REXFORD INDUSTRIAL REALTY, INC. The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto that appear in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q. The terms "Company," "we," "us," and "our" refer toRexford Industrial Realty, Inc. and its consolidated subsidiaries except where the context otherwise requires.
Forward-Looking Statements
We make statements in this quarterly report that are forward-looking statements, which are usually identified by the use of words such as "anticipates," "believes," "expects," "intends," "may," "might," "plans," "estimates," "projects," "seeks," "should," "will," "result" and variations of such words or similar expressions. Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:
•the competitive environment in which we operate;
•real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;
•decreased rental rates or increasing vacancy rates;
•potential defaults on or non-renewal of leases by tenants;
•potential bankruptcy or insolvency of tenants;
•acquisition risks, including failure of such acquisitions to perform in accordance with expectations;
•the timing of acquisitions and dispositions;
•potential natural disasters such as earthquakes, wildfires or floods;
•the consequence of any future security alerts and/or terrorist attacks;
•national, international, regional and local economic conditions, including impacts and uncertainty from trade disputes and tariffs on goods imported tothe United States and goods exported to other countries;
•the general level of interest rates;
•potential impacts of inflation;
•potential changes in the law or governmental regulations that affect us and
interpretations of those laws and regulations, including changes in real estate
and zoning or real estate investment trust ("REIT") tax laws, and potential
increases in real property tax rates;
•financing risks, including the risks that our cash flows from operations may be
insufficient to meet required payments of principal and interest and we may be
unable to refinance our existing debt upon maturity or obtain new financing on
attractive terms or at all;
•lack of or insufficient amounts of insurance;
•our failure to complete acquisitions;
•our failure to successfully integrate acquired properties;
•our ability to qualify and maintain our qualification as a REIT;
•our ability to maintain our current investment grade rating by Fitch Ratings
("Fitch"), Moody's Investors Services ("Moody's) or from Standard and Poor's
Ratings Services ("S&P");
•litigation, including costs associated with prosecuting or defending pending or threatened claims and any adverse outcomes;
•possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us;
•an epidemic or pandemic (such as the outbreak and worldwide spread of
coronavirus ("COVID-19"), as well as new variants of the virus, and the measures
that international, federal, state and local governments, agencies, law
enforcement and/or health authorities may implement to address it, which may (as
with COVID-19) precipitate or
37
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exacerbate one or more of the above-mentioned factors and/or other risks, and
significantly disrupt or prevent us from operating our business in the ordinary
course for an extended period; and
•other events outside of our control.
Accordingly, there is no assurance that our expectations will be realized. Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The reader should carefully review our financial statements and the notes thereto, as well as the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Company Overview
Rexford Industrial Realty, Inc. is a self-administered and self-managed full-service REIT focused on owning and operating industrial properties inSouthern California infill markets. We were formed as aMaryland corporation onJanuary 18, 2013 , andRexford Industrial Realty, L.P. (the "Operating Partnership"), of which we are the sole general partner, was formed as aMaryland limited partnership onJanuary 18, 2013 . Through our controlling interest in ourOperating Partnership and its subsidiaries, we acquire, own, improve, redevelop, lease and manage industrial real estate principally located inSouthern California infill markets, and, from time to time, acquire or provide mortgage debt secured by industrial property. We are organized and conduct our operations to qualify as a REIT under the Internal Revenue Code of 1986 (the "Code"), as amended, and generally are not subject to federal taxes on our income to the extent we distribute our income to our shareholders and maintain our qualification as a REIT.
As of
Our goal is to generate attractive risk-adjusted returns for our stockholders by providing superior access to industrial property investments and mortgage debt investments secured by industrial property in high-barrierSouthern California infill markets. Our target markets provide us with opportunities to acquire both stabilized properties generating favorable cash flow, as well as properties or land parcels where we can enhance returns through value-add repositioning and redevelopments. Scarcity of available space and high barriers limiting new construction of for-lease product all contribute to create superior long-term supply/demand fundamentals within our target infillSouthern California industrial property markets. With our vertically integrated operating platform and extensive value-add investment and management capabilities, we believe we are positioned to capitalize upon the opportunities in our markets to achieve our objectives. 2022 Highlights
Financial and Operational Highlights
•Net income attributable to common stockholders increased by 76.3% to
•Core funds from operations (Core FFO)(1) attributable to common stockholders increased by 58.4% to$76.6 million in first quarter 2022 compared to the first quarter of 2021.
•Net operating income (NOI)(1) increased by 40.9% to
•Total portfolio occupancy at quarter-end was 96.3%.
•Same Property Portfolio(2) occupancy at quarter-end was 99.3%.
•Executed a total of 89 new and renewal leases with a combined 0.9 million rentable square feet, with cash leasing spreads of 71.1% on a GAAP basis and 56.9% on a cash basis. __________________________
(1) For a reconciliation to net income and a discussion of why we believe Core FFO and NOI are useful supplemental measures of operating performance, see "Non-GAAP Supplemental Measures: Funds From Operations" and "Non-GAAP Supplemental Measures: NOI and Cash NOI" included under Item 2 of this Form 10-Q.
(2) For a definition of "Same Property Portfolio," see "Results of Operations" included under Item 2 of this Form 10-Q.
38
--------------------------------------------------------------------------------Acquisitions
•During the first quarter of 2022, we completed 14 acquisitions representing 17 properties with 1.5 million rentable square feet of buildings on 82 acres of land, including 13 acres of land for near term redevelopment, for an aggregate purchase price of$457.7 million .
Dispositions
•During the first quarter of 2022, we sold one property with 79,247 rentable
square feet for a gross sales price of
Repositioning & Redevelopment
•During the first quarter of 2022, we stabilized our 111,260 square foot redevelopment property located at 29025-29055 Avenue Paine.
Equity
•During the first quarter of 2022, we entered into forward equity sales agreements under our at-the-market equity offering program with respect to 5,752,268 shares of common stock at a weighted average initial forward sale price of$70.32 per share. InMarch 2022 , we partially settled these forward equity sale agreements and the outstanding forward equity sale agreement from 2021 by issuing 4,402,110 shares of common stock in exchange for net proceeds of$305.9 million . As ofMarch 31, 2022 , we had 3,256,514 shares of common stock, or approximately$232.2 million of forward net proceeds remaining for settlement to occur by the second quarter of 2023.
Factors That May Influence Future Results of Operations
Market and Portfolio Fundamentals
Our operating results depend upon the infill
The infillSouthern California industrial real estate sector has continued to exhibit strong fundamentals. These high-barrier infill markets are characterized by a relative scarcity of available product, generally operating at or above approximately 98% occupancy, coupled with the limited ability to introduce new supply due to high land and redevelopment costs and a dearth of developable land in markets experiencing a net reduction in supply as over time more industrial property is converted to non-industrial uses than can be delivered. Consequently, available industrial supply has continued to decrease in many of our target infill submarkets and construction deliveries have fallen short of demand. Meanwhile, underlying tenant demand within our infill target markets continues to demonstrate growth, illustrated or driven by strong re-leasing spreads and renewal activity, an expanding regional economy, substantial growth in ecommerce transaction and delivery volumes, as well as further compression of delivery time-frames to consumers and to businesses, increasing the significance of last-mile facilities for timely fulfillment. Tenant demand remains strong within our portfolio, which is strategically located within prime infillSouthern California industrial markets. The quality and intensity of tenant demand through the first quarter of 2022 is demonstrated through the Company's strong leasing spreads and volume, achieving rental rates and related terms from new and renewing tenants that have generally exceeded those from pre-COVID-19 periods (see "-Leasing Activity and Rental Rates" below). This tenant demand has been driven by a wide range of sectors, from consumer products, healthcare and medical products to aerospace, food, construction, and logistics, as well as by an emerging electric vehicle industry, among other sectors. We have also observed a notable increase in ecommerce-oriented tenants securing space within our portfolio, in part driven by the impacts of the COVID-19 pandemic, which has accelerated the growth in the range and volume of goods and customers transacting through ecommerce. In addition, ecommerce-related delivery demand associated with last-mile distribution is driving discernible shifts in inventory-handling strategies among retailers and distributors, which we believe is driving incremental demand for our infill property locations. Our portfolio, which we believe represents prime locations with superior functionality within the largest last-mile logistics distribution market in the nation, is well-positioned to attract incremental ecommerce-oriented demand. We believe our portfolio's leasing performance during the first quarter of 2022 has generally outpaced that of the infill markets within which we operate, although, as discussed in more detail below, our target infill markets continue to operate at or near historically high levels of occupancy. We believe this performance has been driven by our highly entrepreneurial business model focused on acquiring and improving industrial property in superior locations so that our portfolio reflects a higher level of quality and functionality, on average, as compared to typical available product within the markets within which we operate. We also believe the quality and entrepreneurial approach demonstrated by our team of real estate professionals actively 39 --------------------------------------------------------------------------------
managing our properties and our tenants enables the potential to outcompete within our markets that we believe are generally otherwise owned by more passive, less-focused real estate owners.
General Market Conditions
The following are general market conditions and do not necessarily reflect the results of our portfolio. For our portfolio specific results see "-Rental Revenues" and "-Results of Operations" below.
InLos Angeles County , market fundamentals were very strong during the first quarter of 2022. Average asking lease rates increased quarter-over-quarter reaching an all-time high due to high levels of sustained demand and record low vacancy levels, with nearly all submarkets retaining sub 1% vacancy rates. Current market conditions indicate rents are likely to increase through the remainder of 2022 as demand has been consistently strong, occupancy still remains at near capacity levels and new development is limited by a lack of land availability and an increase in land and development costs. InOrange County , market fundamentals were very strong during the first quarter of 2022. Average asking lease rates increased quarter-over-quarter reaching an all-time high and vacancy was unchanged quarter-over-quarter, remaining at record low levels. Current market conditions indicate rents are likely to increase through the remainder of 2022 due to high demand and the continued low availability of industrial product in this region.
In
In
Lastly, in the Inland Empire, new industrial product continues to be absorbed well in the market. In the Inland Empire West, which contains infill markets in which we operate, vacancy decreased quarter-over-quarter to nearly 0%, which is the lowest vacancy rate on record amongst all of our submarkets, and average asking lease rates increased significantly quarter-over-quarter. Current market conditions indicate rents are likely to continue to increase through the remainder of 2022. We generally do not focus on properties located within the non-infill Inland Empire East sub-market where available land and the development and construction pipeline for new supply is substantial.
Acquisitions and Value-Add Repositioning and Redevelopment of Properties
The Company's growth strategy comprises acquiring leased, stabilized properties as well as properties with value-add opportunities to improve functionality and to deploy our value-driven asset management programs in order to increase cash flow and value. Additionally, from time to time, we may acquire industrial outdoor storage sites, land parcels or properties with excess land for ground-up redevelopment projects. Acquisitions may comprise single property investments as well as the purchase of portfolios of properties, with transaction values ranging from approximately$10 million single property investments to portfolios potentially valued in the billions of dollars. The Company's geographic focus remains infillSouthern California . However, from time-to-time, portfolios could be acquired comprising a critical mass of infillSouthern California industrial property that could include some assets located in markets outside of infillSouthern California . In general, to the extent non-infill-Southern California assets were to be acquired as part of a larger portfolio, the Company may underwrite such investments with the potential to dispose such assets over a certain period of time in order to maximize its core focus on infillSouthern California , while endeavoring to take appropriate steps to satisfy REIT safe harbor requirements to avoid prohibited transactions under REIT tax laws. A key component of our growth strategy is to acquire properties through off-market and lightly marketed transactions that are often operating at below-market occupancy or below-market rent at the time of acquisition or that have near-term lease roll-over or that provide opportunities to add value through functional or physical repositioning and improvements. Through various repositioning, redevelopment, and professional leasing and marketing strategies, we seek to increase the properties' functionality and attractiveness to prospective tenants and, over time, to stabilize the properties at occupancy rates that meet or exceed market rates. A repositioning can provide a range of property improvements. This may include a complete structural renovation of a property whereby we convert large underutilized spaces into a series of smaller and more functional spaces, or it may include the creation of additional square footage, the modernization of the property site, the elimination of functional obsolescence, the addition or enhancement of loading areas and truck access, the enhancement of fire-life-safety systems or other accretive improvements, in each case designed to improve the cash flow and value of the property. We have a number of significant repositioning properties, which are presented in the tables below, as well as range of smaller spaces in repositioning, that due to their smaller size, relative scope, projected repositioning costs or relatively nominal amount of down-time, are not presented below, however, in the aggregate, may be substantial. 40 -------------------------------------------------------------------------------- A repositioning property that is considered significant is typically defined as a property where a significant amount of space is held vacant in order to implement capital improvements, the cost to complete repositioning work and lease-up is estimated to be greater than$1 million and the repositioning and lease-up time frame is estimated to be greater than six months. A repositioning is generally considered complete once the investment is fully or nearly fully deployed and the property is available for occupancy. Because each repositioning effort is unique and determined based on the property, targeted tenants and overall trends in the general market and specific submarket, the timing and effect of the repositioning on our rental revenue and occupancy levels will vary, and, as a result, will affect the comparison of our results of operations from period to period with limited predictability.
A redevelopment property is defined as a property where we plan to fully or partially demolish an existing building(s) due to building obsolescence and/or a property with excess or vacant land where we plan to construct a ground-up building.
As ofMarch 31, 2022 , 14 of our properties were under current repositioning or redevelopment and none of our properties were in the lease-up stage. In addition, we have a pipeline of 14 additional properties for which we anticipate beginning repositioning/redevelopment construction work between the second quarter of 2022 and the third quarter of 2023. The tables below set forth a summary of these properties, as well the properties that were most recently stabilized in 2021 and 2022, as the timing of these stabilizations have a direct impact on our current and comparative results of operations. We consider a repositioning/redevelopment property to be stabilized upon the earlier of (i) reaching 90% occupancy or (ii) one year from the date construction work is completed. Estimated Construction Period(1) Total Property Repositioning/ Total Property Rentable Square Lease-up Rentable Leased % at Property (Submarket) Market Feet(2) Square Feet(2) Start Completion 3/31/2022 Current Repositioning: 12821 Knott Street (West OC)(3) OC 165,171 165,171 1Q-2019 2Q-2022 -%12133 Greenstone Avenue (Mid-Counties)(4) LA - - 1Q-2021 2Q-2022 100%(4) 11600 Los Nietos Road (Mid-Counties) LA 106,251 106,251 2Q-2021 3Q-2022 -%15650-15700 Avalon Boulevard (South Bay) LA 98,259 98,259 3Q-2021 3Q-2022 100%(5) 900 East Ball Road (North OC) OC 62,607 62,607 4Q-2021 3Q-2022 100%(6) 19431 Santa Fe Avenue (South Bay) LA 14,793 14,793 1Q-2022 2Q-2022 -% 8210-8240 Haskell Avenue (SF Valley) LA 53,886 53,886 1Q-2022 3Q-2022 -% Total Current Repositioning 500,967 500,967 Future Repositioning: 14100 Vine Place (Mid-Counties) LA 123,148 123,148 2Q-2022 4Q-2022 100%3441 MacArthur Boulevard (OC Airport) OC 117,145 117,145 3Q-2022 1Q-2023 -% 2757 Del Amo Boulevard (South Bay) LA 57,300 57,300 2Q-2023 3Q-2023 100% Total Future Repositioning 297,593 297,593 - See footnotes starting on the following page - 41
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Estimated Construction Period(1)
Estimated
Redevelopment Total Property
Rentable Square Leased % at
Property (Submarket) Market Feet(7) Start Completion 3/31/2022
Current Redevelopment:
415-435 Motor Avenue (San Gabriel
Valley) LA 94,315 2Q-2021 2Q-2022 -%
15601 Avalon Boulevard (South Bay) LA 86,879 3Q-2021 4Q-2022
-%
1055 Sandhill Avenue (South Bay) LA 127,853 3Q-2021 2Q-2023
-%
9615 Norwalk Boulevard (Mid-Counties) LA 201,571 3Q-2021 2Q-2023 -%9920-10020 Pioneer Boulevard (Mid-Counties) LA 162,231 4Q-2021 2Q-2023 -%12752-12822 Monarch Street (West OC)(8) OC 160,547 1Q-2022 2Q-2023 See footnote (8) 1901 Via Burton (North OC) OC 139,449 1Q-2022 3Q-2023 -% Total Current Redevelopment 972,845 Future Redevelopment:4416 Azusa Canyon Road (San Gabriel Valley) LA 130,063 2Q-2022 3Q-2023
-%
3233 Mission Oaks Blvd (Ventura)(9) VC 173,124 2Q-2022 3Q-2023 See footnote (9) 2390-2444 American Way (North OC) OC 97,170 2Q-2022 4Q-2023
-%
8888-8892 Balboa Avenue (Central SD) SD 128,400 2Q-2022 4Q-2023 -%12118 Bloomfield Avenue (Mid-Counties) LA 109,570 3Q-2022 1Q-2024 100% 6027 Eastern Avenue (Central LA) LA 92,781 4Q-2022 4Q-2023
-%
15010 Don Julian Road (San Gabriel Valley) LA 219,242 4Q-2022 4Q-2023
100%
3071 Coronado Street (North OC) OC 107,000 1Q-2023 4Q-2023
100%
13711 Freeway Drive (Mid-Counties) LA 108,000 1Q-2023 1Q-2024
100%
12772 San Fernando Road (San Fernando Valley) LA 143,421 3Q-2023 3Q-2024
52%
21515 Western Avenue (South Bay) LA 84,100 3Q-2023 3Q-2024
100%
Total Future Redevelopment 1,392,871
Total Property
Stabilized Rentable Leased % at
Stabilized(10) Market Square Feet Period Stabilized 3/31/2022
29025-29055 Avenue Paine (San Fernando
Valley) LA 111,260 1Q-2022 100%
Total 2022 Stabilized 111,260
The Merge (Inland Empire West) SB 333,544 2Q-2021 100%
16221 Arthur Street (Mid-Counties) LA 61,372 2Q-2021 100%
Rancho Pacifica Buildings 1 & 6 (South
Bay)(11) LA 488,114 3Q-2021 100%
8745-8775 Production Avenue (Central SD) SD 26,200 3Q-2021 100%
19007 Reyes Avenue (South Bay)(12) LA - 3Q-2021 100%
851 Lawrence Drive (Ventura) VC 90,773 3Q-2021 100%
Total 2021 Stabilized 1,000,003
(1)The estimated start period is the period we anticipate starting physical
construction on a project. Prior to physical construction, we engage in
pre-construction activities, which include design work, securing permits or
entitlements, site work, and other necessary activities preceding construction.
The estimated completion period is our current estimate of the period in which
we will have substantially completed a project and the project is made available
for occupancy. We expect to update our timing estimates on a quarterly basis.
The estimated construction period is subject to change as a result of a number
of factors including but not limited to permit requirements, delays in
construction (including delays
42
--------------------------------------------------------------------------------related to supply chain backlogs), changes in scope, and other unforeseen circumstances.
(2)"Total Property Rentable Square Feet" is the total rentable square footage of the entire property or particular building(s) (footnoted if applicable) under repositioning/lease-up. "Repositioning/Lease-up Rentable Square Feet " is the actual rentable square footage that is subject to repositioning at the property/building, and may be less than Total Property Rentable Square Feet. (3)At12821 Knott Street , we are repositioning the existing 120,800 rentable square foot building and constructing approximately 45,000 rentable square feet of new warehouse space. (4)At12133 Greenstone Avenue , a 4.8 acre industrial site, we demolished the existing 12,586 rentable square foot truck terminal building to provide greater functionality as a single tenant container storage facility. As ofMarch 31, 2022 , the property has been pre-leased with the lease expected to commence inJune 2022 , subject to completion of repositioning work.
(5)As of
(6)As of
(7)Represents the estimated rentable square footage of the project upon completion of redevelopment.
(8)As ofMarch 31, 2022 ,12752-12822 Monarch Street comprises 276,585 rentable square feet and is 41% occupied. The project includes 111,325 rentable square feet with tenants in-place that are not being redeveloped. We plan to reposition 65,335 rentable square feet, and to demolish 99,925 rentable square feet and construct a new 95,212 rentable square feet building in its place. At completion, the total project will contain 271,872 rentable square feet. (9)As ofMarch 31, 2022 ,3233 Mission Oaks Boulevard comprises 461,717 rentable square feet and is 97% occupied. The project includes 409,217 rentable square feet that are not being redeveloped. We plan to demolish the remaining 52,500 rentable square feet and construct two new buildings comprising 173,124 rentable square feet. We are also performing site work across the entire project. At completion, the total project will contain 582,341 rentable square feet. (10)We consider a repositioning property to be stabilized upon the earlier of (i) reaching 90% occupancy or (ii) one year from the date construction work is completed. (11)Rancho Pacifica Buildings 1 & 6 are located at2301-2329 Pacifica Place and2332-2366 Pacifica Place , and represent two buildings totaling 488,114 rentable square feet, out of six buildings at ourRancho Pacifica Park property, which have a total 1,152,883 rentable square feet. Property leased percentage reflects the two buildings.
(12)At
Properties that are nonoperational as a result of repositioning or redevelopment activity may qualify for varying levels of interest, insurance and real estate tax capitalization during the redevelopment and construction period. An increase in our repositioning and redevelopment activities resulting from value-add acquisitions could cause an increase in the asset balances qualifying for interest, insurance and tax capitalization in future periods. We capitalized$2.0 million of interest expense and$1.1 million of insurance and real estate tax expenses during the three months endedMarch 31, 2022 , respectively, related to our repositioning and redevelopment projects.
Rental Revenues
Our operating results depend primarily upon generating rental revenue from the properties in our portfolio. The amount of rental revenue generated by these properties is affected by our ability to maintain or increase occupancy levels and rental rates at our properties, which will depend upon our ability to lease vacant space and re-lease expiring space at favorable rates.
Occupancy Rates
As ofMarch 31, 2022 , our consolidated portfolio, inclusive of space in repositioning as described in the subsequent paragraph, was approximately 96.3% occupied, while our stabilized consolidated portfolio exclusive of such space was approximately 98.7% occupied. We believe the opportunity to increase occupancy at our properties will be an important driver of future revenue growth. An opportunity to drive this growth will derive from the completion and lease-up of repositioning and redevelopment projects that are currently under construction.
As summarized in the tables under "-Acquisitions and Value-Add Repositioning
and Redevelopment of Properties" above, as of
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are under current repositioning or redevelopment. Additionally, we have a
near-term pipeline of 14 repositioning and redevelopment projects with a
combined 1.7 million of estimated rentable square feet at completion. Vacant
space at these properties is concentrated in our Los Angeles and Orange County
markets and represents 2.5% of our total consolidated portfolio square footage
as of March 31, 2022 . Including vacant space at these properties, our weighted
average occupancy rate as of March 31, 2022 in our Los Angeles and Orange County
markets was 96.2% and 87.4%, respectively. Excluding vacant space at these
properties, our weighted average occupancy rate as of March 31, 2022 , in these
markets was 98.4% and 98.5%, respectively. We believe that an important portion
of our long-term future growth will come from the completion of these projects
currently under or scheduled for repositioning, as well as through the
identification or acquisition of new opportunities for repositioning and
redevelopment, whether in our existing portfolio or through new investments,
which may vary from period to period subject to market conditions.
The occupancy rate of properties not undergoing repositioning is affected by
regional and local economic conditions in our Southern California infill
markets. In the last several years, the Los Angeles , Orange County and San
Bernardino markets have continued to show historically low vacancy and positive
absorption, resulting from the combination of sustained high tenant demand and
low product availability. Accordingly, our properties in these markets have
generally exhibited a similar trend. We believe that general market conditions
will remain positive in 2022, and the opportunity to increase occupancy and
rental rates at our properties will be an important driver of future revenue
growth; however, there can be no assurance that recent positive market trends
will continue.
Leasing Activity and Rental Rates
The following tables set forth our leasing activity for new and renewal leases
for the three months ended
New Leases
Weighted Average Effective Rent
Number Lease Term Per Square GAAP Leasing Cash Leasing
Quarter of Leases Rentable Square Feet (in years) Foot(1) Spreads(2)(4) Spreads(3)(4)
Q1-2022 35 314,567 4.4 $ 23.19 66.3 % 49.1 %
Renewal Leases Expired Leases Retention %(7)
Weighted Average Effective Rent
Number Lease Term Per Square GAAP Leasing Cash Leasing Number Rentable Square Rentable Square
Quarter of Leases Rentable Square Feet (in years) Foot(1) Spreads(2)(5) Spreads(3)(5) of Leases Feet(6) Feet
Q1-2022 54 552,828 3.4 $ 21.13 72.8 % 59.9 % 94 1,153,547 79.1 %
(1)Effective rent per square foot is the average base rent calculated in accordance with GAAP, over the term of the lease, expressed in dollars per square foot per year. Includes all new and renewal leases that were executed during the quarter.
(2)Calculated as the change between GAAP rents for new or renewal leases and the expiring GAAP rents on the expiring leases for the same space.
(3)Calculated as the change between starting cash rents for new or renewal leases and the expiring cash rents on the expiring leases for the same space.
(4)The GAAP and cash re-leasing spreads for new leases executed during the three months endedMarch 31, 2022 , exclude two leases aggregating 103,216 rentable square feet for which there was no comparable lease data. Of these two excluded leases, one leases for 98,259 rentable square feet was a recently repositioned/redeveloped space. Comparable leases generally exclude: (i) space that has never been occupied under our ownership, (ii) recently repositioned/redeveloped space, (iii) space that has been vacant for over one year or (iv) space with lease terms shorter than six months.
(5)The GAAP and cash re-leasing rent spreads include all renewal leases executed
during the three months ended
(6)Includes leases totaling 310,656 rentable square feet that expired during the
three months ended
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(7)Retention is calculated as renewal lease square footage plus
relocation/expansion square footage, divided by the square footage of leases
expiring during the period. Retention excludes square footage related to the
following: (i) expiring leases associated with space that is placed into
repositioning after the tenant vacates, (ii) early terminations with
pre-negotiated replacement leases and (iii) move outs where space is directly
leased by subtenants.
Our leasing activity is impacted both by our repositioning and redevelopment
efforts, as well as by market conditions. While we reposition a property, its
space may become unavailable for leasing until completion of our repositioning
efforts. As of March 31, 2022 , we have 14 current repositioning/redevelopment
projects with estimated construction completion periods ranging from the second
quarter of 2022 through the third quarter of 2023, and an additional 14
repositioning and redevelopment projects in our pipeline with estimated
completion dates through the third quarter of 2024. We expect these properties
to have positive impacts on our leasing activity and revenue generation as we
complete our value-add plans and place these properties in service.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases is affected by economic and competitive conditions in our markets and by the relative desirability of our individual properties, which may impact our results of operations. The following table sets forth a summary schedule of lease expirations for leases in place as ofMarch 31, 2022 , for each of the 10 full and partial calendar years beginning with 2022 and thereafter, plus space that is available and under current repositioning. Percentage of Total Annualized Base Number of Leases Total
Expiring Feet(1) Owned Square Feet Base Rent(2) Rent(3) Foot(4)
Vacant(5) - 468,613 1.2 % $ - - % $ -
Current Repositioning(6) - 959,435 2.5 % - - % $ -
MTM Tenants 14 281,955 0.7 % 3,979 0.9 % $ 14.11
Remainder of 2022 325 4,112,658 10.8 % 43,234 9.8 % $ 10.51
2023 391 5,287,953 13.9 % 65,884 15.0 % $ 12.46
2024 363 6,288,262 16.5 % 69,746 15.9 % $ 11.09
2025 219 4,562,605 12.0 % 51,001 11.6 % $ 11.18
2026 163 6,030,357 15.8 % 69,510 15.8 % $ 11.53
2027 65 3,102,636 8.1 % 32,412 7.4 % $ 10.45
2028 17 882,297 2.3 % 11,027 2.5 % $ 12.50
2029 15 1,067,688 2.8 % 13,014 3.0 % $ 12.19
2030 12 1,320,331 3.5 % 15,404 3.5 % $ 11.67
2031 17 1,828,263 4.8 % 28,264 6.4 % $ 15.46
Thereafter 29 1,940,113 5.1 % 35,959 8.2 % $ 18.53
Total Consolidated Portfolio 1,630 38,133,166 100.0 % $ 439,434 100.0 % $ 11.97
(1)Represents the contracted square footage upon expiration.
(2)Calculated as monthly contracted base rent (before rent abatements) per the terms of such lease, as ofMarch 31, 2022 , multiplied by 12. Excludes billboard and antenna revenue and tenant reimbursements. Amounts in thousands.
(3)Calculated as annualized base rent set forth in this table divided by
annualized base rent for the total portfolio as of
(4)Calculated as annualized base rent for such leases divided by the occupied
square feet for such leases as of
(5)Represents vacant space (not under repositioning) as of
(6)Represents vacant space at properties that were classified as repositioning or redevelopment properties as ofMarch 31, 2022 . Excludes stabilized properties and properties in lease-up. Refer to the table under "-Acquisitions and Value-Add Repositioning and Redevelopment of Properties" for additional details related to these properties
As of
45
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13.9% of the aggregate rentable square footage of our portfolio are scheduled to
expire during the remainder of 2022 and 2023, respectively. During the three
months ended March 31, 2022 , we renewed 54 leases for 0.6 million rentable
square feet, resulting in a 79.1% retention rate. Our retention rate during the
period was impacted by the combination of low vacancy and high demand in many of
our key markets. During the three months ended March 31, 2022 , new and renewal
leases had a weighted average term of 4.4 and 3.4 years, and we expect future
new and renewal leases to have similar terms.
The leases scheduled to expire during the remainder of 2022 and 2023 represent
approximately 9.8% and 15.0% respectively, of the total annualized base rent for
our portfolio as of March 31, 2022 . We estimate that, on a weighted average
basis, in-place rents of leases scheduled to expire during the remainder of 2022
and 2023 are currently below current market asking rates, although individual
units or properties within any particular submarket may currently be leased
either above, below, or at the current market asking rates within that
submarket.
As described under "-Market and Portfolio Fundamentals" above, while market
indicators, including changes in vacancy rates and average asking lease rates,
varied by market, overall there was continued low market vacancy and pervasive
supply and demand imbalance across our submarkets, which continues to support
strong market fundamentals including positive rental growth. Therefore, we
expect market dynamics to remain strong and that these positive trends will
continue to provide a favorable environment for additional increases in lease
renewal rates. Accordingly, we expect the remainder of 2022 will show positive
renewal rates and leasing spreads.
Conditions in Our Markets
The properties in our portfolio are located primarily inSouthern California infill markets. Positive or negative changes in economic or other conditions, including the impact of the ongoing COVID-19 pandemic, and related state and local government reactions, adverse weather conditions and natural disasters in this market may affect our overall performance.
Property Expenses
Our property expenses generally consist of utilities, real estate taxes, insurance, site repair and maintenance costs, and the allocation of overhead costs. For the majority of our properties, our property expenses are recovered, in part, by either the triple net provisions or modified gross expense reimbursements in tenant leases. The majority of our leases also comprise contractual three percent or greater annual rental rate increases meant, in part, to help mitigate potential increases in property expenses over time. However, the terms of our leases vary, and, in some instances, we may absorb property expenses. Our overall financial results will be impacted by the extent to which we are able to pass-through property expenses to our tenants.
Taxable REIT Subsidiary
As ofMarch 31, 2022 , ourOperating Partnership indirectly and wholly ownsRexford Industrial Realty and Management, Inc. , which we refer to as our services company. We have elected, together with our services company, to treat our services company as a taxable REIT subsidiary for federal income tax purposes. A taxable REIT subsidiary generally may provide non-customary and other services to our tenants and engage in activities that we or our subsidiaries (other than a taxable REIT subsidiary) may not engage in directly without adversely affecting our qualification as a REIT, provided a taxable REIT subsidiary may not operate or manage a lodging facility or health care facility or provide rights to any brand name under which any lodging facility or health care facility is operated. We may form additional taxable REIT subsidiaries in the future, and ourOperating Partnership may contribute some or all of its interests in certain wholly owned subsidiaries or their assets to our services company. Any income earned by our taxable REIT subsidiaries will not be included in our taxable income for purposes of the 75% or 95% gross income tests, except to the extent such income is distributed to us as a dividend, in which case such dividend income will qualify under the 95%, but not the 75%, gross income test. Because a taxable REIT subsidiary is subject to federal income tax, and state and local income tax (where applicable) as a regular corporation, the income earned by our taxable REIT subsidiaries generally will be subject to an additional level of tax as compared to the income earned by our other subsidiaries. Our taxable REIT subsidiary is a C-corporation subject to federal and state income tax. However, it has a cumulative unrecognized net operation loss carryforward and therefore there is no income tax provision for the three months endedMarch 31, 2022 and 2021. 46 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the reporting periods. Actual amounts may differ from these estimates and assumptions. Management evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions that it believes are reasonable as of the date hereof. In addition, other companies in similar businesses may use different estimation policies and methodologies, which may affect the comparability of our results of operations and financial condition to those of other companies. In our Annual Report on Form 10-K for the year endedDecember 31, 2021 and in "Note 2 - Summary of Significant Accounting Policies" to the consolidated financial statements under Item 1 of this report on Form 10-Q, we identified certain critical accounting policies that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements. We have not made any material changes to our critical accounting policies and estimates during the period covered by this report.
Results of Operations
Our consolidated results of operations are often not comparable from period to period due to the effect of (i) property acquisitions, (ii) property dispositions and (iii) properties that are taken out of service for repositioning or redevelopment during the comparative reporting periods. Our "Total Portfolio" represents all of the properties owned during the reported periods. To eliminate the effect of changes in our Total Portfolio due to acquisitions, dispositions, and repositioning/redevelopment and to highlight the operating results of our on-going business, we have separately presented the results of our "Same Property Portfolio." For the three months endedMarch 31, 2022 and 2021, our Same Property Portfolio includes all properties in our portfolio that were wholly-owned by us for the period fromJanuary 1, 2021 throughMarch 31, 2022 , and that were stabilized prior toJanuary 1, 2021 , which consisted of 224 properties aggregating approximately 28.6 million rentable square feet. Results for our Same Property Portfolio exclude properties that were acquired or sold during the period fromJanuary 1, 2021 throughMarch 31, 2022 , properties classified as current or future repositioning, redevelopment or lease-up during 2021 or 2022, interest income, interest expense and corporate general and administrative expenses. In addition to the properties included in our Same Property Portfolio, our Total Portfolio includes the 70 properties aggregating approximately 7.2 million rentable square feet that were purchased betweenJanuary 1, 2021 andMarch 31, 2022 , and the six properties aggregating approximately 0.3 million rentable square feet that were sold betweenJanuary 1, 2021 andMarch 31, 2022 .
At
47
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Comparison of the Three Months Ended
The following table summarizes the historical results of operations for our Same Property Portfolio and Total Portfolio for the three months endedMarch 31, 2022 and 2021 (dollars in thousands): Same Property Portfolio Total Portfolio Three Months EndedMarch 31 , % Three Months EndedMarch 31 , % 2022 2021 Increase/(Decrease) Change 2022
2021 Increase/(Decrease) Change
REVENUES
Rental income $ 100,215 $ 91,958 $ 8,257 9.0 % $ 140,588 $ 99,644 $ 40,944 41.1 %
Management and leasing services - - - - % 163 105 58 55.2 %
Interest income - - - - % 1 14 (13) (92.9) %
TOTAL REVENUES 100,215 91,958 8,257 9.0 % 140,752 99,763 40,989 41.1 %
OPERATING EXPENSES
Property expenses 23,857 21,256 2,601 12.2 % 33,429 23,575 9,854 41.8 %
General and administrative - - - - % 14,717 11,480 3,237 28.2 %
Depreciation and amortization 29,731 31,834 (2,103) (6.6) % 42,471 35,144 7,327 20.8 %
TOTAL OPERATING EXPENSES 53,588 53,090 498 0.9 % 90,617 70,199 20,418 29.1 %
OTHER EXPENSES
Other expenses - - - - % 38 29 9 31.0 %
Interest expense - - - - % 9,683 9,752 (69) (0.7) %
TOTAL EXPENSES 53,588 53,090 498 0.9 % 100,338 79,980 20,358 25.5 %
Gains on sale of real estate - - - - % 8,486 10,860 (2,374) (21.9) %
NET INCOME $ 46,627 $ 38,868 $ 7,759 20.0 % $ 48,900 $ 30,643 $ 18,257 59.6 %
Rental Income
In the following table, we present the components of rental income, which
includes rental revenue, tenant reimbursements and other income related to
leases. The below presentation of rental income is not, and is not intended to
be, a presentation in accordance with GAAP. We are presenting this information
because we believe it is frequently used by management, investors, securities
analysts and other interested parties to understand and evaluate the Company's
performance.
Same Property Portfolio Total Portfolio
Three Months Ended March 31 , % Three Months Ended March 31 , %
Category 2022 2021 Increase/(Decrease) Change 2022 2021 Increase/(Decrease) Change
Rental revenue(1) $ 82,259 $ 76,380 $ 5,879 7.7 % $ 115,572 $ 82,853 $ 32,719 39.5 %
Tenant reimbursements (2) 17,714 15,477 2,237 14.5 % 24,553 16,644 7,909 47.5 %
Other income(3) 242 101 141 139.6 % 463 147 316 215.0 %
Rental income $ 100,215 $ 91,958 $ 8,257 9.0 % $ 140,588 $ 99,644 $ 40,944 41.1 %
Our Same Property Portfolio and Total Portfolio rental income increased by
$8.3 million , or 9.0%, and $40.9 million , or 41.1%, respectively, during the
three months ended March 31, 2022 , compared to the three months ended March 31,
2021 , for the reasons described below:
48
--------------------------------------------------------------------------------(1) Rental Revenue
Our Same Property Portfolio and Total Portfolio rental revenue increased by$5.9 million , or 7.7%, and$32.7 million , or 39.5%, respectively, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase in our Same Property Portfolio rental revenue is primarily due to an increase in average rental rates on new and renewal leases, an increase in the weighted average occupancy of the portfolio, and a net increase in rental revenue of$0.5 million due to the combination of bad debt recoveries and a decrease in reserves for tenant and deferred rent receivables deemed not probable of collection, partially offset by a decrease of$0.7 million in amortization of net below-market lease intangibles. Our Total Portfolio rental revenue was also positively impacted by the incremental revenues from the 70 properties we acquired betweenJanuary 1, 2021 , andMarch 31, 2022 .
(2) Tenant Reimbursements
Our Same Property Portfolio tenant reimbursements revenue increased by$2.2 million , or 14.5%, and our Total Portfolio tenant reimbursements revenue increased by$7.9 million , or 47.5%, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase in our Same Property Portfolio tenant reimbursements revenue is primarily due to an increase in the weighted average occupancy of the portfolio, higher reimbursable insurance expenses as a result of higher overall premiums and additional earthquake insurance coverage, and an increase in reimbursable property tax expenses, partially offset by a decrease in tenant reimbursements due to timing differences in completing prior year recoverable expense reconciliations for comparable periods. Our Total Portfolio tenant reimbursements revenue was also impacted by the incremental tenant reimbursements from the 70 properties we acquired betweenJanuary 1, 2021 , andMarch 31, 2022 .
(3) Other Income
Our Same Property Portfolio and Total Portfolio other income increased by$0.1 million , or 139.6%, and$0.3 million , or 215.0%, respectively, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to the recommencement of charging fees for late rental payments, which until recently was prohibited due COVID-19 related governmental measures, and an increase in other miscellaneous income.
Management and Leasing Services
Our Total Portfolio management and leasing services revenue increased by$0.1 million , or 55.2%, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 .
Interest Income
Interest income decreased by
Property Expenses
Our Same Property Portfolio and Total Portfolio property expenses increased by$2.6 million , or 12.2%, and$9.9 million , or 41.8%, respectively, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The increase in our Same Property Portfolio property expenses is primarily due to an increase in insurance expense as a result of higher overall premiums and additional earthquake insurance coverage, an increase in allocated overhead costs and an increase in real estate tax expense. Our Total Portfolio property expenses were also impacted by incremental expenses from the 70 properties we acquired betweenJanuary 1, 2021 , andMarch 31, 2022 .
General and Administrative
Our Total Portfolio general and administrative expenses increased by$3.2 million , or 28.2%, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to increases in non-cash equity compensation expense primarily related to performance unit equity grants made in 2020 and 2021, accrued bonus expense and payroll related costs due to a higher employee headcount and rising labor costs. 49 --------------------------------------------------------------------------------
Depreciation and Amortization
Our Same Property Portfolio depreciation and amortization expense decreased by$2.1 million , or 6.6%, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to acquisition-related in-place lease intangibles becoming fully depreciated at certain of our properties subsequent toJanuary 1, 2021 , partially offset by an increase in depreciation expense related to capital improvements placed into service subsequent toJanuary 1, 2021 , and an increase in amortization of deferred leasing costs. Our Total Portfolio depreciation and amortization expense increased by$7.3 million , or 20.8%, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily due to the incremental expense from the 70 properties we acquired betweenJanuary 1, 2021 , andMarch 31, 2022 . Other Expenses
Our Total Portfolio other expenses increased by
Interest Expense
Our Total Portfolio interest expense decreased by$0.1 million , or 0.7%, during the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . The decrease in interest expense is primarily comprised of the following: (i) a$1.4 million net decrease related to the repayment of the$225 Million Term Loan Facility and termination of the related interest rate swaps inAugust 2021 , (ii) a$1.3 million increase in capitalized interest related to redevelopment and repositioning activity, (iii) a$0.4 million net decrease related to the interest rate swap that was terminated inNovember 2020 which had a loss balance in accumulated other comprehensive income/(loss) that was amortized into interest expense throughAugust 2021 , and (iv) a$0.2 million decrease related our$150 million unsecured term loan facility that was amended onJune 30, 2021 to reduce the applicable LIBOR margin. These decreases were partially offset by the following increases: (i) a$2.4 million increase due to the issuance of$400.0 million of 2.15% senior notes inAugust 2021 and (ii) a$0.6 million increase due to an increase in borrowings under our unsecured revolving credit facility and higher facility fees due to an increase in our borrowing capacity.
Gains on Sale of Real Estate
During the three months endedMarch 31, 2022 , we recognized a gain on sale of real estate of$8.5 million from the disposition of one property that was sold for a gross sales price of$16.5 million . During the three months endedMarch 31, 2021 , we recognized a total gain on sale of real estate of$10.9 million from the disposition of two properties that were sold for an aggregate gross sales price of$20.8 million . 50 --------------------------------------------------------------------------------
Non-GAAP Supplemental Measure: Funds From Operations and Core Funds From Operations
We calculate funds from operations ("FFO") attributable to common stockholder
in accordance with the standards established by the National Association of Real
Estate Investment Trusts ("NAREIT"). FFO represents net income (loss) (computed
in accordance with accounting principles generally accepted in the United States
("GAAP")), excluding gains (or losses) from sales of depreciable operating
property or assets incidental to our business, impairment losses of depreciable
operating property or assets incidental to our business, real estate related
depreciation and amortization (excluding amortization of deferred financing
costs) and after adjustments for unconsolidated joint ventures.
Management uses FFO as a supplemental performance measure because, in
excluding real estate related depreciation and amortization, gains and losses
from property dispositions, and asset impairments, it provides a performance
measure that, when compared year over year, captures trends in occupancy rates,
rental rates and operating costs. We also believe that, as a widely recognized
measure of performance used by other REITs, FFO may be used by investors as a
basis to compare our operating performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures
neither the changes in the value of our properties that result from use or
market conditions nor the level of capital expenditures and leasing commissions
necessary to maintain the operating performance of our properties, all of which
have real economic effects and could materially impact our results from
operations, the utility of FFO as a measure of our performance is limited. Other
equity REITs may not calculate or interpret FFO in accordance with the NAREIT
definition as we do, and, accordingly, our FFO may not be comparable to such
other REITs' FFO. FFO should not be used as a measure of our liquidity, and is
not indicative of funds available for our cash needs, including our ability to
pay dividends.
We calculate "Core FFO" by adjusting FFO to exclude the impact of certain items
that we do not consider reflective of our on-going operating performance. Core
FFO adjustments consist of (i) acquisition expenses, (ii) loss on extinguishment
of debt, (iii) the amortization of the loss on termination of interest rate
swaps, (iv) impairments of right-of-use assets and (v) other amounts as they may
occur. We believe that Core FFO is a useful supplemental measure as it provides
a more meaningful and consistent comparison of operating performance and allows
investors to more easily compare the Company's operating results. Because these
adjustments have a real economic impact on our financial condition and results
from operations, the utility of Core FFO as a measure of our performance is
limited. Other REITs may not calculate Core FFO in a consistent manner.
Accordingly, our Core FFO may not be comparable to other REITs' core FFO. Core
FFO should be considered only as a supplement to net income computed in
accordance with GAAP as a measure of our performance.
The following table sets forth a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO and Core FFO (in thousands):
Three Months Ended March 31,
2022 2021
Net income $ 48,900 $ 30,643
Add:
Depreciation and amortization 42,471 35,144
Deduct:
Gains on sale of real estate 8,486 10,860 Funds From Operations (FFO)$ 82,885 $ 54,927 Adjust Acquisition expenses 36 29 Amortization of loss on termination of interest rate swaps 112 410 Core FFO 83,033 55,366 Less: preferred stock dividends (2,314) (3,636) Less: Core FFO attributable to noncontrolling interest(1) (3,793) (3,155) Less: Core FFO attributable to participating securities(2) (296) (211) Core FFO attributable to common stockholders $
76,630
(1)Noncontrolling interests represent (i) holders of outstanding common units of the Company'sOperating Partnership that are owned by unit holders other than the Company and (ii) holders of Series 1 CPOP Units, Series 2 CPOP Units and Series 3 CPOP Units. 51 --------------------------------------------------------------------------------
(2)Participating securities include unvested shares of restricted stock, unvested LTIP units and unvested performance units.
Non-GAAP Supplemental Measures: NOI and Cash NOI
Net operating income ("NOI") is a non-GAAP measure which includes the revenue
and expense directly attributable to our real estate properties. NOI is
calculated as rental income less property expenses (before interest expense,
depreciation and amortization).
We use NOI as a supplemental performance measure because, in excluding real
estate depreciation and amortization expense, general and administrative
expenses, interest expense, gains (or losses) on sale of real estate and other
non-operating items, it provides a performance measure that, when compared year
over year, captures trends in occupancy rates, rental rates and operating
costs. We also believe that NOI will be useful to investors as a basis to
compare our operating performance with that of other REITs. However, because NOI
excludes depreciation and amortization expense and captures neither the changes
in the value of our properties that result from use or market conditions, nor
the level of capital expenditures and leasing commissions necessary to maintain
the operating performance of our properties (all of which have real economic
effect and could materially impact our results from operations), the utility of
NOI as a measure of our performance is limited. Other equity REITs may not
calculate NOI in a similar manner and, accordingly, our NOI may not be
comparable to such other REITs' NOI. Accordingly, NOI should be considered only
as a supplement to net income as a measure of our performance. NOI should not be
used as a measure of our liquidity, nor is it indicative of funds available to
fund our cash needs. NOI should not be used as a substitute for cash flow from
operating activities in accordance with GAAP.
NOI on a cash-basis ("Cash NOI") is a non-GAAP measure, which we calculate by
adding or subtracting the following items from NOI: (i) fair value lease revenue
and (ii) straight-line rental revenue adjustments. We use Cash NOI, together
with NOI, as a supplemental performance measure. Cash NOI should not be used as
a measure of our liquidity, nor is it indicative of funds available to fund our
cash needs. Cash NOI should not be used as a substitute for cash flow from
operating activities computed in accordance with GAAP.
The following table sets forth the revenue and expense items comprising NOI and the adjustments to calculate Cash NOI (in thousands):
Three Months Ended March 31,
2022 2021
Rental income $ 140,588 $ 99,644
Less: Property expenses 33,429 23,575
Net Operating Income $ 107,159 $ 76,069
Amortization of (below) above market lease intangibles, net (5,091) (2,712)
Straight line rental revenue adjustment (6,901) (4,199)
Cash Net Operating Income $
95,167
The following table sets forth a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to NOI and Cash NOI (in thousands):
52
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Three Months Ended March 31,
2022 2021
Net income $ 48,900 $ 30,643
Add:
General and administrative 14,717 11,480
Depreciation and amortization 42,471 35,144
Other expenses 38 29
Interest expense 9,683 9,752
Deduct:
Management and leasing services 163 105
Interest income 1 14
Gains on sale of real estate 8,486 10,860
Net Operating Income $ 107,159 $ 76,069
Amortization of (below) above market lease intangibles, net (5,091) (2,712)
Straight line rental revenue adjustment (6,901) (4,199)
Cash Net Operating Income $
95,167
Non-GAAP Supplemental Measure: EBITDAre
We calculate earnings before interest expense, income taxes, depreciation and
amortization for real estate ("EBITDAre") in accordance with the standards
established by NAREIT. EBITDAre is calculated as net income (loss) (computed in
accordance with GAAP), before interest expense, income tax expense, depreciation
and amortization, gains (or losses) from sales of depreciable operating property
or assets incidental to our business, impairment losses of depreciable operating
property or assets incidental to our business and adjustments for unconsolidated
joint ventures.
We believe that EBITDAre is helpful to investors as a supplemental measure of
our operating performance as a real estate company because it is a direct
measure of the actual operating results of our properties. We also use this
measure in ratios to compare our performance to that of our industry peers. In
addition, we believe EBITDAre is frequently used by securities analysts,
investors and other interested parties in the evaluation of equity REITs.
However, our industry peers may not calculate EBITDAre in accordance with the
NAREIT definition as we do and, accordingly, our EBITDAre may not be comparable
to our peers' EBITDAre. Accordingly, EBITDAre should be considered only as a
supplement to net income (loss) as a measure of our performance.
The following table sets forth a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to EBITDAre (in thousands):
Three Months Ended March 31,
2022 2021
Net income $ 48,900 $ 30,643
Interest expense 9,683 9,752
Depreciation and amortization 42,471 35,144
Gains on sale of real estate (8,486)
(10,860)
EBITDAre $ 92,568 $ 64,679 Supplemental Guarantor Information
InMarch 2020 , theSecurities and Exchange Commission ("SEC") adopted amendments to Rule 3-10 of Regulation S-X and created Rule 13-01 to simplify disclosure requirements related to certain registered securities. The rule became effectiveJanuary 4, 2021 . The Company and theOperating Partnership have filed a registration statement on Form S-3 with theSEC registering, among other securities, debt securities of theOperating Partnership , which will be fully and unconditionally guaranteed by the Company. AtMarch 31, 2022 , theOperating Partnership had issued and outstanding$400.0 million of 2.125% Senior Notes due 2030 (the "$400 Million Notes due 2030") and$400 million of 2.15% Senior Notes due 2031 (the "$400 Million Notes due 2031"). The obligations of theOperating Partnership to pay principal, premiums, if any, and interest 53 --------------------------------------------------------------------------------
on the
As a result of the amendments to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company's consolidated financial statements, the parent guarantee is "full and unconditional" and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 is provided, which includes narrative disclosure and summarized financial information. Accordingly, separate consolidated financial statements of theOperating Partnership have not been presented. Furthermore, as permitted under Rule 13-01(a)(4)(vi), the Company has excluded the summarized financial information for theOperating Partnership as the assets, liabilities and results of operations of the Company and theOperating Partnership are not materially different than the corresponding amounts presented in the consolidated financial statements of the Company, and management believes such summarized financial information would be repetitive and not provide incremental value to investors.
Liquidity and Capital Resources
Overview
Our short-term liquidity requirements consist primarily of funds to pay for operating expenses, interest expense, general and administrative expenses, capital expenditures, tenant improvements and leasing commissions, and distributions to our common and preferred stockholders and holders of common units of partnership interests in ourOperating Partnership ("OP Units"). We expect to meet our short-term liquidity requirements through available cash on hand, cash flow from operations, by drawing on our unsecured revolving credit facility and by issuing shares of common stock pursuant to our at-the-market equity offering program or issuing other securities as described below. Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, recurring and non-recurring capital expenditures and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through net cash flow from operations, proceeds from long-term unsecured and secured financings, borrowings available under our unsecured revolving credit facility, the issuance of debt and/or equity securities, including preferred stock, and proceeds from selective real estate dispositions as we identify capital recycling opportunities.
As of
•Outstanding fixed-rate and variable-rate debt with varying maturities with an aggregate principal amount of$1.5 billion , of which$2.6 million is due within 12 months; •Total scheduled interest payments on our fixed rate debt and projected interest payments on our variable rate debt and interest rate swap of$284.6 million , of which$42.0 million is due within 12 months; •Commitments of$82.8 million for tenant improvements under certain tenant leases and construction work related to obligations under contractual agreements with our construction vendors; and
•Operating lease commitments with aggregate lease payments of
See "Note 5 - Notes Payable" to the consolidated financial statements included in Item 1 of this Report on Form 10-Q for further details regarding the scheduled principal payments. Also see "Note 6 - Leases" to the consolidated financial statements for further details regarding the scheduled operating lease payments.
As of
Sources of Liquidity
Cash Flow from Operations
Cash flow from operations is one of our key sources of liquidity and is
primarily dependent upon: (i) the occupancy levels and lease rates at our
properties, (ii) our ability to collect rent, (iii) the level of operating costs
we incur and (iv) our ability to pass through operating expenses to our tenants.
We are subject to a number of risks related to general economic and other
unpredictable conditions, which have the potential to affect our overall
performance and resulting cash flows from operations. However, based on our
current portfolio mix and business strategy, we anticipate that we will be able
to generate positive cash flows from operations.
54
--------------------------------------------------------------------------------ATM Program
OnJanuary 13, 2022 , we established a new at-the-market equity offering program pursuant to which we are able to sell from time to time shares of our common stock having an aggregate sales price of up to$750.0 million (the "2022 ATM Program"). The 2022 ATM Program replaces our previous$750.0 million at-the-market equity offering program, which was established onNovember 9, 2020 , under which we had sold shares of our common stock having an aggregate gross sales price of$743.9 million throughJanuary 13, 2022 . We may sell shares of our common stock directly through sales agents or we may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under the 2022 ATM Program. The use of a forward equity sale agreement allows us to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date. During the three months endedMarch 31, 2022 , we entered into forward equity sale agreements with certain financial institutions acting as forward purchasers under the 2022 ATM program with respect to 5,752,268 shares of common stock at weighted average initial forward sale price of$70.32 per share. We did not receive any proceeds from the sale of common shares by the forward purchasers at the time we entered into forward equity sale agreements. InMarch 2022 , we physically settled the forward equity sale agreement that was outstanding as ofDecember 31, 2021 , and a portion of the forward equity sale agreements related to the 2022 ATM Program by issuing 4,402,110 shares of our common stock for net proceeds of$305.9 million . The net proceeds were calculated based on a weighted average net forward sale price at the time of settlement of$69.49 per share. As ofMarch 31, 2022 , we had 3,256,514 shares of common stock, or approximately$232.2 million of forward net proceeds remaining for settlement to occur by the second quarter of 2023, based on net forward sales price of$71.29 per share. As ofMarch 31, 2022 , approximately$339.7 million of common stock remains available to be sold under the 2022 ATM Program. Future sales, if any, will depend on a variety of factors, including among others, market conditions, the trading price of our common stock, determinations by us of the appropriate sources of funding for us and potential uses of funding available to us. We intend to use the net proceeds from the offering of shares under the 2022 Million ATM Program, if any, to fund potential acquisition opportunities, repay amounts outstanding from time to time under our unsecured revolving credit facility or other debt financing obligations, to fund our repositioning or redevelopment activities and/or for general corporate purposes.
Securities Offerings
We evaluate the capital markets on an ongoing basis for opportunities to raise capital, and as circumstances warrant, we may issue additional securities, from time to time, to fund acquisitions, for the repayment of long-term debt upon maturity and for other general corporate purposes. Such securities may include common equity, preferred equity and/or debt of us or our subsidiaries. Any future issuance, however, is dependent upon market conditions, available pricing and capital needs and there can be no assurance that we will be able to complete any such offerings of securities.
We continuously evaluate opportunities for the potential disposition of
properties in our portfolio when we believe such disposition is appropriate in
view of our business objectives. In evaluating these opportunities, we consider
a variety of criteria including, but not limited to, local market conditions and
lease rates, asset type and location, as well as potential uses of proceeds and
tax considerations. Tax considerations include entering into tax-deferred
like-kind exchanges under Section 1031 of the Code ("1031 Exchange"), when
possible, to defer some or all of the taxable gains, if any, on dispositions.
During the three months ended March 31, 2022 , we completed the disposition of
one property for a sales price of $16.5 million and total net cash proceeds of
$15.3 million . The net cash proceeds were used to partially fund the acquisition
of one property during the three months ended March 31, 2022 , through a 1031
Exchange transaction.
We anticipate continuing to selectively and opportunistically dispose of
properties, however, the timing of any potential future dispositions will depend
on market conditions, asset-specific circumstances or opportunities, and our
capital needs. Our ability to dispose of selective properties on advantageous
terms, or at all, is dependent upon a number of factors including the
availability of credit to potential buyers to purchase properties at prices that
we consider acceptable, which may be impacted by the ongoing COVID-19 pandemic.
Investment Grade Rating
Our credit ratings at
55
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and BBB (Positive outlook) from Fitch with respect to our Credit Agreement
(described below), $150 million unsecured term loan facility (the "$150 Million
Term Loan Facility"), $100 million unsecured guaranteed senior notes (the "$100
Million Notes"), $25 million unsecured guaranteed senior notes and $75 million
unsecured guaranteed senior notes (together the "Series 2019A and 2019B Notes"),
$400 Million Notes due 2030 and $400 Million Notes due 2031. Our credit rating
at March 31, 2022 , was BB+ from both Fitch and S&P with respect to our 5.875%
Series B Cumulative Redeemable Preferred Stock and our 5.625% Series C
Cumulative Redeemable Preferred Stock. Our credit ratings 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
analysis of us, and, although it is our intent to maintain our investment grade
credit rating, there can be no assurance that we will be able to maintain our
current credit ratings. In the event our current credit ratings are downgraded,
it may become difficult or more expensive to obtain additional financing or
refinance existing indebtedness as maturities become due.
Credit Agreement
As ofMarch 31, 2022 , under the Third Amended and Restated Credit Agreement (the "Credit Agreement"), we have an unsecured revolving credit facility with a borrowing capacity of$700.0 million (the "Revolver"). Subject to certain terms and conditions set forth in the Credit Agreement, we may request additional lender commitments up to an additional aggregate$700.0 million , which may be comprised of additional revolving commitments under the Revolver, term loan tranches or any combination of the foregoing. The Revolver is scheduled to mature onFebruary 13, 2024 and has two six-month extension options available. The Revolver may be voluntarily prepaid in whole or in part at any time without premium or penalty. Interest on the Revolver is generally to be paid based upon, at our option, either (i) LIBOR plus an applicable margin that is based upon our investment grade ratings or (ii) the Base Rate (which is defined as the highest of (a) the federal funds rate plus 0.50%, (b) the administrative agent's prime rate or (c) the Eurodollar Rate plus 1.00%) plus an applicable margin that is based on our investment grade ratings. As ofMarch 31, 2022 , the margins range from 0.725% to 1.40% per annum for LIBOR-based loans and 0.00% to 0.45% per annum for Base Rate-based loans, depending on our investment grade ratings. In addition to the interest payable on amounts outstanding under the Revolver, we are required to pay an applicable facility fee on each lender's commitment amount under the Revolver, regardless of usage. The applicable facility fee ranges in amount from 0.125% to 0.300% per annum, depending on our investment grade ratings. The Credit Agreement contains usual and customary events of default including defaults in the payment of principal, interest or fees, defaults in compliance with the covenants set forth in the Credit Agreement and other loan documentation, cross-defaults to certain other indebtedness, and bankruptcy and other insolvency defaults. If an event of default occurs and is continuing under the Credit Agreement, the unpaid principal amount of all outstanding loans, together with all accrued unpaid interest and other amounts owing in respect thereof, may be declared immediately due and payable. As of the filing date of this Quarterly Report on Form 10-Q, we had$215.0 million outstanding under the Revolver, leaving$485.0 million available for future borrowings. Uses of Liquidity Acquisitions One of our most significant liquidity needs has historically been for the acquisition of real estate properties. Year to date including properties acquired subsequent to quarter end, we have acquired 19 properties with 1.6 million rentable square feet of buildings on 88 acres of land, for an aggregate purchase price of$498.2 million , and we are actively monitoring a volume of properties in our markets that we believe represent attractive potential investment opportunities to continue to grow our business. As of the filing date of this Quarterly Report on Form 10-Q, we have over$500.0 million of acquisitions under contract or letter of intent. There can be no assurance we will complete any such acquisitions. While the actual number of acquisitions that we complete will be dependent upon a number of factors, in the short term, we expect to fund our acquisitions through available cash on hand, cash flows from operations, borrowings available under the Revolver, recycling capital through property dispositions and, in the long term, through the issuance of equity securities or proceeds from long-term secured and unsecured financings. See "Note 3 - Investments in Real Estate" to the consolidated financial statements for a summary of the properties we acquired during the three months endedMarch 31, 2022 . 56 --------------------------------------------------------------------------------
Recurring and Nonrecurring Capital Expenditures
Capital expenditures are considered part of both our short-term and long-term liquidity requirements. As discussed above under - Factors that May Influence Future Results -Acquisitions and Value-Add Repositioning and Redevelopment of Properties, as ofMarch 31, 2022 , 14 of our properties were under current repositioning, redevelopment, or lease-up and we have a pipeline of 14 additional properties for which we anticipate beginning construction work over the next six quarters. We currently estimate that approximately$364.6 million of capital will be required over the next three partial and full years (2022-2024) to complete the repositioning/redevelopment of these properties. However, this estimate is based on our current construction plans and budgets, both of which are subject to change as a result of a number of factors, including increased costs of building materials or construction services and construction delays related to supply chain backlogs and increased lead time on building materials. If we are unable to complete construction on schedule or within budget, we could incur increased construction costs and experience potential delays in leasing the properties. We expect to fund these projects through a combination of cash flow from operations, the issuance of common stock under the 2022 ATM Program and borrowings available under the Revolver.
The following table sets forth certain information regarding non-recurring and recurring capital expenditures at the properties in our portfolio as follows:
Three Months Ended March 31, 2022
Per Square
Total(1) Square Feet(2) Foot(3)
Non-Recurring Capital Expenditures(4) $ 18,815 15,910,777 $ 1.18
Recurring Capital Expenditures(5) 1,251 37,265,952 $ 0.03
Total Capital Expenditures $ 20,066
(1)Cost is reported in thousands. Excludes the following capitalized costs: (i)
compensation costs of personnel directly responsible for and who spend their
time on redevelopment, renovation and rehabilitation activity and (ii) interest,
property taxes and insurance costs incurred during the pre-construction and
construction periods of repositioning or redevelopment projects.
(2)For non-recurring capital expenditures, reflects the aggregate square footage
of the properties in which we incurred such capital expenditures. For recurring
capital expenditures, reflects the weighted average square footage of our
consolidated portfolio during the period.
(3)Per square foot amounts are calculated by dividing the aggregate capital expenditure costs by the square footage as defined in (2) above.
(4)Non-recurring capital expenditures are expenditures made with respect to improvements to the appearance of such property or any redevelopment or other major upgrade or renovation of such property, and further includes capital expenditures for seismic upgrades, or capital expenditures for deferred maintenance existing at the time such property was acquired.
(5)Recurring capital expenditures are expenditures made with respect to the maintenance of such property and replacement of items due to ordinary wear and tear including, but not limited to, expenditures made for maintenance of parking lots, roofing materials, mechanical systems, HVAC systems and other structural systems. Dividends and Distributions In order to maintain our qualification as a REIT, we are required to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. To satisfy the requirements to qualify as a REIT and generally not be subject toU.S. federal income tax, we intend to distribute a percentage of our cash flow on a quarterly basis to holders of our common stock. In addition, we intend to make distribution payments to holders of OP Units and preferred units and dividend payments to holders of our preferred stock. 57 --------------------------------------------------------------------------------
On
Amount per
Security Share/Unit Record Date Payment Date
Common stock $ 0.315 June 30, 2022 July 15, 2022
OP Units $ 0.315 June 30, 2022 July 15, 2022
5.875% Series B Cumulative Redeemable
Preferred Stock $ 0.367188 June 15, 2022 June 30, 2022
5.625% Series C Cumulative Redeemable
Preferred Stock $ 0.351563 June 15, 2022 June 30, 2022
4.43937% Cumulative Redeemable Convertible
Preferred Units $ 0.505085 June 15, 2022 June 30, 2022
4.00% Cumulative Redeemable Convertible
Preferred Units $ 0.45 June 15, 2022 June 30, 2022
3.00% Cumulative Redeemable Convertible
Preferred Units $ 0.545462 June 15, 2022 June 30, 2022
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Consolidated Indebtedness
The following table sets forth certain information with respect to our
consolidated indebtedness outstanding as of
Margin Above Effective Principal Balance Maturity Date of
Contractual Maturity Date LIBOR Interest Rate(1) (in thousands)(2) Effective Swaps
Unsecured and Secured Debt:
Unsecured Debt:
Revolving Credit Facility(3) 2/13/2024 (4) 0.850 % (5) 1.302 % $ 125,000
$150M Term Loan Facility 5/22/2025 0.950 % (5) 3.713 % (6) 150,000 11/22/2024
$100M Senior Notes 8/6/2025 n/a 4.290 % 100,000
$125M Senior Notes 7/13/2027 n/a 3.930 % 125,000
$25M Series 2019A Senior Notes 7/16/2029 n/a 3.880 % 25,000
$400M Senior Notes due 2030 12/1/2030 n/a 2.125 % 400,000
$400M Senior Notes due 2031 9/1/2031 n/a 2.150 % 400,000
$75M Series 2019B Senior Notes 7/16/2034 n/a 4.030 % 75,000
Total Unsecured Debt $ 1,400,000
Secured Debt:
2601-2641 Manhattan Beach Boulevard 4/5/2023 n/a 4.080 % $ 3,922
$60M Term Loan 8/1/2023 (7) 1.700 % 2.152 % 57,912
960-970 Knox Street 11/1/2023 n/a 5.000 % 2,377
7612-7642 Woodwind Drive 1/5/2024 n/a 5.240 % 3,783
11600 Los Nietos Road 5/1/2024 n/a 4.190 % 2,586
5160 Richton Street 11/15/2024 n/a 3.790 % 4,243
22895 Eastpark Drive 11/15/2024 n/a 4.330 % 2,665
701-751 Kingshill Place 1/5/2026 n/a 3.900 % 7,100
13943-13955 Balboa Boulevard 7/1/2027 n/a 3.930 % 15,232
2205 126th Street 12/1/2027 n/a 3.910 % 5,200
2410-2420 Santa Fe Avenue 1/1/2028 n/a 3.700 % 10,300
11832-11954 La Cienega Boulevard 7/1/2028 n/a 4.260 % 3,983
Gilbert/La Palma 3/1/2031 n/a 5.125 % 2,074
7817 Woodley Avenue 8/1/2039 n/a 4.140 % 3,102
2515 Western Avenue 9/1/2042 n/a 4.500 % 13,007
Total Secured Debt $ 137,486
Total Consolidated Debt 2.735 % $ 1,537,486 (1)Includes the effect of one interest rate swap that was effective as of
(2)Excludes unamortized debt issuance costs and premiums/discounts totaling
(3)The Revolver is subject to an applicable facility fee which is calculated as a percentage of the total lenders' commitment amount, regardless of usage. The applicable facility fee will range from 0.125% to 0.300% per annum depending upon our investment grade rating.
(4)Two additional six-month extensions are available at the borrower's option, subject to certain terms and conditions.
(5)As ofMarch 31, 2022 , the interest rates on these loans are comprised of LIBOR plus a LIBOR margin. The LIBOR margin will range from 0.725% to 1.400% per annum for the Revolver and 0.80% to 1.60% per annum for the$150 Million Term Loan Facility, depending on our investment grade rating, which may change from time to time. 59 -------------------------------------------------------------------------------- (6)As ofMarch 31, 2022 , the$150 Million Term Loan Facility has been effectively fixed at 2.7625% plus an applicable LIBOR margin through the use of an interest rate swap with a notional value of$150.0 million and an effective date ofJuly 22, 2019 .
(7)The
The following table summarizes the composition of our consolidated debt between fixed-rate and variable-rate and secured and unsecured debt as ofMarch 31, 2022 : Average Term Remaining Stated Effective Principal Balance (in years) Interest Rate Interest Rate(1) (in thousands)(2) % of Total Fixed vs. Variable: Fixed 7.7 2.89% 2.89%$ 1,354,574 88% Variable 1.7 LIBOR + 1.12% 1.57% $ 182,912 12% Secured vs. Unsecured: Secured 4.9 3.31% $ 137,486 9% Unsecured 7.2 2.68%$ 1,400,000 91%
(1)Includes the effect of interest rate swaps that were effective as of
(2)Excludes unamortized debt issuance costs and premiums/discounts totaling
AtMarch 31, 2022 , we had total consolidated indebtedness of$1.5 billion , excluding unamortized debt issuance costs and premiums/discounts, with a weighted average interest rate of 2.73% and an average term-to-maturity of 7.0 years. As ofMarch 31, 2022 ,$1.4 billion , or 88% of our outstanding indebtedness had an interest rate that was effectively fixed under either the terms of the loan ($1.2 billion ) or an interest rate swap ($150.0 million ). AtMarch 31, 2022 , we had consolidated indebtedness of$1.5 billion , reflecting a net debt to total combined market capitalization of approximately 10.3%. Our total market capitalization is defined as the sum of the liquidation preference of our outstanding preferred stock and preferred units plus the market value of our common stock excluding shares of nonvested restricted stock, plus the aggregate value of common units not owned by us, plus the value of our net debt. Our net debt is defined as our consolidated indebtedness less cash and cash equivalents. Debt Covenants The Credit Agreement,$150 Million Term Loan Facility,$100 Million Notes,$125 Million Notes and Series 2019A and 2019B Notes all include a series of financial and other covenants that we must comply with, including the following covenants which are tested on a quarterly basis:
•Maintaining a ratio of total indebtedness to total asset value of not more than 60%;
•For the Credit Agreement and
•For the
•For the Senior Notes, maintaining a ratio of total secured recourse debt to total asset value of not more than 15%;
•For the Credit Agreement and$150 Million Term Loan Facility, maintaining a minimum tangible net worth of at least the sum of (i)$2,061,865,500 , and (ii) an amount equal to at least 75% of the net equity proceeds received by the Company afterSeptember 30, 2019 ; •For the Senior Notes, maintaining a minimum tangible net worth of at least the sum of (i)$760,740,750 , and (ii) an amount equal to at least 75% of the net equity proceeds received by the Company afterSeptember 30, 2016 ; 60 --------------------------------------------------------------------------------
•Maintaining a ratio of adjusted EBITDA (as defined in each of the loan agreements) to fixed charges of at least 1.5 to 1.0;
•Maintaining a ratio of total unsecured debt to total unencumbered asset value of not more than 60%; and
•Maintaining a ratio of unencumbered NOI (as defined in each of the loan agreements) to unsecured interest expense of at least 1.75 to 1.00.
The
•Maintaining a ratio of total indebtedness to total asset value of not more than 60%;
•Maintaining a ratio of secured debt to total asset value of not more than 40%;
•Maintaining a Debt Service Coverage Ratio of at least 1.5 to 1.0; and
•Maintaining a ratio of unencumbered assets to unsecured debt of at least 1.5 to 1.0.
The Credit Agreement,$150 Million Term Loan Facility and Senior Notes also contain limitations on our ability to pay distributions on our common stock. Specifically, our cash dividends may not exceed the greater of (i) 95% of our FFO (as defined in the credit agreement) and (ii) the amount required for us to qualify and maintain our REIT status. If an event of default exists, we may only make distributions sufficient to qualify and maintain our REIT status. Additionally, subject to the terms of the Senior Notes, upon certain events of default, including, but not limited to, (i) a default in the payment of any principal, make-whole payment amount, or interest under the Senior Notes, (ii) a default in the payment of certain of our other indebtedness, (iii) a default in compliance with the covenants set forth in the Senior Notes agreement and (iv) bankruptcy and other insolvency defaults, the principal and accrued and unpaid interest and the make-whole payment amount on the outstanding Senior Notes will become due and payable at the option of the purchasers. In addition, we are required to maintain at all times a credit rating on the Senior Notes from either S&P, Moody's or Fitch.
The
•Maintaining a Debt Service Coverage Ratio (as defined in the term loan agreement) of at least 1.10 to 1.00, to be tested quarterly;
•Maintaining Unencumbered Liquid Assets (as defined in the term loan agreement) of not less than (i)$5 million , or (ii)$8 million if we elect to have Line of Credit Availability (as defined in the term loan agreement) included in the calculation, of which$2 million must be cash or cash equivalents, to be tested annually as ofDecember 31 of each year;
•Maintaining a minimum
We were in compliance with all of our quarterly debt covenants as of
Cash Flows
Comparison of the Three Months Ended
The following table summarizes the changes in net cash flows associated with our operating, investing, and financing activities for the three months endedMarch 31, 2022 and 2021 (in thousands): Three Months Ended
2022 2021 Change
Cash provided by operating activities $ 91,592 $ 36,376 $ 55,216
Cash used in investing activities $ (471,622) $ (172,401) $ (299,221)
Cash provided by financing activities $ 384,876
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Net cash provided by operating activities. Net cash provided by operating
activities increased by $55.2 million to $91.6 million for the three months
ended March 31, 2022 , compared to $36.4 million for the three months ended
March 31, 2021 . The increase was primarily attributable to the timing of the
second property tax installment payments which were paid in April 2022
(subsequent to March 31, 2022 ) for the 2021-2022 tax year compared to March 2021
for the 2020-2021 tax year, the incremental cash flows from property
acquisitions completed subsequent to January 1, 2021 , and the increase in Cash
NOI from our Same Property Portfolio.
Net cash used in investing activities. Net cash used in investing activities
increased by $299.2 million to $471.6 million for the three months ended
March 31, 2022 , compared to $172.4 million for the three months ended March 31,
2021 . The increase was primarily attributable to a $290.5 million increase in
cash paid for property acquisitions and acquisition related deposits, a $4.6
million decrease in proceeds from the sale of real estate for comparable periods
and a $4.1 million increase in cash paid for construction costs, including costs
related to repositioning/redevelopment projects.
Net cash provided by financing activities. Net cash provided by financing
activities increased by $302.4 million to $384.9 million for the three months
ended March 31, 2022 , compared to $82.5 million for the three months ended
March 31, 2021 . The increase was primarily attributable to an increase of $187.5
million in net cash proceeds from the issuance of shares of common stock and an
increase of $125.0 million in net borrowings under the Revolver.
Inflation
The majority of our leases are either triple net or provide for tenant
reimbursement for costs related to real estate taxes and operating expenses. In
addition, most of the leases provide for fixed rent increases. We believe that
inflationary increases to real estate taxes, utility expenses and other
operating expenses may be partially offset by the contractual rent increases and
tenant payment of taxes and expenses described above. We do not believe that
inflation has had a material impact on our historical financial position or
results of operations. However, a prolonged period of high and persistent
inflation could cause an increase in our operating expenses, capital
expenditures and cost of our variable-rate borrowings which could have a
material impact on our financial position or results of operations.
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