REXFORD INDUSTRIAL REALTY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 131,449 | | | $ | 96,866 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
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Depreciation and amortization | 140,226 | | | 110,048 | |
Amortization of (below) above market lease intangibles, net | (18,250) | | | (9,289) | |
Amortization of debt issuance costs | 1,849 | | | 1,402 | |
Amortization of discount (premium) on notes payable, net | 186 | | | (34) | |
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Loss on extinguishment of debt | 877 | | | 505 | |
Gain on sale of real estate | (8,486) | | | (27,312) | |
Equity based compensation expense | 18,710 | | | 13,230 | |
Straight-line rent | (23,753) | | | (14,904) | |
Payments for termination/settlement of interest rate derivatives | (589) | | | (4,045) | |
Amortization related to termination/settlement of interest rate derivatives | 403 | | | 1,476 | |
Change in working capital components: | | | |
Rents and other receivables | (223) | | | 475 | |
Deferred leasing costs | (10,240) | | | (13,148) | |
Other assets | (3,159) | | | (4,190) | |
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Accounts payable, accrued expenses and other liabilities | 25,047 | | | 21,764 | |
Tenant security deposits | 6,354 | | | 6,766 | |
Prepaid rents | 542 | | | 333 | |
Net cash provided by operating activities | 260,943 | | | 179,943 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Acquisition of investments in real estate | (1,973,307) | | | (1,316,905) | |
Capital expenditures | (90,260) | | | (71,588) | |
Payments for deposits on real estate acquisitions, net | (7,575) | | | (9,610) | |
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Proceeds from sale of real estate | 15,315 | | | 45,382 | |
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Net cash used in investing activities | (2,055,827) | | | (1,352,721) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| | | |
Redemption of preferred stock | — | | | (90,000) | |
Issuance of common stock, net | 1,421,603 | | | 1,092,158 | |
Proceeds from borrowings | 2,654,000 | | | 983,556 | |
Repayment of borrowings | (2,118,731) | | | (813,682) | |
Debt issuance costs | (6,887) | | | (4,556) | |
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Dividends paid to preferred stockholders | (6,943) | | | (10,249) | |
Dividends paid to common stockholders | (144,389) | | | (93,446) | |
Distributions paid to common unitholders | (6,169) | | | (4,795) | |
Distributions paid to preferred unitholders | (2,319) | | | (2,124) | |
Repurchase of common shares to satisfy employee tax withholding requirements | (2,138) | | | (1,403) | |
Net cash provided by financing activities | 1,788,027 | | | 1,055,459 | |
Increase (decrease) in cash, cash equivalents and restricted cash | (6,857) | | | (117,319) | |
Cash, cash equivalents and restricted cash, beginning of period | 43,998 | | | 177,523 | |
Cash, cash equivalents and restricted cash, end of period | $ | 37,141 | | | $ | 60,204 | |
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Supplemental disclosure of cash flow information: | | | |
Cash paid for interest (net of capitalized interest of $8,021 and $2,902 for the nine months ended September 30, 2022 and 2021, respectively) | $ | 33,330 | | | $ | 26,152 | |
Supplemental disclosure of noncash transactions: | | | |
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Operating lease right-of-use assets obtained in exchange for lease liabilities | $ | 6,363 | | | $ | — | |
Issuance of OP Units in connection with acquisition of real estate | $ | 56,167 | | | $ | — | |
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Issuance of 3.00% cumulative redeemable convertible preferred units in connection with acquisition of real estate | $ | 12,000 | | | $ | — | |
Acquisition of private REIT - preferred units | $ | 122 | | | $ | — | |
Assumption of debt in connection with acquisition of real estate including loan premium | $ | — | | | $ | 3,346 | |
Accrual for capital expenditures | $ | 26,059 | | | $ | 16,731 | |
Accrual of dividends and distributions | $ | 59,926 | | | $ | 37,970 | |
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The accompanying notes are an integral part of these consolidated financial statements.
REXFORD INDUSTRIAL REALTY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Rexford Industrial Realty, Inc. is a self-administered and self-managed full-service real estate investment trust (“REIT”) focused on owning and operating industrial properties in Southern California infill markets. We were formed as a Maryland corporation on January 18, 2013, and Rexford Industrial Realty, L.P. (the “Operating Partnership”), of which we are the sole general partner, was formed as a Maryland limited partnership on January 18, 2013. Through our controlling interest in our Operating Partnership and its subsidiaries, we own, manage, lease, acquire and redevelop industrial real estate principally located in Southern California infill markets, and, from time to time, acquire or provide mortgage debt secured by industrial property. As of September 30, 2022, our consolidated portfolio consisted of 345 properties with approximately 41.7 million rentable square feet.
The terms “us,” “we,” “our,” and the “Company” as used in these financial statements refer to Rexford Industrial Realty, Inc. and, unless the context requires otherwise, its subsidiaries (including our Operating Partnership).
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
As of September 30, 2022 and December 31, 2021, and for the three and nine months ended September 30, 2022 and 2021, the financial statements presented are the consolidated financial statements of Rexford Industrial Realty, Inc. and its subsidiaries, including our Operating Partnership. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
Under consolidation guidance, we have determined that our Operating Partnership is a variable interest entity because the holders of limited partnership interests do not have substantive kick-out rights or participating rights. Furthermore, we are the primary beneficiary of the Operating Partnership because we have the obligation to absorb losses and the right to receive benefits from the Operating Partnership and the exclusive power to direct the activities of the Operating Partnership. As of September 30, 2022 and December 31, 2021, the assets and liabilities of the Company and the Operating Partnership are substantially the same, as the Company does not have any significant assets other than its investment in the Operating Partnership.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The interim financial statements should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021 and the notes thereto.
Any references to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications relate to acquisition expenses for the prior period presented that have been reclassified to “Other expenses” to conform to the current period’s presentation and they have no effect on net income or stockholders’ equity as previously reported.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an initial maturity of three months or less. The carrying amount approximates fair value due to the short-term maturity of these investments.
Restricted Cash
Restricted cash is comprised of escrow reserves that we are required to set aside for future costs as required by certain agreements with our lenders, and from time to time, includes cash proceeds from property sales that are being held by qualified intermediaries for purposes of facilitating tax-deferred like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”).
Restricted cash balances are included with cash and cash equivalents balances as of the beginning and ending of each period presented in the consolidated statements of cash flows. The following table provides a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash and cash equivalents | $ | 43,987 | | | $ | 176,293 | |
Restricted cash | 11 | | | 1,230 | |
Cash, cash equivalents and restricted cash, beginning of period | $ | 43,998 | | | $ | 177,523 | |
| | | |
Cash and cash equivalents | $ | 37,141 | | | $ | 60,154 | |
Restricted cash | — | | | 50 | |
Cash, cash equivalents and restricted cash, end of period | $ | 37,141 | | | $ | 60,204 | |
Investments in Real Estate
Acquisitions
We account for acquisitions of properties under Accounting Standards Update (“ASU”) 2017-01, Business Combinations - Clarifying the Definition of a Business, which provides a framework for determining whether transactions should be accounted for as acquisitions of assets or businesses and further revises the definition of a business. Our acquisitions of properties generally no longer meet the revised definition of a business and accordingly are accounted for as asset acquisitions.
For asset acquisitions, we allocate the cost of the acquisition, which includes cash and non-cash consideration paid to the seller and associated acquisition transaction costs, to the individual assets acquired and liabilities assumed on a relative fair value basis. These individual assets and liabilities typically include land, building and improvements, tenant improvements, intangible assets and liabilities related to above- and below-market leases, intangible assets related to in-place leases, and from time to time, assumed mortgage debt. As there is no measurement period concept for an asset acquisition, the allocated cost of the acquired assets is finalized in the period in which the acquisition occurs.
We determine the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on the Company’s assumptions with respect to the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. In determining the “as-if-vacant” value for the properties we acquired during the nine months ended September 30, 2022, we used discount rates ranging from 4.75% to 7.50% and exit capitalization rates ranging from 3.75% to 6.25%.
In determining the fair value of intangible lease assets or liabilities, we also consider Level 3 inputs. Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rental rates and the in-place rental rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated fair value of acquired in-place at-market tenant leases are the estimated costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. We consider estimated costs such as the value associated with leasing commissions, legal and other costs, as well as the estimated period of time necessary to lease such a property to its occupancy level at the time of its acquisition. In determining the fair value of acquisitions completed during the nine months ended September 30, 2022, we used an estimated average lease-up period ranging from six months to twelve months.
The difference between the fair value and the face value of debt assumed, if any, in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
Capitalization of Costs
We capitalize direct costs incurred in developing, renovating, rehabilitating and improving real estate assets as part of the investment basis. This includes certain general and administrative costs, including payroll, bonus and non-cash equity compensation of the personnel performing redevelopment, renovations and rehabilitation if such costs are identifiable to a specific activity to get the real estate asset ready for its intended use. During the redevelopment and construction periods of a project, we also capitalize interest, real estate taxes and insurance costs. We cease capitalization of costs upon substantial completion of the project, but no later than one year from cessation of major construction activity. If some portions of a project are substantially complete and ready for use and other portions have not yet reached that stage, we cease capitalizing costs on the completed portion of the project but continue to capitalize for the incomplete portion of the project. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred.
We capitalized interest costs of $3.6 million and $1.3 million during the three months ended September 30, 2022 and 2021, respectively, and $8.0 million and $2.9 million during the nine months ended September 30, 2022 and 2021 respectively. We capitalized real estate taxes and insurance costs aggregating $1.5 million and $0.7 million during the three months ended September 30, 2022 and 2021, respectively, and $3.9 million and $1.5 million during the nine months ended September 30, 2022 and 2021, respectively. We capitalized compensation costs for employees who provide construction services of $2.3 million and $1.5 million during the three months ended September 30, 2022 and 2021, respectively, and $6.4 million and $4.2 million during the nine months ended September 30, 2022 and 2021, respectively.
Depreciation and Amortization
Real estate, including land, building and land improvements, tenant improvements, furniture, fixtures and equipment and intangible lease assets and liabilities are stated at historical cost less accumulated depreciation and amortization, unless circumstances indicate that the cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value as discussed below in our policy with regard to impairment of long-lived assets. We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense.
The values allocated to buildings, site improvements, in-place lease intangibles and tenant improvements are depreciated on a straight-line basis using an estimated useful life that typically ranges from 10-30 years for buildings, 5-25 years for site improvements, and the shorter of the estimated useful life or respective lease term for in-place lease intangibles and tenant improvements.
As discussed above in—Investments in Real Estate—Acquisitions, in connection with property acquisitions, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an acquired lease intangible asset or liability and amortized to “rental income” over the remaining term of the related leases.
Our estimate of the useful life of our assets is evaluated upon acquisition and when circumstances indicate that a change in the useful life has occurred, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets.
Assets Held for Sale
We classify a property as held for sale when all of the criteria set forth in the Accounting Standards Codification (“ASC”) Topic 360: Property, Plant and Equipment (“ASC 360”) have been met. The criteria are as follows: (i) management, having the authority to approve the action, commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale of the property is probable and is expected to
be completed within one year; (v) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. At the time we classify a property as held for sale, we cease recording depreciation and amortization. A property classified as held for sale is measured and reported at the lower of its carrying amount or its estimated fair value less cost to sell. As of September 30, 2022, we did not have any properties classified as held for sale. As of December 31, 2021, our property located at 28159 Avenue Stanford was classified as held for sale. See “Note 3 – Investments in Real Estate” for details.
Impairment of Long-Lived Assets
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC 360, we assess the carrying values of our respective long-lived assets, including operating lease right-of-use assets (“ROU assets”), whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Recoverability of real estate assets and other long-lived assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows.
To review real estate assets for recoverability, we consider current market conditions as well as our intent with respect to holding or disposing of the asset. The intent with regards to the underlying assets might change as market conditions and other factors change. For office space ROU assets, the execution of a sublease where the remaining lease payments of the original office space lease exceed the sublease receipts reflects an indication of impairment which suggests the carrying value of the ROU asset may not be recoverable. Fair value is determined through various valuation techniques, including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third-party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with estimates of future expectations and the strategic plan used to manage our underlying business.
If our analysis indicates that the carrying value of the real estate asset and other long-lived assets is not recoverable on an undiscounted cash flow basis, we will recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
Assumptions and estimates used in the recoverability analyses for future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with respect to our investment that occur subsequent to our impairment analyses could impact these assumptions and result in future impairment of our real estate properties. During the three and nine months ended September 30, 2022 and 2021, there were no impairment charges recorded to the carrying value of our properties.
Income Taxes
We have elected to be taxed as a REIT under the Code commencing with our initial taxable year ended December 31, 2013. To qualify as a REIT, we are required (among other things) to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our activities. If we fail to qualify as a REIT in any taxable year and were unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to regular federal corporate income tax, including any applicable alternative minimum tax.
In addition, we are subject to taxation by various state and local jurisdictions, including those in which we transact business or reside. Other than the private REIT which is taxable as a REIT, our non-taxable REIT subsidiaries, including our Operating Partnership, are either partnerships or disregarded entities for federal income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss from disregarded entities and flow-through entities such as partnerships is reportable in the income tax returns of the respective equity holders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements for the three and nine months ended September 30, 2022 and 2021.
We periodically evaluate our tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of September 30, 2022, and December 31, 2021, we have not established a liability for uncertain tax positions.
Derivative Instruments and Hedging Activities
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources and duration of our debt funding and through the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing and duration of our known or expected cash payments principally related to our borrowings.
In accordance with ASC Topic 815: Derivatives and Hedging, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional value. From time to time, we also utilize cash flow hedges to lock U.S. Treasury rates in anticipation of future fixed-rate debt issuances (“treasury rate lock agreements”). The gains or losses resulting from changes in fair value of derivatives that qualify as cash flow hedges are recognized in accumulated other comprehensive income/(loss) (“AOCI”). Upon the termination of a derivative for which cash flow hedging was being applied, the balance, which was recorded in AOCI, is amortized to interest expense over the remaining contractual term of the derivative as long as the hedged forecasted transactions continue to be probable of occurring. Upon the settlement of treasury rate lock agreements, amounts remaining in AOCI are amortized through earnings over the underlying term of the hedged transaction. Cash payments made to terminate or settle interest rate derivatives are presented in cash flows provided by operating activities in the accompanying consolidated statements of cash flows, given the nature of the underlying cash flows that the derivative was hedging. See “Note 7 – Interest Rate Derivatives” for details.
Revenue Recognition
Our primary sources of income are rental income, management and leasing services and gains on sale of real estate.
Rental Income
We lease industrial space to tenants primarily under non-cancelable operating leases that generally contain provisions for minimum base rents plus reimbursement for certain operating expenses. Total minimum annual lease payments are recognized in rental income on a straight-line basis over the term of the related lease, regardless of when payments are contractually due, when collectability is probable. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space. Lease termination fees, which are included in rental income, are recognized when the related leases are canceled and we have no continuing obligation to provide services to such former tenants.
Our lease agreements with tenants generally contain provisions that require tenants to reimburse us for certain property expenses. Estimated reimbursements from tenants for these property expenses, which include real estate taxes, insurance, common area maintenance and other recoverable operating expenses, are recognized as revenues in the period that the expenses are incurred. Subsequent to year-end, we perform final reconciliations on a lease-by-lease basis and bill or credit each tenant for any cumulative annual adjustments. As the timing and pattern of revenue recognition is the same and as the lease component would be classified as an operating lease if it were accounted for separately, rents and tenant reimbursements are treated as a combined lease component and presented as a single line item “Rental income” in our consolidated statements of operations.
We record revenues and expenses on a gross basis for lessor costs (which include real estate taxes) when these costs are reimbursed to us by our tenants. Conversely, we record revenues and expenses on a net basis for lessor costs when they are paid by our tenants directly to the taxing authorities on our behalf.
Management and leasing services
We provide property management services and leasing services to related party and third-party property owners, the customer, in exchange for fees and commissions. Property management services include performing property inspections, monitoring repairs and maintenance, negotiating vendor contracts, maintaining tenant relations and providing financial and accounting oversight. For these services, we earn monthly management fees, which are based on a fixed percentage of each managed property’s monthly tenant cash receipts. We have determined that control over the services is passed to the customer simultaneously as performance occurs. Accordingly, management fee revenue is earned as the services are provided to our customers.
Leasing commissions are earned when we provide leasing services that result in an executed lease with a tenant. We have determined that control over the services is transferred to the customer upon execution of each lease agreement. We earn leasing commissions based on a fixed percentage of rental income generated for each executed lease agreement and there is no variable income component.
Gain or Loss on Sale of Real Estate
We account for dispositions of real estate properties, which are considered nonfinancial assets, in accordance with ASC 610-20: Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets and recognize a gain or loss on sale of real estate upon transferring control of the nonfinancial asset to the purchaser, which is generally satisfied at the time of sale. If we were to conduct a partial sale of real estate by transferring a controlling interest in a nonfinancial asset, while retaining a noncontrolling ownership interest, we would measure any noncontrolling interest received or retained at fair value, and recognize a full gain or loss. If we receive consideration before transferring control of a nonfinancial asset, we recognize a contract liability. If we transfer control of the asset before consideration is received, we recognize a contract asset.
When leases contain purchase options, we assess the probability that the tenant will execute the purchase option both at lease commencement and at the time the tenant communicates its intent to exercise the purchase option. If we determine the exercise of the purchase option is reasonably certain, we will account for the lease as a sales-type lease and derecognize the associated real estate assets on our balance sheet and record a gain or loss on sale of real estate.
Valuation of Operating Lease Receivables
We may be subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables related to our operating leases, including deferred rent receivables arising from straight-line recognition of rental income. In order to mitigate these risks, we perform credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired. On a quarterly basis, we perform an assessment of the collectability of operating lease receivables on a tenant-by-tenant basis, which includes reviewing the age and nature of our receivables, the payment history and financial condition of the tenant, our assessment of the tenant’s ability to meet its lease obligations and the status of negotiations of any disputes with the tenant. Any changes in the collectability assessment for an operating lease is recognized as an adjustment, which can be a reduction or increase, to rental income in the consolidated statements of operations. As a result of our quarterly collectability assessments, we recognized $0.1 million and $0.1 million as a net increase adjustment to rental income for the three months ended September 30, 2022 and 2021, respectively, and $0.3 million as a net increase adjustment and $0.5 million as a net reduction adjustment to rental income for the nine months ended September 30, 2022 and 2021, respectively, in the consolidated statements of operations.
Deferred Leasing Costs
We capitalize the incremental direct costs of originating a lease that would not have been incurred had the lease not been executed. As a result, deferred leasing costs will generally only include third-party broker commissions.
Debt Issuance Costs
Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a reduction from the carrying value of the debt liability. This offset against the debt liability is treated similarly to a debt discount, which effectively reduces the proceeds of a borrowing. For line of credit arrangements, we present debt issuance costs as an asset and amortize the cost over the term of the line of credit arrangement. See “Note 5 – Notes Payable” for details.
Equity Based Compensation
We account for equity-based compensation in accordance with ASC Topic 718: Compensation - Stock Compensation. Total compensation cost for all share-based awards is based on the estimated fair market value of the equity instrument issued on the grant date. For share-based awards that vest based solely on a service condition, we recognize compensation cost on a straight-line basis over the total requisite service period for the entire award. For share-based awards that vest based on a market condition, we recognize compensation cost on a straight-line basis over the requisite service period of each separately vesting tranche. For share-based awards that vest based on a performance condition, we recognize compensation cost based on the number of awards that are expected to vest based on the probable outcome of the performance condition. Compensation cost for these awards will be adjusted to reflect the number of awards that ultimately vest. Forfeitures are recognized in the period in which they occur. See “Note 12 – Incentive Award Plan” for details.
Equity Offerings
Underwriting commissions and offering costs incurred in connection with common stock offerings and our at-the-market equity offering program have been reflected as a reduction of additional paid-in capital. Underwriting commissions and offering costs related to our preferred stock issuances have been reflected as a direct reduction of the preferred stock balance.
Under relevant accounting guidance, sales of our common stock under forward equity sale agreements (as discussed in “Note 11 – Equity”) are not deemed to be liabilities, and furthermore, meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments based on the following assessment: (i) none of the agreements’ exercise contingencies were based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.
Earnings Per Share
We calculate earnings per share (“EPS”) in accordance with ASC 260: Earnings Per Share (“ASC 260”). Under ASC 260, unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in the computation of basic EPS pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings.
Basic EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period.
Diluted EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding determined for the basic EPS computation plus the potential effect of any dilutive securities including shares issuable under forward equity sale agreements and unvested share-based awards under the treasury stock method. We include unvested shares of restricted stock and unvested LTIP units in the computation of diluted EPS by using the more dilutive of the two-class method or treasury stock method. We include unvested performance units as contingently issuable shares in the computation of diluted EPS once the market criteria are met, assuming that the end of the reporting period is the end of the contingency period. Any anti-dilutive securities are excluded from the diluted EPS calculation. See “Note 13 – Earnings Per Share” for details.
Segment Reporting
Management views the Company as a single reportable segment based on its method of internal reporting in addition to its allocation of capital and resources.
Leases as a Lessee
We determine if an arrangement is a lease at inception. Operating lease ROU assets are included in “Other assets” and lease liabilities are included in “Accounts payable, accrued expenses and other liabilities” in our consolidated balance sheets. ROU assets represent our right to use, or control the use of, a specified asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Because our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is generally recognized on a straight-line basis over the term of the lease through the amortization of the ROU asset and lease liabilities. Additionally, for our operating leases, we do not separate non-lease components, such as common area maintenance, from associated lease components. See “Note 6 – Leases” for additional lessee disclosures required under lease accounting guidance.
Reference Rate Reform
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future London Interbank Offered Rate (“LIBOR”) indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. As of September 30, 2022, all our derivatives impacted by this guidance have been terminated.
Adoption of New Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 eliminates two of the three accounting models that require separate accounting for embedded conversion features in convertible instruments, simplifies the contract assessment for equity classification, requires the use of the if-converted method for all convertible instruments in diluted EPS calculations and expands disclosure requirements. ASU 2020-06 is effective for fiscal periods beginning after December 15, 2021, including interim periods within those fiscal years. On January 1, 2022, we adopted ASU 2020-06. The adoption of ASU 2020-06 did not have any impact on our consolidated financial statements or overall EPS calculation. We continue to account for each of our various convertible instruments as a single equity instrument measured at historical cost as they do not have embedded features requiring bifurcation and separate accounting. See “Note 11 – Equity” for additional information related to convertible instruments.
3. Investments in Real Estate
Acquisitions
The following table summarizes the wholly-owned properties we acquired during the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property | | Submarket | | Date of Acquisition | | Rentable Square Feet | | Number of Buildings | | Contractual Purchase Price(1) (in thousands) | |
444 Quay Avenue(2) | | Los Angeles - South Bay | | 1/14/2022 | | 29,760 | | | 1 | | | $ | 10,760 | | |
18455 Figueroa Street | | Los Angeles - South Bay | | 1/31/2022 | | 146,765 | | | 2 | | | 64,250 | | |
24903 Avenue Kearny | | Los Angeles - San Fernando Valley | | 2/1/2022 | | 214,436 | | | 1 | | | 58,463 | | |
19475 Gramercy Place | | Los Angeles - South Bay | | 2/2/2022 | | 47,712 | | | 1 | | | 11,300 | | |
14005 Live Oak Avenue | | Los Angeles - San Gabriel Valley | | 2/8/2022 | | 56,510 | | | 1 | | | 25,000 | | |
13700-13738 Slover Ave(2) | | San Bernardino - Inland Empire West | | 2/10/2022 | | 17,862 | | | 1 | | | 13,209 | | |
Meggitt Simi Valley | | Ventura | | 2/24/2022 | | 285,750 | | | 3 | | | 57,000 | | |
21415-21605 Plummer Street | | Los Angeles - San Fernando Valley | | 2/25/2022 | | 231,769 | | | 2 | | | 42,000 | | |
1501-1545 Rio Vista Avenue | | Los Angeles - Central | | 3/1/2022 | | 54,777 | | | 2 | | | 28,000 | | |
17011-17027 Central Avenue | | Los Angeles - South Bay | | 3/9/2022 | | 52,561 | | | 3 | | | 27,363 | | |
2843 Benet Road | | San Diego - North County | | 3/9/2022 | | 35,000 | | | 1 | | | 12,968 | | |
14243 Bessemer Street | | Los Angeles - San Fernando Valley | | 3/9/2022 | | 14,299 | | | 1 | | | 6,594 | | |
2970 East 50th Street | | Los Angeles - Central | | 3/9/2022 | | 48,876 | | | 1 | | | 18,074 | | |
19900 Plummer Street | | Los Angeles - San Fernando Valley | | 3/11/2022 | | 43,472 | | | 1 | | | 15,000 | | |
Long Beach Business Park | | Los Angeles - South Bay | | 3/17/2022 | | 123,532 | | | 4 | | | 24,000 | | (3) |
13711 Freeway Drive(4) | | Los Angeles - Mid-Counties | | 3/18/2022 | | 82,092 | | | 1 | | | 34,000 | | |
6245 Providence Way | | San Bernardino - Inland Empire West | | 3/22/2022 | | 27,636 | | | 1 | | | 9,672 | | |
7815 Van Nuys Blvd | | Los Angeles - San Fernando Valley | | 4/19/2022 | | 43,101 | | | 1 | | | 25,000 | | |
13535 Larwin Circle | | Los Angeles - Mid-Counties | | 4/21/2022 | | 56,011 | | | 1 | | | 15,500 | | |
1154 Holt Blvd | | San Bernardino - Inland Empire West | | 4/29/2022 | | 35,033 | | | 1 | | | 14,158 | | |
900-920 Allen Avenue | | Los Angeles - San Fernando Valley | | 5/3/2022 | | 68,630 | | | 2 | | | 25,000 | | |
1550-1600 Champagne Avenue | | San Bernardino - Inland Empire West | | 5/6/2022 | | 124,243 | | | 2 | | | 46,850 | | |
10131 Banana Avenue(2) | | San Bernardino - Inland Empire West | | 5/6/2022 | | — | | | — | | | 26,166 | | |
2020 Central Avenue | | Los Angeles - South Bay | | 5/20/2022 | | 30,233 | | | 1 | | | 10,800 | | |
14200-14220 Arminta Street(5) | | Los Angeles - San Fernando Valley | | 5/25/2022 | | 200,003 | | | 1 | | | 80,653 | | |
1172 Holt Blvd | | San Bernardino - Inland Empire West | | 5/25/2022 | | 44,004 | | | 1 | | | 17,783 | | |
1500 Raymond Avenue(4) | | Orange County - North | | 6/1/2022 | | — | | | — | | | 45,000 | | |
2400 Marine Avenue | | Los Angeles - South Bay | | 6/2/2022 | | 50,000 | | | 2 | | | 30,000 | | |
14434-14527 San Pedro Street | | Los Angeles - South Bay | | 6/3/2022 | | 118,923 | | | 1 | | | 49,105 | | |
20900 Normandie Avenue | | Los Angeles - South Bay | | 6/3/2022 | | 74,038 | | | 1 | | | 39,980 | | |
15771 Red Hill Avenue | | Orange County - Airport | | 6/9/2022 | | 100,653 | | | 1 | | | 46,000 | | |
14350 Arminta Street | | Los Angeles - San Fernando Valley | | 6/10/2022 | | 18,147 | | | 1 | | | 8,400 | | |
29125 Avenue Paine | | Los Angeles - San Fernando Valley | | 6/14/2022 | | 175,897 | | | 1 | | | 45,000 | | |
3935-3949 Heritage Oak Court | | Ventura | | 6/22/2022 | | 186,726 | | | 1 | | | 56,400 | | |
620 Anaheim Street | | Los Angeles - South Bay | | 6/23/2022 | | 34,555 | | | 1 | | | 17,100 | | |
400 Rosecrans Avenue | | Los Angeles - South Bay | | 7/6/2022 | | 28,006 | | | 1 | | | 8,500 | | |
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Property | | Submarket | | Date of Acquisition | | Rentable Square Feet | | Number of Buildings | | Contractual Purchase Price(1) (in thousands) | |
3547-3555 Voyager Street | | Los Angeles - South Bay | | 7/12/2022 | | 60,248 | | | 3 | | | 20,900 | | |
6996-7044 Bandini Blvd | | Los Angeles - Central | | 7/13/2022 | | 111,515 | | | 2 | | | 40,500 | | |
4325 Etiwanda Avenue | | Riverside / San Bernardino - Inland Empire West | | 7/15/2022 | | 124,258 | | | 1 | | | 47,500 | | |
Merge-West | | Riverside / San Bernardino - Inland Empire West | | 7/18/2022 | | 1,057,419 | | | 6 | | | 470,000 | | |
6000-6052 & 6027-6029 Bandini Blvd | | Los Angeles - Central | | 7/22/2022 | | 182,782 | | | 2 | | | 91,500 | | |
3901 Via Oro Avenue | | Los Angeles - South Bay | | 8/12/2022 | | 53,817 | | | 1 | | | 20,000 | | |
15650 Don Julian Road | | Los Angeles - San Gabriel Valley | | 8/12/2022 | | 43,392 | | | 1 | | | 16,226 | | |
15700 Don Julian Road | | Los Angeles - San Gabriel Valley | | 8/12/2022 | | 40,453 | | | 1 | | | 15,127 | | |
17000 Gale Avenue | | Los Angeles - San Gabriel Valley | | 8/12/2022 | | 29,888 | | | 1 | | | 11,176 | | |
17909 & 17929 Susana Road | | Los Angeles - South Bay | | 8/17/2022 | | 57,376 | | | 2 | | | 26,100 | | |
2880 Ana Street | | Los Angeles - South Bay | | 8/25/2022 | | 80,850 | | | 1 | | | 34,600 | | |
920 Pacific Coast Highway | | Los Angeles - South Bay | | 9/1/2022 | | 148,186 | | | 1 | | | 100,000 | | |
21022 & 21034 Figueroa Street | | Los Angeles - South Bay | | 9/7/2022 | | 51,185 | | | 1 | | | 24,200 | | |
13301 Main Street | | Los Angeles - South Bay | | 9/14/2022 | | 106,969 | | | 1 | | | 51,150 | | |
Total 2022 Property Acquisitions | | | | 5,049,350 | | | 71 | | | $ | 2,034,027 | | |
(1)Represents the gross contractual purchase price before certain credits, prorations, closing costs and other acquisition related costs. Including $25.0 million of capitalized closing costs and acquisition related costs, the total aggregate initial investment was $2.06 billion. Each acquisition was funded with available cash on hand unless otherwise noted.
(2)Represents acquisition of an industrial outdoor storage site.
(3)The acquisition of the Long Beach Business Park was funded through a combination of cash on hand and the issuance of 164,998 3.00% Cumulative Redeemable Convertible Preferred Units of partnership interest in the Operating Partnership. See “Note 11 – Equity – Noncontrolling Interests – Issuance of Series 3 CPOP Units” for additional details.
(4)Represents acquisition of a current or near-term redevelopment site.
(5)On May 25, 2022, we acquired the property located at 14200-14220 Arminta Street for a purchase price of $80.7 million, exclusive of closing costs. The acquisition was funded through a combination of cash on hand and the issuance of 954,000 common units of limited partnership interests in the Operating Partnership valued at $56.2 million.
The following table summarizes the fair value of amounts allocated to each major class of asset and liability for the acquisitions noted in the table above, as of the date of each acquisition (in thousands):
| | | | | | | | |
| | 2022 Acquisitions |
Assets: | | |
Land | | $ | 1,416,773 | |
Buildings and improvements | | 611,418 | |
Tenant improvements | | 8,309 | |
Acquired lease intangible assets(1) | | 74,685 | |
Right of use asset - ground lease(2) | | 4,787 | |
Other acquired assets(3) | | 496 | |
Total assets acquired | | $ | 2,116,468 | |
| | |
Liabilities: | | |
Acquired lease intangible liabilities(4) | | $ | 47,860 | |
| | |
Deferred rent liabilities(5) | | 4,339 | |
Lease liability - ground lease(2) | | 4,787 | |
Other assumed liabilities(3) | | 10,066 | |
Total liabilities assumed | | $ | 67,052 | |
Net assets acquired | | $ | 2,049,416 | |
(1)Acquired lease intangible assets is comprised of (i) $56.3 million of in-place lease intangibles with a weighted average amortization period of 5.8 years, (ii) $5.4 million of above-market lease intangibles with a weighted average amortization period of 7.1 years and (iii) $13.0 million of below-market ground lease intangibles with a weighted average amortization period of 78.9 years.
(2)The ROU asset and lease liability relate to a ground lease that we assumed in March 2022 in connection with the acquisition of 2970 East 50th Street.
(3)Includes other working capital assets acquired and liabilities assumed at the time of acquisition.
(4)Represents below-market lease intangibles with a weighted average amortization period of 9.2 years.
(5)In connection with four of our acquisition transactions, we entered into short-term leaseback agreements with each seller/tenant where the seller/tenant does not pay any base rent for the lease term. The amounts allocated to “Deferred rent liabilities” in the table above represent the present value of lease payments using prevailing market rental rates, which will be amortized into rental income over the term of each respective lease.
Dispositions
The following table summarizes information related to the property that was sold during the nine months ended September 30, 2022.
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Property | | Submarket | | Date of Disposition | | Rentable Square Feet | | Contractual Sales Price(1) (in thousands) | | Gain Recorded (in thousands) |
28159 Avenue Stanford | | Los Angeles - San Fernando Valley | | 1/13/2022 | | 79,247 | | | $ | 16,500 | | | $ | 8,486 | |
| | | | | | | | | | |
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| | | | | | | | | | |
| | | | | | | | | | |
(1)Represents the gross contractual sales price before commissions, prorations, credits and other closing costs.
Real Estate Held for Sale
As of September 30, 2022, we did not have any properties classified as held for sale. As of December 31, 2021, the property located at 28159 Avenue Stanford in Valencia, California was classified as held for sale.
The following table summarizes the major classes of assets and liabilities associated with real estate property classified as held for sale as of December 31, 2021 (dollars in thousands).
| | | | | | | | |
| | December 31, 2021 |
Land | | $ | 1,849 | |
Building and improvements | | 10,753 | |
Tenant improvements | | 1,059 | |
| | |
Real estate held for sale | | 13,661 | |
Accumulated depreciation | | (6,657) | |
Real estate held for sale, net | | 7,004 | |
Other assets associated with real estate held for sale | | 209 | |
Total assets associated with real estate held for sale, net | | $ | 7,213 | |
| | |
Tenant security deposits | | $ | 177 | |
Other liabilities associated with real estate held for sale | | 54 | |
Total liabilities associated with real estate held for sale | | $ | 231 | |
4. Acquired Lease Intangibles
The following table summarizes our acquired lease intangible assets, including the value of in-place tenant leases, above-market tenant leases and a below-market ground lease, and our acquired lease intangible liabilities which includes below-market tenant leases (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Acquired Lease Intangible Assets: | | | |
In-place lease intangibles | $ | 311,382 | | | $ | 256,902 | |
Accumulated amortization | (162,791) | | | (135,415) | |
In-place lease intangibles, net | $ | 148,591 | | | $ | 121,487 | |
| | | |
Above-market tenant leases | $ | 26,412 | | | $ | 21,065 | |
Accumulated amortization | (11,978) | | | (10,394) | |
Above-market tenant leases, net | $ | 14,434 | | | $ | 10,671 | |
| | | |
Below-market ground lease(1) | $ | 12,977 | | | $ | — | |
Accumulated amortization(1) | (89) | | | — | |
Below-market ground lease, net | $ | 12,888 | | | $ | — | |
Acquired lease intangible assets, net | $ | 175,913 | | | $ | 132,158 | |
| | | |
Acquired Lease Intangible Liabilities: | | | |
Below-market tenant leases | $ | (221,758) | | | $ | (174,686) | |
Accumulated accretion | 66,907 | | | 47,669 | |
Below-market tenant leases, net | $ | (154,851) | | | $ | (127,017) | |
| | | |
| | | |
| | | |
| | | |
Acquired lease intangible liabilities, net | $ | (154,851) | | | $ | (127,017) | |
(1)The below-market lease intangible relates to a ground lease that we assumed in March 2022 in connection with the acquisition of 2970 East 50th Street.
The following table summarizes the amortization related to our acquired lease intangible assets and liabilities for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
In-place lease intangibles(1) | $ | 10,855 | | | $ | 7,159 | | | $ | 29,154 | | | $ | 21,856 | |
Net below-market tenant leases(2) | $ | (7,074) | | | $ | (3,191) | | | $ | (18,339) | | | $ | (9,289) | |
Below-market ground leases(3) | $ | 41 | | | $ | — | | | $ | 89 | | | $ | — | |
(1)The amortization of in-place lease intangibles is recorded to depreciation and amortization expense in the consolidated statements of operations for the periods presented.
(2)The amortization of net below-market tenant leases is recorded as an increase to rental income in the consolidated statements of operations for the periods presented.
(3)The amortization of net below-market ground lease is recorded as an increase to property expenses in the consolidated statements of operations for the periods presented.
5. Notes Payable
The following table summarizes the components and significant terms of our indebtedness as of September 30, 2022 and December 31, 2021 (dollars in thousands):
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| September 30, 2022 | | December 31, 2021 | | Margin Above LIBOR/SOFR | | Interest Rate(1) | | Contractual Maturity Date | |
Unsecured and Secured Debt | | | | | | | | | | |
Unsecured Debt: | | | | | | | | | | |
Revolving Credit Facility | $ | — | | | $ | — | | | S+0.725 | % | (2) | 3.805 | % | (3) | 5/26/2026 | (4) |
$400M Term Loan | 400,000 | | | — | | | S+0.800 | % | (2) | 3.942 | % | | 7/19/2024 | (4) |
$150M Term Loan Facility(5) | — | | | 150,000 | | | n/a | | n/a | | 5/22/2025 | |
$100M Notes | 100,000 | | | 100,000 | | | n/a | | 4.290 | % | | 8/6/2025 | |
$300M Term Loan | 300,000 | | | — | | | S+0.800 | % | (2) | 3.717 | % | (6) | 5/26/2027 | |
$125M Notes | 125,000 | | | 125,000 | | | n/a | | 3.930 | % | | 7/13/2027 | |
$25M Series 2019A Notes | 25,000 | | | 25,000 | | | n/a | | 3.880 | % | | 7/16/2029 | |
$400M Senior Notes due 2030 | 400,000 | | | 400,000 | | | n/a | | 2.125 | % | | 12/1/2030 | |
$400M Senior Notes due 2031 | 400,000 | | | 400,000 | | | n/a | | 2.150 | % | | 9/1/2031 | |
$75M Series 2019B Notes | 75,000 | | | 75,000 | | | n/a | | 4.030 | % | | 7/16/2034 | |
Total Unsecured Debt | $ | 1,825,000 | | | $ | 1,275,000 | | | | | | | | |
| | | | | | | | | | |
Secured Debt: | | | | | | | | | | |
2601-2641 Manhattan Beach Boulevard(7) | $ | 3,862 | | | $ | 3,951 | | | n/a | | 4.080 | % | | 4/5/2023 | |
$60M Term Loan(8) | 57,521 | | | 58,108 | | | L+1.700 | % | | 4.843 | % | | 8/1/2023 | (8) |
960-970 Knox Street(7) | 2,330 | | | 2,399 | | | n/a | | 5.000 | % | | 11/1/2023 | |
7612-7642 Woodwind Drive(7) | 3,736 | | | 3,806 | | | n/a | | 5.240 | % | | 1/5/2024 | |
11600 Los Nietos Road(7) | 2,503 | | | 2,626 | | | n/a | | 4.190 | % | | 5/1/2024 | |
5160 Richton Street(7) | 4,183 | | | 4,272 | | | n/a | | 3.790 | % | | 11/15/2024 | |
22895 Eastpark Drive(7) | 2,630 | | | 2,682 | | | n/a | | 4.330 | % | | 11/15/2024 | |
701-751 Kingshill Place(9) | 7,100 | | | 7,100 | | | n/a | | 3.900 | % | | 1/5/2026 | |
13943-13955 Balboa Boulevard(7) | 15,055 | | | 15,320 | | | n/a | | 3.930 | % | | 7/1/2027 | |
2205 126th Street(10) | 5,200 | | | 5,200 | | | n/a | | 3.910 | % | | 12/1/2027 | |
2410-2420 Santa Fe Avenue(10) | 10,300 | | | 10,300 | | | n/a | | 3.700 | % | | 1/1/2028 | |
11832-11954 La Cienega Boulevard(7) | 3,947 | | | 4,002 | | | n/a | | 4.260 | % | | 7/1/2028 | |
Gilbert/La Palma(7) | 1,982 | | | 2,119 | | | n/a | | 5.125 | % | | 3/1/2031 | |
7817 Woodley Avenue(7) | 3,041 | | | 3,132 | | | n/a | | 4.140 | % | | 8/1/2039 | |
2515 Western Avenue(11) | — | | | 13,104 | | | n/a | | 4.500 | % | | 9/1/2042 | |
Total Secured Debt | $ | 123,390 | | | $ | 138,121 | | | | | | | | |
Total Unsecured and Secured Debt | $ | 1,948,390 | | | $ | 1,413,121 | | | | | | | | |
Less: Unamortized premium/discount and debt issuance costs(12) | (14,308) | | | (13,556) | | | | | | | | |
Total | $ | 1,934,082 | | | $ | 1,399,565 | | | | | | | | |
(1)Reflects the contractual interest rate under the terms of each loan as of September 30, 2022, and includes the effect of interest rate swaps that were effective as of September 30, 2022. See footnote (4) below. Excludes the effect of unamortized debt issuance costs and unamortized fair market value premiums and discounts.
(2)The interest rates on these loans are comprised of daily Secured Overnight Financing Rate (“SOFR”) for the unsecured revolving credit facility and 1-month term SOFR (“Term SOFR”) for the $300.0 million and $400.0 million unsecured term loans (in each case increased by a 0.10% SOFR adjustment) plus an applicable margin ranging from 0.725% to
1.400% per annum for the unsecured revolving credit facility and 0.80% to 1.60% per annum for the $300.0 million and $400.0 million unsecured term loans, depending on our investment grade ratings, leverage ratio and sustainability performance metrics, which may change from time to time. These loans are also subject to a 0% SOFR floor. During the three months ended September 30, 2022, our credit ratings were upgraded by two credit rating agencies and as a result, the applicable margin on the unsecured revolving credit facility was lowered to 0.725% from 0.775% and the applicable margin on the $300.0 million and $400.0 million unsecured term loans was lowered to 0.80% from 0.85%.
(3)The unsecured revolving credit facility is subject to an applicable facility fee which is calculated as a percentage of the total lenders’ commitment amount, regardless of usage. The applicable facility fee ranges from 0.125% to 0.300% per annum depending upon our investment grade rating, leverage ratio and sustainability performance metrics.
(4)The unsecured revolving credit facility has two six-month extensions, and the $400.0 million unsecured term loan has two one-year extensions available at the borrower’s option, subject to certain terms and conditions.
(5)In May 2022, we paid in full the outstanding principal balance on this unsecured debt.
(6)As of September 30, 2022, Term SOFR related to $300.0 million of our variable rate debt has been effectively fixed through the use of interest rate swaps. See Note 7 for details related to our interest rate swaps. Including the impact of these interest rate swaps, the hedged effective interest rate on the $300.0 million unsecured term loan is 3.717%.
(7)Fixed monthly payments of interest and principal until maturity as follows: 2601-2641 Manhattan Beach Boulevard ($23,138), 960-970 Knox Street ($17,538), 7612-7642 Woodwind Drive ($24,270), 11600 Los Nietos ($22,637), 5160 Richton Street ($23,270), 22895 Eastpark Drive ($15,396), 13943-13955 Balboa Boulevard ($79,198), 11832-11954 La Cienega Boulevard ($20,194), Gilbert/La Palma ($24,008) and 7817 Woodley Avenue ($20,855).
(8)Loan is secured by six properties. One 24-month extension is available at the borrower’s option, subject to certain terms and conditions. Monthly payments of interest only through June 2021, followed by equal monthly payments of principal ($65,250), plus accrued interest until maturity.
(9)For 701-751 Kingshill Place, fixed monthly payments of interest only through January 2023, followed by fixed monthly payments of interest and principal ($33,488) until maturity.
(10)Fixed monthly payments of interest only.
(11)In June 2022, we paid in full the outstanding principal balance on this secured debt and incurred no penalty for the prepayment in advance of its maturity date of September 1, 2042.
(12)Excludes unamortized debt issuance costs related to our unsecured revolving credit facility, which are presented in the line item “Deferred loan costs, net” in the consolidated balance sheets.
Contractual Debt Maturities
The following table summarizes the contractual debt maturities and scheduled amortization payments, excluding debt premiums/discounts and debt issuance costs, as of September 30, 2022, and does not consider extension options available to us as noted in the table above (in thousands):
| | | | | |
October 1, 2022 - December 31, 2022 | $ | 550 | |
2023 | 64,815 | |
2024 | 413,403 | |
2025 | 100,973 | |
2026 | 7,587 | |
Thereafter | 1,361,062 | |
Total | $ | 1,948,390 | |
Fourth Amended and Restated Credit Agreement
On May 26, 2022, we amended our credit agreement, which was comprised of a $700.0 million unsecured revolving credit facility that was scheduled to mature on February 13, 2024, by entering into a Fourth Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement initially provided for (i) a senior unsecured term loan facility that permits aggregate borrowings of up to $300.0 million (the “$300M Term Loan”), all of which was borrowed at closing on May 26, 2022, and (ii) a senior unsecured revolving credit facility (the “Revolver”) in the aggregate principal amount of $1.0 billion. On July 19, 2022, we exercised the accordion option under the Credit Agreement to add a $400.0 million unsecured term loan (the “$400M Term Loan” and together with the $300M Term Loan, the “Term Facility”). Subject to certain terms and conditions set forth in the Credit Agreement, we may request additional lender commitments and increase the size of the Credit Agreement by an additional $800.0 million, which may be comprised of additional revolving commitments under the Revolver, an increase to the Term Facility, additional term loan tranches or any combination of the foregoing.
The Revolver is scheduled to mature on May 26, 2026 and has two six-month extension options available. The $400M Term Loan is scheduled to mature on July 19, 2024 and has two one-year extension options available. The $300M Term Loan matures on May 26, 2027.
Interest on the Credit Agreement is generally to be paid based upon, at our option, either (i) Term SOFR plus the applicable margin; (ii) daily SOFR (“Daily Simple SOFR”) plus the applicable margin or (iii) the applicable base rate (which is defined as the highest of (a) the federal funds rate plus 0.50%, (b) the administrative agent’s prime rate, (c) Term SOFR plus 1.00%, and (d) one percent (1.00%)) plus the applicable margin. Additionally, Term SOFR and Daily Simple SOFR will be increased by a 0.10% SOFR adjustment. The applicable margin for the Term Facility ranges from 0.80% to 1.60% per annum for SOFR-based loans and 0.00% to 0.60% per annum for base rate loans, depending on our investment grade ratings. The applicable margin for the Revolver ranges from 0.725% to 1.400% per annum for SOFR-based loans and 0.00% to 0.40% per annum for base rate loans, depending on our investment grade ratings. In addition to the interest payable on amounts outstanding under the Revolver, we are required to pay an applicable credit facility fee, on each lender's commitment amount under the Revolver, regardless of usage. The applicable credit facility fee ranges from 0.125% to 0.300% per annum, depending on our investment grade ratings. The interest rate under the Credit Agreement is also subject to a favorable leverage-based adjustment if our ratio of total indebtedness to total asset value is less than 35.0%.
In addition, the Credit Agreement also features a sustainability-linked pricing component whereby the applicable margin and applicable credit facility fee can decrease by 0.04% and 0.01%, respectively, or increase by 0.04% and 0.01%, respectively, if we meet, or do not meet, certain sustainability performance targets, as applicable.
The Revolver and the Term Facility may be voluntarily prepaid in whole or in part at any time without premium or penalty. Amounts borrowed under the Term Facility and repaid or prepaid may not be reborrowed.
The Credit Agreement contains usual and customary events of default including defaults in the payment of principal, interest or fees, defaults in compliance with the covenants set forth in the Credit Agreement and other loan documentation, cross-defaults to certain other indebtedness, and bankruptcy and other insolvency defaults. If an event of default occurs and is continuing under the Credit Agreement, the unpaid principal amount of all outstanding loans, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable.
In connection with the amendment of our credit agreement, during the second quarter of 2022 we wrote off $0.2 million of unamortized debt issuance costs attributable to one of the creditors departing the unsecured revolving credit facility. This write-off is included in “Loss on extinguishment of debt” in the accompanying consolidated statements of operations.
On September 30, 2022, we did not have any borrowings outstanding under the Revolver, leaving $1.0 billion available for future borrowings.
Repayment of $150 Million Term Loan Facility
On May 26, 2022, we used a portion of the borrowing proceeds from the $300M Term Loan to repay our $150.0 million unsecured term loan facility in full. We did not incur any prepayment penalties for repaying the $150.0 million unsecured term loan facility in advance of the maturity date of May 22, 2025. In connection with the repayment of the $150.0 million unsecured term loan facility, during the second quarter of 2022 we wrote off $0.7 million of unamortized debt issuance costs, which is included in “Loss on extinguishment of debt” in the accompanying consolidated statements of operations.
Debt Covenants
The Credit Agreement, our $100.0 million unsecured guaranteed senior notes (the “$100 Million Notes”), our $125 million unsecured guaranteed senior notes (the “$125 Million Notes”) and our $25 million unsecured guaranteed senior notes and $75 million unsecured guaranteed senior notes (together the “Series 2019A and 2019B Notes”) all include a series of financial and other covenants that we must comply with, including the following covenants which are tested on a quarterly basis:
•Maintaining a ratio of total indebtedness to total asset value of not more than 60%;
•For the Credit Agreement, maintaining a ratio of secured debt to total asset value of not more than 45%;
•For the $100 Million Notes, $125 Million Notes and Series 2019A and 2019B Notes (together the “Senior Notes”), maintaining a ratio of secured debt to total asset value of not more than 40%;
•For the Senior Notes, maintaining a ratio of total secured recourse debt to total asset value of not more than 15%;
•For the Senior Notes, maintaining a minimum tangible net worth of at least the sum of (i) $760,740,750, and (ii) an amount equal to at least 75% of the net equity proceeds received by the Company after September 30, 2016;
•Maintaining a ratio of adjusted EBITDA (as defined in each of the loan agreements) to fixed charges of at least 1.5 to 1.0;
•Maintaining a ratio of total unsecured debt to total unencumbered asset value of not more than 60%; and
•Maintaining a ratio of unencumbered NOI (as defined in each of the loan agreements) to unsecured interest expense of at least 1.75 to 1.00.
The $400.0 million of 2.125% Senior Notes due 2030 and $400.0 million of 2.150% Senior Notes due 2031 contain the following covenants (as defined in the indentures) that we must comply with:
•Maintaining a ratio of total indebtedness to total asset value of not more than 60%;
•Maintaining a ratio of secured debt to total asset value of not more than 40%;
•Maintaining a Debt Service Coverage Ratio of at least 1.5 to 1.0; and
•Maintaining a ratio of unencumbered assets to unsecured debt of at least 1.5 to 1.0.
The Credit Agreement and Senior Notes also provide that our distributions may not exceed the greater of (i) 95.0% of our funds from operations or (ii) the amount required for us to qualify and maintain our status as a REIT and avoid the payment of federal or state income or excise tax in any 12-month period.
Subject to the terms of the Senior Notes, upon certain events of default, including, but not limited to, (i) a default in the payment of any principal, make-whole payment amount, or interest under the Senior Notes, (ii) a default in the payment of certain of our other indebtedness, (iii) a default in compliance with the covenants set forth in the Senior Notes agreement, and (iv) bankruptcy and other insolvency defaults, the principal and accrued and unpaid interest and the make-whole payment amount on the outstanding Senior Notes will become due and payable at the option of the purchasers. In addition, we are required to maintain at all times a credit rating on the Senior Notes from either Standard and Poor’s Ratings Services, Moody’s Investors Services or Fitch Ratings.
Our $60.0 million term loan contains a financial covenant that is tested on a quarterly basis, which requires us to maintain a minimum Debt Service Coverage Ratio (as defined in the term loan agreement) of at least 1.10 to 1.0.
We were in compliance with all of our required quarterly debt covenants as of September 30, 2022.
6. Leases
Lessor
We lease industrial space to tenants primarily under non-cancelable operating leases that generally contain provisions for minimum base rents plus reimbursement for certain operating expenses. Total minimum lease payments are recognized in rental income on a straight-line basis over the term of the related lease and estimated reimbursements from tenants for real estate taxes, insurance, common area maintenance and other recoverable operating expenses are recognized in rental income in the period that the expenses are incurred.
For the three and nine months ended September 30, 2022, we recognized $155.5 million and $433.8 million of rental income related to operating lease payments, of which $127.3 million and $354.7 million are for fixed lease payments and $28.2 million and $79.1 million are for variable lease payments, respectively. For the comparable three and nine month-period ended September 30, 2021, we recognized $112.1 million and $309.9 million of rental income related to operating lease payments, of which $92.8 million and $256.4 million were for fixed lease payments and $19.3 million and $53.5 million were for variable lease payments, respectively.
The following table sets forth the undiscounted cash flows for future minimum base rents to be received under operating leases as of September 30, 2022 (in thousands):
| | | | | |
Twelve Months Ended September 30, | |
2023 | $ | 493,849 | |
2024 | 433,245 | |
2025 | 368,109 | |
2026 | 298,556 | |
2027 | 220,361 | |
Thereafter | 787,015 | |
Total | $ | 2,601,135 | |
The future minimum base rents in the table above excludes tenant reimbursements of operating expenses, amortization of adjustments for deferred rent receivables and the amortization of above/below-market lease intangibles.
Lessee
We lease office space as part of conducting our day-to-day business. As of September 30, 2022, our office space leases have current remaining lease terms ranging from approximately two years to five years with options to renew for an additional term of five years each. As of September 30, 2022, we also have two ground leases, one of which is a lease we assumed in the acquisition of 2970 East 50th Street in March 2022 which has a current remaining lease term of approximately 38 years and four additional ten-year options to renew. The second ground lease is for a parcel of land that is adjacent to one of our properties and is used as a parking lot. This ground lease has a current remaining term of approximately one year and two additional ten-year options to renew.
As of September 30, 2022, total ROU assets and lease liabilities were approximately $8.8 million and $11.4 million, respectively. As of December 31, 2021, total ROU assets and lease liabilities were approximately $3.5 million and $5.0 million, respectively.
The tables below present financial and supplemental information associated with our leases.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Lease Cost(1) (in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | $ | 455 | | | $ | 404 | | | $ | 1,387 | | | $ | 1,208 | |
Variable lease cost | 27 | | | 15 | | | 87 | | | 46 | |
Sublease income | (67) | | | — | | | (201) | | | — | |
Total lease cost | $ | 415 | | | $ | 419 | | | $ | 1,273 | | | $ | 1,254 | |
(1)Amounts are included in “General and administrative” and “Property expenses” in the accompanying consolidated statements of operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
Other Information (in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 547 | | | $ | 370 | | | $ | 1,450 | | | $ | 1,051 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | — | | | $ | — | | | $ | 6,363 | | | $ | — | |
| | | | | | | | | | | |
Lease Term and Discount Rate | September 30, 2022 | | December 31, 2021 |
Weighted-average remaining lease term(1) | 35.2 years | | 3.3 years |
Weighted-average discount rate(2) | 3.75 | % | | 2.95 | % |
(1)Includes the impact of extension options that we are reasonably certain to exercise. The weighted average remaining lease term as of September 30, 2022 includes the ground lease we assumed in the acquisition of 2970 East 50th Street in March 2022, which has a remaining lease term of approximately 78 years (including the four additional ten-year renewal options). Excluding this ground lease, the weighted average remaining lease term as of September 30, 2022, is 3.5 years.
(2)Because the rate implicit in each of our leases was not readily determinable, we used our incremental borrowing rate. In determining our incremental borrowing rate for each lease, we considered recent rates on secured borrowings, observable risk-free interest rates and credit spreads correlating to our creditworthiness, the impact of collateralization and the term of each of our lease agreements.
The following table summarizes the maturity of operating of lease liabilities under our corporate office leases and ground leases as of September 30, 2022 (in thousands):
| | | | | | | | |
| | September 30, 2022 |
October 1, 2022 - December 31, 2022 | | $ | 566 | |
2023 | | 2,308 | |
2024 | | 2,297 | |
2025 | | 1,122 | |
2026 | | 681 | |
Thereafter | | 20,748 | |
Total undiscounted lease payments | | $ | 27,722 | |
Less imputed interest | | (16,361) | |
Total lease liabilities | | $ | 11,361 | |
7. Interest Rate Derivatives
The following table sets forth a summary of the terms and fair value of our interest rate swaps at September 30, 2022 and December 31, 2021 (dollars in thousands):
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| | | | | | | | Notional Value(2) | | Fair Value of Interest Rate Derivative Assets/ (Liabilities)(3) |
Derivative Instrument | | Effective Date | | Maturity Date | | Interest Strike Rate(1) | | September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
Interest Rate Swaps | | 7/27/2022 | | 5/26/2027 | | 2.8170 | % | | $ | 150,000 | | | $ | — | | | $ | 6,296 | | | $ | — | |
Interest Rate Swaps | | 7/27/2022 | | 5/26/2027 | | 2.8175 | % | | $ | 150,000 | | | $ | — | | | $ | 6,269 | | | $ | — | |
Interest Rate Swap | | 7/22/2019 | | 11/22/2024 | | 2.7625 | % | | $ | — | | | $ | 150,000 | | | $ | — | | | $ | (7,482) | |
(1)As of September 30, 2022, our interest rate swaps were indexed to 1-month SOFR. As of December 31, 2021, our interest rate swap was indexed to 1-month LIBOR.
(2)Represents the notional value of swaps that are effective as of the balance sheet date presented.
(3)The fair value of derivative assets is included in the line item “Interest rate swap asset” in the accompanying consolidated balance sheets and the fair value of (derivative liabilities) are included in the line item “Interest rate swap liability” in the accompanying consolidated balance sheets.
Transactions
On July 21, 2022, we executed five interest rate swap transactions with an aggregate notional value of $300.0 million to manage our exposure to changes in Term SOFR related to a portion of our variable-rate debt. These swaps, which became effective commencing on July 27, 2022 and mature on May 26, 2027, currently fix Term SOFR at a weighted average rate of 2.81725%. We have designated these interest rate swaps as cash flow hedges.
On May 26, 2022, in conjunction with the repayment of the $150 million term loan facility, we paid $0.6 million to terminate the interest rate swap that was used to hedge the monthly cash flows associated with $150.0 million of LIBOR-based variable-rate debt, and which had an unrealized loss balance of $0.6 million in AOCI at the time of termination. We are amortizing the loss on this transaction from AOCI into interest expense on a straight-line basis over the period beginning from the termination date of the interest rate swap (May 26, 2022) through the original maturity date of the interest rate swap (November 22, 2024).
Our interest rate swaps are designated and qualify as cash flow hedges. We do not use derivatives for trading or speculative purposes. The change in fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in AOCI and is subsequently reclassified from AOCI into earnings in the period that the hedged forecasted transactions affect earnings. The following table sets forth the impact of our interest rate derivatives on our financial statements for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Interest Rate Swaps in Cash Flow Hedging Relationships: | | | | | | | |
Amount of gain (loss) recognized in AOCI on derivatives | $ | 12,326 | | | $ | (2,893) | | | $ | 17,743 | | | $ | (1,435) | |
Amount of loss reclassified from AOCI into earnings under “Interest expense”(1) | $ | (368) | | | $ | (1,993) | | | $ | (2,118) | | | $ | (6,241) | |
Total interest expense presented in the Consolidated Statement of Operations in which the effects of cash flow hedges are recorded (line item “Interest expense”) | $ | 14,975 | | | $ | 10,427 | | | $ | 34,826 | | | $ | 29,772 | |
(1)Includes losses that have been reclassified from AOCI into interest expense related to (i) the treasury rate lock agreements that were settled in August 2021 and for which amounts will continue to be reclassified over the ten-year term of the hedged transaction, (ii) the interest rate swaps that were terminated in November 2020 and August 2021 and for which amounts have been fully reclassified into interest expense as of the original maturity date of each interest rate swap, which was in August 2021 and January 2022, respectively, and (iii) the interest rate swap that was terminated in May 2022 as discussed above.
As of September 30, 2022, we estimate that approximately $3.5 million of net unrealized gains will be reclassified from AOCI into earnings as a net decrease to interest expense over the next 12 months.
Credit-risk-related Contingent Features
Certain of our agreements with our derivative counterparties contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then we could also be declared in default on its derivative obligations.
Certain of our agreements with our derivative counterparties contain provisions where if a merger or acquisition occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.
8. Fair Value Measurements
ASC Topic 820: Fair Value Measurements and Disclosure (“ASC 820”) defines fair value and establishes a framework for measuring fair value. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Recurring Measurements – Interest Rate Swaps
We use interest rate swap agreements to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves.
To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties. However, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have
determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, we have determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below sets forth the estimated fair value of our interest rate swaps as of September 30, 2022 and December 31, 2021, which we measured on a recurring basis by level within the fair value hierarchy (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement Using |
| | Total Fair Value | | Quoted Price in Active Markets for Identical Assets and Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
September 30, 2022 | | | | | | | | |
Interest Rate Swap Asset | | $ | 12,565 | | | $ | — | | | $ | 12,565 | | | $ | — | |
| | | | | | | | |
December 31, 2021 | | | | | | | | |
| | | | | | | | |
Interest Rate Swap Liability | | $ | (7,482) | | | $ | — | | | $ | (7,482) | | | $ | — | |
Financial Instruments Disclosed at Fair Value
The carrying amounts of cash and cash equivalents, rents and other receivables, other assets, accounts payable, accrued expenses and other liabilities, and tenant security deposits approximate fair value because of their short-term nature.
The fair value of our notes payable was estimated by calculating the present value of principal and interest payments, using discount rates that best reflect current market rates for financings with similar characteristics and credit quality, and assuming each loan is outstanding through its respective contractual maturity date.
The table below sets forth the carrying value and the estimated fair value of our notes payable as of September 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement Using | | |
Liabilities | | Total Fair Value | | Quoted Price in Active Markets for Identical Assets and Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Carrying Value |
Notes Payable at: | | | | | | | | | | |
September 30, 2022 | | $ | 1,717,084 | | | $ | — | | | $ | — | | | $ | 1,717,084 | | | $ | 1,934,082 | |
December 31, 2021 | | $ | 1,404,680 | | | $ | — | | | $ | — | | | $ | 1,404,680 | | | $ | 1,399,565 | |
9. Related Party Transactions
Howard Schwimmer
We engage in transactions with Howard Schwimmer, our Co-Chief Executive Officer, earning management fees and leasing commissions from 19 properties with approximately 1.0 million rentable square feet owned by entities controlled individually by Mr. Schwimmer. Fees and commissions earned from these entities are included in “Management and leasing services” in the consolidated statements of operations. We recorded $0.2 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2022 and 2021, respectively, in management and leasing services revenue.
10. Commitments and Contingencies
Legal
From time to time, we are party to various lawsuits, claims and legal proceedings that arise in the ordinary course of business. We are not currently a party to any legal proceedings that we believe would reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.
Environmental
We will generally perform environmental site assessments at properties we are considering acquiring. After the acquisition of such properties, we continue to monitor the properties for the presence of hazardous or toxic substances. From time to time, we acquire properties with known adverse environmental conditions. If at the time of acquisition, losses associated with environmental remediation obligations are probable and can be reasonably estimated, we record a liability.
As of September 30, 2022, we are not aware of any environmental liabilities that would have a material impact on our consolidated financial condition, results of operations or cash flows. However, we cannot be sure that we have identified all environmental liabilities at our properties, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that such environmental liabilities arise. Furthermore, we cannot assure you that future changes to environmental laws or regulations and their application will not give rise to loss contingencies for future environmental remediation.
Tenant and Construction Related Commitments
As of September 30, 2022, we had commitments of approximately $108.8 million for tenant improvement and construction work under the terms of leases with certain of our tenants and contractual agreements with our construction vendors.
Concentrations of Credit Risk
We have deposited cash with financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000 per institution. Although we have deposits at institutions in excess of federally insured limits as of September 30, 2022, we do not believe we are exposed to significant credit risk due to the financial position of the institutions in which those deposits are held.
Concentration of Properties in Southern California
As of September 30, 2022, all of our properties are located in the Southern California infill markets. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate and other conditions.
Tenant Concentration
During the nine months ended September 30, 2022, no single tenant accounted for more than 5% of our total consolidated rental income.
11. Equity
Preferred Stock
At September 30, 2022 and December 31, 2021, we had the following series of Cumulative Preferred Shares outstanding (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | September 30, 2022 | | December 31, 2021 |
Series | | Earliest Redemption Date | | Dividend Rate | | Shares Outstanding | | Liquidation Preference | | Shares Outstanding | | Liquidation Preference |
Series B | | November 13, 2022 | | 5.875 | % | | 3,000,000 | | | $ | 75,000 | | | 3,000,000 | | | $ | 75,000 | |
Series C | | September 20, 2024 | | 5.625 | % | | 3,450,000 | | | 86,250 | | | 3,450,000 | | | 86,250 | |
Total Preferred Shares | | 6,450,000 | | | $ | 161,250 | | | 6,450,000 | | | $ | 161,250 | |
On August 16, 2021, we redeemed all 3,600,000 shares of our 5.875% Series A Cumulative Redeemable Preferred Stock at $25.00 per share, plus all accrued and unpaid dividends on such shares up to but not including the redemption date.
Common Stock
ATM Program
On May 27, 2022, we established a new at-the-market equity offering program pursuant to which we are able to sell from time to time shares of our common stock having an aggregate sales price of up to $1.0 billion (the “Current 2022 ATM Program”). The Current 2022 ATM Program replaces our previous $750.0 million at-the-market equity offering program, which was established on January 13, 2022 (the “Prior 2022 ATM Program”), under which we had sold shares of our common stock having an aggregate gross sales price of $697.5 million through May 27, 2022. In addition, we previously established a $750.0 million at-the-market equity offering program on November 9, 2020 (the “2020 ATM Program”), under which we had sold shares of our common stock having an aggregate gross sales price of $743.9 million through January 13, 2022. We may sell shares of our common stock directly through sales agents or we may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under ATM programs. The use of a forward equity sale agreement allows us to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date.
During the three and nine months ended September 30, 2022, we entered into forward equity sale agreements with certain financial institutions acting as forward purchasers under the Current 2022 ATM Program and Prior 2022 ATM Program with respect to 5,127,587 and 22,882,335 shares of common stock at a weighted average initial forward sale price of $64.73 and $64.55 per share, respectively. We did not receive any proceeds from the sale of common shares by the forward purchasers at the time we entered into forward equity sale agreements.
During the three months ended September 30, 2022, we physically settled a portion of the forward equity sale agreements under the Current 2022 ATM Program and Prior 2022 ATM Program by issuing 11,515,553 shares of our common stock for net proceeds of $697.0 million. During the nine months ended September 30, 2022, we physically settled the forward equity sale agreement that was outstanding as of December 31, 2021 under the 2020 ATM Program, all the forward equity sale agreements under the Prior 2022 ATM Program and a portion of the forward equity sale agreements under the Current 2022 ATM Program by issuing 21,885,446 shares of our common stock for net proceeds of $1.4 billion. The net proceeds for the three and nine months ended September 30, 2022 were calculated based on a weighted average net forward sale price at the time of settlement of $60.53 and $64.99 per share, respectively. As of September 30, 2022, we had 2,903,245 shares of common stock, or approximately $188.6 million of forward net proceeds remaining for settlement to occur before the third quarter of 2023, based on net forward sales price of $64.96 per share.
As of September 30, 2022, approximately $201.0 million of common stock remains available to be sold under the Current 2022 ATM Program. Future sales, if any, will depend on a variety of factors, including among others, market conditions, the trading price of our common stock, determinations by us of the appropriate sources of funding for us and potential uses of funding available to us.
Changes in Accumulated Other Comprehensive Income
The following table summarizes the changes in our AOCI balance for the nine months ended September 30, 2022 and 2021, which consists solely of adjustments related to our cash flow hedges (in thousands): | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
Accumulated other comprehensive loss - beginning balance | | $ | (9,874) | | | $ | (17,709) | |
Other comprehensive income (loss) before reclassifications | | 17,743 | | | (1,435) | |
Amounts reclassified from accumulated other comprehensive loss to interest expense | | 2,118 | | | 6,241 | |
Net current period other comprehensive income | | 19,861 | | | 4,806 | |
Less: other comprehensive income attributable to noncontrolling interests | | (764) | | | (331) | |
Other comprehensive income attributable to common stockholders | | 19,097 | | | 4,475 | |
Accumulated other comprehensive income (loss) - ending balance | | $ | 9,223 | | | $ | (13,234) | |
Noncontrolling Interests
Noncontrolling interests relate to interests in the Operating Partnership, represented by common units of partnership interests in the Operating Partnership (“OP Units”), fully-vested LTIP units, fully-vested performance units, 4.43937% Cumulative Redeemable Convertible Preferred Units of partnership interest in the Operating Partnership, 4.00% Cumulative Redeemable Convertible Preferred Units of partnership interest in the Operating Partnership, 3.00% Cumulative Redeemable Convertible Preferred Units of partnership interest in the Operating Partnership (the “Series 3 CPOP Units”) and the private REIT units, as more fully described below, that are not owned by us.
Operating Partnership Units
As of September 30, 2022, noncontrolling interests included 5,901,264 OP Units, 659,586 fully-vested LTIP units and 744,899 fully-vested performance units, and represented approximately 3.9% of our Operating Partnership. OP Units and shares of our common stock have essentially the same economic characteristics, as they share equally in the total net income or loss and distributions of our Operating Partnership. Investors who own OP Units have the right to cause our Operating Partnership to redeem any or all of their units in our Operating Partnership for an amount of cash per unit equal to the then current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis.
During the nine months ended September 30, 2022, 87,168 OP Units were converted into an equivalent number of shares of common stock, resulting in the reclassification of $3.2 million of noncontrolling interest to Rexford Industrial Realty, Inc.’s stockholders’ equity.
On May 25, 2022, we acquired the property located at 14200-14220 Arminta Street for a purchase price of $80.7 million. As partial consideration for the property, we issued the seller 954,000 OP Units valued at $56.2 million.
Issuance of Series 3 CPOP Units
On March 17, 2022, we acquired an industrial business park located in Long Beach, California for a contractual purchase price of approximately $24.0 million. In consideration for the property, we (i) paid approximately $12.0 million in cash and (ii) issued the seller 164,998 newly issued Series 3 CPOP Units, valued at $12.0 million.
Holders of Series 3 CPOP Units, when and as authorized by the Company as general partner of the Operating Partnership, are entitled to cumulative cash distributions at the rate of 3.00% per annum of the $72.73 per unit liquidation preference, payable quarterly in arrears on or about the last day of March, June, September and December of each year, beginning on March 31, 2022. The holders of Series 3 CPOP Units are entitled to receive the liquidation preference, which is $72.73 per unit and approximately $12.0 million in the aggregate for all of the Series 3 CPOP Units, before the holders of OP Units in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Operating Partnership.
The Series 3 CPOP Units are convertible (i) at the option of the holder anytime from time to time (the “Holder Conversion Right”), or (ii) at the option of the Operating Partnership, at any time on or after March 17, 2027 (the “Company Conversion Right”), in each case, into OP Units on a one-for one basis, subject to adjustment to eliminate fractional units or to the extent that there are any accrued and unpaid distributions on the Series 3 CPOP Units. As noted above, investors who own
OP Units have the right to cause our Operating Partnership to redeem any or all of their units in our Operating Partnership for an amount of cash per unit equal to the then current market value of one share of our common stock, or, at our election, shares of our common stock on a one for-one basis (the “Subsequent Redemption Right”).
The Series 3 CPOP Units rank senior to the Operating Partnership’s OP Units, on parity with the Operating Partnership’s other currently outstanding preferred and CPOP units.
Pursuant to relevant accounting guidance, we analyzed the Series 3 CPOP Units for any embedded derivatives that should be bifurcated and accounted for separately and also considered the conditions that would require classification of the Series 3 CPOP Units in temporary equity versus permanent equity. In carrying out our analyses, we evaluated the key features of the Series 3 CPOP Units including the right to discretionary distributions, the Holder Conversion Right, the Company Conversion Right and the Subsequent Redemption Right to determine whether we control the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement if the Series 3 CPOP Units are converted into shares of our common stock (subsequent to conversion into OP Units). Based on the results of our analyses, we concluded that (i) none of the embedded features of the Series 3 CPOP Units require bifurcation and separate accounting, and (ii) the Series 3 CPOP Units met the criteria to be classified within equity, and accordingly are presented as noncontrolling interests within permanent equity in the consolidated balance sheets.
Private REIT Preferred Units
On July 18, 2022, we acquired the Merge-West properties through the purchase of a private REIT. The private REIT has 122 units of 12% cumulative redeemable non-voting preferred units (the “private REIT units”) outstanding that are held by unaffiliated third parties. Pursuant to the REIT purchase agreement and corresponding tax indemnification agreement, we have the obligation to maintain the REIT through February 3, 2023, which would prevent us from redeeming the private REIT units until that time. Upon redemption, the private REIT units have a redemption price equal to $1,000 per unit, or an aggregate price of $122,000, plus any distributions thereon that have accrued but have not been paid at the time of such redemption (the “liquidation preference”), plus a redemption premium of $100 per unit if redeemed on or before December 31, 2024. The private REIT units have been classified as noncontrolling interests in our consolidated balance sheets and have a balance equal to the liquidation preference.
12. Incentive Award Plan
Second Amended and Restated 2013 Incentive Award Plan
We maintain one share-based incentive plan, the Second Amended and Restated Rexford Industrial Realty, Inc. and Rexford Industrial Realty, L.P. 2013 Incentive Award Plan (the “Plan”), pursuant to which, we may make grants of restricted stock, LTIP units of partnership interest in our Operating Partnership (“LTIP Units”), performance units in our Operating Partnership (“Performance Units”), dividend equivalents and other stock based and cash awards to our non-employee directors, employees and consultants.
As of September 30, 2022, a total of 2,479,273 shares of common stock, LTIP Units, Performance Units and other stock based award remain available for issuance under the Plan. Shares and units granted under the Plan may be authorized but unissued shares or units, or, if authorized by the board of directors, shares purchased in the open market. If an award under the Plan is forfeited, expires, or is settled for cash, any shares or units subject to such award will generally be available for future awards.
LTIP Units and Performance Units
LTIP Units and Performance Units are each a class of limited partnership units in the Operating Partnership. Initially, LTIP Units and Performance Units do not have full parity with OP Units with respect to liquidating distributions. However, upon the occurrence of certain events described in the Operating Partnership’s partnership agreement, the LTIP Units and Performance Units can over time achieve full parity with the OP Units for all purposes. If such parity is reached, vested LTIP Units and vested Performance Units may be converted into an equal number of OP Units, and upon conversion, enjoy all rights of OP Units. LTIP Units, whether vested or not, receive the same quarterly per-unit distributions as OP Units, which equal the per-share distributions on shares of our common stock. Performance Units that have not vested receive a quarterly per-unit distribution equal to 10% of the distributions paid on OP Units.
Share-Based Award Activity
The following table sets forth our unvested restricted stock activity and unvested LTIP Unit activity for the nine months ended September 30, 2022:
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| Unvested Awards |
| Restricted Common Stock | | LTIP Units | | | | |
| Number of Shares | | Weighted-Average Grant Date Fair Value per Share | | Number of Units | | Weighted-Average Grant Date Fair Value per Unit | | | | |
Balance at January 1, 2022 | 249,179 | | | $ | 45.62 | | | 239,709 | | | $ | 54.99 | | | | | |
Granted | 133,476 | | | 68.15 | | | 47,837 | | | 68.79 | | | | | |
Forfeited | (9,636) | | | 55.28 | | | — | | | — | | | | | |
Vested(1) | (97,302) | | | 43.45 | | | (37,540) | | | 61.34 | | | | | |
Balance at September 30, 2022 | 275,717 | | | $ | 56.95 | | | 250,006 | | | $ | 56.68 | | | | | |
(1)During the nine months ended September 30, 2022, 31,230 shares of the Company’s common stock were tendered in accordance with the terms of the Plan to satisfy minimum statutory tax withholding requirements associated with the vesting of restricted shares of common stock.
The following table sets forth the vesting schedule of all unvested share-based awards outstanding as of September 30, 2022:
| | | | | | | | | | | | | | | | | |
| Unvested Awards |
| Restricted Common Stock | | LTIP Units | | Performance Units(1) |
October 1, 2022 - December 31, 2022 | 1,034 | | | 104,176 | | | 253,900 | |
2023 | 111,593 | | | 85,717 | | | 476,915 | |
2024 | 78,231 | | | 42,788 | | | 366,004 | |
2025 | 55,895 | | | 11,778 | | | — | |
2026 | 28,964 | | | 5,547 | | | — | |
Total | 275,717 | | | 250,006 | | | 1,096,819 | |
(1)Represents the maximum number of Performance Units that would become earned and vested in December of 2022, 2023 and 2024, in the event that the specified maximum total shareholder return (“TSR”) and FFO per share growth hurdles are achieved at the end of the three-year performance period for awards that were initially granted in December of 2019, 2020, and 2021, respectively.
Compensation Expense
The following table sets forth the amounts expensed and capitalized for all share-based awards for the reported periods presented below (in thousands):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Expensed share-based compensation(1) | $ | 6,316 | | | $ | 4,506 | | | $ | 18,710 | | | $ | 13,230 | |
Capitalized share-based compensation(2) | 167 | | | 90 | | | 454 | | | 264 | |
Total share-based compensation | $ | 6,483 | | | $ | 4,596 | | | $ | 19,164 | | | $ | 13,494 | |
(1)Amounts expensed are included in “General and administrative” and “Property expenses” in the accompanying consolidated statements of operations.
(2)For the three and nine months ended September 30, 2022 and 2021, amounts capitalized relate to employees who provide construction services, and are included in “Building and improvements” in the consolidated balance sheets.
As of September 30, 2022, total unrecognized compensation cost related to all unvested share-based awards was $33.9 million and is expected to be recognized over a weighted average remaining period of 25 months.
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share and per share amounts):
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net income | $ | 41,648 | | | $ | 40,186 | | | $ | 131,449 | | | $ | 96,866 | |
Less: Preferred stock dividends | (2,314) | | | (2,976) | | | (6,943) | | | (10,249) | |
Less: Original issuance costs of redeemed preferred stock | — | | | (3,349) | | | — | | | (3,349) | |
Less: Net income attributable to noncontrolling interests | (2,368) | | | (2,173) | | | (7,142) | | | (5,852) | |
Less: Net income attributable to participating securities | (201) | | | (143) | | | (605) | | | (423) | |
Net income attributable to common stockholders – basic and diluted | $ | 36,765 | | | $ | 31,545 | | | $ | 116,759 | | | $ | 76,993 | |
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Denominator: | | | | | | | |
Weighted average shares of common stock outstanding – basic | 171,908,895 | | | 138,762,384 | | | 165,852,466 | | | 134,922,168 | |
Effect of dilutive securities | 922,278 | | | 868,091 | | | 548,968 | | | 507,008 | |
| | | | | | | |
Weighted average shares of common stock outstanding – diluted | 172,831,173 | | | 139,630,475 | | | 166,401,434 | | | 135,429,176 | |
| | | | | | | |
Earnings per share — Basic | | | | | | | |
Net income attributable to common stockholders | $ | 0.21 | | | $ | 0.23 | | | $ | 0.70 | | | $ | 0.57 | |
Earnings per share — Diluted | | | | | | | |
Net income attributable to common stockholders | $ | 0.21 | | | $ | 0.23 | | | $ | 0.70 | | | $ | 0.57 | |
Unvested share-based payment awards that contain non-forfeitable rights to dividends, whether paid or unpaid, are accounted for as participating securities. As such, unvested shares of restricted stock, unvested LTIP Units and unvested Performance Units are considered participating securities. Participating securities are included in the computation of basic EPS pursuant to the two-class method. The two-class method determines EPS for each class of common stock and each participating security according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings. Participating securities are also included in the computation of diluted EPS using the more dilutive of the two-class method or treasury stock method for unvested shares of restricted stock and LTIP Units, and by determining if certain market conditions have been met at the reporting date for unvested Performance Units.
The effect of including unvested shares of restricted stock and unvested LTIP Units using the treasury stock method was excluded from our calculation of weighted average shares of common stock outstanding – diluted, as their inclusion would have been anti-dilutive.
Performance Units, which are subject to vesting based on the Company achieving certain TSR levels and FFO per share growth over a three-year performance period, are included as contingently issuable shares in the calculation of diluted EPS when TSR and/or FFO per share growth has been achieved at or above the threshold levels specified in the award agreements, assuming the reporting period is the end of the performance period, and the effect is dilutive.
Shares issuable under forward equity sale agreements during the period prior to settlement are reflected in our calculation of weighted average shares of common stock outstanding – diluted using the treasury stock method as the impact was dilutive for the periods presented above.
We also consider the effect of other potentially dilutive securities, including the CPOP Units and OP Units, which may be redeemed for shares of our common stock under certain circumstances, and include them in our computation of diluted EPS when their inclusion is dilutive. These units were not dilutive for the periods presented above.
14. Subsequent Events
Acquisitions
The following table summarizes the property we acquired subsequent to September 30, 2022:
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Property | | Submarket | | Date of Acquisition | | Rentable Square Feet | | Number of Buildings | | Contractual Purchase Price (in thousands) |
20851 Currier Road | | Los Angeles - San Gabriel Valley | | 10/05/2022 | | 59,412 | | 1 | | $ | 21,800 | |
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Dividends and Distributions Declared
On October 17, 2022, our board of directors declared the following quarterly cash dividends/distributions, record dates and payment dates.
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Security | | Amount per Share/Unit | | Record Date | | Payment Date |
Common stock | | $ | 0.315 | | | December 30, 2022 | | January 17, 2023 |
OP Units | | $ | 0.315 | | | December 30, 2022 | | January 17, 2023 |
5.875% Series B Cumulative Redeemable Preferred Stock | | $ | 0.367188 | | | December 15, 2022 | | December 30, 2022 |
5.625% Series C Cumulative Redeemable Preferred Stock | | $ | 0.351563 | | | December 15, 2022 | | December 30, 2022 |
4.43937% Cumulative Redeemable Convertible Preferred Units | | $ | 0.505085 | | | December 15, 2022 | | December 30, 2022 |
4.00% Cumulative Redeemable Convertible Preferred Units | | $ | 0.45 | | | December 15, 2022 | | December 30, 2022 |
3.00% Cumulative Redeemable Convertible Preferred Units | | $ | 0.545462 | | | December 15, 2022 | | December 30, 2022 |