Building Dispositions
We regularly work to identify, consider and pursue opportunities to dispose of properties on an opportunistic basis and on a basis that is generally consistent with our strategic plans.
We sold
seven
wholly owned buildings during the
three months ended March 31, 2017
and
32
wholly owned buildings during the year ended
December 31, 2016
. The following table summarizes the sales prices, in-place yields and percent leased, by product type, of these buildings (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date 2017 Dispositions
|
|
Full Year 2016 Dispositions
|
Type
|
Sales Price
|
|
In-Place Yield*
|
|
Percent Occupied**
|
|
Sales Price
|
|
In-Place Yield*
|
|
Percent Occupied**
|
Industrial
|
$
|
14,400
|
|
|
6.0
|
%
|
|
100.0
|
%
|
|
$
|
162,831
|
|
|
6.4
|
%
|
|
96.7
|
%
|
Non-reportable Rental Operations
|
70,986
|
|
|
9.6
|
%
|
|
90.6
|
%
|
|
353,734
|
|
|
8.1
|
%
|
|
88.2
|
%
|
Total
|
$
|
85,386
|
|
|
9.0
|
%
|
|
94.6
|
%
|
|
$
|
516,565
|
|
|
7.6
|
%
|
|
92.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
* In-place yields of completed dispositions are calculated as annualized net operating income from space leased to tenants at the date of sale on a lease-up basis, including full rent from all executed leases, even if currently in a free rent period, divided by the sales price. Annualized net operating income is comprised of base rental payments, excluding reimbursement of operating expenses, less current annualized operating expenses not recovered through tenant reimbursements.
|
** Represents percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced, at the date of sale.
|
Development
At
March 31, 2017
, we had
11.0 million
square feet of property under development with total estimated costs upon completion of
$894.8 million
compared to 8.7 million square feet with total estimated costs upon completion of $754.6 million at
March 31, 2016
. The square footage and estimated costs include both consolidated properties and unconsolidated joint venture development activity at 100%.
The following table summarizes our properties under development at
March 31, 2017
(in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Type
|
Square
Feet
|
|
Percent
Leased
|
|
Total
Estimated
Project Costs
|
|
|
Total
Incurred
to Date
|
|
|
Amount
Remaining
to be Spent
|
|
Consolidated properties
|
10,223
|
|
71%
|
|
$
|
855,933
|
|
|
$
|
446,360
|
|
|
$
|
409,573
|
|
Unconsolidated joint venture properties
|
727
|
|
100%
|
|
38,872
|
|
|
14,715
|
|
|
24,157
|
|
Total
|
10,950
|
|
73%
|
|
$
|
894,805
|
|
|
$
|
461,075
|
|
|
$
|
433,730
|
|
Results of Operations
A summary of our operating results and property statistics is as follows (in thousands, except number of properties and per share or Common Unit data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Rental and related revenue from continuing operations
|
$
|
217,915
|
|
|
$
|
201,803
|
|
General contractor and service fee revenue
|
9,399
|
|
|
23,151
|
|
Operating income
|
102,860
|
|
|
79,158
|
|
General Partner
|
|
|
|
Net income attributable to common shareholders
|
$
|
70,200
|
|
|
$
|
43,307
|
|
Weighted average common shares outstanding
|
355,282
|
|
|
345,665
|
|
Weighted average common shares and potential dilutive securities
|
360,700
|
|
|
349,674
|
|
Partnership
|
|
|
|
Net income attributable to common unitholders
|
$
|
70,852
|
|
|
$
|
43,745
|
|
Weighted average Common Units outstanding
|
358,598
|
|
|
349,163
|
|
Weighted average Common Units and potential dilutive securities
|
360,700
|
|
|
349,674
|
|
General Partner and Partnership
|
|
|
|
Basic income per common share or Common Unit:
|
|
|
|
Continuing operations
|
$
|
0.20
|
|
|
$
|
0.12
|
|
Diluted income per common share or Common Unit:
|
|
|
|
Continuing operations
|
$
|
0.20
|
|
|
$
|
0.12
|
|
Number of in-service consolidated properties at end of period
|
496
|
|
|
490
|
|
In-service consolidated square footage at end of period
|
120,659
|
|
|
116,552
|
|
Number of in-service joint venture properties at end of period
|
42
|
|
|
66
|
|
In-service joint venture square footage at end of period
|
11,286
|
|
|
18,894
|
|
Supplemental Performance Measures
In addition to net income computed in accordance with GAAP, we assess and measure the overall operating results of the General Partner and the Partnership using certain non-GAAP supplemental performance measures, which include (i) Funds From Operations ("FFO"), (ii) PNOI and (iii) Same-Property Net Operating Income - Cash Basis ("SPNOI").
These non-GAAP metrics are commonly used by industry analysts and investors as supplemental operating performance measures of REITs and are viewed by management to be useful indicators of operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Management believes that the use of FFO, PNOI and SPNOI, combined with net income (which remains the primary measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful.
The most comparable GAAP measure to FFO is net income (loss) attributable to common shareholders or common unitholders, while the most comparable GAAP measure to PNOI and SPNOI is income (loss) from continuing operations before income taxes.
FFO, PNOI and SPNOI each exclude expenses that materially impact our overall results of operations and, therefore, should not be considered as a substitute for net income (loss) attributable to common shareholders or
common unitholders, income (loss) from continuing operations before income taxes, or any other measures derived in accordance with GAAP. Furthermore, these metrics may not be comparable to other similarly titled measures of other companies.
Funds From Operations
The National Association of Real Estate Investment Trusts ("NAREIT") created FFO as a non-GAAP supplemental measure of REIT operating performance. FFO, as defined by NAREIT, represents GAAP net income (loss), excluding gains or losses from sales of previously depreciated real estate assets, impairment charges related to depreciable real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures. We calculate FFO in accordance with the definition that was adopted by the Board of Governors of NAREIT.
Management believes that the use of FFO as a performance measure enables investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activity and assists them in comparing these operating results between periods or between different companies that use the NAREIT definition of FFO.
The following table shows a reconciliation of net income attributable to common shareholders or common unitholders to the calculation of FFO attributable to common shareholders or common unitholders (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Net income attributable to common shareholders of the General Partner
|
$
|
70,200
|
|
|
$
|
43,307
|
|
Add back: Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership
|
652
|
|
|
438
|
|
Net income attributable to common unitholders of the Partnership
|
70,852
|
|
|
43,745
|
|
Adjustments:
|
|
|
|
Depreciation and amortization
|
81,557
|
|
|
77,798
|
|
Company share of joint venture depreciation, amortization and other adjustments
|
2,495
|
|
|
3,639
|
|
Impairment charges - depreciable property
|
859
|
|
|
—
|
|
Gains on depreciable property sales - wholly owned
|
(37,046
|
)
|
|
(15,491
|
)
|
Income tax expense triggered by depreciable property sales
|
—
|
|
|
343
|
|
Gains on depreciable property sales - share of joint venture
|
(1,798
|
)
|
|
(17,942
|
)
|
FFO attributable to common unitholders of the Partnership
|
$
|
116,919
|
|
|
$
|
92,092
|
|
Additional General Partner Adjustments:
|
|
|
|
Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership
|
(652
|
)
|
|
(438
|
)
|
Noncontrolling interest share of adjustments
|
(427
|
)
|
|
(484
|
)
|
FFO attributable to common shareholders of the General Partner
|
$
|
115,840
|
|
|
$
|
91,170
|
|
Property-Level Net Operating Income - Cash Basis
PNOI is comprised of rental revenues from continuing operations less rental expenses and real estate taxes from continuing operations, along with certain other adjusting items. As a performance metric that consists of only the cash-based revenues and expenses directly related to ongoing real estate rental operations, PNOI is narrower in scope than FFO.
PNOI, as we calculate it, may not be directly comparable to similarly titled, but differently calculated, measures for other REITs. We believe that PNOI is another useful supplemental performance measure, as it is an input in many REIT valuation models and it provides a means by which to evaluate the performance of the properties within our Rental Operations segments.
The major factors influencing PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses.
Note 9 to the consolidated financial statements included in Part I, Item 1 of this Report shows a calculation of our PNOI for the
three months ended March 31, 2017
and
2016
and provides a reconciliation of PNOI for our Rental Operations segments to income from continuing operations before income taxes.
Same Property Net Operating Income - Cash Basis
We also evaluate the performance of our properties, including our share of properties we jointly control, on a "same property" basis, using a metric referred to as SPNOI. We view SPNOI as a useful supplemental performance measure because it improves comparability between periods by eliminating the effects of changes in the composition of our portfolio.
On an individual property basis, SPNOI is generally computed in a consistent manner as PNOI.
We have defined our same-property portfolio, for the three months ended
March 31, 2017
, as those properties that were owned and in-service as of January 1,
2016
, and held as in-service properties through the end of the reporting periods shown. In addition to excluding properties that were sold or identified as held-for-sale through the end of the reporting periods shown, we also exclude properties where revenues from lease buyouts in excess of $250,000 have been recognized in either the full calendar year 2016 or year-to-date calendar year 2017. A reconciliation of income from continuing operations before income taxes to SPNOI is presented as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Percent
|
|
|
2017
|
|
2016
|
Change
|
Income from continuing operations before income taxes
|
|
$
|
72,913
|
|
|
$
|
43,948
|
|
|
Share of SPNOI from unconsolidated joint ventures
|
|
4,913
|
|
|
5,269
|
|
|
PNOI excluded from the same property population
|
|
(17,762
|
)
|
|
(7,161
|
)
|
|
Earnings from Service Operations
|
|
(1,775
|
)
|
|
(2,231
|
)
|
|
Rental Operations revenues and expenses excluded from PNOI
|
|
(15,139
|
)
|
|
(15,200
|
)
|
|
Non-Segment Items
|
|
89,616
|
|
|
101,583
|
|
|
SPNOI
|
|
$
|
132,766
|
|
|
$
|
126,208
|
|
5.2
|
%
|
The composition of the line items titled "Rental Operations revenues and expenses excluded from PNOI" and "Non-Segment Items" from the table above are shown in greater detail in Note 9 to the consolidated financial statements included in Part I, Item 1 of this Report.
We believe that the factors that impact SPNOI are generally the same as those that impact PNOI. The following table details the number of properties, square feet, average occupancy and cash rental rates for the properties included in SPNOI for the respective periods:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Number of properties
|
|
471
|
|
471
|
Square feet (in thousands) (1)
|
|
113,368
|
|
113,368
|
Average commencement occupancy percentage (2)
|
|
97.5%
|
|
96.0%
|
Average rental rate - cash basis (3)
|
|
$4.88
|
|
$4.81
|
(1) Includes the total square feet of the consolidated properties that are in the same property population as well as 4.5 million square feet of space for unconsolidated joint ventures, which represents our ratable share of the 9.4 million total square feet of space for buildings owned by unconsolidated joint ventures that are in the same property population.
|
(2) Commencement occupancy represents the percentage of total square feet where the leases have commenced.
|
(3) Represents the average annualized contractual rent per square foot for the three months ended March 31, 2017 and 2016 for tenants in occupancy in properties in the same property population. Cash rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant was within a free rent period at March 31, 2017 or 2016 its rent would equal zero for purposes of this metric.
|
Comparison of Three Months Ended
March 31, 2017
to Three Months Ended
March 31, 2016
Rental and Related Revenue
The following table sets forth rental and related revenue from continuing operations by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Rental and related revenue:
|
|
|
|
Industrial
|
$
|
156,882
|
|
|
$
|
142,980
|
|
Medical Office
|
47,522
|
|
|
42,225
|
|
Non-reportable Rental Operations and non-segment revenues
|
13,511
|
|
|
16,598
|
|
Total rental and related revenue from continuing operations
|
$
|
217,915
|
|
|
$
|
201,803
|
|
Rental and related revenue from discontinued operations
|
—
|
|
|
229
|
|
Total rental and related revenue from continuing and discontinued operations
|
$
|
217,915
|
|
|
$
|
202,032
|
|
The following factors contributed to the
increase
in rental and related revenue from continuing operations:
|
|
•
|
We acquired 23 properties and placed 27 developments in service from January 1,
2016
to
March 31, 2017
, which provided incremental revenues of $17.3 million in the
first
quarter of
2017
, as compared to the same period in
2016
.
|
|
|
•
|
Rental and related revenue from continuing operations includes lease termination fees, which relate to specific tenants who pay a fee to terminate their lease obligation before the end of the contractual lease term.
The overall increase in rental and related revenue from continuing operations included an increase of $9.4 million in termination fees compared to the three months ended
March 31, 2016
.
|
|
|
•
|
Increased occupancy and rental rates within our same-property portfolio also contributed to the increase to rental and related revenue from continuing operations. Average commencement occupancy in our same-property portfolio
increased
by
1.5%
from the three months ended
March 31, 2016
.
|
|
|
•
|
The sale of 39 properties since January 1,
2016
, which did not meet the criteria to be classified within discontinued operations, resulted in a decrease of $11.0 million to rental and related revenue from continuing operations in the three months ended
March 31, 2017
, as compared to the same period in
2016
, which partially offset the aforementioned increases to rental and related revenues.
|
Rental Expenses and Real Estate Taxes
The following table sets forth rental expenses and real estate taxes from continuing operations by reportable segment (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Rental expenses:
|
|
|
|
Industrial
|
$
|
14,805
|
|
|
$
|
14,362
|
|
Medical Office
|
8,994
|
|
|
8,395
|
|
Non-reportable Rental Operations and non-segment expenses
|
1,472
|
|
|
6,521
|
|
Total rental expenses from continuing operations
|
$
|
25,271
|
|
|
$
|
29,278
|
|
Rental expenses from discontinued operations
|
—
|
|
|
(8
|
)
|
Total rental expenses from continuing and discontinued operations
|
$
|
25,271
|
|
|
$
|
29,270
|
|
Real estate taxes:
|
|
|
|
Industrial
|
$
|
25,388
|
|
|
$
|
22,708
|
|
Medical Office
|
6,050
|
|
|
4,960
|
|
Non-reportable Rental Operations and non-segment expenses
|
1,035
|
|
|
1,959
|
|
Total real estate tax expense from continuing operations
|
$
|
32,473
|
|
|
$
|
29,627
|
|
Rental expenses from continuing operations
decreased
by
$4.0 million
during the three months ended
March 31, 2017
, compared to the same period in
2016
. The decrease to rental expenses was primarily the result of sales of office properties, which have higher utility and other operating costs relative to industrial properties, that did not meet the criteria to be classified within discontinued operations.
Real estate tax expense from continuing operations
increased
by
$2.8 million
during the three months ended
March 31, 2017
, compared to the same period in
2016
. The increase to real estate tax expense was mainly the result of industrial developments placed in service from January 1,
2016
to
March 31, 2017
and increases in real estate taxes on our existing base of properties. These increases to real estate tax expense were partially offset by the impact of property sales that did not meet the criteria to be classified within discontinued operations.
Depreciation and Amortization
Depreciation and amortization expense from continuing operations
increased
from
$77.8 million
for the three months ended
March 31, 2016
to
$81.6 million
for the same period in
2017
primarily as the result of the 23 properties acquired and the 27 developments placed in service since January 1,
2016
. The impact of acquired properties and developments placed in service was partially offset by property dispositions that did not meet the criteria to be classified within discontinued operations.
Equity in Earnings
Equity in earnings represents our ownership share of net income from investments in unconsolidated companies that generally own and operate rental properties. Equity in earnings
decreased
from
$21.9 million
for the three months ended
March 31, 2016
to
$4.7 million
for the same period in
2017
. During the three months ended
March 31, 2017
, we recorded
$1.8 million
to equity in earnings related to our share of the gain on sale of one joint venture building. During the three months ended March 31, 2016, we recorded $14.0 million to equity in earnings for our share of the net gains from the sale of four office properties in one of our joint ventures.
Gain on Sale of Properties - Continuing Operations
The
$37.0 million
recognized as gain on sale of properties in continuing operations for the three months ended
March 31, 2017
is the result of the sale of
seven
properties. These properties did not meet the criteria for inclusion in discontinued operations.
The
$15.6 million
recognized as gain on sale of properties in continuing operations for the three months ended
March 31, 2016
was the result of the gain from the sale of three properties. These properties did not meet the criteria for inclusion in discontinued operations.
General and Administrative Expenses
General and administrative expenses consist of two components. The first component includes general corporate expenses, and the second component includes the indirect operating costs not allocated to, or absorbed by, the development or Rental Operations of our wholly-owned properties or our Service Operations. The indirect operating costs that are either allocated to, or absorbed by, the development or Rental Operations of our wholly-owned properties, or our Service Operations, are primarily comprised of employee compensation, including related costs such as benefits and wage-related taxes, but also include other ancillary costs such as travel and information technology support. Total indirect operation costs, prior to any allocation or absorption, and general corporate expenses are collectively referred to as our overall pool of overhead costs.
Those indirect costs not allocated to or absorbed by these operations are charged to general and administrative expenses. We regularly review our total overhead cost structure relative to our leasing, development and construction volume and adjust the level of total overhead, generally through changes in our level of staffing in various functional departments, as necessary in order to control overall general and administrative expense.
General and administrative expenses
increased
from
$18.1 million
for the three months ended
March 31, 2016
to
$19.2 million
for the same period in
2017
. The following table sets forth the factors that led to the increase in general and administrative expenses (in millions):
|
|
|
|
|
General and administrative expenses - three-month period ended March 31, 2016
|
$
|
18.1
|
|
Decrease to overall pool of overhead costs
|
(1.1
|
)
|
Increased absorption of costs by wholly owned leasing and development activities (1)
|
(0.5
|
)
|
Decreased allocation of costs to Service Operations and Rental Operations (2)
|
2.7
|
|
General and administrative expenses - three-month period ended March 31, 2017
|
$
|
19.2
|
|
(1) We capitalized
$5.3 million
and
$8.3 million
of our total overhead costs to leasing and development, respectively, for consolidated properties during the three months ended
March 31, 2017
, compared to capitalizing
$6.8 million
and
$6.3 million
of such costs, respectively, for the three months ended
March 31, 2016
. Combined overhead costs capitalized to leasing and development totaled
33.3%
and
31.4%
of our overall pool of overhead costs for the three months ended
March 31, 2017
and
2016
, respectively.
(2) The decrease in allocation of costs to Service Operations and Rental Operations resulted from a lower volume of third-party construction projects during the three months ended
March 31, 2017
as well as a lower allocation of property management and maintenance expenses to Rental Operations due to significantly decreasing our investment in office properties through 2016 disposition activities.
Interest Expense
Interest expense allocable to continuing operations
decreased
from
$37.7 million
for the three months ended
March 31, 2016
to
$30.5 million
for the three months ended
March 31, 2017
. The decrease to interest expense from continuing operations was primarily due to interest savings from reducing leverage and refinancing higher rate indebtedness during 2016.
We capitalized
$4.2 million
and
$5.7 million
of interest costs for the three months ended
March 31, 2017
and
2016
, respectively.
Discontinued Operations
The property-specific components of earnings that are classified as discontinued operations include rental revenues, rental expenses, real estate taxes, allocated interest expense and depreciation expense, as well as the net gain or loss on the disposition of the properties.
We had no buildings classified as discontinued operations for both the three months ended
March 31, 2017
and
March 31, 2016
. The amounts classified in discontinued operations for the three months ended
March 31, 2016
were comprised of true-up activity related to 2015 property sales that were classified as discontinued operations. There was no true-up activity for the three months ended
March 31, 2017
.
Liquidity and Capital Resources
Sources of Liquidity
We expect to meet our short-term liquidity requirements over the next 12 months, including maturities of indebtedness, payments of dividends and distributions and the capital expenditures needed to maintain our current real estate assets, primarily through working capital, net cash provided by operating activities and proceeds received from real estate dispositions. We had a
$237.0 million
balance outstanding on the Partnership's
$1.20 billion
unsecured line of credit at
March 31, 2017
.
In addition to our existing sources of liquidity, we expect to meet long-term liquidity requirements, such as scheduled mortgage and unsecured debt maturities, property acquisitions, financing of development activities and other capital improvements, through multiple sources of capital including operating cash flow, proceeds from property dispositions and through accessing the public debt and equity markets.
Rental Operations
Cash flows from Rental Operations is our primary source of liquidity and provides a stable source of cash flow to fund operational expenses. We believe that this cash-based revenue stream is substantially aligned with revenue recognition (except for items such as periodic straight-line rental income accruals and amortization of above or below market rents) as cash receipts from the leasing of rental properties are generally received in advance of, or a short time following, the actual revenue recognition.
We are subject to a number of risks related to general economic conditions, including reduced occupancy, tenant defaults and bankruptcies and potential reduction in rental rates upon renewal or re-letting of properties, any of which would result in reduced cash flow from operations.
Unsecured Debt and Equity Securities
We use the Partnership's unsecured line of credit (which is guaranteed by the General Partner) as a temporary source of capital to fund development activities, acquire additional rental properties and provide working capital.
At
March 31, 2017
, we had on file with the SEC an automatic shelf registration statement on Form S-3 relating to the offer and sale, from time to time, of an indeterminate amount of debt and equity securities (including guarantees of the Partnership's debt securities by the General Partner). Equity securities are offered and sold by the General Partner, and the net proceeds of such offerings are contributed to the Partnership in exchange for additional General Partner Units or Preferred Units. From time to time, we expect to issue additional securities under this automatic shelf registration statement to fund the repayment of long-term debt upon maturity and for other general corporate purposes.
The General Partner has an ATM equity program that allows it to issue new common shares from time to time, with an aggregate offering price of up to $200.0 million. During the three months ended March 31, 2017, the General Partner did not issue any common shares pursuant to its ATM equity program. As of
March 31, 2017
, the ATM equity program still had $108.1 million worth of new common shares available to issue.
The Partnership has issued debt securities pursuant to certain indentures and related supplemental indentures, which also require us to comply with financial ratios and other covenants regarding our operations. We were in compliance with all such covenants, as well as applicable covenants under our unsecured line of credit, at
March 31, 2017
.
Sale of Real Estate Assets
We regularly work to identify, consider and pursue opportunities to dispose of non-strategic properties on an opportunistic basis and on a basis that is generally consistent with our strategic plans. Our ability to dispose of such properties on favorable terms, or at all, is dependent upon a number of factors including the availability of credit to potential buyers to purchase properties at prices that we consider acceptable. Although we believe that we have demonstrated our ability to generate significant liquidity through the disposition of non-strategic properties, potential future adverse changes to general market and economic conditions could negatively impact our further ability to dispose of such properties.
Sales of land and depreciable property provided
$103.1 million
in net proceeds during the
three months ended March 31, 2017
.
Transactions with Unconsolidated Joint Ventures
Transactions with unconsolidated joint ventures also provide a source of liquidity. From time to time we will sell properties to unconsolidated joint ventures, while retaining a continuing interest in that entity, and receive proceeds commensurate to those interests that we do not own. Additionally, unconsolidated joint ventures will from time to time obtain debt financing or sell properties and will then distribute to us, and our joint venture partners, all or a portion of the proceeds from such transactions. During the
three months ended March 31, 2017
, our share of sale distributions from unconsolidated joint ventures totaled
$4.9 million
.
Uses of Liquidity
Our principal uses of liquidity include the following:
|
|
•
|
dividends and distributions to shareholders and unitholders;
|
|
|
•
|
long-term debt maturities;
|
|
|
•
|
opportunistic repurchases of outstanding debt; and
|
|
|
•
|
other contractual obligations.
|
Property Investment
Our overall strategy is to continue to increase our investment in quality industrial properties. Pursuant to this strategy, we evaluate development and acquisition opportunities based upon our market outlook, including general economic conditions, supply and long-term growth potential. Our ability to make future property investments is dependent upon identifying suitable acquisition and development opportunities, and our continued access to our longer-term sources of liquidity, including issuances of debt or equity securities as well as generating cash flow by disposing of selected properties.
Leasing/Capital Costs
Tenant improvements and lease-related costs pertaining to our initial leasing of newly completed space, or vacant space in acquired properties, are referred to as first generation expenditures. Such first generation expenditures for tenant improvements are included within "development of real estate investments" in our Consolidated Statements of Cash Flows, while such expenditures for lease-related costs are included within "other deferred leasing costs."
Cash expenditures related to the construction of a building's shell, as well as the associated site improvements, are also included within "development of real estate investments" in our Consolidated Statements of Cash Flows.
Tenant improvements and leasing costs to re-let rental space that we previously leased to tenants are referred to as second generation expenditures. Building improvements that are not specific to any tenant but serve to improve integral components of our real estate properties are also second generation expenditures. One of the principal uses of our liquidity is to fund the second generation leasing/capital expenditures of our real estate investments.
The following table summarizes our second generation capital expenditures by type of expenditure, as well as capital expenditures for the development of real estate investments and for other deferred leasing costs (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Second generation tenant improvements
|
$
|
3,694
|
|
|
$
|
7,763
|
|
Second generation leasing costs
|
5,650
|
|
|
6,235
|
|
Building improvements
|
1,087
|
|
|
403
|
|
Total second generation capital expenditures
|
$
|
10,431
|
|
|
$
|
14,401
|
|
Development of real estate investments
|
$
|
112,727
|
|
|
$
|
108,179
|
|
Other deferred leasing costs
|
$
|
4,398
|
|
|
$
|
8,359
|
|
The capital expenditures in the table above include the capitalization of internal overhead costs. We capitalized
$5.3 million
and
$6.8 million
of overhead costs related to leasing activities, including both first and second generation leases, during the
three months ended
March 31, 2017
and
2016
, respectively. We capitalized
$8.3 million
and
$6.3 million
of overhead costs related to development activities, including both development and tenant improvement projects on first and second generation space, during the
three months ended
March 31, 2017
and
2016
, respectively. Combined overhead costs capitalized to leasing and development totaled
33.3%
and
31.4%
of our overall pool of overhead costs for the
three months ended
March 31, 2017
and
2016
, respectively. Further discussion of the capitalization of overhead costs can be found herein, in the quarter-to-quarter comparison of general and administrative expenses of this Item 2 as well as in the Critical Accounting Policies section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Annual Report.
In addition to the capitalization of overhead costs, the totals for development of real estate assets in the table above include the capitalization of
$4.2 million
and
$5.7 million
of interest costs in the
three months ended
March 31, 2017
and
2016
, respectively.
The following table summarizes our second generation capital expenditures by reportable operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Industrial
|
$
|
9,401
|
|
|
$
|
12,193
|
|
Medical Office
|
717
|
|
|
534
|
|
Non-reportable Rental Operations
|
313
|
|
|
1,674
|
|
Total
|
$
|
10,431
|
|
|
$
|
14,401
|
|
Both our first and second generation expenditures vary significantly between leases on a per square foot basis, dependent upon several factors including the product type, the nature of a tenant's operations, the specific physical characteristics of each individual property and the market in which the property is located.
Dividend and Distribution Requirements
The General Partner is required to meet the distribution requirements of the Code, in order to maintain its REIT status. We paid regular dividends or distributions of $0.19 per common share or Common Unit in the first quarter of
2017
, and the General Partner's board of directors declared dividends or distributions of $0.19 per common share or Common Unit for the
second
quarter of
2017
.
We expect to continue to distribute at least an amount equal to our taxable earnings, to meet the requirements to maintain the General Partner's REIT status, and additional amounts as determined by the General Partner's board of directors. Distributions are declared at the discretion of the General Partner's board of directors and are subject to actual cash available for distribution, our financial condition, capital requirements and such other factors as the General Partner's board of directors deems relevant.
Debt Maturities
Debt outstanding at
March 31, 2017
had a face value totaling
$3.10 billion
with a weighted average interest rate of
4.33%
and maturities at various dates through 2028. Of this total amount, we had
$2.50 billion
of unsecured debt,
$366.8 million
of secured debt and
$237.0 million
outstanding on our unsecured line of credit at
March 31, 2017
. Scheduled principal amortization, maturities and early repayments of such debt totaled
$18.2 million
for the
three months ended March 31, 2017
.
The following table is a summary of the scheduled future amortization and maturities of our indebtedness at
March 31, 2017
(in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Repayments
|
|
|
Year
|
Scheduled
Amortization
|
|
|
Maturities
|
|
Total
|
|
Weighted Average Interest Rate of
Future Repayments
|
|
Remainder of 2017
|
$
|
6,754
|
|
|
$
|
50,262
|
|
|
$
|
57,016
|
|
|
5.91
|
%
|
2018
|
7,768
|
|
|
285,611
|
|
|
293,379
|
|
|
6.08
|
%
|
2019
|
6,936
|
|
|
268,438
|
|
|
275,374
|
|
|
7.60
|
%
|
2020
|
5,381
|
|
|
615,660
|
|
|
621,041
|
|
|
2.96
|
%
|
2021
|
3,416
|
|
|
259,047
|
|
|
262,463
|
|
|
3.99
|
%
|
2022
|
3,611
|
|
|
600,000
|
|
|
603,611
|
|
|
4.20
|
%
|
2023
|
3,817
|
|
|
250,000
|
|
|
253,817
|
|
|
3.75
|
%
|
2024
|
4,036
|
|
|
300,000
|
|
|
304,036
|
|
|
3.92
|
%
|
2025
|
3,938
|
|
|
—
|
|
|
3,938
|
|
|
5.53
|
%
|
2026
|
2,029
|
|
|
375,000
|
|
|
377,029
|
|
|
3.37
|
%
|
2027
|
358
|
|
|
—
|
|
|
358
|
|
|
6.42
|
%
|
Thereafter
|
—
|
|
|
50,000
|
|
|
50,000
|
|
|
7.29
|
%
|
|
$
|
48,044
|
|
|
$
|
3,054,018
|
|
|
$
|
3,102,062
|
|
|
4.33
|
%
|
The Partnership's variable rate unsecured notes and unsecured line of credit are both reflected in the table above as maturing in January 2020, based on the ability to exercise a one-year extension option from their stated maturity dates of January 2019. We anticipate generating capital to fund our debt maturities by using undistributed cash generated from our Rental Operations and property dispositions and by raising additional capital from future debt or equity transactions.
Repurchases of Outstanding Debt
To the extent that it supports our overall capital strategy, we may purchase some of our outstanding unsecured notes prior to their stated maturities.
Contractual Obligations
Aside from repayments of long-term debt, there have not been material changes in our outstanding commitments since
December 31, 2016
, as previously discussed in our
2016
Annual Report.
Historical Cash Flows
Cash and cash equivalents were
$13.4 million
and
$15.6 million
at
March 31, 2017
and
2016
, respectively. The following table highlights significant changes in net cash associated with our operating, investing and financing activities (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
General Partner
|
|
|
|
Net Cash Provided by Operating Activities
|
$
|
109.9
|
|
|
$
|
72.9
|
|
Net Cash Used for Investing Activities
|
$
|
(210.9
|
)
|
|
$
|
(62.6
|
)
|
Net Cash Provided by (Used for) Financing Activities
|
$
|
101.7
|
|
|
$
|
(17.2
|
)
|
|
|
|
|
Partnership
|
|
|
|
Net Cash Provided by Operating Activities
|
$
|
109.9
|
|
|
$
|
72.9
|
|
Net Cash Used for Investing Activities
|
$
|
(210.9
|
)
|
|
$
|
(62.6
|
)
|
Net Cash Provided by (Used for) Financing Activities
|
$
|
101.7
|
|
|
$
|
(17.2
|
)
|
Operating Activities
Cash flows from operating activities provide the cash necessary to meet normal operational requirements of our Rental Operations and Service Operations activities. The receipt of rental income from Rental Operations continues to be our primary source of operating cash flows. The increase to cash flow provided by operating activities, compared to the
three months ended March 31, 2016
, was due to improved operational performance, carrying a larger overall portfolio of real estate assets and lower cash paid for interest, as the result of the significant debt repayments or refinancings that took place throughout 2016.
Investing Activities
Investing activities are one of the primary uses of our liquidity. Development and acquisition activities typically generate additional rental revenues and provide cash flows for operational requirements. Highlights of significant cash sources and uses are as follows:
|
|
•
|
During the
three months ended March 31, 2017
, we paid cash of approximately
$114.4 million
and
$50.4 million
, respectively, for real estate and undeveloped land acquisitions, compared to
$27.2 million
of undeveloped land acquisitions and no real estate acquisitions in the same period in
2016
.
|
|
|
•
|
Real estate development costs were
$112.7 million
during the
three months ended March 31, 2017
, compared to
$108.2 million
for the same period in
2016
. During the three months ended March 31, 2017, we placed five newly completed wholly owned development projects in service and expect to continue with a robust level of new development.
|
|
|
•
|
Sales of land and depreciated properties provided
$103.1 million
in net proceeds for the
three months ended March 31, 2017
, compared to
$57.4 million
for the same period in
2016
.
|
|
|
•
|
Second generation tenant improvements, leasing costs and building improvements totaled
$10.4 million
for the
three months ended March 31, 2017
compared to
$14.4 million
for the same period in
2016
.
|
|
|
•
|
For the
three months ended March 31, 2017
, we received
$4.9 million
in capital distributions from unconsolidated joint ventures, compared to
$29.5 million
during the same period in
2016
.
|
|
|
•
|
For the
three months ended March 31, 2017
, we made capital contributions of
$297,000
to unconsolidated joint ventures, compared to
$23.2 million
during the same period in
2016
.
|
Financing Activities
The following items highlight significant capital transactions:
|
|
•
|
For the
three months ended March 31, 2017
, we increased net borrowings on the Partnership's unsecured line of credit by
$189.0 million
, compared to an increase of
$77.0 million
of net borrowings for the same period in
2016
.
|
|
|
•
|
During the
three months ended March 31, 2017
, we repaid
two
secured loans for
$15.9 million
. We repaid one secured loan for $14.4 million during the same period in 2016.
|
|
|
•
|
Changes in book overdrafts are classified as financing activities within our consolidated Statements of Cash Flows. Book overdrafts were $20.6 million and $2.5 million for the
three months ended March 31, 2017
and
2016
, respectively.
|
|
|
•
|
We paid regular cash dividends or distributions totaling
$67.6 million
and
$62.3 million
for the
three months ended March 31, 2017
and
2016
, respectively.
|
Off Balance Sheet Arrangements - Investments in Unconsolidated Companies
We analyze our investments in unconsolidated joint ventures to determine if they meet the criteria for classification as a VIE and would require consolidation. We (i) evaluate the sufficiency of the total equity at risk, (ii) review the voting rights and decision-making authority of the equity investment holders as a group and whether there are limited partners (or similar owning entities) that lack substantive participating or kick out rights and (iii) establish whether or not activities within the venture are on behalf of an investor with disproportionately few voting rights in making this VIE determination. To the extent that we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary of the VIE and would consolidate it. At the end of each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary. To the extent that our joint ventures do not qualify as VIEs, we further assess each joint venture partner's substantive participating rights to determine if the venture should be consolidated. There were no unconsolidated joint ventures that met the criteria to be a VIE at
March 31, 2017
.
We have equity interests in unconsolidated partnerships and limited liability companies that primarily own and operate rental properties and hold land for development. These unconsolidated joint ventures are primarily engaged in the operations and development of industrial and medical office real estate properties. These investments provide us with increased market share and tenant and property diversification. The equity method of accounting is used for these investments in which we have the ability to exercise significant influence, but not control, over operating and financial policies. As a result, the assets and liabilities of these entities are not included on our balance sheet. Our investments in and advances to unconsolidated joint ventures represented approximately
3%
of our total assets at both
March 31, 2017
and
December 31, 2016
. Total assets of our unconsolidated joint ventures were $734.1 million and $743.4 million at
March 31, 2017
and
December 31, 2016
, respectively. The combined revenues of our unconsolidated joint ventures totaled $21.5 million and $36.0 million for the
three months ended March 31, 2017
and
2016
, respectively.
We have guaranteed the repayment of certain secured and unsecured loans of our unconsolidated joint ventures. The outstanding balances on the guaranteed portion of these loans totaled
$63.1 million
at
March 31, 2017
.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate changes primarily as a result of our line of credit and our long-term borrowings. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we borrow primarily at fixed rates. We do not enter into derivative or interest rate transactions for speculative purposes. We have one outstanding swap, which fixes the rate on one of our variable rate loans and is not significant to our financial statements at
March 31, 2017
.
Our interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts (in thousands) of the expected annual maturities, weighted average interest rates for the average debt outstanding in the specified period, fair values (in thousands) and other terms required to evaluate the expected cash flows and sensitivity to interest rate changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Thereafter
|
|
Face Value
|
|
Fair Value
|
Fixed rate
secured debt
|
$
|
54,809
|
|
|
$
|
4,783
|
|
|
$
|
272,215
|
|
|
$
|
3,583
|
|
|
$
|
12,163
|
|
|
$
|
16,489
|
|
|
$
|
364,042
|
|
|
$
|
392,885
|
|
Weighted average
interest rate
|
5.92
|
%
|
|
6.46
|
%
|
|
7.63
|
%
|
|
5.98
|
%
|
|
5.73
|
%
|
|
6.07
|
%
|
|
7.20
|
%
|
|
|
Variable rate
secured debt
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
1,300
|
|
|
$
|
2,800
|
|
|
$
|
2,800
|
|
Weighted average
interest rate
|
0.94
|
%
|
|
0.94
|
%
|
|
0.94
|
%
|
|
0.94
|
%
|
|
0.94
|
%
|
|
0.94
|
%
|
|
0.94
|
%
|
|
|
Fixed rate
unsecured debt
|
$
|
1,907
|
|
|
$
|
288,296
|
|
|
$
|
2,859
|
|
|
$
|
130,158
|
|
|
$
|
250,000
|
|
|
$
|
1,575,000
|
|
|
$
|
2,248,220
|
|
|
$
|
2,316,628
|
|
Weighted average
interest rate
|
6.26
|
%
|
|
6.08
|
%
|
|
6.26
|
%
|
|
6.74
|
%
|
|
3.91
|
%
|
|
3.96
|
%
|
|
4.39
|
%
|
|
|
Variable rate
unsecured notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
Rate at March 31, 2017
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
1.99%
|
|
|
N/A
|
|
|
N/A
|
|
|
1.99
|
%
|
|
|
Variable rate unsecured
line of credit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237,000
|
|
|
$
|
237,000
|
|
Rate at March 31, 2017
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
1.85%
|
|
|
N/A
|
|
|
N/A
|
|
|
1.85
|
%
|
|
|
The Partnership's variable rate unsecured notes and unsecured line of credit are both reflected in the table above as maturing in January 2020, based on the ability to exercise a one-year extension option from their stated maturity dates of January 2019.
As the above table incorporates only those exposures that existed at
March 31, 2017
, it does not consider those exposures or positions that could arise after that date. As a result, the ultimate impact of interest rate fluctuations will depend on future exposures that arise, our hedging strategies at that time, to the extent we are party to interest rate derivatives, and interest rates. Interest expense on our unsecured line of credit, to the extent we have outstanding borrowings, and our variable rate unsecured notes will be affected by fluctuations in the LIBOR indices as well as changes in our credit rating. The interest rate at such point in the future as we may renew, extend or replace our unsecured line of credit will be heavily dependent upon the state of the credit environment.
Item 4. Controls and Procedures
Controls and Procedures (General Partner)
(a)
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon the foregoing, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective.
(b)
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Controls and Procedures (Partnership)
(a)
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures are further designed to ensure that such information is accumulated and communicated to management, including the General Partner's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including the General Partner's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon the foregoing, the General Partner's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were effective.
(b)
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.