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Terreno Realty Corp (TRNO) SEC Filing 10-K Annual report for the fiscal year ending Tuesday, December 31, 2013

Terreno Realty Corp

CIK: 1476150 Ticker: TRNO
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Feb. 14, 2014
Jun. 28, 2013
Document and Entity Information [Abstract]      
Entity Registrant Name Terreno Realty Corp    
Entity Central Index Key 0001476150    
Document Type 10-K    
Document Period End Date Dec. 31, 2013    
Amendment Flag false    
Document Fiscal Year Focus 2013    
Document Fiscal Period Focus FY    
Current Fiscal Year End Date --12-31    
Entity Filer Category Accelerated Filer    
Entity Common Stock, Shares Outstanding   24,990,120  
Entity Well-known Seasoned Issuer No    
Entity Voluntary Filers No    
Trading Symbol trno    
Entity Current Reporting Status Yes    
Entity Public Float     $ 341,815,313
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-34603

Terreno Realty Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   27-1262675

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

101 Montgomery Street, Suite 200

San Francisco, CA

  94104
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (415) 655-4580

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  Name of Exchange on Which Registered

Common Stock, $0.01 par value per share

7.75% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share

 

New York Stock Exchange

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price, as reported by the New York Stock Exchange, at which the common equity was last sold, as of June 28, 2013, the last business day of the Registrant’s most recently completed second fiscal quarter: $341,815,313. (For this computation, the Registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the Registrant).

The registrant had 24,990,120 shares of its common stock, $0.01 par value per share, outstanding as of February 14, 2014.

Documents Incorporated by Reference

Part III of this Annual Report on Form 10-K incorporates by reference portions of Terreno Realty Corporation’s Proxy Statement for its 2014 Annual Meeting of Stockholders, which the registrant anticipates will be filed with the Securities and Exchange Commission no later than 120 days after the end of its 2013 fiscal year pursuant to Regulation 14A.

 

 

 


Table of Contents

Terreno Realty Corporation

Annual Report on Form 10-K

for the Year Ended December 31, 2013

Table of Contents

 

Part I:

  
  

Item 1

  

Business

     2   
  

Item 1A

  

Risk Factors

     6   
  

Item 1B

  

Unresolved Staff Comments

     23   
  

Item 2

  

Properties

     23   
  

Item 3

  

Legal Proceedings

     25   
  

Item 4

  

Mine Safety Disclosures

     25   

Part II:

  
  

Item 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

     26   
  

Item 6

  

Selected Financial Data

     29   
  

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   
  

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risk

     45   
  

Item 8

  

Financial Statements and Supplementary Data

     45   
  

Item 9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     45   
  

Item 9A

  

Controls and Procedures

     46   
  

Item 9B

  

Other Information

     48   

Part III:

  
  

Item 10

  

Directors, Executive Officers and Corporate Governance

     48   
  

Item 11

  

Executive Compensation

     48   
  

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     48   
  

Item 13

  

Certain Relationships and Related Transactions, and Director Independence

     48   
  

Item 14

  

Principal Accounting Fees and Services

     48   

Part IV:

  
  

Item 15

  

Exhibits and Financial Statement Schedules

     48   
     

Index to Financial Statements

     48   
     

Signatures

  
     

Exhibit Index

  


Table of Contents

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We caution investors that forward-looking statements are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “project”, “result”, “should”, “will”, “seek”, “target”, “see”, “likely”, “position”, “opportunity”, and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

   

the factors included in this Annual Report on Form 10-K, including those set forth under the headings “Risk Factors”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

 

   

our ability to identify and acquire industrial properties on terms favorable to us;

 

   

general volatility of the capital markets and the market price of our common stock;

 

   

adverse economic or real estate conditions or developments in the industrial real estate sector and/or in the markets in which we acquire properties;

 

   

our dependence on key personnel and our reliance on third parties to property manage the majority of our industrial properties;

 

   

our inability to comply with the laws, rules and regulations applicable to companies, and in particular, public companies;

 

   

our ability to manage our growth effectively;

 

   

tenant bankruptcies and defaults on or non-renewal of leases by tenants;

 

   

decreased rental rates or increased vacancy rates;

 

   

increased interest rates and operating costs;

 

   

declining real estate valuations and impairment charges;

 

   

our expected leverage, our failure to obtain necessary outside financing, and future debt service obligations;

 

   

our ability to make distributions to our stockholders;

 

   

our failure to successfully hedge against interest rate increases;

 

   

our failure to successfully operate acquired properties;

 

   

our failure to qualify or maintain our status as a real estate investment trust (“REIT”) and possible adverse changes to tax laws;

 

   

uninsured or underinsured losses relating to our properties;

 

   

environmental uncertainties and risks related to natural disasters;

 

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financial market fluctuations; and

 

   

changes in real estate and zoning laws and increases in real property tax rates.

PART I

 

Item 1. Business

Overview

Terreno Realty Corporation (“Terreno”, and together with its subsidiaries, “we”, “us”, “our”, “our company” or “the company”) acquires, owns and operates industrial real estate in six major coastal U.S. markets: Los Angeles; Northern New Jersey/New York City; San Francisco Bay Area; Seattle; Miami; and Washington, D.C./Baltimore. We invest in several types of industrial real estate, including warehouse/distribution (approximately 86.4% of our total portfolio square footage as of December 31, 2013), flex (including light industrial and research and development, or R&D) (approximately 11.1%) and trans-shipment (approximately 2.5%). We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. Infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings. As of December 31, 2013, we owned 96 buildings aggregating approximately 6.8 million square feet, which we purchased for an aggregate purchase price of approximately $615.8 million, including the assumption of mortgage loans payable of approximately $55.1 million, which includes mortgage premiums of approximately $1.5 million. As of December 31, 2013, our properties were approximately 92.8% leased to 214 tenants, the largest of which accounted for approximately 7.2% of our total annualized base rent.

We are an internally managed Maryland Corporation. We were incorporated in November 2009 and on February 16, 2010, we completed our initial public offering of 8,750,000 shares of our common stock and a concurrent private placement of an aggregate of 350,000 shares of our common stock to our executive officers at a price per share of $20.00. The net proceeds of our initial public offering were approximately $162.8 million after deducting the full underwriting discount of approximately $10.5 million and other offering expenses of approximately $1.7 million. We received net proceeds of approximately $7.0 million from our concurrent private placement.

On January 13, 2012, we completed a public follow-on offering of 4,000,000 shares of our common stock, including 93,000 shares purchased by our senior management and directors, at a price per share of $14.25. On February 13, 2012, we sold an additional 61,853 shares of our common stock at a price per share of $14.25 upon the exercise by the underwriters of their option to purchase additional shares. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering, after deducting the underwriting discount and offering costs, were approximately $54.7 million. We used approximately $41.0 million of the net proceeds to repay outstanding borrowings under our revolving credit facility on January 13, 2012 and used the remainder of the net proceeds to invest in industrial properties and for general business purposes.

On July 19, 2012, we completed a public offering of 1,840,000 shares of our 7.75% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”), including 240,000 shares sold upon the exercise by the underwriters of their option to purchase additional shares, at a price per share of $25.00. The net proceeds of the offering were approximately $44.3 million after deducting the underwriting discount and other offering expenses of approximately $1.7 million. We used the net proceeds to reduce outstanding borrowings under our revolving credit facility.

On February 19, 2013, we completed a public follow-on offering of 5,750,000 shares of our common stock at a price per share of $16.60, including 90,325 shares that were sold in the offering to our executive and senior officers and members of our board of directors. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering, after deducting the underwriting discount and offering costs, were approximately $90.8 million. We used approximately $65.4 million of the net proceeds to repay outstanding borrowings under our revolving credit facility and the remaining net proceeds to invest in industrial properties and for general business purposes.

On July 11, 2013, we completed a public follow-on offering of 5,750,000 shares of our common stock at a price per share of $18.25, including 43,250 shares that were sold in the offering to our executive and senior officers and members of our board of directors. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering were approximately $99.9 million after deducting the underwriting discount and offering costs of approximately $5.0 million. We used approximately $6.5 million of the net proceeds to repay outstanding borrowings under our revolving credit facility and the remaining net proceeds to acquire industrial properties and for general business purposes.

We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Code, commencing with our taxable year ended December 31, 2010.

 

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Our Investment Strategy

We invest in industrial properties in six major coastal U.S. markets: Los Angeles; Northern New Jersey/New York City; San Francisco Bay Area; Seattle; Miami; and Washington, D.C./Baltimore.

As described in more detail in the table below, we invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and R&D) and trans-shipment. We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate.

Industrial Facility General Characteristics

Warehouse / distribution (approximately 86.4% of our total portfolio square footage as of December 31, 2013)

 

   

Single and multiple tenant facilities that typically serve tenants greater than 30,000 square feet of space

 

   

Generally less than 20% office space

 

   

Typical clear height from 18 feet to 36 feet

 

   

May include production/manufacturing areas

 

   

Adequate interior access via dock high and/or grade level doors

 

   

Adequate truck court for large and small truck distribution options, possibly including staging for a high volume of truck activity and/or trailer storage

Flex (including light industrial and R&D, approximately 11.1% of our total portfolio square footage as of December 31, 2013)

 

   

Single and multiple tenant facilities that typically serve tenants less than 30,000 square feet of space

 

   

Facilities generally accommodate both office and warehouse/manufacturing activities

 

   

Typically has a larger amount of office space and shallower bay depths than warehouse/distribution facilities

 

   

Adequate parking consistent with increased office use

 

   

Adequate interior access via grade level and/or dock high doors

 

   

Staging for moderate truck activity

 

   

May include a showroom, service center, or assembly/light manufacturing component

 

   

Enhanced landscaping

Trans-shipment (approximately 2.5% of our total portfolio square footage as of December 31, 2013)

 

   

Includes truck terminals and airport on-tarmac facilities, which serve both single and multiple tenants

 

   

Typically has a high number of dock high doors, shallow bay depth and lower clear height

 

   

Staging for a high volume of truck activity and trailer storage

We selected our target markets by drawing upon the experiences of our management team investing and operating in over 50 global industrial markets located in North America, Europe and Asia and also in anticipation of trends in logistics patterns resulting from population changes, regulatory and physical constraints, potential long term increases in carbon prices and other factors. We believe that our target markets have attractive long term investment attributes. We target assets with characteristics that include, but are not limited to, the following:

 

   

Located in high population coastal markets;

 

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Close proximity to transportation infrastructure (such as sea ports, airports, highways and railways);

 

   

Situated in supply-constrained submarkets with barriers to new industrial development, as a result of physical and/or regulatory constraints;

 

   

Functional and flexible layout that can be modified to accommodate single and multiple tenants;

 

   

Acquisition price at a discount to the replacement cost of the property;

 

   

Potential for enhanced return through re-tenanting or operational or physical improvements; and

 

   

Opportunity for higher and better use of the property over time.

In general, we prefer to utilize local third party property managers for day-to-day property management. We believe outsourcing property management is cost effective and provides us with operational flexibility and is a source of acquisition opportunities. We currently manage one of our properties directly and may directly manage other properties in the future if we determine such direct property management is in our best interest.

We have no current intention to acquire undeveloped industrial land or to pursue ground up development. However, we may pursue redevelopment opportunities of properties that we own or acquire adjacent land to expand our existing facilities.

We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties. We may also acquire industrial properties through the acquisition of other corporations or entities that own industrial real estate. We will opportunistically target investments in debt secured by industrial real estate that would otherwise meet our investment criteria with the intention of ultimately acquiring the underlying real estate. We currently do not intend to target specific percentages of holdings of particular types of industrial properties. This expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions.

The properties we acquire may be stabilized (fully leased) or unstabilized (have near term lease expirations or be partially or fully vacant). During the period from February 16, 2010 to December 31, 2013, we acquired 28 unstabilized properties of which 14 have been stabilized.

We may sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value or the market value of the property is significantly greater than its estimated replacement cost. Capital from such sales will be reinvested into properties that are expected to provide better prospective returns or returned to shareholders. We have disposed of two properties since inception.

Competitive Strengths

We believe we distinguish ourselves from our competitors through the following competitive advantages:

 

   

Focused Investment Strategy. We invest exclusively in six major coastal U.S. markets and focus on infill locations. We selected our six target markets based upon the experiences of our management team’s investing and operating in over 50 global industrial markets located in North America, Europe and Asia and also in anticipation of trends in logistics patterns resulting from population changes, regulatory and physical constraints, potential long term increases in carbon prices and other factors. We have no current intention to acquire undeveloped land or pursue ground up development.

 

   

Highly Aligned Compensation Structure. We believe that executive compensation should be closely aligned with long-term stockholder value creation. As a result, all of the incentive compensation of our executive officers is based solely on our total shareholder return exceeding the total shareholder return of the MSCI U.S. REIT Index or the FTSE NAREIT Equity Industrial Index.

 

   

Commitment to Strong Corporate Governance. We are committed to strong corporate governance, as demonstrated by the following:

 

   

all members of our board of directors serve annual terms;

 

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we have adopted a majority voting standard in non-contested director elections;

 

   

we have opted out of two Maryland anti-takeover provisions and, in the future, we may not opt back in to these provisions without stockholder approval;

 

   

we designed our ownership limits solely to protect our status as a REIT and not for the purpose of serving as an anti-takeover device; and

 

   

we have no stockholder rights plan. In the future, we will not adopt a stockholder rights plan unless our stockholders approve in advance the adoption of such a plan or, if adopted by our board of directors, we will submit the stockholder rights plan to our stockholders for a ratification vote within 12 months of adoption or the plan will terminate.

Our Financing Strategy

The primary objective of our financing strategy is to maintain financial flexibility with a conservative capital structure using retained cash flows, long-term debt and the issuance of common and perpetual preferred stock to finance our growth. Over the long term, we intend to:

 

   

limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 40% of our total enterprise value;

 

   

maintain a fixed charge coverage ratio in excess of 2.0x;

 

   

limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness; and

 

   

have staggered debt maturities that are aligned to our expected average lease term (5-7 years), positioning us to re-price parts of our capital structure as our rental rates change with market conditions.

We intend to preserve a flexible capital structure with a long-term goal to obtain an investment grade rating and be in a position to issue unsecured debt and additional perpetual preferred stock. Prior to attaining an investment grade rating, we intend to primarily utilize non-recourse debt secured by individual properties or pools of properties with a targeted maximum loan-to-value of 65% at the time of financing, or recourse bank term loans, credit facilities and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value.

Our Corporate Structure

We are a Maryland corporation formed on November 6, 2009 and have been publicly held and subject to U.S. Security and Exchange Commission, or SEC, reporting obligations since 2010. We are not structured as an Umbrella Partnership Real Estate Investment Trust, or UPREIT. We currently own our properties indirectly through subsidiaries and may utilize one or more taxable REIT subsidiaries as appropriate.

Our Tax Status

We elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our taxable year ended December 31, 2010. We believe that our organization and method of operation has enabled and will continue to enable us to meet the requirements for qualification and taxation as a REIT for federal income tax purposes. To maintain REIT status we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our net taxable income to our stockholders, excluding net capital gains. As a REIT, we generally will not be subject to federal income tax on REIT taxable income we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property and the income of our taxable REIT subsidiaries, if any, will be subject to taxation at regular corporate rates. We do not currently own any taxable REIT subsidiaries but may in the future.

Competition

We believe the current market for industrial real estate acquisitions to be competitive. We compete for real property investments with pension funds and their advisors, bank and insurance company investment accounts, other public and private real estate investment companies, real estate limited partnerships, owner-users, individuals and other entities engaged in real estate

 

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investment activities, some of which have greater financial resources than we do. In addition, we believe the leasing of real estate to be highly competitive. We experience competition for customers from owners and managers of competing properties. As a result, we may have to provide free rental periods, incur charges for tenant improvements or offer other inducements, all of which may have an adverse impact on our results of operations.

Environmental Matters

The industrial properties that we own and will acquire are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and therefore it is possible we could incur these costs even after we sell some of our properties. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow using the property as collateral or to sell the property. Under applicable environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.

Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos at one of our properties may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals to manage them carefully and to notify local officials that the chemicals are being used.

We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. We generally obtain “Phase I environmental site assessments”, or ESAs, on each property prior to acquiring it. However, these ESAs may not reveal all environmental costs that might have a material adverse effect on our business, assets, results of operations or liquidity and may not identify all potential environmental liabilities.

In general, we utilize local third party property managers for day-to-day property management and will rely on these third parties to operate our industrial properties in compliance with applicable federal, state and local environmental laws in their daily operation of the respective properties and to promptly notify us of any environmental contaminations or similar issues. As a result, we may become subject to material environmental liabilities of which we are unaware. We can make no assurances that (1) future laws or regulations will not impose material environmental liabilities on us, or (2) the environmental condition of our industrial properties will not be affected by the condition of the properties in the vicinity of our industrial properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us. We were not aware of any significant or material exposures as of December 31, 2013 and 2012.

Employees

As of February 19, 2014, we have 15 employees. None of our employees is a member of any union.

Available Information

We maintain an internet website at the following address: http://terreno.com. The information on our website is neither part of nor incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge, on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Exchange Act. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and exhibits and amendments to these reports, and Section 16 filings. Our Code of Business Conduct and Ethics is also available on our website. We intend to disclose any amendments or waivers to our Code of Business Conduct and Ethics that apply to any of our executive officers on our website. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. You may also obtain our reports by accessing the EDGAR database at the SEC’s website at http://www.sec.gov.

 

Item 1A. Risk Factors.

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we may currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be adversely affected. Investors should also refer to our quarterly reports on Form 10-Q and current reports on Form 8-K for updates to these risk factors.

 

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Risks Related to Our Business and Our Properties

Our long-term growth will depend upon future acquisitions of properties, and we may be unable to consummate acquisitions on advantageous terms, the acquired properties may not perform as we expect, or we may be unable to quickly and efficiently integrate our new acquisitions into our existing operations.

We intend to acquire industrial properties in our six target markets. The acquisition of properties entails various risks, including the risks that our investments may not perform as we expect, that we may be unable to quickly and efficiently integrate our new acquisitions into our existing operations and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. In addition, we cannot assure you of the availability of investment opportunities in our targeted markets at attractive pricing levels or at all. In the event that such opportunities are not available in our targeted markets as we expect, our ability to execute our business plan may be adversely affected. Further, we face significant competition for attractive investment opportunities from other well-capitalized real estate investors, including pension funds and their advisors, bank and insurance company investment accounts, other public and private real estate investment companies and REITs, real estate limited partnerships, owner-users, individuals and other entities engaged in real estate investment activities, some of which have a history of operations, greater financial resources than we do and a greater ability to borrow funds to acquire properties. This competition increases as investments in real estate become increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire properties as we desire or the purchase price may be significantly elevated.

In addition, we expect to finance future acquisitions through a combination of borrowings under our revolving credit facility, term loans and the use of retained cash flows, long-term debt and the issuance of common and perpetual preferred stock, which may not be available at all or on advantageous terms and which could adversely affect our cash flows. Any of the above risks could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock and our preferred stock.

We may make acquisitions, which pose integration and other risks that could harm our business.

We may be required to incur debt and expenditures and issue additional shares of our common stock or preferred stock to pay for industrial properties that we acquire, which may dilute our stockholders’ ownership interests and may reduce or eliminate our profitability. These acquisitions may also expose us to risks such as:

 

   

the possibility that we may not be able to successfully integrate acquired properties into our operations;

 

   

the possibility that additional capital expenditures may be required;

 

   

the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired properties;

 

   

the possible loss or reduction in value of acquired properties;

 

   

the possibility of pre-existing undisclosed liabilities regarding acquired properties, including but not limited to environmental or asbestos liability, of which our insurance may be insufficient or for which we may be unable to secure insurance coverage;

 

   

the possibility that a concentration of our industrial properties in Los Angeles, the San Francisco Bay Area and Seattle may increase our exposure to seismic activity, especially if these industrial properties are located on or near fault zones; and

 

   

the possibility that we may not meet our estimated forecasts related to stabilized cap rates.

We expect acquisition costs, including capital expenditures required to render industrial properties operational, to increase in the future. If our revenue does not keep pace with these potential acquisition costs, we may not be able to maintain our current or expected earnings as we absorb these additional expenses. There is no assurance we would successfully overcome these risks or any other problems encountered with these acquisitions.

If we cannot obtain additional financing, our growth will be limited.

If adverse conditions in the credit markets — in particular with respect to real estate — materially deteriorate, our business could be materially and adversely affected. Our long-term ability to grow through investments in industrial properties will be limited if we cannot obtain additional financing on favorable terms or at all. In the future, we will rely on debt financing, including borrowings

 

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under our revolving credit facility, term loans, issuances of unsecured debt securities and debt secured by individual properties, to finance our acquisition activities and for working capital. If we are unable to obtain debt financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely affected. Market conditions may make it difficult to obtain additional financing, and we cannot assure you that we will be able to obtain additional debt or equity financing or that we will be able to obtain it on favorable terms.

In addition, to qualify as a REIT, we are required to distribute at least 90% of our taxable income (determined before the deduction for dividends paid and excluding any net capital gains) each year to our stockholders, and we generally expect to make distributions in excess of such amount. As a result, our ability to retain earnings to fund acquisitions, redevelopment and expansion, if any, or other capital expenditures will be limited. We have a $100.0 million revolving credit facility to finance acquisitions and for working capital requirements. Terreno guarantees the obligations of the borrower (a wholly-owned subsidiary) under the revolving credit facility. The revolving credit facility matures in January 2016 and provides for one 12-month extension option exercisable by us, subject, among other things, to there being an absence of an event of default and to our payment of an extension fee. As of December 31, 2013, there were $31.0 million of borrowings outstanding on the revolving credit facility.

The availability and timing of cash distributions is uncertain.

In 2012 and 2013, we made quarterly distributions to holders of our common stock and beginning in September 2012, to holders of our preferred stock and we intend to continue to pay regular quarterly distributions. However, we bear all expenses incurred by our operations, and the funds generated by our operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders. In addition, our board of directors, in its discretion, may retain any portion of such cash for working capital. Our ability to make distributions to our stockholders also will depend on our levels of retained cash flows, which we intend to use as a source of investment capital. We cannot assure our stockholders that sufficient funds will be available to pay distributions. Our corporate strategy is to fund the payment of quarterly distributions to our stockholders entirely from distributable cash flows. However, we may fund our quarterly distributions to our stockholders from a combination of available cash flows, net of recurring capital expenditures, and proceeds from borrowings and property dispositions. In the event we are unable to consistently fund future quarterly distributions to our stockholders entirely from distributable cash flows the value of our shares may be negatively impacted.

We depend on key personnel.

Our success depends to a significant degree upon the contributions of certain key personnel including, but not limited to, our chairman and chief executive officer and our president, each of whom would be difficult to replace. If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our senior management group or to attract suitable replacements should any members of the senior management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets. We have not obtained and do not expect to obtain key man life insurance on any of our key personnel.

We also believe that, as we expand, our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, investment, financial and operational personnel. Competition for such personnel is intense, and we cannot assure our stockholders that we will be successful in attracting and retaining such skilled personnel.

Failure of the projected improvement in industrial operating fundamentals may adversely affect our ability to execute our business plan.

A substantial part of our business plan is based on our belief that industrial operating fundamentals are expected to improve over the next several years. We cannot assure you as to whether or when industrial operating fundamentals will in fact improve or to what extent they improve. In the event conditions in the industry do not improve when and as we expect, or deteriorate, our ability to execute our business plan may be adversely affected.

Our investments are concentrated in the industrial real estate sector, and our business would be adversely affected by an economic downturn in that sector.

Our investments in real estate assets are concentrated in the industrial real estate sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities included a more significant portion of other sectors of the real estate industry.

 

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Events or occurrences that affect areas in which our properties are located may materially adversely impact our financial results.

In addition to general, regional, national and international economic conditions that may materially adversely affect our business and financial results, our operating performance will be materially adversely impacted by adverse economic conditions in the specific markets in which we operate and particularly in the markets in which we have significant concentrations of properties. Any downturn in the economy in the real estate market or any of our markets and any failure to accurately predict the timing of any economic improvement in these markets could cause our operations and our revenue and cash available for distribution, including cash available to pay distributions to our stockholders, to be materially adversely affected. As of December 31, 2013, approximately 37.5% of our buildings were located in Northern New Jersey / New York City, representing approximately 35.8% of our total annualized base rent.

We may be unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire.

We cannot assure you that leases at our properties will be renewed or that such properties will be re-leased at net effective rental rates equal to or above the then current average net effective rental rates. If the rental rates for our properties decrease, our tenants do not renew their leases or we do not re-lease a significant portion of our available space, including vacant space resulting from tenant defaults, and space for which leases are scheduled to expire, our financial condition, results of operations, cash flows, cash available for distribution to stockholders, per share trading price of our common stock and preferred stock and our ability to satisfy our debt service obligations could be materially adversely affected. In addition, if we are unable to renew leases or re-lease a property, the resale value of that property could be diminished because the market value of a particular property will depend in part upon the value of the leases of such property.

We face potential adverse effects from the bankruptcies or insolvencies of tenants or from tenant defaults generally.

We are dependent on tenants for our revenues, including certain significant tenants. Moreover, certain of our properties are occupied by a single tenant, and the income produced by these properties depends on the financial stability of that tenant. The bankruptcy or insolvency of the tenants at our properties, or tenant defaults generally, may adversely affect the income produced by our properties. The tenants, particularly those that are highly leveraged, could file for bankruptcy protection or become insolvent in the future. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy. On the other hand, a bankrupt tenant may reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full. This shortfall could adversely affect our cash flows and results of operations and could cause us to reduce the amount of distributions to stockholders.

A default by a tenant on its lease payments could force us to find an alternative source of revenues to pay any mortgage loan or operating expenses on the property. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs, including litigation and related expenses, in protecting our investment and re-leasing our property.

Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

We review the carrying value of our properties when circumstances, such as adverse market conditions, indicate potential impairment may exist. We base our review on an estimate of the future cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our evaluation indicates that we may be unable to recover the carrying value of a real estate investment, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses would have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition, results of operations, cash available for distribution, including cash available for us to pay distributions to our stockholders and per share trading price of our common stock and preferred stock.

We utilize local third party managers for day-to-day property management for the majority of our properties.

In general, we prefer to utilize local third party managers for day-to-day property management, although we currently manage one of our properties directly and may directly manage more of our properties in the future. To the extent we utilize third party managers, our cash flows from our industrial properties may be adversely affected if our managers fail to provide quality services. In addition, our managers or their affiliates may manage, and in some cases may own, invest in or provide credit support or operating guarantees to industrial properties that compete with our industrial properties, which may result in conflicts of interest and decisions regarding the operation of our industrial properties that are not in our best interests.

 

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Our real estate redevelopment or expansion strategies may not be successful.

In connection with our business strategy, we may pursue redevelopment opportunities or construct expansions or improvements of industrial properties that we own. We will be subject to risks associated with our redevelopment, renovation and expansion activities that could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

We may not have funding for future tenant improvements.

When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings in the future, it is likely that, in order to attract one or more new tenants, we will be required to expend funds to construct new tenant improvements in the vacated space. Although we intend to manage our cash position or financing availability to pay for any improvements required for re-leasing, we cannot assure our stockholders that we will have adequate sources of funding available to us for such purposes in the future.

Debt service obligations could adversely affect our overall operating results, may require us to sell industrial properties and could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock and preferred stock.

Our business strategy contemplates the use of both non-recourse secured debt and unsecured debt to finance long-term growth. As of December 31, 2013, we had total debt outstanding of approximately $189.3 million, which consisted of our revolving credit facility, our $50.0 million term loan and mortgage loans payable. While over the long-term we intend to limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding shares of preferred stock to less than 40% of our total enterprise value, our governing documents contain no limitations on the amount of debt that we may incur, and our board of directors may change our financing policy at any time without stockholder approval. Over the long-term, we also intend to maintain a fixed charge coverage ratio in excess of 2.0x and limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness. Our board of directors may modify or eliminate these limitations at any time without the approval of our stockholders. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:

 

   

our cash flows from operations will be insufficient to make required payments of principal and interest;

 

   

our debt may increase our vulnerability to adverse economic and industry conditions;

 

   

we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes;

 

   

the terms of any refinancing will not be as favorable as the terms of the debt being refinanced; and

 

   

the use of leverage could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock and preferred stock.

If we incur additional debt in the future, including debt under our revolving credit facility, and do not have sufficient funds to repay such debt at maturity, it may be necessary to refinance the debt through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense would adversely affect our cash flows, and, consequently, cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of industrial properties on disadvantageous terms, potentially resulting in losses. We may place mortgages on our properties that we own to secure a revolving credit facility or other debt. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our industrial properties that may be pledged to secure our obligations to foreclosure. Also, covenants applicable to any future debt could impair our planned investment strategy and, if violated, result in a default.

Higher interest rates could increase debt service requirements on any floating rate debt that we incur and could reduce the amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future business opportunities, or other purposes. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions. Adverse economic conditions could cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our industrial properties in order to meet our debt service obligations at times which may not permit us to receive an attractive return on our investments.

 

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Our revolving credit facility, our $50.0 million term loan and certain of our existing mortgage loans payable contain, and we expect that our future indebtedness will contain, covenants that could limit our operations and our ability to make distributions to our stockholders.

We have a credit facility, which consists of a $100.0 million revolving credit facility and a $50.0 million term loan. We have agreed to guarantee the obligations of the borrower (a wholly-owned subsidiary) under our revolving credit facility and our term loan. Our revolving credit facility and our term loan and certain of our existing mortgage loans payable contain, and we expect that our future indebtedness will contain, financial and operating covenants, such as fixed charge coverage and debt ratios and other limitations that will limit or restrict our ability to make distributions or other payments to our stockholders and may restrict our investment activities. For example, our credit facility restricts distributions if we are in default and otherwise limits our fiscal year distributions to 95% of our funds from operations. The covenants in our debt agreements may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders. Failure to meet our financial covenants could result from, among other things, changes in our results of operations, the incurrence of debt or changes in general economic conditions. In addition, the failure of at least one of our chief executive officer and our president or any successors approved by the administrative agent to continue to be active in our day-to-day management constitutes an event of default under our credit facility. We have 120 days under our revolving credit facility to hire a successor executive reasonably satisfactory to the administrative agent in the event that both our chief executive officer and our president or any successors cease to be active in our management. If we violate covenants or if there is an event of default under our credit facility, our existing mortgage loans payable or in our future agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all.

In addition, any unsecured debt agreements we enter into may contain specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could materially and adversely affect our financial condition and results of operations.

We may acquire outstanding debt secured by an industrial property, which may expose us to risks.

We may acquire outstanding debt secured by an industrial property from lenders and investors if we believe we can acquire ownership of the underlying property in the near-term through foreclosure, deed-in-lieu of foreclosure or other means. However, if we do acquire such debt, borrowers may seek to assert various defenses to our foreclosure or other actions and we may not be successful in acquiring the underlying property on a timely basis, or at all, in which event we could incur significant costs and experience significant delays in acquiring such properties, all of which could adversely affect our financial performance and reduce our expected returns from such investments. In addition, we may not earn a current return on such investments particularly if the loan that we acquire is in default.

Adverse changes in our credit ratings could negatively affect our financing activity.

The credit ratings of the senior unsecured long-term debt that we may incur in the future and preferred stock we may issue in the future are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to obtain or maintain our credit ratings, and in the event our credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our future credit facilities and debt instruments. For example, if our credit ratings of any future senior unsecured long-term debt are downgraded to below investment grade levels, we may not be able to obtain or maintain extensions on certain of our then existing debt. Adverse changes in our credit ratings could negatively impact our refinancing activities, our ability to manage our debt maturities, our future growth, our financial condition, the market price of our stock, and our acquisition activities.

Failure to hedge effectively against interest rate changes may adversely affect results of operations.

We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap contracts and swap agreements. These agreements have costs and involve the risks that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such agreements are not legally enforceable. Hedging may reduce overall returns on our investments. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations.

Our property taxes could increase due to property tax rate changes or reassessment, which would impact our cash flows.

Even if we qualify as a REIT for federal income tax purposes, we will be required to pay some state and local taxes on our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are assessed or

 

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reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially. If the property taxes we pay increase, our cash flows will be impacted, and our ability to pay expected distributions to our stockholders could be adversely affected.

Actions of our joint venture partners could negatively impact our performance.

We may acquire and/or redevelop properties through joint ventures, limited liability companies and partnerships with other persons or entities when warranted by the circumstances. Such partners may share certain approval rights over major decisions. Such investments may involve risks not otherwise present with other methods of investment in real estate. We generally will seek to maintain sufficient control of our partnerships, limited liability companies and joint ventures to permit us to achieve our business objectives; however, we may not be able to do so, and the occurrence of one or more of the events described above could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock and our preferred stock.

If we invest in a limited partnership as a general partner, we could be responsible for all liabilities of such partnership.

In some joint ventures or other investments we may make, if the entity in which we invest is a limited partnership, we may acquire all or a portion of our interest in such partnership as a general partner. As a general partner, we could be liable for all the liabilities of such partnership. Additionally, we may be required to take our interests in other investments as a non-managing general partner. Consequently, we would be potentially liable for all such liabilities without having the same rights of management or control over the operation of the partnership as the managing general partner or partners may have. Therefore, we may be held responsible for all of the liabilities of an entity in which we do not have full management rights or control, and our liability may far exceed the amount or value of the investment we initially made or then had in the partnership.

The conflict of interest policies we have adopted may not adequately address all of the conflicts of interest that may arise with respect to our activities.

In order to avoid any actual or perceived conflicts of interest with our directors, officers or employees, we have adopted certain policies to specifically address some of the potential conflicts relating to our activities. In addition, our board of directors is subject to certain provisions of Maryland law, which are also designed to eliminate or minimize conflicts. Although under these policies the approval of a majority of our disinterested directors is required to approve any transaction, agreement or relationship in which any of our directors, officers or employees has an interest, there is no assurance that these policies will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that is favorable to us.

We may not be able to successfully operate our business.

We were organized in November 2009 and commenced operations on February 16, 2010. We may not be able to successfully operate our business or implement our operating policies and investment strategy. Furthermore, we may not be able to generate sufficient operating cash flows to pay our operating expenses, service our debt and maintain and make distributions to our stockholders. We may be unable to attract and retain qualified personnel, create effective operating and financial controls and systems or effectively manage our anticipated growth, any of which could have a material adverse effect on our business and our operating results.

Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting.

The design and effectiveness of our disclosure controls and procedures and internal controls over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, there can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal controls over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in our stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.

Volatility in the capital and credit markets could materially and adversely impact us.

The capital and credit markets have experienced extreme volatility and disruption in recent years, which has made it more difficult to borrow money or raise equity capital. Market volatility and disruption could hinder our ability to obtain new debt financing or refinance our maturing debt on favorable terms or at all. In addition, our future access to the equity markets could be limited. Any such financing or refinancing issues could materially and adversely affect us. Market turmoil and tightening of credit in recent years have also led to an increased lack of consumer confidence and widespread reduction of business activity generally, which also could materially and adversely impact us, including our ability to acquire and dispose of assets on favorable terms or at all. The volatility in capital and credit markets may also have a material adverse effect on the market price of our common stock and preferred stock.

 

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We may not acquire the industrial properties that we have entered into agreements to acquire or with respect to which we have entered into non-binding letters of intent.

We have entered into agreements with third-party sellers to acquire two industrial buildings containing an aggregate of approximately 258,769 square feet as more fully described under the heading “Contractual Obligations” in this Annual Report on Form 10-K. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions and there is no assurance that such proposed acquisitions, if completed, will be completed on the timeframe we expect. If we do not complete the acquisition of the properties under contract, we will have incurred expenses without our stockholders realizing any benefit from the acquisition of such properties.

Risks Related to the Real Estate Industry

Our performance and value are subject to general economic conditions and risks associated with our real estate assets.

The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, then our ability to pay distributions to our stockholders could be adversely affected. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances reduce the income from the property. Income from and the value of our properties may be adversely affected by:

 

   

downturns in national, regional and local economic conditions (particularly increases in unemployment);

 

   

the attractiveness of our properties to potential tenants and competition from other industrial properties;

 

   

changes in supply of or demand for similar or competing properties in an area;

 

   

bankruptcies, financial difficulties or lease defaults by the tenants of our properties;

 

   

changes in interest rates, availability and terms of debt financing;

 

   

changes in operating costs and expenses and our ability to control rents;

 

   

changes in, or increased costs of compliance with, governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder;

 

   

our ability to provide adequate maintenance and insurance;

 

   

changes in the cost or availability of insurance, including coverage for mold or asbestos;

 

   

unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;

 

   

periods of high interest rates;

 

   

tenant turnover;

 

   

general overbuilding or excess supply in the market area; and

 

   

disruptions in the global supply chain caused by political, regulatory or other factors including terrorism.

In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would adversely affect our financial condition and results of operations. Future terrorist attacks may result in declining economic activity, which could reduce the demand for, and the value of, our properties. To the extent that future attacks impact the tenants of our properties, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases. For these and other reasons, we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.

 

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Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties.

We compete with other developers, owners and operators of real estate, some of which own properties similar to our properties in the same markets and submarkets in which the properties we own are located. If our competitors offer space at rental rates below current market rates or below the rental rates we will charge the tenants of our properties, we may lose potential tenants, and we may be pressured to reduce our rental rates in order to retain tenants when such tenants’ leases expire. In addition, if our competitors sell assets similar to assets we intend to divest in the same markets and/or at valuations below our valuations for comparable assets, we may be unable to divest our assets at all or at favorable pricing or on favorable terms. As a result of these actions by our competitors, our financial condition, cash flows, cash available for distribution, trading price of our common stock and preferred stock and ability to satisfy our debt service obligations could be materially adversely affected.

Real estate investments are not as liquid as other types of assets, which may reduce economic returns to investors.

Real estate investments are not as liquid as other types of investments, and this lack of liquidity may limit our ability to react promptly to changes in economic, financial, investment or other conditions. In addition, significant expenditures associated with real estate investments, such as mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. In addition, we intend to comply with the safe harbor rules relating to the number of properties that can be disposed of in a year, the tax bases and the costs of improvements made to these properties, and meet other tests which enable a REIT to avoid punitive taxation on the sale of assets. Thus, our ability at any time to sell assets or contribute assets to property funds or other entities in which we have an ownership interest may be restricted. This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic, financial, investment or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the market price of, our common stock and preferred stock.

Uninsured or underinsured losses relating to real property may adversely affect our returns.

We will attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, hurricanes, fires, earthquakes and other natural disasters, acts of war, acts of terrorism or riots, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a property after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property. Any such losses could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock. In addition, we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure that any such sources of funding will be available to us for such purposes in the future.

We own properties in Los Angeles, the San Francisco Bay Area and Seattle, which are located in areas that are known to be subject to earthquake activity. Although we carry replacement-cost earthquake insurance on all of our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles that we believe are commercially reasonable, we may not be able to obtain coverage to cover all losses with respect to such properties on economically favorable terms, which could expose us to uninsured casualty losses. We intend to evaluate our earthquake insurance coverage annually in light of current industry practice.

We own properties located in areas which are known to be subject to hurricane and/or flood risk. Although we carry replacement-cost hurricane and/or flood hazard insurance on all of our properties located in areas historically subject to such activity, subject to coverage limitations and deductibles that we believe are commercially reasonable, we may not be able to obtain coverage to cover all losses with respect to such properties on economically favorable terms, which could expose us to uninsured casualty losses. We intend to evaluate our insurance coverage annually in light of current industry practice.

Contingent or unknown liabilities could adversely affect our financial condition.

We may own or acquire properties that are subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of any of these entities or properties, then we might have to pay substantial sums to settle it, which could adversely affect our cash flows. Unknown liabilities with respect to entities or properties acquired might include:

 

   

liabilities for clean-up or remediation of adverse environmental conditions;

 

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accrued but unpaid liabilities incurred in the ordinary course of business;

 

   

tax liabilities; and

 

   

claims for indemnification by the general partners, officers and directors and others indemnified by the former owners of the properties.

We may from time to time be subject to litigation that may negatively impact our cash flow, financial condition, results of operations and market price of our common stock.

We may from time to time be a defendant in lawsuits and regulatory proceedings relating to our business. Such litigation and proceedings may result in defense costs, settlements, fines or judgments against us, some of which may not be covered by insurance. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such litigation or proceedings. An unfavorable outcome could negatively impact our cash flow, financial condition, results of operations and trading price of our common stock.

Environmentally hazardous conditions may adversely affect our operating results.

Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, each person covered by applicable environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resource or property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated. A property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our properties, we may be exposed to such costs. The cost of defending against environmental claims, of compliance with environmental regulatory requirements or of remediating any contaminated property could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.

Environmental laws in the U.S. also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties may contain asbestos-containing building materials.

We invest in properties historically used for industrial, manufacturing and commercial purposes. Some of these properties contain, or may have contained, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our properties may be adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties may be on or are adjacent to or near other properties upon which others, including former owners or tenants of such properties, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances. As needed, we may obtain environmental insurance policies on commercially reasonable terms that provide coverage for potential environmental liabilities, subject to the policy’s coverage conditions and limitations. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk-adjusted return. In such an instance, we underwrite the costs of environmental investigation, clean-up and monitoring into the cost. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.

We generally obtain Phase I environmental site assessments on each property prior to acquiring it and we generally anticipate that the properties that we may acquire in the future may be subject to a Phase I or similar environmental assessment by independent environmental consultants at the time of acquisition. Phase I assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. Even if none of our environmental assessments of our properties reveal an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations taken as a whole, we cannot give any assurance that such conditions do not exist or may not arise in the future. Material environmental conditions, liabilities or compliance concerns may arise after the environmental assessment has been completed. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of such properties (such as releases from underground storage tanks), or by third parties unrelated to us.

 

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Costs of complying with governmental laws and regulations with respect to our properties may adversely affect our income and the cash available for any distributions.

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Tenants’ ability to operate and to generate income to pay their lease obligations may be affected by permitting and compliance obligations arising under such laws and regulations. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Leasing our properties to tenants that engage in industrial, manufacturing, and commercial activities will cause us to be subject to the risk of liabilities under environmental laws and regulations. In addition, the presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.

Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, the operations of the tenants of our properties, the existing condition of the land, operations in the vicinity of such properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect such properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines or damages we must pay will reduce our ability to make distributions and may reduce the value of our common stock. In addition, changes in these laws and governmental regulations, or their interpretation by agencies or the courts, could occur.

The impacts of climate-related initiatives at the U.S. federal and state levels remain uncertain at this time but could result in increased operating costs.

Government authorities and various interest groups are promoting laws and regulations that could limit greenhouse gas, or GHG, emissions due to concerns over contributions to climate change. The United States Environmental Protection Agency, or EPA, is moving to regulate GHG emissions from large stationary sources, including electricity producers, and mobile sources, through fuel efficiency and other requirements, using its existing authority under the Clean Air Act. Moreover, certain state and regional programs, such as those adopted by California and the Regional Greenhouse Gas Initiative of various northeastern states, are being implemented to require reductions in GHG emissions. Any additional taxation or regulation of energy use, including as a result of (i) the regulations that EPA has proposed or may propose in the future, (ii) state programs and regulations, or (iii) renewed GHG legislative efforts by future Congresses, could result in increased operating costs that we may not be able to effectively pass on to our tenants. In addition, any increased regulation of GHG emissions could impose substantial costs on our tenants. These costs include, for example, an increase in the cost of the fuel and other energy purchased by our tenants and capital costs associated with updating or replacing their trucks earlier than planned. Any such increased costs could impact the financial condition of our tenants and their ability to meet their lease obligations and to lease or re-lease our properties.

We are exposed to the potential impacts of future climate change and climate-change related risks.

We may be exposed to potential physical risks from possible future changes in climate. Our properties may be exposed to rare catastrophic weather events, such as severe storms or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase.

Compliance or failure to comply with the Americans with Disabilities Act and other similar regulations could result in substantial costs.

Under the Americans with Disabilities Act, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If we are required to make unanticipated expenditures to comply with the Americans with Disabilities Act, including removing access barriers, then our cash flows and the amounts available for distributions to our stockholders may be adversely affected. If we are required to make substantial modifications to our properties, whether to comply with the Americans with Disabilities Act or other changes in governmental rules and regulations, our financial condition, cash flows, results of operations, the market price of our shares of common stock and preferred stock and our ability to make distributions to our stockholders could be adversely affected.

 

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We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions, which could adversely affect the return on an investment in our common stock and our preferred stock.

We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our investment objectives. Our ability to dispose of properties on advantageous terms depends on factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the future disposition of our properties, we cannot assure our stockholders that we will be able to sell such properties at a profit in the future. Accordingly, the extent to which our stockholders will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions.

Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements. In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.

If we sell properties and provide financing to purchasers, defaults by the purchasers would adversely affect our cash flows.

If we decide to sell any of our properties, we presently intend to sell them for cash. However, if we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders and result in litigation and related expenses. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed of.

Risks Related to Our Organizational Structure

Our board of directors may change significant corporate policies without stockholder approval.

Our investment, financing, borrowing and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, will be determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of the board of directors without a vote of our stockholders. In addition, the board of directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal and regulatory requirements, including the listing standards of the NYSE. A change in these policies could have an adverse effect on our financial condition, results of operations, cash flows, per share trading price of our common stock and preferred stock and ability to satisfy our debt service obligations and to pay distributions to our stockholders.

We could increase the number of authorized shares of stock and issue stock without stockholder approval.

Subject to applicable legal and regulatory requirements, our charter authorizes our board of directors, without stockholder approval, to increase the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of such classified or unclassified shares. Although our board of directors has no such intention at the present time, it could establish a series of preferred stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting or deterring a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

   

“Business Combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting shares) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter may impose special appraisal rights and special stockholder voting requirements on these combinations; and

 

   

“Control Share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

 

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We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of our board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, in the future, only upon the approval of our stockholders, our board of directors may by resolution elect to opt in to the business combination provisions of the MGCL and we may, only upon the approval of our stockholders, by amendment to our bylaws, opt in to the control share provisions of the MGCL.

In addition, the provisions of our charter on removal of directors and the advance notice provisions of our bylaws could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest. Likewise, if our company’s board of directors were to opt in to the business combination provisions of the MGCL or the provisions of Title 3, Subtitle 8 of the MGCL, or if the provision in our bylaws opting out of the control share acquisition provisions of the MGCL were rescinded by our board of directors and our stockholders, these provisions of the MGCL could have similar anti-takeover effects.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she satisfies his or her duties to us and our stockholders. Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

   

actual receipt of an improper benefit or profit in money, property or services; or

 

   

a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter will authorize us to obligate our company, and our bylaws will require us, to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited. In addition, we may be obligated to advance the defense costs incurred by our directors and executive officers, and may, in the discretion of our board of directors, advance the defense costs incurred by our employees and other agents in connection with legal proceedings.

Risks Related to Our Status as a REIT

Failure to qualify as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to stockholders.

We believe that our organization and method of operation has enabled and will continue to enable us to meet the requirements for qualification and taxation as a REIT. However, we cannot assure you that we will qualify as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.

If we fail to qualify as a REIT in any taxable year we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:

 

   

we would not be allowed a deduction for distributions paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates;

 

   

we could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

   

unless we are entitled to relief under statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

In addition, if we fail to qualify as a REIT, we will no longer be required to pay distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our common stock.

 

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Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Any of these taxes would decrease cash available for distributions to stockholders.

REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.

In order to maintain our REIT status and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding capital gains. In addition, we will be subject to corporate income tax to the extent we distribute less than 100% of our net taxable income including any net capital gain. We intend to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligation to the extent consistent with our business objectives. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.

Dividends payable by REITs generally do not qualify for reduced tax rates.

Currently, the maximum tax rate for qualified dividends payable to individual U.S. stockholders is (i) 15%; or (ii) 20% if such individual’s modified adjusted gross income exceeds certain thresholds. Dividends payable by REITs, however, are generally not eligible for such reduced rates. However, to the extent such dividends are attributable to certain dividends that we receive from a taxable REIT subsidiary, such dividends generally will be eligible for the reduced rates that apply to qualified dividend income. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

We may in the future choose to pay dividends in our stock instead of cash, in which case stockholders may be required to pay income taxes in excess of the cash dividends they receive.

Although we have no current intention to do so, we may, in the future, distribute taxable dividends that are payable in cash and common stock at the election of each stockholder or distribute other forms of taxable stock dividends. Taxable stockholders receiving such dividends or other forms of taxable stock dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive investments.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the total voting power of the outstanding securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries, or TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must

 

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correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Our relationship with any TRS will be limited, and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. While we have no current intention to own any interest in a TRS, we may own any such interest in the future. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A domestic TRS will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

Any TRS of ours will pay federal, state and local income tax on its taxable income, and its after-tax net income will be available (but not required) to be distributed to us. We anticipate that the aggregate value of any TRS stock and securities owned by us will be significantly less than 25% of the value of our total assets (including the TRS stock and securities). Furthermore, we will monitor the value of our investments in TRSs for the purpose of ensuring compliance with the rule that no more than 25% of the value of our assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter). In addition, we will scrutinize all of our transactions with TRSs for the purpose of ensuring that they are entered into on arm’s-length terms in order to avoid incurring the 100% excise tax described above. No assurance, however, can be given that we will be able to comply with the 25% limitation on ownership of TRS stock and securities on an ongoing basis so as to maintain our REIT qualification or avoid application of the 100% excise tax imposed on certain non-arm’s-length transactions.

The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to federal income tax and reduce distributions to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to be qualified as a REIT. If we cease to be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock and preferred stock.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.

Risks Related to Our Common Stock and Our Preferred Stock

Level of cash distributions, market interest rates and other factors may affect the value of our common stock and our preferred stock.

The market value of the equity securities of a REIT is based upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and upon the real estate market value of the underlying assets. Our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flows for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock. In addition, the price of our common stock and our preferred stock will be influenced by the dividend yield on the common stock and preferred stock relative to market interest rates and the dividend yields of other REITs. An increase in market interest rates, which are currently at low levels relative to historical rates, could cause the market price of our common stock or our preferred stock to go down. The trading price of the shares of common stock and preferred stock will also depend on many other factors, which may change from time to time, including:

 

   

the market for similar securities;

 

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the attractiveness of REIT securities in comparison to the securities of other companies, taking into account, among other things, the higher tax rates imposed on dividends paid by REITs;

 

   

government action or regulation;

 

   

our issuance of debt or preferred equity securities;

 

   

changes in earnings estimates by analysts and our ability to meet analysts’ earnings estimates;

 

   

general economic conditions; and

 

   

our financial condition, performance and prospects.

The number of shares of our common stock available for future sale could adversely affect the market price of our common stock and our preferred stock and have a dilutive effect to our existing stockholders.

Sales of substantial amounts of shares of our common stock and preferred stock in the public market or the perception that such sales might occur could adversely affect the market price of the shares of our common stock and preferred stock, respectively. The vesting of any restricted stock granted to certain directors, executive officers and other employees under our 2010 Equity Incentive Plan, the issuance of our common stock in connection with property, portfolio or business acquisitions and other issuances of our common stock and preferred stock could have an adverse effect on the market price of our common stock and preferred stock. Future sales of shares of our common stock or preferred stock may be dilutive to existing stockholders.

The market price and trading volume of our common stock and preferred stock may be volatile.

The market price of our common stock and preferred stock may be volatile. In addition, the trading volume in our common stock and preferred stock may fluctuate and cause significant price variations to occur. If the market price of our common stock or preferred stock declines significantly, you may be unable to resell your shares at or above the price you paid for such shares. We cannot assure you that the market price of our common stock or preferred stock will not fluctuate or decline significantly in the future.

Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock and preferred stock include:

 

   

our financial condition, performance, liquidity and prospects;

 

   

actual or anticipated variations in our quarterly operating results or distributions;

 

   

changes in our funds from operations (as defined by NAREIT and discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this Annual Report on Form 10-K) or earnings;

 

   

publication of research reports about us or the real estate industry;

 

   

changes in earnings estimates by analysts;

 

   

our ability to meet analysts’ earnings estimates;

 

   

increases in market interest rates that lead purchasers of our shares to demand a higher yield;

 

   

changes in market valuations of similar companies;

 

   

adverse market reaction to any additional debt we incur in the future;

 

   

additions or departures of key management personnel;

 

   

the market for similar securities issued by REITs;

 

   

actions by institutional stockholders;

 

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speculation in the press or investment community;

 

   

our compliance with generally accepted accounting principles;

 

   

our compliance with applicable laws and regulations and the listing requirements of the New York Stock Exchange;

 

   

the realization of any of the other risk factors presented in this Annual Report on Form 10-K; and

 

   

general market, including capital market and real estate market, and economic conditions.

Future offerings of debt, which would be senior to our common stock and preferred stock upon liquidation, and/or preferred stock which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our common stock or preferred stock, as applicable.

We have a credit facility that consists of a $100.0 million revolving credit facility and a $50.0 million term loan to finance acquisitions and for working capital requirements with total outstanding borrowings of $81.0 million as of December 31, 2013. In addition, as of December 31, 2013, we had total mortgage loans payable of approximately $108.3 million. We have agreed to guarantee the obligations of the borrower (a wholly-owned subsidiary) under our credit facility. Upon liquidation, holders of our debt securities and shares of preferred stock, including our Series A Preferred Stock, and lenders with respect to other borrowings, including our existing mortgage loans payable, will receive distributions of our available assets prior to the holders of our common stock. In addition, holders of our debt securities and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our Series A Preferred Stock. Additional equity offerings may dilute the holdings of our existing stockholders and/or reduce the market price of our common stock or our preferred stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock has a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay a dividend or make another distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock or preferred stock and diluting their stock holdings in us.

We may be unable to generate sufficient cash flows from our operations to make distributions to our stockholders at any time in the future.

Our ability to make distributions to our stockholders may be adversely affected by the risk factors described in this Form 10-K. We may not generate sufficient income to make distributions to our stockholders. Our board of directors has the sole discretion to determine the timing, form and amount of any distributions to our stockholders. Our board of directors will make determinations regarding distributions based upon, among other factors, our financial performance, any debt service obligations, any debt covenants, and capital expenditure requirements. Among the factors that could impair our ability to make distributions to our stockholders are:

 

   

our inability to realize attractive risk-adjusted returns on our investments;

 

   

unanticipated expenses or reduced revenues that reduce our cash flow or non-cash earnings; and

 

   

decreases in the value of our industrial properties that we own.

As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will increase or even be maintained over time, any of which could materially and adversely affect the market price of our shares of common stock and preferred stock.

Our shares of common stock rank junior to our Series A Preferred Stock.

Our shares of common stock rank junior to our Series A Preferred Stock with respect to dividends and upon liquidation, dissolution or winding up, which could limit or restrict our ability to make distributions on our common stock. In certain circumstances, following a change of control of our company, holders of our Series A Preferred Stock will be entitled to convert their shares of Series A Preferred Stock into a specified number of shares of common stock, subject to our option to redeem the Series A Preferred Stock for cash at $25.00 per share plus accrued and unpaid dividends. Holders of our shares of common stock are not entitled to preemptive rights or other protections against dilution. We may in the future attempt to increase our capital resources by making additional offerings of equity securities, including additional classes or series of preferred stock, which would likely have preferences with respect to dividends or upon dissolution that are senior to our shares of common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors, many of which are beyond our control, we cannot

predict or estimate the amount, timing or nature of any future offerings. Thus, our common stockholders bear the risk of our future offerings reducing the market price of our shares of common stock and diluting their interest in us.

 

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The change of control conversion feature of the Series A Preferred Stock may make it more difficult for a party to take over our company or discourage a party from taking over our company.

Upon the occurrence of a change of control (as defined in the Articles Supplementary for the Series A Preferred Stock) the result of which our common stock or the common securities of the acquiring or surviving entity are not listed on the NYSE, NYSE Amex or NASDAQ, holders of the Series A Preferred Stock will have the right (unless, prior to the change of control conversion date, we have provided or provide notice of our election to redeem the Series A Preferred Stock) to convert some or all of their Series A Preferred Stock into shares of our common stock (or equivalent value of alternative consideration). Upon such a conversion, the holders will be limited to a maximum number of shares of our common stock equal to the share cap of 3.2446 multiplied by the number of shares of Series A Preferred Stock converted. The change of control conversion feature of the Series A Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for our company or of delaying, deferring or preventing certain change of control transactions of our company under circumstances that stockholders may otherwise believe are in their best interests.

Our ability to pay dividends is limited by the requirements of Maryland law.

Our ability to pay dividends on our stock is limited by the laws of the State of Maryland. Under applicable Maryland law, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter provides otherwise, the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we generally may not make a distribution on our stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences senior to those of our outstanding stock.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

As of December 31, 2013, we owned 96 buildings aggregating approximately 6.8 million square feet. The properties are located in Los Angeles; Northern New Jersey/New York City; San Francisco Bay Area; Seattle; Miami; and Washington D.C./Baltimore. As of December 31, 2013, our properties were approximately 92.8% leased to 214 tenants, the largest of which accounted for approximately 7.2% of our total annualized base rent. Our focus is on the ownership of several types of industrial real estate, including warehouse/distribution (approximately 86.4% of our total portfolio square footage as of December 31, 2013), flex (including light industrial and R&D) (approximately 11.1%) and trans-shipment (approximately 2.5%). See “Our Investment Strategy – Industrial Facility General Characteristics” in this Annual Report on Form 10-K for a general description of these types of industrial real estate. We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. See our “Consolidated Financial Statements, Schedule III-Real Estate Investments and Accumulated Depreciation” in this Annual Report on Form 10-K, for a detailed listing of our properties.

The following table summarizes by market our investments in real estate as of December 31, 2013:

 

Market

   Number of
Buildings
     Rentable
Square Feet
     % of Total     Occupancy % as of
December 31, 2013
    Annualized
Base Rent
(000’s) 1
     % of Total     Annualized
Base Rent
Per
Occupied
Square
Foot
     Weighted
Average
Remaining
Lease Term
(Years) 2
     Gross Book
Value
(000’s)
 

Los Angeles

     13         1,136,422         16.7     98.6   $ 6,945         15.2   $ 6.20         1.7       $ 121,129   

Northern New Jersey/New York City

     36         2,151,969         31.7     93.9     16,386         35.8     8.11         3.5         230,743   

San Francisco Bay Area

     15         742,783         10.9     85.8     6,617         14.5     10.38         5.7         95,187   

Seattle

     5         492,794         7.3     89.9     2,515         5.5     5.68         4.5         40,735   

Miami

     17         1,248,243         18.4     94.8     7,721         16.9     6.53         3.1         93,783   

Washington, D.C./Baltimore

     10         1,017,917         15.0     88.0     5,541         12.1     6.18         5.4         70,262   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total/Weighted Average

     96         6,790,128         100.0     92.8   $ 45,725         100.0   $ 7.26         3.9       $ 651,839   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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1

Annualized base rent is calculated as monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2013, multiplied by 12.

2

Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of December 31, 2013, weighted by the respective square footage.

The following table summarizes our capital expenditures incurred during the three months and years ended December 31, 2013 and 2012 (dollars in thousands):

 

     For the Three Months Ended December 31,      For the Year Ended
December 31,
 
     2013      2012      2013      2012  

Building improvements

   $ 1,578      $ 1,179      $ 5,441      $ 7,020  

Tenant improvements

     509        190        1,904        1,638  

Leasing commissions

     950        102        2,633        742  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures (1)

   $ 3,037      $ 1,471      $ 9,978      $ 9,400  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1

Includes approximately $2.4 million and $0.8 million for the three months ended December, 2013 and 2012, respectively, and approximately $5.7 million and $4.7 million for the years ended December 31, 2013 and 2012, respectively, related to leasing acquired vacancy and renovation projects (stabilization capital) at seven and nine properties, respectively, for the three months and year ended December 31, 2013 and four properties for the three months and year ended December 31, 2012.

The following table summarizes the anticipated lease expirations for leases in place at December 31, 2013, without giving effect to the exercise of renewal options or termination rights, if any, at or prior to the scheduled expirations:

 

Year

   Rentable
Square Feet  1
     % of Total
Rentable
Square Feet
    Annualized
Base Rent
(000’s) 1, 2
     % of Total
Annualized
Base Rent

1
 

2014

     993,779        14.6   $ 5,966        11.8

2015

     1,709,361        25.2     10,717        21.2

2016

     455,394        6.7     4,020        7.9

2017

     337,716        5.0     3,083        6.1

2018

     683,517        10.1     6,451        12.7

2019+

     2,121,212        31.2     20,393        40.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     6,300,979        92.8   $ 50,630        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

1

Includes leases that expire on or after December 31, 2013 and month-to-month leases totaling 319,623 square feet.

2

Annualized base rent is calculated as monthly base rent per the leases at expiration, excluding any partial or full rent abatements, as of December 31, 2013, multiplied by 12.

Our ability to re-lease or renew expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. As of December 31, 2013, leases representing approximately 14.6% of the total rentable square footage of our portfolio are scheduled to expire during the year ending December 31, 2014. In general, we continue to see improving demand for industrial space in most of our markets. We currently expect that on average, the rental rates we are likely to achieve on any new (re-leased) or renewed leases for our 2014 expirations will generally be flat to slightly above the rates currently being paid for the same space. Our past performance may not be indicative of future results, and we cannot assure you that leases will be renewed or that our properties will be re-leased at all or at rental rates equal to or slightly above the current average rental rates. Further, re-leased/renewed rental rates in a particular market may not be consistent with rental rates across our portfolio as a whole and re-leased/renewed rental rates for particular properties within a market may not be consistent with rental rates across our portfolio within a particular market, in each case due to a number of factors, including local real estate conditions, local supply and demand for industrial space, the condition of the property, the impact of leasing incentives, including free rent and tenant improvements and whether the property, or space within the property, has been redeveloped.

Our industrial properties are typically subject to leases on a “triple net basis,” in which tenants pay their proportionate share of real estate taxes, insurance and operating costs, or are subject to leases on a “modified gross basis,” in which tenants pay expenses over certain threshold levels. In addition, approximately 77.4% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years. We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing outstanding accounts receivable balances, and as provided under the respective lease

agreements, review the tenant’s financial condition periodically as appropriate. As needed, we hold discussions with the tenant’s management about their business and we conduct site visits of the tenant’s operations.

 

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Table of Contents

Our top 20 tenants based on annualized base rent as of December 31, 2013 are as follows:

 

    

Tenant

   Leases      Rentable
Square Feet
     % of Total
Rentable
Square Feet
    Annualized
Base Rent
(000’s) 1
     % of Total
Annualized
Base Rent
 

1

   FedEx Corporation      5        241,783        3.6   $ 3,283        7.2

2

   Cepheid      3        171,707        2.5     2,742        6.0

3

   H.D. Smith Wholesale Drug Company      1        211,418        3.1     2,070        4.5

4

   Home Depot      1        413,092        6.1     1,809        4.0

5

   YRC Worldwide      2        61,252        0.9     1,288        2.8

6

   Miami International Freight Solutions      1        192,454        2.8     1,139        2.5

7

   Avborne Accessory Group      1        137,594        2.0     1,028        2.2

8

   Northrop Grumman Systems      1        103,200        1.5     998        2.2

9

   Sohnen Enterprises      1        161,610        2.4     994        2.2

10

   Banah International Group 2      1        301,983        4.4     906        2.0

11

   United States Government      1        71,400        1.1     690        1.5

12

   Monarch Electric Company      1        92,913        1.4     687        1.5

13

   JAM’N Logistics      1        110,336        1.6     671        1.5

14

   International Paper Company      1        137,872        2.0     653        1.5

15

   Maines Paper & Food Service      1        98,745        1.5     642        1.4

16

   United Parcel Service      3        79,712        1.2     615        1.3

17

   Vista Color      1        74,786        1.1     600        1.3

18

   Creative Touch Interiors      1        84,961        1.3     598        1.3

19

   Con-way Freight      1        57,682        0.8     585        1.3

20

   Bakeco      1        68,989        1.0     569        1.2
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
  

Total

     29        2,873,489        42.3   $ 22,567        49.4
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

1

Annualized base rent is calculated as monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2013, multiplied by 12.

2

Represents a month-to-month lease related to the tenant default described under the heading “2013 Developments” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.

As of December 31, 2013, 15 of our 53 properties with a net investment book value of approximately $218.0 million were encumbered by mortgage loans payable totaling approximately $108.3 million, which bear interest at a weighted average fixed annual rate of 4.54%.

 

Item 3. Legal Proceedings.

We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

 

Item 4. Mine Safety Disclosures.

Not Applicable.

 

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Table of Contents

PART II

 

Item 5. Market for Our Common Stock and Related Stockholder Matters.

Market Information

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “TRNO”. The following table sets forth, for the indicated periods, the high and low sale prices for our common stock, as reported on the NYSE and the per share dividends declared:

 

Year

   High      Low      Dividend  

2013

        

First Quarter

   $ 18.03      $ 15.59      $ 0.12  

Second Quarter

     20.20        17.78        0.13  

Third Quarter

     19.21        17.00        0.13  

Fourth Quarter

     18.63        16.71        0.13  

2012

        

First Quarter

   $ 15.25      $ 13.75      $ 0.10  

Second Quarter

     15.11        13.40        0.12  

Third Quarter

     16.10        14.64        0.12  

Fourth Quarter

     15.79        14.20        0.12  

As of February 1, 2014, there were approximately 2,039 holders of record of shares of our common stock. This number does not include stockholders for which shares are held in “nominee” or “street” name.

Distribution Policy

We intend to pay regular quarterly distributions when, as and if authorized by our board of directors and declared by us. Our ability to make distributions to our stockholders also will depend on our levels of retained cash flows, which we intend to use as a source of investment capital. In order to qualify for taxation as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  (i) 90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain); plus

 

  (ii) 90% of the excess of our after-tax net income, if any, from foreclosure property over the tax imposed on such income by the Code; less

 

  (iii) the sum of certain items of non-cash income.

Generally, we expect to distribute 100% of our REIT taxable income so as to avoid the income and excise tax on undistributed REIT taxable income. However, we cannot assure you as to our ability to sustain those distributions.

The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including:

 

   

actual results of operations;

 

   

our level of retained cash flows;

 

   

any debt service requirements;

 

   

capital expenditure requirements for our properties;

 

   

our property dispositions;

 

   

our taxable income;

 

   

the annual distribution requirement under the REIT provisions of the Code;

 

   

the amount required to declare and pay in cash or set aside for the payment of dividends on our Series A Preferred Stock for all past dividend periods that have ended;

 

   

our operating expenses;

 

   

restrictions on the availability of funds under Maryland law; and

 

   

other factors that our board of directors may deem relevant.

 

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Table of Contents

In addition, our credit facility has a covenant limiting our maximum REIT distribution paid to a percentage of our funds from operations (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures”) before acquisition costs of 95% for each fiscal year (subject to distribution payments necessary to preserve our REIT status) beginning in fiscal 2012. The percentage limitation was 110% for fiscal 2010 and 100% for fiscal 2011. To the extent that, in respect of any calendar year, cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable share distribution or distribution of debt securities. Income as computed for purposes of the tax rules described above will not necessarily correspond to our income as determined for financial reporting purposes.

Distributions to our stockholders generally are taxable to our stockholders as ordinary income; however, because a significant portion of our investments are equity ownership interests in industrial properties, which generate depreciation and other non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital, although our current intention is to limit the level of such return of capital.

The following table sets forth the cash dividends paid or payable during the years ended December 31, 2013 and 2012:

 

For the Three Months Ended

  Security   Dividend
per Share
    Declaration Date   Record Date   Date Paid

March 31, 2013

  Common stock   $ 0.120000     February 19, 2013   April 5, 2013   April 19, 2013

March 31, 2013

  Preferred stock   $ 0.484375     February 19, 2013   March 11, 2013   March 31, 2013

June 30, 2013

  Common stock   $ 0.130000     May 7, 2013   July 5, 2013   July 19, 2013

June 30, 2013

  Preferred stock   $ 0.484375     May 7, 2013   June 11, 2013   July 1, 2013

September 30, 2013

  Common stock   $ 0.130000     August 6, 2013   October 7, 2013   October 21, 2013

September 30, 2013

  Preferred stock   $ 0.484375     August 6, 2013   September 11, 2013   September 30, 2013

December 31, 2013

  Common stock   $ 0.130000     November 5, 2013   December 31, 2013   January 14, 2014

December 31, 2013

  Preferred stock   $ 0.484375     November 5, 2013   December 11, 2013   December 31, 2013

For the Three Months Ended

  Security   Dividend
per Share
    Declaration Date   Record Date   Date Paid

March 31, 2012

  Common stock   $ 0.100000     February 21, 2012   April 5, 2012   April 19, 2012

June 30, 2012

  Common stock   $ 0.120000     May 4, 2012   July 9, 2012   July 23, 2012

September 30, 2012

  Common stock   $ 0.120000     August 3, 2012   October 5, 2012   October 26, 2012

September 30, 2012

  Preferred stock   $ 0.387500     August 3, 2012   September 10, 2012   October 1, 2012

December 31, 2012

  Common stock   $ 0.120000     November 6, 2012   December 31, 2012   January 14, 2013

December 31, 2012

  Preferred stock   $ 0.484375     November 6, 2012   December 10, 2012   December 31, 2012

Issuer Purchases of Equity Securities

 

Period

   (a) Total Number of
Shares of Common
Stock Purchased
    (b) Average Price Paid
per Common Share
     (c) Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
   (d) Maximum
Number (or
Approximate Dollar
Value) of Shares that
May Yet be
Purchased Under the
Plan or Program

October 1, 2013 - October 31, 2013

     —        $ —         N/A    N/A

November 1, 2013 - November 30, 2013

     326  (1)      17.16      N/A    N/A

December 1, 2013 - December 31, 2013

     —          —         N/A    N/A
  

 

 

   

 

 

    

 

  

 

     326     $ 17.16      N/A    N/A

 

1

Represents shares of common stock surrendered by employees to the Company to satisfy such employees’ tax withholding obligations in connection with the vesting of restricted stock.

 

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Table of Contents

Performance Graph

The following graph compares the change in the cumulative total stockholder return on our common stock during the period from February 10, 2010 (the first day our stock began trading on the NYSE) to December 31, 2013 with the cumulative total return of the Standard and Poor’s 500 Stock Index, the MSCI U.S. REIT Index and the FTSE NAREIT Equity Industrial Index. The return

shown on the graph is not necessarily indicative of future performance. The comparison assumes that $100 was invested on February 10, 2010 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.

 

LOGO

The performance graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing, except to the extent that the Company specifically incorporates it by reference into such filing.

 

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Table of Contents
Item 6. Selected Financial Data.

The following table sets forth selected financial data derived from our audited consolidated financial statements as of December 31, 2013, 2012, 2011 and 2010, for the years ended December 31, 2013, 2012 and 2011 and the period from February 16, 2010 (commencement of operations) to December 31, 2010 and should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K beginning on page F-1 and with Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (dollars in thousands, except share and per share amounts):

 

     For the Year Ended
December 31,
    Period from
February 16, 2010
(Commencement of
Operations) to
December 31, 2010
 
     2013     2012     2011    

Operating Data

        

Total revenues

   $ 45,529     $ 29,335     $ 14,182     $ 3,105  

Total costs and expenses

     36,973       25,931       17,375       8,629   

Income (loss) from continuing operations

     2,451       (2,031     (5,807     (5,984

Income from discontinued operations

     1,412       2,059       2,078       594   

Gain on sales of real estate investments

     2,778       4,037       —          —     

Net and comprehensive income (loss) available to common stockholders, net of preferred stock dividends

     3,056       2,437       (3,729     (5,390

Earnings per Common Share - Basic and Diluted:

        

Income (loss) from continuing operations available to common stockholders, net of preferred stock dividends

   $ (0.05   $ (0.28   $ (0.64   $ (0.63

Income from discontinued operations

     0.20       0.47       0.23       0.04  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders, net of preferred stock dividends

   $ 0.15     $ 0.19     $ (0.41   $ (0.59
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.51     $ 0.46     $ 0.40     $ —     

Dividends declared per preferred share

     1.94       0.87       —          —     

Basic and Diluted Weighted Average Common Shares Outstanding

     21,011,276       13,135,440       9,161,805       9,112,000  

Other Data

        

Funds from operations 1

   $ 12,689     $ 7,435     $ 1,056     $ (4,209

Basic and diluted FFO per common share 1

     0.60       0.57       0.12       (0.46

Cash flows provided by (used in):

        

Operating activities

   $ 13,495     $ 9,749     $ 2,149     $ (2,019

Investing activities

     (201,865     (160,180     (105,884     (116,581

Financing activities

     189,429       153,112       49,731       175,852  

Balance Sheet Data

        

Investments in real estate at cost

   $ 651,839     $ 445,348     $ 264,584     $ 136,363  

Total assets

     645,324       445,318       267,049       194,382  

Total debt

     189,313       177,044       99,315       17,676  

Total stockholders’ equity

     438,835       255,274       159,011       165,499  

 

 

1

See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures,” in this Annual Report on Form 10-K for a reconciliation to net and comprehensive income (loss), net of preferred stock dividends and a discussion of why we believe funds from operations, or FFO, is a useful supplemental measure of operating performance, ways in which investors might use FFO when assessing our financial performance, and FFO’s limitations as a measurement tool.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion in conjunction with the sections of this Annual Report on Form 10-K entitled “Risk Factors”, “Forward-Looking Statements”, “Business” and our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We acquire, own and operate industrial real estate in six major coastal U.S. markets: Los Angeles; Northern New Jersey/New York City; San Francisco Bay Area; Seattle; Miami; and Washington, D.C./Baltimore. We invest in several types of industrial real estate, including warehouse/distribution (approximately 86.4% of our total portfolio square footage as of December 31, 2013), flex (including light industrial and R&D) (approximately 11.1%) and trans-shipment (approximately 2.5%). We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. As of December 31, 2013, we owned 96 buildings aggregating approximately 6.8 million square feet, which we purchased for an aggregate purchase price of approximately $615.8 million, including the assumption of mortgage loans payable of approximately $55.1 million, which includes mortgage premiums of approximately $1.5 million. As of December 31, 2013, our properties were approximately 92.8% leased to 214 tenants, the largest of which accounted for approximately 7.2% of our total annualized base rent. We are an internally managed Maryland corporation and elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2010.

Our Investment Strategy

We invest in industrial properties in six major coastal U.S. markets: Los Angeles; Northern New Jersey/New York City; San Francisco Bay Area; Seattle; Miami; and Washington, D.C./Baltimore. We invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and R&D) and trans-shipment. We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate.

 

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We selected our target markets by drawing upon the experiences of our management team investing and operating in over 50 global industrial markets located in North America, Europe and Asia and also in anticipation of trends in logistics patterns resulting from population changes, regulatory and physical constraints, potential long term increases in carbon prices and other factors. We believe that our target markets have attractive long term investment attributes. We target assets with characteristics that include, but are not limited to, the following:

 

   

Located in high population coastal markets;

 

   

Close proximity to transportation infrastructure (such as sea ports, airports, highways and railways);

 

   

Situated in supply-constrained submarkets with barriers to new industrial development, as a result of physical and/or regulatory constraints;

 

   

Functional and flexible layout that can be modified to accommodate single and multiple tenants;

 

   

Acquisition price at a discount to the replacement cost of the property;

 

   

Potential for enhanced return through re-tenanting or operational and physical improvements; and

 

   

Opportunity for higher and better use of the property over time.

In general, we prefer to utilize local third party property managers for day-to-day property management and as a source of acquisition opportunities. We believe outsourcing property management is cost effective and provides us with operational flexibility. We currently manage one of our properties directly and may directly manage other properties in the future if we determine such direct property management is in our best interest.

We have no current intention to acquire undeveloped industrial land or to pursue ground up development. However, we may pursue redevelopment opportunities of properties that we own or acquire adjacent land to expand our existing facilities.

We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties. We may also acquire industrial properties through the acquisition of other corporations or entities that own industrial real estate. We will opportunistically target investments in debt secured by industrial real estate that would otherwise meet our investment criteria with the intention of ultimately acquiring the underlying real estate. We currently do not intend to target specific percentages of holdings of particular types of industrial properties. This expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions.

The properties we acquire may be stabilized (fully leased) or unstabilized (have near term lease expirations or be partially or fully vacant). During the period from February 16, 2010 to December 31, 2013, we acquired 28 unstabilized properties of which 14 have been stabilized.

We may sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value and/or the market value of the property is significantly greater than its estimated replacement cost. Capital from such sales will be reinvested into properties that are expected to provide better prospective returns or returned to shareholders. We have disposed of two properties since inception.

2013 Developments

Acquisition Activity

During the year ended December 31, 2013, we acquired 30 industrial buildings containing 1,916,394 square feet for a total purchase price of approximately $205.5 million and land adjacent to one of our existing properties for a purchase price of approximately $5.0 million. The properties were acquired from unrelated third parties using existing cash on hand and net of borrowings under our revolving credit facility and our $50.0 million term loan. The following table sets forth the industrial buildings we acquired during the year ended December 31, 2013:

 

Property Name

  

Location

  

Acquisition Date

   Number of
Buildings
     Square Feet      Purchase Price
(in thousands) 1
     Stabilized
Cap Rate  2
 

107th Avenue

   Medley, FL    March 6, 2013      1         49,284      $ 5,095        6.3

SeaTac 8th Ave

   Burien, WA    March 21, 2013      1         68,583        6,450        5.6

240 Littlefield Avenue

   South San Francisco, CA    April 3, 2013      1         67,800        8,400        6.4

101st Road

   Medley, FL    April 26, 2013      1         52,536        6,000        7.0

Americas Gateway

   Doral, FL    May 22, 2013      6         306,924        23,725        6.7

Route 100

   Elkridge, MD    June 12, 2013      2         348,610        16,650        8.0

1 Dodge Drive

   West Caldwell, NJ    June 20, 2013      1         92,913        6,775        9.0

17 Madison

   Fairfield, NJ    July 23, 2013      1         30,792        2,840        8.5

550 Delancy

   Newark, NJ    July 25, 2013      1         52,086        15,000        5.6

Melanie Lane

   East Hanover, NJ    September 30, 2013      3         166,735        20,000        7.4

Michele/Meadow

   Carlstadt, NJ    October 17, 2013      2         90,225        9,875        5.7

60 Ethel

   Piscataway, NJ    November 6, 2013      2         104,930        7,000        7.4

8215 Dorsey

   Jessup, MD    November 15, 2013      1         88,438        6,000        6.7

4230 Forbes

   Lanham, MD    December 11, 2013      1         55,877        5,600        10.0

14611 Broadway

   Gardena, CA    December 19, 2013      1         40,000        6,000        6.5

3601 Pennsy

   Landover, MD    December 23, 2013      1         71,400        7,000        5.8

JFK Airgate

   Queens, NY    December 27, 2013      4         229,261        53,111        5.3
        

 

 

    

 

 

    

 

 

    

 

 

 

Total/Weighted Average

           30         1,916,394      $ 205,521        6.5
        

 

 

    

 

 

    

 

 

    

 

 

 

 

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1

Excludes intangible liabilities totaling approximately $1.4 million and 130 Interstate expansion land adjacent to one of the Company’s properties acquired totaling approximately $5.0 million. The total aggregate investment was approximately $212.4 million.

2

Stabilized cap rates are calculated, at the time of acquisition, as annualized cash basis net operating income for the property stabilized to market occupancy (generally 95%) divided by the total acquisition cost for the property. Total acquisition cost basis for the property includes the initial purchase price, the effects of marking assumed debt to market, buyer’s due diligence and closing costs, estimated near-term capital expenditures and leasing costs necessary to achieve stabilization. We define cash basis net operating income for the property as net operating income excluding straight-line rents and amortization of lease intangibles. These stabilized cap rates are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in this Annual Report on Form 10-K.

Disposition Activity

During the year ended December 31, 2013, we sold one property located in Totowa, New Jersey for a sales price of approximately $19.0 million, resulting in a gain of approximately $2.8 million.

Public Follow-on Offerings

On February 19, 2013, we completed a public follow-on offering of 5,750,000 shares of our common stock at a price per share of $16.60, including 90,325 shares that were sold in the offering to our executive and senior officers and members of our board of directors. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering, after deducting the underwriting discount and offering costs, were approximately $90.8 million. We used approximately $65.4 million of the net proceeds to repay outstanding borrowings under our revolving credit facility and the remaining net proceeds to invest in industrial properties and for general business purposes.

On July 11, 2013, we completed a public follow-on offering of 5,750,000 shares of our common stock at a price per share of $18.25, including 43,250 shares that were sold in the offering to our executive and senior officers and members of our board of directors. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering were approximately $99.9 million after deducting the underwriting discount and offering costs of approximately $5.0 million. We used approximately $6.5 million of the net proceeds to repay outstanding borrowings under our revolving credit facility and the remaining net proceeds to acquire industrial properties and for general business purposes.

Term Loan and Amendment to Senior Credit Agreement

On January 17, 2013, we entered into a Second Amended and Restated Senior Credit Agreement (the “Facility”) with KeyBank National Association, as administrative agent and as a lender, KeyBanc Capital Markets, as a lead arranger, and PNC Bank, National Association, Union Bank, N.A. and Regions Bank as lenders to add a five-year $50.0 million term loan (the “Term Loan”) and amend our existing $100.0 million revolving credit facility.

The $50.0 million Term Loan maturity date under the Facility is January 16, 2018. The amendment extends the maturity date for the $100.0 million revolving credit facility under the Facility to January 2016 and provides for one 12-month extension option

 

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exercisable by us, subject, among other things, to there being an absence of an event of default under the Facility and to our payment of an extension fee. Interest on the Facility, including the Term Loan, continues to generally be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greater of the administrative agent’s prime rate plus 1.00%, 0.50% above the federal funds effective rate, or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Facility. The applicable LIBOR margin was reduced to a range from 1.65% to 2.65% depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value. The aggregate amount of the Facility may be increased to a total of up to $300.0 million, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. The Facility continues to be guaranteed by the Company and by substantially all of the borrower’s current and to-be-formed subsidiaries that own a “borrowing base property.” In addition, the Facility continues to be secured by a pledge of the equity interests of the borrower (a wholly-owned subsidiary of the Company) in the subsidiaries that hold each of the borrowing base properties. Outstanding borrowings under the Facility are limited to the lesser of (i) the sum of the $100.0 million revolving credit facility amount and the $50.0 million Term Loan amount or (ii) 60% of the value of the borrowing base properties. As of December 31, 2013, there were approximately $31.0 million of borrowings outstanding under the revolving credit facility under the Facility and $50.0 million of borrowings outstanding under the Term Loan.

Tenant Default

On January 29, 2013, we filed a one count eviction action against Banah International Group (“Banah”), our tenant at 215 10th Avenue located in Hialeah, FL for failure to pay December 2012 and January 2013 rent. As a result, we incurred charges during the year ended December 31, 2012 of approximately $45,000 related to the bad-debt reserve of outstanding accounts receivable, approximately $1.1 million related to the write-off of deferred rent receivable and approximately $0.4 million related to the write-off of capitalized leasing commissions, net of deferred lease commissions payable. On February 21, 2013, the state court entered a default judgment for possession against Banah. Later that same day, Banah filed a Chapter 11 bankruptcy petition and has subsequently extended the deadline to affirm or reject the lease while working on a plan of reorganization. On December 18, 2013, Banah filed its proposed plan for reorganization which calls for a successor entity to assume the lease, pending plan confirmation by the Bankruptcy Court. Banah has paid lease payments in accordance with the lease for the period from February 21, 2013 through February 28, 2014. It cannot be determined currently if Banah will successfully emerge from bankruptcy and assume the lease, or if they can continue paying rent during the bankruptcy. Therefore, at December 31, 2013, the lease is recorded as a month-to-month lease and revenue is recognized as cash is received. Any ultimate recovery of damages, including past due rent, is undetermined at this time.

Dividend and Distribution Activity

The following table sets forth the cash dividends paid or payable per share during the year ended December 31, 2013:

 

For the Three Months Ended

   Security    Dividend
per Share
     Declaration Date    Record Date    Date Paid

March 31, 2013

   Common stock    $ 0.120000      February 19, 2013    April 5, 2013    April 19, 2013

March 31, 2013

   Preferred stock    $ 0.484375      February 19, 2013    March 11, 2013    March 31, 2013

June 30, 2013

   Common stock    $ 0.130000      May 7, 2013    July 5, 2013    July 19, 2013

June 30, 2013

   Preferred stock    $ 0.484375      May 7, 2013    June 11, 2013    July 1, 2013

September 30, 2013

   Common stock    $ 0.130000      August 6, 2013    October 7, 2013    October 21, 2013

September 30, 2013

   Preferred stock    $ 0.484375      August 6, 2013    September 11, 2013    September 30, 2013

December 31, 2013

   Common stock    $ 0.130000      November 5, 2013    December 31, 2013    January 14, 2014

December 31, 2013

   Preferred stock    $ 0.484375      November 5, 2013    December 11, 2013    December 31, 2013

Recent Developments

Acquisition Activity

Subsequent to December 31, 2013, we acquired one industrial building containing 62,004 square feet for a total purchase price of approximately $6.6 million. The property was acquired from an unrelated third party using borrowings under our credit facility, net of an assumed mortgage loan payable with a total principal amount of approximately $2.8 million with a fixed annual interest rate of 5.09%. The following table sets forth the wholly-owned industrial property we acquired subsequent to December 31, 2013:

 

Property Name

   Location    Acquisition Date    Number of
Buildings
     Square Feet      Purchase Price
(in thousands)
 

SW 34th Street

   Renton, WA    February 11, 2014      1         62,004       $ 6,600  

 

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Dividend and Distribution Activity

On November 5, 2013, our board of directors declared a cash dividend in the amount of $0.13 per share of the Company’s common stock payable on January 14, 2014 to the stockholders of record as of the close of business on December 31, 2013.

On November 5, 2013, our board of directors declared a cash dividend in the amount of $0.484375 per share of the Company’s Series A Preferred Stock payable on December 31, 2013 to the preferred stockholders of record as of the close of business on December 11, 2013.

Contractual Commitments

Currently we have two contracts with third-party sellers to acquire two industrial properties as described under the heading “Contractual Obligations” in this Annual Report on Form 10-K. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions.

Outlook

We believe that industrial rents have stopped falling in our markets and in most cases are rising and will continue to rise in 2014. However, new speculative development has begun in a growing number of markets. This new development is likely to slow potential rent growth from what it would be without such new development. We see a growing set of acquisition opportunities and seek to increase our total acquisitions in 2014 over 2013. Over the intermediate term of the next five to six years, we seek to grow our portfolio to approximately $3.0 billion of assets to optimize our operating efficiency, increase our shareholder liquidity and position us to achieve an investment grade credit rating to broaden our access to capital. We remain mindful, however, that it is per share, rather than aggregate, results that matter. We believe in the long-term operating prospects of our functional, infill coastal assets. We believe in sound balance sheet management. We believe in the benefits of our market-leading corporate governance and exceptionally aligned executive management compensation.

The primary source of our operating revenues and earnings is rents received from tenants under operating leases at our properties, including reimbursements from tenants for certain operating costs. We seek long-term earnings growth primarily through increasing rents and operating income at existing properties and acquiring properties in our six target markets. We intend to seek to grow our portfolio by utilizing one or more of cash on hand, future borrowings under our credit facility, future sales of common or preferred equity and future placements of secured or unsecured debt.

Inflation

Although the U.S. economy has been experiencing relatively modest inflation rates recently, and a wide variety of industries and sectors are affected differently by changing commodity prices, inflation has not had a significant impact on us in our markets of operation. Most of our leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. In addition, approximately 61.6% of our total rentable square feet expire within five years which enables us to seek to replace existing leases with new leases at the then-existing market rate.

Financial Condition and Results of Operations

We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants. Approximately 77.4% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years.

Our primary cash expenses consist of our property operating expenses, which include: real estate taxes, repairs and maintenance, management expenses, insurance, utilities, general and administrative expenses, which include compensation costs, office expenses, professional fees and other administrative expenses, acquisition costs, which include third-party costs paid to brokers and consultants, and interest expense, primarily on mortgage loans and our Facility.

Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions at various times during the course of such periods. The results of operations of any acquired property are included in our financial statements as of the date of its acquisition.

The analysis of our results below for the years ended December 31, 2013 and 2012 includes the changes attributable to same store properties. The same store pool for the comparison of the 2013 and 2012 fiscal years includes all properties that were owned and

 

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in operation as of December 31, 2013 and since January 1, 2012 and excludes properties that were either disposed of or held for sale to a third party. As of December 31, 2013, the same store pool consisted of 44 buildings aggregating approximately 3.1 million square feet. As of December 31, 2013, the non-same store properties, which we acquired or disposed of during the course of 2012 and 2013, consisted of 52 buildings aggregating approximately 3.7 million square feet. As of December 31, 2013, the consolidated same store pool occupancy was approximately 96.8% compared to approximately 95.0% as of December 31, 2012.

Our future financial condition and results of operations, including rental revenues, straight-line rents and amortization of lease intangibles, may be impacted by the acquisitions of additional properties, and expenses may vary materially from historical results.

Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012:

 

     For the Year Ended December 31,              
     2013     2012     $ Change     % Change  
     (Dollars in thousands)        

Rental revenues

        

Same store

   $ 18,779     $ 17,889     $ 890       5.0

2012 and 2013 Acquisitions

     17,092       5,168       11,924       230.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total rental revenues

     35,871       23,057       12,814       55.6

Tenant expense reimbursements

        

Same store

     5,630       5,012       618       12.3

2012 and 2013 Acquisitions

     4,028       1,266       2,762       218.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total tenant expense reimbursements

     9,658       6,278       3,380       53.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     45,529       29,335       16,194       55.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses

        

Same store

     7,163       6,965       198       2.8

2012 and 2013 Acquisitions

     5,608       1,597       4,011       251.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property operating expenses

     12,771       8,562       4,209       49.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income (1)

        

Same store

     17,246       15,936       1,310       8.2

2012 and 2013 Acquisitions

     15,512       4,837       10,675       220.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating income

   $ 32,758     $ 20,773     $ 11,985       57.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Other costs and expenses

        

Depreciation and amortization

     12,481       8,728       3,753       43.0

General and administrative

     8,423       6,403       2,020       31.5

Acquisition costs

     3,298       2,238       1,060       47.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other costs and expenses

     24,202       17,369       6,833       39.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense)

        

Interest and other income

     109       37       72       194.6

Interest expense, including amortization

     (6,214     (5,472     (742     13.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and expenses

     (6,105     (5,435     (670     12.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     4,190       6,096       (1,906     (31.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,641     $ 4,065     $ 2,576       63.4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1

Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a reconciliation of net operating income and same store net operating income from net income and a discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance.

Revenues. Total revenues increased approximately $16.2 million for the year ended December 31, 2013 compared to the prior year due primarily to property acquisitions during 2012 and 2013. Approximately $1.5 million of the increase is from same store revenues, of which approximately $1.1 million is due to the write-off related to the tenant default in 2012 as described under the heading “2013 Developments – Tenant Default.” For the quarter and year ended December 31, 2013, approximately $0.4 million and $2.4 million, respectively, was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants.

Property operating expenses. Total property operating expenses increased approximately $4.2 million during the year ended December 31, 2013 compared to the same period from the prior year. The increase in total property operating expenses was due to an increase of approximately $4.0 million attributable to property acquisitions during 2012 and 2013 and an increase in same store property operating expenses of approximately $0.2 million compared to the same period from the prior year due to non-reimbursable legal expenses related to the tenant default described under the heading “2013 Developments – Tenant Default” and an increase in real estate tax expense and snow removal expenses.

 

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Depreciation and amortization. Depreciation and amortization increased approximately $3.8 million during the year ended December 31, 2012 compared to the same period from the prior year due to property acquisitions during 2012 and 2013.

General and administrative expenses. General and administrative expenses increased approximately $2.0 million for the year ended December 31, 2013 compared to the same period from the prior year due primarily to an increase in the accrued LTIP awards of approximately $0.9 million as compared to the prior year and increased compensation expense and professional fees as compared to the prior year period.

Acquisition costs. Acquisition costs increased by approximately $1.1 million for the year ended December 31, 2013 from the prior year due to a higher volume of property acquisitions during the year ended December 31, 2013 as compared to the prior year.

Interest and other income. Interest and other income increased approximately $0.1 million for the year ended December 31, 2013 compared to the same period from the prior year due primarily to insurance proceeds received in 2013 in excess of expenses due to Hurricane Sandy.

Interest expense, including amortization. Interest expense increased approximately $0.7 million for the year ended December 31, 2013 compared to the prior year due primarily to the assumption and origination of mortgage loans payable during 2012 and 2013, as well as borrowings under our Facility, including the Term Loan.

The analysis of our results below for the years ended December 31, 2012 and 2011 includes the changes attributable to same store properties. The same store pool for the comparison of the 2012 and 2011 fiscal years includes all properties that were owned and in operation as of December 31, 2012 and since January 1, 2011 and excludes properties that were either disposed of or held for sale to a third party. As of December 31, 2012, the same store pool consisted of 30 buildings aggregating approximately 2.0 million square feet. As of December 31, 2012, the non-same store properties, which we acquired or disposed of during the course of 2011 and 2012, consisted of 37 buildings aggregating approximately 3.1 million square feet. As of December 31, 2012, the consolidated same store pool occupancy was approximately 93.0% compared to approximately 89.8% as of December 31, 2011.

Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011:

 

     For the Year Ended December 31,              
     2012     2011     $ Change     % Change  
     (Dollars in thousands)        

Rental revenues

        

Same store

   $ 8,946     $ 7,466     $ 1,480       1.0

2011 and 2012 Acquisitions

     14,111       3,331       10,780       323.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total rental revenues

     23,057       10,797       12,260       113.6

Tenant expense reimbursements

        

Same store

     2,533       2,591       (58     (2.2 )% 

2011 and 2012 Acquisitions

     3,745       794       2,951       371.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total tenant expense reimbursements

     6,278       3,385       2,893       85.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     29,335       14,182       15,153       106.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating expenses

        

Same store

     4,283       4,780       (497     (10.4 )% 

2011 and 2012 Acquisitions

     4,279       922       3,357       364.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property operating expenses

     8,562       5,702       2,860       50.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income (1)

        

Same store

     7,196       5,277       1,919       36.4

2011 and 2012 Acquisitions

     13,577       3,203       10,374       323.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating income

   $ 20,773     $ 8,480     $ 12,293       145.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Other costs and expenses

        

Depreciation and amortization

     8,728       4,285       4,443       103.7

General and administrative

     6,403       5,407       996       18.4

Acquisition costs

     2,238       1,981       257       13.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other costs and expenses

     17,369       11,673       5,696       48.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Income (Expense)

        

Interest and other income (expense)

     37       (2     39       n/a   

Interest expense, including amortization

     (5,472     (2,612     (2,860     109.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and expenses

     (5,435     (2,614     (2,821     107.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     6,096       2,078       4,018       193.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,065     $ (3,729   $ 7,794       n/a   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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1

Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a reconciliation of net operating income and same store net operating income from net income (loss) and a discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance.

Revenues. Total revenues increased approximately $15.2 million for the year ended December 31, 2012 compared to the prior year. Approximately $1.5 million, net of approximately $1.1 million due to the write-off related to the tenant default, of this increase is from same store revenues mainly due to increased occupancy, as same store consolidated occupancy at year end increased to 93.0% as of December 31, 2012 as compared to 89.8% from the same period in 2011. The remaining increase in total revenues is due to property acquisitions during 2011 and 2012. For the quarter and year ended December 31, 2012, approximately $0.4 million and $1.9 million, respectively, was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants.

Property operating expenses. Total property operating expenses increased approximately $2.9 million during the year ended December 31, 2012 compared to the same period from the prior year. The increase in total property operating expenses was due to an increase of approximately $3.4 million attributable to property acquisitions during 2011 and 2012, which was partially offset by a decrease in same store property operating expenses of approximately $0.5 million. The decrease in same store property operating expenses was primarily due to a decrease in snow removal and security expenses from the prior year period.

Depreciation and amortization. Depreciation and amortization increased approximately $4.4 million, including approximately $0.3 million of write-offs related to the tenant default, during the year ended December 31, 2012 compared to the same period from the prior year due to property acquisitions during 2011 and 2012.

General and administrative expenses. General and administrative expenses increased approximately $1.0 million for the year ended December 31, 2012 compared to the prior year due primarily to an increase in compensation expense related to a higher number of employees in 2012.

Acquisition costs. Acquisition costs increased by approximately $0.3 million for the year ended December 31, 2012 from the prior year due to a higher volume of property acquisitions during the year ended December 31, 2012 as compared to the prior year.

Interest and other income (expense). Interest and other income (expense) increased approximately $39,000 for the year ended December 31, 2012 compared to the prior year.

Interest expense, including amortization. Interest expense increased approximately $2.9 million for the year ended December 31, 2012 compared to the prior year due primarily to the assumption and origination of mortgage loans payable during 2011 and 2012, as well as borrowings under our Facility and term loan payable.

Liquidity and Capital Resources

The primary objective of our financing strategy is to maintain financial flexibility with a conservative capital structure using retained cash flows, long-term debt and the issuance of common and perpetual preferred stock to finance our growth. Over the long-term, we intend to:

 

   

limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 40% of our total enterprise value;

 

   

maintain a fixed charge coverage ratio in excess of 2.0x;

 

   

limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness; and

 

   

have staggered debt maturities that are aligned to our expected average lease term (5-7 years), positioning us to re-price parts of our capital structure as our rental rates change with market conditions.

 

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We intend to preserve a flexible capital structure with a long-term goal to obtain an investment grade rating and be in a position to issue unsecured debt and additional perpetual preferred stock. Prior to attaining an investment grade rating, we intend to primarily utilize non-recourse debt secured by individual properties or pools of properties with a targeted maximum loan-to-value of 65% at the time of financing, or recourse bank term loans, credit facilities and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our Facility. We believe that our net cash provided by operations will be adequate to fund operating requirements, pay interest on any borrowings and fund distributions in accordance with the REIT requirements of the federal income tax laws. In the near-term, we intend to fund future investments in properties with term loans, mortgages, borrowings under our Facility, perpetual preferred and common stock issuance and, from time to time, property sales. We expect to meet our long-term liquidity requirements, including with respect to other investments in industrial properties, property acquisitions and scheduled debt maturities, through borrowings under our Facility, periodic issuances of common stock, perpetual preferred stock, and long-term secured and unsecured debt, and with proceeds from the disposition of properties. The success of our acquisition strategy may depend, in part, on our ability to obtain and borrow under our credit facility and to access additional capital through issuances of equity and debt securities.

On January 13, 2012, we completed a public follow-on offering of 4,000,000 shares of our common stock, including 93,000 shares purchased by our senior management and directors, at a price per share of $14.25. On February 13, 2012, we sold an additional 61,853 shares of our common stock at a price per share of $14.25 upon the exercise by the underwriters of their option to purchase additional shares. The net proceeds of the offering, after deducting the underwriting discount and estimated offering costs, were approximately $54.7 million. We used approximately $41.0 million of the net proceeds to repay outstanding borrowings under our credit facility on January 13, 2012 and the remaining net proceeds were used to invest in industrial properties and for general business purposes.

On July 19, 2012, we completed a public offering of 1,840,000 shares of our Series A Preferred Stock, including 240,000 shares sold upon the exercise by the underwriters of their option to purchase additional shares, at a price per share of $25.00. The net proceeds of the offering were approximately $44.3 million after deducting the underwriting discount and other offering expenses of approximately $1.7 million. We used the net proceeds to reduce outstanding borrowings under our Facility. Dividends on the Series A Preferred Stock are payable when, as and if authorized by our board of directors quarterly in arrears on or about the last day of March, June, September and December of each year. The Series A Preferred Stock ranks, with respect to dividend rights and rights upon our liquidation, dissolution or winding-up, senior to our common stock.

Generally, we may not redeem the Series A Preferred Stock prior to July 19, 2017, except in limited circumstances relating to our ability to qualify as a REIT, and pursuant to a special optional redemption related to a specified change of control (as defined in the articles supplementary for the Series A Preferred Stock). On and after July 19, 2017, we may, at our option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends (whether or not authorized or declared) up to but excluding the redemption date.

On February 19, 2013, we completed a public follow-on offering of 5,750,000 shares of our common stock at a price per share of $16.60, including 90,325 shares that were sold in the offering to our executive and senior officers and members of our board of directors. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering, after deducting the underwriting discount and offering costs, were approximately $90.8 million. We used approximately $65.4 million of the net proceeds to repay outstanding borrowings under our revolving credit facility and the remaining net proceeds to invest in industrial properties and for general business purposes.

On July 11, 2013, we completed a public follow-on offering of 5,750,000 shares of our common stock at a price per share of $18.25, including 43,250 shares that were sold in the offering to our executive and senior officers and members of our board of directors. No underwriting discount or commission was paid on the shares sold to such officers and directors. The net proceeds of the offering were approximately $99.9 million after deducting the underwriting discount and offering costs of approximately $5.0 million. We used approximately $6.5 million of the net proceeds to repay outstanding borrowings under our revolving credit facility and the remaining net proceeds to acquire industrial properties and for general business purposes.

On January 17, 2013, we entered into a Second Amended and Restated Senior Credit Agreement with KeyBank National Association, as administrative agent and as a lender, KeyBanc Capital Markets, as a lead arranger and PNC Bank, National Association, Union Bank, N.A. and Regions Bank as lenders (collectively the “Lenders”) to add a five-year $50.0 million Term Loan and amend the existing $100.0 million revolving credit facility. The five-year $50.0 million Term Loan maturity date under the Facility is January 16, 2018. The aggregate amount of the Facility may be increased to a total of up to $300.0 million, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. The maturity date of the revolving credit facility under the Facility is January 2016, with one 12-month extension option exercisable by us, subject,

 

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among other things, to there being an absence of an event of default under the Facility and to the payment of an extension fee. Outstanding borrowings under the Facility are limited to the lesser of (i) the sum of the $100.0 million revolving credit facility and the $50.0 million Term Loan amount or (ii) 60.0% of the value of the borrowing base properties. The Facility is secured by a pledge of the borrower’s equity interests in the subsidiaries that hold each of the borrowing base properties. Interest on the Facility, including the Term Loan, is generally to be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greater of the administrative agent’s prime rate plus 1.00%, 0.50% above the federal funds effective rate, or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Facility. The applicable LIBOR margin will range from 1.65% to 2.65% (1.65% as of December 31, 2013), depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value. The Facility requires quarterly payments of an annual unused facility fee in an amount equal to 0.25% or 0.35% depending on the unused portion of the Facility. The Facility is guaranteed by us and by substantially all of the borrower’s current and to-be-formed subsidiaries that own a “borrowing base property.” The Facility includes a series of financial and other covenants that we must comply with in order to borrow under the Facility. As of December 31, 2013, there were approximately $31.0 million of borrowings under the revolving credit facility under the Facility and $50.0 million of borrowings outstanding under the Term Loan and 19 properties were in the borrowing base. As of December 31, 2012, there were $65.4 million of borrowings outstanding under the Facility. We were in compliance with the covenants under the Facility at December 31, 2013 and 2012.

As of December 31, 2013 and 2012, we had outstanding mortgage loans payable of approximately $108.3 million and $111.6 million, respectively, and held cash and cash equivalents totaling approximately $7.0 million and $5.9 million, respectively.

The following table summarizes our debt maturities, principal payments, market capitalization, capitalization ratios, Adjusted EBITDA, interest coverage, fixed charge coverage and debt ratios as of and for the year ended December 31, 2013 (dollars in thousands):

 

      Credit
Facility
    Term Loan     Mortgage
Loans
Payable
    Total Debt  

2014

   $ —        $ —        $ 12,161     $ 12,161  

2015

     —          —          21,879       21,879  

2016

     31,000       —          6,649       37,649  

2017

     —          —          1,916       1,916  

2018

     —          50,000       1,910       51,910  

Thereafter

     —          —          63,153       63,153  
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     31,000       50,000       107,668       188,668  

Unamortized net premiums

     —          —          645       645  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt

   $ 31,000     $ 50,000     $ 108,313     $ 189,313  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted Average Interest Rate

     1.8     1.8     4.5     3.4

 

     Shares
Outstanding1
     Market Price 2      Market Value  

Common Stock

     24,990,120      $ 17.70      $ 442,325   

Preferred Stock ($25.00 per share liquidation preference)

           46,000   
        

 

 

 

Total Equity

           488,325   
        

 

 

 

Total Market Capitalization

         $ 677,638   
        

 

 

 

Total Debt-to-Total Investments in Properties 3

           29.0

Total Debt-to-Total Market Capitalization 4

           27.9

Total Debt and Preferred Stock-to-Total Market Capitalization 5

           34.7

Floating Rate Debt as a % of Total Debt

           42.8

Adjusted EBITDA 6

         $ 28,094   

Interest Coverage 7

           4.5 x   

Fixed Charge Coverage 8

           2.8 x   

Total Debt-to-Adjusted EBITDA 9

           5.8 x   

Total Debt and Preferred Stock-to-Adjusted EBITDA 10

           7.2 x   

Weighted Average Maturity (years)

           4.0   

 

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Table of Contents

 

1

Includes 156,568 shares of unvested restricted stock as of December 31, 2013.

2

Closing price of our shares of common stock on the New York Stock Exchange on December 31, 2013 in dollars per share.

3

Total debt-to-total investments in properties is calculated as total debt, including premiums, divided by total investments in properties as of December 31, 2013.

4

Total debt-to-total market capitalization is calculated as total debt, including premiums, divided by total market capitalization as of December 31, 2013.

5

Total debt and preferred stock-to-total market capitalization is calculated as total debt, including premiums, plus preferred stock at liquidation preference, divided by total market capitalization as of December 31, 2013.

6

Earnings before interest, taxes, gains (losses) from sales of property, depreciation and amortization, acquisition costs and stock-based compensation (“Adjusted EBITDA”) for the year ended December 31, 2013. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a reconciliation of Adjusted EBITDA from net income (loss) and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.

7

Interest coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a reconciliation of Adjusted EBITDA from net income (loss) and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.

8

Fixed charge coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization plus preferred stock dividends. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a reconciliation of Adjusted EBITDA from net income (loss) and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.

9

Total debt-to-Adjusted EBITDA is calculated as total debt, including premiums, divided by annualized Adjusted EBITDA. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a reconciliation of Adjusted EBITDA from net income (loss) and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.

10

Total debt and preferred stock-to-Adjusted EBITDA is calculated as total debt, including premiums, plus preferred stock divided by annualized Adjusted EBITDA. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a reconciliation of Adjusted EBITDA from net income (loss) and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.

The following table sets forth the cash dividends paid or payable per share during the years ended December 31, 2013 and 2012.

 

For the Three Months Ended

   Security    Dividend
per Share
     Declaration Date    Record Date    Date Paid

March 31, 2013

   Common stock    $ 0.120000      February 19, 2013    April 5, 2013    April 19, 2013

March 31, 2013

   Preferred stock    $ 0.484375      February 19, 2013    March 11, 2013    March 31, 2013

June 30, 2013

   Common stock    $ 0.130000      May 7, 2013    July 5, 2013    July 19, 2013

June 30, 2013

   Preferred stock    $ 0.484375      May 7, 2013    June 11, 2013    July 1, 2013

September 30, 2013

   Common stock    $ 0.130000      August 6, 2013    October 7, 2013    October 21, 2013

September 30, 2013

   Preferred stock    $ 0.484375      August 6, 2013    September 11, 2013    September 30, 2013

December 31, 2013

   Common stock    $ 0.130000      November 5, 2013    December 31, 2013    January 14, 2014

December 31, 2013

   Preferred stock    $ 0.484375      November 5, 2013    December 11, 2013    December 31, 2013

 

For the Three Months Ended

   Security    Dividend
per Share
     Declaration Date    Record Date    Date Paid

March 31, 2012

   Common stock    $ 0.100000      February 21, 2012    April 5, 2012    April 19, 2012

June 30, 2012

   Common stock    $ 0.120000      May 4, 2012    July 9, 2012    July 23, 2012

September 30, 2012

   Common stock    $ 0.120000      August 3, 2012    October 5, 2012    October 26, 2012

September 30, 2012

   Preferred stock    $ 0.387500      August 3, 2012    September 10, 2012    October 1, 2012

December 31, 2012

   Common stock    $ 0.120000      November 6, 2012    December 31, 2012    January 14, 2013

December 31, 2012

   Preferred stock    $ 0.484375      November 6, 2012    December 10, 2012    December 31, 2012

 

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Sources and Uses of Cash

Our principal sources of cash are cash from operations, borrowings under mortgage loans payable, draws on our Facility and common and preferred stock issuances. Our principal uses of cash are asset acquisitions, debt service, capital expenditures, operating costs, corporate overhead costs and common and preferred stock dividends.

Cash From Operating Activities. Net cash provided by operating activities totaled approximately $13.5 million for the year ended December 31, 2013 compared to approximately $9.7 million for the year ended December 31, 2012. This increase in cash provided by operating activities is attributable to additional cash flows generated from properties acquired during 2012 and 2013.

Cash From Investing Activities. Net cash used in investing activities was $201.9 million and $160.2 million, respectively, for the years ended December 31, 2013 and 2012, which consists primarily of cash paid for property acquisitions of $209.3 million and $166.0 million, respectively, and additions to buildings and improvements and leasing costs of approximately $9.5 million and $10.2 million, respectively, offset by proceeds from sales of real estate investments of approximately $17.5 million and $16.3 million, respectively.

Cash From Financing Activities. Net cash provided by financing activities was $189.4 million for the year ended December 31, 2013, which consists primarily of $190.7 million in net common stock issuance proceeds and net borrowings on the Facility of approximately $15.6 million less approximately $13.2 million in dividend payments.Net cash provided by financing activities was $153.1 million for the year ended December 31, 2012, which consists primarily of $98.9 million in net common and preferred stock issuance proceeds and borrowings on mortgage loans and the Facility of approximately $222.6 million, less payments on the Facility and Term Loan of approximately $158.3 million.

Critical Accounting Policies

Below is a discussion of the accounting policies that we believe are critical. We consider these policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements.

Capitalization of Costs. We capitalize costs directly related to the redevelopment, expansion and renovation of our investment in real estate. Costs associated with redevelopment, expansion or renovation projects are capitalized as incurred. If the project is abandoned, these costs are expensed during the period in which the redevelopment project is abandoned. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes and insurance, if appropriate. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress. In the event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. Costs incurred for maintaining and repairing properties, which do not extend their useful lives, are expensed as incurred.

Interest is capitalized based on actual capital expenditures from the period when redevelopment or expansion commences until the asset is ready for its intended use, at the weighted average borrowing rate during the period.

Property Acquisitions. Upon acquisition of a property, which are accounted for as business combinations, we estimate the fair value of acquired tangible assets (consisting generally of land, buildings and improvements) and intangible assets and liabilities (consisting generally of the above and below-market leases and the origination value of all in-place leases). We determine fair values using replacement cost, estimated cash flow projections and other valuation techniques and applying appropriate discount and capitalization rates based on available market information. Mortgage loans assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the date of acquisition. Acquisition-related costs associated with business combinations are expensed as incurred.

The fair value of the tangible assets is determined by valuing the property as if it were vacant. Land values are derived from current comparative sales values, when available, or management’s estimates of the fair value based on market conditions and the experience of our management team. Building and improvement values are calculated as replacement cost less depreciation, or

 

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management’s estimates of the fair value of these assets using discounted cash flows analyses or similar methods. The fair value of the above and below-market leases is based on the present value of the difference between the contractual amounts to be received pursuant to the acquired leases (using a discount rate that reflects the risks associated with the acquired leases) and our estimate of the market lease rates measured over a period equal to the remaining term of the leases plus the term of any below-market fixed rate renewal options. The above and below-market lease values are amortized to rental revenues over the remaining initial term plus the term of any below-market fixed rate renewal options that are considered bargain renewal options of the respective leases. The origination value of in-place leases is based on costs to execute similar leases including commissions and other related costs. The origination value of in-place leases also includes real estate taxes, insurance and an estimate of lost rent revenue at market rates during the estimated time required to lease up the property from vacant to the occupancy level at the date of acquisition.

Impairment. Carrying values for financial reporting purposes are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of a property may not be fully recoverable. Examples of such events or changes in circumstances may include classifying an asset to be held for sale, changing the intended hold period or when an asset remains vacant significantly longer than expected. The intended use of an asset either held for sale or held for use can significantly impact how impairment is measured. If an asset is intended to be held for the long-term, the recoverability is based on the undiscounted future cash flows. If the asset carrying value is not supported on an undiscounted future cash flow basis, then the asset carrying value is measured against the lower of cost or the present value of expected cash flows over the expected hold period. An impairment charge to earnings is recognized for the excess of the asset’s carrying value over the lower of cost or the present values of expected cash flows over the expected hold period. If an asset is intended to be sold, impairment is determined using the estimated fair value less costs to sell. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions, among other things, regarding current and future economic and market conditions and the availability of capital. We determine the estimated fair values based on its assumptions regarding rental rates, lease-up and holding periods, as well as sales prices. When available, current market information is used to determine capitalization and rental growth rates. If available, current comparative sales values may also be used to establish fair value. When market information is not readily available, the inputs are based on our understanding of market conditions and the experience of our management team. Actual results could differ significantly from our estimates. The discount rates used in the fair value estimates represent a rate commensurate with the indicated holding period with a premium layered on for risk.

Revenue Recognition. We record rental revenue from operating leases on a straight-line basis over the term of the leases and maintains an allowance for estimated losses that may result from the inability of our tenants to make required payments. If tenants fail to make contractual lease payments that are greater than our allowance for doubtful accounts, security deposits and letters of credit, then we may have to recognize additional doubtful account charges in future periods. We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing their financial condition periodically as appropriate. Each period we review our outstanding accounts receivable, including straight-line rents, for doubtful accounts and provide allowances as needed. We also record lease termination fees when a tenant has executed a definitive termination agreement with us and the payment of the termination fee is not subject to any conditions that must be met or waived before the fee is due to us. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination will be deferred and recognized over the term of such tenant’s occupancy.

Tenant expense reimbursement income includes payments and amounts due from tenants pursuant to their leases for real estate taxes, insurance and other recoverable property operating expenses and is recognized as revenues during the same period the related expenses are incurred.

Income Taxes. We elected to be taxed as a REIT under the Code and operate as such beginning with our taxable year ended December 31, 2010. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT.

Stock-Based Compensation and Other Long-Term Incentive Compensation. We follow the provisions of ASC 718, Compensation-Stock Compensation, to account for our stock-based compensation plan, which requires that the compensation cost relating to stock-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued. We have adopted the 2010 Equity Incentive Plan, which provides for the grant of restricted stock awards, performance share awards, unrestricted shares or any combination of the foregoing. Stock-based compensation is recognized as a general and administrative expense in the financial statements and measured at the fair value of the award on the date of grant. We estimate the forfeiture rate based on historical experience as well as expected behavior. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the stock-based award.

 

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In addition, we have awarded long-term incentive target awards to our executives that are payable in shares of our common stock after the conclusion of each pre-established performance measurement period. The amount that may be earned under the long-term incentive plan is variable depending on the relative total shareholder return of our stock as compared to the total shareholder return of the MSCI U.S. REIT Index and the FTSE NAREIT Equity Industrial Index over the pre-established performance measurement period. We estimate the fair value of the long-term incentive target awards using a Monte Carlo simulation model on the date of grant and at each reporting period. These awards are recognized as compensation expense over the requisite performance period based on the fair value of the award at the balance sheet date.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations

Currently we have two outstanding contracts with third-party sellers to acquire two industrial properties. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions. The following table summarizes certain information with respect to the properties we have under contract:

 

Market

   Number of
Buildings
     Square Feet      Purchase Price
(in thousands)
     Assumed Debt
(in thousands)
 

Los Angeles

     —           —         $ —         $ —     

Northern New Jersey/New York City

     1        100,000        9,265        —     

San Francisco Bay Area

     —           —           —           —     

Seattle

     —           —           —           —     

Miami

     —           —           —           —     

Washington, D.C./Baltimore

     1         158,769         18,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2        258,769      $ 27,265      $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes our contractual obligations due by period as of December 31, 2013 (dollars in thousands):

 

Contractual Obligations

   Less than
1 Year
     1-3 Years      3-5 Years      More than
5 Years
     Total  

Debt

   $ 12,161      $ 59,528      $ 53,826      $ 63,153      $ 188,668  

Debt Interest Payments

     4,526         6,964         5,268        3,113        19,871   

Operating lease commitments

     233         485         509         951         2,178   

Purchase Obligations

     27,265         —           —           —           27,265  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,185       $ 66,977       $ 59,603       $ 67,217       $ 237,982   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Financial Measures

We use the following non-GAAP financial measures that we believe are useful to investors as key supplemental measures of our operating performance: funds from operations, or FFO, Adjusted EBITDA, net operating income, or NOI, same store NOI and cash-basis same store NOI. FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. Further, our computation of FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI may not be comparable to FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI reported by other companies.

We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of

 

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property and impairment write-downs of depreciable real estate, plus depreciation and amortization on real estate assets and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We believe that presenting FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets.

We believe that FFO is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, we believe that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our operating performance.

The following table reflects the calculation of FFO reconciled from net and comprehensive income (loss), net of preferred stock dividends for the three months ended December 31, 2013, 2012 and 2011 and for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands except per share data):

 

    For the Three Months Ended
December 31,
                For the Three Months Ended
December 31,
             
    2013     2012     $ Change     % Change     2012     2011     $ Change     % Change  

Net and comprehensive income (loss), net of preferred stock dividends

  $ 2,810      $ 2,662      $ 148        5.6   $ 2,662      $ (194   $ 2,856        n/a   

Gain on sales of real estate investments

    (2,778     (4,037     1,259        (31.2 )%      (4,037     —          (4,037     n/a   

Depreciation and amortization

               

Depreciation and amortization from continuing operations

    3,685        2,911        774        26.6     2,911        1,469        1,442        98.2

Depreciation related to discontinued operations

    —          101        (101     n/a        101        52        49        94.2

Non-real estate depreciation

    (23     (56     33        (58.9 )%      (56     (26     (30     115.4

Allocation to participating securities (1)

    (23     (18     (5     27.8     (18     (16     (2     12.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations (2)

  $ 3,671      $ 1,563      $ 2,108        134.9   $ 1,563      $ 1,285      $ 278        21.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted FFO per common share

  $ 0.15      $ 0.12      $ 0.03        25.6   $ 0.12      $ 0.14      $ (0.02     (16 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average basic and diluted common shares

    24,833,304        13,285,181            13,285,181        9,174,747       
 

 

 

   

 

 

       

 

 

   

 

 

     
    For the Year Ended December 31,                 For the Year Ended December 31,              
    2013     2012     $ Change     % Change     2012     2011     $ Change     % Change  

Net and comprehensive income (loss), net of preferred stock dividends

  $ 3,076      $ 2,461      $ 615        25.0   $ 2,461      $ (3,729   $ 6,190        n/a   

Gain on sales of real estate investments

    (2,778     (4,037     1,259        (31.2 )%      (4,037     —          (4,037     n/a   

Depreciation and amortization

               

Depreciation and amortization from continuing operations

    12,481        8,728        3,753        43.0     8,728        4,285        4,443        103.7

Depreciation related to discontinued operations

    101        509        (408     (80.2 )%      509        614        (105     (17.1 )% 

Non-real estate depreciation

    (100     (147     47        (32 )%      (147     (98     (49     50.0

Allocation to participating securities (1)

    (91     (79     (12     15.2     (79     (16     (63     393.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations (2)

  $ 12,689      $ 7,435      $ 5,254        70.7   $ 7,435      $ 1,056      $ 6,379        604.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted FFO per common share

  $ 0.60      $ 0.57      $ 0.04        6.7   $ 0.57      $ 0.12      $ 0.45        391.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average basic and diluted common shares

    21,011,276        13,135,440            13,135,440        9,161,805       
 

 

 

   

 

 

       

 

 

   

 

 

     

 

1

To be consistent with the company’s policies of determining whether instruments granted in share-based payment transactions are participating securities and accounting for earnings per share, the FFO per common share is adjusted for FFO distributed through declared dividends (if any) and allocated to all participating securities (weighted average common shares outstanding and unvested restricted shares outstanding) under the two-class method. Under this method, allocations were made to 156,965, 149,532 and 134,958 of weighted average unvested restricted shares outstanding for the three months ended December 31, 2013, 2012 and 2011, respectively, and 156,203, 147,200 and 138,440 for the years ended December 31, 2013 2012 and 2011, respectively.

2

Includes expensed acquisition costs of approximately $1.4 million, $0.4 million and $0.3 million, respectively, for the three months ended December 31, 2013, 2012 and 2011 and approximately $3.3 million, $2.2 million and $2.0 million, respectively, for the years ended December 31, 2013, 2012 and 2011.

 

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We compute Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, acquisition costs and stock-based compensation. We believe that presenting Adjusted EBITDA provides useful information to investors regarding our operating performance because they are measures of our operations on an unleveraged basis before the effects of tax, non-cash depreciation and amortization expense (and acquisition costs and stock-based compensation with regard to Adjusted EBITDA). By excluding interest expense, Adjusted EBITDA allow investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allow for more meaningful comparison of our operating performance between quarters as well as annual periods and for the comparison of our operating performance to that of other companies, both in the real estate industry and in other industries. As we are currently in a growth phase, acquisition costs are excluded from Adjusted EBITDA to allow for the comparison of our operating performance to that of stabilized companies.

The following table reflects the calculation of Adjusted EBITDA reconciled from net income (loss) for the three months ended December 31, 2013, 2012 and 2011 and for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

 

    For the Three Months Ended December 31,                 For the Three Months Ended
December 31,
             
    2013     2012     $ Change     % Change     2012     2011     $ Change     % Change  

Net income (loss)

  $ 3,701      $ 3,553      $ 148        4.2   $ 3,553      $ (194   $ 3,747        n/a   

Gain on sales of real estate investments

    (2,778     (4,037     1,259        (31.2 )%      (4,037     —          (4,037     n/a   

Depreciation and amortization from continuing operations

    3,685        2,911        774        26.6     2,911        1,469        1,442        98.2

Depreciation related to discontinued operations

    —          101        (101     n/a        101        52        49        94.2

Interest expense, including amortization

    1,604        1,740        (136     (7.8 )%      1,740        985        755        76.6

Stock-based compensation

    523        109        414        n/a        109        206        (97     (47.1 )% 

Acquisition costs

    1,437        440        997        226.6     440        300        140        46.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 8,172      $ 4,817      $ 3,355        69.6   $ 4,817      $ 2,818      $ 1,999        70.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    For the Year Ended December 31,                 For the Year Ended December 31,              
    2013     2012     $ Change     % Change     2012     2011     $ Change     % Change  

Net income (loss)

  $ 6,641      $ 4,065      $ 2,576        63.4   $ 4,065      $ (3,729   $ 7,794        n/a   

Gain on sales of real estate investments

    (2,778     (4,037     1,259        (31.2 )%      (4,037     —          (4,037     n/a   

Depreciation and amortization from continuing operations

    12,481        8,728        3,753        43.0     8,728        4,285        4,443        103.7

Depreciation related to discontinued operations

    101        509        (408     (80.2 )%      509        614        (105     (17.1 )% 

Interest expense, including amortization

    6,214        5,472        742        13.6     5,472        2,612        2,860        109.5

Stock-based compensation

    2,137        1,121        1,016        90.6     1,121        1,202        (81     (6.7 )% 

Acquisition costs

    3,298        2,238        1,060        47.4     2,238        1,981        257        13.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 28,094      $ 18,096      $ 9,998        55.2   $ 18,096      $ 6,965      $ 11,131        159.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We compute NOI as rental revenues, including tenant expense reimbursements, less property operating expenses. We compute same store NOI as rental revenues, including tenant expense reimbursements, less property operating expenses on a same store basis. NOI excludes depreciation, amortization, general and administrative expenses, acquisition costs and interest expense. We compute cash-basis same store NOI as same store NOI excluding straight-line rents and amortization of lease intangibles. The same store pool includes all properties that were owned as of December 31, 2013 and since January 1, 2012 and excludes properties that were either disposed of or held for sale to a third party. As of December 31, 2013, the same store pool consisted of 44 buildings aggregating approximately 3.1 million square feet. We believe that presenting NOI, same store NOI and cash-basis same store NOI provides useful information to investors regarding our operating performance of our properties because NOI excludes certain items that are not considered to be controllable in connection with the management of the property, such as depreciation, amortization, general and administrative expenses, acquisition costs and interest expense. By presenting same store NOI and cash-basis same store NOI, the operating results on a same store basis are directly comparable from period to period.

 

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The following table reflects the calculation of NOI, same store NOI and cash-basis same store NOI reconciled from net income (loss) for the three months and the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

 

     For the Three Months
Ended December 31,
                For the Three Months
Ended December 31,
             
     2013     2012     $ Change     % Change