UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2014

OR

For the transition period from                  to                 

Commission File Number: 001-36008

 

Rexford Industrial Realty, Inc.

(Exact name of registrant as specified in its charter)

 

 

(310) 966-1680

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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

 

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

The number of shares of common stock outstanding at November 3, 2014 was 43,478,233.

 

 

 

 

 

 

---

 

REXFORD INDUSTRIAL REALTY, INC.

QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

 

 

 

 

---

 

PART I. FINANCIAL INFORMATION

 

REXFORD INDUSTRIAL REALTY, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

 

 

3

---

 

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTRIAL REALTY, INC. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (Unaudited)

 

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

 

 

4

---

 

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTRIAL REALTY, INC. PREDECESSOR

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

 

 

5

---

 

REXFORD INDUSTRIAL REALTY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)

 

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

 

 

6

---

 

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTRIAL REALTY, INC. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (Unaudited)

 

7

---

 

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

 

8

---

 

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Unaudited)

 

Rexford Industrial Realty, Inc. is a self-administered and self-managed full-service real estate investment trust (“REIT”) focused on owning and operating industrial properties in Southern California infill markets. We were formed as a Maryland corporation on January 18, 2013 and Rexford Industrial Realty, L.P. (the “Operating Partnership”), of which we are the sole general partner, was formed as a Maryland limited partnership on January 18, 2013. Through our controlling interest in our Operating Partnership and its subsidiaries, we own, manage, lease, acquire and develop industrial real estate primarily located in Southern California infill markets.  As of September 30, 2014, our consolidated portfolio consisted of 86 properties with approximately 8.6 million rentable square feet.  We also own a 15% interest in a joint venture that owns three properties with approximately 1.2 million square feet, which we also manage.   In addition, we currently manage an additional 20 properties with approximately 1.2 million rentable square feet.  

We did not have any meaningful operating activity until the consummation of our initial public offering (“IPO”) and the related acquisition of certain assets of our predecessor as part of our formation transactions on July 24, 2013.  The historical financial results in these financial statements for periods prior to July 24, 2013 relate to our accounting predecessor. Our Predecessor is comprised of Rexford Industrial, LLC (“RILLC”), Rexford Sponsor V, LLC (“Sponsor”), Rexford Industrial Fund V REIT, LLC (“RIF V REIT”) and their consolidated subsidiaries, which consist of Rexford Industrial Fund I, LLC (“RIF I”), Rexford Industrial Fund II, LLC (“RIF II”), Rexford Industrial Fund III, LLC (“RIF III”), Rexford Industrial Fund IV, LLC (“RIF IV”), Rexford Industrial Fund V, LP (“RIF V”) and their subsidiaries (collectively the “Predecessor Funds”). The entities comprising Rexford Industrial Realty, Inc. Predecessor are combined on the basis of common management and common ownership.

The terms “us,” “we,” “our,” and the “Company” as used in these financial statements refer to Rexford Industrial Realty, Inc. and its subsidiaries (including our Operating Partnership) subsequent to our IPO on July 24, 2013 and our predecessor prior to that date (“Predecessor” or “Rexford Industrial Realty, Inc. Predecessor”).

Basis of Presentation

As of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and the period from July 24, 2013 to September 30, 2013, the financial statements presented are the consolidated financial statements of Rexford Industrial Realty, Inc. and its subsidiaries, including our Operating Partnership. The financial statements presented for the periods prior to July 24, 2013 are the combined financial statements of our Predecessor. All of the outside ownership interests in entities that our Predecessor consolidates are included in non-controlling interests. All significant intercompany balances and transactions have been eliminated in the consolidated and combined financial statements.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The interim financial statements should be read in conjunction with the combined and consolidated financial statements in our 2013 Annual Report on Form 10-K and the notes thereto. Any references to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated and combined financial statements and accompanying notes. Actual results could differ from those estimates.

We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entity and we are the primary beneficiary through consideration of the substantive terms of the

9

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

arrangement to identify which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities in which we do not control but over which we have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that we do not control and over which we do not exercise significant influence are carried at the lower of cost or fair value, as appropriate. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in our consolidated and combined financial statements.

 

Cash and Cash Equivalents

Cash and cash equivalents include all cash and liquid investments with an initial maturity of three months or less. The carrying amount approximates fair value due to the short term maturity of these investments.

Discontinued Operations

On April 14, 2014, the FASB issued ASU 2014-08: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. ASU 2014-08 further expands the disclosure requirements for disposals that meet the definition of a discontinued operation, and requires entities to disclose information about disposals of individually significant components.  ASU 2014-08 will be applied prospectively and is effective for annual periods and interim periods within those years, beginning after December 15, 2014 with early adoption permitted. We elected to adopt ASU 2014-08 early, beginning in the fiscal quarter ended September 30, 2014. The adoption of ASU 2014-08 will likely result in fewer property sales being classified as discontinued operations.

For assets held for sale or sold prior to the adoption of ASU 2014-08, the revenue, expenses, impairment and/or gain on sale of operating properties that meet the applicable criteria are reported as discontinued operations in the consolidated and combined statements of operations for all periods presented. A gain on sale, if any, is recognized in the period during which the property is disposed.  In addition, all amounts for all prior periods presented are reclassified from continuing operations to discontinued operations.

In determining whether to report the results of operations, impairment and/or gain on sale of operating properties as discontinued operations, we evaluate whether we have any significant continuing involvement in the operations, leasing or management of the property after disposition. If we determine that we have significant continuing involvement after disposition, we report the revenue, expenses, impairment and/or gain on sale as part of continuing operations.  See Note 13.

Held for Sale Assets

We classify properties as held for sale when certain criteria set forth in the Long-Lived Assets Classified as Held for Sale Subsections of ASC Topic 360: Property, Plant, and Equipment, are met. At that time, the assets and liabilities of the property held for sale are presented separately in the consolidated balance sheets, which includes the reclassification of the assets and liabilities for all comparative periods. In addition, we cease recording depreciation and amortization expense at the time a property is classified as held for sale. Properties held for sale are reported at the lower of their carrying value or their estimated fair value, less estimated costs to sell.  See Note 13.

Investment in Real Estate

Acquisitions

When we acquire operating properties, with the intention to hold the investment for the long-term, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component. The components typically include land, building and improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities.  The initial allocation of the purchase price is based on

10

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which typically does not exceed one year.

We allocate the purchase price to the fair value of the tangible assets by valuing the property as if it were vacant. We consider Level 3 inputs, which are unobservable inputs based on the Company’s assumptions about the assumptions a market participant would use, such as the replacement cost of such assets, appraisals, property condition reports, comparable market rental data and other related information.  

In determining the fair value of intangible lease assets or liabilities, we also consider Level 3 inputs. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the term of any below market fixed rate renewal options for below market leases, if applicable.  The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property, that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with the business combination are expensed in the period they are incurred.

The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.

For acquisitions that do not meet the accounting criteria to be accounted for as a business combination, we record to land and building the purchase price paid and capitalize the associated acquisition costs.  

Capitalization of Costs

We capitalize costs incurred in developing, renovating, rehabilitating, and improving real estate assets as part of the investment basis. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. During the land development and construction periods, we capitalize insurance, real estate taxes and certain general and administrative costs of the personnel performing development, renovations, and rehabilitation if such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. Capitalized costs are included in the investment basis of real estate assets.

Depreciation and Amortization

Real estate, including land, building and land improvements, tenant improvements, and furniture, fixtures and equipment, leasing costs and intangible lease assets and liabilities are stated at historical cost less accumulated depreciation and amortization, unless circumstances indicate that the cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value as discussed below in our policy with regards to impairment of long-lived assets. We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense. Our ability to estimate the depreciable portions of our real estate assets and useful lives is critical to the determination of the appropriate amount of depreciation and amortization expense recorded and the carrying value of the underlying assets. Any change to the assets to be depreciated and the estimated depreciable lives of these assets would have an impact on the depreciation expense recognized.

The values allocated to buildings, site improvements, in-place leases, tenant improvements and leasing costs are depreciated on a straight-line basis using an estimated remaining life of 10-30 years for buildings, 20 years for site improvements, and the shorter of the estimated useful life or respective lease term for tenant improvements.

As discussed above, in connection with property acquisitions, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an intangible lease asset or liability and amortized to “rental revenues” over the reasonably assured term of the related leases. The unamortized balances of these assets and liabilities associated with the early termination of leases are fully amortized to their respective revenue line items in our consolidated financial statements over the shorter of the expected life of such assets and liabilities or the remaining lease term.

11

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Our estimate of the useful life of our assets is evaluated upon acquisition and when circumstances indicate a change in the useful life, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets.

Impairment of Long-Lived Assets

In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC Topic 360: Property, Plant, and Equipment, we assess the carrying values of our respective long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.

Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review real estate assets for recoverability, we consider current market conditions as well as our intent with respect to holding or disposing of the asset. The intent with regards to the underlying assets might change as market conditions and other factors change. Fair value is determined through various valuation techniques; including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property, quoted market values and third party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with estimates of future expectations and the strategic plan used to manage our underlying business. If our analysis indicates that the carrying value of the real estate asset is not recoverable on an undiscounted cash flow basis, we will recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.

Assumptions and estimates used in the recoverability analyses for future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with respect to to our investment that occur subsequent to our impairment analyses could impact these assumptions and result in future impairment of our real estate properties.

At September 30, 2014 and December 31, 2013, our investment in real estate has been recorded net of a cumulative impairment of $18.6 million as of the end of both periods.

Acquired Indefinite-Lived Intangibles

Acquired indefinite-lived intangibles represent the fair value of the management contracts in-place at the time of the contribution of Sponsor, RIF V REIT and their consolidated subsidiaries to the Operating Partnership as part of our formation transactions.  The asset has an indefinite life, and, accordingly, is not amortized.

Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”) commencing with our initial taxable year ended December 31, 2013. To qualify as a REIT, we are required (among other things) to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. If we fail to qualify as a REIT in any taxable year, and were unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

In addition, we are subject to taxation by various state and local jurisdictions, including those in which we transact business or reside. Our non-taxable REIT subsidiaries, including our Operating Partnership, are either partnerships or disregarded entities for federal income tax purposes. Under applicable federal and state income tax rules, the allocated share of net income or loss from disregarded entities (including limited partnerships and S-Corporations) is reportable in the income tax returns of the respective partners and stockholders. Accordingly, no income tax provision is included in the accompanying consolidated financial statements for the three and nine months ended September 30, 2014 and for the period from July 24, 2013 through September 30, 2013.

Each of RIF I, RIF II, RIF III and RIF IV are limited liability companies but have elected to be taxed as a partnership for tax purposes. As such, the allocated share of net income or loss from the limited liability companies is reportable in the income

12

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

tax returns of the respective partners and investors. Accordingly, no income tax provision is included in the accompanying combined financial statements.

RIF V REIT has elected to be taxed as a REIT under the Code, commencing with its tax period ended December 31, 2010. We believe that RIF V REIT met all of the REIT distribution and technical requirements for the period from July 1, 2013 to July 23, 2013 and the period from January 1, 2013 to July 23, 2013, and accordingly, has not recognized any provision for income taxes.

We periodically evaluate our tax positions to determine whether it is more likely than not that such positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations, based on their technical merits. As of September 30, 2014 and December 31, 2013, we have not established a liability for uncertain tax positions.

Derivative Instruments and Hedging Activities

FASB ASC Topic 815: Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, we record all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.  See Note 8.

 

Revenue Recognition

We recognize revenue from rent, tenant reimbursements and other revenue sources once all of the following criteria are met: persuasive evidence of an arrangement exists, the delivery has occurred or services rendered, the fee is fixed and determinable and collectability is reasonably assured. Minimum annual rental revenues are recognized in rental revenues on a straight-line basis over the term of the related lease. Rental revenue recognition commences when the tenant takes possession or controls the physical use of the leased space.

Estimated reimbursements from tenants for real estate taxes, common area maintenance and other recoverable operating expenses are recognized as revenues in the period that the expenses are incurred. Subsequent to year-end, we perform final reconciliations on a lease-by-lease basis and bill or credit each tenant for any cumulative annual adjustments. Lease termination fees, which are included in rental revenues in the accompanying consolidated and combined statements of operations, are recognized when the related lease is canceled and we have no continuing obligation to provide services to such former tenant.

Revenues from management, leasing and development services are recognized when the related services have been provided and earned.

13

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The recognition of gains on sales of real estate requires us to measure the timing of a sale against various criteria related to the terms of the transaction, as well as any continuing involvement in the form of management or financial assistance associated with the property. If the sales criteria are not met, we defer gain recognition and account for the continued operations of the property by applying the finance, profit-sharing or leasing method. If the sales criteria have been met, we further analyze whether profit recognition is appropriate using the full accrual method. If the criteria to recognize profit using the full accrual method have not been met, we defer the gain and recognize it when the criteria are met or use the installment or cost recovery method as appropriate under the circumstances. See Note 13 for discussion of dispositions.

Valuation of Receivables

We are subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, we perform credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired. We specifically analyze aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. As a result of our periodic analysis, we maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. This estimate requires significant judgment related to the lessees’ ability to fulfill their obligations under the leases. We believe our allowance for doubtful accounts is adequate for our outstanding receivables for the periods presented. If a tenant is insolvent or files for bankruptcy protection and fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances, which include amounts recognized as straight-line revenue not realizable until future periods. We had a $0.9 million and $0.5 million reserve for allowance for doubtful accounts as of September 30, 2014 and December 31, 2013, respectively.

Equity Based Compensation

We account for equity-based compensation, including shares of restricted stock, in accordance with ASC Topic 718 Compensation – Stock Compensation, which requires us to recognize an expense for the fair value of equity-based compensation awards. The estimated fair value of shares of restricted stock are amortized over their respective vesting periods. See Note 14.

Earnings Per Share

We calculate earnings per share (“EPS”) in accordance with ASC 260 – Earnings Per Share (“ASC 260”).  Under ASC 260, shares of unrestricted stock that contain non-forfeitable rights to dividends are participating securities and, therefore, are included in computing basic EPS pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends declared (or accumulated) and their respective participation rights in undistributed earnings.  

Basic EPS is calculated by dividing the net income (loss) attributable to common stockholders by the weighted average shares of common stock outstanding for the period. Diluted EPS is computed using the weighted average shares of common stock outstanding determined for the basic EPS computation plus the effect of any dilutive securities, including the dilutive effect of unvested restricted common stock using the treasury stock method. See Note 15.

Segment Reporting

Management views the Company as a single reportable segment based on its method of internal reporting in addition to its allocation of capital and resources.

Recently Issued Accounting Pronouncements

Changes to GAAP are established by the FASB in the form of ASUs to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all ASUs.

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 establishes principles for reporting the nature, amount, timing and uncertainty of revenues and cash flows arising from

14

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

an entity's contracts with customers. The core principle of the new standard is that an entity recognizes revenue to represent the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard is effective for us in the first quarter of 2017 and will replace most existing revenue recognition guidance within GAAP. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating ASU 2014-09 to determine its impact on our consolidated financial statements and related disclosures, as well as the transition method to apply the new standard.

 

Acquisitions

On January 15, 2014, we acquired the property located at 7110 Rosecrans Avenue located in Paramount, CA for a contract price of $4.969 million using proceeds from our revolving credit facility.  The property consists of one industrial building totaling 72,000 square foot situated on 3.25 acres of land.  

On January 22, 2014, we acquired the property located at 14723-14825 Oxnard Street in Van Nuys, CA for a contract price of $8.875 million using proceeds from our revolving credit facility.  The property consists of a six-building multi-tenant industrial business park totaling 78,000 square feet situated on 3.25 acres of land.

On February 12, 2014, we acquired the property located at 845, 855, and 865 Milliken Avenue and 4317 and 4319 Santa Ana Street in Ontario, CA for a contract price of $8.55 million as part of a 1031 exchange using proceeds from the disposition of our property located at 1335 Park Center Drive.  The property consists of a five-building multi-tenant industrial business park totaling 113,612 square feet situated on 5.74 acres of land.

On February 25, 2014, we acquired the property located at 1500-1510 W. 228th Street in Los Angeles, CA for a contract price of $6.6 million.  A portion of the acquisition was funded with the remaining proceeds from the disposition of 1335 Park Center Drive, and the remainder of the funding was provided from availability under our revolving credit facility.  The property consists of a six-building multi-tenant industrial complex totaling 88,330 square feet situated on 3.9 acres of land.

On March 20, 2014, we acquired the property located at 24105 and 24201 Frampton Avenue in Los Angeles, California for a contract price of $3.93 million using proceeds from our revolving credit facility.  The property consists of one single-tenant building totaling 47,903 square feet situated on 2.07 acres of land.

On April 17, 2014, we acquired the property located at 1700 Saturn Way in Seal Beach, California for a contract price of $21.1 million using proceeds from our revolving credit facility.  The property consists of one single-tenant building totaling 170,865 square feet situated on 9.25 acres of land.

On May 30, 2014, we acquired the property located at 2980 and 2990 N. San Fernando Boulevard in Burbank, California for a contract price of $15.425 million.  We funded the acquisition in part by assuming a $10.3 million first mortgage loan secured by the property and used proceeds from our revolving credit facility to fund the remaining purchase price.  The property consists of one single-tenant building totaling 130,800 square feet situated on 5.86 acres of land.

On May 30, 2014, we acquired the property located at 20531 Crescent Bay Drive in Lake Forest, California for a contract price of $6.48 million using proceeds from our revolving credit facility.  The property consists of one single-tenant building totaling 46,178 square feet situated on 2.47 acres of land.

On June 5, 2014, we acquired the property located at 2610 and 2701 S. Birch Street in Santa Ana, California for a contract price of $11.0 million using funds from our revolving credit facility.  The property consists of two single-tenant buildings totaling 98,105 square feet situated on 7.9 acres of land.

On June 24, 2014, we acquired the property located at 4051 Santa Ana Street and 701 Dupont Avenue in Ontario, California for a contract price of $10.2 million using funds from our revolving credit facility.  The property consists of a two-building multi-tenant industrial business park totaling 111,890 square feet situated on 5.66 acres of land.

15

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

On June 27, 2014, we acquired an industrial portfolio consisting of nine properties located in the San Gabriel Valley, Orange County, and San Diego submarkets of California for a contract price of $88.5 million.  We partially funded the acquisition with a new $48.5 million term loan secured by certain properties in the portfolio.  The remaining purchase price was funded by using proceeds from our revolving credit facility.  The portfolio consists of four single-tenant properties and five multi-tenant properties totaling 817,166 square feet situated on an aggregate 43.6 acres of land.

On July 8, 2014, we acquired the property located at 3116 W. Avenue 32 in Los Angeles, California for a contract price of $11.0 million using funds from our revolving credit facility.  The property consists of one two-tenant building totaling 100,500 square feet situated on 2.62 acres of land.

On July 23, 2014, we acquired the Chatsworth Industrial Park located at 21019-21051 Osborne St., 9035 Independence Ave. and 21026-21040 Nordhoff St. in Chatsworth, California for a contract price of $16.8 million using funds from our revolving credit facility.  The property consists of seven buildings totaling 153,212 square feet situated on 7.4 acres of land.

On July 25, 2014, we acquired the property located at 24935 and 24955 Avenue Kearney in Santa Clarita, California for a contract price of $11.5 million using funds from our revolving credit facility.  The property consists of two single-tenant building totaling 138,980 square feet situated on 6.0 acres of land.

On August 26, 2014, we acquired the property located at 605 8^th Street located in San Fernando, California for a contract price of $5.075 million using cash on hand.  The property consists of one two-tenant building totaling 55,516 square feet situated on 2.75 acres of land.

On September 12, 2014, we acquired the property located at 9120 Mason Avenue in Chatsworth, California for a contract price of $30.5 million using cash on hand.  The property consists of one building totaling 319,348 square feet situated on 11.82 acres of land.

 

During the period from July 24, 2013 to September 30, 2013, we acquired two properties consisting of two buildings and approximately 124,000 square feet.  The properties are located in Southern California.  The total contract price for those acquisitions was $14.0 million.

During the period from January 1, 2013 to July 23, 2013 our predecessor acquired four properties consisting of 17 buildings and approximately 741,000 square feet.  The properties are located throughout Southern California.  The total contract price for those acquisitions was $73.8 million.

 

16

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

 

17

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

  

The preliminary allocation of the purchase price is based upon a preliminary valuation and our estimates and assumptions are subject to change within the purchase price allocation period (generally one year from the acquisition date).

The following table summarizes the combined results from operations of our 2014 acquisitions since the acquisition date, included in the consolidated income statement for the following period:

 

 

The following table presents unaudited pro-forma financial information as if the closing of our 2014 acquisitions had occurred on January 1, 2013. These unaudited pro-forma results have been prepared for comparative purposes only and include certain adjustments, such as increased depreciation and amortization expenses as a result of tangible and intangible assets

18

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

acquired in the acquisitions, and increased interest expense for borrowings associated with our 2014 acquisitions.  These unaudited pro-forma results do not purport to be indicative of what operating results would have been had the acquisitions actually occurred on January 1, 2013 and may not be indicative of future operating results.

 

 

 

The following table summarizes our acquired lease intangible assets, including the value of in-place leases and above-market tenant leases, and our acquired lease intangible liabilities, including below-market tenant leases and above-market ground leases as follows:

 

19

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

 

The following table summarizes the amortization related to our acquired lease intangible assets and liabilities for the reported periods noted below:

 

 

 

On February 8, 2013, the mortgage note borrower for the 2824 E. Foothill Blvd. loan repaid, ahead of schedule, the outstanding principal in full. Our Predecessor received gross proceeds from this payoff of $5.4 million, including $6,310 in per diem interest, of which $2.5 million was used to repay the loan secured by this note. The remaining proceeds were paid as a distribution to investors in RIF V. Our Predecessor recorded a $1.4 million gain on collection of notes receivable during the period from January 1, 2013 to July 23, 2013.

The following table summarizes the balance of our notes receivable:

 

  

 

20

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following table summarizes our notes payable:

 

 

On May 30, 2014, in connection with the acquisition of the property located at 2980 San Fernando, we assumed a first mortgage loan that is secured by the property.  The assumed mortgage had a principal balance of $10.3 million at the acquisition date and was recorded at fair value at the date of acquisition resulting in an initial debt premium of $308,000.  The loan, which was put in place in 2005 by the seller, bears interest at a fixed rate of 5.088% with amortization over 30 years, and has a maturity date of July 1, 2015.

On June 24, 2014, we entered into a $48.5 million term loan which bears interest at LIBOR plus 1.55% that matures on June 24, 2017, with one additional two-year extension at our option.  The loan proceeds were used to partially fund the acquisition of a portfolio of nine properties.  The loan is secured by the first priority deed of trust on eight of these nine properties.  Additionally, the loan includes a series of customary covenants that we must comply with, in addition to a performance covenant that is tested annually and requires the achievement of a minimum in-place debt yield of 9.25% by the properties securing the loan.

21

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of September 30, 2014 and does not consider extension options available to us as noted above:

 

 

 

Amended Facility

On June 11, 2014, we amended our existing revolving credit facility by entering into an Amended and Restated Credit Agreement (the “Amended Facility”). The Amended Facility, among other matters, adds a five-year $100.0 million term loan to the existing $200.0 million revolving credit facility.

The Amended Facility has an initial principal amount of $300.0 million comprised of a senior unsecured revolving credit facility (the “Revolver”) in an initial principal amount of $200.0 million, and a senior unsecured term loan facility (the “Term Loan Facility”) in the principal amount of $100.0 million.  The maturity date of the Revolver was extended to June 11, 2018 (previously July 24, 2016), with one 12-month extension option available, subject to certain conditions, and the Term Loan Facility has a maturity date of June 11, 2019.  The aggregate principal amount of the Amended Facility may be increased to a total of up to $600.0 million, which may be comprised of additional revolving commitments under the Revolver or an increase to the Term Loan Facility, or any combination of the foregoing, subject to the satisfaction of specified conditions and the identification of lenders willing to make available such additional amounts.

Interest on the Amended Facility is generally to be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greater of (a) the federal funds rate plus 0.50%, (b) the administrative agent’s prime rate or (c) the thirty-day LIBOR plus 1.00%, plus the applicable base rate margin. Until we attain an investment grade rating, the applicable LIBOR margin will range from 1.30% to 1.90% (previously 1.35% to 2.05%), for the Revolver and 1.25% to 1.85% for the Term Loan Facility, depending on the our Leverage Ratio (as defined in the Amended Facility). The Amended Facility requires quarterly payments of an annual unused facility fee in an amount equal to 0.20% or 0.30% depending on the undrawn amount of the Revolver.

The Amended Facility is guaranteed by the Company and by substantially all of the current and future subsidiaries of the Operating Partnership that own an unencumbered property. The Amended Facility is not secured by the Company’s properties or by equity interests in the subsidiaries that hold such properties.

The Amended Facility includes a series of financial and other covenants that we must comply with in order to borrow under the Amended Facility, including:

22

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The Revolver and the Term Loan Facility may be voluntarily prepaid in whole or in part at any time without premium or penalty.  Amounts borrowed under the Term Loan Facility and repaid or prepaid may not be reborrowed.

The Amended Facility 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 Amended Facility 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 Amended Facility, 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.  We believe we are currently in compliance with all of the financial covenants required by our loan agreements.

On August 22, 2014, we paid down the outstanding balance of $137.5 million on our Revolver, leaving $200.0 million available for additional borrowings as of September 30, 2014.  

 

We lease space to tenants primarily under non-cancelable operating leases that generally contain provisions for a base rent plus reimbursement for certain operating expenses. Operating expense reimbursements are reflected in the consolidated and combined statements of operations as tenant reimbursements.

Future minimum base rent under operating leases as of September 30, 2014 is summarized as follows:

 

 

  

The future minimum base rent in the table above excludes tenant reimbursements, amortization of adjustments for deferred rent receivables and the amortization of above/below-market lease intangibles.

 

Risk Management Objective of Using Derivatives

We are exposed to certain risk arising from both our business operations and economic conditions.  We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments.  Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.

Derivative Instruments

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy.  Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate

23

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

payments over the life of the agreements without exchange of the underlying notional amount. We do not use derivatives for trading or speculative purposes.  

The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.  Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative that is designated and that qualifies as a cash flow hedge, the effective portion of the change in fair value of the derivative is initially recorded in accumulated other comprehensive income (“AOCI”).  Amounts recorded in AOCI are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

On February 4, 2014, we executed two forward-starting interest rate swap transactions to hedge the variable cash flows associated with our existing $60.0 million variable-rate term loan.  Each of the two swaps has a notional value of $30.0 million, which will be in effect beginning in 2015. We are required to make certain monthly fixed rate payments calculated on notional amounts of $30.0 million for each of the swaps, while the applicable counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional amount.  The first forward swap will effectively fix the annual interest rate payable on $30.0 million of debt at 3.726% for the period from January 15, 2015 to February 15, 2019. The second forward swap will effectively fix the annual interest rate payable on the other $30.0 million of debt at 3.91% for the period from July 15, 2015 to February 15, 2019.

On August 19, 2014, we executed two forward-starting interest rate swap transactions to hedge the variable cash flows associated with our $100.0 million Term Loan Facility.  Each of the two swaps has a notional value of $50.0 million.  The first swap has an effective date of August 14, 2015 and a maturity date of December 14, 2018.  The second swap has an effective date of February 16, 2016 and a maturity date of December 14, 2018.  We are required to make certain monthly fixed rate payments calculated on notional amounts of $50.0 million for each of the swaps, while the applicable counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional amount.  The interest rate swaps will effectively fix the annual interest rate payable on our Term Loan Facility at 1.79% for the first swap and 2.005% for the second swap, plus an applicable margin under the terms of the Amended Facility.  

Prior to our IPO, our predecessor was party to an interest rate swap that was not designated as a hedge, and as such, the changes in its fair value were recognized in earnings.  This interest rate swap reached its natural termination on March 15, 2013.  As of September 30, 2014 and December 31, 2013, we do not have any derivatives that are not designated as hedges.

The following table presents a summary of our derivative instruments designated as hedging instruments. We record all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities.

 

  

24

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following table presents the impact of our derivative instruments on our consolidated and combined statement of operations for the periods presented:

 

  

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt. During the next twelve months, we estimate that an additional $504,000 will be reclassified as an increase to interest expense.

Credit-risk-related Contingent Features

Certain of our agreements with our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then we could also be declared in default on its derivative obligations.

 Certain of our agreements with our derivative counterparties contain provisions where if a merger or acquisition occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.

As of September 30, 2014, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $245,000.  As of September 30, 2014, we have not posted any collateral related to these agreements.

 

We have adopted FASB Accounting Standards Codification Topic 820: Fair Value Measurements and Disclosure (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances. 

25

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Recurring Measurements – Interest Rate Swaps

Currently, we use interest rate swap agreements to manage our interest rate risk.   The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. 

To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties.  However, as of September 30, 2014, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.  As a result, we have determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below sets forth the estimated fair value of our interest rate swaps as of September 30, 2014, which we measure on a recurring basis by level within the fair value hierarchy.  There were no assets or liabilities that we measure at fair value on a recurring basis as of December 31, 2013.

 

 

26

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Financial Instruments Disclosed at Fair Value

The carrying amounts of cash and cash equivalents, restricted cash, rents and other receivables, other assets, accounts payable, accrued expenses and other liabilities, and tenant security deposits approximate fair value because of their short-term nature. Additionally, we believe the carrying value of notes receivable approximates fair value.

The fair value of our secured notes payable was estimated by calculating the present value of principal and interest payments, using currently available market rates, adjusted with a credit spread, and assuming the loans are outstanding through maturity.

The table below sets forth the carrying value and the estimated fair value of our notes payable as of September 30, 2014 and December 31, 2013:

 

 

 

Howard Schwimmer

We engage in transactions with Howard Schwimmer, our Co-Chief Executive Officer, earning management and development fees and leasing commissions from entities controlled individually by Mr. Schwimmer. Fees and commissions earned from these entities are included in “Management, leasing and development services” in the consolidated and combined statements of operations. We recorded $46,000 for the three months ended September 30, 2014, $30,000 for the period from July 24, 2013 to September 30, 2013, $8,000 for the period from July 1, 2013 to July 23, 2013, $162,000 for the nine months ended September 30, 2014 and $87,000 for the period from January 1, 2013 to July 23, 2013, in management, leasing and development services revenue.   

 

Legal

From time to time, we are subject to various legal proceedings that arise in the ordinary course of business.

On October 3, 2013, two pre-IPO investors filed a putative class action purportedly brought on behalf of the investors in RIF III in the Los Angeles County Superior Court. On February 14, 2014, a First Amended Complaint was filed adding an additional individual pre-IPO investor and putative class claims on behalf of investors in RIF IV.  This complaint also alleged that the communication of the proposed accommodation (in which Messrs. Schwimmer, Frankel and Ziman, together with certain other pre-IPO owners of the pre-IPO management companies agreed to return up to $32.1 million that they received in connection with our IPO and formation transactions) was materially misleading by not including disclosures regarding the lawsuit and claims asserted by plaintiffs.  On July 15, 2014, a Second Amended Complaint was filed withdrawing the class action allegations and the allegations concerning communication of the accommodation, and adding four additional plaintiff investors. During the third quarter of 2014, the Company entered into settlement agreements with three of these four additional

27

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

plaintiffs.  The aggregate amounts paid by the Company in these settlements was not material. Plaintiffs assert claims against the Company, RIF III, RIF IV, RILLC and Messrs. Schwimmer, Frankel and Ziman for breach of fiduciary duty, violation of certain California securities laws, negligent misrepresentation, and fraud. Plaintiffs allege, among other things, that the terms of the Company’s formation transactions were unfair to investors in RIF III and RIF IV, that the consideration received by investors in RIF III and RIF IV in the formation transactions was inadequate, that the pre-IPO management companies were allocated unfair value in the formation transactions and that the disclosure documents related to the formation transactions were materially misleading.  Plaintiffs also request to inspect the books and records of RIF III and RIF IV, which entities no longer exist, and further seek declaratory relief, unspecified recessionary damages, disgorgement, compensatory, punitive and exemplary damages, an accounting for unjust enrichment, and an award of costs including pre-judgment interest, attorneys’ and experts’ fees, and other unspecified relief. Defendants have answered the Second Amended Complaint denying all allegations and asserting affirmative defenses.   While we believe that the action is without merit and intend to defend the litigation vigorously, we expect to incur costs associated with defending the action. At this early stage of the litigation, the ultimate outcome of the action is uncertain and we cannot reasonably assess the timing or outcome, or estimate the amount of loss, if any, or its effect, if any, on our financial condition.

Environmental

We generally will perform environmental site assessments at properties we are considering acquiring.  After the acquisition of such properties, we continue to monitor the properties for the presence of hazardous or toxic substances. From time to time, we acquire properties with known adverse environmental conditions.  If at the time of acquisition, losses associated with environmental remediation obligations are probable and can be reasonably estimable, we record a liability.

On February 25, 2014, we acquired the property located at West 228th Street.  Before purchasing the property, during the due diligence phase, we engaged with a third party environmental consultant to perform various environmental site assessments to determine the presence of any environmental contaminants that might warrant remediation efforts. Based on their investigation, they determined that hazardous substances existed at the property and that additional assessment and remediation work would likely be required to satisfy regulatory requirements.  The total remediation costs were estimated to be $1.3 million.  

To address the estimated costs associated with the environmental issues at the West 228^th Street property, we entered into an Environmental Holdback Escrow Agreement (the “Holdback Agreement”) with the seller, whereby $1.3 million of the purchase price, which would have otherwise been paid to the seller, was to be placed into an escrow account to be used to pay remediation costs.  In addition, we have also funded $100,000 into the escrow account.  According to the Holdback Agreement, the seller has no liability or responsibility to pay for remediation costs in excess of $1.3 million.

As part of the purchase price allocation, we have recorded a contingent liability in the amount of $1.2 million in the line item Accounts payable, accrued expenses and other liabilities on the balance sheet, related to the estimated cost to remediate potential environmental liabilities that existed prior to the acquisition date. Based on the Holdback Agreement, we have recorded a corresponding $1.2 million indemnification asset in the line item Other assets on the balance sheet.  We expect that resolution of the environmental matters relating to the above will not have a material impact on our consolidated financial condition, results of operations or cash flows.

Rent Expense

As of September 30, 2014, we lease a parcel of land that is currently being sub-leased to a tenant for a parking lot.  The ground lease is scheduled to expire on June 1, 2062.  

28

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The future minimum commitment under our ground lease and corporate office lease as of September 30, 2014 is as follows:

 

 

Tenant Related

As of September 30, 2014, we had commitments of $1.0 million for tenant improvement and construction work under the terms of leases with certain of our tenants.

 

We currently manage and hold a 15% equity interest in a joint venture (“the JV”) that indirectly owns three properties located at 3001-3233 Mission Oaks Boulevard in Ventura County.  We account for this investment under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from other-than-temporary impairments, if applicable). The carrying value of our JV investment includes a gross $2.8 million basis adjustment resulting from the contribution of our equity interest as part of the formation transactions that occurred on July 24, 2013.  The basis adjustment is being amortized over the estimated useful life of the underlying assets.

Our Predecessor owned a 70% interest in a property located at 10439-10477 Roselle Street.  This was a tenancy-in-common interest in which control was shared equally with the other 30% tenant-in-common partner.  As part of the formation transactions, on July 24, 2013, we acquired the 30% interest not previously owned by us in exchange for 2,828 common units in our Operating Partnership.  Before this transaction, this investment was accounted for under the equity method of accounting.  

The following tables present combined summarized financial information of our equity method investment properties. Amounts provided are the total amounts attributable to the entities and do not represent our proportionate share:

 

 

29

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

 

(1)Includes summarized financial information for our equity method investment property located at 3001-3233 Mission Oaks Boulevard.

(2)Includes summarized financial information for properties located at 3001-3233 Mission Oaks Boulevard and 10439-10477 Roselle St.

Our unconsolidated real estate entities incurred management, leasing and development fees, which were payable to us, of $103,000 for the three months ended September 30, 2014, $86,000 for the period from July 24, 2013 to September 30, 2013, $24,000 for the period from July 1, 2013 to July 23, 2013, $291,000 for the nine months ended September 30, 2014, and $218,000 for the period from January 1, 2013 to July 23, 2013.

We recognized management, leasing and development revenue of $97,000 for the three months ended September 30, 2014, $222,000 for the period from July 24, 2013 to September 30, 2013, $0 for the period from July 1, 2013 to July 23, 2013, $366,000 for the nine months ended September 30, 2014, and $207,000 for the period from January 1, 2013 to July 23, 2013, which has been recorded in management, leasing and development services.

 

Dispositions

The table below summarizes the properties sold during the nine months ended September 30, 2014 and 2013.  The results of operations and the gain or loss on sale of the property are reported under Discontinued Operations in the Consolidated and Combined Statements of Operations.

 

  

 

On August 29, 2014, we sold our property located at 500-560 Zenith Drive (37,992 square feet) for $1,822,000 and recognized a loss on sale of $150,000.  The results of operations and loss on sale for the property sold during the period are reported as part of Net Income (Loss) from Continuing Operations in the Consolidated and Combined Statements of Operations.

 

Discontinued Operations

Income from discontinued operations includes the results of operations (prior to disposition) and the gain on sale of real estate attributable to the seven properties in the table above.  Their consolidated results of operations for the three and nine months ended September 30, 2014, and the period from July 24, 2013 to September 30, 2013, and combined results of operations for the period from July 1, 2013 to July 23, 2013, and the period from January 1, 2013 to July 23, 2013, are summarized in the table below.

 

30

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

  

 

Properties Held for Sale

As of September 30, 2014, we did not have any properties classified as held for sale. Our properties located at 1335 Park Center Drive, 2900 N. Madera Road and 500-560 Zenith Drive were sold during 2014 and classified as held for sale at December 31, 2013.

The major classes of assets and liabilities associated with real estate classified as held for sale are summarized in the table below:

 

 

Common Stock

On August 19, 2014, we completed a public follow-on offering of 17,250,000 shares of our common stock at a price of $13.50 per share.  The net proceeds of the follow-on offering were approximately $221.8 million, after deducting the underwriting discount and offering costs of approximately $11.1 million.  On August 19, 2014, we contributed the net proceeds of the offering to our Operating Partnership in exchange for 17,250,000 common units of partnership interests in the Operating Partnership (“OP Units”).

Noncontrolling Interests

Noncontrolling interests in our Operating Partnership relate to interests in the partnership that are not owned by us. Noncontrolling interests consisted of 2,646,027 OP Units and represented approximately 5.8% of our Operating Partnership as of September 30, 2014. OP Units and shares of our common stock have essentially the same economic characteristics, as they

31

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

share equally in the total net income or loss distributions of our Operating Partnership. Investors who own OP Units have the right to cause our Operating Partnership to redeem any or all of their units in our Operating Partnership for an amount of cash per unit equal to the then current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis.

During the three and nine months ended September 30, 2014, 363,232 OP Units were converted into an equivalent number of shares of common stock, resulting in the reclassification of $4.1 million of noncontrolling interest to Rexford Industrial Realty, Inc.’s stockholders equity.

2013 Incentive Award Plan

In July 2013, we established the Rexford Industrial Realty, Inc. and Rexford Industrial Realty, L.P. 2013 Incentive Award Plan (the “Plan”), pursuant to which we may make grants of stock options, restricted stock, long term incentive plan units in our Operating Partnership and other stock based and cash awards to our non-employee directors, employees and consultants. The maximum number of shares of our common stock that may be issued or transferred pursuant to the Plan is 2,272,689 shares (of which 2,040,528 shares of common stock remain available for issuance as of September 30, 2014).

Shares of our restricted common stock generally may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent or the administrator of the Plan, a domestic relations order, unless and until all restrictions applicable to such shares have lapsed. Such restrictions generally expire upon vesting. Shares of our restricted common stock have full voting rights and rights to dividends. During the three and nine months ended September 30, 2014 and the period from July 24, 2013 to September 30, 2013, we recognized net equity compensation expense of $340,000, $791,000 and $382,000, respectively, related to the restricted common stock grants ultimately expected to vest. Equity compensation expense is included in general and administrative and property expenses in the accompanying consolidated statements of operations. Certain amounts of equity compensation expense are capitalized for employees who provide leasing and construction services. During the three and nine months ended September 30, 2014, and the period from July 24, 2013 to September 30, 2013, we capitalized $36,000, $106,000 and $14,000 respectively, related to these employees.

The following is a table summarizing our unvested restricted stock activity for the three months ended September 30, 2014:

 

 

The following is a vesting schedule of the total unvested shares of restricted stock outstanding as of September 30, 2014:

 

32

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

  

ASC Topic 718: Compensation - Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We have estimated a forfeiture rate of 5.3% for unvested restricted stock as of September 30, 2014.  As of September 30, 2014, there was $1.8 million of total unrecognized compensation expense related to the unvested shares of our restricted common stock assuming the forfeiture rate noted above, of which $0.2 million will be capitalized for employees who provide leasing and construction services. As of September 30, 2014, this expense is expected to be recognized over a weighted average remaining period of 23 months.

Changes in Accumulated Other Comprehensive Income

The following table summarizes the changes in our Accumulated Other Comprehensive Income balance for the nine months ended September 30, 2014, which consists solely of adjustments related to our cash flow hedges:

 

  

 

The following table sets forth the computation of basic and diluted earnings per share:

 

33

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

 

Participating securities include 198,141 and 920,734 shares of unvested restricted stock outstanding at September 30, 2014 and 2013, respectively, which participate in non-forfeitable dividends of the Company. As participating security holders are not obligated to share in losses of the Company, participating securities have been allocated earnings, in proportion to total weighted average shares outstanding, based upon the greater of net income or common dividends declared.

 

The effect of including unvested restricted common stock using the treasury stock method was excluded from our calculation of weighted average shares of common stock outstanding – diluted, as its inclusion would have been antidilutive.  As such, the number of weighted average shares of common stock outstanding, both basic and diluted, are the same for the three and nine months ended September 30, 2014 and for the period from July 24, 2013 to September 30, 2013.

 

Controlling interests in our Predecessor include the interests owned by partners of RILLC, and Rexford Sponsor V LLC, and any interests held by their spouses and children (“RILLC and Affiliates”). Noncontrolling interests relate to all other interests not held by RILLC and Affiliates. Noncontrolling interests also includes the 27.76% interest of 10 investors in RIF I—Walnut, LLC, and the 3.23% interest of one investor in RIF IV—Burbank, LLC, both consolidated subsidiaries in our Predecessor’s financial statements during the period from January 1, 2013 to July 23, 2013.

34

---

REXFORD INDUSTRIAL REALTY, INC. AND

REXFORD INDUSTIRAL REALTY, INC. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Equity distributions by our Predecessor Funds are allocated between the general partner and limited partners (collectively “Partners”) in accordance with each fund’s operating agreements. Generally this provides for distributions to be allocated to Partners, pari passu, in accordance with their respective percentage interests. After Partners have exceeded certain cash distribution thresholds, as defined in each Predecessor Fund’s operating agreement, then the general partner may receive incentive promote cash distributions commensurate with the cash return performance hurdles also detailed in the Predecessor Fund’s operating agreement. Each fund’s operating agreement generally provides for income, expenses, gains and losses to be allocated in a manner consistent with cash distributions described above.

During November and December 2012, our predecessor granted to its employees a 9.0% equity interest in Rexford Fund V Manager, LLC’s (“Fund V Manager”) profits interest in RIF V. An additional 2.0% equity interest was granted in January 2013. Fund V Manager is the controlling member of RIF V and is a wholly-owned subsidiary of Sponsor. The fair value of these interests was estimated to be approximately $1.0 million at the time they were granted. The equity interests are considered performance-based equity interests and are subject to graded vesting over the shorter of a 7-year period or the dissolution date of Fund V Manager. On July 24, 2013, the day we consummated our IPO, Fund V Manager was dissolved.

Our Predecessor expensed $899,000 and $985,000 during the period from July 1, 2013 to July 23, 2013 and the period from January 1, 2013 to July 23, 2013, respectively, related to these equity awards.  

 

 

On October 1, 2014, we repaid the $5.0 million outstanding balance on our loan secured by the property located at 10700 Jersey Boulevard.  We repaid the balance using available cash on hand and did not incur any prepayment penalties for repaying in advance of the maturity date of January 1, 2015.  

On October 23, 2014, 59,282 shares of restricted common stock were granted to each of our named executive officers (Messrs. Frankel and Schwimmer).  These shares will vest 25%, 25% and 50% on each of the first, second and third anniversaries of the date of grant.

Subsequent to September 30, 2014, 141,198 OP Units were converted into an equivalent number of shares of common stock.

 

 

 

35

---

 

The following discussion should be read in conjunction with the consolidated financial statements of Rexford Industrial Realty, Inc. and the combined financial statements of Rexford Industrial Realty, Inc. Predecessor (the “Predecessor”) 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 to Rexford 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,” “estimates,” “expects,” “intends,” “may,” “plans” “projects,” “seeks,” “should,” “will,” 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:

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 review carefully our financial statements and the notes thereto, as well as the section entitled “Risk Factors” in our Annual Report on Form 10K for the year ended December 31, 2013.

36

---

 

Company Overview

Rexford Industrial Realty, Inc. is a self-administered and self-managed full-service REIT focused on owning and operating industrial properties in Southern California infill markets. We were formed as a Maryland corporation on January 18, 2013 and Rexford Industrial Realty, L.P. (the “Operating Partnership”), of which we are the sole general partner, was formed as a Maryland limited partnership on January 18, 2013. Through our controlling interest in our Operating Partnership and its subsidiaries, we own, manage, lease, acquire and develop industrial real estate primarily located in Southern California infill markets.  As of September 30, 2014, our consolidated portfolio consisted of 86 properties with approximately 8.6 million rentable square feet.  We also hold a 15% interest in a joint venture (the “JV”) that indirectly owns three properties located in Ventura County with approximately 1.2 million square feet, which we manage. In addition we currently manage an additional 20 properties with approximately 1.2 million rentable square feet.  

We did not have any meaningful operating activity until the consummation of our initial public offering (“IPO”) and the related acquisition of certain assets of our Predecessor as part of our formation transactions on July 24, 2013.  The historical financial results in these financial statements for the period from July 1, 2013 to July 23, 2013 and the period from January 1, 2013 to July 23, 2013 relate to our accounting predecessor. Our Predecessor is comprised of Rexford Industrial, LLC, Rexford Sponsor V, LLC, Rexford Industrial Fund V REIT, LLC (“RIF V REIT”) and their consolidated subsidiaries, which consist of Rexford Industrial Fund I, LLC, Rexford Industrial Fund II, LLC, Rexford Industrial Fund III, LLC, Rexford Industrial Fund IV, LLC, Rexford Industrial Fund V, LP and their subsidiaries (collectively the “Predecessor Funds”). The entities comprising Rexford Industrial Realty, Inc. Predecessor are combined on the basis of common management and common ownership.

We are organized and conduct our operations to qualify as a REIT under the Internal Revenue Code of 1986, 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.

Factors That May Influence Future Results of Operations

Rental Revenue and Tenant Reimbursements

We receive income primarily from rental revenue from our properties. The amount of rental revenue generated by the properties in our portfolio depends principally on the occupancy levels and lease rates at our properties, our ability to lease currently available space and space that becomes available as a result of lease expirations and on the rental rates at our properties.

Occupancy Rates. As of September 30, 2014, our consolidated portfolio was approximately 91.8% occupied and 92.3% leased. The difference between our occupancy rate and leased rate is attributed to our uncommenced leases. Our occupancy rate is impacted by market conditions in the areas in which we operate. San Diego County, where our properties were 82.4% occupied as of September 30, 2014. By way of comparison, our Los Angeles County properties and Orange County properties were 95.4% and 90.3% occupied, respectively, as of September 30, 2014. In addition, a key component of our growth strategy is to acquire distressed, off-market and lightly marketed properties that are often operating at below-market occupancy at the time of acquisition. Through various redevelopment, repositioning and professional leasing and marketing strategies, we seek to increase the properties’ functionality and attractiveness to prospective tenants and, over time, stabilize the properties at occupancy rates that meet or exceed market rates. Consistent with this strategy, four of our properties, representing 290,181 square feet, are currently in various stages of redevelopment and repositioning. Excluding properties in redevelopment or repositioning, our remaining properties were approximately 93.3% occupied as of September 30, 2014.  During the three months ended September 30, 2014, we entered into 11 leases (excluding renewals) that had not commenced as of September 30, 2014, representing 41,803 square feet, or an additional 0.5% of our total rentable square feet (net of renewals). We believe the opportunity to increase occupancy at our properties will be a significant driver of future revenue growth.

37

---

 

Leasing Activity and Rental Rates. The following table sets forth our leasing activity for the three and nine months ended September 30, 2014:

 

 

During the nine months ended September 30, 2014, we executed 135 new leases covering 769,343 square feet and renewed 201 leases covering 1,154,044 square feet, while 123 leases covering 671,598 square feet vacated.  Of the 671,598 square feet that vacated, 96,430 square feet was a result of 25 tenant defaults, while the remaining 575,168 square feet was a result of 98 natural lease expirations. Our leasing activity is impacted both by our own redeveloping and repositioning efforts as well as by market conditions. When we redevelop or reposition a property, its space may become unavailable for leasing until completion of the redevelopment or repositioning efforts. In addition, while we have recently noted gradual improvements in market conditions in our markets, the market recovery has been uneven and some markets, particularly San Diego County, have been slower to recover.

Of the 201 leases that we renewed during the nine months ended September 30, 2014, the cash renewal spreads increased on average by 4.2%.  Of the 135 new leases that were executed during the nine months ended September 30, 2014, the cash renewal spreads increased by 3.7% when compared to the ending cash rental rates on the expiring leases for the same space. We believe that while the recovery in our markets has generally been uneven, our recent leasing statistics are indicative of a trend of improving leasing fundamentals. Among the factors that affect lease rates on renewal is our acquisition activity. We acquired 24 properties during the nine months ended September 30, 2014. At the time of acquisition of some of these properties, our underwriting and what we believe to be our value-oriented purchase prices may have factored in anticipated or potential roll-downs in rent at some upcoming lease expirations. We believe that rental rates in our markets for product such as our properties are just beginning to recover from the 2008 financial crisis and subsequent economic recession, and accordingly we expect potential increases in lease rates upon renewal of upcoming lease expirations as market conditions continue to improve.

Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and adverse developments that affect the ability of our tenants to fulfill their lease obligations, such as tenant bankruptcies, could adversely affect our ability to maintain or increase occupancy or rental rates at our properties. Adverse developments or trends in one or more of these factors could adversely affect our rental revenue in future periods.  Additionally, due to the size of our tenant spaces compared with our peer group and our typically shorter-term leases, we may have increased exposure to a negative trend in rental rates among our target tenant base than other industrial REITs.

Scheduled Lease Expirations

Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual properties. As of September 30, 2014, in addition to approximately 706,000 rentable square feet of currently available space in our properties, leases representing approximately 6.8% and 17.0% of the aggregate rentable square footage of our portfolio are scheduled to expire during the years ending December 31, 2014 and December 31, 2015, respectively. As described in more detail above under “—Rental Revenue and Tenant Reimbursements,” during the nine months ended September 30, 2014. We renewed approximately 62.0% of leases scheduled to expire which represented approximately 63.2% of the aggregate rentable square footage under all expiring leases.

The leases scheduled to expire during the years ending December 31, 2014, and December 31, 2015, represent approximately 5.6% and 19.4% respectively, of the total annualized rent for our portfolio at September 30, 2014. We estimate that, on a weighted average basis, in-place rents of leases scheduled to expire in 2014 and 2015 are currently at or slightly below current market asking rents. However, we believe that rental rates in our markets for product such as our properties are just beginning to recover, and accordingly we expect potential increases in lease rates upon renewal of upcoming 2014 and 2015 lease expirations as market conditions continue to improve.

38

---

 

Taxable REIT Subsidiary

As of September 30, 2014, our Operating Partnership indirectly and wholly owns Rexford Industrial Realty and Management, Inc., which we refer to as the 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 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 our Operating 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.

Conditions in Our Markets

The properties in our portfolio are located primarily in Southern California infill markets. Positive or negative changes in economic or other conditions, 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 rental expenses are controlled, in part, by either the triple net provisions or modified gross expense reimbursements in tenant leases. However, the terms of our leases vary and in some instances we may absorb rental expenses. Our overall financial results will be impacted by the extent to which we are able to pass-through rental expenses to our tenants.

General and Administrative Expenses

We expect to incur increased general and administrative expenses, including legal, accounting and other expenses related to corporate governance, public reporting and compliance with various provisions of the Sarbanes-Oxley Act, as compared to our predecessor. We anticipate that our staffing levels will increase from approximately 45 employees presently to between 60 and 70 employees during the next 12 to 24 months and, as a result, our general and administrative expenses will increase further.

Critical Accounting Policies

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. We have summarized below those accounting policies that require material subjective or complex judgments and that have the most significant impact on financial condition and results of operations. 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 impact the comparability of our results of operations and financial condition to those of other companies.

A critical accounting policy is one that is both important to the portrayal of an entity’s financial condition and results of operations and requires judgment on the part of management. Generally, the judgment requires management to make estimates and assumptions about the effect of matters that are inherently uncertain. Estimates are prepared using management’s best judgment, after considering past and current economic conditions and expectations for the future. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions. Changes in estimates could affect our financial position and specific items in our results of operations that are used by the users of our financial statements in their evaluation of our performance. Of the accounting policies discussed in Note 2 to the consolidated and combined financial statements, the accounting policies presented below have been identified by us as critical accounting policies.

39

---

 

Investment in Real Estate

Acquisitions

When we acquire operating properties, with the intention to hold the investment for the long-term, we allocate the purchase price to the various components of the acquisition based upon the fair value of each component. The components typically include land, building and improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities.  The initial allocation of the purchase price is based on management’s preliminary assessment, which may differ when final information becomes available. Subsequent adjustments made to the initial purchase price allocation are made within the allocation period, which typically does not exceed one year.

We allocate the purchase price to the fair value of the tangible assets by valuing the property as if it were vacant. We consider Level 3 inputs such as the replacement cost of such assets, appraisals, property condition reports, comparable market rental data and other related information.

In determining the fair value of intangible lease assets or liabilities, we consider Level 3 inputs. Acquired above and below market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the term of any below market fixed rate renewal options for below market leases, if applicable.  The estimated fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property, that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with the business combination are expensed in the period they are incurred.

The difference between the fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.

For acquisitions that do not meet the accounting criteria to be accounted for as a business combination, we record to land and building the purchase price paid and capitalize the associated acquisition costs.

Capitalization of Costs

We capitalize costs incurred in developing, renovating, rehabilitating, and improving real estate assets as part of the investment basis. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. During the land development and construction periods, we capitalize, insurance, real estate taxes and certain general and administrative costs of the personnel performing development, renovations, and rehabilitation if such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. Capitalized costs are included in the investment basis of real estate assets.

Depreciation and Amortization

Real estate, including land, building and land improvements, tenant improvements, and furniture, fixtures and equipment, leasing costs and intangible lease assets and liabilities are stated at historical cost less accumulated depreciation and amortization, unless circumstances indicate that the cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value as discussed below in our policy with regards to impairment of long-lived assets. We estimate the depreciable portion of our real estate assets and related useful lives in order to record depreciation expense. Our ability to estimate the depreciable portions of our real estate assets and useful lives is critical to the determination of the appropriate amount of depreciation and amortization expense recorded and the carrying value of the underlying assets. Any change to the assets to be depreciated and the estimated depreciable lives of these assets would have an impact on the depreciation expense recognized.

The values allocated to land, buildings, site improvements, in-place leases, tenant improvements and leasing costs are depreciated on a straight-line basis using an estimated remaining life of 10-30 years for buildings, 20 years for site improvements, and the shorter of the estimated useful life or respective lease term for tenant improvements.

As discussed above in investments in real estate, in connection with property acquisitions, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an intangible lease asset or liability and amortized to “rental revenues” over the reasonably assured term of the related leases. The unamortized balances of these assets and liabilities associated with the early termination of leases are fully amortized to their respective revenue line items in our consolidated financial statements over the shorter of the expected life of such assets and liabilities or the remaining lease term.

40

---

 

Our estimate of the useful life of our assets is evaluated upon acquisition and when circumstances indicate a change in the useful life, which requires significant judgment regarding the economic obsolescence of tangible and intangible assets

Impairment of Long-Lived Assets

We assess the carrying values of our respective long-lived assets, including goodwill, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable.

Recoverability of real estate assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review our real estate assets for recoverability, we consider current market conditions, as well as our intent with respect to holding or disposing of the asset. Our intent with regard to the underlying assets might change as market conditions change, as well as other factors, especially in the current global economic environment. Fair value is determined through various valuation techniques, including discounted cash flow models, applying a capitalization rate to estimated net operating income of a property and quoted market values and third party appraisals, where considered necessary. The use of projected future cash flows is based on assumptions that are consistent with our estimates of future expectations and the strategic plan we use to manage our underlying business. If our analysis indicates that the carrying value of the real estate asset is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.

Assumptions and estimates used in the recoverability analyses for future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions or our intent with regard to our investment that occur subsequent to our impairment analyses could impact these assumptions and result in future impairment of our real estate properties.

Valuation of Receivables

We are subject to tenant defaults and bankruptcies that could affect the collection of outstanding receivables. In order to mitigate these risks, we perform credit reviews and analyses on prospective tenants before significant leases are executed and on existing tenants before properties are acquired. We specifically analyze aged receivables, customer credit-worthiness, historical bad debts and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. As a result of our periodic analysis, we maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. This estimate requires significant judgment related to the lessees’ ability to fulfill their obligations under the leases. We believe our allowance for doubtful accounts is adequate for our outstanding receivables for the periods presented. If a tenant is insolvent or files for bankruptcy protection and fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances, which include amounts recognized as straight-line revenue not realizable until future periods.

Consolidation

We consolidate all entities that are wholly owned and those in which we own less than 100% but control, as well as any variable interest entities in which we are the primary beneficiary. We evaluate our ability to control an entity and whether the entity is a variable interest entity and we are the primary beneficiary through consideration of the substantive terms of the arrangement to identify which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Investments in entities in which we do not control but over which we have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities that we do not control and over which we do not exercise significant influence are carried at the lower of cost or fair value, as appropriate. Our ability to correctly assess our influence and/or control over an entity affects the presentation of these investments in our consolidated and combined financial statements.

Results of Operations

Comparison of the Three Months Ended September 30, 2014 to the Three Months Ended September 30, 2013

Our results of operations for all periods presented were affected by acquisitions and dispositions made during the nine months ended September 30, 2014, and the period from July 1, 2013 through December 31, 2013.  Therefore, our results are not comparable from period to period. 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 and dispositions, we have separately presented the results of our “Same Properties Portfolio.”

Properties included in our Same Properties Portfolio are the properties in our industrial portfolio that were wholly-owned by us as of July 1, 2013 and still owned by us as of September 30, 2014.  Results for our Same Properties Portfolio exclude our joint venture

41

---

 

or tenants-in-common properties, any properties that were acquired or sold during the nine months ended September 30, 2014 and the period from July 1, 2013 through December 31, 2013, and corporate general and administrative expenses.

Our results of operations for the three months ended September 30, 2014, and for the period from July 24, 2013 to September 30, 2013, contain the consolidated results of Rexford Industrial Realty, Inc. and its subsidiaries, including our Operating Partnership. The results of operations for the period from July 1, 2013 to July 23, 2013 contain the combined results of our Predecessor. In our analysis below, we have combined the results of our Predecessor and Rexford Industrial Realty, Inc. for combined results for the three months ended September 30, 2013, in order to compare the Company’s results for the three months ended September 30, 2014.

The results of our Same Properties Portfolio are presented to highlight for investors and users of our consolidated financial statements the operating results of our on-going business.

 

 

 

42

---

 

 

 

 

 

43

---

 

Rental Revenue

Our Same Properties Portfolio and Total Portfolio rental revenue increased $0.3 million, or 2.9%, and $5.5 million, or 54.8%, respectively, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase in our Same Properties Portfolio is primarily due to the increase in our average occupancy for comparable periods. Our Total Portfolio rental revenue was also positively impacted by the revenues from the 31 properties we acquired between July 1, 2013 and September 30, 2014, and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

Tenant Reimbursements

Our Same Properties Portfolio and Total Portfolio tenant reimbursements revenue increased $0.1 million, or 13.5%, and $1.0 million, or 89.6% during the three months ended September 30, 2014 compared to the three months ended September 30, 2013.  The increase in our Same Properties Portfolio is primarily due to the increase in our average occupancy for comparable periods. Our Total Portfolio rental revenue was also positively impacted by the revenues from the 31 properties we acquired between July 1, 2013 and September 30, 2014, and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

Management, Leasing and Development Services

Our Total Portfolio management, leasing and development services revenue decreased by $0.1 million, or 41.8%, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013.  This was primarily due to lower management fee revenue and commissions from our management of properties not owned by us for comparable periods.

Property Expenses

Our Same Properties Portfolio and Total Portfolio property expenses as a percentage of total rental revenues remained unchanged at 28.3% and decreased to 27.5% from 28.1%, respectively, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013.  Our Total Portfolio property expenses increased by $1.7 million, or 51.7%, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013, primarily as a result of incremental expenses from the 31 properties we acquired between July 1, 2013 and September 30, 2014, and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

General and Administrative

Our Total Portfolio general and administrative expenses decreased $1.1 million, or 25.4%, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013.  The decrease is primarily due to the cumulative year-to-date non-cash equity compensation charge for our Predecessor in the amount of $0.9 million and a decrease in bonus accruals of $0.6 million, partially offset by higher legal expenses of $0.2 million combined with higher corporate public company expenses and additional headcount.  

Depreciation and Amortization

Our Same Properties Portfolio and Total Portfolio depreciation and amortization expense increased $0.5 million, or 13.1%, and $4.1 million, or 105.3%, respectively, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013.  The increase for Same Properties Portfolio was primarily due to the properties contributed by RIF V REIT and their consolidated subsidiaries as part of the formation transactions, which were recorded at the estimated fair value of the assets acquired on the date of contribution.  Our Total Portfolio depreciation and amortization expense also increased due to incremental expenses from the 31 properties we acquired between July 1, 2013 and September 30, 2014, and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

Acquisition Expenses

Our Total Portfolio acquisition expenses increased $0.3 million, or 238.1%, during the three months ended September 30, 2014 compared to the three months ended September 30, 2013, due to the higher volume of acquisitions during the three months ended September 30, 2014 compared to the same period in 2013.

Interest Expense

Our Same Properties Portfolio interest expense for the three months ended September 30, 2014 is not comparable to the three months ended September 30, 2013, due to the change in our debt structure at the time of the IPO.  Our Total Portfolio interest expense increased $7,000 during the three months ended September 30, 2014 compared to the three months ended September 30, 2013,

44

---

 

primarily due to the increase in borrowings on our revolving credit facility for comparable periods, partially offset by the pay down of mortgage debt at the consummation of the IPO.

Equity in Income of Unconsolidated Real Estate Entities

Our Total Portfolio equity in income of unconsolidated real estate entities for the three months ended September 30, 2014 is not comparable to the three months ended September 30, 2013. The equity in income of unconsolidated real estate entities of $0.1 million for the three months ended September 30, 2013 includes our equity interests in the operating results of two properties, La Jolla Sorrento and Mission Oaks, whereas the equity in income of unconsolidated real estate entities of $2,000 for three months ended September 30, 2014 only includes our equity interest in Mission Oaks, since the La Jolla Sorrento property was acquired as part of our formation transactions on July 24, 2013.  

Loss on Extinguishment of Debt

Our Same Properties Portfolio and Total Portfolio loss on extinguishment of debt of $3.7 million and $3.9 million, respectively, for the three months ended September 30, 2013 is due to pre-payment charges incurred as a result of the pay down of mortgage debt at the consummation of our IPO.

Loss on Sale of Real Estate

Our Total Portfolio loss on sale of real estate of $0.2 million for the three months ended September 30, 2014 relates to the disposition of our property located at 500-560 Zenith Drive, in Glenview, Illinois.

Discontinued Operations

Our income from discontinued operations of $0.1 million for the three months ended September 30, 2013 is comprised primarily of income from discontinued operations of our property located at 1335 Park Center Drive, which was disposed of during the first quarter of 2014.

Comparison of the Nine Months Ended September 30, 2014 to the Nine Months Ended September 30, 2013

Our results of operations for all periods presented were affected by acquisitions and dispositions made during the nine months ended September 30, 2014 and the year ended December 31, 2013.  Therefore, our results are not comparable from period to period. 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 and dispositions, we have separately presented the results of our “Same Properties Portfolio.”

Properties included in our Same Properties Portfolio are the properties in our industrial portfolio that were wholly-owned by us as of January 1, 2013, and still owned as of September 30, 2014.  Results for our Same Properties Portfolio exclude our joint venture or tenants-in-common properties, any properties that were acquired or sold during the nine months ended September 30, 2014 and the year ended December 31, 2013, and corporate general and administrative expenses.

Our results of operations for the nine months ended September 30, 2014 and for the period from July 24, 2013 to September 30, 2013, contain the consolidated results of Rexford Industrial Realty, Inc. and its subsidiaries, including our Operating Partnership. The results of operations for the period from January 1, 2013 to July 23, 2013 contain the combined results of our Predecessor. In our analysis below, we have combined the results of our Predecessor and Rexford Industrial Realty, Inc. for combined results for the nine months ended September 30, 2013, in order to compare the Company’s results for the nine months ended September 30, 2014.

The results of our Same Properties Portfolio are presented to highlight for investors and users of our consolidated financial statements the operating results of our on-going business.

 

 

 

45

---

 

 

 

 

 

46

---

 

Rental Revenue

Our Same Properties Portfolio and Total Portfolio rental revenue increased $0.9 million, or 3.9%, and $13.1 million, or 48.7%, respectively, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase in our Same Properties Portfolio is primarily due to the increase in our average occupancy for comparable periods. Our Total Portfolio rental revenue was also positively impacted by the revenues from the 35 properties we acquired between January 1, 2013 and September 30, 2014 and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

Tenant Reimbursements

Our Same Properties Portfolio and Total Portfolio tenant reimbursements revenue increased $0.3 million, or 10.8%, and $2.2 million or 72.5%, respectively, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.  The increase in our Same Properties Portfolio is primarily due to the increase in our average occupancy for comparable periods.  Our Total Portfolio was also positively impacted by the revenues from the 35 properties we acquired between January 1, 2013 and September 30, 2014 and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

Management, Leasing and Development Services

Our Total Portfolio management, leasing and development services revenue decreased by $0.1 million, or 9.8%, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.  This was primarily due to lower management fee revenue and commissions from our management of properties not owned by us for comparable periods.

Other Income

Our Same Properties Portfolio and Total Portfolio other income decreased by $0.1 million, or 74.1%, and $0.2 million, or 67.8% during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.  This was primarily due to the receipt of construction easement income at one our properties during the nine months ended September 30, 2013.

Property Expenses

Our Same Properties Portfolio and Total Portfolio property expenses as a percentage of total rental revenues increased to 28.0% and 28.1%, respectively, during the nine months ended September 30, 2014 from 27.4% and 27.4%, respectively, during the nine months ended September 30, 2013, primarily due to an increase in overhead expenses in the 2014 period due to the growth of the company. In addition, our Total Portfolio property expenses also increased by $4.5 million primarily as a result of incremental expenses from the 35 properties we acquired between January 1, 2013 and September 30, 2014 and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

General and Administrative

Our Total Portfolio general and administrative expenses increased $1.7 million, or 25.1%, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.  The increase is primarily due to higher corporate public company expenses of $0.8 million, higher legal expenses of $0.6 million, higher payroll and employment fees of $0.5 million due to increased staffing levels, and higher post-IPO non-cash equity compensation of $0.3 million, partially offset by non-cash equity compensation expense for our Predecessor in the amount of $1.0 million.

Depreciation and Amortization

Our Same Properties Portfolio and Total Portfolio depreciation and amortization expense increased $1.5 million, or 17.6%, and $10.1 million, or 100.7%, respectively, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.  The increase in Same Property Portfolio is primarily due to the properties contributed by RIF V REIT and their consolidated subsidiaries as part of the formation transactions, which were recorded at the estimated fair value of the assets acquired on the date of contribution.  Our Total Portfolio depreciation and amortization expense also increased due to incremental expenses from the 35 properties we acquired between January 1, 2013 and September 30, 2014 and the consolidation of our La Jolla Sorrento property that was acquired as part of our formation transactions.

Acquisition Expenses

Our Total Portfolio acquisition expenses increased $0.6 million, or 67.4%, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, due to the higher volume of acquisitions during the nine months ended September 30, 2014 compared to the same period in 2013.

47

---

 

Interest Expense

Our Same Properties Portfolio interest expense for the nine months ended September 30, 2014 is not comparable to the nine months ended September 30, 2013, due to the change in our debt structure at the time of the IPO.  Our Total Portfolio interest expense decreased $5.4 million, or 53.1%, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 due to the pay down of mortgage debt at the consummation of our IPO.

Gain on mark-to-market interest rate swaps

Our Total Portfolio gain on mark-to-market interest rate swaps decreased $49,000 or 100.0%, during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, due to the expiration of our interest rate swaps during the nine months ended September 30, 2013.  

Equity in Loss of Unconsolidated Real Estate Entities

The equity in loss of unconsolidated real estate entities of $0.8 million for the nine months ended September 30, 2013 includes our equity interests in the operating results of two properties, La Jolla Sorrento and Mission Oaks, whereas the equity in loss of unconsolidated real estate entities of $4,000 for the nine months ended September 30, 2014 only includes our equity interest in Mission Oaks, since the La Jolla Sorrento property was acquired as part of our formation transactions on July 24, 2013.  The difference is primarily attributable to a $0.8 million impairment charge associated with our interest in La Jolla Sorrento during the nine months ended September 30, 2013.

Gain from Early Repayment of Note Receivable

The gain from early repayment of a note receivable for the nine months ended September 30, 2013 represents the gain related to the collection of a note receivable held by us and secured by the Foothill property located at 2824 Foothill & 2801 Sierra Blvd., in Pasadena, California.

Loss on Extinguishment of Debt

Our Same Properties Portfolio and Total Portfolio loss on extinguishment of debt of $3.5 million and $4.0 million, respectively, for the nine months ended September 30, 2013, is primarily due to pre-payment charges incurred as a result of the pay down of mortgage debt at the consummation of our IPO.

Loss on Sale of Real Estate

Our Total Portfolio loss on sale of real estate of $0.2 million for the nine months ended September 30, 2014 relates to the disposition of our property located at 500-560 Zenith Drive, in Glenview, Illinois.

Discontinued Operations

Our income from discontinued operations of $2.1 million for the nine months ended September 30, 2014 is comprised primarily of the gain related to the sale of our property located at 1335 Park Center Drive, partially offset by the loss on sale of our property located at 2900 Madera Road.  Our income from discontinued operations of $4.0 million for the nine months ended September 30, 2013 is comprised primarily of the gain related to the disposition of our properties located at 4578 Worth Street, 1950 East Williams Street, 9027 Glenoaks Blvd., 2929 S. Fair Drive and 2411, 2507 and 2515 Erie Drive and 1255 Knollwood Circle. This gain is partially offset by losses from operations of the disposed properties as well as the property located at 1335 Park Center Drive.

Non-GAAP Supplemental Measure: Funds From Operations

We calculate funds from operations (“FFO”) before non-controlling interest 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, real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and 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

48

---

 

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.

The following table sets forth a reconciliation of FFO before non-controlling interest for the periods presented to net income (loss), the nearest GAAP equivalent:

 

 

49

---

 

Non-GAAP Supplemental Measure: NOI and Cash NOI

Net operating income (“NOI”) includes the revenue and expense directly attributable to our real estate properties calculated in accordance with GAAP.  Calculated as total revenue from real estate operations including i) rental revenues ii) tenant reimbursements, and iii) other 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 and gains (or losses) from property dispositions, 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 from NOI i) fair value lease revenue and ii) straight-line rent adjustment.  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 are the revenue and expense items comprising NOI and the adjustments to calculate Cash NOI:

 

 

50

---

 

The following is reconciliation from net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, to NOI and Cash NOI:

 

 

51

---

 

Non-GAAP Supplemental Measure: EBITDA

We believe that EBITDA 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 industrial properties. We also use this measure in ratios to compare our performance to that of our industry peers. The following table sets forth a reconciliation of our EBITDA for the periods presented to net income (loss):

 

 

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds to pay for operating expenses, interest expense and scheduled principal payments on outstanding indebtedness, general and administrative expenses, capital expenditures for tenant improvements and leasing commissions and distributions to our common stockholders and holders of common units.  We expect to meet our short-term liquidity requirements through available cash on hand, cash flow from operations and by drawing on our revolving credit facility.

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 cash flow from operations, long-term secured and unsecured borrowings, borrowings available under our revolving credit facility and the issuance of equity securities.

On August 19, 2014, we completed a public follow-on offering of 17,250,000 shares of our common stock at a price per share of $13.50.  The net proceeds, after deducting the underwriting discount and offering costs, were approximately $221.8 million.  The proceeds were partially used to repay the outstanding balance on our revolving credit facility. As of September 30, 2014, our cash and cash equivalents were approximately $60.5 million, and there were no outstanding borrowings under our credit facility, leaving $200.0 million available for additional borrowings.

At September 30, 2014, we had total indebtedness of approximately $269.7 million, excluding the net debt premium of $0.1 million, and additionally, there was approximately $6.2 million of secured indebtedness allocable to our JV which is not reflected on our consolidated balance sheet, reflecting a net debt to total market capitalization of approximately 25.4%. Our total market capitalization is defined as the sum of the market value of our outstanding common stock (which may decrease, thereby increasing our debt to total capitalization ratio), excluding shares of unvested 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 the sum of our total consolidated indebtedness plus the debt allocable to our JV, less cash and cash equivalents.

52

---

 

Contractual Obligations

The following table sets forth our principal obligations and commitments, including periodic interest payments related to our indebtedness outstanding as of September 30, 2014 (in thousands):

 

 

Consolidated Indebtedness

At September 30, 2014, we had total indebtedness of approximately $269.7 million excluding the net debt premium of $0.1 million.  Additionally, there was approximately $6.2 million of secured indebtedness allocable to our 15% joint venture interest in the three properties owned indirectly by the JV which is not reflected on our consolidated balance sheet. The weighted average interest rate on our total consolidated indebtedness is 2.0% (based on the LIBOR rates in effect on September 30, 2014, based on the rate definition per the loan documents and a margin of 135 basis points on our term loan facility).  As of September 30, 2014, approximately $251.2 million (representing the outstanding principal amount under our term loan facility, and our three other secured term loans), or approximately 93.2%, of our outstanding long-term debt is exposed to fluctuations in short-term interest rates.

The following table sets forth our consolidated indebtedness as of September 30, 2014:

 

 

53

---

 

The following table sets forth our allocated share of secured indebtedness outstanding on three properties owned directly by the JV, in which we own a 15% interest, as of September 30, 2014:

 

 

Debt Covenants

Certain of our loan agreements contain financial covenants. The Glendale Commerce Center loan contains a debt service coverage ratio requirement that is tested quarterly, and a debt service coverage ratio requirement and a loan-to-value ratio requirement that are tested each time we exercise an option to extend the maturity date of the loan. In addition, pursuant to the terms of the Glendale Commerce Center loan, we must also meet certain liquidity and net worth requirements that are tested annually.

The Mission Oaks Boulevard loans each contain a combined debt yield ratio requirement that is tested annually, and a combined debt service coverage ratio requirement and a combined loan-to-value ratio requirement that are tested each time the borrowers of the Mission Oaks Blvd loans exercise an option to extend the maturity date of the loans. We and the borrowers of the Mission Oaks Blvd loans are currently in compliance with the financial covenants and net worth liquidity requirements in our and their respective loan agreements. The Glendale Commerce Center loan and the Mission Oaks Blvd loans also each contain cross-default provisions with respect to certain of our other indebtedness, and the Mission Oaks Blvd loans are cross-collateralized with each other.

Our $60.0 million Term Loan contains a debt service coverage ratio requirement that is tested quarterly.  In addition, pursuant to the terms of loan, we must also meet certain liquidity and net worth requirements that are tested annually.

Our $48.5 million Term Loan contains a performance covenant that is tested annually and requires the achievement of a minimum in-place debt yield of 9.25% by the eight properties securing the loan.  

Our ability to borrow under our Amended Facility is subject to our ongoing compliance with a number of customary restrictive covenants, including a maximum leverage ratio, a maximum secured leverage ratio, a maximum recourse debt ratio, a minimum fixed charge coverage ratio, a maximum unsecured leverage ratio, a minimum tangible net worth requirement, and a minimum unencumbered interest coverage ratio. Additionally, under our revolving credit facility, our distributions may not exceed the greater of (i) 95.0% of our funds from operations or (ii) the amount required for us to qualify and maintain our status as a REIT and avoid the payment of federal or state income or excise tax in any 12 month period. If a default or event of default occurs and is continuing, we may be precluded from making certain distributions (other than those required to allow us to qualify and maintain our status as a REIT). The revolving credit facility also includes cross-default provisions with respect to certain of our other indebtedness.  We believe we are currently in compliance with all of the financial covenants required by our loan agreements.

Off Balance Sheet Arrangements

As of September 30, 2014, we did not have any off-balance sheet arrangements other than the one unconsolidated real estate entity which has been disclosed in the notes to our consolidated and combined financial statements.

54

---

 

Cash Flows

Comparison of the Nine Months Ended September 30, 2014 to the Nine Months Ended September 30, 2013

The following table summarizes the cash flows of Rexford Industrial Realty, Inc. and the Predecessor for the nine months ended September 30, 2014 and 2013:

 

 

Net cash provided by operating activities. Net cash provided by operating activities increased by $9.8 million to $17.9 million for the nine months ended September 30, 2014 compared to $8.1 million for the nine months ended September 30, 2013. The increase was primarily attributable to incremental cash flows from property acquisitions completed after January 1, 2013, and lower cash interest paid due to the reduction of debt at the date of our IPO.  These increases were partially offset by the loss of cash flows from property dispositions that occurred after January 1, 2013, and fluctuations in working capital.

Net cash used in investing activities. Net cash used in investing activities increased by $177.8 million to $240.2 million for the nine months ended September 30, 2014 compared to $62.4 million for the nine months ended September 30, 2013. The increase is primarily attributable to an increase of $167.9 million paid toward acquisitions and construction and development projects for comparable periods, a decrease in proceeds of $6.1 million received from property dispositions for comparable periods, and the $5.4 million from the Foothill note receivable repayment during the nine months ended September 30, 2013.

Net cash provided by financing activities. Net cash provided by financing activities of $273.8 million for the nine months ended September 30, 2014 primarily reflects the $221.8 million in net proceeds raised from the completion of our follow-on offering, and new term loan borrowings totaling $148.5 million, partially offset by the net repayment of $81.4 million on our unsecured line of credit, the payment of $12.9 million in dividends and distributions to shareholders and unitholders and the payment of $1.9 million of deferred loan costs related to new borrowings.  Net cash provided by financing activities of $15.2 million for the nine months ended September 30, 2013 primarily reflects the $253.8 million in net proceeds raised from the completion of our IPO and concurrent private placement, partially offset by a net decrease in debt of $194.0 million, the payment of $39.6 million in distributions to Predecessor members, the payment of $2.5 million of mortgage prepayment fees at the date of our IPO and the payment of $2.5 million of deferred loan costs related to new borrowings.  

 

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. In the future, we may use derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings, primarily through interest rate swaps.

An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based on a notional amount of principal. Under the most common form of interest rate swap, known from our perspective as a floating-to-fixed interest rate swap, a series of floating, or variable, rate payments on a notional amount of principal is exchanged for a series of fixed interest rate payments on such notional amount.

On February 4, 2014, we executed two forward interest rate swaps transactions to hedge the variable cash flows associated with our existing $60.0 million variable-rate term loan. Each of the two swaps has a notional value of $30.0 million, which will be in effect beginning in 2015. We are required to make certain monthly fixed rate payments calculated on notional amounts of $30.0 million for each of the swaps, while the applicable counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional amount.  The first forward swap will effectively fix the annual interest rate payable on $30.0 million of debt at 3.726% for the period from January 15, 2015 to February 15, 2019.  The second forward swap will effectively fix the annual interest rate payable on the other $30.0 million of debt at 3.91% for the period from July 15, 2015 to February 15, 2019.

On August 19, 2014, we executed two forward-starting interest rate swap transactions to hedge the variable cash flows associated with our $100.0 million Term Loan Facility.  Each of the two swaps has a notional value of $50.0 million. The first swap has an effective date of August 14, 2015 and a maturity date of December 14, 2018.  The second swap has an effective date of February 16, 2016 and a maturity date of December 14, 2018.  We are required to make certain monthly fixed rate payments calculated on notional amounts of $50.0 million for each of the swaps, while the applicable counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional amount.  The interest rate swaps will effectively

55

---

 

fix the annual interest rate payable on our Term Loan Facility at 1.79% for the first swap and 2.005% for the second swap, plus an applicable margin under the terms of the Amended Facility.

No assurance can be given that any future hedging activities by us will have the desired beneficial effect on our results of operations or financial condition.

The variable rate component of our variable rate consolidated indebtedness is LIBOR-based. Based on our consolidated indebtedness balance as of September 30, 2014, if LIBOR were to increase by 50 basis points, the increase in interest expense on our variable rate debt would decrease our future earnings and cash flows by approximately $1.0 million annually. If LIBOR were to decrease by 50 basis points, the decrease in interest expense on our variable rate debt would be approximately $0.3 million annually.

Interest risk amounts are our management’s estimates and were determined by considering the effect of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the Security and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of September 30, 2014, the end of the period covered by this report. Based on the foregoing, our Co-Chief Executive Officers and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective at the reasonable assurance level.

No changes to our internal control over financial reporting were identified that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

56

---

 

Part II. OTHER INFORMATION

 

On October 3, 2013, two pre-IPO investors filed a putative class action purportedly brought on behalf of the investors in Rexford Industrial Fund III (“RIF III”) in the Los Angeles County Superior Court. On February 14, 2014, a First Amended Complaint was filed adding an additional individual pre-IPO investor and putative class claims on behalf of investors in Rexford Industrial Fund IV, LLC (“RIF IV”).  This complaint also alleged that the communication of the proposed accommodation (in which Messrs. Schwimmer, Frankel and Ziman, together with certain other pre-IPO owners of the pre-IPO management companies agreed to return up to $32.1 million that they received in connection with our IPO and formation transactions) was materially misleading by not including disclosures regarding the lawsuit and claims asserted by plaintiffs.  On July 15, 2014, a Second Amended Complaint was filed withdrawing the class action allegations and the allegations concerning communication of the accommodation, and adding four additional plaintiff investors.  During the third quarter of 2014, the Company entered into settlement agreements with three of these four additional plaintiffs.  The aggregate amounts paid by the Company in these settlements was not material.   Plaintiffs assert claims against the Company, RIF III, RIF IV, Rexford Industrial, LLC and Messrs. Schwimmer, Frankel and Ziman for breach of fiduciary duty, violation of certain California securities laws, negligent misrepresentation, and fraud. Plaintiffs allege, among other things, that the terms of the Company’s formation transactions were unfair to investors in RIF III and RIF IV, that the consideration received by investors in RIF III and RIF IV in the formation transactions was inadequate, that the pre-IPO management companies were allocated unfair value in the formation transactions and that the disclosure documents related to the formation transactions were materially misleading.  Plaintiffs also request to inspect the books and records of RIF III and RIF IV, which entities no longer exist, and further seek declaratory relief, unspecified recessionary damages, disgorgement, compensatory, punitive and exemplary damages, an accounting for unjust enrichment, and an award of costs including pre-judgment interest, attorneys’ and experts’ fees, and other unspecified relief. Defendants have answered the Second Amended Complaint denying all allegations and asserting affirmative defenses.   While we believe that the action is without merit and intend to defend the litigation vigorously, we expect to incur costs associated with defending the action. At this early stage of the litigation, the ultimate outcome of the action is uncertain and we cannot reasonably assess the timing or outcome, or estimate the amount of loss, if any, or its effect, if any, on our financial statements.

 

There have been no material changes to the risk factors set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

  

  

 

None.

 

None.

 

57

---

 

None

 

 

 

58

---

 

Item 6. Exhibits

 

 

 

 

59

---

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized.

 

 

60