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”).
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 (the “Securities Act”), 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:
|
|
•
|
the factors included in our Annual Report on Form 10-K for the year ended December 31, 2017, 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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|
|
•
|
our ability to raise equity capital on attractive terms;
|
|
|
•
|
the competitive environment in which we operate;
|
|
|
•
|
real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;
|
|
|
•
|
decreased rental rates or increased vacancy rates;
|
|
|
•
|
potential defaults (including bankruptcies or insolvency) on or non-renewal of leases by tenants;
|
|
|
•
|
acquisition risks, including our ability to identify and complete accretive acquisitions and/or failure of such acquisitions to perform in accordance with projections;
|
|
|
•
|
the timing of acquisitions and dispositions;
|
|
|
•
|
potential natural disasters and other potentially catastrophic events such as acts of war and/or terrorism;
|
|
|
•
|
international, national, regional and local economic conditions;
|
|
|
•
|
the general level of interest rates and currencies;
|
|
|
•
|
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;
|
|
|
•
|
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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|
•
|
credit risk in the event of non-performance by the counterparties to the interest rate swaps and revolving and unfunded debt;
|
|
|
•
|
lack of or insufficient amounts of insurance;
|
|
|
•
|
our ability to maintain our qualification as a REIT;
|
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|
•
|
our ability to retain key personnel;
|
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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.
|
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 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 Internal Revenue Code of 1986, as amended, 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
September 30, 2018
(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
September 30, 2018
, 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 over eight years of economic growth, some uncertainty regarding U.S. policy initiatives, and continued asset appreciation. In September 2018, the federal funds target rate was raised 25 basis points to a target range of 2.00% to 2.25%. This announcement combined with the unwinding of its balance sheet by selling Treasury securities and anticipation of one more rate increase in 2018 are signs of the Central Bank’s confidence in the economy. The current trajectory of the federal funds target rate aligns with the Central Bank’s consistent commentary that future rate increases would be gradual. If interest rates 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 and regional investors who are likely to be more heavily impacted by interest rate increases.
Several industrial specific trends contribute to the expected strong demand, including:
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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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|
•
|
the 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); and
|
|
|
•
|
the overall quality of the transportation infrastructure in the U.S.
|
Furthermore, the lack of material speculative development and the broader failure of supply to keep pace with demand in many of our markets has improved and may continue to modestly 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 primary industrial markets. On the demand side, we note that the quality and availability of labor remains a key focus of tenants making occupancy decisions. 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
September 30, 2018
, our Operating Portfolio was approximately
96.0%
leased and our straight-line (“SL”) rent change (as defined below) on new and renewal leases together grew approximately
10.6%
and
14.7%
during the
three and nine
months ended
September 30, 2018
, respectively.
We define the Operating Portfolio as all warehouse and light manufacturing assets that were acquired stabilized or have achieved Stabilization. The Operating Portfolio excludes non-core flex/office assets and assets contained in the Value Add Portfolio.
We define Stabilization for assets under redevelopment to occur upon the earlier of achieving 90% occupancy or 12 months after completion. Stabilization for assets that were acquired and immediately added to the Value Add Portfolio occurs under the following:
(i) i
f acquired with less than 75% occupancy as of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy or 12 months from the acquisition date;
or (ii) i
f acquired and will be less than 75% occupied due to known move-outs within two years of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy after the known move-outs have occurred or 12 months after the known move-outs have occurred.
We define the Value Add Portfolio as properties that meet any of the following criteria:
(i) l
ess than 75% occupied as of the acquisition date;
(ii) w
ill be less than 75% occupied due to known move-outs within two years of the acquisition date;
or (iii) o
ut of service with significant physical renovation of the asset
.
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 and nine
months ended
September 30, 2018
. 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
|
|
Square Feet
|
|
Cash
Basis Rent Per
Square Foot
|
|
SL Rent Per
Square Foot
|
|
Total Costs Per
Square
Foot
(1)
|
|
Cash
Rent Change
(2)
|
|
SL Rent Change
(3)
|
|
Weighted Average Lease
Term
(4)
(years)
|
|
Rental Concessions per Square Foot
(5)
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases
(6)
|
|
544,253
|
|
|
$
|
4.26
|
|
|
$
|
4.41
|
|
|
$
|
2.61
|
|
|
(4.1
|
)%
|
|
(0.4
|
)%
|
|
5.6
|
|
|
$
|
0.54
|
|
Renewal Leases
(7)
|
|
523,306
|
|
|
4.37
|
|
|
4.52
|
|
|
0.56
|
|
|
13.9
|
%
|
|
19.5
|
%
|
|
3.6
|
|
|
—
|
|
Total/weighted average
|
|
1,067,559
|
|
|
$
|
4.31
|
|
|
$
|
4.46
|
|
|
$
|
1.60
|
|
|
5.9
|
%
|
|
10.6
|
%
|
|
4.6
|
|
|
$
|
0.27
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases
(6)
|
|
1,756,935
|
|
|
$
|
3.73
|
|
|
$
|
3.87
|
|
|
$
|
2.33
|
|
|
9.9
|
%
|
|
17.7
|
%
|
|
6.8
|
|
|
$
|
0.75
|
|
Renewal Leases
(7)
|
|
5,254,633
|
|
|
3.98
|
|
|
4.11
|
|
|
0.62
|
|
|
7.4
|
%
|
|
14.1
|
%
|
|
4.6
|
|
|
0.07
|
|
Total/weighted average
|
|
7,011,568
|
|
|
$
|
3.91
|
|
|
$
|
4.05
|
|
|
$
|
1.05
|
|
|
7.9
|
%
|
|
14.7
|
%
|
|
5.1
|
|
|
$
|
0.24
|
|
|
|
(1)
|
We define Total Costs as the costs for improvements of vacant and renewal spaces, as well as the legal fees and commissions for leasing transactions. Total Costs per square foot represent the total costs expected to be incurred on the leases signed during the period and do not reflect actual expenditures for the period.
|
|
|
(2)
|
We
define Cash Rent Change as the percentage change in the base rent of the lease executed during the period compared to the base rent of the Comparable Lease for assets included in the Operating Portfolio. The calculation compares the first base rent payment due after the lease commencement date compared to the base rent of the last monthly payment due prior to the termination of the lease, excluding holdover rent. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses.
We define a Comparable Lease as a lease in the same space 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. This resulted in 192,707 and 1,532,343 square feet to be deemed non-comparable for three and nine months ended September 30, 2018, respectively.
|
|
|
(3)
|
We define SL Rent Change as the percentage change in the average monthly base rent over the term of the lease, calculated on a straight-line basis, of the lease executed during the period compared to the Comparable Lease for assets included in the Operating Portfolio. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses, and this calculation excludes the impact of any holdover rent.
|
|
|
(4)
|
We define Weighted Average Lease Term as the contractual lease term in years as of the lease start date weighted by square footage.
|
|
|
(5)
|
Represents the total rental concessions for the entire lease term.
|
|
|
(6)
|
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.
|
|
|
(7)
|
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.
|
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
9.7%
of our annualized base rental revenue will expire during the period from
October 1, 2018 to September 30, 2019
, 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 higher than the rates under existing leases expiring during the period
October 1, 2018 to September 30, 2019
, thereby resulting in higher revenue from the same space.
The following table sets forth a summary of lease expirations for leases in place as of
September 30, 2018
, plus available space, for each of the ten calendar years beginning with
2018
and thereafter in our portfolio. The information in the table assumes that tenants exercise no renewal options and no early termination rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Expiration Year
|
|
Number
of
Leases
Expiring
|
|
Total Rentable
Square Feet
|
|
% of
Total
Occupied
Square Feet
|
|
Total Annualized
Base Rental
Revenue
(in thousands)
|
|
% of Total
Annualized
Base Rental Revenue
|
Available
|
|
—
|
|
3,466,010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Month-to-month leases
|
|
5
|
|
205,043
|
|
|
0.3
|
%
|
|
$
|
828
|
|
|
0.3
|
%
|
Remainder of 2018
|
|
4
|
|
798,875
|
|
|
1.1
|
%
|
|
3,489
|
|
|
1.2
|
%
|
2019
|
|
53
|
|
8,413,096
|
|
|
11.7
|
%
|
|
35,622
|
|
|
11.8
|
%
|
2020
|
|
50
|
|
9,814,812
|
|
|
13.6
|
%
|
|
42,116
|
|
|
14.0
|
%
|
2021
|
|
69
|
|
10,940,764
|
|
|
15.2
|
%
|
|
47,063
|
|
|
15.6
|
%
|
2022
|
|
51
|
|
6,532,253
|
|
|
9.1
|
%
|
|
28,129
|
|
|
9.3
|
%
|
2023
|
|
46
|
|
8,755,494
|
|
|
12.2
|
%
|
|
32,648
|
|
|
10.9
|
%
|
2024
|
|
28
|
|
5,320,625
|
|
|
7.4
|
%
|
|
21,716
|
|
|
7.2
|
%
|
2025
|
|
23
|
|
3,991,385
|
|
|
5.5
|
%
|
|
17,349
|
|
|
5.8
|
%
|
2026
|
|
23
|
|
5,069,584
|
|
|
7.0
|
%
|
|
19,818
|
|
|
6.6
|
%
|
2027
|
|
12
|
|
1,916,418
|
|
|
2.7
|
%
|
|
9,059
|
|
|
3.0
|
%
|
Thereafter
|
|
45
|
|
10,161,454
|
|
|
14.2
|
%
|
|
43,022
|
|
|
14.3
|
%
|
Total
|
|
409
|
|
75,385,813
|
|
|
100.0
|
%
|
|
$
|
300,859
|
|
|
100.0
|
%
|
Portfolio Summary
The following table sets forth information relating to diversification by building type in our portfolio as of
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square Footage
|
|
|
|
Annualized Base Rental Revenue
|
Building Type
|
|
Number of Buildings
|
|
Amount
|
|
%
|
|
Occupancy Rate
(1)
|
|
Amount
(in thousands)
|
|
%
|
Warehouse/Distribution
|
|
309
|
|
|
67,433,301
|
|
|
89.5
|
%
|
|
95.7
|
%
|
|
$
|
264,832
|
|
|
88.1
|
%
|
Light Manufacturing
|
|
59
|
|
|
6,614,487
|
|
|
8.8
|
%
|
|
100.0
|
%
|
|
29,615
|
|
|
9.8
|
%
|
Total Operating Portfolio/weighted average
|
|
368
|
|
|
74,047,788
|
|
|
98.3
|
%
|
|
96.0
|
%
|
|
$
|
294,447
|
|
|
97.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value Add
|
|
4
|
|
|
773,345
|
|
|
1.0
|
%
|
|
53.7
|
%
|
|
1,792
|
|
|
0.6
|
%
|
Flex/Office
|
|
9
|
|
|
564,680
|
|
|
0.7
|
%
|
|
67.9
|
%
|
|
4,620
|
|
|
1.5
|
%
|
Total portfolio/weighted average
|
|
381
|
|
|
75,385,813
|
|
|
100.0
|
%
|
|
95.4
|
%
|
|
$
|
300,859
|
|
|
100.0
|
%
|
|
|
(1)
|
We define Occupancy Rate as the percentage of total leasable square footage for which either revenue recognition has commenced in accordance with GAAP or the lease term has commenced as of the close of the reporting period, whichever occurs earlier.
|
Portfolio Acquisitions
The following table summarizes our acquisitions during the
nine
months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
(1)
|
|
Date Acquired
|
|
Square Feet
|
|
Buildings
|
|
Purchase Price
(in thousands)
|
Greenville/Spartanburg, SC
|
|
January 11, 2018
|
|
203,000
|
|
|
1
|
|
|
$
|
10,755
|
|
Minneapolis/St Paul, MN
|
|
January 26, 2018
|
|
145,351
|
|
|
1
|
|
|
13,538
|
|
Philadelphia, PA
|
|
February 1, 2018
|
|
278,582
|
|
|
1
|
|
|
18,277
|
|
Houston, TX
|
|
February 22, 2018
|
|
242,225
|
|
|
2
|
|
|
22,478
|
|
Greenville/Spartanburg, SC
|
|
March 30, 2018
|
|
222,710
|
|
|
1
|
|
|
13,773
|
|
Three months ended March 31, 2018
|
|
|
|
1,091,868
|
|
|
6
|
|
|
78,821
|
|
Chicago, IL
|
|
April 23, 2018
|
|
169,311
|
|
|
2
|
|
|
10,975
|
|
Milwaukee/Madison, WI
|
|
April 26, 2018
|
|
53,680
|
|
|
1
|
|
|
4,316
|
|
Pittsburgh, PA
|
|
April 30, 2018
|
|
175,000
|
|
|
1
|
|
|
15,380
|
|
Detroit, MI
|
|
May 9, 2018
|
|
274,500
|
|
|
1
|
|
|
19,328
|
|
Minneapolis/St Paul, MN
|
|
May 15, 2018
|
|
509,910
|
|
|
2
|
|
|
26,983
|
|
Cincinnati/Dayton, OH
|
|
May 23, 2018
|
|
158,500
|
|
|
1
|
|
|
7,317
|
|
Baton Rouge, LA
|
|
May 31, 2018
|
|
279,236
|
|
|
1
|
|
|
21,379
|
|
Las Vegas, NV
|
|
June 12, 2018
|
|
122,472
|
|
|
1
|
|
|
17,920
|
|
Greenville/Spartanburg, SC
|
|
June 15, 2018
|
|
131,805
|
|
|
1
|
|
|
5,621
|
|
Denver, CO
|
|
June 18, 2018
|
|
64,750
|
|
|
1
|
|
|
7,044
|
|
Cincinnati/Dayton, OH
|
|
June 25, 2018
|
|
465,136
|
|
|
1
|
|
|
16,421
|
|
Charlotte, NC
|
|
June 29, 2018
|
|
69,200
|
|
|
1
|
|
|
5,446
|
|
Houston, TX
|
|
June 29, 2018
|
|
252,662
|
|
|
1
|
|
|
27,170
|
|
Three months ended June 30, 2018
|
|
|
|
2,726,162
|
|
|
15
|
|
|
185,300
|
|
Knoxville, TN
|
|
July 10, 2018
|
|
106,000
|
|
|
1
|
|
|
6,477
|
|
Pittsburgh, PA
|
|
August 2, 2018
|
|
265,568
|
|
|
1
|
|
|
19,186
|
|
Raleigh/Durham, NC
|
|
August 2, 2018
|
|
365,000
|
|
|
1
|
|
|
21,067
|
|
Detroit, MI
|
|
August 6, 2018
|
|
439,150
|
|
|
1
|
|
|
21,077
|
|
Des Moines, IA
|
|
August 8, 2018
|
|
121,922
|
|
|
1
|
|
|
6,053
|
|
McAllen/Edinburg/Pharr, TX
|
|
August 9, 2018
|
|
270,084
|
|
|
1
|
|
|
18,523
|
|
Pittsburgh, PA
|
|
August 15, 2018
|
|
200,500
|
|
|
1
|
|
|
11,327
|
|
Minneapolis/St Paul, MN
|
|
August 24, 2018
|
|
120,606
|
|
|
1
|
|
|
8,422
|
|
Milwaukee/Madison, WI
|
|
September 28, 2018
|
|
100,800
|
|
|
1
|
|
|
7,484
|
|
Milwaukee/Madison, WI
|
|
September 28, 2018
|
|
174,633
|
|
|
2
|
|
|
13,288
|
|
Chicago, IL
|
|
September 28, 2018
|
|
105,637
|
|
|
1
|
|
|
6,368
|
|
Indianapolis, IN
|
|
September 28, 2018
|
|
478,721
|
|
|
1
|
|
|
29,085
|
|
Augusta/Richmond County, GA
|
|
September 28, 2018
|
|
203,726
|
|
|
1
|
|
|
9,379
|
|
Charlotte, NC
|
|
September 28, 2018
|
|
301,000
|
|
|
1
|
|
|
16,807
|
|
Three months ended September 30, 2018
|
|
|
|
3,253,347
|
|
|
15
|
|
|
194,543
|
|
Nine months ended September 30, 2018
|
|
|
|
7,071,377
|
|
|
36
|
|
|
$
|
458,664
|
|
(1) As defined by CoStar Realty Information Inc.
Portfolio Dispositions
During the
nine
months ended
September 30, 2018
, we sold
11
buildings comprised of approximately
2.0 million
square feet with a net book value of approximately
$57.1 million
to third parties. Net proceeds from the sales of rental property were approximately
$89.4 million
and we recognized the full gain on the sales of rental property, net of approximately
$32.3 million
for the
nine
months ended
September 30, 2018
.
We may dispose of additional properties from time to time and, among other individual properties, are currently marketing for sale a portfolio of seven assets in six states. The seven assets contain a total of approximately 1.8 million rentable square feet. We make no assurance that the sale will occur or, if it does, that the portfolio sold will not differ substantially from the portfolio now on the market.
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
September 30, 2018
.
|
|
|
|
|
Top Ten Markets
(1)
|
|
% of Total Annualized Base Rental Revenue
|
Philadelphia, PA
|
|
9.5
|
%
|
Chicago, IL
|
|
8.6
|
%
|
Greenville/Spartanburg, SC
|
|
4.8
|
%
|
Milwaukee/Madison, WI
|
|
4.1
|
%
|
Detroit, MI
|
|
3.9
|
%
|
Cincinnati/
Dayton, OH
|
|
3.3
|
%
|
Charlotte,
NC
|
|
3.2
|
%
|
Houston, TX
|
|
3.2
|
%
|
Minneapolis/St Paul, MN
|
|
3.0
|
%
|
Pittsburgh, PA
|
|
2.8
|
%
|
Total
|
|
46.4
|
%
|
(1) As defined by CoStar Realty Information Inc.
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
September 30, 2018
.
|
|
|
|
|
Top Ten Tenant Industries
(1)
|
|
% of Total Annualized Base Rental Revenue
|
Capital Goods
|
|
14.8
|
%
|
Automobiles &
Components
|
|
12.8
|
%
|
Materials
|
|
11.7
|
%
|
Transportation
|
|
8.9
|
%
|
Consumer Durables & Apparel
|
|
8.9
|
%
|
Food, Beverage & Tobacco
|
|
7.9
|
%
|
Commercial & Prof Services
|
|
7.6
|
%
|
Retailing
|
|
5.0
|
%
|
Household & Personal Products
|
|
4.7
|
%
|
Food & Staples Retailing
|
|
4.3
|
%
|
Total
|
|
86.6
|
%
|
(1) Industry classification based on GICS methodology.
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
September 30, 2018
.
|
|
|
|
|
|
|
|
Top Ten Tenants
(1)
|
|
Number of Leases
|
|
% of Total Annualized Base Rental Revenue
|
General Service Administration
|
|
1
|
|
|
2.3
|
%
|
XPO Logistics
|
|
4
|
|
|
1.9
|
%
|
Deckers Outdoor
|
|
2
|
|
|
1.4
|
%
|
Yanfeng US Automotive Interior
|
|
3
|
|
|
1.3
|
%
|
Solo Cup
|
|
1
|
|
|
1.3
|
%
|
TriMas Corporation
|
|
4
|
|
|
1.2
|
%
|
DHL
|
|
4
|
|
|
1.0
|
%
|
Generation Brands
|
|
1
|
|
|
0.9
|
%
|
Schneider Electric USA, Inc.
|
|
4
|
|
|
0.9
|
%
|
Carolina Beverage Group
|
|
2
|
|
|
0.9
|
%
|
Total
|
|
26
|
|
|
13.1
|
%
|
(1) Includes tenants, guarantors, and/or non-guarantor parents.
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, 2017, for a discussion of our critical accounting policies and estimates.
Results of Operations
The following discussion of our results of our same store (as defined below) 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. 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. 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
September 30, 2018
to the three months ended
September 30, 2017
We define same store properties
as properties that were in the Operating Portfolio for the entirety of the comparative periods presented.
Same store properties exclude Operating Portfolio properties with expansions placed into service after
June 30, 2017
. On
September 30, 2018
, we owned
309
industrial buildings consisting of approximately
61.8 million
square feet, which represents approximately
82.0%
of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy decreased approximately
0.3%
to
96.1%
as of
September 30, 2018
compared to
96.4%
as of
September 30, 2017
.
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the three months ended
September 30, 2018
and
2017
(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
September 30, 2018
and
2017
with respect to the buildings acquired and disposed of and Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after
June 30, 2017
and our flex/office buildings and Value Add Portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Portfolio
|
|
Acquisitions/Dispositions
|
|
Other
|
|
Total Portfolio
|
|
Three months ended September 30,
|
|
Change
|
|
Three months ended September 30,
|
|
Three months ended September 30,
|
|
Three months ended September 30,
|
|
Change
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
$
|
|
%
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
61,926
|
|
|
$
|
60,611
|
|
|
$
|
1,315
|
|
|
2.2
|
%
|
|
$
|
9,977
|
|
|
$
|
3,030
|
|
|
$
|
3,256
|
|
|
$
|
2,032
|
|
|
$
|
75,159
|
|
|
$
|
65,673
|
|
|
$
|
9,486
|
|
|
14.4
|
%
|
Tenant recoveries
|
10,760
|
|
|
11,239
|
|
|
(479
|
)
|
|
(4.3
|
)%
|
|
1,865
|
|
|
620
|
|
|
893
|
|
|
507
|
|
|
13,518
|
|
|
12,366
|
|
|
1,152
|
|
|
9.3
|
%
|
Other income
|
254
|
|
|
44
|
|
|
210
|
|
|
477.3
|
%
|
|
15
|
|
|
50
|
|
|
—
|
|
|
11
|
|
|
269
|
|
|
105
|
|
|
164
|
|
|
156.2
|
%
|
Total operating revenue
|
72,940
|
|
|
71,894
|
|
|
1,046
|
|
|
1.5
|
%
|
|
11,857
|
|
|
3,700
|
|
|
4,149
|
|
|
2,550
|
|
|
88,946
|
|
|
78,144
|
|
|
10,802
|
|
|
13.8
|
%
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
13,572
|
|
|
13,388
|
|
|
184
|
|
|
1.4
|
%
|
|
2,049
|
|
|
993
|
|
|
1,491
|
|
|
1,020
|
|
|
17,112
|
|
|
15,401
|
|
|
1,711
|
|
|
11.1
|
%
|
Net operating income
(1)
|
$
|
59,368
|
|
|
$
|
58,506
|
|
|
$
|
862
|
|
|
1.5
|
%
|
|
$
|
9,808
|
|
|
$
|
2,707
|
|
|
$
|
2,658
|
|
|
$
|
1,530
|
|
|
71,834
|
|
|
62,743
|
|
|
9,091
|
|
|
14.5
|
%
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,911
|
|
|
8,380
|
|
|
531
|
|
|
6.3
|
%
|
Property acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
1,386
|
|
|
(1,386
|
)
|
|
(100.0
|
)%
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,355
|
|
|
38,186
|
|
|
6,169
|
|
|
16.2
|
%
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223
|
|
|
58
|
|
|
165
|
|
|
284.5
|
%
|
Total other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,489
|
|
|
48,010
|
|
|
5,479
|
|
|
11.4
|
%
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,601
|
|
|
63,411
|
|
|
7,190
|
|
|
11.3
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
2
|
|
|
1
|
|
|
50.0
|
%
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,698
|
)
|
|
(10,446
|
)
|
|
(2,252
|
)
|
|
21.6
|
%
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
(13
|
)
|
|
—
|
|
|
—
|
%
|
Gain on the sales of rental property, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,239
|
|
|
17,563
|
|
|
(14,324
|
)
|
|
(81.6
|
)%
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,469
|
)
|
|
7,106
|
|
|
(16,575
|
)
|
|
(233.3
|
)%
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,876
|
|
|
$
|
21,839
|
|
|
$
|
(12,963
|
)
|
|
(59.4
|
)%
|
|
|
(1)
|
For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.
|
Net Income
Net income
for our total portfolio
decreased
by
$13.0 million
or
59.4%
to
$8.9 million
for the three months ended
September 30, 2018
, compared to
$21.8 million
for the three months ended
September 30, 2017
.
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of (i) rental income consisting of base rent, 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
$1.3 million
or
2.2%
to
$61.9 million
for the three months ended
September 30, 2018
compared to
$60.6 million
for the three months ended
September 30, 2017
. Approximately $2.4 million of the increase was attributable to rental increases due to new leases and renewals of existing tenants. This increase was 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
decreased
by
$0.5 million
or
4.3%
to
$10.8 million
for the three months ended
September 30, 2018
compared to
$11.2 million
for the three months ended
September 30, 2017
. The decrease was primarily attributable to one of our properties where it was determined, during the three months ended September 30, 2017, that the tenant will not be able to meet its requirements set forth by the taxing authority to be entitled to an abatement of real estate taxes. The abatement was applicable to prior periods, and therefore the expense and related recovery recorded for the three months ended September 30, 2017 includes 36 months of real estate taxes, which attributed to approximately $0.6 million of the decrease in same store tenant recoveries as it did not recur for the three months ended September 30, 2018. Additionally, approximately $0.3 million of the decrease related to the vacancy of previously occupied buildings and decreases in real estate taxes levied by the taxing authority. These decreases were partially offset by an increase of approximately $0.4 million related 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
$0.2 million
or
1.4%
to
$13.6 million
for the three months ended
September 30, 2018
compared to
$13.4 million
for the three months ended
September 30, 2017
. This increase was primarily related to increases in general repairs and maintenance and utilities expense of approximately $0.4 million and an increase in real estate taxes levied by the related taxing authority of approximately $0.1 million. Additionally during the three months ended
September 30, 2017
approximately $0.3 million of previously recorded bad debt reserve was reversed, which did not recur during the three months ended
September 30, 2018
. These increases were partially offset by a decrease in real estate taxes attributable to one of our properties where it was determined, during the three months ended September 30, 2017, that the tenant will not be able to meet its requirements set forth by the taxing authority to be entitled to an abatement of real estate taxes. The abatement was applicable to prior periods, and therefore the expense and related recovery recorded for the three months ended September 30, 2017 includes 36 months of real estate taxes, which attributed to approximately $0.6 million of the decrease in same store operating expenses as it did not recur for the three months ended September 30, 2018.
Acquisitions and Dispositions Net Operating Income
For a detailed reconciliation of our acquisitions and dispositions NOI to
net income
, see the table above.
Subsequent to
June 30, 2017
, we acquired
53
buildings consisting of approximately
10.5 million
square feet (excluding four buildings that were included in the Value Add Portfolio at
September 30, 2018
or transferred from the Value Add Portfolio to the Operating Portfolio after
June 30, 2017
), and sold
18
buildings consisting of approximately
3.7 million
square feet. For the three months ended
September 30, 2018
and
2017
, the buildings acquired after
June 30, 2017
contributed approximately
$9.8 million
and
$0.2 million
to NOI, respectively. For the three months ended
September 30, 2018
and
2017
, the buildings sold after
June 30, 2017
contributed approximately
$(8,000)
and
$2.5 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, Value Add Portfolio, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after
June 30, 2017
. Other NOI also includes termination income from buildings in our same store portfolio.
For a detailed reconciliation of our other NOI to
net income
, see the table above.
At
September 30, 2018
, we owned
nine
flex/office buildings consisting of approximately
0.6 million
square feet,
four
buildings in our Value Add Portfolio consisting of approximately
0.8 million
square feet, and six buildings consisting of approximately 1.8 million square feet that were Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after
June 30, 2017
. These buildings contributed approximately
$2.5 million
and
$1.3 million
to NOI for the three months ended
September 30, 2018
and
2017
, respectively. Additionally, there was
$0.2 million
and
$0.2 million
of termination fee income from certain buildings in our same store portfolio for the three months ended
September 30, 2018
and
2017
, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, property acquisition costs, depreciation and amortization, and other expenses.
Total other expenses
increased
$5.5 million
or
11.4%
for the three months ended
September 30, 2018
to
$53.5 million
compared to
$48.0 million
for the three months ended
September 30, 2017
. This is primarily a result of an increase in depreciation and amortization of approximately
$6.2 million
as a result of acquisitions increased the depreciable asset base. General and administrative expenses increased by approximately
$0.5 million
due to increases in compensation and other payroll costs. Additionally, other expenses increased by approximately
$0.2 million
primarily due to a gain on incentive fee of approximately $0.2 million during the three months ended
September 30, 2017
due to the finalization of a one-time incentive fee payable to Columbus Nova Real Estate Acquisition Group, LLC, which did not recur during the three months ended
September 30, 2018
. These increases were partially offset by a decrease in property acquisition costs of approximately
$1.4 million
due to the adoption of Accounting Standards Update 2017-01, as discussed in Note 2 of the accompanying Notes to Consolidated Financial Statements.
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, loss on extinguishment of debt, and gain on the sales of rental property, net. 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 net other income decreased
$16.6 million
or
233.3%
to a net other expense position of
$9.5 million
for the three months ended
September 30, 2018
compared a net other income of
$7.1 million
for the three months ended
September 30, 2017
. This decrease is primarily the result of a decrease in the gain on the sales of rental property, net of approximately
$14.3 million
. This decrease is also attributable to an increase in interest expense of approximately
$2.3 million
which was primarily attributable to
the issuance of new unsecured term loans and unsecured notes as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements.
Comparison of the
nine
months ended
September 30, 2018
to the
nine
months ended
September 30, 2017
We define same store properties
as properties that were in the Operating Portfolio for the entirety of the comparative periods presented.
Same store properties exclude Operating Portfolio properties with expansions placed into service after
December 31, 2016
. On
September 30, 2018
, we owned
278
industrial buildings consisting of approximately
55.1 million
square feet, which represents approximately
73.1%
of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy decreased approximately
0.4%
to
95.6%
as of
September 30, 2018
compared to
96.0%
as of
September 30, 2017
.
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the
nine
months ended
September 30, 2018
and
2017
(dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the
nine
months ended
September 30, 2018
and
2017
with respect to the buildings acquired and disposed of and Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after
December 31, 2016
and our flex/office buildings and Value Add Portfolio.
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store Portfolio
|
|
Acquisitions/Dispositions
|
|
Other
|
|
Total Portfolio
|
|
Nine months ended September 30,
|
|
Change
|
|
Nine months ended September 30,
|
|
Nine months ended September 30,
|
|
Nine months ended September 30,
|
|
Change
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
$
|
|
%
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
$
|
162,063
|
|
|
$
|
158,798
|
|
|
$
|
3,265
|
|
|
2.1
|
%
|
|
$
|
44,984
|
|
|
$
|
21,629
|
|
|
$
|
10,180
|
|
|
$
|
6,194
|
|
|
$
|
217,227
|
|
|
$
|
186,621
|
|
|
$
|
30,606
|
|
|
16.4
|
%
|
Tenant recoveries
|
28,341
|
|
|
27,519
|
|
|
822
|
|
|
3.0
|
%
|
|
8,693
|
|
|
4,004
|
|
|
2,409
|
|
|
1,429
|
|
|
39,443
|
|
|
32,952
|
|
|
6,491
|
|
|
19.7
|
%
|
Other income
|
725
|
|
|
118
|
|
|
607
|
|
|
514.4
|
%
|
|
216
|
|
|
70
|
|
|
92
|
|
|
56
|
|
|
1,033
|
|
|
244
|
|
|
789
|
|
|
323.4
|
%
|
Total operating revenue
|
191,129
|
|
|
186,435
|
|
|
4,694
|
|
|
2.5
|
%
|
|
53,893
|
|
|
25,703
|
|
|
12,681
|
|
|
7,679
|
|
|
257,703
|
|
|
219,817
|
|
|
37,886
|
|
|
17.2
|
%
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
35,947
|
|
|
33,839
|
|
|
2,108
|
|
|
6.2
|
%
|
|
10,337
|
|
|
5,317
|
|
|
4,451
|
|
|
3,156
|
|
|
50,735
|
|
|
42,312
|
|
|
8,423
|
|
|
19.9
|
%
|
Net operating income
(1)
|
$
|
155,182
|
|
|
$
|
152,596
|
|
|
$
|
2,586
|
|
|
1.7
|
%
|
|
$
|
43,556
|
|
|
$
|
20,386
|
|
|
$
|
8,230
|
|
|
$
|
4,523
|
|
|
206,968
|
|
|
177,505
|
|
|
29,463
|
|
|
16.6
|
%
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,637
|
|
|
25,090
|
|
|
547
|
|
|
2.2
|
%
|
Property acquisition costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
4,684
|
|
|
(4,684
|
)
|
|
(100.0
|
)%
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,221
|
|
|
110,286
|
|
|
14,935
|
|
|
13.5
|
%
|
Loss on impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,934
|
|
|
—
|
|
|
2,934
|
|
|
100.0
|
%
|
Loss on involuntary conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
330
|
|
|
(330
|
)
|
|
(100.0
|
)%
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
864
|
|
|
1,502
|
|
|
(638
|
)
|
|
(42.5
|
)%
|
Total other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,656
|
|
|
141,892
|
|
|
12,764
|
|
|
9.0
|
%
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,391
|
|
|
184,204
|
|
|
21,187
|
|
|
11.5
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
10
|
|
|
6
|
|
|
60.0
|
%
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,602
|
)
|
|
(31,557
|
)
|
|
(4,045
|
)
|
|
12.8
|
%
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
(15
|
)
|
|
2
|
|
|
(13.3
|
)%
|
Gain on the sales of rental property, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,276
|
|
|
19,225
|
|
|
13,051
|
|
|
67.9
|
%
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,323
|
)
|
|
(12,337
|
)
|
|
9,014
|
|
|
73.1
|
%
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,989
|
|
|
$
|
23,276
|
|
|
$
|
25,713
|
|
|
110.5
|
%
|
|
|
(1)
|
For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.
|
Net Income
Net income
for our total portfolio increased by
$25.7 million
or
110.5%
to
$49.0 million
for the
nine
months ended
September 30, 2018
compared to
$23.3 million
for the
nine
months ended
September 30, 2017
.
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of (i) rental income consisting of base rent, straight-line rent and above and below market lease amortization from our properties, and (ii) 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
$3.3 million
or
2.1%
to
$162.1 million
for the
nine
months ended
September 30, 2018
compared to
$158.8 million
for the
nine
months ended
September 30, 2017
. Approximately $5.9 million of the increase was attributable to rental increases due to new leases and renewals of existing tenants. Same store rental income also increased by approximately $0.5 million due to a net decrease in the amortization of net above market leases. These increases were partially offset by an approximately $3.1 million decrease due to a reduction of base rent due to tenants downsizing their spaces and vacancies.
Same store tenant recoveries
increased
by
$0.8 million
or
3.0%
to
$28.3 million
for the
nine
months ended
September 30, 2018
compared to
$27.5 million
for the
nine
months ended
September 30, 2017
. Approximately $2.7 million of the increase was primarily due to increases in occupancy and real estate taxes levied by the taxing authority, as well as changes to lease terms where we began paying the real estate taxes and operating expenses on behalf of tenants that had previously paid its taxes and operating expenses directly to respective vendors. This increase was partially offset by a decrease of approximately $1.3 million related to vacancy of previously occupied buildings and decreases in real estate taxes levied by the taxing authority. These increases were also partially offset by one of our properties where it was determined, during the nine months ended September 30, 2017, that the tenant will not be able to meet its requirements set forth by the taxing authority to be entitled to an abatement of real estate taxes. The abatement was applicable to prior periods, and therefore the expense and related recovery recorded for the nine months ended September 30, 2017 includes 36 months of real estate taxes, which attributed to approximately $0.6 million of the decrease in same store tenant recoveries as it did not recur for the nine months ended September 30, 2018.
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
$2.1 million
or
6.2%
to
$35.9 million
for the
nine
months ended
September 30, 2018
compared to
$33.8 million
for the
nine
months ended
September 30, 2017
. This increase was primarily related to increases in general repairs and maintenance expense of approximately $0.4 million, an increase in real estate taxes levied by the related taxing authority of approximately $0.8 million, an increase of approximately $0.6 million in snow removal and utilities expenses, and an increase of approximately $0.6 million of bad debt expense. Additionally during the nine months ended
September 30, 2017
approximately $0.3 million of previously recorded bad debt reserve was reversed, which did not recur during the nine months ended
September 30, 2018
. These increases were partially offset by a decrease in real estate taxes attributable to one of our properties where it was determined, during the nine months ended September 30, 2017, that the tenant will not be able to meet its requirements set forth by the taxing authority to be entitled to an abatement of real estate taxes. The abatement was applicable to prior periods, and therefore the expense and related recovery recorded for the nine months ended September 30, 2017 includes 36 months of real estate taxes, which attributed to approximately $0.6 million of the decrease in same store operating expenses as it did not recur for the three months ended September 30, 2018.
Acquisitions
and Dispositions
Net Operating Income
For a detailed reconciliation of our acquisitions and dispositions NOI to
net income
, see the table above.
Subsequent to
December 31, 2016
, we acquired
83
buildings consisting of approximately
17.0 million
square feet (excluding six buildings that were included in the Value Add Portfolio at
September 30, 2018
or transferred from the Value Add Portfolio to the Operating Portfolio after
December 31, 2016
), and sold
22
buildings consisting of approximately
3.9 million
square feet. For the
nine
months ended
September 30, 2018
and
September 30, 2017
, the buildings acquired after
December 31, 2016
contributed approximately
$42.2 million
and
$12.1 million
to NOI, respectively. For the
nine
months ended
September 30, 2018
and
September 30, 2017
, the buildings sold after
December 31, 2016
contributed approximately
$1.4 million
and
$8.3 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, Value Add Portfolio, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after
December 31, 2016
. Other NOI also includes termination income from buildings from our same store portfolio.
For a detailed reconciliation of our other NOI to
net income
, see the table above.
At
September 30, 2018
we owned
nine
flex/office buildings consisting of approximately
0.6 million
square feet,
four
buildings in our Value Add Portfolio consisting of approximately
0.8 million
square feet, and seven buildings consisting of approximately 2.0 million square feet that were Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after
December 31, 2016
. These buildings contributed approximately
$7.8 million
and
$3.8 million
to NOI for the
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively. Additionally, there was
$0.4 million
and
$0.7 million
of termination fee income from certain buildings in our same store portfolio for the
nine
months ended
September 30, 2018
and
September 30, 2017
, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, property acquisition costs, depreciation and amortization, loss on impairments, loss on involuntary conversion, and other expenses.
Total other expenses
increased
$12.8 million
or
9.0%
to
$154.7 million
for the
nine
months ended
September 30, 2018
compared to
$141.9 million
for the
nine
months ended
September 30, 2017
. This is primarily a result of an
increase
in depreciation and amortization of approximately
$14.9 million
as a result of acquisitions that increased the depreciable asset base. The increase was also attributable to two buildings that were impaired in the amount of approximately
$2.9 million
during the
nine
months ended
September 30, 2018
, whereas there were no buildings impaired during the
nine
months ended
September 30, 2017
. General and administrative expenses increased by approximately
$0.5 million
due to increases in compensation and other payroll costs. These increases were partially offset by a
decrease
in property acquisition costs of approximately
$4.7 million
due to the adoption of Accounting Standards Update 2017-01, as discussed in Note 2 of the accompanying Notes to Consolidated Financial Statements. Additionally, loss on involuntary conversion decreased approximately
$0.3 million
as there were no involuntary conversion events during the
nine
months ended
September 30, 2018
, and other expenses decreased by approximately
$0.6 million
primarily due to the finalization of a one-time incentive fee during the
nine
months ended
September 30, 2017
payable to Columbus Nova Real Estate Acquisition Group, LLC, which did not recur for the
nine
months ended
September 30, 2018
.
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, loss on extinguishment of debt, and gain on the sales of rental property, net. 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 expenses
decreased
$9.0 million
or
73.1%
to
$3.3 million
for the
nine
months ended
September 30, 2018
compared to
$12.3 million
for the
nine
months ended
September 30, 2017
. This decrease was primarily the result of an
increase
in the gain on the sales of rental property of approximately
$13.1 million
. This was partially offset by an increase in interest expense of approximately
$4.0 million
which was primarily attributable to a higher unsecured credit facility balance during the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
, and the issuance of new unsecured term loans and unsecured notes as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements. The increase in interest expense was slightly offset by the repayment of several mortgage notes during the year ended December 31, 2017.
Non-GAAP Financial Measures
In this report, we disclose 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 Securities and Exchange Commission (“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 (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, 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
, the nearest GAAP equivalent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Reconciliation of Net Income to FFO (in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
|
$
|
8,876
|
|
|
$
|
21,839
|
|
|
$
|
48,989
|
|
|
$
|
23,276
|
|
Rental property depreciation and amortization
|
|
44,281
|
|
|
38,114
|
|
|
124,999
|
|
|
110,069
|
|
Loss on impairments
|
|
—
|
|
|
—
|
|
|
2,934
|
|
|
—
|
|
Gain on the sales of rental property, net
|
|
(3,239
|
)
|
|
(17,563
|
)
|
|
(32,276
|
)
|
|
(19,225
|
)
|
FFO
|
|
49,918
|
|
|
42,390
|
|
|
144,646
|
|
|
114,120
|
|
Preferred stock dividends
|
|
(1,289
|
)
|
|
(2,449
|
)
|
|
(6,315
|
)
|
|
(7,345
|
)
|
Redemption of preferred stock
|
|
—
|
|
|
—
|
|
|
(2,661
|
)
|
|
—
|
|
FFO attributable to common stockholders and unit holders
|
|
$
|
48,629
|
|
|
$
|
39,941
|
|
|
$
|
135,670
|
|
|
$
|
106,775
|
|
Net Operating Income
We consider NOI to be an appropriate supplemental performance measure to net income (loss) because we believe it helps investors and management understand the core operations of our buildings. NOI is defined as rental revenue, including reimbursements and other income, 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
, the nearest GAAP equivalent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
Reconciliation of Net Income to NOI (in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
|
$
|
8,876
|
|
|
$
|
21,839
|
|
|
$
|
48,989
|
|
|
$
|
23,276
|
|
Asset management fee income
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
(52
|
)
|
General and administrative
|
|
8,911
|
|
|
8,380
|
|
|
25,637
|
|
|
25,090
|
|
Property acquisition costs
|
|
94
|
|
|
1,386
|
|
|
170
|
|
|
4,684
|
|
Depreciation and amortization
|
|
44,355
|
|
|
38,186
|
|
|
125,221
|
|
|
110,286
|
|
Interest and other income
|
|
(3
|
)
|
|
(2
|
)
|
|
(16
|
)
|
|
(10
|
)
|
Interest expense
|
|
12,698
|
|
|
10,446
|
|
|
35,602
|
|
|
31,557
|
|
Loss on impairments
|
|
—
|
|
|
—
|
|
|
2,934
|
|
|
—
|
|
Loss on involuntary conversion
|
|
—
|
|
|
—
|
|
|
—
|
|
|
330
|
|
Loss on extinguishment of debt
|
|
13
|
|
|
13
|
|
|
13
|
|
|
15
|
|
Other expenses
|
|
129
|
|
|
260
|
|
|
694
|
|
|
813
|
|
(Gain) loss on incentive fee
|
|
—
|
|
|
(202
|
)
|
|
—
|
|
|
689
|
|
Gain on the sales of rental property, net
|
|
(3,239
|
)
|
|
(17,563
|
)
|
|
(32,276
|
)
|
|
(19,225
|
)
|
Net operating income
|
|
$
|
71,834
|
|
|
$
|
62,734
|
|
|
$
|
206,968
|
|
|
$
|
177,453
|
|
Cash Flows
Comparison of the
nine
months ended
September 30, 2018
to the
nine
months ended
September 30, 2017
The following table summarizes our cash flows for the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
Change
|
Cash Flows (dollars in thousands)
|
|
2018
|
|
2017
|
|
$
|
|
%
|
Net cash provided by operating activities
|
|
$
|
148,610
|
|
|
$
|
120,034
|
|
|
$
|
28,576
|
|
|
23.8
|
%
|
Net cash used in investing activities
|
|
$
|
393,250
|
|
|
$
|
468,294
|
|
|
$
|
(75,044
|
)
|
|
(16.0
|
)%
|
Net cash provided by financing activities
|
|
$
|
227,766
|
|
|
$
|
341,042
|
|
|
$
|
(113,276
|
)
|
|
(33.2
|
)%
|
Net cash provided by operating activities
increased
$28.6 million
to
$148.6 million
for the
nine
months ended
September 30, 2018
compared to
$120.0 million
for the
nine
months ended
September 30, 2017
. The increase was primarily attributable to incremental operating cash flows from property acquisitions completed after
December 31, 2016
, and operating performance at existing properties. These increases were partially offset by the loss of cash flows from property dispositions completed after
December 31, 2016
and fluctuations in working capital due to timing of payments and rental receipts.
Net cash used in investing activities
decreased
$75.0 million
to
$393.3 million
for the
nine
months ended
September 30, 2018
compared to
$468.3 million
for the
nine
months ended
September 30, 2017
. The decreased cash outflow was primarily due to the acquisition of
36
buildings for a total cash consideration of approximately
$458.4 million
for the
nine
months ended
September 30, 2018
compared to the acquisition of 42 buildings for a total cash consideration of approximately
$485.8 million
for the
nine
months ended
September 30, 2017
. The decrease is also attributable to the sale of
11
buildings during the
nine
months ended
September 30, 2018
for net proceeds of approximately
$89.4 million
, compared to the
nine
months ended
September 30, 2017
where we sold nine buildings for net proceeds of approximately
$43.5 million
.
Net cash provided by financing activities
decreased
$113.3 million
to
$227.8 million
for the
nine
months ended
September 30, 2018
compared to
$341.0 million
for the
nine
months ended
September 30, 2017
. The decrease was primarily due to an increase in net cash outflow on our unsecured credit facility of approximately
$393.0 million
and a decrease in proceeds from sales of common stock of approximately
$63.2 million
, as well as an approximately
$13.5 million
increase in dividends paid during the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
and the redemption of the 6.625% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”) of $70.0 million on July 11, 2018. These increases in net cash outflow were partially offset by the
$150.0 million
draw on the unsecured term loan that was entered into on July 28, 2017, the funding of the unsecured notes that were entered into on April 10, 2018 of
$175.0 million
, as well as a decrease in the repayment of mortgage notes of approximately
$103.6 million
during the
nine
months ended
September 30, 2018
compared to the
nine
months ended
September 30, 2017
.
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
September 30, 2018
, we had total immediate liquidity of approximately
$580.4 million
, comprised of
$6.0 million
of cash and cash equivalents and
$574.4 million
of immediate availability on our unsecured credit facility and unsecured term loans.
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 outstanding common stock that had a record date during the
nine
months ended
September 30, 2018
. 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 2018
|
|
Declaration Date
|
|
Record Date
|
|
Per Share
|
|
Payment Date
|
September 30
|
|
July 11, 2018
|
|
September 28, 2018
|
|
$
|
0.118333
|
|
|
October 15, 2018
|
August 31
|
|
July 11, 2018
|
|
August 31, 2018
|
|
0.118333
|
|
|
September 17, 2018
|
July 31
|
|
July 11, 2018
|
|
July 31, 2018
|
|
0.118333
|
|
|
August 15, 2018
|
June 30
|
|
April 10, 2018
|
|
June 29, 2018
|
|
0.118333
|
|
|
July 16, 2018
|
May 31
|
|
April 10, 2018
|
|
May 31, 2018
|
|
0.118333
|
|
|
June 15, 2018
|
April 30
|
|
April 10, 2018
|
|
April 30, 2018
|
|
0.118333
|
|
|
May 15, 2018
|
March 31
|
|
November 2, 2017
|
|
March 29, 2018
|
|
0.118333
|
|
|
April 16, 2018
|
February 28
|
|
November 2, 2017
|
|
February 28, 2018
|
|
0.118333
|
|
|
March 15, 2018
|
January 31
|
|
November 2, 2017
|
|
January 31, 2018
|
|
0.118333
|
|
|
February 15, 2018
|
Total
|
|
|
|
|
|
$
|
1.064997
|
|
|
|
On
October 10, 2018
, our board of directors declared the common stock dividends for the months ending
October 31, 2018
,
November 30, 2018
and
December 31, 2018
at a monthly rate of
$0.118333
per share of common stock.
During the
nine
months ended
September 30, 2018
, we paid quarterly cumulative dividends on the Series B Preferred Stock and the 6.875% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock,” and together with Series B Preferred Stock, 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
nine
months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended 2018
|
|
Declaration Date
|
|
Series B
Preferred Stock Per Share
|
|
Series C
Preferred Stock Per Share
|
|
Payment Date
|
September 30
|
|
July 11, 2018
|
|
$
|
0.0460069
|
|
(1)
|
$
|
0.4296875
|
|
|
October 1, 2018
|
June 30
|
|
April 10, 2018
|
|
0.4140625
|
|
|
0.4296875
|
|
|
July 2, 2018
|
March 31
|
|
February 14, 2018
|
|
0.4140625
|
|
|
0.4296875
|
|
|
April 2, 2018
|
Total
|
|
|
|
$
|
0.8741319
|
|
|
$
|
1.2890625
|
|
|
|
|
|
(1)
|
On June 11, 2018, we gave notice to redeem all
2,800,000
issued and outstanding shares of the Series B Preferred Stock. On July 11, 2018, we redeemed all of the Series B Preferred Stock at a cash redemption price of
$25.00
per share, plus accrued and unpaid dividends to but excluding the redemption date, without interest.
|
On
October 10, 2018
, our board of directors declared the Series C Preferred Stock dividends for the quarter ending
December 31, 2018
at a quarterly rate of
$0.4296875
per share.
Indebtedness Outstanding
The following table sets forth certain information with respect to our indebtedness outstanding as of
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
Principal Outstanding (in thousands)
|
|
Interest
Rate
(1)
|
|
Maturity Date
|
|
Prepayment Terms
(2)
|
Unsecured credit facility:
|
|
|
|
|
|
|
|
|
Unsecured Credit Facility
(3)
|
|
$
|
95,000
|
|
|
L + 1.05%
|
|
|
Jan-15-2023
|
|
i
|
Total unsecured credit facility
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Unsecured Term Loan D
|
|
150,000
|
|
|
L + 1.30%
|
|
|
Jan-04-2023
|
|
i
|
Unsecured Term Loan E
(4)
|
|
—
|
|
|
L + 1.20%
|
|
|
Jan-15-2024
|
|
i
|
Total unsecured term loans
|
|
600,000
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs
|
|
(3,915
|
)
|
|
|
|
|
|
|
Total carrying value unsecured term loans, net
|
|
596,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 G Unsecured Notes
|
|
75,000
|
|
|
4.10
|
%
|
|
Jun-13-2025
|
|
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
|
Series H Unsecured Notes
|
|
100,000
|
|
|
4.27
|
%
|
|
Jun-13-2028
|
|
ii
|
Total unsecured notes
|
|
575,000
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs
|
|
(2,611
|
)
|
|
|
|
|
|
|
Total carrying value unsecured notes, net
|
|
572,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes (secured debt):
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo Bank, National Association CMBS Loan
|
|
53,652
|
|
|
4.31
|
%
|
|
Dec-1-2022
|
|
iii
|
Thrivent Financial for Lutherans
|
|
3,824
|
|
|
4.78
|
%
|
|
Dec-15-2023
|
|
iv
|
Total mortgage notes
|
|
57,476
|
|
|
|
|
|
|
|
|
Add: Total unamortized fair market value premiums
|
|
52
|
|
|
|
|
|
|
|
|
Less: Total unamortized deferred financing fees and debt issuance costs
|
|
(535
|
)
|
|
|
|
|
|
|
Total carrying value mortgage notes, net
|
|
56,993
|
|
|
|
|
|
|
|
|
Total / weighted average interest rate
(5)
|
|
$
|
1,320,467
|
|
|
3.69
|
%
|
|
|
|
|
|
|
(1)
|
Interest rate as of
September 30, 2018
. At
September 30, 2018
, the one-month LIBOR (“L”) was
2.26056%
. The 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 beginning January 1, 2016; and (iv) pre-payable without penalty
three
months prior to the maturity date.
|
|
|
(3)
|
The capacity of the unsecured credit facility is
$500.0 million
.
|
|
|
(4)
|
Capacity of $175.0 million, which we have until July 25, 2019 to draw.
|
|
|
(5)
|
The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of
$600.0 million
of debt that was in effect as of
September 30, 2018
, 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 and unsecured term loans as of
September 30, 2018
was approximately
$574.4 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
September 30, 2018
, we were in compliance with the applicable financial covenants.
On
July 26, 2018
, we closed on the refinancing of the unsecured credit facility. The refinancing transaction included extending the maturity date to
January 15, 2023
, increasing the capacity to
$500.0 million
, and reducing the annual interest rate. As of
September 30, 2018
, the interest rate on the unsecured credit facility was LIBOR plus a spread of
1.05%
based on the Company’s consolidated leverage ratio, as defined in the credit agreement.
On
July 26, 2018
, we entered into a
$175.0 million
unsecured term loan agreement. As of
September 30, 2018
, the interest rate on the new term loan was LIBOR plus a spread of
1.20%
based on the Company's consolidated leverage ratio, as defined in the loan agreement. On
July 24, 2018
, we entered into
four
interest rate swaps with a total notional amount of
$175.0 million
to fix LIBOR at
2.9187%
on the new unsecured term loan. The interest rate swaps will become effective on
July 26, 2019
and expire on
January 12, 2024
.
On July 26, 2018, we entered into amendments to our unsecured term loan agreements to conform certain provisions to the new unsecured term loan agreement and the new unsecured credit facility agreement.
On
April 10, 2018
, we entered into a note purchase agreement for the private placement by the Operating Partnership of
$75.0 million
senior unsecured notes (“Series G Unsecured Notes”) maturing June 13, 2025 with a fixed annual interest rate of
4.10%
, and
$100.0 million
senior unsecured notes (“Series H Unsecured Notes”) maturing June 13, 2028 with a fixed annual interest rate of
4.27%
. We issued the Series G Unsecured Notes and the Series H Unsecured Notes on June 13, 2018. In addition, on April 10, 2018, we entered into amendments to the note purchase agreements related to our outstanding unsecured notes to conform certain provisions in the agreements to the provisions in the new note purchase agreement.
On March 28, 2018, we drew
$75.0 million
of the $150.0 million unsecured term loan that was entered into on July 28, 2017. On July 27, 2018, we drew the remaining $75.0 million of the $150.0 million unsecured term loan.
The chart below details our debt capital structure as of
September 30, 2018
.
|
|
|
|
|
|
Debt Capital Structure
|
|
September 30, 2018
|
Total principal outstanding (in thousands)
|
|
$
|
1,327,476
|
|
Weighted average duration (years)
|
|
4.9
|
|
% Secured debt
|
|
4
|
%
|
% Debt maturing next 12 months
|
|
—
|
%
|
Net Debt to Real Estate Cost Basis
(1)
|
|
39
|
%
|
|
|
(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
On June 11, 2018, we gave notice to redeem all
2,800,000
issued and outstanding shares of the Series B Preferred Stock. We recognized a deemed dividend to the holders of the Series B Preferred Stock of approximately
$2.7 million
on the accompanying Consolidated Statements of Operations for the
nine
months ended
September 30, 2018
related to redemption costs and the original issuance costs of the Series B Preferred Stock. On July 11, 2018, we redeemed all of the Series B Preferred Stock.
The table below sets forth our outstanding preferred stock issuances as of
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock Issuances
|
|
Issuance Date
|
|
Number of Shares
|
|
Liquidation Value Per Share
|
|
Interest Rate
|
Series C Preferred Stock
|
|
March 17, 2016
|
|
3,000,000
|
|
|
$
|
25.00
|
|
|
6.875
|
%
|
The Series C Preferred Stock ranks senior to our common stock with respect to dividend rights and
rights upon the liquidation, dissolution or winding up of our affairs. The Series C Preferred Stock has no stated maturity date and is not subject to mandatory redemption or any sinking fund. Generally, we are not permitted to redeem the Series C Preferred Stock prior to March 17, 2021, 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
September 30, 2018
. We may from time to time sell common stock through sales agents under the program.
|
|
|
|
|
|
|
|
|
|
|
|
ATM Common Stock Offering Program
|
|
Date
|
|
Maximum Aggregate Offering Price (in thousands)
|
|
Aggregate Common Stock Available as of
September 30, 2018 (in thousands)
|
2017 $500 million ATM
|
|
November 13, 2017
|
|
$
|
500,000
|
|
|
$
|
213,217
|
|
The table below set forth the activity for the ATM common stock offering programs during the
three and nine
months ended
September 30, 2018
(in thousands, except share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
ATM Common Stock Offering Program
|
|
Shares
Sold
|
|
Weighted Average Price Per Share
|
|
Gross
Proceeds
|
|
Sales
Agents’ Fee
|
|
Net
Proceeds
|
2017 $500 million ATM
|
|
3,568,382
|
|
|
$
|
27.94
|
|
|
$
|
99,695
|
|
|
$
|
1,129
|
|
|
$
|
98,566
|
|
Total/weighted average
|
|
3,568,382
|
|
|
$
|
27.94
|
|
|
$
|
99,695
|
|
|
$
|
1,129
|
|
|
$
|
98,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
ATM Common Stock Offering Program
|
|
Shares
Sold
|
|
Weighted Average Price Per Share
|
|
Gross
Proceeds
|
|
Sales
Agents’ Fee
|
|
Net
Proceeds
|
2017 $500 million ATM
|
|
10,387,962
|
|
|
$
|
26.61
|
|
|
$
|
276,457
|
|
|
$
|
2,888
|
|
|
$
|
273,569
|
|
Total/weighted average
|
|
10,387,962
|
|
|
$
|
26.61
|
|
|
$
|
276,457
|
|
|
$
|
2,888
|
|
|
$
|
273,569
|
|
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
September 30, 2018
, we owned approximately
96.4%
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
3.6%
.
Interest Rate Risk
We use interest rate swaps to fix the rate of our variable rate debt. As of
September 30, 2018
, 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. 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
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Regions Bank
|
|
Mar-01-2013
|
|
Mar-01-2013
|
|
$
|
25,000
|
|
|
$
|
471
|
|
|
1.3300
|
%
|
|
One-month L
|
|
Feb-14-2020
|
Capital One, N.A.
|
|
Jun-13-2013
|
|
Jul-01-2013
|
|
$
|
50,000
|
|
|
$
|
703
|
|
|
1.6810
|
%
|
|
One-month L
|
|
Feb-14-2020
|
Capital One, N.A.
|
|
Jun-13-2013
|
|
Aug-01-2013
|
|
$
|
25,000
|
|
|
$
|
344
|
|
|
1.7030
|
%
|
|
One-month L
|
|
Feb-14-2020
|
Regions Bank
|
|
Sep-30-2013
|
|
Feb-03-2014
|
|
$
|
25,000
|
|
|
$
|
245
|
|
|
1.9925
|
%
|
|
One-month L
|
|
Feb-14-2020
|
The Toronto-Dominion Bank
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
25,000
|
|
|
$
|
700
|
|
|
1.3830
|
%
|
|
One-month L
|
|
Sep-29-2020
|
PNC Bank, N.A.
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
50,000
|
|
|
$
|
1,391
|
|
|
1.3906
|
%
|
|
One-month L
|
|
Sep-29-2020
|
Regions Bank
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
35,000
|
|
|
$
|
978
|
|
|
1.3858
|
%
|
|
One-month L
|
|
Sep-29-2020
|
U.S. Bank, N.A.
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
25,000
|
|
|
$
|
695
|
|
|
1.3950
|
%
|
|
One-month L
|
|
Sep-29-2020
|
Capital One, N.A.
|
|
Oct-14-2015
|
|
Sep-29-2016
|
|
$
|
15,000
|
|
|
$
|
417
|
|
|
1.3950
|
%
|
|
One-month L
|
|
Sep-29-2020
|
Royal Bank of Canada
|
|
Jan-08-2015
|
|
Mar-20-2015
|
|
$
|
25,000
|
|
|
$
|
684
|
|
|
1.7090
|
%
|
|
One-month L
|
|
Mar-21-2021
|
The Toronto-Dominion Bank
|
|
Jan-08-2015
|
|
Mar-20-2015
|
|
$
|
25,000
|
|
|
$
|
682
|
|
|
1.7105
|
%
|
|
One-month L
|
|
Mar-21-2021
|
The Toronto-Dominion Bank
|
|
Jan-08-2015
|
|
Sep-10-2017
|
|
$
|
100,000
|
|
|
$
|
1,488
|
|
|
2.2255
|
%
|
|
One-month L
|
|
Mar-21-2021
|
Wells Fargo, N.A.
|
|
Jan-08-2015
|
|
Mar-20-2015
|
|
$
|
25,000
|
|
|
$
|
886
|
|
|
1.8280
|
%
|
|
One-month L
|
|
Mar-31-2022
|
The Toronto-Dominion Bank
|
|
Jan-08-2015
|
|
Feb-14-2020
|
|
$
|
25,000
|
|
|
$
|
271
|
|
|
2.4535
|
%
|
|
One-month L
|
|
Mar-31-2022
|
Regions Bank
|
|
Jan-08-2015
|
|
Feb-14-2020
|
|
$
|
50,000
|
|
|
$
|
520
|
|
|
2.4750
|
%
|
|
One-month L
|
|
Mar-31-2022
|
Capital One, N.A.
|
|
Jan-08-2015
|
|
Feb-14-2020
|
|
$
|
50,000
|
|
|
$
|
467
|
|
|
2.5300
|
%
|
|
One-month L
|
|
Mar-31-2022
|
The Toronto-Dominion Bank
|
|
Jul-20-2017
|
|
Oct-30-2017
|
|
$
|
25,000
|
|
|
$
|
1,054
|
|
|
1.8485
|
%
|
|
One-month L
|
|
Jan-04-2023
|
Royal Bank of Canada
|
|
Jul-20-2017
|
|
Oct-30-2017
|
|
$
|
25,000
|
|
|
$
|
1,054
|
|
|
1.8505
|
%
|
|
One-month L
|
|
Jan-04-2023
|
Wells Fargo, N.A.
|
|
Jul-20-2017
|
|
Oct-30-2017
|
|
$
|
25,000
|
|
|
$
|
1,055
|
|
|
1.8505
|
%
|
|
One-month L
|
|
Jan-04-2023
|
PNC Bank, N.A.
|
|
Jul-20-2017
|
|
Oct-30-2017
|
|
$
|
25,000
|
|
|
$
|
1,052
|
|
|
1.8485
|
%
|
|
One-month L
|
|
Jan-04-2023
|
PNC Bank, N.A.
|
|
Jul-20-2017
|
|
Oct-30-2017
|
|
$
|
50,000
|
|
|
$
|
2,105
|
|
|
1.8475
|
%
|
|
One-month L
|
|
Jan-04-2023
|
The Toronto-Dominion Bank
|
|
Jul-24-2018
|
|
Jul-26-2019
|
|
$
|
50,000
|
|
|
$
|
111
|
|
|
2.9180
|
%
|
|
One-month L
|
|
Jan-12-2024
|
PNC Bank, N.A.
|
|
Jul-24-2018
|
|
Jul-26-2019
|
|
$
|
50,000
|
|
|
$
|
106
|
|
|
2.9190
|
%
|
|
One-month L
|
|
Jan-12-2024
|
Bank of Montreal
|
|
Jul-24-2018
|
|
Jul-26-2019
|
|
$
|
50,000
|
|
|
$
|
113
|
|
|
2.9190
|
%
|
|
One-month L
|
|
Jan-12-2024
|
U.S. Bank, N.A.
|
|
Jul-24-2018
|
|
Jul-26-2019
|
|
$
|
25,000
|
|
|
$
|
57
|
|
|
2.9190
|
%
|
|
One-month L
|
|
Jan-12-2024
|
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
September 30, 2018
, the fair value of all of our
25
interest rate swaps were in an asset position of approximately
$17.6 million
, including any adjustment for nonperformance risk related to these agreements.
As of
September 30, 2018
, we had
$695.0 million
of variable rate debt. As of
September 30, 2018
, all of our outstanding variable rate debt, with the 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.
Off-balance Sheet Arrangements
As of
September 30, 2018
, we had letters of credit related to development projects and certain other agreements of approximately
$5.6 million
. As of
September 30, 2018
, we had no other material off-balance sheet arrangements.