10-Q 1 rexr2016q210-q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 001-36008
 
Rexford Industrial Realty, Inc.
(Exact name of registrant as specified in its charter) 
 
 
MARYLAND
46-2024407
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
11620 Wilshire Boulevard, Suite 1000,
Los Angeles, California
90025
(Address of principal executive offices)
(Zip Code)
(310) 966-1680
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer þ
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
The number of shares of common stock outstanding at August 3, 2016 was 66,028,189.




REXFORD INDUSTRIAL REALTY, INC.
QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
TABLE OF CONTENTS
 
PART I.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION
 
Item 1.        Financial Statements

REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands – except share and per share data)
 
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Land
$
605,694

 
$
492,704

Buildings and improvements
745,968

 
650,075

Tenant improvements
33,873

 
28,977

Furniture, fixtures, and equipment
175

 
188

Construction in progress
23,714

 
16,822

Total real estate held for investment
1,409,424

 
1,188,766

Accumulated depreciation
(117,590
)
 
(103,623
)
Investments in real estate, net
1,291,834

 
1,085,143

Cash and cash equivalents
29,177

 
5,201

Restricted cash
17,979

 

Rents and other receivables, net
3,010

 
3,040

Deferred rent receivable, net
9,585

 
7,827

Deferred leasing costs, net
6,531

 
5,331

Deferred loan costs, net
1,146

 
1,445

Acquired lease intangible assets, net
37,789

 
30,383

Acquired indefinite-lived intangible
5,271

 
5,271

Other assets
5,589

 
5,523

Acquisition related deposits
400

 

Investment in unconsolidated real estate entities
4,203

 
4,087

Total Assets
$
1,412,514

 
$
1,153,251

LIABILITIES & EQUITY
 
 
 
Liabilities
 
 
 
Notes payable
$
500,608

 
$
418,154

Interest rate swap liability
7,551

 
3,144

Accounts payable, accrued expenses and other liabilities
10,877

 
12,631

Dividends payable
9,212

 
7,806

Acquired lease intangible liabilities, net
4,346

 
3,387

Tenant security deposits
13,769

 
11,539

Prepaid rents
3,367

 
2,846

Total Liabilities
549,730

 
459,507

Equity
 
 
 
Rexford Industrial Realty, Inc. stockholders’ equity
 
 
 
Common Stock, $0.01 par value 490,000,000 authorized and
   66,035,732 and 55,598,684 outstanding as of June 30, 2016
   and December 31, 2015, respectively
657

 
553

Additional paid in capital
897,991

 
722,722

Cumulative distributions in excess of earnings
(50,733
)
 
(48,103
)
Accumulated other comprehensive loss
(7,328
)
 
(3,033
)
Total stockholders’ equity
840,587

 
672,139

Noncontrolling interests
22,197

 
21,605

Total Equity
862,784


693,744

Total Liabilities and Equity
$
1,412,514

 
$
1,153,251

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


3



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands – except share and per share data)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
RENTAL REVENUES
 
 
 
 
 
 
 
Rental income
$
26,119

 
$
19,275

 
$
49,618

 
$
37,832

Tenant reimbursements
4,119

 
2,844

 
7,677

 
5,028

Other income
259

 
162

 
572

 
352

TOTAL RENTAL REVENUES
30,497

 
22,281

 
57,867

 
43,212

Management, leasing and development services
111

 
161

 
245

 
293

Interest income

 
280

 

 
557

TOTAL REVENUES
30,608

 
22,722

 
58,112

 
44,062

OPERATING EXPENSES
 
 
 
 
 
 
 
Property expenses
7,959

 
5,874

 
15,502

 
11,645

General and administrative
4,521

 
3,740

 
8,123

 
7,286

Depreciation and amortization
12,610

 
10,490

 
23,824

 
20,374

TOTAL OPERATING EXPENSES
25,090

 
20,104

 
47,449

 
39,305

OTHER EXPENSES
 
 
 
 
 
 
 
Acquisition expenses
635

 
847

 
1,110

 
1,080

Interest expense
3,716

 
1,658

 
6,970

 
3,484

TOTAL OTHER EXPENSES
4,351

 
2,505

 
8,080

 
4,564

TOTAL EXPENSES
29,441

 
22,609

 
55,529

 
43,869

Equity in income from unconsolidated real estate entities
62

 
12

 
123

 
13

Gain on extinguishment of debt

 
71

 

 
71

Gains on sale of real estate
11,563

 

 
11,563

 

NET INCOME
12,792

 
196

 
14,269

 
277

 Less: net income attributable to noncontrolling interest
(418
)
 
(8
)
 
(470
)
 
(12
)
NET INCOME ATTRIBUTABLE TO REXFORD INDUSTRIAL REALTY, INC.
12,374

 
188

 
13,799

 
265

 Less: earnings allocated to participating securities
(75
)
 
(49
)
 
(153
)
 
(99
)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
12,299

 
$
139

 
$
13,646

 
$
166

Net income available to common stockholders per share - basic and diluted
$
0.19

 
$

 
$
0.23

 
$

Weighted average shares of common stock outstanding - basic
64,063,337

 
54,963,093

 
59,666,468

 
52,835,132

Weighted average shares of common stock outstanding - diluted
64,304,713

 
54,963,093

 
59,860,831

 
52,835,132

Dividends declared per common share
$
0.135

 
$
0.120

 
$
0.270

 
$
0.240

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


4



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
12,792

 
$
196

 
$
14,269

 
$
277

Other comprehensive (loss) income: cash flow hedge adjustment
(2,650
)
 
319

 
(4,407
)
 
(1,558
)
Comprehensive income (loss)
10,142

 
515

 
9,862

 
(1,281
)
Comprehensive (income) loss attributable to noncontrolling interests
(368
)
 
(27
)
 
(358
)
 
30

Comprehensive income (loss) attributable to common stockholders
$
9,774

 
$
488

 
$
9,504

 
$
(1,251
)
 
 
The accompanying notes are an integral part of these consolidated financial statements.


5



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited and in thousands – except share data) 
 
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at January 1, 2016
55,598,684

 
$
553

 
$
722,722

 
$
(48,103
)
 
$
(3,033
)
 
$
672,139

 
$
21,605

 
$
693,744

Issuance of common stock
10,350,000

 
103

 
182,574

 

 

 
182,677

 

 
182,677

Offering costs

 

 
(8,352
)
 

 

 
(8,352
)
 

 
(8,352
)
Share-based compensation
71,650

 
1

 
964

 

 

 
965

 
996

 
1,961

Repurchase of common shares
(11,681
)
 

 
(204
)
 

 

 
(204
)
 

 
(204
)
Conversion of units to common stock
27,079

 

 
287

 

 

 
287

 
(287
)
 

Acquisition of real estate portfolio

 

 

 

 

 

 
125

 
125

Dividends

 

 

 
(16,429
)
 

 
(16,429
)
 

 
(16,429
)
Distributions

 

 

 

 

 

 
(600
)
 
(600
)
Net income

 

 

 
13,799

 

 
13,799

 
470

 
14,269

Other comprehensive loss

 

 

 

 
(4,295
)
 
(4,295
)
 
(112
)
 
(4,407
)
Balance at June 30, 2016
66,035,732

 
$
657

 
$
897,991

 
$
(50,733
)
 
$
(7,328
)
 
$
840,587

 
$
22,197

 
$
862,784

 
 
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions in Excess of Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Balance at January 1, 2015
43,702,442

 
$
434

 
$
542,318

 
$
(21,673
)
 
$
(1,331
)
 
$
519,748

 
$
26,129

 
$
545,877

Issuance of common stock
11,500,000

 
115

 
183,885

 

 

 
184,000

 

 
184,000

Offering costs

 

 
(8,027
)
 

 

 
(8,027
)
 

 
(8,027
)
Share-based compensation
115,307

 

 
863

 

 

 
863

 

 
863

Repurchase of common shares
(4,225
)
 

 
(67
)
 

 

 
(67
)
 

 
(67
)
Conversion of units to common stock
145,771

 
1

 
1,611

 

 

 
1,612

 
(1,612
)
 

Dividends

 

 

 
(13,294
)
 

 
(13,294
)
 

 
(13,294
)
Distributions

 

 

 

 

 

 
(555
)
 
(555
)
Net income

 

 

 
265

 

 
265

 
12

 
277

Other comprehensive loss

 

 

 

 
(1,516
)
 
(1,516
)
 
(42
)
 
(1,558
)
Balance at June 30, 2015
55,459,295

 
$
550

 
$
720,583

 
$
(34,702
)
 
$
(2,847
)
 
$
683,584

 
$
23,932

 
$
707,516

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


6



REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
 
Six Months Ended June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
14,269

 
$
277

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Equity in income from unconsolidated real estate entities
(123
)
 
(13
)
Depreciation and amortization
23,824

 
20,374

Amortization of above (below) market lease intangibles, net
56

 
85

Accretion of discount on notes receivable

 
(140
)
Gain on extinguishment of debt

 
(71
)
Gain on sale of real estate
(11,563
)
 

Amortization of loan costs
485

 
418

Accretion of premium on notes payable
(118
)
 
(125
)
Equity based compensation expense
1,887

 
815

Straight-line rent
(2,017
)
 
(977
)
Change in working capital components:
 
 
 
Rents and other receivables
40

 
(398
)
Deferred leasing costs
(2,245
)
 
(1,654
)
Other assets
(48
)
 
(737
)
Accounts payable, accrued expenses and other liabilities
(1,119
)
 
(1,270
)
Tenant security deposits
1,171

 
441

Prepaid rents
(144
)
 
799

Net cash provided by operating activities
24,355

 
17,824

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of investments in real estate
(228,131
)
 
(105,471
)
Capital expenditures
(15,305
)
 
(9,573
)
Acquisition related deposits
(400
)
 
710

Principal repayments of notes receivable

 
140

Proceeds from sale of real estate
20,435

 

Proceeds from sale of real estate placed in qualified intermediary account
(17,979
)
 

Net cash used in investing activities
(241,380
)
 
(114,194
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Issuance of common stock
182,677

 
184,000

Offering costs
(8,238
)
 
(7,917
)
Proceeds from notes payable
263,000

 
60,500

Repayment of notes payable
(178,690
)
 
(126,262
)
Deferred loan costs
(1,924
)
 
(64
)
Dividends paid to common stockholders
(15,020
)
 
(11,883
)
Distributions paid to common unitholders
(600
)
 
(555
)
Repurchase of common shares
(204
)
 
(67
)
Net cash provided by financing activities
241,001

 
97,752

Increase in cash and cash equivalents
23,976

 
1,382

Cash and cash equivalents, beginning of period
5,201

 
8,606

Cash and cash equivalents, end of period
$
29,177

 
$
9,988

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of capitalized interest of $882 and $196 for the six months ended June 30, 2016 and 2015, respectively)
$
6,404

 
$
3,197

Supplemental disclosure of noncash investing and financing transactions:
 
 
 
Assumption of loan in connection with acquisition of real estate including loan premium
$

 
$
5,874

Capital expenditure accruals
$
1,278

 
$
1,492

Accrual of dividends
$
9,212

 
$
6,655

Accrual of offering costs
$
114

 
$
110


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

7

REXFORD INDUSTRIAL REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.
Organization
Rexford Industrial Realty, Inc. is a self-administered and self-managed full-service real estate investment trust (“REIT”) focused on owning and operating industrial properties in Southern California infill markets. We were formed as a Maryland corporation on January 18, 2013, and Rexford Industrial Realty, L.P. (the “Operating Partnership”), of which we are the sole general partner, was formed as a Maryland limited partnership on January 18, 2013. Through our controlling interest in our Operating Partnership and its subsidiaries, we own, manage, lease, acquire and develop industrial real estate located in Southern California infill markets, and from time to time, acquire or provide mortgage debt secured by industrial property.  As of June 30, 2016, our consolidated portfolio consisted of 130 properties with approximately 13.6 million rentable square feet.  We also own a 15% interest in a joint venture that owns one property with approximately 0.5 million rentable square feet, which we also manage.  In addition, we currently manage an additional 19 properties with approximately 1.2 million rentable square feet.  
The terms “us,” “we,” “our,” and the “Company” as used in these financial statements refer to Rexford Industrial Realty, Inc. and its subsidiaries (including our Operating Partnership).
Basis of Presentation
As of June 30, 2016, and December 31, 2015, and for the three and six months ended June 30, 2016 and 2015, the financial statements presented are the consolidated financial statements of Rexford Industrial Realty, Inc. and its subsidiaries, including our Operating Partnership. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The interim financial statements should be read in conjunction with the combined and consolidated financial statements in our 2015 Annual Report on Form 10-K and the notes thereto. Any references to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.  
We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entity and we are the primary beneficiary through consideration of the substantive terms of the arrangement to identify which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities in which we do not control but over which we have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that we do not control and over which we do not exercise significant influence are carried at the lower of cost or fair value, as appropriate. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in our consolidated financial statements.
 


8



 2.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an initial maturity of three months or less. The carrying amount approximates fair value due to the short term maturity of these investments.
Restricted Cash
Restricted cash represents the cash proceeds from property sales that are being held by qualified intermediaries for purposes of facilitating tax-deferred like-kind exchanges under Section 1031 of the Internal Revenue Code (“1031 Exchange”). As of June 30, 2016, the net proceeds from the sale of our properties located at 1840 Dana Street and 12910 East Mulberry Street (see Note 3) are included in restricted cash.
     Investments in Real Estate
Acquisitions
When we acquire operating properties with the intention to hold the investment for the long-term, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component. The components typically include land, building and improvements, tenant improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities.  Because of the timing or complexity of completing certain fair value adjustments, the initial purchase price allocation may be incomplete at the end of a reporting period, in which case we may record provisional purchase price allocation amounts based on information available at the acquisition date.  Subsequent adjustments to provisional amounts are recognized during the measurement period, which cannot exceed one year from the date of acquisition.
We allocate the purchase price to the fair value of the tangible assets of a property by valuing the property as if it were vacant.  This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company’s assumptions about the assumptions a market participant would use.  These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties.  Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions.  In determining the “as-if-vacant” value for acquisitions completed during the six months ended June 30, 2016, we used discount rates ranging from 6.75% to 8.00% and capitalization rates ranging from 5.50% to 6.25%.
In determining the fair value of intangible lease assets or liabilities, we also consider Level 3 inputs.  Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable.  The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. In determining the fair value for acquisitions completed during the six months ended June 30, 2016, we used an estimated average lease-up period ranging from six to twelve months. Acquisition costs associated with business combinations are expensed in the period they are incurred.
The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
For acquisitions that do not meet the accounting criteria to be accounted for as a business combination, we record to land and building the purchase price paid and capitalize the associated acquisition costs.  We did not capitalize any acquisition costs during the three and six months ended June 30, 2016, as our acquisitions were accounted for as business combinations. However, we capitalized acquisition costs of $0.3 million and $0.3 million during the three and six months ended June 30, 2015, respectively.  See Note 3.

9



Capitalization of Costs
We capitalize direct costs incurred in developing, renovating, rehabilitating and improving real estate assets as part of the investment basis. This includes certain general and administrative costs, including payroll, bonus and non-cash equity compensation of the personnel performing development, renovations and rehabilitation if such costs are identifiable to a specific activity to get the real estate asset ready for its intended use. During the development and construction periods of a project, we also capitalize interest, real estate taxes and insurance costs. We cease capitalization of costs upon substantial completion of the project, but no later than one year from cessation of major construction activity. If some portions of a project are substantially complete and ready for use and other portions have not yet reached that stage, we cease capitalizing costs on the completed portion of the project but continue to capitalize for the incomplete portion of the project. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred.
We capitalized interest costs of $0.4 million and $0.2 million during the three months ended June 30, 2016 and 2015, respectively, and $0.9 million and $0.2 million during the six months ended June 30, 2016 and 2015, respectively. We capitalized real estate taxes and insurance costs aggregating $0.2 million and $0.2 million during the three months ended June 30, 2016 and 2015, respectively, and $0.4 million and $0.4 million during the six months ended June 30, 2016 and 2015, respectively. We capitalized compensation costs for employees who provide construction services of $0.3 million and $0.2 million during the three months ended June 30, 2016 and 2015, respectively, and $0.5 million and $0.4 million during the six months ended June 30, 2016 and 2015, respectively.
Depreciation and Amortization
Real estate, including land, building and land improvements, tenant improvements, furniture, fixtures and equipment and intangible lease assets and liabilities are stated at historical cost less accumulated depreciation and amortization, unless circumstances indicate that the cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value as discussed below in our policy with regards to impairment of long-lived assets. We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense.
The values allocated to buildings, site improvements, in-place lease intangibles and tenant improvements are depreciated on a straight-line basis using an estimated remaining life of 10-30 years for buildings, 5-20 years for site improvements, and the shorter of the estimated useful life or respective lease term for in-place lease intangibles and tenant improvements.
As discussed above in—Investments in Real Estate—Acquisitions, in connection with property acquisitions, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an acquired lease intangible asset or liability and amortized to “rental income” over the remaining term of the related leases.
Our estimate of the useful life of our assets is evaluated upon acquisition and when circumstances indicate a change in the useful life, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets.
Deferred Leasing Costs
We capitalize costs directly related to the successful origination of a lease. These costs include leasing commissions paid to third parties for new leases or lease renewals, as well as an allocation of compensation costs, including payroll, bonus and non-cash equity compensation of employees who spend time on lease origination activities. In determining the amount of compensation costs to be capitalized for these employees, allocations are made based on estimates of the actual amount of time spent working on successful leases in comparison to time spent on unsuccessful origination efforts. We capitalized compensation costs for these employees of $0.1 million and $0.1 million during the three months ended June 30, 2016 and 2015, respectively, and $0.2 million and $0.2 million during the six months ended June 30, 2016 and 2015, respectively.
Impairment of Long-Lived Assets
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC Topic 360: Property, Plant, and Equipment, we assess the carrying values of our respective long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.
Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review real estate assets for recoverability, we consider current market conditions as

10



well as our intent with respect to holding or disposing of the asset. The intent with regards to the underlying assets might change as market conditions and other factors change. Fair value is determined through various valuation techniques; including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with estimates of future expectations and the strategic plan used to manage our underlying business. If our analysis indicates that the carrying value of the real estate asset is not recoverable on an undiscounted cash flow basis, we will recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
Assumptions and estimates used in the recoverability analyses for future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with respect to our investment that occur subsequent to our impairment analyses could impact these assumptions and result in future impairment of our real estate properties.
Investment in Unconsolidated Real Estate
Investments in unconsolidated real estate in which we have the ability to exercise significant influence (but not control) are accounted for under the equity method of investment.  Under the equity method, we initially record our investment at cost, and subsequently adjust for equity in earnings or losses and cash contributions and distributions. Any difference between the carrying amount of these investments on the balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in income (loss) from unconsolidated real estate over the life of the related asset. Under the equity method of accounting, our net equity investment is reflected within the consolidated balance sheets, and our share of net income or loss from the joint venture is included within the consolidated statements of operations.  See Note 11.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our initial taxable year ended December 31, 2013. To qualify as a REIT, we are required (among other things) to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and were unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.
In addition, we are subject to taxation by various state and local jurisdictions, including those in which we transact business or reside. Our non-taxable REIT subsidiaries, including our Operating Partnership, are either partnerships or disregarded entities for federal income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss from disregarded entities and flow-through entities such as partnerships is reportable in the income tax returns of the respective equity holders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements for the three and six months ended June 30, 2016 and 2015.
We periodically evaluate our tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of June 30, 2016, and December 31, 2015, we have not established a liability for uncertain tax positions.
Derivative Instruments and Hedging Activities
FASB ASC Topic 815: Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

11



As required by ASC 815, we record all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.  See Note 7.
Revenue Recognition
We recognize revenue from rent, tenant reimbursements and other revenue sources once all of the following criteria are met: persuasive evidence of an arrangement exists, the delivery has occurred or services rendered, the fee is fixed and determinable and collectability is reasonably assured. Minimum annual rental revenues are recognized in rental revenues on a straight-line basis over the term of the related lease. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space.
Estimated reimbursements from tenants for real estate taxes, common area maintenance and other recoverable operating expenses are recognized as revenues in the period that the expenses are incurred. Subsequent to year-end, we perform final reconciliations on a lease-by-lease basis and bill or credit each tenant for any cumulative annual adjustments. Lease termination fees, which are included in rental income in the accompanying consolidated statements of operations, are recognized when the related lease is canceled and we have no continuing obligation to provide services to such former tenant.
Revenues from management, leasing and development services are recognized when the related services have been provided and earned.
The recognition of gains on sales of real estate requires us to measure the timing of a sale against various criteria related to the terms of the transaction, as well as any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the finance, profit-sharing or leasing method. If the sales criteria have been met, we further analyze whether profit recognition is appropriate using the full accrual method. If the criteria to recognize profit using the full accrual method have not been met, we defer the gain and recognize it when the criteria are met or use the installment or cost recovery method as appropriate under the circumstances.
Valuation of Receivables
We are subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, we perform credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired. We specifically analyze aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. As a result of our periodic analysis, we maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. This estimate requires significant judgment related to the lessees’ ability to fulfill their obligations under the leases. We believe our allowance for doubtful accounts is adequate for our outstanding receivables for the periods presented. If a tenant is insolvent or files for bankruptcy protection and fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances, which include amounts recognized as straight-line revenue not realizable until future periods. We recorded a provision for doubtful accounts of $0.4 million and $0.4 million for the three months ended June 30, 2016 and 2015, respectively, and $0.8 million and $0.8 million for the six months ended June 30, 2016 and 2015, respectively, as a reduction to rental revenues in our consolidated statements of operations. We had a $2.8 million and $2.0 million reserve for allowance for doubtful accounts as of June 30, 2016 and December 31, 2015, respectively.

12



Equity Based Compensation
We account for equity based compensation in accordance with ASC Topic 718 Compensation - Stock Compensation.  Total compensation cost for all share-based awards is based on the estimated fair market value on the grant date. For share-based awards that vest based solely on a service condition, we recognize compensation cost on a straight-line basis over the total requisite service period for the entire award.  For share-based awards that vest based on a market or performance condition, we recognize compensation cost on a straight-line basis over the requisite service period of each separately vesting tranche.  See Note 12.
Equity Offering Costs
Underwriting commissions and offering costs have been reflected as a reduction of additional paid-in capital.
Earnings Per Share
We calculate earnings per share (“EPS”) in accordance with ASC 260 - Earnings Per Share (“ASC 260”). Under ASC 260, nonvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in computing basic EPS pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings.
Basic EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.
Diluted EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding determined for the basic EPS computation plus the effect of any dilutive securities. We include unvested shares of restricted stock and unvested LTIP units in the computation of diluted EPS by using the more dilutive of the two-class method or treasury stock method. We include unvested performance units as contingently issuable shares in the computation of diluted EPS once the market criteria are met, assuming that the end of the reporting period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted EPS calculation. See Note 13.
Segment Reporting
Management views the Company as a single reportable segment based on its method of internal reporting in addition to its allocation of capital and resources.
Recently Issued Accounting Pronouncements
Changes to GAAP are established by the FASB in the form of ASUs to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs.
On March 30, 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), to amend and simplify several aspects of the accounting for share-based payment award transactions, including: (i) income tax consequences, (ii) classification of awards as equity or liabilities and (iii) classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. We are currently assessing the impact of the guidance on our consolidated financial statements and notes to our consolidated financial statements.
On February 25, 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged under ASU 2016-02. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently assessing the impact of the guidance on our consolidated financial statements and notes to our consolidated financial statements.

13



On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 establishes principles for reporting the nature, amount, timing and uncertainty of revenues and cash flows arising from an entity’s contracts with customers. The core principle of the new standard is that an entity recognizes revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  For public entities, ASU 2014-09 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2016. Early application is not permitted. In July 2015, the FASB deferred the implementation date by one year, which would make this ASU effective for annual reporting periods beginning after December 15, 2017.  ASU 2014-09 notes that lease contracts with customers are a scope exception, and accordingly, we do not expect the adoption to have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
Adoption of New Accounting Pronouncements
Effective January 1, 2016, we adopted ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which changes the way an entity evaluates whether they should consolidate certain legal entities.  Specifically, ASU 2015-02 (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership and (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships.
Under the provisions of ASU 2015-02, we concluded that (1) our Operating Partnership is a VIE of the Company because the holders of limited partnership interests do not have substantive kick-out or participating rights and (2) the Company is the primary beneficiary of the VIE, which requires us to consolidate the Operating Partnership. However, as we already consolidate our Operating Partnership under prior consolidation guidance, the adoption of ASU 2015-02 did not have an effect on our consolidated financial statements. Additionally, the assets and liabilities of the Company and the Operating Partnership are substantially the same, as the Company does not have any significant assets other than its investment in the Operating Partnership.
On September 25, 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”).  ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation or amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, must be recorded in the reporting period in which the adjustment amounts are determined rather than retrospectively.  ASU 2015-16 also requires that an acquirer present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  ASU 2015-16 is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted. We early-adopted ASU 2015-16, beginning with the quarter ended September 30, 2015.  The adoption of ASU 2015-16 did not have a material impact on our consolidated financial statements.
On April 7, 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (“ASU 2015-03”).  ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a reduction from the carrying value of the debt liability.  This offset against the debt liability is treated similarly to a debt discount, which effectively reduces the proceeds of a borrowing. For line of credit arrangements, however, entities may present debt issuance costs as an asset and amortize the cost over the term of the line of credit arrangement. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015, with early adoption permitted on a retrospective basis.  We early-adopted ASU 2015-03, beginning with the quarter ended March 31, 2015.  The adoption of ASU 2015-03 did not have a material impact on our consolidated financial statements. See Note 5.

 

14



3.
Investments in Real Estate

REIT Portfolio Acquisition
On April 11, 2016, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) to acquire a private real estate investment trust that owns a portfolio of nine industrial properties totaling approximately 1.5 million rentable square feet (the “REIT Portfolio”) from a third-party seller in exchange for approximately 191.0 million in cash, exclusive of closing costs and credits (the “REIT Portfolio Acquisition”).
On April 15, 2016, pursuant to the Stock Purchase Agreement, we consummated the transaction. As part of the REIT Portfolio Acquisition, we acquired 100% of the private REIT’s common stock and 575 of 700 issued and outstanding shares of the private REIT’S 12.5% cumulative non-voting preferred stock (the “preferred stock”). The remaining 125 shares of the preferred stock are held by unaffiliated third parties and will remain outstanding in order to help us comply with federal income tax regulations applicable to REITs. These shares of preferred stock may be redeemed by us at any time, subject to procedural requirements, for an aggregate price of $125,000 plus any dividends thereon that have accrued but have not been repaid at the time of such redemption.
Acquisition Summary
The following table sets forth the wholly-owned industrial properties we acquired during the six months ended June 30, 2016
Property
 
Submarket
 
Date of Acquisition
 
Rentable Square Feet
 
Number of Buildings
 
Contractual Purchase Price
(in thousands)
8525 Camino Santa Fe(1)
 
San Diego - Central
 
3/15/2016
 
59,399

 
1
 
$
8,450

28454 Livingston Avenue(1)
 
Los Angeles - San Fernando Valley
 
3/29/2016
 
134,287

 
1
 
16,000

REIT Portfolio(2)
 
Various(2)
 
4/15/2016
 
1,530,814

 
9
 
191,000

10750-10826 Lower Azusa Road(3)
 
Los Angeles - San Gabriel Valley
 
5/3/2016
 
79,050

 
4
 
7,660

525 Park Avenue(4)
 
Los Angeles - San Fernando Valley
 
6/30/2016
 
63,403

 
1
 
7,550

Total 2016 Wholly-Owned Property Acquisitions
 
 
 
1,866,953

 
16
 
$
230,660

 
(1)
This acquisition was funded with available cash on hand and borrowings under our unsecured revolving credit facility.
(2)
The REIT Portfolio Acquisition was funded with available cash on hand, proceeds from a $100.0 million term loan borrowing and proceeds from an equity offering of 10.35 million shares of our common stock. See Notes 5 and 12 for additional information. The REIT Portfolio consists of nine properties located in four of our core submarkets, including Orange County, Los Angeles - San Gabriel Valley, Inland Empire West and Central San Diego.
(3)
This acquisition was funded with $2.5 million from a 1031 Exchange and available cash on hand.
(4)
This acquisition was funded with available cash on hand.

15



The following table summarizes the fair value of amounts recognized for each major class of asset and liability for the acquisitions noted in the table above, as of the date of acquisition (in thousands):
 
 
REIT Portfolio
 
Other 2016 Acquisitions
 
Total 2016 Acquisitions
Assets:
 
 
 
 
 
Land
$
101,530

 
$
17,392

 
$
118,922

Buildings and improvements
74,586

 
20,014

 
94,600

Tenant improvements
2,875

 
471

 
3,346

Acquired lease intangible assets(1)
12,103

 
2,456

 
14,559

Other acquired assets(2)
222

 
105

 
327

Total assets acquired
191,316

 
40,438

 
231,754

Liabilities:
 
 
 
 
 
Acquired lease intangible liabilities(3)
934

 
835

 
1,769

Other assumed liabilities(2)
1,519

 
210

 
1,729

Total liabilities assumed
2,453

 
1,045

 
3,498

Net assets acquired
$
188,863

 
$
39,393

 
$
228,256

 
(1)
For the REIT Portfolio, acquired lease intangible assets consist of $11.1 million of in-place lease intangibles with a weighted average amortization period of 5.0 years and $1.0 million of above-market lease intangibles with a weighted average amortization period of 7.6 years. For the other 2016 acquisitions, represents in-place lease intangibles with a weighted average amortization period of 4.3 years.
(2)
Includes other working capital assets acquired (prepaid expenses, other receivables and other assets) and liabilities assumed (tenant security deposits, prepaid rent and other payables), respectively, at the time of acquisition.
(3)
Represents below-market lease intangibles with a weighted average amortization period of 4.8 years and 5.3 years for the REIT Portfolio and the other 2016 acquisitions, respectively.
The following table sets forth the unaudited results of operations on a combined basis for the three and six months ended June 30, 2016, for the properties acquired during the six months ended June 30, 2016, included in the consolidated statements of operations from the date of acquisition (in thousands):
 
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
Total revenues
 
$
3,629

 
$
3,664

Net income
 
$
1,317

 
$
1,344

     The following table sets forth unaudited pro-forma financial information (in thousands) as if the closing of our acquisitions during the six months ended June 30, 2016, had occurred on January 1, 2015. These unaudited pro-forma results have been prepared for comparative purposes only and include certain adjustments, such as (i) increased rental revenues for the amortization of the net amount of above- and -below-market rents acquired in the acquisition, (ii) increased depreciation and amortization expenses as a result of tangible and intangible assets acquired in the acquisitions and (iii) increased interest expense for borrowings associated with these acquisitions.  These unaudited pro-forma results do not purport to be indicative of what operating results would have been had the acquisitions actually occurred on January 1, 2015, and may not be indicative of future operating results.

16



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Total revenues
$
31,399

 
$
25,800

 
$
62,580

 
$
50,273

Net income (loss) attributable to common shareholders
$
12,653

 
$
(546
)
 
$
14,730

 
$
(1,154
)
Net income attributable to common stockholders per share - basic
$
0.20

 
$
(0.01
)
 
$
0.25

 
$
(0.02
)
Net income attributable to common stockholders per share - diluted
$
0.20

 
$
(0.01
)
 
$
0.25

 
$
(0.02
)

Dispositions
    
The following table summarizes the properties we disposed of during the six months ended June 30, 2016:
Property
 
Submarket
 
Date of Disposition
 
Rentable Square Feet
 
Contractual Sales Price
(in thousands)
 
Gain Recorded
(in thousands)
6010 North Paramount Boulevard
 
Los Angeles - South Bay
 
5/2/2016
 
16,534

 
$
2,480

 
$
944

1840 Dana Street
 
Los Angeles - San Fernando Valley
 
5/25/2016
 
13,497

 
$
4,250

 
$
1,445

12910 East Mulberry Drive
 
Los Angeles - Mid-Counties
 
6/7/2016
 
153,080

 
$
15,000

 
$
9,174

Total
 
 
 
 
 
183,111

 
$
21,730

 
$
11,563



4.
Intangible Assets  

The following table summarizes our acquired lease intangible assets, including the value of in-place leases and above-market tenant leases, and our acquired lease intangible liabilities, including below-market tenant leases and above-market ground leases (in thousands): 
 
June 30, 2016
 
December 31, 2015
Acquired Lease Intangible Assets:
 
 
 
In-place lease intangibles
$
62,591

 
$
49,265

Accumulated amortization
(31,150
)
 
(25,107
)
In-place lease intangibles, net
31,441

 
24,158

Above-market tenant leases
9,999

 
9,062

Accumulated amortization
(3,651
)
 
(2,837
)
Above-market tenant leases, net
6,348

 
6,225

Acquired lease intangible assets, net
$
37,789

 
$
30,383

Acquired Lease Intangible Liabilities:
 

 
 

Below-market tenant leases
(6,678
)
 
(5,227
)
Accumulated accretion
2,529

 
2,053

Below-market tenant leases, net
(4,149
)
 
(3,174
)
Above-market ground lease
(290
)
 
(290
)
Accumulated accretion
93

 
77

Above-market ground lease, net
(197
)
 
(213
)
Acquired lease intangible liabilities, net
$
(4,346
)
 
$
(3,387
)
 

17



The following table summarizes the amortization related to our acquired lease intangible assets and liabilities for the reported periods noted below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
In-place lease intangibles(1)
$
3,402

 
$
3,120

 
$
6,288

 
$
6,339

Net above (below)-market tenant leases(2)
$
67

 
$
54

 
$
72

 
$
101

Above-market ground lease(3)
$
(8
)
 
$
(8
)
 
$
(16
)
 
$
(16
)
 
(1)
The amortization of in-place lease intangibles is recorded to depreciation and amortization expense in the consolidated statements of operations for the periods presented.
(2)
The amortization of net above (below)-market tenant leases is recorded as a decrease to rental revenues in the consolidated statements of operations for the periods presented.
(3)
The accretion of the above-market ground lease is recorded as a decrease to property expenses in the consolidated statements of operations for the periods presented.

5.
Notes Payable

The following table summarizes the balance of our indebtedness as of June 30, 2016, and December 31, 2015 (in thousands): 
 
 
June 30, 2016
 
December 31, 2015
Principal amount
 
$
503,009

 
$
418,698

Less: unamortized discount and deferred loan costs(1)
 
(2,401
)
 
(544
)
Carrying value
 
$
500,608

 
$
418,154

 
(1)
Unamortized discount and deferred loan costs exclude net debt issuance costs related to establishing our unsecured credit facility.  These costs are presented in the line item “Deferred loan costs, net” in the consolidated balance sheets.  
 

18



The following table summarizes the components and significant terms of our indebtedness as of June 30, 2016, and December 31, 2015 (dollars in thousands): 
 
June 30, 2016
 
December 31, 2015
 
 
  
 
  
 
  
 
Principal Amount
 
Unamortized Discount and Deferred Loan Costs
 
Principal Amount
 
Unamortized Discount and Deferred Loan Costs
 
Contractual
Maturity Date
  
Stated
Interest
Rate(1)
  
Effective Interest Rate (2)
  
Secured Debt
 
 
 
 
 
 
 
 
 
  
 

  
 

  
Term Loan(3)
$
60,000

 
$
(243
)
 
$
60,000

 
$
(283
)
 
8/1/2019
(4) 
LIBOR + 1.90%

  
3.95
%
 
Gilbert/La Palma
2,977

 
(149
)
 
3,044

 
(153
)
 
3/1/2031
 
5.125
%
(5) 
5.38
%
 
12907 Imperial Highway
5,242

 
242

 
5,299

 
303

 
4/1/2018
 
5.95
%
(6) 
3.61
%
 
1065 Walnut Street
9,790

 
242

 
9,855

 
292

 
2/1/2019
(7) 
4.55
%
(8) 
3.54
%
 
Unsecured Debt
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$100M Term Loan Facility
100,000

 

 
100,000

 

 
6/11/2019
 
LIBOR + 1.35%

(9) 
3.25
%
(10) 
Revolving Credit Facility

 

 
140,500

 

 
6/11/2018
(4) 
LIBOR + 1.40%

(9)(11) 
1.87
%
 
$225M Term Loan Facility
225,000

 
(1,821
)
 

 

 
1/14/2023
 
LIBOR + 1.60%

(9) 
2.19
%
 
Guaranteed Senior Notes
100,000

 
(672
)
 
100,000

 
(703
)
 
8/6/2025
 
4.29
%
  
4.36
%
 
Total
$
503,009

 
$
(2,401
)
 
$
418,698

 
$
(544
)
 
 
  
 
  
 
 

(1)
Reflects the contractual interest rate under the terms of the loan, as of June 30, 2016.
(2)
Reflects the effective interest rate as of June 30, 2016, which includes the effect of the amortization of discounts/premiums and deferred loan costs and the effect of interest rate swaps that are effective as of June 30, 2016.  
(3)
This term loan is secured by six properties. Beginning August 15, 2016, monthly payments of interest and principal are based on a 30-year amortization table. As of June 30, 2016, the interest rate on the $60.0 million variable-rate term loan has been effectively fixed through the use of two interest rate swaps. See Note 7 for details.
(4)
One additional one-year extension available at the borrower’s option.
(5)
Monthly payments of interest and principal are based on a 20-year amortization table.
(6)
Monthly payments of interest and principal are based on a 30-year amortization table, with a balloon payment at maturity.
(7)
One additional five-year extension available at the borrower’s option.
(8)
Monthly payments of interest and principal are based on a 25-year amortization table, with a balloon payment at maturity.
(9)
The LIBOR margin will range from 1.25% to 1.85% for the $100.0 million term loan facility, 1.30% to 1.90% for the revolving credit facility and 1.50% to 2.25% for the $225.0 million term loan facility depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value, which is measured on a quarterly basis.
(10)
As of June 30, 2016, the interest on the $100.0 million term loan facility has been effectively fixed through the use of two interest rate swaps. See Note 7 for details.
(11)
The facility additionally bears interest at 0.30% or 0.20% of the daily undrawn amount of the unsecured revolving credit facility, if the balance is under $100.0 million or over $100.0 million, respectively.
    

19



The following table summarizes the contractual debt maturities and scheduled amortization payments, excluding debt discounts/premiums and deferred loan costs, as of June 30, 2016, and does not consider extension options available to us as noted in the table above (in thousands):
 
July 1, 2016 - December 31, 2016
$
207

2017
430

2018
5,380

2019
169,533

2020
166

Thereafter
327,293

Total
$
503,009


$225 Million Term Loan Facility
On January 14, 2016, we entered into a credit agreement for a senior unsecured term loan facility (the “$225 Million Term Loan Facility”) that initially permits aggregate borrowings of up to $125.0 million, the total of which we borrowed the same day at closing. Under the terms of the credit agreement, we are permitted to add one or more incremental term loans in an aggregate amount not to exceed $100.0 million (the “Accordion”), subject to the satisfaction of specified conditions. On April 15, 2016, we exercised the Accordion in full, thereby increasing the aggregate amount outstanding under the $225 Million Term Loan Facility to $225.0 million. The maturity date of the $225 Million Term Loan Facility is January 14, 2023.
Interest on the $225 Million Term Loan Facility accrues based upon, at our option, either (i) LIBOR plus the applicable Eurodollar rate margin or (ii) the applicable base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the administrative agent’s prime rate or (c) the thirty-day LIBOR plus 1.00%, plus the applicable base rate margin. Until we obtain an investment grade rating by two or more of Standard & Poor’s, Moody’s Investor Services and Fitch Ratings, and elect to use the alternative rates based on our debt rating, the applicable Eurodollar rate margin will range from 1.50% to 2.25% per annum, and the applicable base rate margin will range from 0.50% to 1.25% per annum, depending on our Leverage Ratio (as defined in the credit agreement).
We have the option to voluntarily prepay any amounts borrowed under the $225 Million Term Loan Facility in whole or in part at any time, subject to certain notice requirements. To the extent that we prepay all or any portion of a loan on or prior to January 14, 2018, we will pay a prepayment premium equal to (i) if such prepayment occurs prior to January 14, 2017, 2.00% of the principal amount so prepaid and (ii) if such prepayment occurs on or after January 14, 2017, but prior to January 14, 2018, 1.00% of the principal amount so prepaid. Amounts borrowed under the $225 Million Term Loan Facility and repaid or prepaid may not be reborrowed.
The $225 Million Term Loan Facility contains usual and customary events of default including defaults in the payment of principal, interest or fees, defaults in compliance with the covenants set forth in the credit agreement and other loan documentation, cross-defaults to certain other indebtedness, and bankruptcy and other insolvency defaults. If an event of default occurs and is continuing under the $225 Million Term Loan Facility, all outstanding principal amounts, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable.
Unsecured Credit Facility
We have a senior unsecured revolving credit facility with a borrowing capacity of $200.0 million (the “Revolver”) and a senior unsecured term loan facility (the “$100 Million Term Loan Facility”) with a borrowing capacity of $100.0 million (together the “Credit Facility”).  The Revolver is scheduled to mature on June 11, 2018, with one 12-month extension option available, subject to certain conditions, and the $100 Million Term Loan Facility is scheduled to mature on June 11, 2019.  The aggregate principal amount of the Credit Facility may be increased to a total of up to $600.0 million, which may be comprised of additional revolving commitments under the Revolver or an increase to the $100 Million Term Loan Facility, or any combination of the foregoing, subject to the satisfaction of specified conditions and the identification of lenders willing to make available such additional amounts.
Interest on the Credit Facility accrues, at our option, at either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the administrative agent’s prime rate or (c)

20



the thirty-day LIBOR plus 1.00%, plus the applicable base rate margin. Until we attain an investment grade rating by two or more of Standard & Poor’s, Moody’s Investor Services and Fitch Ratings, and elect to use the alternative rates based on our debt rating, the applicable LIBOR margin will range from 1.30% to 1.90% for the Revolver and 1.25% to 1.85% for the $100 Million Term Loan Facility, depending on our Leverage Ratio (as defined in the credit agreement).  In February 2015, the Revolver and the $100 Million Term Loan Facility were assigned an investment grade rating of BBB- by Fitch Ratings. Additionally, there is a quarterly facility fee that is paid on the undrawn portion of the Revolver in an amount equal to 0.20% or 0.30% depending on the undrawn amount of the Revolver.
The Credit Facility is guaranteed by the Company and by substantially all of the current and future subsidiaries of the Operating Partnership that own an unencumbered property. The Credit Facility is not secured by the Company’s properties or by equity interests in the subsidiaries that hold such properties.
The Revolver and the $100 Million Term Loan Facility may be voluntarily prepaid in whole or in part at any time without premium or penalty.  Amounts borrowed under the $100 Million Term Loan Facility and repaid or prepaid may not be re-borrowed.
The Credit Facility contains usual and customary events of default including defaults in the payment of principal, interest or fees, defaults in compliance with the covenants set forth in the Credit Facility and other loan documentation, cross-defaults to certain other indebtedness, and bankruptcy and other insolvency defaults. If an event of default occurs and is continuing under the Credit Facility, the unpaid principal amount of all outstanding loans, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable.   
On June 30, 2016, we did not have any borrowings outstanding under our Revolver, leaving $200.0 million available for additional borrowings.  
Debt Covenants
The $225 Million Term Loan Facility and the Credit Facility both include a series of financial and other covenants that we must comply with, including the following covenants which are tested on a quarterly basis:
Maintaining a ratio of total indebtedness to total asset value of not more than 60%;
Maintaining a ratio of secured debt to total asset value of not more than 45%;
Maintaining a ratio of total secured recourse debt to total asset value of not more than 15%;
Maintaining a minimum tangible net worth of at least the sum of (i) $283,622,250, and (ii) an amount equal to at least 75% of the net equity proceeds received by the Company after March 31, 2014;
Maintaining a ratio of adjusted EBITDA to fixed charges of at least 1.50 to 1.0
Maintaining a ratio of total unsecured debt to total unencumbered asset value of not more than 60%; and
Maintaining a ratio of unencumbered NOI to unsecured interest expense of at least 1.75 to 1.0
Additionally, the $225 Million Term Loan Facility and the Credit Facility provide that our distributions may not exceed the greater of (i) 95.0% of our funds from operations or (ii) the amount required for us to qualify and maintain our status as a REIT and avoid the payment of federal or state income or excise tax in any 12-month period.
Our $100.0 million unsecured guaranteed senior notes (the “Notes”) contain a series of financial and other covenants with which we must comply.  The financial covenants, which are tested on a quarterly basis, are the same as those that we must comply with under the $225 Million Term Loan Facility and the Credit Facility, as detailed above. Subject to the terms of the Notes, upon certain events of default, including, but not limited to, (i) a default in the payment of any principal, make-whole payment amount, or interest under the Notes, (ii) a default in the payment of certain of our other indebtedness, (iii) a default in compliance with the covenants set forth in the Notes agreement, and (iv) bankruptcy and other insolvency defaults, the principal and accrued and unpaid interest and the make-whole payment amount on the outstanding Notes will become due and payable at the option of the purchasers.
Our $60.0 million term loan contains a financial covenant that is tested on a quarterly basis, which requires us to maintain a minimum Debt Service Coverage Ratio (as defined in the term loan agreement) of at least 1.10 to 1.00.  
We were in compliance with all of our required quarterly debt covenants as of June 30, 2016. 
 

21



6.
Operating Leases

We lease space to tenants primarily under non-cancelable operating leases that generally contain provisions for a base rent plus reimbursement for certain operating expenses. Operating expense reimbursements are reflected in the consolidated statements of operations as tenant reimbursements.
Future minimum base rent under operating leases as of June 30, 2016 is summarized as follows (in thousands):
  
Twelve months ended June 30,
 
2017
$
97,197

2018
79,184

2019
64,921

2020
51,680

2021
37,151

Thereafter
73,330

Total
$
403,463

The future minimum base rent in the table above excludes tenant reimbursements, amortization of adjustments for deferred rent receivables and the amortization of above/below-market lease intangibles.
 
7.
Interest Rate Contracts
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions.  We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial instruments.  Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.  
Derivative Instruments
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. We do not use derivatives for trading or speculative purposes.  
The effective portion of the change in fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income/(loss) (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  The ineffective portion of the change in fair value of the derivatives is immediately recognized in earnings.  
On February 24, 2016, we entered into an interest rate swap transaction to manage our exposure to fluctuations in variable interest rate associated with the $125.0 million initially borrowed under the $225 Million Term Loan Facility. The interest rate swap has a notional amount of $125.0 million with an effective date of February 14, 2018 and a maturity date of January 14, 2022. Under the terms of the interest rate swap, we are required to make certain monthly fixed rate payments on a notional amount of $125.0 million while the counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional amount. The interest rate swap will effectively fix the annual interest rate payable on this notional amount of the Company’s debt which may exist under the $225 Million Term Loan Facility at 1.349% plus an applicable margin under the terms of the $225 Million Term Loan Facility.
On May 12, 2016, we entered into a second interest rate swap transaction to manage our exposure to fluctuations in variable interest rate associated with the incremental $100.0 million borrowed under the $225 Million Term Loan Facility. The interest rate swap has a notional amount of $100.0 million with an effective date of August 14, 2018, and a maturity date of

22



January 14, 2022. Under the terms of the interest rate swap, we are required to make certain monthly fixed rate payments on a notional amount of $100.0 million while the counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional amount. The interest rate swap will effectively fix the annual interest rate payable on this notional amount of the Company’s debt which may exist under the $225 Million Term Loan Facility at 1.406% plus an applicable margin under the terms of the $225 Million Term Loan Facility.
The following table sets forth a summary of our interest rate swaps at June 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
 
 
 
 
 
 
Fair Value(1)
 
Current Notional Amount(2)
Derivative Instrument
Effective Date
 
Maturity Date
 
Interest Strike Rate
 
June 30, 2016
 
December 31, 2015
 
June 30, 2016
 
December 31, 2015
Liabilities:
 
 
 
 
 

 
 
 
 
 
 
 
 
Interest Rate Swap
1/15/2015
 
2/15/2019
 
1.826
%
 
$
949

 
$
538

 
$
30,000

 
$
30,000

Interest Rate Swap
7/15/2015
 
2/15/2019
 
2.010
%
 
$
1,059

 
$
698

 
$
30,000

 
$
30,000

Interest Rate Swap
8/14/2015
 
12/14/2018
 
1.790
%
 
$
1,455

 
$
849

 
$
50,000

 
$
50,000

Interest Rate Swap
2/16/2016
 
12/14/2018
 
2.005
%
 
$
1,717

 
$
1,059

 
$
50,000

 
$

Interest Rate Swap
2/14/2018
 
1/14/2022
 
1.349
%
 
$
1,394

 
$

 
$

 
$

Interest Rate Swap
8/14/2018
 
1/14/2022
 
1.406
%
 
$
977

 
$

 
$

 
$

 
(1)
We record all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of June 30, 2016, and December 31, 2015, all of our derivatives were in a liability position, and as such, the fair value is included in the line item “Interest rate swap liability” in the accompanying consolidated balance sheets.
(2)
Represents the notional amount of swaps that are effective as of the balance sheet date presented. 

The following table sets forth the impact of our interest rate swaps on our consolidated statements of operations for the periods presented (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Interest Rate Swaps in Cash Flow Hedging Relationships:
 
 
 
 
 
 
 
Amount of (loss) gain recognized in AOCI on derivatives (effective portion)
$
(3,243
)
 
$
194

 
$
(5,501
)
 
$
(1,788
)
Amount of (loss) gain reclassified from AOCI into earnings under “Interest expense” (effective portion)
$
(593
)
 
$
(125
)
 
$
(1,094
)
 
$
(230
)
Amount of gain (loss) recognized in earnings under “Interest expense” (ineffective portion and amount excluded from effectiveness testing)
$

 
$

 
$

 
$

 
During the next twelve months, we estimate that an additional $2.3 million will be reclassified from AOCI as an increase to interest expense.
Credit-risk-related Contingent Features
Certain of our agreements with our derivative counterparties contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then we could also be declared in default on its derivative obligations.

23



Certain of our agreements with our derivative counterparties contain provisions where if a merger or acquisition occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.
As of June 30, 2016, the fair value of interest rate swaps in a net liability position, which excludes any adjustment for nonperformance risk related to these agreements, was $7.6 million.  As of June 30, 2016, we have not posted any collateral related to these agreements.

8.
Fair Value Measurements

We have adopted FASB Accounting Standards Codification Topic 820: Fair Value Measurements and Disclosure (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. 
ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Recurring Measurements – Interest Rate Swaps
Currently, we use interest rate swap agreements to manage our interest rate risk.   The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. 
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties.  However, as of June 30, 2016, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, we have determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

24



The table below sets forth the estimated fair value of our interest rate swaps as of June 30, 2016 and December 31, 2015, which we measure on a recurring basis by level within the fair value hierarchy (in thousands).  
 
 
 
Fair Value Measurement Using
Liabilities
 
Total Fair Value
 
Quoted Price in Active
Markets for Identical
Assets and Liabilities
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
Interest Rate Swaps at:
 
 
 
 
 
 
 
 
June 30, 2016
 
$
(7,551
)
 
$

 
$
(7,551
)
 
$

December 31, 2015
 
$
(3,144
)
 
$

 
$
(3,144
)
 
$

 
Financial Instruments Disclosed at Fair Value
The carrying amounts of cash and cash equivalents, rents and other receivables, other assets, accounts payable, accrued expenses and other liabilities, and tenant security deposits approximate fair value because of their short-term nature.
The fair value of our notes payable was estimated by calculating the present value of principal and interest payments, using currently available market rates, adjusted with a credit spread, and assuming the loans are outstanding through contractual maturity date.
The table below sets forth the carrying value and the estimated fair value of our notes payable as of June 30, 2016, and December 31, 2015 (in thousands):
 
 
 
Fair Value Measurement Using
 
 
Liabilities
 
Total Fair Value
 
Quoted Price in Active
Markets for Identical
Assets and Liabilities
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Carrying Value
Notes Payable at:
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
$
507,522

 
$

 
$

 
$
507,522

 
$
500,608

December 31, 2015
 
$
416,497

 
$

 
$

 
$
416,497

 
$
418,154

 

9.
Related Party Transactions

Howard Schwimmer
We engage in transactions with Howard Schwimmer, our Co-Chief Executive Officer, earning management and leasing commissions from entities controlled individually by Mr. Schwimmer. Fees and commissions earned from these entities are included in “Management, leasing and development services” in the consolidated statements of operations.  We recorded $0.1 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2016 and 2015, respectively, in management, leasing and development services revenue.   
 


25



10.
Commitments and Contingencies
Legal
From time to time, we are party to various lawsuits, claims and legal proceedings that arise in the ordinary course of business. Excluding ordinary routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.
Environmental
We generally will perform environmental site assessments at properties we are considering acquiring.  After the acquisition of such properties, we continue to monitor the properties for the presence of hazardous or toxic substances. From time to time, we acquire properties with known adverse environmental conditions.  If at the time of acquisition, losses associated with environmental remediation obligations are probable and can be reasonably estimable, we record a liability.
On February 25, 2014, we acquired the property located at West 228th Street.  Before purchasing the property during the due diligence phase, we engaged with a third party environmental consultant to perform various environmental site assessments to determine the presence of any environmental contaminants that might warrant remediation efforts. Based on their investigation, they determined that hazardous substances existed at the property and that additional assessment and remediation work would likely be required to satisfy regulatory requirements.  The total remediation costs were estimated to be $1.3 million, which includes remediation, processing and oversight costs.
To address the estimated costs associated with the environmental issues at the West 228th Street property, we entered into an Environmental Holdback Escrow Agreement (the “Holdback Agreement”) with the former owner, whereby $1.4 million was placed into an escrow account to be used to pay remediation costs.  To fund the $1.4 million, the escrow holder withheld $1.3 million of the purchase price, which would have otherwise been paid to the seller at closing, and the Company funded an additional $0.1 million. According to the Holdback Agreement, the seller has no liability or responsibility to pay for remediation costs in excess of $1.3 million.
As of June 30, 2016, and December 31, 2015, we have a $1.2 million contingent liability recorded in our consolidated balance sheets included in the line item “Accounts payable and accrued expenses,” reflecting the estimated remaining cost to remediate environmental liabilities at West 228th Street that existed prior to the acquisition date.  As of June 30, 2016, and December 31, 2015, we also have a $1.2 million corresponding indemnification asset recorded in our consolidated balance sheets included in the line item “Other assets,” reflecting the estimated costs we expect the former owner to cover pursuant to the Holdback Agreement.  
We expect that the resolution of the environmental matters relating to the above will not have a material impact on our consolidated financial condition, results of operations or cash flows.  However, we cannot assure you that we have identified all environmental liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that such environmental liabilities arise.  Furthermore, we cannot assure you that future changes to environmental laws or regulations and their application will not give rise to loss contingencies for future environmental remediation.
Rent Expense
As of June 30, 2016, we lease a parcel of land that is currently being sub-leased to a tenant for a parking lot.  The ground lease is scheduled to expire on June 1, 2062.  

26



The future minimum commitment under our ground lease and corporate and satellite office leases as of June 30, 2016, is as follows (in thousands):   
 
 
Office Leases
 
Ground Lease
July 1, 2016 through December 31, 2016
 
$
313

 
$
72

2017
 
635

 
144

2018
 
622

 
144

2019
 
337

 
144

2020
 

 
144

Thereafter
 

 
5,964

Total
 
$
1,907

 
$
6,612

 
Tenant and Construction Related
As of June 30, 2016, we had commitments of approximately $6.6 million for tenant improvement and construction work under the terms of leases with certain of our tenants and contractual agreements with our construction vendors.
Concentrations of Credit Risk
We have deposited cash with financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000 per institution.  Although we have deposits at institutions in excess of federally insured limits as of June 30, 2016, we do not believe we are exposed to significant credit risk due to the financial position of the institutions in which those deposits are held.
As of June 30, 2016, all of our properties are located in the Southern California infill markets.  The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate.
As of June 30, 2016, our 10 largest tenants represented approximately 13.2% of our annualized base rent, which is based on the monthly contracted base rent from leases in effect as of June 30, 2016, multiplied by 12, excluding billboard and antenna revenue and rent abatements.  During the three and six months ended June 30, 2016, no single tenant accounted for more than 1.9% of our annualized base rent.
 

27



11.
Investment in Unconsolidated Real Estate Entities
We currently manage and hold a 15% equity interest in a joint venture (the “JV”) that indirectly owns one property located at 3233 Mission Oaks Boulevard in Camarillo, California. The property is a two-building industrial property containing 457,693 rentable square feet in the Ventura County submarket.  We account for this investment under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from other-than-temporary impairments, if applicable).
The following tables present combined summarized financial information of our unconsolidated joint venture property. Amounts provided are the total amounts attributable to the JV and do not represent our proportionate share, unless otherwise noted (in thousands).
 
 
June 30, 2016
 
December 31, 2015
Assets
$
24,579

 
$
24,280

Liabilities
(626
)
 
(1,250
)
Partners’/members’ equity
$
23,953

 
$
23,030

Company’s share of equity
$
3,593

 
$
3,455

Basis adjustment(1)
610

 
632

Carrying value of the Company’s investment in unconsolidated real estate
$
4,203

 
$
4,087

 
(1)
This amount represents the difference between our historical cost basis and the basis reflected at the joint venture level, resulting from the contribution of our equity interest as part of the formation transactions that occurred on July 24, 2013.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
$
656

 
$
685

 
$
1,288

 
$
1,348

Expenses
(191
)
 
(574
)
 
(365
)
 
(1,196
)
Net income
$
465

 
$
111

 
$
923

 
$
152

     Fees and commissions earned from managing the JV are included in “Management, leasing and development services” in the consolidated statements of operations.  We recorded $18 thousand and $47 thousand for the three months ended June 30, 2016 and 2015, respectively, and $0.1 million and $0.1 million for the six months ended June 30, 2016 and 2015, respectively, in management, leasing and development services revenue.

12.
Equity
Common Stock
On April 15, 2016, we completed a public follow-on offering of 10,350,000 shares of our common stock, including the underwriters exercise in full of its option to purchase 1,350,000 shares of our common stock, at an offering price per share of $17.65. The net proceeds of the follow-on offering were approximately $174.4 million, after deducting the underwriting discount and offering costs totaling $8.3 million. We contributed the net proceeds of the offering to our Operating Partnership in exchange for 10,350,000 common units of partnership interests in the Operating Partnership (“OP Units”).
On February 3, 2015, we completed a public follow-on offering of 11,500,000 shares of our common stock at a public offering price of $16.00 per share.  The net proceeds of the follow-on offering were $176.3 million, after deducting the underwriting discount and offering costs totaling $7.7 million.  We contributed the net proceeds of the offering to our Operating Partnership in exchange for 11,500,000 OP Units.
On April 17, 2015, we established an at-the-market equity offering program (the “ATM Program”) through which we may sell from time to time up to an aggregate of $125.0 million of our common stock through sales agents.  During the six months ended June 30, 2016, we did not utilize the ATM Program, and as of June 30, 2016, we have issued a total of 500 shares

28



of common stock under the ATM Program.  Future sales, if any, will depend on a variety of factors to be determined by us from time to time, including among others, market conditions, the trading price of our common stock, determinations by us of the appropriate sources of funding for us and potential uses of funding available to us.  
Noncontrolling Interests
Noncontrolling interests in our Operating Partnership relate to interests in the Operating Partnership that are not owned by us. Noncontrolling interests consisted of 1,999,563 OP Units and represented approximately 2.9% of our Operating Partnership as of June 30, 2016. OP Units and shares of our common stock have essentially the same economic characteristics, as they share equally in the total net income or loss and distributions of our Operating Partnership. Investors who own OP Units have the right to cause our Operating Partnership to redeem any or all of their units in our Operating Partnership for an amount of cash per unit equal to the then current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis.
During the six months ended June 30, 2016, 27,079 OP Units were converted into an equivalent number of shares of common stock, resulting in the reclassification of $0.3 million of noncontrolling interest to Rexford Industrial Realty, Inc.’s stockholders’ equity.
As described in Note 3, as part of the REIT Portfolio Acquisition, we acquired 100% of the private REIT’s common stock and 575 of 700 issued and outstanding shares of the private REIT’S 12.5% cumulative non-voting preferred stock. The remaining 125 shares of preferred stock (the “noncontrolling preferred stock”) may be redeemed by us at any time, subject to procedural requirements, at a redemption price equal to $1,000 per share, or an aggregate price of $125,000, plus any dividends thereon that have accrued but have not been repaid at the time of such redemption (the “redemption price”). The noncontrolling preferred stock is entitled to a liquidation preference that is equal to the redemption price noted above. The noncontrolling preferred stock has been classified as noncontrolling interests in our consolidated balance sheets and has a balance equal to its liquidation preference.
2013 Incentive Award Plan
In July 2013, we established the Rexford Industrial Realty, Inc. and Rexford Industrial Realty, L.P. 2013 Incentive Award Plan (the “Plan”), pursuant to which we may make grants of stock options, restricted stock, dividend equivalents, stock payments, restricted stock units, performance shares, LTIP units of partnership interest in our Operating Partnership (“LTIP units”), performance units in our Operating Partnership (“Performance Units”), and other stock based and cash awards to our non-employee directors, employees and consultants. The aggregate number of shares of our common stock, LTIP units and Performance Units that may be issued or transferred pursuant to the Plan is 2,272,689 shares (of which 1,244,157 shares of common stock, LTIP Units and Performance Units remain available for issuance as of June 30, 2016).
Shares of our restricted common stock generally may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent or the administrator of the Plan, a domestic relations order, unless and until all restrictions applicable to such shares have lapsed. Such restrictions generally expire upon vesting. Shares of our restricted common stock are participating securities and have full voting rights and nonforfeitable rights to dividends.
LTIP units and Performance Units are each a class of limited partnership units in the Operating Partnership. Initially, LTIP units and performance units do not have full parity with OP Units with respect to liquidating distributions. However, upon the occurrence of certain events described in the Operating Partnership’s partnership agreement, the LTIP units and Performance Units can over time achieve full parity with the common units for all purposes. If such parity is reached, vested LTIP units and Performance Units may be converted into an equal number of OP Units, and, upon conversion, enjoy all rights of OP Units. LTIP Units, whether vested or not, receive the same quarterly per-unit distributions as OP Units, which equal the per-share distributions on shares of our common stock. Performance Units that have not vested receive a quarterly per-unit distribution equal to 10% of the distributions paid on OP Units.

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The following table sets forth our share-based award activity for the six months ended June 30, 2016:
 
 
Unvested Awards
 
Restricted
Common Stock
 
LTIP Units
 
Performance Units
Balance at January 1, 2016
333,441

 
166,669

 
315,998

Granted
92,216

 

 

Forfeited
(20,566
)
 

 

Vested(1)
(48,842
)
 

 

Balance at June 30, 2016
356,249

 
166,669

 
315,998

(1)
During the six months ended June 30, 2016, 11,681 shares of the Company’s common stock were tendered in accordance with the terms of the Plan to satisfy minimum tax withholding requirements related to the shares of restricted common stock that have vested.  We accept the return of shares at the current quoted closing share price of the Company’s common stock on the NYSE to satisfy tax obligations.
The following table sets forth the vesting schedule of all unvested share-based awards outstanding as of June 30, 2016:  
 
Unvested Awards
 
Restricted
Common Stock
 
LTIP Units
 
Performance Units(1)
July 1, 2016 - December 31, 2016
76,508

 
41,668

 

2017
165,045

 
41,666

 

2018
58,483

 
41,668

 
315,998

2019
37,178

 
41,667

 

2020
19,035

 

 

Total
356,249

 
166,669

 
315,998

(1)
Represents the maximum number of Performance Units that would be earned in the event that specified maximum total shareholder return (“TSR”) goals are achieved over the three-year performance period from December 15, 2015 through December 14, 2018 (the “performance period”). The number of Performance Unit awards that ultimately vest will be based on both the Company’s absolute TSR and TSR performance relative to a peer group over the performance period. The maximum number of Performance Units will be earned under the awards if the Company both (i) achieves 50% or higher absolute TSR, inclusive of all dividends paid, over the performance period and (ii) finishes in the 75th or greater percentile of the peer group for TSR over the performance period.

The following table sets forth the amounts expensed and capitalized for all share-based awards for the reported periods presented below (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Expensed share-based compensation(1)
 
$
954

 
$
466

 
$
1,887

 
$
815

Capitalized share-based compensation(2)
 
41

 
30

 
74

 
49

Total share-based compensation
 
$
995

 
$
496

 
$
1,961

 
$
864

(1)
Amounts expensed are included in “General and administrative” and “Property expenses” in the accompanying consolidated statements of operations.
(2)
Amounts capitalized, which relate to employees who provide construction and leasing services, and are included in “Building and improvements” and “Deferred leasing costs, net” in the consolidated balance sheets.

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As of June 30, 2016, there was $7.3 million of total unrecognized compensation expense related to all unvested share-based awards expected to vest, of which we estimate $0.4 million will be capitalized for employees who provide leasing and construction services. As of June 30, 2016, this total unrecognized compensation expense is expected to be recognized over a weighted average remaining period of 28 months.
Changes in Accumulated Other Comprehensive Loss
The following table summarizes the changes in our accumulated other comprehensive loss balance for the six months ended June 30, 2016, which consists solely of adjustments related to our cash flow hedges (in thousands):
 
Accumulated Other
Comprehensive Loss
Balance at January 1, 2016
$
(3,033
)
Other comprehensive loss before reclassifications
(5,501
)
Amounts reclassified from accumulated other comprehensive loss to interest expense
1,094

Net current period other comprehensive loss
(4,407
)
Less other comprehensive loss attributable to noncontrolling interests
112

Other comprehensive loss attributable to common stockholders
(4,295
)
Balance at June 30, 2016
$
(7,328
)

13.
Earnings Per Share  

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share amounts): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
12,792

 
$
196

 
$
14,269

 
$
277

Less: Net income attributable to noncontrolling interests
(418
)
 
(8
)
 
(470
)
 
(12
)
Less: Net income attributable to participating securities
(75
)
 
(49
)
 
(153
)
 
(99
)
Net income attributable to common stockholders
$
12,299

 
$
139

 
$
13,646

 
$
166

Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding – basic
64,063,337

 
54,963,093

 
59,666,468

 
52,835,132

Effect of dilutive securities - performance units
241,376

 

 
194,363

 

Weighted average shares of common stock outstanding – diluted
64,304,713

 
54,963,093

 
59,860,831

 
52,835,132

 
 
 
 
 
 
 
 
Earnings per share  Basic
 
 
 

 
 
 
 

Net income attributable to common stockholders
$
0.19

 
$

 
$
0.23

 
$