forma net tangible book value of approximately $297.9 million divided by the sum of shares of our common stock and common units (other than common units held by us) to be outstanding upon completion of this offering, the formation transactions and the concurrent private placement, including 923,929 shares of restricted common stock to be issued to our executive officers, directors and certain employees upon completion of this offering.
(3) Dilution is determined by subtracting pro forma net tangible book value per share of our common stock after giving effect to our formation transactions, the concurrent private placement and this offering from the initial public offering price paid by a new investor for a share of our common stock.

 

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Differences Between New Investors and Prior Investors in Number of Shares and Amount Paid

The table below summarizes, as of March 31, 2013, on a pro forma basis after giving effect to this offering, the formation transactions and the concurrent private placement, the differences between the number of shares of our common stock and common units to be received by the prior investors in the formation transactions and the concurrent private placement and the new investors purchasing shares of our common stock in this offering, the total consideration paid and the average price per share or unit paid by the prior investors in the formation transactions (based on the net tangible book value attributable to the prior investors in the formation transactions) and the cash paid in the concurrent private placement and by the new investors purchasing shares of our common stock in this offering.

 

   

Shares Issued

   

Common Units Issued

   

Net Tangible Book Value
of Contribution(1)/Cash

   

Average

Amount

Per

Share/Unit

 

(dollars and shares in millions, except
per share data)

 

Number

   

Percentage

   

Number

   

Percentage

   

Amount

   

Percentage

   

Prior investors

    9,239,339        36.6     3,714,419        100.0   $ 97,116,000        32.7   $ 7.50   

New investors

    16,000,000        63.4     —          0     200,820,000        67.3   $ 12.55   

Total

    25,239,339        100.0     3,714,419        100.0   $ 297,936,000        100.0   $ 10.29   

 

(1) Represents pro forma net tangible book value as of March 31, 2013, of the assets contributed to us in the formation transactions.

 

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SELECTED FINANCIAL INFORMATION

The following table sets forth selected financial and operating data on (i) a pro forma basis for our company and (ii) a historical basis for “Rexford Industrial Realty, Inc. Predecessor.” Rexford Industrial Realty, Inc. Predecessor consists of RI, LLC, Sponsor, Fund V REIT and their consolidated subsidiaries, which consist of one limited partnership and four limited liability companies, and their subsidiaries. Each of the entities comprising Rexford Industrial Realty, Inc. Predecessor owned, managed, and controlled (individually or jointly as discussed in more detail elsewhere in the prospectus) by our predecessor principals. As such, we have combined these entities on the basis of common ownership and common management. Upon completion of our formation transactions, the concurrent private placement and this offering, we will acquire the interests owned directly or indirectly by Rexford Industrial Realty, Inc. Predecessor in 61 industrial properties, including two properties that we currently have under contract to purchase.

We have not presented historical information for Rexford Industrial Realty, Inc. because we have not had any corporate activity since our formation and because we believe that a discussion of the results of Rexford Industrial Realty, Inc. would not be meaningful.

You should read the following summary financial and operating data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our unaudited pro forma consolidated financial statements and related notes, and the historical combined financial statements and related notes of Rexford Industrial Realty, Inc. Predecessor included elsewhere in the prospectus.

The unaudited pro forma condensed consolidated balance sheet data is presented as if our formation transactions, the concurrent private placement and this offering had occurred on March 31, 2013, and the unaudited pro forma statements of operations and other data for the three months ended March 31, 2013 and the year ended December 31, 2012, is presented as if our formation transactions, the concurrent private placement and this offering had occurred on January 1, 2012. The unaudited pro forma condensed consolidated financial statements include the effects of the contribution of the entities that comprise Rexford Industrial Realty, Inc. Predecessor, including (i) RI, LLC and it consolidated subsidiaries, (ii) Sponsor and Fund V REIT and their consolidated subsidiaries and (iii) other contributions or acquisitions of non-predecessor entities. The contribution of Sponsor and Fund V REIT and their consolidated subsidiaries and the other contributions or acquisitions of non-predecessor entities has been accounted for using the acquisition method of accounting as discussed in more detail elsewhere in the prospectus. The pro forma financial information is not necessarily indicative of what our actual financial condition would have been as of March 31, 2013 or what our actual results of operations would have been assuming our formation transactions, the concurrent private placement and this offering had been completed as of January 1, 2012, nor does it purport to represent our future financial position or results of operations.

 

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The unaudited summary historical combined balance sheet information as of March 31, 2013 and statement of operations data for the three months ended March 31, 2013 and 2012 have been derived from the unaudited combined financial statements of Rexford Industrial Realty, Inc. Predecessor included elsewhere in this prospectus. The summary historical combined balance sheet information as of December 31, 2012 and 2011, and the historical combined statement of operations data for the years ended December 31, 2012 and 2011 have been derived from the combined financial statements of Rexford Industrial Realty, Inc. Predecessor, which were audited by Ernst & Young LLP, independent registered public accountants, and are included elsewhere in this prospectus.

 

    

Three Months Ended March 31,

   

Year Ended December 31,

 
    

Company
Pro Forma
Consolidated

   

Rexford Predecessor
Historical Combined

   

Company
Pro Forma
Consolidated

   

Rexford Predecessor
Historical Combined

 
     2013     2013     2012     2012     2012     2011  
     (Unaudited)     (Unaudited)     (Unaudited)              
     (in thousands)     (in thousands)  

Statement of Operations Data:

            

Revenue

            

Rental revenues

   $ 9,592      $ 7,902      $ 7,039      $ 35,500      $ 28,586      $ 23,696   

Tenant reimbursements

     1,095        904        789        4,085        3,262        2,438   

Management, leasing and development services

     261        261        64        519        519        316   

Other income

     119        118        17        115        124