Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion with the financial statements and related notes included elsewhere in Item 1 of this report and the audited financial statements and related notes thereto included in our most recent Annual Report on Form 10-K.
As used herein, except where the context otherwise requires, “Company,” “we,” “our” and “us,” refer to STAG Industrial, Inc. and our consolidated subsidiaries and partnerships, including our operating partnership,
STAG Industrial Operating Partnership, L.P. (“Operating Partnership”).
Revision of Previously Reported Consolidated Financial Statements
In connection with the preparation of our consolidated financial statements for the year ended December 31, 2016, we identified an error in the estimated useful life of a building acquired in the fourth quarter of 2014. As a result of the error, depreciation expense had been overstated and thereby rental property, net and equity were understated. We concluded that the amounts were not material to any of our previously issued consolidated financial statements. Accordingly, we revised these balances in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. For more information on this revision, see Note 2 in the accompanying Notes to Consolidated Financial Statements, “Revision of Previously Reported Consolidated Financial Statements."
Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. Forward-looking statements in this report include, among others, statements about our future financial condition, results of operations, capitalization rates on future acquisitions, our business strategy and objectives, including our acquisition strategy, occupancy and leasing rates and trends, and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward‑looking statements. Furthermore, actual results may differ materially from those described in the forward‑looking statements and may be affected by a variety of risks and factors including, without limitation:
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•
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the factors included in our Annual Report on Form 10-K for the year ended December 31, 2016, as updated elsewhere in this report, including those set forth under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
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•
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our ability to raise equity capital on attractive terms;
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•
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the competitive environment in which we operate;
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•
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real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;
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•
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decreased rental rates or increased vacancy rates;
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•
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potential defaults (including bankruptcies or insolvency) on or non-renewal of leases by tenants;
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•
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acquisition risks, including our ability to identify and complete accretive acquisitions and/or failure of such acquisitions to perform in accordance with projections;
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•
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the timing of acquisitions and dispositions;
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•
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potential natural disasters and other potentially catastrophic events such as acts of war and/or terrorism;
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•
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international, national, regional and local economic conditions;
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•
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the general level of interest rates and currencies;
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•
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potential changes in the law or governmental regulations and interpretations of those laws and regulations, including changes in real estate and zoning laws or real estate investment trust (“REIT”) or corporate income tax laws, and potential increases in real property tax rates;
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•
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financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;
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•
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credit risk in the event of non-performance by the counterparties to the interest rate swaps and revolving and unfunded debt;
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lack of or insufficient amounts of insurance;
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our ability to maintain our qualification as a REIT;
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our ability to retain key personnel;
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•
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litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and
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possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us.
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Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a REIT focused on the acquisition and operation of single-tenant, industrial properties throughout the United States. We (i) identify properties that create relative value investments across all locations, single-tenant industrial property types, and tenants through the principled application of our proprietary risk assessment model, (ii) operate our properties in an efficient, cost-effective manner, and (iii) capitalize our business appropriately given the characteristics of our assets. We are a Maryland corporation and our common stock is publicly traded on the New York Stock Exchange under the symbol “STAG.”
We are organized and conduct our operations to qualify as a REIT under Sections 856 through 860 of the Code, and generally are not subject to federal income tax to the extent we currently distribute our income to our stockholders and maintain our qualification as a REIT. We remain subject to state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed income.
Factors That May Influence Future Results of Operations
Our ability to increase revenues or cash flow will depend in part on our (i) external growth, specifically acquisition activity, and (ii) internal growth, specifically occupancy and rental rates on our portfolio. A variety of other factors, including those noted below, also affect our future results of operations.
As used herein “total annualized base rental revenue” refers to the contractual monthly base rent as of
March 31, 2017
(which differs from rent calculated in accordance with generally accepted accounting principles in the United States of America ("GAAP")) multiplied by 12. If a tenant is in a free rent period as of
March 31, 2017
, the annualized rent is calculated based on the first contractual monthly base rent amount multiplied by 12.
Outlook
The outlook for our business remains positive, albeit on a moderated basis in light of continued slow economic growth, some uncertainty regarding the new U.S. presidential administration and its policy initiatives, and continued asset appreciation. The
federal funds target rate was raised 25 basis points in March 2017; however, the target rate remains very low, in a range of 0.75% to 1.00%. This range aligns with the Central Bank’s consistent commentary that future rate increases would be gradual and rates would likely remain historically low for an extended period of time. At the same time, its most recent commentary suggested increasing comfort with adjusting rates again in the near future. If interest rates were to rise further as a result of Federal Reserve policy action (short-term interest rates) or changes in market expectations and capital flows (long-term interest rates), we believe strengthening economic conditions are likely to accompany these changes. This strengthening of economic conditions combined with the currently favorable industrial supply/demand environment should translate to a net positive result for our business. Specifically, our existing portfolio should benefit from rising rental rates and our acquisition activity should benefit from higher yields. Furthermore, we believe certain characteristics of our business should position us well in a rising interest rate environment, including the fact that we have minimal floating rate debt exposure (taking into account our hedging activities) and that many of our competitors for the assets we purchase tend to be smaller local investors who are likely to be more heavily impacted by interest rate increases.
The new U.S. presidential administration's first 100 days have been active, however, the administration has faced difficulty implementing its initiatives. So far, there have been no significant legislative changes related to policy promises. The positive capital market movement since the election appears to indicate net favorable expectations in key areas, including corporate tax, healthcare, regulation, infrastructure, and trade. Other notable items with economic impact include the continued relative strength of the U.S. dollar versus competing currencies (including the euro and pound), the continued relatively low oil prices, and Brexit. A strong U.S. dollar can harm U.S. exporters and U.S. multi-nationals; however, it can also benefit foreign multi-nationals positively, which support U.S. subsidiaries and U.S. industrial properties. Oil price declines over the past two years and the lack of a sustained rebound in price have put significant pressure on oil and gas exploration and production companies, resulting in many oil and gas sector bankruptcies, while simultaneously benefiting many industries (e.g. automotive, freight) and consumers’ disposable incomes. In June 2016, the passing of the U.K.’s referendum to separate itself from the European Union, known as Brexit, was a major surprise to the markets. The U.K.'s formal withdrawal process commenced in March 2017. The country’s progress in renegotiating financial and economic relationships with the European Union and the resulting outcomes will take many years to unfold. We believe our direct exposure to the U.K. market is limited. Of our tenants that do have direct exposure to the U.K., we believe they are well-diversified businesses. We will continue to monitor these trends for short-term and long-term impacts to our business.
Several economic indicators and other factors provide insight into the U.S. economic environment and industrial demand. Presently, we believe the key factors include gross domestic product ("GDP") growth rate, unemployment rate, non-farm payrolls, Conference Board consumer confidence index, manufacturing-purchasing manager index (“ISM”), the 10-year Treasury yield, U.S. total vehicle sales, and durable goods new orders. Below are recent trends in each of these factors.
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Economic Indicators
(1)
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March 31, 2017
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December 31, 2016
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September 30, 2016
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June 30, 2016
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March 31, 2016
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GDP Growth Rate
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0.7%
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2.1%
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3.5%
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1.4%
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0.8%
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Unemployment Rate
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4.5%
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4.7%
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4.9%
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4.9%
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5.0%
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Change in Non-Farm Employment (in thousands)
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98
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155
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249
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297
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225
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Consumer Confidence Index
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125.6
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113.3
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104.1
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97.4
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96.1
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ISM
(2)
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57.2%
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54.7%
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51.5%
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53.2%
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51.8%
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10-year Treasury Yield
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2.40%
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2.45%
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1.60%
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1.49%
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1.78%
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Seasonally Adjusted Annualized Rate US Total Vehicle Sales (in thousands)
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16,896
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18,680
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18,059
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17,161
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17,032
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Manufacturing New Orders: Durable Goods (in millions)
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238,713
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226,239
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228,204
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219,055
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228,499
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(1)
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Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Conference Board, Board of Governors of the Federal Reserve System, U.S. Census Bureau, and Institute for Supply Management. Each statistic is the latest revision available at the time of publishing this report.
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(2)
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ISM is a composite index based on a survey of over 300 purchasing and supply executives from across the country who respond to a monthly questionnaire about changes in production, new orders, new export orders, imports, employment, inventories, prices, lead-times, and timelines of supplier deliveries in their companies. When the index is over 50, it indicates expansion, while a reading below 50 signals contraction.
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Currently, the GDP growth rate, growing non-farm employment, level of U.S. total vehicle sales, ISM level, consumer confidence, and low interest rates are positive fundamental signs for industrial demand. Expanding job count and the ongoing low unemployment rate suggests consumers will be spending more money on goods in the foreseeable future. The strengthening U.S. dollar means that U.S. consumers may be purchasing a relatively larger amount of imported goods and that U.S. companies are likely to lower their rate of exports. This is likely to be a net positive for industrial real estate demand as imports tend to lead to greater net absorption than do exports. At the end of March, the consumer confidence index reached its highest level since 2000 and the ISM level grew beyond last quarter’s two year high. The trailing twelve months March 2017 speculative grade corporate default rate declined to 4.1% compared to 5.1% at December 2016 as oil and gas defaults decreased. We continue to monitor the energy sector as well as both the retail sector, due to stress around apparel and department stores, and the automotive industry, given light vehicle sales are at or near peak cyclical levels. Overall, we expect default rates to be stable in the coming year behind positive economic
growth. We believe improving commodity markets and capital markets stability will be important in supporting this outlook. We also note that automotive sales declined by 1.4% in the first quarter (driven by passenger car sales declining 12%) and we are seeing many large multinational companies experience weak organic growth, commonly due to negative currency effects and commodity price deflation. We believe the combination of these observations signal some caution in underlying economic strength, however, we still expect an increase in industrial activity and more demand for industrial space in the foreseeable future given the job growth, low-interest rate environment, and GDP growth.
Several industrial specific trends contribute to the expected demand increase, including:
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an increasing attractiveness of the U.S. as a manufacturing and distribution location because of the size of the U.S. consumer market, an increase in overseas labor costs and the overall cost of supplying and shipping goods (i.e. the shortening and fattening of the supply chain);
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•
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the overall quality of the transportation infrastructure in the U.S.; and
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•
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the rise of e-commerce (as compared to the traditional retail store distribution model) and the concomitant demand by e-commerce industry participants for well-located, functional distribution space.
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Furthermore, the lack of material speculative development in most of our markets and the broader failure of supply to keep pace with demand in many of our markets may improve occupancy levels and rental rates in our portfolio. We believe, however, that industrial supply, more so than other real estate property types, has historically had a short lead time and can appear quickly. We have started to see a notable pick-up in development activity in a growing number of the more active industrial markets, but this has yet to take firm hold on a broader scale. We will continue to monitor the supply and demand fundamentals for industrial real estate and assess its impact on our business.
Conditions in Our Markets
The buildings in our portfolio are located in markets throughout the United States. Positive or negative changes in economic or other conditions, new supply, adverse weather conditions and natural disasters and other factors in these markets may affect our overall performance.
Rental Income
We receive income primarily in the form of rental income from the tenants who occupy our buildings. The amount of rental income generated by the buildings in our portfolio depends principally on occupancy and rental rates. As of
March 31, 2017
, our Operating Portfolio was approximately
95.8%
leased and our lease rates as defined by GAAP on new and renewal leases together grew approximately
9.8%
during the
three
months ended
March 31, 2017
.
We define our Operating Portfolio as including all warehouse and light manufacturing assets and excluding non-core flex/office assets and assets under redevelopment. Our Operating Portfolio also excludes billboard, parking lot and cell tower leases.
Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our buildings. Our ability to lease our properties and the attendant rental rate is dependent upon, among other things, (i) the overall economy, (ii) the supply/demand dynamic in our markets, (iii) the quality of our properties, including age, clear height, and configuration, and (iv) our tenants’ ability to meet their contractual obligations to us.
The following table provides a summary of our Operating Portfolio leases executed during the
three
months ended
March 31, 2017
. Certain leases contain rental concessions; any such rental concessions are accounted for on a straight-line basis over the term of the lease.
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Operating Portfolio
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Square Feet
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Cash
Basis Rent Per
Square Foot
(1)
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GAAP Basis Rent Per
Square Foot
(2)
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Total Turnover Costs Per
Square
Foot
(3)
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Cash
Rent Change
(1)
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GAAP Rent Change
(2)
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Weighted Average Lease
Term
(4)
(years)
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Rental Concessions per Square Foot
(5)
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Three months ended March 31, 2017
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New leases
(6)
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898,905
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$
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4.21
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$
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4.35
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$
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2.07
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6.6
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%
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10.8
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%
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4.7
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$
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0.16
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Renewal leases
(7)
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2,675,965
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3.61
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3.75
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0.38
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3.2
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%
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|
9.4
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%
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5.1
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0.13
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Total/weighted average
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3,574,870
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$
|
3.76
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$
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3.90
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$
|
0.80
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4.1
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%
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9.8
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%
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5.0
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$
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0.14
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(1)
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We define Cash Basis Rent Change as the percentage change in base rent (excluding straight-line rent adjustments and above/below market lease amortization as required by GAAP) of the Comparable Lease.
We define a Comparable Lease as a lease with a similar lease structure as compared to the previous in-place lease, excluding new leases for space that was not occupied under our ownership, leases on space with downtime in excess of two years, leases with materially different lease structures,
leases associated with known vacates at the time of acquisition, and leases with credit-related modifications
.
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(2)
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We define GAAP Rent Change as the percentage change in the average base rent over the contractual lease term (excluding above/below market lease amortization) of the Comparable Lease.
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(3)
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We define Turnover Costs as the costs for improvements of vacant and renewal spaces, as well as the commissions for leasing transactions. Turnover Costs per square foot represent the total turnover costs expected to be incurred on the leases signed during the period and do not reflect actual expenditures for the period.
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(4)
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We define Weighted Average Lease Term as the contractual lease term in years as of the lease start date weighted by square footage.
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(5)
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Represents the total concession (free rent) for the entire lease term.
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(6)
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We define a New Lease as any lease that is signed for an initial term equal to or greater than twelve months for any vacant space; this includes a new tenant or an existing tenant that is expanding into new (additional) space.
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(7)
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We define a Renewal Lease as a lease signed by an existing tenant to extend the term for twelve months or more, including (i) a renewal of the same space as the current lease at lease expiration, (ii) a renewal of only a portion of the current space at lease expiration and (iii) an early renewal or workout, which ultimately does extend the original term for twelve months or more.
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Property Operating Expenses
Our property operating expenses generally consist of utilities, real estate taxes, management fees, insurance and site repair and maintenance costs. For the majority of our tenants, our property operating expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance and maintenance costs. However, we also have modified gross leases and gross leases in our building portfolio. The terms of those leases vary and on some occasions we may absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for some building related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all costs related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through property operating expenses to our tenants.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately
12.2%
of our annualized base rental revenue will expire during the period from
April 1, 2017 to March 31, 2018
, excluding month to month leases. We assume, based upon internal renewal probability estimates that some of our tenants will renew and others will vacate and the associated space will be re-let subject to downtime assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases will generally be lower than the rates under existing leases expiring during the period
April 1, 2017 to March 31, 2018
, thereby resulting in lower revenue from the same space.
The following table sets forth a summary of lease expirations for leases in place as of
March 31, 2017
, plus available space, for each of the ten calendar years beginning with 2017 and thereafter in our portfolio. The information in the table assumes that tenants exercise no renewal options and no early termination rights.
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Lease Expiration Year
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Number
of
Leases
Expiring
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|
Total Rentable
Square Feet
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|
% of
Total
Occupied
Square Feet
|
|
Total Annualized
Base Rental
Revenue
(in thousands)
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|
% of Total
Annualized
Base Rental Revenue
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|
Available
|
|
—
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|
3,279,779
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|
—
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$
|
—
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|
|
—
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|
Month-to-month leases
|
|
7
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|
234,080
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|
0.4
|
%
|
|
789
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|
|
0.3
|
%
|
|
Remainder of 2017
|
|
29
|
|
2,961,450
|
|
|
4.9
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%
|
|
12,822
|
|
|
5.3
|
%
|
|
2018
|
|
63
|
|
10,866,946
|
|
|
18.2
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%
|
|
42,549
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|
|
17.6
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%
|
|
2019
|
|
51
|
|
9,344,351
|
|
|
15.6
|
%
|
|
37,738
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|
|
15.6
|
%
|
|
2020
|
|
38
|
|
8,304,791
|
|
|
13.8
|
%
|
|
35,087
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|
|
14.5
|
%
|
|
2021
|
|
45
|
|
7,629,587
|
|
|
12.7
|
%
|
|
31,881
|
|
|
13.2
|
%
|
|
2022
|
|
30
|
|
4,255,507
|
|
|
7.1
|
%
|
|
17,911
|
|
|
7.4
|
%
|
|
2023
|
|
16
|
|
3,610,888
|
|
|
6.0
|
%
|
|
12,358
|
|
|
5.1
|
%
|
|
2024
|
|
10
|
|
2,314,777
|
|
|
3.9
|
%
|
|
8,566
|
|
|
3.5
|
%
|
|
2025
|
|
12
|
|
2,188,742
|
|
|
3.6
|
%
|
|
8,817
|
|
|
3.6
|
%
|
|
2026
|
|
16
|
|
3,668,354
|
|
|
6.1
|
%
|
|
13,137
|
|
|
5.4
|
%
|
|
Thereafter
|
|
21
|
|
4,590,195
|
|
|
7.7
|
%
|
|
20,436
|
|
|
8.5
|
%
|
|
Total/weighted average
|
|
338
|
|
63,249,447
|
|
|
100.0
|
%
|
|
$
|
242,091
|
|
|
100.0
|
%
|
As of
March 31, 2017
, for the period
April 1, 2017 to March 31, 2018
, none of our top ten leases based on
March 31, 2017
annualized base rental revenue will be expiring.
Portfolio Summary
The following table sets forth information relating to diversification by building type in our portfolio as of
March 31, 2017
.
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|
|
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|
|
Square Footage
|
|
|
|
Annualized Base Rental Revenue
|
|
Building Type
|
|
Number of Buildings
|
|
Amount
|
|
%
|
|
Occupancy Rate
(1)
|
|
Amount
(in thousands)
|
|
%
|
|
Warehouse/Distribution
|
|
254
|
|
|
56,159,296
|
|
|
88.8
|
%
|
|
95.6
|
%
|
|
$
|
211,891
|
|
|
87.6
|
%
|
|
Light Manufacturing
|
|
53
|
|
|
5,812,250
|
|
|
9.2
|
%
|
|
97.7
|
%
|
|
23,114
|
|
|
9.5
|
%
|
|
Total Operating Portfolio
|
|
307
|
|
|
61,971,546
|
|
|
98.0
|
%
|
|
95.8
|
%
|
|
$
|
235,005
|
|
|
97.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redevelopment
|
|
1
|
|
|
307,315
|
|
|
0.5
|
%
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Flex/Office
|
|
16
|
|
|
970,586
|
|
|
1.5
|
%
|
|
65.0
|
%
|
|
7,086
|
|
|
2.9
|
%
|
|
Total portfolio/weighted average
|
|
324
|
|
|
63,249,447
|
|
|
100.0
|
%
|
|
94.8
|
%
|
|
$
|
242,091
|
|
|
100.0
|
%
|
|
|
|
|
(1)
|
We define Occupancy Rate as the percentage of total leasable square footage for which the lease term has commenced as of the close of the reporting period.
|
Portfolio Acquisitions
The following table summarizes the acquisitions during the
three
months ended
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Property
|
|
Square Feet
|
|
Buildings
|
|
Purchase Price
(in thousands)
|
|
Jacksonville, FL
|
|
1,025,720
|
|
|
4
|
|
|
$
|
34,264
|
|
|
Sparks, NV
|
|
174,763
|
|
|
1
|
|
|
8,380
|
|
|
Salisbury, NC
|
|
288,000
|
|
|
1
|
|
|
8,250
|
|
|
Franklin Township, NJ
|
|
183,000
|
|
|
1
|
|
|
12,800
|
|
|
Milford, CT
|
|
200,000
|
|
|
1
|
|
|
12,762
|
|
|
Bedford Heights, OH
|
|
173,034
|
|
|
1
|
|
|
7,622
|
|
|
Redford, MI
|
|
135,728
|
|
|
1
|
|
|
7,769
|
|
|
Warren, MI
|
|
154,377
|
|
|
1
|
|
|
7,940
|
|
|
Three months ended March 31, 2017
|
|
2,334,622
|
|
|
11
|
|
|
$
|
99,787
|
|
Portfolio Dispositions
During the
three
months ended
March 31, 2017
, we sold
one
building comprised of approximately
0.1 million
square feet with a net book value of approximately
$3.6 million
to a third party. This building contributed approximately
$15,000
to revenue (exclusive of acceleration of straight line rent) and approximately
$8,000
to
net loss (exclusive of acceleration of straight line rent and gain
on the sales of rental property, net)
for the
three
months ended
March 31, 2017
. Net proceeds from the sale of rental property was approximately
$3.9 million
and we recognized a gain on the sales of rental property, net of approximately
$0.3 million
for the
three
months ended
March 31, 2017
. This disposition was accounted for under the full accrual method.
Geographic Diversification
The following table sets forth information about the ten largest markets in our portfolio based on total annualized base rental revenue as of
March 31, 2017
.
|
|
|
|
|
|
|
|
Market
(1)
|
|
% of Total Annualized Base Rental Revenue
|
|
Philadelphia, PA
|
|
9.4
|
%
|
|
Chicago, IL
|
|
8.6
|
%
|
|
Greenville/Spartanburg, SC
|
|
4.6
|
%
|
|
Milwaukee/Madison, WI
|
|
4.1
|
%
|
|
Charlotte, NC
|
|
3.4
|
%
|
|
Cincinnati/Dayton, OH
|
|
3.2
|
%
|
|
West Michigan, MI
|
|
3.0
|
%
|
|
Detroit, MI
|
|
2.7
|
%
|
|
Cleveland, OH
|
|
2.4
|
%
|
|
Westchester/So Connecticut, CT/NY
|
|
2.3
|
%
|
|
Total
|
|
43.7
|
%
|
(1) As defined by CoStar Realty Information Inc.
Buildings by Market
While we invest in properties in all locations, our proprietary risk assessment model typically identifies the best relative value in primary and secondary markets. As of
March 31, 2017
, our Operating Portfolio investments in primary, secondary, and tertiary markets are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square Footage
|
|
|
|
Annualized Base Rental Revenue
|
|
Operating Portfolio Market Type
|
|
Number of
Buildings
|
|
Amount
|
|
%
|
|
Occupancy
|
|
Amount
(in thousands)
|
|
%
|
|
Primary (greater than 200 million net rentable square feet)
|
|
72
|
|
|
15,091,672
|
|
|
24.4
|
%
|
|
94.6
|
%
|
|
$
|
61,286
|
|
|
26.1
|
%
|
|
Secondary (25 million to 200 million net rentable square feet)
|
|
190
|
|
|
39,851,654
|
|
|
64.3
|
%
|
|
96.7
|
%
|
|
149,508
|
|
|
63.6
|
%
|
|
Tertiary (less than 25 million net rentable square feet)
|
|
45
|
|
|
7,028,220
|
|
|
11.3
|
%
|
|
92.8
|
%
|
|
24,211
|
|
|
10.3
|
%
|
|
Total/weighted average
|
|
307
|
|
|
61,971,546
|
|
|
100.0
|
%
|
|
95.8
|
%
|
|
$
|
235,005
|
|
|
100.0
|
%
|
Industry Diversification
The following table sets forth information about the ten largest tenant industries in our portfolio based on total annualized base rental revenue as of
March 31, 2017
.
|
|
|
|
|
|
|
|
Top Ten Tenant Industries
|
|
% of Total
Annualized Base Rental Revenue
|
|
Automotive
|
|
13.3
|
%
|
|
Air Freight & Logistics
|
|
12.4
|
%
|
|
Ind Equip, Component & Metals
|
|
10.9
|
%
|
|
Containers & Packaging
|
|
10.3
|
%
|
|
Food & Beverages
|
|
8.6
|
%
|
|
Retail
|
|
6.9
|
%
|
|
Personal Products
|
|
6.2
|
%
|
|
Business Services
|
|
5.1
|
%
|
|
Household Durables
|
|
5.1
|
%
|
|
Non-Profit/Government
|
|
3.5
|
%
|
|
Total
|
|
82.3
|
%
|
Top Tenants
The following table sets forth information about the ten largest tenants in our portfolio based on total annualized base rental revenue as of
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
Top Ten Tenants
|
|
Number of Leases
|
|
% of Total
Annualized Base
Rental Revenue
|
|
General Service Administration
|
|
1
|
|
|
2.9
|
%
|
|
XPO Logistics
|
|
4
|
|
|
2.2
|
%
|
|
Deckers Outdoor
|
|
2
|
|
|
1.7
|
%
|
|
TriMas Corporation
|
|
4
|
|
|
1.6
|
%
|
|
Solo Cup
|
|
1
|
|
|
1.6
|
%
|
|
FedEx
|
|
3
|
|
|
1.1
|
%
|
|
Berry Global
|
|
2
|
|
|
1.1
|
%
|
|
Generation Brands
|
|
1
|
|
|
1.1
|
%
|
|
DHL Supply Chain
|
|
2
|
|
|
1.0
|
%
|
|
Perrigo
|
|
2
|
|
|
1.0
|
%
|
|
Total
|
|
22
|
|
|
15.3
|
%
|
Top Leases
The following table sets forth information about the ten largest leases in our portfolio based on total annualized base rental revenue as of
March 31, 2017
.
|
|
|
|
|
|
|
|
Top Ten Leases
|
|
% of Total
Annualized Base
Rental Revenue
|
|
General Service Administration
|
|
2.9
|
%
|
|
Solo Cup
|
|
1.6
|
%
|
|
XPO Logistics
|
|
1.2
|
%
|
|
Generation Brands
|
|
1.1
|
%
|
|
Deckers Outdoor
|
|
1.0
|
%
|
|
Spencer Gifts
|
|
1.0
|
%
|
|
Closetmaid Corporation
|
|
0.8
|
%
|
|
Jo-Ann Stores
|
|
0.8
|
%
|
|
Archway Marketing
|
|
0.8
|
%
|
|
CareFusion 213
|
|
0.8
|
%
|
|
Total
|
|
12.0
|
%
|
Tenant Retention
Our direct relationships with our tenants and our in-house expertise in leasing, asset management, engineering, and credit underwriting help us to manage all operational aspects of our portfolio, maintain occupancy, and increase rental rates. The following table provides a summary of our Operating Portfolio tenant retention during the
three
months ended
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended 2017
|
|
Retention %
(1)
|
|
Weighted Average Lease Term (years)
|
|
Expiring Square Feet
|
|
Renewal Square Feet
(2)
|
|
Cash Rent Change
|
|
GAAP Rent Change
|
|
March 31
|
|
51.3
|
%
|
|
3.4
|
|
|
1,185,453
|
|
|
607,608
|
|
|
13.4
|
%
|
|
23.6
|
%
|
|
Total/weighted average
|
|
51.3
|
%
|
|
3.4
|
|
|
1,185,453
|
|
|
607,608
|
|
|
13.4
|
%
|
|
23.6
|
%
|
|
|
|
|
(1)
|
We define Retention as the percentage determined by taking Renewal Lease square footage commencing in the period divided by square footage of leases expiring in the period. Neither the Renewal Leases nor leases expiring include Temporary Leases or License Agreements. Retention excludes leases associated with known vacates at the time of acquisition, leases with credit-related modifications, and early terminations.
|
|
|
|
|
(2)
|
We define Renewal Square Feet as the square footage of renewal leases commencing during the period, irrespective of the date signed.
|
Critical Accounting Policies
See "Critical Accounting Policies" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of our critical accounting policies and estimates.
Goodwill
In January of 2017, the Financial Accounting Standards Board issued Accounting Standards Update 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
. The new standard removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We elected to early adopt this standard effective January 1, 2017. The adoption of this standard did not have a material effect on our consolidated financial statements.
Results of Operations
Our results of operations are largely driven by our levels of occupancy as well as the rental rates we receive from tenants. From a rental rate standpoint, we have historically achieved overall rental increases in our tenant rollovers on a cash basis and GAAP basis.
The following discussion of our results of our same store net operating income (“NOI”) should be read in conjunction with our Consolidated Financial Statements. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below. We consider our same store portfolio to consist of only those buildings owned and operated at the beginning and at the end of both of the applicable periods presented. Same store results are considered to be useful to investors in evaluating our performance because they provide information relating to changes in building-level operating performance without taking into account the effects of acquisitions or dispositions. However, because we have generally acquired 100% occupied properties and grown the portfolio significantly every year since our initial public offering, our same store results do not represent a market portfolio with market occupancy. Because we have above market occupancy, our same store results may look unfavorable at times as we trend to market levels. We encourage the reader to not only look at our same store results, but also our total portfolio results, due to historic and future growth.
Comparison of the three months ended
March 31, 2017
to the three months ended
March 31, 2016
Our results of operations are affected by the acquisition and disposition activity during the
2017
and
2016
periods as described below. The following discussion of our same store portfolio excludes flex/office buildings, redevelopment buildings, buildings classified as held for sale on the accompanying Consolidated Balance Sheets, and buildings with expansions placed in service after
January 1, 2016
. On
March 31, 2017
, we owned
248
industrial buildings consisting of approximately 49.1 million square feet, which represents approximately
77.6%
of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy decreased approximately
0.4%
to
95.7%
as of
March 31, 2017
compared to
96.1%
as of
March 31, 2016
.
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the three months ended
March 31, 2017
and
March 31, 2016
(dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the three months ended
March 31, 2017
and
March 31, 2016
with respect to the buildings acquired and disposed of after
January 1, 2016
and our flex/office buildings, redevelopment buildings, buildings classified as held for sale, and expansion buildings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Portfolio
|
|
Acquisitions/Dispositions
|
|
Other
(1)
|
|
Total Portfolio
|
|
|
Three months ended March 31,
|
|
Change
|
|
Three months ended March 31,
|
|
Three months ended March 31,
|
|
Three months ended March 31,
|
|
Change
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
45,999
|
|
|
$
|
45,689
|
|
|
$
|
310
|
|
|
0.7
|
%
|
|
$
|
11,368
|
|
|
$
|
3,445
|
|
|
$
|
1,855
|
|
|
$
|
2,215
|
|
|
$
|
59,222
|
|
|
$
|
51,349
|
|
|
$
|
7,873
|
|
|
15.3
|
%
|
|
Tenant recoveries
|
7,870
|
|
|
7,732
|
|
|
138
|
|
|
1.8
|
%
|
|
1,743
|
|
|
854
|
|
|
572
|
|
|
856
|
|
|
10,185
|
|
|
9,442
|
|
|
743
|
|
|
7.9
|
%
|
|
Other income
|
11
|
|
|
36
|
|
|
(25
|
)
|
|
(69.4
|
)%
|
|
32
|
|
|
—
|
|
|
30
|
|
|
45
|
|
|
73
|
|
|
81
|
|
|
(8
|
)
|
|
(9.9
|
)%
|
|
Total operating revenue
|
53,880
|
|
|
53,457
|
|
|
423
|
|
|
0.8
|
%
|
|
13,143
|
|
|
4,299
|
|
|
2,457
|
|
|
3,116
|
|
|
69,480
|
|
|
60,872
|
|
|
8,608
|
|
|
14.1
|
%
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
10,115
|
|
|
9,639
|
|
|
476
|
|
|
4.9
|
%
|
|
1,850
|
|
|
1,510
|
|
|
1,311
|
|
|
1,506
|
|
|
13,276
|
|
|
12,655
|
|
|
621
|
|
|
4.9
|
%
|
|
Net operating income
(2)
|
$
|
43,765
|
|
|
$
|
43,818
|
|
|
$
|
(53
|
)
|
|
(0.1
|
)%
|
|
$
|
11,293
|
|
|
$
|
2,789
|
|
|
$
|
1,146
|
|
|
$
|
1,610
|
|
|
56,204
|
|
|
48,217
|
|
|
7,987
|
|
|
16.6
|
%
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,771
|
|
|
11,019
|
|
|
(2,248
|
)
|
|
(20.4
|
)%
|
|
Property acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740
|
|
|
552
|
|
|
188
|
|
|
34.1
|
%
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,953
|
|
|
29,749
|
|
|
6,204
|
|
|
20.9
|
%
|
|
Loss on involuntary conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
—
|
|
|
330
|
|
|
100.0
|
%
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
260
|
|
|
(66
|
)
|
|
(25.4
|
)%
|
|
Total other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,988
|
|
|
41,580
|
|
|
4,408
|
|
|
10.6
|
%
|
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,264
|
|
|
54,235
|
|
|
5,029
|
|
|
9.3
|
%
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
3
|
|
|
2
|
|
|
66.7
|
%
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,477
|
)
|
|
(10,847
|
)
|
|
370
|
|
|
(3.4
|
)%
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
(1,134
|
)
|
|
1,134
|
|
|
(100.0
|
)%
|
|
Gain on the sales of rental property, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
17,673
|
|
|
(17,348
|
)
|
|
(98.2
|
)%
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,147
|
)
|
|
5,695
|
|
|
(15,842
|
)
|
|
(278.2
|
)%
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69
|
|
|
$
|
12,332
|
|
|
$
|
(12,263
|
)
|
|
(99.4
|
)%
|
|
|
|
|
(1)
|
Includes flex/office buildings, redevelopment buildings, buildings classified as held for sale, and buildings with expansions placed in service after
January 1, 2016
, which are excluded from the same store portfolio. Also includes asset management fee income, which are separated for purposes of calculating NOI.
|
|
|
|
|
(2)
|
Excluding asset management fee income, NOI for the total portfolio for the three months ended
March 31, 2017
and
March 31, 2016
was
$56.2 million
and
$48.2 million
, respectively. Asset management fee income is included in other income in the table above. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.
|
Net Income (Loss)
Net income
for our total portfolio
decreased
by
$12.3 million
or
99.4%
to
$0.1 million
for the three months ended
March 31, 2017
compared to
$12.3 million
for the three months ended
March 31, 2016
.
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of (i) rental income consisting of base rent, termination income, straight-line rent and above and below market lease amortization from our properties, and (ii) tenant reimbursements for insurance, real estate taxes and certain other expenses (“tenant recoveries”).
For a detailed reconciliation of our same store total operating revenue to
net income
, see the table above.
Same store rental income
increased
by
$0.3 million
or
0.7%
to
$46.0 million
for the three months ended
March 31, 2017
compared to
$45.7 million
for the three months ended
March 31, 2016
. Approximately $0.9 million of the increase was attributable to rental increases due to new leases and renewals of existing tenants. Same store rental income also increased approximately $0.2 million due to a net decrease in the amortization of net above market leases and approximately $0.3 million due to the recognition of straight-line income from termination fees at our Buena Vista, VA, Belvidere, IL, and Golden, CO properties, as discussed in Note 2 of the accompanying Notes to Consolidated Financial Statements. These increases were partially offset by an approximately $1.1 million decrease due to a reduction of base rent due to tenants downsizing their spaces and vacancies.
Same store tenant recoveries
increased
by
$0.1 million
or
1.8%
to
$7.9 million
for the three months ended
March 31, 2017
compared to
$7.7 million
for the three months ended
March 31, 2016
. The increase is primarily due to increases in occupancy and real estate taxes levied by the taxing authority.
Same Store Operating Expenses
Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance.
For a detailed reconciliation of our same store operating expenses to
net income
, see the table above.
Total same store operating expenses
increased
by
$0.5 million
or
4.9%
to
$10.1 million
for the three months ended
March 31, 2017
compared to
$9.6 million
for the three months ended
March 31, 2016
. This increase is primarily related to increases in real estate taxes levied by the related taxing authority of approximately $0.4 million, as well as in increase of approximately $0.1 million in general repairs and maintenance and utilities expenses. These increases were partially offset by a decrease of approximately $0.1 million in snow removal expenses.
Acquisitions
and Dispositions
Net Operating Income
For a detailed reconciliation of our acquisitions and dispositions net operating income to
net income
, see the table above.
Subsequent to
January 1, 2016
, we acquired
58
buildings consisting of approximately
12.6 million
square feet, and sold
25
buildings consisting of approximately
4.3 million
square feet. For the three months ended
March 31, 2017
and
March 31, 2016
, the buildings acquired after
January 1, 2016
contributed approximately
$11.3 million
and
$0.1 million
to NOI, respectively. For the three months ended
March 31, 2017
and
March 31, 2016
, the buildings sold after
January 1, 2016
contributed approximately
$0
and
$2.7 million
to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold.
Other Net Operating Income
Our other assets include our flex/office buildings, redevelopment buildings, buildings classified as held for sale, and buildings with expansions placed in service after
January 1, 2016
. It also includes asset management fee income, which is separated for purposes of calculating NOI for the total portfolio.
For a detailed reconciliation of our other net operating income to
net income
, see the table above.
At
March 31, 2017
, we owned
16
flex/office buildings consisting of approximately
1.0 million
square feet (which includes the
two
buildings consisting of approximately 35,000 square feet that were classified as held for sale),
one
redevelopment building consisting of approximately
0.3 million
square feet, and one building consisting of approximately 237,500 square feet that had an
expansion that was placed into service after
January 1, 2016
. These buildings contributed approximately $1.1 million and $1.6 million to NOI for the three months ended
March 31, 2017
and
March 31, 2016
, respectively. Additionally, we earned approximately
$30,000
and
$41,000
in asset management fee income for the three months ended
March 31, 2017
and
March 31, 2016
, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expense, property acquisition costs, depreciation and amortization, loss on involuntary conversion, and other expenses.
Total other expenses
increased
$4.4 million
or
10.6%
for the three months ended
March 31, 2017
to
$46.0 million
compared to
$41.6 million
for the three months ended
March 31, 2016
. The increase is primarily related to an increase in depreciation and amortization of approximately
$6.2 million
as a result of buildings acquired which increased the depreciable asset base. The increase is also attributable to an increase in property acquisition costs of approximately
$0.2 million
due to increased acquisition volume during the three months ended
March 31, 2017
compared to the three months ended
March 31, 2016
. Additionally, we recognized a loss on involuntary conversion of approximately
$0.3 million
during the three months ended
March 31, 2017
, as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, whereas there were no losses on involuntary conversions recorded during the three months ended
March 31, 2016
. These increases were partially offset by a decrease in general and administrative expenses of approximately
$2.2 million
, primarily attributable to a decrease of approximately $3.1 million related to the severance of a former executive officer during the three months ended
March 31, 2016
, which did not recur in 2017. These severance costs were partially offset by an increase in non-cash compensation expense related to the 2017 equity grants for employees and independent directors and other general and administrative expenses.
Total Other Income (Expense)
Total other income (expense) consists of interest income, interest expense, loss on extinguishment of debt, and gain on the sales of rental property. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs and amortization of fair market value adjustments associated with the assumption of debt.
Total other income (expense) decreased
$15.8 million
or
278.2%
to a net other expense of
$10.1 million
for the three months ended
March 31, 2017
compared to a net other income of
$5.7 million
for the three months ended
March 31, 2016
. This decrease is primarily the result of a decrease in the gain on the sales of rental property of approximately
$17.3 million
due to decreased disposition volume during the three months ended
March 31, 2017
compared to the three months ended
March 31, 2016
. This decrease was offset by a decrease in interest expense of approximately
$0.4 million
related to a gain on hedge ineffectiveness of approximately $0.2 million coupled with a lower weighted average interest rate on indebtedness for the three months ended
March 31, 2017
compared to the three months ended
March 31, 2016
. The overall decrease was also offset by approximately $1.1 million related to a loss on extinguishment of indebtedness recorded for the three months ended
March 31, 2016
, whereas there was none recorded during the three months ended
March 31, 2017
.
Non-GAAP Financial Measures
In this report, we disclose and discuss funds from operations (“FFO”) and NOI, which meet the definition of “non-GAAP financial measures” as set forth in Item 10(e) of Regulation S-K promulgated by the SEC. As a result, we are required to include in this report a statement of why management believes that presentation of these measures provides useful information to investors.
Funds From Operations
FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, and we believe that to understand our performance further, FFO should be compared with our reported net income or net loss in accordance with GAAP, as presented in our consolidated financial statements included in this report.
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO represents GAAP net income (loss), excluding gains (or losses) from sales of depreciable operating buildings, impairment write-downs of depreciable real estate, real estate related depreciation and amortization (excluding amortization of deferred financing costs and fair market value of debt adjustment) and after adjustments for unconsolidated partnerships and joint ventures.
Management uses FFO as a supplemental performance measure because it is a widely recognized measure of the performance of REITs. FFO may be used by investors as a basis to compare our operating performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our buildings that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our buildings, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such other REITs’ FFO. FFO should not be used as a measure of our liquidity, and is not indicative of funds available for our cash needs, including our ability to pay dividends.
The following table sets forth a reconciliation of our FFO attributable to common stockholders and unit holders for the periods presented to net income (loss), the nearest GAAP equivalent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Reconciliation of Net Income (Loss) to FFO (in thousands)
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
69
|
|
|
$
|
12,332
|
|
|
Rental property depreciation and amortization
|
|
35,879
|
|
|
29,700
|
|
|
Gain on the sales of rental property, net
|
|
(325
|
)
|
|
(17,673
|
)
|
|
FFO
|
|
35,623
|
|
|
24,359
|
|
|
Preferred stock dividends
|
|
(2,448
|
)
|
|
(2,912
|
)
|
|
Other expenses
|
|
—
|
|
|
(100
|
)
|
|
FFO attributable to common stockholders and unit holders
|
|
$
|
33,175
|
|
|
$
|
21,347
|
|
Net Operating Income
We consider NOI to be an appropriate supplemental performance measure to net income because we believe it helps investors and management understand the core operations of our buildings. NOI is defined as rental revenue, including reimbursements, less property expenses and real estate taxes and insurance. NOI should not be viewed as an alternative measure of our financial performance since it excludes expenses which could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI.
The following table sets forth a reconciliation of our NOI for the periods presented to net income (loss), the nearest GAAP equivalent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Reconciliation of Net Income (Loss) to NOI (in thousands)
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
69
|
|
|
$
|
12,332
|
|
|
Asset management fee income
|
|
(30
|
)
|
|
(41
|
)
|
|
General and administrative
|
|
8,771
|
|
|
11,019
|
|
|
Property acquisition costs
|
|
740
|
|
|
552
|
|
|
Depreciation and amortization
|
|
35,953
|
|
|
29,749
|
|
|
Interest income
|
|
(5
|
)
|
|
(3
|
)
|
|
Interest expense
|
|
10,477
|
|
|
10,847
|
|
|
Loss on involuntary conversion
|
|
330
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
1,134
|
|
|
Other expenses
|
|
194
|
|
|
260
|
|
|
Gain on the sales of rental property, net
|
|
(325
|
)
|
|
(17,673
|
)
|
|
Net operating income
|
|
$
|
56,174
|
|
|
$
|
48,176
|
|
Cash Flows
Comparison of the
three
months ended
March 31, 2017
to the
three
months ended
March 31, 2016
The following table summarizes our cash flows for the
three
months ended
March 31, 2017
compared to the
three
months ended
March 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Change
|
|
Cash Flows (dollars in thousands)
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
Net cash provided by operating activities
|
|
$
|
31,158
|
|
|
$
|
25,217
|
|
|
$
|
5,941
|
|
|
23.6
|
%
|
|
Net cash provided by (used in) investing activities
|
|
$
|
(100,946
|
)
|
|
$
|
600
|
|
|
$
|
(101,546
|
)
|
|
(16,924.3
|
)%
|
|
Net cash provided by (used in) financing activities
|
|
$
|
64,678
|
|
|
$
|
(22,359
|
)
|
|
$
|
87,037
|
|
|
389.3
|
%
|
Net cash provided by operating activities
increased
$5.9 million
to
$31.2 million
for the
three
months ended
March 31, 2017
compared to
$25.2 million
for the
three
months ended
March 31, 2016
. The increase was primarily attributable to incremental operating cash flows from property acquisitions completed after
March 31, 2016
, and operating performance at existing properties. These increases were partially offset by the loss of cash flows from property dispositions completed after
March 31, 2016
and fluctuations in working capital due to timing of payments and rental receipts.
Net cash used in investing activities was
$100.9 million
for the
three
months ended
March 31, 2017
, a decrease of
$101.5 million
from net cash provided by investing activities of
$0.6 million
for the
three
months ended
March 31, 2016
. The increased cash outflow is primarily due to the acquisition of
11
buildings for a total cash consideration of approximately
$99.8 million
for the
three
months ended
March 31, 2017
compared to the acquisition of five buildings for a total cash consideration of approximately
$27.8 million
for the
three
months ended
March 31, 2016
. The change is also attributable to the sale of
one
building during the
three
months ended
March 31, 2017
for net proceeds of approximately
$3.9 million
, compared to the
three
months ended
March 31, 2016
where we sold four buildings for net proceeds of approximately
$31.9 million
.
Net cash provided by financing activities was
$64.7 million
for the
three
months ended
March 31, 2017
, an increase of
$87.0 million
from net cash used in financing activities of
$22.4 million
for the
three
months ended
March 31, 2016
.The change is primarily due to an increase in net cash inflow from our unsecured credit facility of approximately
$93.0 million
, an increase in proceeds from sales of common stock of approximately
$68.5 million
, and a decrease in the repayment of mortgage notes of approximately
$4.0 million
during the
three
months ended
March 31, 2017
compared to the
three
months ended
March 31, 2016
. These increases in net cash inflow were partially offset by the issuance of the 6.875% Series C Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") on March 17, 2016 for
$75.0 million
whereas there were no preferred stock issuances during the
three
months ended
March 31, 2017
, as well as a
$0.002501
increase in the dividend paid per share during the
three
months ended
March 31, 2017
compared to the
three
months ended
March 31, 2016
.
Liquidity and Capital Resources
We believe that our liquidity needs will be satisfied through cash flows generated by operations, disposition proceeds, and financing activities. Operating cash flow is primarily rental income, expense recoveries from tenants, and other income from operations and is our principal source of funds that we use to pay operating expenses, debt service, recurring capital expenditures and the distributions required to maintain our REIT qualification. We look to the capital markets (common equity, preferred equity, and debt) to primarily fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality standards for our buildings that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. We believe that our revenue, together with proceeds from building sales and debt and equity financings, will continue to provide funds for our short-term and medium-term liquidity needs.
Our short-term liquidity requirements consist primarily of funds to pay for operating expenses and other expenditures directly associated with our buildings, including interest expense, interest rate swap payments, scheduled principal payments on outstanding indebtedness, funding of property acquisitions under contract, general and administrative expenses, and capital expenditures for tenant improvements and leasing commissions.
Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through cash flow from operations, the issuance of equity or debt securities, other borrowings, property dispositions, or, in connection with acquisitions of certain additional buildings, the issuance of common units in the Operating Partnership.
As of
March 31, 2017
, we had total immediate liquidity of approximately
$382.7 million
, comprised of
$7.1 million
of cash and cash equivalents and
$375.6 million
of immediate availability on our unsecured credit facility.
In addition, we require funds for future dividends to be paid to our common and preferred stockholders and common unit holders in our Operating Partnership. The table below sets forth the dividends attributable to our common stock that were declared or paid during the
three
months ended
March 31, 2017
. These distributions on our common stock are voluntary (at the discretion of our board of directors), to the extent we have satisfied distribution requirements in order to maintain our REIT status for federal income tax purposes, and may be reduced or stopped if needed to fund other liquidity requirements or for other reasons.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month Ended 2017
|
|
Declaration Date
|
|
Record Date
|
|
Per Share
|
|
Payment Date
|
|
June 30
|
|
February 15, 2017
|
|
June 30, 2017
|
|
$
|
0.116667
|
|
|
July 17, 2017
|
|
May 31
|
|
February 15, 2017
|
|
May 31, 2017
|
|
0.116667
|
|
|
June 15, 2017
|
|
April 30
|
|
February 15, 2017
|
|
April 28, 2017
|
|
0.116667
|
|
|
May 15, 2017
|
|
March 31
|
|
November 2, 2016
|
|
March 31, 2017
|
|
0.116667
|
|
|
April 17, 2017
|
|
February 28
|
|
November 2, 2016
|
|
February 28, 2017
|
|
0.116667
|
|
|
March 15, 2017
|
|
January 31
|
|
November 2, 2016
|
|
January 31, 2017
|
|
0.116667
|
|
|
February 15, 2017
|
|
Total
|
|
|
|
|
|
$
|
0.700002
|
|
|
|
On
May 1, 2017
, our board of directors declared the common stock dividend for the months ending
July 31, 2017
,
August 31, 2017
and
September 30, 2017
at a monthly rate of
$0.1175
per share of common stock.
We pay quarterly cumulative dividends on the 6.625% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") and the Series C Preferred Stock (collectively, the "Preferred Stock Issuances") at a rate equivalent to the fixed annual rate of
$1.65625
and
$1.71875
per share, respectively. The table below sets forth the dividends on the Preferred Stock Issuances during the
three
months ended
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2017
|
|
Declaration Date
|
|
Series B
Preferred Stock Per Share
|
|
Series C
Preferred Stock Per Share
|
|
Payment Date
|
|
March 31
|
|
February 15, 2017
|
|
$
|
0.4140625
|
|
|
$
|
0.4296875
|
|
|
March 31, 2017
|
|
Total
|
|
|
|
$
|
0.4140625
|
|
|
$
|
0.4296875
|
|
|
|
On
May 1, 2017
, our board of directors declared the Series B Preferred Stock and Series C Preferred Stock dividend for the quarter ending
June 30, 2017
at a quarterly rate of
$0.4140625
per share and
$0.4296875
per share, respectively.
Indebtedness Outstanding
The following table sets forth certain information with respect to our indebtedness outstanding as of
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
Principal Outstanding as of March 31, 2017 (in thousands)
|
|
Interest
Rate
(1)
|
|
Current Maturity
|
|
Prepayment Terms
(2)
|
|
Unsecured credit facility:
|
|
|
|
|
|
|
|
|
|
Unsecured Credit Facility
(3)
|
|
$
|
71,000
|
|
|
L + 1.15%
|
|
|
Dec-18-2019
|
|
i
|
|
Total unsecured credit facility
|
|
71,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured term loans:
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Term Loan C
|
|
150,000
|
|
|
L + 1.30%
|
|
|
Sep-29-2020
|
|
i
|
|
Unsecured Term Loan B
|
|
150,000
|
|
|
L + 1.30%
|
|
|
Mar-21-2021
|
|
i
|
|
Unsecured Term Loan A
|
|
150,000
|
|
|
L + 1.30%
|
|
|
Mar-31-2022
|
|
i
|
|
Total unsecured term loans
|
|
450,000
|
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs
|
|
(3,234
|
)
|
|
|
|
|
|
|
|
Total carrying value unsecured term loans
|
|
446,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes:
|
|
|
|
|
|
|
|
|
|
|
|
Series F Unsecured Notes
|
|
100,000
|
|
|
3.98
|
%
|
|
Jan-05-2023
|
|
ii
|
|
Series A Unsecured Notes
|
|
50,000
|
|
|
4.98
|
%
|
|
Oct-1-2024
|
|
ii
|
|
Series D Unsecured Notes
|
|
100,000
|
|
|
4.32
|
%
|
|
Feb-20-2025
|
|
ii
|
|
Series B Unsecured Notes
|
|
50,000
|
|
|
4.98
|
%
|
|
Jul-1-2026
|
|
ii
|
|
Series C Unsecured Notes
|
|
80,000
|
|
|
4.42
|
%
|
|
Dec-30-2026
|
|
ii
|
|
Series E Unsecured Notes
|
|
20,000
|
|
|
4.42
|
%
|
|
Feb-20-2027
|
|
ii
|
|
Total unsecured notes
|
|
400,000
|
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs
|
|
(1,967
|
)
|
|
|
|
|
|
|
|
Total carrying value unsecured notes
|
|
398,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable (secured debt):
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo, National Association
|
|
4,024
|
|
|
5.90
|
%
|
|
Aug-1-2017
|
|
iii
|
|
Connecticut General Life Insurance Company -1 Facility
|
|
35,167
|
|
|
6.50
|
%
|
|
Feb-1-2018
|
|
iv
|
|
Connecticut General Life Insurance Company -2 Facility
|
|
36,717
|
|
|
5.75
|
%
|
|
Feb-1-2018
|
|
iv
|
|
Connecticut General Life Insurance Company -3 Facility
|
|
16,073
|
|
|
5.88
|
%
|
|
Feb-1-2018
|
|
iv
|
|
Wells Fargo Bank, National Association CMBS Loan
|
|
56,192
|
|
|
4.31
|
%
|
|
Dec-1-2022
|
|
v
|
|
Thrivent Financial for Lutherans
|
|
3,986
|
|
|
4.78
|
%
|
|
Dec-15-2023
|
|
vi
|
|
Total mortgage notes
|
|
152,159
|
|
|
|
|
|
|
|
|
|
Total unamortized fair market value premiums
|
|
80
|
|
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs
|
|
(787
|
)
|
|
|
|
|
|
|
|
Total carrying value mortgage notes
|
|
151,452
|
|
|
|
|
|
|
|
|
|
Total / weighted average interest rate
(4)
|
|
$
|
1,067,251
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Current interest rate as of
March 31, 2017
. At
March 31, 2017
, the one-month LIBOR (“L”) was
0.98278%
. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on our consolidated leverage ratio, as defined in the respective loan agreements.
|
|
|
|
|
(2)
|
Prepayment terms consist of (i) pre-payable with no penalty; (ii) pre-payable with penalty; (iii) pre-payable without penalty three months prior to the maturity date, however can be defeased; (iv) pre-payable without penalty six months prior to the maturity date; (v) pre-payable without penalty three months prior to the maturity date, however can be defeased beginning January 1, 2016; and (vi) pre-payable without penalty three months prior to the maturity date.
|
|
|
|
|
(3)
|
The capacity of the unsecured credit facility is currently
$450.0 million
.
|
|
|
|
|
(4)
|
The weighted average interest rate was calculated using the fixed interest rate swapped on the current notional amount of
$450.0 million
of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums.
|
The aggregate undrawn nominal commitments on the unsecured credit facility as of
March 31, 2017
was approximately
$375.6 million
, including issued letters of credit. Our actual borrowing capacity at any given point in time may be less and is restricted to a maximum amount based on our debt covenant compliance.
Our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes are subject to ongoing compliance with a number of financial and other covenants. As of
March 31, 2017
, we were in compliance with the applicable financial covenants.
The chart below details our debt capital structure as of
March 31, 2017
.
|
|
|
|
|
|
|
|
|
Debt Capital Structure
|
|
March 31, 2017
|
|
Total principal outstanding (in thousands)
|
|
$
|
1,073,159
|
|
|
Weighted average duration (years)
|
|
5.3
|
|
|
% Secured debt
|
|
14
|
%
|
|
% Debt maturing next 12 months
|
|
9
|
%
|
|
Net Debt to Real Estate Cost Basis
(1)
|
|
41
|
%
|
|
|
|
|
(1)
|
We define Net Debt as our amounts outstanding under our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes, less cash and cash equivalents.
We define Real Estate Cost Basis as the book value of rental property and deferred leasing intangibles, exclusive of the related accumulated depreciation and amortization.
|
We regularly pursue new financing opportunities to ensure an appropriate balance sheet position. As a result of these dedicated efforts, we are confident in our ability to meet future debt maturities and building acquisition funding needs. We believe that our current balance sheet is in an adequate position at the date of this filing, despite possible volatility in the credit markets.
Our interest rate exposure as it relates to interest expense payments on our floating rate debt is managed through our use of interest rate swaps, which fix the rate of our long term floating rate debt. For a detailed discussion on our use of interest rate swaps, see “Interest Rate Risk” below.
Equity
Preferred Stock
The table below sets forth our outstanding preferred stock issuances as of
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Issuances
|
|
Issuance Date
|
|
Number of Shares
|
|
Liquidation Value Per Share
|
|
Interest Rate
|
|
6.625% Series B Cumulative Redeemable Preferred Stock
|
|
April 16, 2013
|
|
2,800,000
|
|
|
$
|
25.00
|
|
|
6.625
|
%
|
|
6.875% Series C Cumulative Redeemable Preferred Stock
|
|
March 17, 2016
|
|
3,000,000
|
|
|
$
|
25.00
|
|
|
6.875
|
%
|
The Preferred Stock Issuances rank on parity and ranks senior to our common stock with respect to dividend rights and
rights upon the liquidation, dissolution or winding up of the Company. The Preferred Stock Issuances have no stated maturity date and are not subject to mandatory redemption or any sinking fund. Generally, we are not permitted to redeem the Series B Preferred Stock and Series C Preferred Stock prior to April 16, 2018 and March 17, 2021, respectively, except in limited circumstances relating to our ability to qualify as a REIT and in certain other circumstances related to a change of control.
C
ommon Stock
The following sets forth our at-the-market ("ATM") common stock offering program as of
March 31, 2017
. We may from time to time sell common stock through sales agents under the program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATM Stock Offering Program
|
|
Date
|
|
Maximum Aggregate Offering Price (in thousands)
|
|
Aggregate Common Stock Available as of
March 31, 2017 (in thousands)
|
|
2016 $228 million ATM
|
|
November 8, 2016
|
|
$
|
228,218
|
|
|
$
|
48,788
|
|
The table below sets forth the activity for the ATM common stock offering programs during the
three
months ended
March 31, 2017
(in thousands, except share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
ATM Stock Offering Program
|
|
Shares
Sold
|
|
Weighted Average Price Per Share
|
|
Gross
Proceeds
|
|
Sales
Agents’ Fee
|
|
Net
Proceeds
|
|
2016 $228 million ATM
|
|
2,843,907
|
|
|
$
|
24.10
|
|
|
$
|
68,543
|
|
|
$
|
941
|
|
|
$
|
67,602
|
|
|
Total/weighted average
|
|
2,843,907
|
|
|
$
|
24.10
|
|
|
$
|
68,543
|
|
|
$
|
941
|
|
|
$
|
67,602
|
|
On
April 7, 2017
, we entered into a new ATM common stock offering program with a maximum aggregate offering price of up to
$300.0 million
. Subsequent to
March 31, 2017
, we sold
5,344,543
shares under its ATM common stock offering programs for gross proceeds of approximately
$135.0 million
. The net proceeds of approximately
$133.4 million
were used to fund acquisitions, repay amounts outstanding under our unsecured credit facility, and other general corporate purposes.
Noncontrolling Interest
We own our interests in all of our properties and conduct substantially all of our business through our Operating Partnership. We are the sole member of the sole general partner of the Operating Partnership. As of
March 31, 2017
, we owned approximately
95.8%
of the common units of our Operating Partnership, and our current and former executive officers, directors, senior employees and their affiliates, and third parties who contributed properties to us in exchange for common units in our Operating Partnership, owned the remaining
4.2%
.
Non-cash Compensation Expense
We recorded approximately
$2.3 million
in general and administrative expenses in the accompanying Consolidated Statements of Operations for the
three
months ended
March 31, 2017
for the amortization of our equity incentive plan, excluding board of directors' compensation. We expect to recognize approximately
$9.2
for the year ending December 31,
2017
for the amortization of our equity incentive plan, excluding board of directors compensation. The following table summarizes the expected amortization of our unrecognized compensation expense over the next five years as of
March 31, 2017
.
|
|
|
|
|
|
|
|
|
Year
|
|
Future Amortization of Non-cash Compensation Expense (in thousands)
|
|
Remainder of 2017
|
|
$
|
6,927
|
|
|
2018
|
|
$
|
5,165
|
|
|
2019
|
|
$
|
3,596
|
|
|
2020
|
|
$
|
1,732
|
|
|
2021
|
|
$
|
113
|
|
Interest Rate Risk
We use interest rate swaps to fix the rate of our variable rate debt. As of
March 31, 2017
, all of our outstanding variable rate debt, with the exception of our unsecured credit facility, was fixed with interest rate swaps.
We recognize all derivatives on the balance sheet at fair value. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income (loss), which is a component of equity. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. Derivatives that are not designated as hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense.
We have established criteria for suitable counterparties in relation to various specific types of risk. We only use counterparties that have a credit rating of no lower than investment grade at swap inception from Moody’s Investor Services, Standard & Poor’s, or Fitch Ratings or other nationally recognized rating agencies.
The following table details our outstanding interest rate swaps as of
March 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
Derivative Counterparty
|
|
Trade Date
|
|
Effective Date
|
|
Notional Amount
(in thousands)
|
|
Fair Value
(in thousands)
|
|
Pay Fixed Interest Rate
|
|
Receive Variable Interest Rate
|
|
Maturity Date
|
|
PNC Bank, N.A.
|
|
Sep-14-2012
|
|
Oct-10-2012
|
|
$
|
10,000
|
|
|
$
|
12
|
|
|
0.7945
|
%
|
|
One-month L
|
|
Sep-10-2017
|
|
Bank of America, N.A.
|
|
Sep-14-2012
|
|
Oct-10-2012
|
|
$
|
10,000
|
|
|
$
|
12
|
|
|
0.7945
|
%
|
|
One-month L
|
|
Sep-10-2017
|
|
UBS AG
|
|
Sep-14-2012
|
|
Oct-10-2012
|
|
$
|
10,000
|
|
|
$
|
12
|
|
|
0.7945
|
%
|
|
One-month L
|
|
Sep-10-2017
|
|
Royal Bank of Canada
|
|
Sep-14-2012
|
|
Oct-10-2012
|
|
$
|
10,000
|
|
|
$
|
12
|
|
|
0.7945
|
%
|
|
One-month L
|
|
Sep-10-2017
|
|
RJ Capital Services, Inc.
|
|
Sep-14-2012
|
|
Oct-10-2012
|
|
$
|
10,000
|
|
|
$
|
12
|
|
|
0.7975
|
%
|
|
One-month L
|
|
Sep-10-2017
|
|
Bank of America, N.A.
|
|
Sep-20-2012
|
|
Oct-10-2012
|
|
$
|
25,000
|
|
|
$
|
36
|
|
|
0.7525
|
%
|
|
One-month L
|
|
Sep-10-2017
|
|
RJ Capital Services, Inc.
|
|
Sep-24-2012
|
|
Oct-10-2012
|
|
$
|
25,000
|
|
|
$
|
39
|
|
|
0.7270
|
%
|
|
One-month L
|
|
Sep-10-2017
|
|
Regions Bank
|
|
Mar-01-2013
|
|
Mar-01-2013
|
|
$
|
25,000
|
|
|
$
|
216
|
|
|
1.3300
|
%
|
|
One-month L
|
|
Feb-14-2020
|
|
Capital One, N.A.
|
|
Jun-13-2013
|
|
Jul-01-2013
|
|
$
|
50,000
|
|
|
$
|
(66
|
)
|
|
1.6810
|
%
|
|
One-month L
|
|
Feb-14-2020
|
|
Capital One, N.A.
|
|
Jun-13-2013
|
|
Aug-01-2013
|
|
$
|
25,000
|
|
|
$
|
(49
|
)
|
|
1.7030
|
%
|
|
One-month L
|
|
Feb-14-2020
|
|
Regions Bank
|
|
Sep-30-2013
|
|
Feb-03-2014
|
|
$
|
25,000
|
|
|
$
|
(254
|
)
|
|
1.9925
|
%
|
|
One-month L
|
|
Feb-14-2020
|
|
The Toronto-Dominion Bank
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
25,000
|
|
|
$
|
299
|
|
|
1.3830
|
%
|
|
One-month L
|
|
Sep-29-2020
|
|
PNC Bank, N.A.
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
50,000
|
|
|
$
|
588
|
|
|
1.3906
|
%
|
|
One-month L
|
|
Sep-29-2020
|
|
Regions Bank
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
35,000
|
|
|
$
|
414
|
|
|
1.3858
|
%
|
|
One-month L
|
|
Sep-29-2020
|
|
U.S. Bank, N.A.
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
25,000
|
|
|
$
|
290
|
|
|
1.3950
|
%
|
|
One-month L
|
|
Sep-29-2020
|
|
Capital One, N.A.
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
15,000
|
|
|
$
|
173
|
|
|
1.3950
|
%
|
|
One-month L
|
|
Sep-29-2020
|
|
Royal Bank of Canada
|
|
Jan-08-2015
|
|
Mar-20-2015
|
|
$
|
25,000
|
|
|
$
|
81
|
|
|
1.7090
|
%
|
|
One-month L
|
|
Mar-21-2021
|
|
The Toronto-Dominion Bank
|
|
Jan-08-2015
|
|
Mar-20-2015
|
|
$
|
25,000
|
|
|
$
|
80
|
|
|
1.7105
|
%
|
|
One-month L
|
|
Mar-21-2021
|
|
The Toronto-Dominion Bank
|
|
Jan-08-2015
|
|
Sep-10-2017
|
|
$
|
100,000
|
|
|
$
|
(1,159
|
)
|
|
2.2255
|
%
|
|
One-month L
|
|
Mar-21-2021
|
|
Wells Fargo, N.A.
|
|
Jan-08-2015
|
|
Mar-20-2015
|
|
$
|
25,000
|
|
|
$
|
102
|
|
|
1.8280
|
%
|
|
One-month L
|
|
Mar-31-2022
|
|
The Toronto-Dominion Bank
|
|
Jan-08-2015
|
|
Feb-14-2020
|
|
$
|
25,000
|
|
|
$
|
(71
|
)
|
|
2.4535
|
%
|
|
One-month L
|
|
Mar-31-2022
|
|
Regions Bank
|
|
Jan-08-2015
|
|
Feb-14-2020
|
|
$
|
50,000
|
|
|
$
|
(167
|
)
|
|
2.4750
|
%
|
|
One-month L
|
|
Mar-31-2022
|
|
Capital One, N.A.
|
|
Jan-08-2015
|
|
Feb-14-2020
|
|
$
|
50,000
|
|
|
$
|
(219
|
)
|
|
2.5300
|
%
|
|
One-month L
|
|
Mar-31-2022
|
The swaps outlined in the above table were all designated as cash flow hedges of interest rate risk, and all are valued as Level 2 financial instruments. Level 2 financial instruments are defined as significant other observable inputs. As of
March 31, 2017
, the fair value of
16
of our
23
interest rate swaps were in an asset position of approximately
$2.4 million
and
7
interest rate swaps were in a liability position of approximately
$2.0 million
, including any adjustment for nonperformance risk related to these agreements.
As of
March 31, 2017
, we had
$521.0 million
of variable rate debt. As of
March 31, 2017
, all of our outstanding variable rate debt, with exception of our unsecured credit facility, was fixed with interest rate swaps. To the extent interest rates increase, interest costs on our floating rate debt not fixed with interest rate swaps will increase, which could adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our security holders. From time to time, we may enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. In addition, an increase in interest rates could decrease the amounts third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions.
Inflation
Our business could be impacted in multiple ways due to inflation. We believe, however, that we are well positioned to be able to manage our business in an inflationary environment. Specifically, our weighted average lease term is approximately
4.4 years
and, on average, approximately 10-20% of our leases will roll annually over the next few years. We expect that this lease roll will allow us to capture inflationary increases in rent on a relatively efficient basis. In addition, we have long term liabilities averaging approximately 5.5 years when excluding our unsecured credit facility. Our variable rate debt has been fully swapped to fixed rates through maturity with the exception of the unsecured credit facility. Therefore, as rents rise and increase our operating cash flow, this positive impact will flow more directly to the bottom line without the offset of higher in place debt costs. Lastly, while inflation will likely lead to increases in the operating costs of our portfolio, such as real estate taxes, utility expenses, and other operating expenses, the majority of our leases are either triple net leases or otherwise provide for tenant reimbursement for costs related to these expenses. Therefore, the increased costs in an inflationary environment would generally be passed through to our tenant.
Off-balance Sheet Arrangements
As of
March 31, 2017
, we had letters of credit of approximately
$3.4 million
related to development projects and our corporate office lease. As of
March 31, 2017
, we had no other material off-balance sheet arrangements.