UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 1-34907
STAG INDUSTRIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) | 27-3099608 (IRS Employer Identification No.) |
One Federal Street, 23rd Floor Boston, Massachusetts (Address of principal executive offices) | 02110 (Zip Code) |
(617) 574-4777
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value | New York Stock Exchange | |
6.875% Series C Cumulative Redeemable Preferred Stock, $0.01 par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $2,832 million based on the closing price on the New York Stock Exchange as of June 29, 2018.
Number of shares of the registrant’s common stock outstanding as of February 11, 2019: 112,502,759
Number of shares of 6.875% Series C Cumulative Redeemable Preferred Stock as of February 11, 2019: 3,000,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement with respect to its 2019 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the registrant’s fiscal year are incorporated by reference into Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 hereof as noted therein.
STAG INDUSTRIAL, INC.
Table of Contents
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PART I.
Introduction
As used herein, except where the context otherwise requires, “Company,” “we,” “our” and “us,” refer to STAG Industrial, Inc. and our consolidated subsidiaries and partnerships, including our operating partnership, STAG Industrial Operating Partnership, L.P. (“Operating Partnership”).
Forward-Looking Statements
This report, including the information incorporated by reference, contains “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. Forward-looking statements in this report include, among others, statements about our future financial condition, results of operations, capitalization rates on future acquisitions, our business strategy and objectives, including our acquisition strategy, occupancy and leasing rates and trends, and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward‑looking statements. Furthermore, actual results may differ materially from those described in the forward‑looking statements and may be affected by a variety of risks and factors including, without limitation:
• | the factors included in this report, including those set forth under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” |
• | our ability to raise equity capital on attractive terms; |
• | the competitive environment in which we operate; |
• | real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets; |
• | decreased rental rates or increased vacancy rates; |
• | potential defaults (including bankruptcies or insolvency) on or non-renewal of leases by tenants; |
• | acquisition risks, including our ability to identify and complete accretive acquisitions and/or failure of such acquisitions to perform in accordance with projections; |
• | the timing of acquisitions and dispositions; |
• | technological developments, particularly those affecting supply chains and logistics; |
• | potential natural disasters and other potentially catastrophic events such as acts of war and/or terrorism; |
• | international, national, regional and local economic conditions; |
• | the general level of interest rates and currencies; |
• | potential changes in the law or governmental regulations and interpretations of those laws and regulations, including changes in real estate and zoning laws or real estate investment trust (“REIT”) or corporate income tax laws, and potential increases in real property tax rates; |
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• | financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all; |
• | credit risk in the event of non-performance by the counterparties to the interest rate swaps and revolving and unfunded debt; |
• | lack of or insufficient amounts of insurance; |
• | our ability to maintain our qualification as a REIT; |
• | our ability to retain key personnel; |
• | litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and |
• | possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us. |
Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 1. Business
Certain Definitions
In this report:
We define "GAAP" as generally accepted accounting principles in the United States.
We define "total annualized base rental revenue" as the contractual monthly base rent as of December 31, 2018 (which differs from rent calculated in accordance with GAAP) multiplied by 12. If a tenant is in a free rent period as of December 31, 2018, the total annualized base rental revenue is calculated based on the first contractual monthly base rent amount multiplied by 12.
We define "occupancy rate" as the percentage of total leasable square footage for which either revenue recognition has commenced in accordance with GAAP or the lease term has commenced as of the close of the reporting period, whichever occurs earlier.
We define the "Value Add Portfolio" as properties that meet any of the following criteria: (i) less than 75% occupied as of the acquisition date; (ii) will be less than 75% occupied due to known move-outs within two years of the acquisition date; or (iii) out of service with significant physical renovation of the asset.
We define "Stabilization" for properties being redeveloped as the earlier of achieving 90% occupancy or 12 months after completion. With respect to properties acquired and immediately added to the Value Add Portfolio, (i) if acquired with less than 75% occupancy as of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy or 12 months from the acquisition date; or (ii) if acquired and will be less than 75% occupied due to known move-outs within two years of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy after the known move-outs have occurred or 12 months after the known move-outs have occurred.
We define the "Operating Portfolio" as all warehouse and light manufacturing assets that were acquired stabilized or have achieved Stabilization. The Operating Portfolio excludes non-core flex/office assets and assets contained in the Value Add Portfolio.
We define a "Comparable Lease" as a lease in the same space with a similar lease structure as compared to the previous in-place lease, excluding new leases for space that was not occupied under our ownership.
We define "SL Rent Change" as the percentage change in the average monthly base rent over the term of the lease, calculated on a straight-line basis, of the lease executed during the period compared to the Comparable Lease for assets included in the Operating Portfolio. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses, and this calculation excludes the impact of any holdover rent.
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We define "Cash Rent Change" as the percentage change in the base rent of the lease executed during the period compared to the base rent of the Comparable Lease for assets included in the Operating Portfolio. The calculation compares the first base rent payment due after the lease commencement date compared to the base rent of the last monthly payment due prior to the termination of the lease, excluding holdover rent. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses.
Overview
We are a REIT focused on the acquisition, ownership and operation of single-tenant, industrial properties throughout the United States. We seek to (i) identify properties for acquisition that offer relative value across all locations, industrial property types, and tenants through the principled application of our proprietary risk assessment model, (ii) operate our properties in an efficient, cost-effective manner, and (iii) capitalize our business appropriately given the characteristics of our assets. We are a Maryland corporation and our common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the symbol “STAG.”
We are organized and conduct our operations to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and generally are not subject to federal income tax to the extent we currently distribute our income to our stockholders and maintain our qualification as a REIT. We remain subject to state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed income.
As of December 31, 2018, we owned 390 buildings in 37 states with approximately 76.8 million rentable square feet, consisting of 320 warehouse/distribution buildings, 58 light manufacturing buildings, nine flex/office buildings, and three Value Add Portfolio buildings. We own both single- and multi-tenant properties, although we focus on the former. As of December 31, 2018, our buildings were approximately 95.5% leased to 349 tenants, with no single tenant accounting for more than approximately 2.3% of our total annualized base rental revenue and no single industry accounting for more than approximately 15.0% of our total annualized base rental revenue. We intend to maintain a diversified mix of tenants to limit our exposure to any single tenant.
As of December 31, 2018, our Operating Portfolio was approximately 95.8% leased and our SL Rent Change (as defined below) on new and renewal leases together grew approximately 15.2% and 10.8% during the years ended December 31, 2018 and 2017, respectively and our Cash Rent Change on new and renewal leases together grew approximately 7.9% and 2.9% during the years ended December 31, 2018 and 2017, respectively.
We have a fully-integrated acquisition, leasing and asset management platform, and our senior management team has a significant amount of single-tenant, industrial real estate experience. Our mission is to continue to be a disciplined, relative value investor and a leading owner and operator of single-tenant, industrial properties in the United States. We seek to deliver attractive stockholder returns in all market environments by providing a covered dividend combined with accretive growth.
We are structured as an umbrella partnership REIT, also known as an UPREIT, and own all of our properties and conduct substantially all of our business through our Operating Partnership, which we control and manage. As of December 31, 2018, we owned approximately 96.5% of the common equity of our Operating Partnership, and our current and former executive officers, directors, senior employees and their affiliates, and third parties who contributed properties to us in exchange for common equity in our Operating Partnership, owned the remaining 3.5%. We completed our initial public offering of common stock and related formation transactions, pursuant to which we succeeded our predecessor, on April 20, 2011.
Our Strategy
Our primary business objectives are to own and operate a balanced and diversified portfolio of binary risk investments (individual single-tenant industrial properties) that maximize cash flows available for distribution to our stockholders, and to enhance stockholder value over time by achieving sustainable long-term growth in distributable cash flow from operations per share.
We believe that our focus on owning and operating a portfolio of individually-acquired, single-tenant industrial properties throughout the United States will, when compared to other real estate portfolios, generate returns for our stockholders that are attractive in light of the associated risks for the following reasons.
• | Buyers tend to price an individual, single-tenant, industrial property according to the binary nature of its cash flows; with only one potential tenant, any one property is either generating revenue or not. Furthermore, tenants typically cover operating expenses at a property and when a property is not generating revenue, we, as owners, are responsible for paying these expenses. We believe the market prices these properties are based upon a higher risk profile due to the single-tenant nature of these properties and therefore applies a lower value relative to a diversified cash flowing investment. |
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• | The acquisition and contribution of these single-tenant properties to an aggregated portfolio of these individual binary risk cash flows creates diversification, thereby lowering risk and creating value. |
• | Industrial properties generally require less capital expenditure than other commercial property types and single-tenant properties generally require less expenditure for leasing, operating and capital costs per property than multi-tenant properties. |
• | Other institutional, industrial real estate buyers tend to focus on larger properties and portfolios in a select few primary markets. In contrast, we focus on smaller, individual properties across many markets. As a result, our typical competitors are local investors who often do not have the same access to debt or equity capital as us. In our fragmented, predominantly non-institutional environment, a sophisticated, institutional platform with access to capital has execution and operational advantages. |
Our focus on single-tenant properties is not exclusive; we also own multi-tenant properties, as a result of acquiring properties with more than one tenant or of originally single-tenant properties re-leasing to multiple tenants.
Regulation
General
Our properties are subject to various laws, ordinances and regulations, including regulations relating to common areas and fire and safety requirements. We believe that we and/or our tenants, as applicable, have the necessary permits and approvals to operate each of our properties.
Americans with Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act of 1990, as amended (the “ADA”) to the extent that such properties are “public accommodations” as defined under the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Although we believe that the properties in our portfolio in the aggregate substantially comply with current requirements of the ADA, and we have not received any notice for correction from any regulatory agency, we have not conducted a comprehensive audit or investigation of all of our properties to determine whether we are in compliance and therefore we may own properties that are not in compliance with the ADA.
ADA compliance is dependent upon the tenant’s specific use of the property, and as the use of a property changes or improvements to existing spaces are made, we will take steps to ensure compliance. Noncompliance with the ADA could result in additional costs to attain compliance, imposition of fines by the U.S. government or an award of damages or attorney’s fees to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations to achieve compliance as necessary.
Environmental Matters
Our properties are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and therefore it is possible we could incur these costs even after we sell some of our properties. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow using the property as collateral or to sell the property. Under applicable environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment. We invest in properties historically used for industrial, light manufacturing and commercial purposes. Certain of our properties are on or are adjacent to or near other properties upon which others, including former owners or tenants of our properties have engaged, or may in the future engage, in activities that may generate or release petroleum products or other hazardous or toxic substances.
Environmental laws in the United States also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our buildings are known to have asbestos containing materials, and others, due to the age of the building and observed conditions,
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are suspected of having asbestos containing materials. We do not believe these conditions will materially and adversely affect us. In most or all instances, no immediate action was recommended to address the conditions.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos at one of our properties may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. All of our properties were subject to a Phase I or similar environmental assessment by independent environmental consultants at the time of acquisition. We generally expect to continue to obtain a Phase I or similar environmental assessment by independent environmental consultants on each property prior to acquiring it. However, these environmental assessments may not reveal all environmental costs that might have a material adverse effect on our business, assets, results of operations or liquidity and may not identify all potential environmental liabilities.
At the time of acquisition, we add each property to our portfolio environmental insurance policy that provides coverage for potential environmental liabilities, subject to the policy’s coverage conditions and limitations.
We can make no assurances that future laws, ordinances or regulations will not impose material environmental liabilities on us, or the current environmental condition of our properties will not be affected by tenants, the condition of land or operations in the vicinity of our properties (such as releases from underground storage tanks), or by third parties unrelated to us.
Insurance
We carry comprehensive general liability, fire, extended coverage and rental loss insurance covering all of the properties in our portfolio under a blanket insurance policy. In addition, we maintain a portfolio environmental insurance policy that provides coverage for potential environmental liabilities, subject to the policy’s coverage conditions and limitations. Generally, we do not carry insurance for certain losses, including, but not limited to, losses caused by floods (unless the property is located in a flood plain), earthquakes, acts of war, acts of terrorism or riots. We carry employment practices liability insurance that covers us against claims by employees, former employees or potential employees for various employment related matters including wrongful termination, discrimination, sexual harassment in the workplace, hostile work environment, and retaliation, subject to the policy’s coverage conditions and limitations. We carry comprehensive cyber liability insurance coverage that covers us against claims related to certain first party and third party losses including data restoration costs, crisis management expenses, credit monitoring costs, failure to implement and maintain reasonable security procedures, invasion of customer’s privacy and negligence, subject to the policy’s coverage conditions and limitations. We also carry directors and officers insurance. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and standard industry practice; however, our insurance coverage may not be sufficient to cover all of our losses.
Competition
In acquiring our target properties, we compete primarily with local individuals or local operators due to the smaller, single asset (versus portfolio) focus of our acquisition strategy. From time to time we compete with other public industrial property sector REITs, single-tenant REITs, income oriented non-traded REITs, and private real estate funds. Local real estate investors historically have represented our predominant competition for deals and they typically do not have the same access to capital that we do as a publicly traded institution. We also face significant competition from owners and managers of competing properties in leasing our properties to prospective tenants and in re-leasing space to existing tenants.
Operating Segments
We manage our operations on an aggregated, single segment basis for purposes of assessing performance and making operating decisions, and accordingly, have only one reporting and operating segment. See Note 2 in the accompanying Notes to Consolidated Financial Statements under “Segment Reporting.”
Employees
As of December 31, 2018, we employed 73 employees. None of our employees are represented by a labor union.
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Our Corporate Structure
We were incorporated in Maryland on July 21, 2010, and our Operating Partnership was formed as a Delaware limited partnership on December 21, 2009.
We are structured as an UPREIT; our publicly-traded entity, STAG Industrial, Inc., is the REIT in the UPREIT structure, and our Operating Partnership is the umbrella partnership. We own a majority, but not all, of the Operating Partnership. We also wholly own the sole general partner (the manager) of the Operating Partnership. Substantially all of our assets are held in, and substantially all of our operations are conducted through, the Operating Partnership. Shares of our common stock are traded on the NYSE under the symbol "STAG." The limited partnership interests in the Operating Partnership, which we sometimes refer to as “common units,” are not and cannot be publicly traded, although they may provide liquidity through an exchange feature described below. Our UPREIT structure allows us to acquire properties on a tax-deferred basis by issuing common units in exchange for the property.
The common units of limited partnership interest in our Operating Partnership correlate on a one-for-one economic basis to the shares of common stock in the REIT. Each common unit receives the same distribution as a share of our common stock, the value of each common unit is tied to the value of a share of our common stock and each common unit, after one year, generally may be redeemed (that is, exchanged) for cash in an amount equivalent to the value of a share of common stock or, if we choose, for a share of common stock on a one-for-one basis. When redeeming common units for cash, the value of a share of common stock is calculated as the average common stock closing price on the NYSE for the 10 trading days immediately preceding the redemption notice date.
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The following is a simplified diagram of our UPREIT structure at December 31, 2018.
Additional Information
Our principal executive offices are located at One Federal Street, 23rd Floor, Boston, Massachusetts 02110. Our telephone number is (617) 574-4777.
Our website is www.stagindustrial.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to any of those reports that we file with the SEC are available free of charge as soon as reasonably practicable through our website at www.stagindustrial.com. Also posted on our website, and available in print upon request, are charters of each committee of the board of directors, our code of business conduct and ethics and our corporate governance guidelines. Within the time period required by the SEC, we will post on our website any amendment to the code of business conduct and ethics and any waiver applicable to any executive officer, director or senior financial officer. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this report or any other report or document we file with or furnish to the SEC.
All reports, proxy and information statements and other information we file with the SEC are also available free of charge through the SEC’s website at www.sec.gov.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties not presently known to us or that we may currently deem immaterial also may impair our business operations. If any of the following or other risks
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occur, our business, financial condition, operating results, cash flows, and distributions, as well as the market prices for our securities, could be materially adversely affected.
Risks Related to Our Business and Operations
Our investments are concentrated in the industrial real estate sector, and we would be adversely affected by an economic downturn in that sector.
As of December 31, 2018, the majority of our buildings were industrial properties. This concentration may expose us to the risk of economic downturns in the industrial real estate sector to a greater extent than if our properties were more diversified across other sectors of the real estate industry.
Adverse economic conditions will harm our returns and profitability.
Our operating results may be affected by market and economic challenges and uncertainties, which may result from a continued or exacerbated general economic slowdown experienced by the nation as a whole, by the local economies where our properties may be located or our tenants may conduct business, or by the real estate industry, including the following:
• | poor economic conditions may result in tenant defaults under leases and extended vacancies at our properties; |
• | re-leasing may require concessions or reduced rental rates under the new leases due to reduced demand; |
• | adverse capital and credit market conditions may restrict our operating activities; and |
• | constricted access to credit may result in tenant defaults, non-renewals under leases or inability of potential buyers to acquire properties held for sale. |
Also, to the extent we purchase real estate in an unstable market, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future that it attracts at the time of our purchases, or the number of companies seeking to acquire properties decreases, the value of our investments may not appreciate or may decrease significantly below the amount we paid for these investments. The length and severity of any economic slowdown or downturn cannot be predicted. Our operations could be negatively affected to the extent that an economic slowdown or downturn is prolonged or becomes more severe.
Substantial international, national and local government deficits and the weakened financial condition of these governments may adversely affect us.
The values of, and the cash flows from, the properties we own may be affected by historical or future developments in global, national and local economies. As a result of any global economic crisis and significant government intervention, federal, state and local governments have historically incurred and may continue to incur record deficits and assume or guarantee liabilities of private financial institutions or other private entities. Increased budget deficits and weakened financial condition of federal, state and local governments may lead to reduced governmental spending, tax increases, public sector job losses, increased interest rates, currency devaluations, defaults on debt obligations or other adverse economic events, which may directly or indirectly adversely affect our business, financial condition and results of operations.
Events or occurrences that affect areas in which our properties are geographically concentrated may impact financial results.
In addition to general, regional, national and international economic conditions, our operating performance is impacted by the economic conditions of the specific markets in which we have concentrations of properties. See our "Geographic Diversification" table in Item 2, "Properties" for details of geographic concentration of our properties. Our operating performance could be adversely affected if conditions become less favorable in any of the markets in which we have a concentration of properties.
We are subject to industry concentrations that make us susceptible to adverse events with respect to certain industries.
We are subject to certain industry concentrations with respect to our properties. See our "Industry Diversification" table in Item 2, "Properties" for details of industry concentration of our properties. Such industries are subject to specific risks that could result in downturns within the industries. Any downturn in one or more of these industries, or in any other industry in which we may have a significant concentration now or in the future, could adversely affect our tenants who are involved in such industries. If any of these tenants is unable to withstand such downturn or is otherwise unable to compete effectively in its business, it may be forced to declare bankruptcy, fail to meet its rental obligations, seek rental concessions or be unable to enter into new leases, which could materially and adversely affect us.
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Default by one or more of our tenants could materially and adversely affect us.
Any of our tenants may experience a downturn in its business at any time that may significantly weaken its financial condition or cause its failure. As a result, such a tenant may decline to extend or renew its lease upon expiration, fail to make rental payments when due or declare bankruptcy. The default, financial distress or bankruptcy of a tenant could cause interruptions in the receipt of rental revenue and/or result in a vacancy, which is, in the case of a single-tenant property, likely to result in the complete reduction in the operating cash flows generated by the property and may decrease the value of that property. In addition, a majority of our leases generally require the tenant to pay all or substantially all of the operating expenses normally associated with the ownership of the property, such as utilities, real estate taxes, insurance and routine maintenance. Following a vacancy at a single-tenant property, we will be responsible for all of the operating costs at such property until it can be re-let, if at all.
If our tenants are unable to obtain financing necessary to continue to operate their businesses and pay us rent, we could be materially and adversely affected.
Many of our tenants rely on external sources of financing to operate their businesses. The U.S. financial and credit markets may experience liquidity disruptions, resulting in the unavailability of financing for many businesses. If our tenants are unable to obtain financing necessary to continue to operate their businesses, they may be unable to meet their rental obligations to us or enter into new leases with us or be forced to declare bankruptcy and reject our leases, which could materially and adversely affect us.
We have owned our properties for a limited time, and we may not be aware of characteristics or deficiencies involving any one or all of them.
Of the properties in our portfolio at December 31, 2018, 232 buildings totaling approximately 46.9 million rentable square feet have been acquired in the past five years. These properties may have characteristics or deficiencies unknown to us that could affect their valuation or revenue potential and such properties may not ultimately perform up to our expectations. We cannot assure you that the operating performance of the properties will not decline under our management.
We face risks associated with system failures through security breaches or cyber attacks, as well as other significant disruptions of our information technology (IT) networks and related systems.
We face risks associated with security breaches, whether through cyber attacks, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations and, in some cases, may be critical to the operations of certain of our tenants. Although we make efforts to maintain the security and integrity of these types of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target, and in some cases are designed to not be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, and thus it is impossible for us to mitigate this risk entirely. A security breach or other significant disruption involving our IT networks and related systems could disrupt the proper functioning of our networks and systems; result in misstated financial reports, violations of loan covenants and/or missed reporting deadlines; result in our inability to monitor our compliance with the rules and regulations regarding our qualification as a REIT; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; require significant management attention and resources to remedy any damages that result; subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other agreements; or damage our reputation among our tenants and investors generally.
We depend on key personnel; the loss of their full service could adversely affect us.
Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, our executive officers, whose continued service is not guaranteed, and each of whom would be difficult to replace. While we have entered into employment contracts with our executive officers, they may nevertheless cease to provide services to us at any time. If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our management group or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market. The loss of services from key members of the management group or a limitation in their availability could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived
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in the capital markets. As of December 31, 2018, we have not obtained and do not expect to obtain key man life insurance on any of our key personnel.
We also believe that, as we expand, our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, investment, financing, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such skilled personnel.
Our growth will depend upon future acquisitions of properties, and we may be unable to consummate acquisitions on advantageous terms or acquisitions may not perform as we expect.
We acquire and intend to continue to acquire primarily warehouse/distribution properties and light manufacturing properties. The acquisition of properties entails various risks, including the risk that our investments may not perform as we expect. Further, we face competition for attractive investment opportunities from other well-capitalized real estate investors, including both publicly-traded REITs and private institutional investment funds, and these competitors may have greater financial resources and a greater ability to borrow funds to acquire properties. This competition will increase as investments in real estate become increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire additional properties for the purchase price we desire. In addition, we expect to finance future acquisitions through a combination of secured and unsecured borrowings, proceeds from equity or debt offerings by us or our Operating Partnership or its subsidiaries and proceeds from property contributions and divestitures which may not be available and which could adversely affect our cash flows.
The cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can we assure you of our ability to make distributions in the future.
Distributions will be authorized and determined by our board of directors in its sole discretion from time to time and will depend upon a number of factors, including:
• | cash available for distribution; |
• | our results of operations; |
• | our financial condition, especially in relation to the anticipated future capital needs of our properties; |
• | the distribution requirements for REITs under the Code; |
• | our operating expenses; and |
• | other factors our board of directors deems relevant. |
Consequently, we may not continue our current level of distributions to stockholders, and our distribution levels may fluctuate.
In addition, some of our distributions may include a return of capital. To the extent that we make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in its shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. To the extent that distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock. If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.
Risks Related to Our Organization and Structure
Our growth depends on external sources of capital, which are outside of our control and affect our ability to take advantage of strategic opportunities, satisfy debt obligations and make distributions to our stockholders.
In order to maintain our qualification as a REIT, we are generally required under the Code to annually distribute at least 90% of our net taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to federal income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including acquisition financing, from operating cash flow. Consequently, we may rely on third-party sources to fund our capital needs. We may not be able to sell equity or obtain financing on favorable terms or at all. In addition, any additional debt we incur will increase our leverage and debt service obligations. Our access to third-party sources of capital depends, in part, on:
• | general market conditions; |
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• | the market’s perception of our growth potential; |
• | our current debt levels; |
• | our current and expected future earnings; |
• | our cash flow and dividends; and |
• | the market price per share of our common stock. |
If we cannot raise equity or obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties or satisfy our debt service obligations. Further, in order to meet the REIT distribution requirements and maintain our REIT status and to avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes or the effect of non-deductible capital expenditures, the creation of reserves, certain restrictions on distributions under loan documents or required debt or amortization payments.
To the extent that capital is not available to acquire properties, profits may not be realized or their realization may be delayed, which could result in an earnings stream that is less predictable than some of our competitors or a failure to meet our projected earnings and distributable cash flow levels in a particular reporting period. Such a failure to meet our projected earnings and distributable cash flow levels in a particular reporting period could have an adverse effect on our financial condition and on the market price of our stock.
Our fiduciary duties as sole member of the general partner of our Operating Partnership could create conflicts of interest, which may impede business decisions that could benefit our stockholders.
We, as the sole member of the general partner of our Operating Partnership, have fiduciary duties to the other limited partners in our Operating Partnership, the discharge of which may conflict with the interests of our stockholders. The limited partners of our Operating Partnership have agreed that, in the event of a conflict in the fiduciary duties owed by us to our stockholders and, in our capacity as indirect general partner of our Operating Partnership, to such limited partners, we are under no obligation to give priority to the interests of such limited partners. In addition, those persons holding common units will have the right to vote on certain amendments to the Operating Partnership agreement (which require approval by a majority interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. For example, we are unable to modify the rights of limited partners to receive distributions as set forth in the Operating Partnership agreement in a manner that adversely affects their rights without their consent, even though such modification might be in the best interest of our stockholders.
In addition, conflicts may arise when the interests of our stockholders and the limited partners of our Operating Partnership diverge, particularly in circumstances in which there may be an adverse tax consequence to the limited partners. Tax consequences to holders of common units upon a sale or refinancing of our properties may cause the interests of our senior management to differ from your own. As a result of unrealized built-in gain attributable to contributed property at the time of contribution, some holders of common units, including our principals, may suffer different and more adverse tax consequences than holders of our securities upon the sale or refinancing of the properties owned by our Operating Partnership, including disproportionately greater allocations of items of taxable income and gain upon a realization event. As those holders will not receive a correspondingly greater distribution of cash proceeds, they may have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain properties, or whether to sell or refinance such properties at all.
We may experience conflicts of interest with several members of our senior management team and board who have or may become limited partners in our Operating Partnership through the receipt of common units or long-term incentive plan units in our Operating Partnership (“LTIP units”) granted under the STAG Industrial, Inc. 2011 Equity Incentive Plan, as amended and restated (the “2011 Plan”).
We are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared and we may not be able to accurately report our financial results.
We are subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These reporting and other obligations place significant demands on our management, administrative, operational, internal audit and accounting resources and cause us to incur significant expenses. We may need to upgrade our systems or create new systems; implement additional financial and management controls, reporting systems and procedures; expand our internal audit function;
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or hire additional accounting, internal audit and finance staff. Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and trading price of our securities.
Our charter, the partnership agreement of our Operating Partnership and Maryland law contain provisions that may delay or prevent a change of control transaction.
Our charter contains 9.8% ownership limits. Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to limit any person to actual or constructive ownership of no more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock and no more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. In addition, the articles supplementary for our 6.875% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”) provide that generally no person may own, or be deemed to own by virtue of the attribution provisions of the Code, either more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding Series C Preferred Stock. Our board of directors, in its sole discretion, may exempt a proposed transferee from the ownership limits. However, our board of directors may not grant an exemption from the ownership limits to any proposed transferee whose ownership, direct or indirect, of more than 9.8% of the value or number of our outstanding shares of our common stock or Series C Preferred Stock, could jeopardize our status as a REIT. The ownership limits contained in our charter and the restrictions on ownership of our common stock may delay or prevent a transaction or a change of control that might be in the best interest of our stockholders.
Our board of directors may create and issue a class or series of preferred stock without stockholder approval. Subject to the rights of holders of Series C Preferred Stock to approve the classification or issuance of any class or series of stock ranking senior to the Series C Preferred Stock, our board of directors is empowered under our charter to amend our charter to increase or decrease the aggregate number of shares of our common stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock without stockholder approval. Subject to the rights of holders of Series C Preferred Stock discussed above, our board of directors may determine the relative rights, preferences and privileges of any class or series of preferred stock issued. The issuance of preferred stock could also have the effect of delaying or preventing a change of control transaction that might otherwise be in the best interests of our stockholders.
Certain provisions in the partnership agreement for our Operating Partnership may delay or prevent unsolicited acquisitions of us. Provisions in the partnership agreement for our Operating Partnership could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:
• | redemption rights of qualifying parties; |
• | transfer restrictions on our common units; |
• | the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited partners; and |
• | the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified circumstances. |
Any potential change of control transaction may be further limited as a result of provisions of the partnership unit designation for the LTIP units, which require us to preserve the rights of LTIP unit holders and may restrict us from amending the partnership agreement for our Operating Partnership in a manner that would have an adverse effect on the rights of LTIP unit holders.
Certain provisions of Maryland law could inhibit changes in control.
Title 8, Subtitle 3 of the Maryland General Corporation Law (“MGCL”), permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not currently have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that might be in the best interest of our stockholders.
Our charter and bylaws, the partnership agreement for our Operating Partnership and Maryland law contain other provisions that may delay, defer or prevent a transaction or a change of control that might be in the best interest of our stockholders.
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Under their employment agreements, our executive officers have the right to terminate their employment and, under certain conditions, receive severance, which may adversely affect us.
The employment agreements with our executive officers provide that each executive may terminate his or her employment and, under certain conditions, receive severance based on two or three times (depending on the officer) the annual total of salary and bonus and immediate vesting of equity-based awards. In the case of certain terminations, they would not be restricted from competing with us after their departure.
Compensation awards to our management may not be tied to or correspond with our improved financial results or the stock price, which may adversely affect us.
The compensation committee of our board of directors is responsible for overseeing our compensation and employee benefit plans and practices, including our executive compensation plans and our incentive compensation and equity-based compensation plans. Our compensation committee has significant discretion in structuring compensation packages and may make compensation decisions based on any number of factors. As a result, compensation awards may not be tied to or correspond with improved financial results at our company or the share price of our common stock.
Our board of directors can take many actions without stockholder approval.
Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility. For example, our board of directors can do the following:
• | amend or revise at any time and from time to time our investment, financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization and operations; |
• | amend our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements; |
• | within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders; |
• | issue additional shares without obtaining stockholder approval, which could dilute the ownership of existing stockholders; |
• | amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series, without obtaining stockholder approval; |
• | subject to the rights of holders of Series C Preferred Stock, classify or reclassify any unissued shares of our common stock or preferred stock, set the preferences, rights and other terms of such classified or reclassified shares, without obtaining stockholder approval; |
• | make certain amendments to the 2011 Plan; |
• | employ and compensate affiliates; |
• | direct our resources toward investments that do not ultimately appreciate over time; |
• | change creditworthiness standards with respect to third-party tenants; and |
• | determine that it is no longer in our best interests to continue to qualify as a REIT. |
Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving you, as a stockholder, the right to vote.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the
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extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.
The number of shares of our common stock available for future sale, including by our affiliates or investors in our Operating Partnership, could adversely affect the market price of our common stock, and future sales by us of shares of our common stock may be dilutive to existing stockholders.
Sales of substantial amounts of shares of our common stock in the public market, or upon exchange of common units or exercise of any options, or the perception that such sales might occur could adversely affect the market price of our common stock. The exchange of common units for common stock, the exercise of any stock options or the vesting of any restricted stock granted under the 2011 Plan, the issuance of our common stock or common units in connection with property, portfolio or business acquisitions and other issuances of our common stock or common units could have an adverse effect on the market price of our common stock. The existence of shares of our common stock reserved for issuance under the 2011 Plan or upon exchange of common units may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. We also have filed a registration statement with the SEC allowing us to offer, from time to time, an indefinite amount of equity securities (including common and preferred stock) on an as-needed basis and subject to our ability to affect offerings on satisfactory terms based on prevailing conditions. In addition, our board of directors authorized us to issue shares of common stock in our at-the market program. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including issuances of common and preferred stock. No prediction can be made about the effect that future distributions or sales of our common stock will have on the market price of our common stock. In addition, future sales by us of our common stock may be dilutive to existing stockholders.
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may adversely affect the market price of our securities.
Our common stock is ranked junior to our Series C Preferred Stock. Our outstanding Series C Preferred Stock also has or will have a preference upon our dissolution, liquidation or winding up in respect of assets available for distribution to our stockholders. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our securities or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our securities and diluting their proportionate ownership.
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the price at which they traded when you acquired them. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the market price of our common stock or result in fluctuations in the market price or trading volume of our common stock include:
• | actual or anticipated variations in our quarterly operating results; |
• | changes in our operations or earnings estimates or publication of research reports about us or the industry; |
• | changes in our dividend policy; |
• | increases in market interest rates that lead purchasers of our shares to demand a higher yield; |
• | changes in market valuations of similar companies; |
• | adverse market reaction to any increased indebtedness we incur in the future; |
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• | our ability to comply with applicable financial covenants in our unsecured credit facility, unsecured term loans, unsecured notes, and other loan agreements; |
• | additions or departures of key management personnel; |
• | actions by institutional stockholders; |
• | the realization of any of the other risk factors presented in this report; |
• | speculation in the press or investment community; and |
• | general U.S. and worldwide market and economic conditions. |
General Real Estate Risks
Our performance and value are subject to general economic conditions and risks associated with our real estate assets.
The investment returns available from equity investments in real estate depend on the amount of income earned and capital appreciation generated by the properties, as well as the expenses incurred in connection with the properties. If our properties do not generate income sufficient to meet operating expenses, including debt service and capital expenditures, then our ability to pay distributions to our stockholders could be adversely affected. In addition, there are significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) that generally do not decline when circumstances reduce the income from the property. Income from and the value of our properties may be adversely affected by:
• | changes in general or local economic climate; |
• | the attractiveness of our properties to potential tenants; |
• | changes in supply of or demand for similar or competing properties in an area; |
• | bankruptcies, financial difficulties or lease defaults by our tenants; |
• | technological changes, such as reconfiguration of supply chains, autonomous vehicles, drones, robotics, "3D" printing, online marketplaces for industrial space, or other developments; |
• | changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive or otherwise reduce returns to stockholders; |
• | changes in operating costs and expenses and our ability to control rents; |
• | changes in or increased costs of compliance with governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder; |
• | our ability to provide adequate maintenance and insurance; |
• | changes in the cost or availability of insurance, including coverage for mold or asbestos; |
• | unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions; |
• | periods of high interest rates and tight money supply; |
• | tenant turnover; |
• | general overbuilding or excess supply in the market; and |
• | disruptions in the global supply chain caused by political, regulatory or other factors, including terrorism and geopolitical developments outside the United States, such as the effects of the United Kingdom’s referendum to withdraw from the European Union. |
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would adversely affect our financial condition and results of operations. Future terrorist attacks may result in declining economic activity, which could reduce the demand for, and the value of, our properties. To the extent that future attacks impact our tenants, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.
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For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our properties.
Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties.
We compete with other owners, operators and developers of real estate, some of which own properties similar to ours in the same markets and sub-markets in which our properties are located. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants when our tenants’ leases expire.
A significant portion of our properties have leases that expire in the next three years and we may be unable to renew leases, lease vacant space or re-lease space as leases expire.
Our results of operations, cash flows, cash available for distribution, and the value of our securities would be adversely affected if we are unable to lease, on economically favorable terms, a significant amount of space in our operating properties. As of December 31, 2018, leases with respect to approximately 38.8% (excluding month-to-month leases, which comprise an additional 0.2%) of our total annualized base rental revenue will expire before December 31, 2021. We cannot assure you that expiring leases will be renewed or that our properties will be re-leased at base rental rates equal to or above the current market rental rates. In addition, the number of vacant or partially vacant industrial properties in a market or sub-market could adversely affect our ability to re‑lease the space at attractive rental rates.
We may be unable to lease vacant space or renew leases or re-lease on favorable terms.
A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. In addition, certain of the properties we acquire may have some level of vacancy at the time of closing. Certain of our properties may be specifically suited to the particular needs of a tenant. We may face difficulty obtaining, or be unable to obtain, a new tenant for any vacant space we have in our properties. If the vacancy continues for a long period of time, we may suffer reduced revenue resulting in less cash available to be distributed to stockholders. In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
We may not have funding for future tenant improvements.
When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings, it is likely that, in order to attract one or more new tenants, we will be required to expend funds to construct new tenant improvements in the vacated space. Except with respect to our current reserves for capital expenditures, tenant improvements and leasing commissions, we cannot assure you that we will have adequate sources of funding available to us for such purposes in the future.
Bankruptcy laws will limit our remedies if a tenant becomes bankrupt and rejects the lease and we may be unable to collect balances due on our leases.
The bankruptcy or insolvency of a tenant could diminish the income we receive from that tenant’s lease. Our tenants may experience downturns in their operating results due to adverse changes to their business or economic conditions, and those tenants that are highly leveraged may have a higher possibility of filing for bankruptcy or insolvency. We may not be able to evict a tenant solely because of its bankruptcy. On the other hand, a bankruptcy court might authorize the tenant to terminate its lease with us. If that happens, our claim against the bankrupt tenant for unpaid future rent would be an unsecured pre-petition claim subject to statutory limitations, and therefore such amounts received in bankruptcy are likely to be substantially less than the remaining rent we otherwise were owed under the lease. In addition, any claim we have for unpaid past rent could be substantially less than the amount owed. If the lease for such a property is rejected in bankruptcy, our revenue would be reduced and could adversely impact our ability to pay distributions to stockholders.
Real estate investments are not as liquid as other types of investments.
Real estate investments are not as liquid as other types of investments, and this lack of liquidity may limit our ability to react promptly to changes in economic or other conditions. In addition, significant expenditures associated with real estate investments, such as mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. In addition, we intend to comply with the safe harbor rules relating to the number of properties that can be disposed of in a year, the tax bases and the costs of improvements made to these properties, and other items that enable a REIT to avoid punitive taxation on the sale of assets. Thus, our ability at any time to sell assets or contribute assets to property funds or other entities in which we have an ownership interest may be restricted. This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions.
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Acquired properties may be located in new markets where we may face risks associated with investing in an unfamiliar market.
We have acquired, and may continue to acquire, properties in markets that are new to us. When we acquire properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures.
Uninsured losses relating to real property may adversely affect your returns.
We attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, earthquakes, acts of war, acts of terrorism or riots, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could expose us to uninsured casualty losses. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenue in these properties and could potentially remain obligated under any recourse debt associated with the property. Moreover, we, as the indirect general partner of our Operating Partnership, generally will be liable for all of our Operating Partnership’s unsatisfied recourse obligations, including any obligations incurred by our Operating Partnership as the general partner of joint ventures. In addition, we may have no source of funding to repair or reconstruct the damaged property, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. We evaluate our insurance coverage annually in light of current industry practice through an analysis prepared by outside consultants.
Environmentally hazardous conditions, including the effect of climate change, may adversely affect our operating results.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of remediation or removing hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean‑up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resources or property damage or other costs, including investigation and clean‑up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated. A property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our properties, we may be exposed to such costs. The cost of defending against environmental claims, of compliance with environmental regulatory requirements or of remediation of any contaminated property could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.
Environmental laws in the United States also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties contain asbestos‑containing building materials.
We invest in properties historically used for industrial, light manufacturing and commercial purposes. Some of these properties contain, or may have contained, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our properties are adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties are on or are adjacent to or near other properties upon which others, including former owners or tenants of our properties, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances.
From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk‑adjusted return. In such an instance, we underwrite the costs of environmental investigation, clean‑up and monitoring into the cost. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
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Before acquiring a property, we typically obtain a preliminary assessment of environmental conditions at the property that meets certain specifications, often referred to as “Phase I environmental site assessment” or “Phase I environmental assessment.” It is intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. A Phase I environmental assessment generally includes an historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report, but does not include soil sampling or subsurface investigations and typically does not include an asbestos survey. Material environmental conditions, liabilities or compliance concerns may arise after the environmental assessment has been completed. Moreover, there can be no assurance that:
• | future laws, ordinances or regulations will not impose any material environmental liability; or |
• | the current environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of our properties (such as releases from underground storage tanks), or by third parties unrelated to us. |
We are also exposed to potential physical risks from any changes in climate. Our properties may be exposed to rare catastrophic weather events, such as severe storms or floods. If the frequency of extreme weather events increases due to climate change, our exposure to these events could increase. We may be harmed with respect to any real estate development or redevelopment by potential changes to the supply chain or stricter energy efficiency standards for industrial buildings. To the extent climate change causes shifts in weather patterns, our markets could experience negative consequences, including declining demand for industrial space and our inability to operate our buildings. Climate change may also have indirect negative effects on our business by increasing the cost of, or making unavailable, property insurance on terms we find acceptable and increasing the cost of energy, building materials and snow removal at our properties.
Compliance or failure to comply with the ADA and other similar regulations could result in substantial costs.
Under the ADA, places of public accommodation must meet certain federal requirements related to access and use by disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If we are required to make unanticipated expenditures to comply with the ADA, including removing access barriers, then our cash flows and the amounts available for distributions to our stockholders may be adversely affected. While we believe that our properties are currently in material compliance with these regulatory requirements, the requirements may change or new requirements may be imposed that could require significant unanticipated expenditures.
Some of our properties are subject to ground leases that expose us to the loss of such property upon breach or termination of the ground lease and may limit our ability to sell the property.
We own some properties through leasehold interests in the land underlying the building and we may acquire additional buildings in the future that are subject to similar ground leases. As lessee under a ground lease, we are exposed to the possibility of losing the property upon expiration, or an earlier breach by us, of the ground lease.
In the future, our ground leases may contain certain provisions that may limit our ability to sell certain of our properties. In addition, in the future, in order to assign or transfer our rights and obligations under certain of our ground leases, we may be required to obtain the consent of the landlord which, in turn, could adversely impact the price realized from any such sale.
We also own properties that benefit from payment in lieu of tax (“PILOT”) programs or similar programs and to facilitate such tax treatment our ownership in this property is structured as a leasehold interest with the relevant municipality serving as lessor. With respect to such arrangements, we have the right to purchase the fee interest in the property for a nominal purchase price, so the risk factors set forth above for traditional ground leases are mitigated by our ability to convert such leasehold interests to fee interests. In the event of such a conversion of our ownership interests, however, any preferential tax treatment offered by the PILOT programs will be lost.
We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions.
We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our investment objectives. Our ability to dispose of properties on advantageous terms depends on factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers of our properties. We cannot predict the various market conditions affecting real estate investments which will exist at any particular time in the future. Due to the uncertainty of market conditions which may affect the future disposition of our properties, we cannot assure you that we will be able to sell our properties at a profit in the future. Accordingly, the extent to which you will receive cash distributions and realize potential appreciation on our real estate investments will be dependent upon fluctuating market conditions.
Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements.
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If we sell properties and provide financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
If we decide to sell any of our properties, we presently intend to use our best efforts to sell them for cash. However, in some instances we may sell our properties by providing financing to purchasers. If we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders and result in litigation and related expenses. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed of.
Risks Related to Our Debt Financings
Our operating results and financial condition could be adversely affected if we are unable to make required payments on our debt.
Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur, and we are subject to risks normally associated with debt financing, including the risk that our cash flows will be insufficient to meet required payments of principal and interest. There can be no assurance that we will be able to refinance any maturing indebtedness, that such refinancing would be on terms as favorable as the terms of the maturing indebtedness or that we will be able to otherwise obtain funds by selling assets or raising equity to make required payments on maturing indebtedness.
In particular, loans obtained to fund property acquisitions may be secured by first mortgages on such properties. If we are unable to make our debt service payments as required, a lender could foreclose on the property or properties securing its debt. This could cause us to lose part or all of our investment. Certain of our existing secured indebtedness is, and future secured indebtedness may be, cross-collateralized and, consequently, a default on this indebtedness could cause us to lose part or all of our investment in multiple properties.
Increases in interest rates and changes to the LIBOR settling process could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
As of December 31, 2018, we had total outstanding debt of approximately $1.3 billion, including $100.5 million of debt subject to variable interest rates (excluding amounts that were hedged to fix rates), and we expect that we will incur additional indebtedness in the future. Interest we pay reduces our cash available for distributions. Since we have incurred and may continue to incur variable rate debt, increases in interest rates raise our interest costs, which reduces our cash flows and our ability to make distributions to you. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected, and we may lose the property securing such indebtedness. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to sell one or more of our properties at times which may not permit realization of the maximum return on such investments.
Additionally, we pay interest under our unsecured credit facility and other debt instruments based on the London Interbank Offered Rate (“LIBOR”). In July 2017, the Financial Conduct Authority announced that by the end of 2021, LIBOR would be replaced with a more reliable alternative, due to LIBOR rate manipulation and the resulting fines assessed on several major financial institutions over the past several years. It is unclear whether new methods of calculating LIBOR will be established, such that LIBOR may continue to exist after 2021. At this time, we do not know what changes will be made by the Financial Conduct Authority, or how the changes to or replacement of LIBOR will affect the interest we pay on our unsecured credit facility and other debt instruments. Additionally, there is no guarantee that a transition from LIBOR to an alternative rate will not result in financial market disruptions, significant increases in benchmark interest rates or borrowing costs, any of which may have an adverse effect on us.
Covenants in our unsecured credit facility, unsecured term loans, unsecured notes, mortgage notes, and any future debt instruments could limit our flexibility, prevent us from paying distributions, and adversely affect our financial condition or our status as a REIT.
The terms of certain of our mortgage notes require us to comply with loan-to-collateral-value ratios, debt service coverage ratios and, in the case of an event of default, limitations on the ability of our subsidiaries that are borrowers under our mortgage notes to make distributions to us or our other subsidiaries. In addition, our unsecured credit facility, unsecured term loans and unsecured notes require us to comply with loan-to-collateral-value ratios, debt service coverage ratios, leverage ratios, and fixed charge coverage ratios. Our existing loan covenants may reduce flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we have satisfied our payment obligations. In addition, upon a default, our unsecured credit facility, unsecured term loans and unsecured notes, will limit, among other things, our ability to pay dividends, even if we are otherwise in compliance with our financial covenants. Other indebtedness that we may
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incur in the future may contain financial or other covenants more restrictive than those in our unsecured credit facility, unsecured term loans, unsecured notes and mortgage notes.
Our unsecured credit facility, unsecured term loans and unsecured notes contain, and future borrowing facilities may contain, certain cross-default provisions which are triggered in the event that our other material indebtedness is in default. These cross-default provisions may require us to repay or restructure the facilities in addition to any mortgage or other debt that is in default. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, we would be adversely affected.
We are a holding company and conduct substantially all of our business through our Operating Partnership. We do not have, apart from our ownership of our Operating Partnership, any independent operations. As a result, we will rely on distributions from our Operating Partnership to pay any dividends we might declare on our securities. We will also rely on distributions from our Operating Partnership to meet our debt service and other obligations, including our obligations to make distributions required to maintain our REIT status. The ability of subsidiaries of our Operating Partnership to make distributions to our Operating Partnership, and the ability of our Operating Partnership to make distributions to us in turn, will depend on their operating results and on the terms of any loans that encumber the properties owned by them. Such loans may contain lock box arrangements, reserve requirements, financial covenants and other provisions that restrict the distribution of funds. In the event of a default under these loans, the defaulting subsidiary would be prohibited from distributing cash. For example, our subsidiaries are party to mortgage notes that prohibit, in the event of default, their distribution of any cash to a related party, including our Operating Partnership. As a result, a default under any of these loans by the borrower subsidiaries could cause us to have insufficient cash to make the distributions required to maintain our REIT status.
Financing arrangements involving balloon payment obligations may adversely affect us.
Most of our financing arrangements require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity is uncertain and, in the event that we do not have sufficient funds to repay the debt at maturity of these loans, we will need to refinance this debt. If the credit environment is constrained at the time the balloon payment is due, we may not be able to refinance the existing financing on acceptable terms and may be forced to choose from a number of unfavorable options. These options include agreeing to otherwise unfavorable financing terms on one or more of our unencumbered assets, selling one or more properties on disadvantageous terms or defaulting on the loan and permitting the lender to foreclose. The effect of a refinancing or sale could affect the rate of return to stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the distributions that we are required to pay to maintain our qualification as a REIT.
If mortgage debt or unsecured debt is unavailable at reasonable rates, we may not be able to finance the purchase of our properties or refinance our debt.
If mortgage debt or unsecured debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. In addition, we run the risk of being unable to refinance mortgage debt or unsecured debt when the loans come due or of being unable to refinance such debt on favorable terms. If interest rates are higher when we refinance such debt, our net income could be reduced. We may be unable to refinance such debt at appropriate times, which may require us to sell properties on terms that are not advantageous to us or could result in the foreclosure of any mortgaged properties. In addition, we locked in our fixed-rate debt at a point in time when we were able to obtain favorable interest rates, principal amortization and other terms. When we refinance our debt, prevailing interest rates and other factors may result in paying a greater amount of debt service, which will adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders.
Our hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment.
We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. These instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such agreements are not legally enforceable. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT income tests. In addition, the nature and timing of hedging transactions may influence the effectiveness of our hedging strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. Moreover, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses that may reduce the overall return on your investment.
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Adverse changes in our credit ratings could negatively affect our financing activity.
The credit ratings of our unsecured debt are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies. Our credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit ratings, and in the event our credit ratings are downgraded, we would incur greater borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit ratings may trigger additional payments or other negative consequences under our unsecured credit facility and other debt instruments. Adverse changes in our credit ratings could harm our business and, in particular, our financing, refinancing and other capital market activities, our ability to manage debt maturities, our future growth and our acquisition activity.
U.S. Federal Income Tax Risks
Failure to qualify as a REIT would reduce our net earnings available for investment or distribution.
Our qualification as a REIT will depend upon our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Code. If we fail to qualify as a REIT for any taxable year after electing REIT status, we will be subject to federal income tax on our taxable income at regular corporate rates (21%). In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify as a REIT. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, dividends to stockholders would no longer qualify for the dividends‑paid deduction and we would no longer be required to make distributions. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax.
Even if we maintain our qualification as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to our stockholders.
Even if we maintain our qualification as a REIT for federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property. For example:
• | To maintain our qualification as a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders (which is determined without regard to the dividends-paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on the undistributed income. |
• | We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years. |
• | If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non‑qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate. |
• | If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transaction” tax unless such sale were made by our taxable REIT subsidiary (“TRS”) or if we qualify for a safe harbor from tax. |
• | Our TRS will be subject to federal, state and local income tax at regular corporate rates on any income that it earns. |
We intend to make distributions to our stockholders to comply with the REIT requirements of the Code.
REIT distribution requirements could adversely affect our ability to execute our business plan.
From time to time, we may generate taxable income greater than our income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we could be required to borrow or raise equity on unfavorable terms, sell investments at disadvantageous prices, make taxable distributions of our stock or debt securities or find another alternative source of funds to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce the value of our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
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To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return.
To maintain our qualification as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and the value of our stockholders’ investment.
Re-characterization of sale‑leaseback transactions may cause us to lose our REIT status.
In certain circumstances, we expect to purchase real properties and lease them back to the sellers of such properties. While we intend to structure any such sale‑leaseback transaction such that the lease will be characterized as a “true lease” for tax purposes, thereby allowing us to be treated as the owner of the property for federal income tax purposes, we cannot assure you that the Internal Revenue Service (“IRS”) will not challenge such characterization. In the event that any such sale‑leaseback transaction is challenged and re-characterized as a financing transaction or loan for federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale‑leaseback transaction were so re-characterized, we might fail to satisfy the REIT qualification “asset tests” or “income tests” and, consequently, lose our REIT status effective with the year of re-characterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year.
The prohibited transactions tax may limit our ability to engage in transactions, including dispositions of assets that would be treated as sales for federal income tax purposes.
A REIT's net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a TRS.
We may be subject to adverse legislative or regulatory tax changes.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or may reduce the relative attractiveness of an investment in a REIT compared to a corporation not qualified as a REIT. The Tax Cuts and Jobs Act (“TCJA”) significantly changed the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders. Additional technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming at any time. We cannot predict the long-term effect of the TCJA or any future changes on REITs and their stockholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2018, we owned the properties in the following table.
State | City | Number of Buildings | Asset Type | Total Rentable Square Feet | |
Alabama | |||||
Montgomery | 1 | Warehouse / Distribution | 332,000 | ||
Phenix City | 1 | Warehouse / Distribution | 117,568 | ||
Arkansas | |||||
Rogers | 1 | Warehouse / Distribution | 400,000 | ||
Arizona | |||||
Avondale | 1 | Warehouse / Distribution | 186,643 | ||
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State | City | Number of Buildings | Asset Type | Total Rentable Square Feet | |
Tucson | 1 | Warehouse / Distribution | 129,047 | ||
California | |||||
Camarillo | 2 | Warehouse / Distribution | 732,606 | ||
San Diego | 1 | Warehouse / Distribution | 205,440 | ||
Colorado | |||||
Grand Junction | 1 | Warehouse / Distribution | 82,800 | ||
Longmont | 1 | Light Manufacturing | 64,750 | ||
Connecticut | |||||
Avon | 1 | Light Manufacturing | 78,400 | ||
East Windsor | 2 | Warehouse / Distribution | 271,111 | ||
Milford | 1 | Warehouse / Distribution | 200,000 | ||
North Haven | 3 | Warehouse / Distribution | 824,727 | ||
Wallingford | 1 | Warehouse / Distribution | 105,000 | ||
Delaware | |||||
New Castle | 1 | Warehouse / Distribution | 485,987 | ||
Florida | |||||
Daytona Beach | 1 | Light Manufacturing | 142,857 | ||
Jacksonville | 4 | Warehouse / Distribution | 1,025,720 | ||
Ocala | 1 | Warehouse / Distribution | 619,466 | ||
Orlando | 1 | Light Manufacturing | 215,900 | ||
Orlando | 1 | Warehouse / Distribution | 155,000 | ||
Pensacola | 1 | Flex / Office | 30,620 | ||
Georgia | |||||
Augusta | 1 | Warehouse / Distribution | 203,726 | ||
Calhoun | 1 | Warehouse / Distribution | 151,200 | ||
Dallas | 1 | Warehouse / Distribution | 92,807 | ||
Forest Park | 1 | Warehouse / Distribution | 373,900 | ||
LaGrange | 2 | Warehouse / Distribution | 645,191 | ||
Norcross | 1 | Warehouse / Distribution | 152,036 | ||
Savannah | 1 | Warehouse / Distribution | 504,200 | ||
Shannon | 1 | Warehouse / Distribution | 568,516 | ||
Smyrna | 1 | Warehouse / Distribution | 102,000 | ||
Statham | 1 | Warehouse / Distribution | 225,680 | ||
Stone Mountain | 1 | Warehouse / Distribution | 78,000 | ||
Idaho | |||||
Idaho Falls | 1 | Warehouse / Distribution | 90,300 | ||
Illinois | |||||
Batavia | 1 | Warehouse / Distribution | 102,500 | ||
Belvidere | 10 | Warehouse / Distribution | 1,469,222 | ||
DeKalb | 1 | Warehouse / Distribution | 146,740 | ||
Gurnee | 2 | Warehouse / Distribution | 562,500 | ||
Harvard | 1 | Light Manufacturing | 126,304 | ||
Itasca | 1 | Warehouse / Distribution | 202,000 | ||
Libertyville | 1 | Warehouse / Distribution | 251,961 | ||
Libertyville | 1 | Flex / Office | 35,141 | ||
Machesney Park | 1 | Warehouse / Distribution | 80,000 | ||
McHenry | 2 | Warehouse / Distribution | 169,311 | ||
Montgomery | 1 | Warehouse / Distribution | 584,301 | ||
Sauk Village | 1 | Warehouse / Distribution | 375,785 | ||
South Holland | 1 | Warehouse / Distribution | 202,902 | ||
Waukegan | 1 | Warehouse / Distribution | 131,252 | ||
West Chicago | 5 | Light Manufacturing | 305,874 | ||
West Chicago | 1 | Warehouse / Distribution | 249,470 | ||
Wood Dale | 1 | Light Manufacturing | 137,607 | ||
Woodstock | 1 | Light Manufacturing | 129,803 | ||
Indiana | |||||
Albion | 7 | Light Manufacturing | 261,013 | ||
Elkhart | 2 | Warehouse / Distribution | 170,100 | ||
Fort Wayne | 1 | Warehouse / Distribution | 108,800 | ||
Goshen | 1 | Warehouse / Distribution | 366,000 | ||
Greenwood | 1 | Warehouse / Distribution | 446,500 | ||
Kendallville | 1 | Light Manufacturing | 58,500 | ||
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State | City | Number of Buildings | Asset Type | Total Rentable Square Feet | |
Lafayette | 3 | Warehouse / Distribution | 466,400 | ||
Lebanon | 1 | Warehouse / Distribution | 478,721 | ||
Marion | 1 | Warehouse / Distribution | 249,920 | ||
Portage | 1 | Warehouse / Distribution | 212,000 | ||
South Bend | 1 | Warehouse / Distribution | 225,000 | ||
Iowa | |||||
Council Bluffs | 1 | Warehouse / Distribution | 90,000 | ||
Des Moines | 1 | Warehouse / Distribution | 121,922 | ||
Marion | 1 | Warehouse / Distribution | 95,500 | ||
Kansas | |||||
Edwardsville | 1 | Warehouse / Distribution | 270,869 | ||
Lenexa | 2 | Warehouse / Distribution | 276,219 | ||
Olathe | 1 | Warehouse / Distribution | 496,373 | ||
Wichita | 3 | Warehouse / Distribution | 248,550 | ||
Kentucky | |||||
Bardstown | 1 | Warehouse / Distribution | 102,318 | ||
Danville | 1 | Warehouse / Distribution | 757,047 | ||
Erlanger | 1 | Warehouse / Distribution | 108,620 | ||
Florence | 1 | Warehouse / Distribution | 465,136 | ||
Hebron | 1 | Warehouse / Distribution | 109,000 | ||
Louisville | 3 | Warehouse / Distribution | 722,741 | ||
Louisiana | |||||
Baton Rouge | 1 | Warehouse / Distribution | 279,236 | ||
Shreveport | 1 | Warehouse / Distribution | 420,259 | ||
Maine | |||||
Belfast | 5 | Flex / Office | 306,554 | ||
Biddeford | 2 | Warehouse / Distribution | 265,126 | ||
Gardiner | 1 | Warehouse / Distribution | 265,000 | ||
Lewiston | 1 | Flex / Office | 60,000 | ||
Portland | 1 | Warehouse / Distribution | 100,600 | ||
Maryland | |||||
Hampstead | 1 | Warehouse / Distribution | 1,035,249 | ||
White Marsh | 1 | Warehouse / Distribution | 60,000 | ||
Massachusetts | |||||
Chicopee | 1 | Warehouse / Distribution | 217,000 | ||
Malden | 2 | Light Manufacturing | 109,943 | ||
Norton | 1 | Warehouse / Distribution | 200,000 | ||
South Easton | 1 | Light Manufacturing | 86,000 | ||
Stoughton | 2 | Warehouse / Distribution | 258,213 | ||
Westborough | 1 | Warehouse / Distribution | 121,700 | ||
Michigan | |||||
Belleville | 1 | Light Manufacturing | 160,464 | ||
Chesterfield | 4 | Warehouse / Distribution | 478,803 | ||
Grand Rapids | 1 | Warehouse / Distribution | 301,317 | ||
Holland | 1 | Warehouse / Distribution | 195,000 | ||
Kentwood | 1 | Light Manufacturing | 85,157 | ||
Lansing | 4 | Warehouse / Distribution | 770,425 | ||
Livonia | 2 | Warehouse / Distribution | 285,306 | ||
Marshall | 1 | Light Manufacturing | 57,025 | ||
Novi | 3 | Warehouse / Distribution | 685,010 | ||
Plymouth | 1 | Warehouse / Distribution | 125,214 | ||
Redford | 1 | Warehouse / Distribution | 135,728 | ||
Romulus | 1 | Light Manufacturing | 274,500 | ||
Romulus | 1 | Warehouse / Distribution | 303,760 | ||
Sterling Heights | 1 | Warehouse / Distribution | 108,000 | ||
Walker | 1 | Warehouse / Distribution | 210,000 | ||
Warren | 2 | Warehouse / Distribution | 422,377 | ||
Minnesota | |||||
Carlos | 1 | Light Manufacturing | 196,270 | ||
Bloomington | 1 | Light Manufacturing | 145,351 | ||
Brooklyn Park | 1 | Warehouse / Distribution | 200,720 | ||
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State | City | Number of Buildings | Asset Type | Total Rentable Square Feet | |
Maple Grove | 1 | Warehouse / Distribution | 108,628 | ||
Mendota Heights | 1 | Warehouse / Distribution | 87,183 | ||
New Hope | 1 | Light Manufacturing | 107,348 | ||
Oakdale | 1 | Warehouse / Distribution | 109,444 | ||
Plymouth | 1 | Warehouse / Distribution | 120,606 | ||
Rogers | 1 | Warehouse / Distribution | 386,724 | ||
Savage | 1 | Warehouse / Distribution | 244,050 | ||
South Saint Paul | 1 | Warehouse / Distribution | 422,727 | ||
Missouri | |||||
Earth City | 1 | Warehouse / Distribution | 116,783 | ||
Hazlewood | 1 | Warehouse / Distribution | 305,550 | ||
O'Fallon | 2 | Warehouse / Distribution | 186,854 | ||
Nevada | |||||
Las Vegas | 1 | Light Manufacturing | 122,472 | ||
Las Vegas | 1 | Warehouse / Distribution | 34,916 | ||
Reno | 1 | Light Manufacturing | 87,264 | ||
Sparks | 1 | Warehouse / Distribution | 161,986 | ||
New Hampshire | |||||
Londonderry | 1 | Warehouse / Distribution | 125,060 | ||
Nashua | 1 | Warehouse / Distribution | 337,391 | ||
New Jersey | |||||
Burlington | 2 | Warehouse / Distribution | 1,552,121 | ||
Franklin Township | 2 | Warehouse / Distribution | 306,962 | ||
Lopatcong | 1 | Warehouse / Distribution | 237,500 | ||
Pedricktown | 1 | Warehouse / Distribution | 245,749 | ||
New York | |||||
Buffalo | 1 | Warehouse / Distribution | 117,000 | ||
Cheektowaga | 1 | Warehouse / Distribution | 121,760 | ||
Farmington | 3 | Warehouse / Distribution | 301,246 | ||
Gloversville | 3 | Warehouse / Distribution | 172,465 | ||
Johnstown | 1 | Warehouse / Distribution | 57,102 | ||
Johnstown | 1 | Light Manufacturing | 42,325 | ||
North Carolina | |||||
Charlotte | 4 | Warehouse / Distribution | 462,451 | ||
Durham | 1 | Warehouse / Distribution | 80,600 | ||
Greensboro | 1 | Warehouse / Distribution | 128,287 | ||
Huntersville | 1 | Warehouse / Distribution | 185,570 | ||
Lexington | 1 | Warehouse / Distribution | 201,800 | ||
Mebane | 2 | Warehouse / Distribution | 606,840 | ||
Mebane | 1 | Light Manufacturing | 202,691 | ||
Mooresville | 2 | Warehouse / Distribution | 799,200 | ||
Mountain Home | 1 | Warehouse / Distribution | 146,014 | ||
Newton | 1 | Warehouse / Distribution | 217,200 | ||
Pineville | 1 | Light Manufacturing | 75,400 | ||
Rural Hall | 1 | Warehouse / Distribution | 250,000 | ||
Salisbury | 1 | Warehouse / Distribution | 288,000 | ||
Smithfield | 1 | Warehouse / Distribution | 307,845 | ||
Troutman | 1 | Warehouse / Distribution | 301,000 | ||
Winston-Salem | 1 | Warehouse / Distribution | 385,000 | ||
Youngsville | 1 | Warehouse / Distribution | 365,000 | ||
Ohio | |||||
Bedford Heights | 1 | Warehouse / Distribution | 173,034 | ||
Boardman | 1 | Warehouse / Distribution | 175,900 | ||
Columbus | 2 | Warehouse / Distribution | 333,645 | ||
Dayton | 2 | Warehouse / Distribution | 775,727 | ||
Fairborn | 1 | Warehouse / Distribution | 258,680 | ||
Fairfield | 2 | Warehouse / Distribution | 364,948 | ||
Gahanna | 1 | Warehouse / Distribution | 383,000 | ||
Groveport | 1 | Warehouse / Distribution | 320,657 | ||
Grove City | 1 | Warehouse / Distribution | 175,512 | ||
Hilliard | 1 | Warehouse / Distribution | 237,500 | ||
Macedonia | 1 | Warehouse / Distribution | 201,519 | ||
27
State | City | Number of Buildings | Asset Type | Total Rentable Square Feet | |
Mason | 1 | Light Manufacturing | 116,200 | ||
North Jackson | 1 | Warehouse / Distribution | 209,835 | ||
North Jackson | 1 | Warehouse / Distribution | 307,315 | ||
Oakwood Village | 1 | Warehouse / Distribution | 75,000 | ||
Salem | 1 | Light Manufacturing | 271,000 | ||
Seville | 2 | Warehouse / Distribution | 345,000 | ||
Streetsboro | 1 | Warehouse / Distribution | 343,416 | ||
Strongsville | 1 | Warehouse / Distribution | 161,984 | ||
Toledo | 1 | Warehouse / Distribution | 177,500 | ||
Twinsburg | 1 | Warehouse / Distribution | 150,974 | ||
West Chester | 1 | Warehouse / Distribution | 269,868 | ||
Oklahoma | |||||
Oklahoma City | 2 | Warehouse / Distribution | 303,740 | ||
Tulsa | 1 | Warehouse / Distribution | 175,000 | ||
Oregon | |||||
Salem | 2 | Light Manufacturing | 155,900 | ||
Pennsylvania | |||||
Allentown | 1 | Warehouse / Distribution | 289,900 | ||
Charleroi | 1 | Warehouse / Distribution | 119,161 | ||
Clinton | 3 | Warehouse / Distribution | 737,768 | ||
Croydon | 1 | Warehouse / Distribution | 101,869 | ||
Elizabethtown | 1 | Warehouse / Distribution | 206,236 | ||
Lancaster | 1 | Warehouse / Distribution | 240,529 | ||
Langhorne | 2 | Light Manufacturing | 287,647 | ||
Langhorne | 1 | Warehouse / Distribution | 102,000 | ||
Lebanon | 1 | Warehouse / Distribution | 211,358 | ||
Mechanicsburg | 4 | Warehouse / Distribution | 1,077,054 | ||
Muhlenberg Townsh | 1 | Warehouse / Distribution | 394,289 | ||
New Kensington | 1 | Warehouse / Distribution | 200,500 | ||
O'Hara Township | 1 | Warehouse / Distribution | 887,084 | ||
Pittston | 1 | Warehouse / Distribution | 437,446 | ||
Reading | 1 | Warehouse / Distribution | 248,000 | ||
Warrendale | 1 | Warehouse / Distribution | 179,394 | ||
Williamsport | 1 | Warehouse / Distribution | 250,000 | ||
York | 2 | Warehouse / Distribution | 661,468 | ||
South Carolina | |||||
Columbia | 1 | Light Manufacturing | 185,600 | ||
Duncan | 2 | Warehouse / Distribution | 787,380 | ||
Edgefield | 1 | Light Manufacturing | 126,190 | ||
Fountain Inn | 1 | Light Manufacturing | 203,000 | ||
Fountain Inn | 2 | Warehouse / Distribution | 442,472 | ||
Gaffney | 1 | Warehouse / Distribution | 226,968 | ||
Graniteville | 1 | Warehouse / Distribution | 450,000 | ||
Greenville | 1 | Warehouse / Distribution | 157,500 | ||
Greenwood | 2 | Light Manufacturing | 175,055 | ||
Greer | 6 | Warehouse / Distribution | 645,417 | ||
Laurens | 1 | Warehouse / Distribution | 125,000 | ||
Piedmont | 4 | Warehouse / Distribution | 610,891 | ||
Rock Hill | 2 | Warehouse / Distribution | 590,520 | ||
Simpsonville | 3 | Warehouse / Distribution | 1,138,494 | ||
Spartanburg | 6 | Warehouse / Distribution | 1,209,963 | ||
Ware Shoals | 1 | Light Manufacturing | 20,514 | ||
West Columbia | 4 | Warehouse / Distribution | 769,532 | ||
South Dakota | |||||
Rapid City | 1 | Flex / Office | 132,365 | ||
Tennessee | |||||
Chattanooga | 3 | Warehouse / Distribution | 646,200 | ||
Cleveland | 1 | Warehouse / Distribution | 151,704 | ||
Clinton | 1 | Warehouse / Distribution | 166,000 | ||
Jackson | 1 | Warehouse / Distribution | 216,902 | ||
Knoxville | 1 | Light Manufacturing | 106,000 | ||
Knoxville | 1 | Warehouse / Distribution | 108,400 | ||
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State | City | Number of Buildings | Asset Type | Total Rentable Square Feet | |
Loudon | 1 | Warehouse / Distribution | 104,000 | ||
Madison | 1 | Warehouse / Distribution | 418,406 | ||
Mascot | 1 | Warehouse / Distribution | 130,560 | ||
Mascot | 1 | Light Manufacturing | 130,560 | ||
Murfreesboro | 1 | Warehouse / Distribution | 102,505 | ||
Nashville | 1 | Warehouse / Distribution | 150,000 | ||
Portland | 1 | Warehouse / Distribution | 414,043 | ||
Vonore | 1 | Warehouse / Distribution | 342,700 | ||
Texas | |||||
Arlington | 2 | Warehouse / Distribution | 290,132 | ||
Cedar Hill | 1 | Warehouse / Distribution | 420,000 | ||
Conroe | 1 | Warehouse / Distribution | 252,662 | ||
El Paso | 8 | Warehouse / Distribution | 1,887,074 | ||
Garland | 1 | Light Manufacturing | 253,900 | ||
Houston | 2 | Light Manufacturing | 408,599 | ||
Houston | 7 | Warehouse / Distribution | 827,859 | ||
Laredo | 1 | Warehouse / Distribution | 206,810 | ||
Mission | 1 | Warehouse / Distribution | 270,084 | ||
Rockwall | 1 | Warehouse / Distribution | 389,546 | ||
Stafford | 1 | Warehouse / Distribution | 68,300 | ||
Waco | 1 | Warehouse / Distribution | 66,400 | ||
Virginia | |||||
Chester | 1 | Warehouse / Distribution | 100,000 | ||
Independence | 1 | Warehouse / Distribution | 120,000 | ||
Harrisonburg | 1 | Warehouse / Distribution | 357,673 | ||
Wisconsin | |||||
Caledonia | 1 | Light Manufacturing | 53,680 | ||
Chippewa Falls | 2 | Light Manufacturing | 97,400 | ||
DeForest | 1 | Warehouse / Distribution | 254,431 | ||
De Pere | 1 | Warehouse / Distribution | 200,000 | ||
East Troy | 1 | Warehouse / Distribution | 149,624 | ||
Germantown | 4 | Warehouse / Distribution | 520,163 | ||
Hartland | 1 | Warehouse / Distribution | 121,050 | ||
Janesville | 1 | Warehouse / Distribution | 700,000 | ||
Kenosha | 1 | Light Manufacturing | 175,052 | ||
Madison | 2 | Warehouse / Distribution | 283,000 | ||
Mayville | 1 | Light Manufacturing | 339,179 | ||
New Berlin | 1 | Warehouse / Distribution | 205,063 | ||
Oak Creek | 2 | Warehouse / Distribution | 232,144 | ||
Pewaukee | 2 | Warehouse / Distribution | 288,201 | ||
Pleasant Prairie | 1 | Light Manufacturing | 105,637 | ||
Pleasant Prairie | 1 | Warehouse / Distribution | 195,415 | ||
Sun Prairie | 1 | Warehouse / Distribution | 427,000 | ||
West Allis | 4 | Warehouse / Distribution | 241,977 | ||
Yorkville | 1 | Warehouse / Distribution | 98,151 | ||
390 | 76,796,145 | ||||
As of December 31, 2018, 25 of our 390 buildings were encumbered by mortgage indebtedness totaling approximately $57.0 million (excluding unamortized deferred financing fees, debt issuance costs, and fair market value premiums). See Note 4 in the accompanying Notes to the Consolidated Financial Statements and the accompanying Schedule III for additional information.
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Geographic Diversification
The following table sets forth information about the ten largest markets in our portfolio based on total annualized base rental revenue as of December 31, 2018.
Top Ten Markets (1) | % of Total Annualized Base Rental Revenue | ||
Philadelphia, PA | 9.4 | % | |
Chicago, IL | 8.4 | % | |
Greenville/Spartanburg, SC | 5.9 | % | |
Milwaukee/Madison, WI | 4.4 | % | |
Detroit, MI | 4.3 | % | |
Pittsburgh, PA | 3.4 | % | |
Charlotte, NC | 3.3 | % | |
Minneapolis/St Paul, MN | 3.2 | % | |
Houston, TX | 3.1 | % | |
Cincinnati/Dayton, OH | 2.8 | % | |
Total | 48.2 | % | |
(1) As defined by CoStar Realty Information, Inc.
Industry Diversification
The following table sets forth information about the ten largest tenant industries in our portfolio based on total annualized base rental revenue as of December 31, 2018.
Top Ten Tenant Industries (1) | % of Total Annualized Base Rental Revenue | ||
Capital Goods | 15.0 | % | |
Automobiles & Components | 12.5 | % | |
Materials | 11.1 | % | |
Transportation | 9.8 | % | |
Consumer Durables & Apparel | 8.7 | % | |
Commercial & Prof Services | 7.9 | % | |
Food, Beverage & Tobacco | 7.4 | % | |
Retailing | 4.7 | % | |
Household & Personal Products | 4.4 | % | |
Food & Staples Retailing | 4.2 | % | |
Total | 85.7 | % | |
(1) Industry classification based on Global Industry Classification Standard methodology.
Tenant Diversification
The following table sets forth information about the ten largest tenants in our portfolio based on total annualized base rental revenue as of December 31, 2018.
Top Ten Tenants (1) | Number of Leases | % of Total Annualized Base Rental Revenue | |||
General Service Administration | 1 | 2.3 | % | ||
XPO Logistics | 4 | 1.8 | % | ||
Deckers Outdoor | 2 | 1.4 | % | ||
Yanfeng US Automotive Interior | 3 | 1.2 | % | ||
Solo Cup | 1 | 1.2 | % | ||
TriMas Corporation | 4 | 1.2 | % | ||
DHL | 4 | 1.0 | % | ||
WestRock Company | 6 | 0.9 | % | ||
Generation Brands | 1 | 0.9 | % | ||
Carolina Beverage Group | 2 | 0.9 | % | ||
Total | 28 | 12.8 | % | ||
(1) Includes tenants, guarantors, and/or non-guarantor parents.
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Scheduled Lease Expirations
As of December 31, 2018, our weighted average lease term was approximately 4.9 years. We define weighted average lease term as the contractual lease term in years, assuming that tenants exercise no renewal options, purchase options, or early termination rights, weighted by square footage. The following table sets forth a summary of lease expirations for leases in place as of December 31, 2018, plus available space, for each of the ten calendar years beginning with 2019 and thereafter in our portfolio.
Lease Expiration Year | Number of Leases Expiring | Total Rentable Square Feet | % of Total Occupied Square Feet | Total Annualized Base Rental Revenue (in thousands) | % of Total Annualized Base Rental Revenue | ||||||||||
Available | — | 3,456,600 | — | $ | — | — | |||||||||
Month-to-month leases | 5 | 129,500 | 0.2 | % | 642 | 0.2 | % | ||||||||
2019 | 46 | 6,924,804 | 9.4 | % | 30,021 | 9.7 | % | ||||||||
2020 | 52 | 9,994,198 | 13.6 | % | 42,748 | 13.8 | % | ||||||||
2021 | 70 | 10,931,569 | 14.9 | % | 47,431 | 15.3 | % | ||||||||
2022 | 56 | 7,015,995 | 9.6 | % | 29,774 | 9.6 | % | ||||||||
2023 | 51 | 9,118,286 | 12.4 | % | 34,695 | 11.2 | % | ||||||||
2024 | 36 | 6,456,861 | 8.8 | % | 26,780 | 8.6 | % | ||||||||
2025 | 24 | 4,031,385 | 5.5 | % | 17,650 | 5.7 | % | ||||||||
2026 | 24 | 4,491,582 | 6.1 | % | 18,976 | 6.1 | % | ||||||||
2027 | 12 | 1,916,418 | 2.6 | % | 9,105 | 3.0 | % | ||||||||
2028 | 23 | 4,589,199 | 6.3 | % | 19,085 | 6.2 | % | ||||||||
Thereafter | 30 | 7,739,748 | 10.6 | % | 32,911 | 10.6 | % | ||||||||
Total/weighted average | 429 | 76,796,145 | 100.0 | % | $ | 309,818 | 100.0 | % | |||||||
Item 3. Legal Proceedings
From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not currently a party, as plaintiff or defendant, to any legal proceedings that, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operations if determined adversely to our company.
Item 4. Mine Safety Disclosures
Not applicable.
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Information about our equity compensation plans and other related stockholder matters is incorporated by reference to our definitive Proxy Statement for our 2019 Annual Meeting of Stockholders.
Market Information
Our common stock is listed on the NYSE and is traded under the symbol “STAG.”
Holders of Our Common Stock
As of February 11, 2019, we had 65 stockholders of record. This figure does not reflect the beneficial ownership of shares held in the nominee name.
Dividends
To maintain our qualification as a REIT, we must make annual distributions to our stockholders of at least 90% of our taxable net income (not including net capital gains). Dividends are declared at the discretion of our board of directors and depend on actual and anticipated cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and other factors our board of directors may consider relevant.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Performance Graph
The following graph provides a comparison of the cumulative total return on our common stock with the cumulative total return on the Standard & Poor’s 500 Index and the MSCI US REIT Index. The MSCI US REIT Index represents performance of publicly-traded REITs. Returns over the indicated period are based on historical data and should not be considered indicative of future returns. The graph covers the period from December 31, 2013 to December 31, 2018 and assumes that $100 was invested in our common stock and in each index on December 31, 2013 and that all dividends were reinvested.
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or incorporated by reference into any filing by us under the Securities Act, except as shall be expressly set forth by specific reference in such filing.
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Item 6. Selected Financial Data
The following sets forth selected financial and operating data for our company on a historical consolidated basis. The following data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Our selected historical Consolidated Balance Sheet information as of December 31, 2018, 2017, 2016, 2015 and 2014, and our selected historical Consolidated Statement of Operations data for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, have been derived from the audited financial statements of STAG Industrial, Inc. Certain prior year amounts have been reclassified to conform to the current year presentation.
Year Ended December 31, | ||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
Statements of Operations Data: | ||||||||||||||||||||
Revenue | ||||||||||||||||||||
Total revenue | $ | 350,993 | $ | 301,087 | $ | 250,243 | $ | 218,633 | $ | 173,816 | ||||||||||
Expenses | ||||||||||||||||||||
Property | 69,021 | 57,701 | 48,904 | 42,627 | 33,388 | |||||||||||||||
General and administrative | 34,052 | 33,349 | 33,395 | 28,750 | 26,396 | |||||||||||||||
Property acquisition costs | — | 5,386 | 4,567 | 4,757 | 4,390 | |||||||||||||||
Depreciation and amortization | 167,617 | 150,881 | 125,444 | 110,421 | 87,703 | |||||||||||||||
Loss on impairments | 6,182 | 1,879 | 16,845 | 29,272 | 2,840 | |||||||||||||||
Gain on involuntary conversion | — | (325 | ) | — | — | — | ||||||||||||||
Other expenses | 1,277 | 1,786 | 1,149 | 1,048 | 803 | |||||||||||||||
Total expenses | 278,149 | 250,657 | 230,304 | 216,875 | 155,520 | |||||||||||||||
Other income (expense) | ||||||||||||||||||||
Interest and other income | 20 | 12 | 10 | 9 | 15 | |||||||||||||||
Interest expense | (48,817 | ) | (42,469 | ) | (42,923 | ) | (36,098 | ) | (25,109 | ) | ||||||||||
Loss on extinguishment of debt | (13 | ) | (15 | ) | (3,261 | ) | — | (686 | ) | |||||||||||
Gain on the sales of rental property, net | 72,211 | 24,242 | 61,823 | 4,986 | 2,799 | |||||||||||||||
Total other income (expense) | 23,401 | (18,230 | ) | 15,649 | (31,103 | ) | (22,981 | ) | ||||||||||||
Net income (loss) | $ | 96,245 | $ | 32,200 | $ | 35,588 | $ | (29,345 | ) | $ | (4,685 | ) | ||||||||
Less: income (loss) attributable to noncontrolling interest after preferred stock dividends | 3,319 | 941 | 1,069 | (1,962 | ) | (992 | ) | |||||||||||||
Less: preferred stock dividends | 7,604 | 9,794 | 13,897 | 10,848 | 10,848 | |||||||||||||||
Less: redemption of preferred stock | 2,661 | — | — | — | — | |||||||||||||||
Less: amount allocated to participating securities | 276 | 334 | 384 | 385 | 345 | |||||||||||||||
Net income (loss) attributable to common stockholders | $ | 82,385 | $ | 21,131 | $ | 20,238 | $ | (38,616 | ) | $ | (14,886 | ) | ||||||||
Net income (loss) per share attributable to common stockholders — basic | $ | 0.80 | $ | 0.24 | $ | 0.29 | $ | (0.58 | ) | $ | (0.28 | ) | ||||||||
Net income (loss) per share attributable to common stockholders — diluted | $ | 0.79 | $ | 0.23 | $ | 0.29 | $ | (0.58 | ) | $ | (0.28 | ) | ||||||||
Balance Sheets Data (December 31): | ||||||||||||||||||||
Rental property, before accumulated depreciation and amortization | $ | 3,555,133 | $ | 3,097,276 | $ | 2,541,705 | $ | 2,188,642 | $ | 1,809,895 | ||||||||||
Rental property, after accumulated depreciation and amortization | $ | 2,991,701 | $ | 2,567,577 | $ | 2,116,836 | $ | 1,839,967 | $ | 1,558,434 | ||||||||||
Total assets | $ | 3,102,532 | $ | 2,680,667 | $ | 2,186,156 | $ | 1,901,782 | $ | 1,623,802 | ||||||||||
Total debt | $ | 1,325,908 | $ | 1,173,781 | $ | 1,036,139 | $ | 980,248 | $ | 680,478 | ||||||||||
Total liabilities | $ | 1,432,900 | $ | 1,270,360 | $ | 1,119,230 | $ | 1,043,925 | $ | 731,924 | ||||||||||
Total equity | $ | 1,669,632 | $ | 1,410,307 | $ | 1,066,926 | $ | 857,857 | $ | 891,878 | ||||||||||
Other Data: | ||||||||||||||||||||
Dividends declared per common share | $ | 1.419996 | $ | 1.405002 | $ | 1.389996 | $ | 1.365 | $ | 1.29 | ||||||||||
Net cash provided by operating activities | $ | 197,769 | $ | 162,098 | $ | 135,788 | $ | 121,747 | $ | 96,803 | ||||||||||
Net cash used in investing activities | $ | 507,201 | $ | 571,635 | $ | 346,259 | $ | 370,589 | $ | 421,740 | ||||||||||
Net cash provided by financing activities | $ | 303,845 | $ | 415,861 | $ | 211,870 | $ | 238,464 | $ | 342,225 | ||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. For the definitions of certain terms used in the following discussion, refer to Item 1, "Business - Certain Definitions" included elsewhere in this Annual Report on Form 10-K.
Overview
We are a REIT focused on the acquisition, ownership, and operation of single-tenant, industrial properties throughout the United States. We seek to (i) identify properties that offer relative value across all locations, industrial property types, and tenants through the principled application of our proprietary risk assessment model, (ii) operate our properties in an efficient, cost-effective manner, and (iii) capitalize our business appropriately given the characteristics of our assets. We are a Maryland corporation and our common stock is publicly traded on the NYSE under the symbol “STAG.”
We are organized and conduct our operations to qualify as a REIT under Sections 856 through 860 of the Code, and generally are not subject to federal income tax to the extent we currently distribute our income to our stockholders and maintain our qualification as a REIT. We remain subject to state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed income.
Our qualification and taxation as a REIT depends upon our ability to meet on a continuing basis, through actual annual operating results, qualification tests in the federal income tax laws. Those tests involve the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity of our capital stock ownership and the percentage of our earnings that we distribute.
As of December 31, 2018, we owned 390 buildings in 37 states with approximately 76.8 million rentable square feet, consisting of 320 warehouse/distribution buildings, 58 light manufacturing buildings, nine flex/office buildings, and three Value Add Portfolio buildings. We own both single- and multi-tenant properties, although we focus on the former.
As of December 31, 2018, our buildings were approximately 95.5% leased to 349 tenants, with no single tenant accounting for more than approximately 2.3% of our total annualized base rental revenue and no single industry accounting for more than approximately 15.0% of our total annualized base rental revenue.
We own the interests in all of our properties and conduct substantially all of our business through our Operating Partnership. We are the sole member of the sole general partner of the Operating Partnership. As of December 31, 2018, we owned approximately 96.5% of the common equity of our Operating Partnership, and our current and former executive officers, directors, senior employees and their affiliates, and third parties who contributed properties to us in exchange for common equity in our Operating Partnership, owned the remaining 3.5%.
Factors That May Influence Future Results of Operations
Our ability to increase revenues or cash flow will depend in part on our (i) external growth, specifically acquisition activity, and (ii) internal growth, specifically occupancy and rental rates on our portfolio. A variety of other factors, including those noted below, also affect our future results of operations.
Outlook
The outlook for our business remains positive, albeit on a moderated basis in light of more than nine years of economic growth, some uncertainty regarding the current U.S. presidential administration and its policy initiatives, and continued asset appreciation. In December 2018, the federal funds target rate was raised 25 basis points to a target range of 2.25% to 2.50%. We believe that this announcement, combined with the unwinding of the Central Bank's balance sheet by selling Treasury securities, signal the Central Bank's confidence in the economy. If interest rates rise further as a result of Federal Reserve policy action (short-term interest rates) or changes in market expectations and capital flows (long-term interest rates), we believe strengthening economic conditions are likely to accompany these changes. This strengthening of economic conditions combined with the currently favorable industrial supply-demand environment should translate to a net positive result for our business. Specifically, our existing portfolio should benefit from rising rental rates and our acquisition activity should benefit from higher yields. Furthermore, we believe certain characteristics of our business should position us well in a rising interest rate environment, including the fact that we have minimal floating rate debt exposure (taking into account our hedging activities) and that many of our competitors for the assets we purchase tend to be smaller local and regional investors may to be more affected by interest rate increases.
34
Several industrial specific trends contribute to the expected strong demand, including:
• | the rise of e-commerce (as compared to the traditional retail store distribution model) and the concomitant demand by e-commerce industry participants for well-located, functional distribution space; |
• | the increasing attractiveness of the U.S. as a manufacturing and distribution location because of the size of the U.S. consumer market, an increase in overseas labor costs and the overall cost of supplying and shipping goods (i.e. the shortening and fattening of the supply chain); and |
• | the overall quality of the transportation infrastructure in the U.S. |
Our portfolio continues to benefit from historically low availability throughout the national industrial market. As of year-end 2018, demand for space has continued to outpace new supply supporting an accommodative environment for owners. Development activity has steadily increased over the past several years and is now reaching material levels in a growing number of primary industrial markets. Though availability remains historically low, this is a trend we will monitor closely in the coming year. At this point the supply remains fairly concentrated in the larger primary markets. We have limited exposure to many of these markets. On the demand side, we note that the quality and availability of labor remains a key focus of tenants making occupancy decisions. We will continue to monitor the supply and demand fundamentals for industrial real estate and assess its impact on our business.
Conditions in Our Markets
The buildings in our portfolio are located in markets throughout the United States. Positive or negative changes in economic or other conditions, new supply, adverse weather conditions and natural disasters and other factors in these markets may affect our overall performance.
Rental Income
We receive income primarily in the form of rental income from the tenants who occupy our buildings. The amount of rental income generated by the buildings in our portfolio depends principally on occupancy and rental rates.
The following table provides a summary of our Operating Portfolio leases executed during the years ended December 31, 2018 and 2017. Certain leases contain rental concessions; any such rental concessions are accounted for on a straight-line basis over the term of the lease.
Operating Portfolio | Square Feet | Cash Basis Rent Per Square Foot | SL Rent Per Square Foot | Total Costs Per Square Foot(1) | Cash Rent Change | SL Rent Change | Weighted Average Lease Term(2) (years) | Rental Concessions per Square Foot(3) | ||||||||||||||||||||
Year ended December 31, 2018 | ||||||||||||||||||||||||||||
New Leases(4) | 2,513,085 | $ | 3.63 | $ | 3.77 | $ | 2.12 | 10.3 | % | 17.8 | % | 6.3 | $ | 0.71 | ||||||||||||||
Renewal Leases(5) | 7,129,299 | $ | 4.07 | $ | 4.22 | $ | 0.81 | 7.3 | % | 14.5 | % | 4.8 | $ | 0.11 | ||||||||||||||
Total/weighted average | 9,642,384 | $ | 3.96 | $ | 4.10 | $ | 1.15 | 7.9 | % | 15.2 | % | 5.2 | $ | 0.26 | ||||||||||||||
Year ended December 31, 2017 | ||||||||||||||||||||||||||||
New Leases(4) | 2,554,246 | $ | 4.04 | $ | 4.29 | $ | 1.46 | 4.5 | % | 10.6 | % | 4.5 | $ | 0.23 | ||||||||||||||
Renewal Leases(5) | 8,644,161 | $ | 3.89 | $ | 4.04 | $ | 0.66 | 2.5 | % | 10.9 | % | 5.3 | $ | 0.29 | ||||||||||||||
Total/weighted average | 11,198,407 | $ | 3.92 | $ | 4.10 | $ | 0.84 | 2.9 | % | 10.8 | % | 5.2 | $ | 0.28 | ||||||||||||||
(1) | We define Total Costs as the costs for improvements of vacant and renewal spaces, as well as the legal fees and commissions for leasing transactions. Total Costs per square foot represent the total costs expected to be incurred on the leases signed during the period and do not reflect actual expenditures for the period. |
(2) | We define weighted average lease term as the contractual lease term in years, assuming that tenants exercise no renewal options, purchase options, or early termination rights, weighted by square footage. |
(3) | Represents the total rental concessions for the entire lease term. |
(4) | We define a New Lease as any lease that is signed for an initial term equal to or greater than twelve months for any vacant space; this includes a new tenant or an existing tenant that is expanding into new (additional) space. |
(5) | We define a Renewal Lease as a lease signed by an existing tenant to extend the term for twelve months or more, including (i) a renewal of the same space as the current lease at lease expiration, (ii) a renewal of only a portion of the current space at lease expiration and (iii) an early renewal or workout, which ultimately does extend the original term for twelve months or more. |
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Property Operating Expenses
Our property operating expenses generally consist of utilities, real estate taxes, management fees, insurance, and site repair and maintenance costs. For the majority of our tenants, our property operating expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance, and maintenance costs. However, we also have modified gross leases and gross leases in our building portfolio. The terms of those leases vary and on some occasions we may absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for some building related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all costs related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through property operating expenses to our tenants.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately 9.7% of our total annualized base rental revenue will expire during the period from January 1, 2019 to December 31, 2019, excluding month-to-month leases. We assume, based upon internal renewal probability estimates, that some of our tenants will renew and others will vacate and the associated space will be re-let subject to downtime assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases will generally be higher than the rates under existing leases expiring during the period January 1, 2019 to December 31, 2019, thereby resulting in slightly higher revenue from the same space.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
See Note 2 in the accompanying Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.
Rental Property and Deferred Leasing Intangibles
Rental property is carried at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized.
We capitalize costs directly related to the development, pre-development, redevelopment or improvement of rental property. Real estate taxes, compensation costs of development personnel, insurance, interest, and other directly related costs during construction periods are capitalized as incurred and depreciated commencing with the date the property is substantially completed. Such costs begin to be capitalized to the development projects from the point we are undergoing the necessary activities to get the development project ready for its intended use and cease when the development projects are substantially completed and held available for occupancy. Interest is capitalized based on actual capital expenditures from the period when development or redevelopment commences until the asset is ready for its intended use, at the weighted average borrowing rate of our unsecured indebtedness during the period.
For properties classified as held for sale, we cease depreciating and amortizing the rental property and value the rental property at the lower of depreciated and amortized cost or fair value, less costs to dispose. We present those properties classified as held for sale with any qualifying assets and liabilities associated with those properties as held for sale in the accompanying Consolidated Balance Sheets.
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We allocate the purchase price of business combinations or asset acquisitions of properties based upon the fair value of the assets and liabilities acquired, which generally consist of land, buildings, tenant improvements, mortgage debt assumed, and deferred leasing intangibles, which includes in-place leases, above market and below market leases, and tenant relationships. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. The portion of the purchase price that is allocated to above and below market leases is 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 term plus the term of any bargain renewal options. The purchase price is further allocated to in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and its overall relationship with the respective tenant.
The above and below market lease values are amortized into rental income over the remaining lease term. The value of in-place lease intangibles and tenant relationships are amortized over the remaining lease term (and expected renewal period of the respective lease for tenant relationships) as increases to depreciation and amortization expense. The remaining lease terms are adjusted for bargain renewal options or assumed exercises of early termination options, as applicable. If a tenant subsequently terminates its lease, any unamortized portion of above and below market leases is accelerated into rental income and the in-place lease value and tenant relationships are accelerated into depreciation and amortization expense over the shortened lease term.
The purchase price allocated to deferred leasing intangible assets are included in rental property on our Consolidated Balance Sheets and the purchase price allocated to deferred leasing intangible liabilities are included in deferred leasing intangibles on our Consolidated Balance Sheets under the liabilities section.
In determining the fair value of the debt assumed, we discount the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt based on a current market rate. The associated fair market value debt adjustment is amortized through interest expense over the life of the debt on a basis which approximates the effective interest method.
Using information available at the time of acquisition, we allocate the total consideration to tangible assets and liabilities and identified intangible assets and liabilities, as discussed above. We may adjust the preliminary purchase price allocations after obtaining more information about asset valuations and liabilities assumed.
We evaluate the carrying value of all tangible and intangible rental property assets and deferred leasing intangible liabilities held for use for possible impairment when an event or change in circumstance has occurred that indicates their carrying value may not be recoverable. The evaluation includes estimating and reviewing anticipated future undiscounted cash flows to be derived from the asset and the ultimate sale of the asset. If such cash flows are less than the asset’s carrying value, an impairment charge is recognized to the extent by which the asset’s carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective and is based in part on assumptions regarding anticipated hold period, future occupancy, rental rates, capital requirements, and exit capitalization rates that could differ from actual results. The discount rate used to present value the cash flows for determining fair value is also subjective.
Depreciation expense is computed using the straight-line method based on the following estimated useful lives.
Description | Estimated Useful Life | |
Building | 40 Years | |
Building and land improvements | Up to 20 years | |
Tenant improvements | Shorter of useful life or terms of related lease | |
Goodwill
The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Our goodwill of approximately $4.9 million represents amounts allocated to the assembled workforce from the acquired management company, and is presented in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets. Goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis at December 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We take a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. We have not recorded any impairments to goodwill through December 31, 2018.
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Use of Derivative Financial Instruments
We record all derivatives on the accompanying Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, 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 of its risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.
In accordance with fair value measurement guidance, we made an accounting policy election to measure the credit risk of our derivative financial instruments that are subject to master netting arrangements on a net basis by counterparty portfolio. Credit risk is the risk of failure of the counterparty to perform under the terms of the contract. We minimize the credit risk in the interest rate swaps by entering into transactions with various high-quality counterparties. Our exposure to credit risk at any point is generally limited to amounts recorded as assets on the accompanying Consolidated Balance Sheets.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, restricted cash, tenant accounts receivable, interest rate swaps, accounts payable, accrued expenses, unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes. See Note 4 in the accompanying Notes to Consolidated Financial Statements for the fair value of our indebtedness. See Note 5 in the accompanying Notes to Consolidated Financial Statements for the fair value of our interest rate swaps.
We adopted fair value measurement provisions for our financial instruments recorded at fair value. The guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Incentive and Equity-Based Employee Compensation Plans
We grant equity-based compensation awards to our employees and directors in the form of restricted shares of common stock, LTIP units, outperformance programs, and performance units. See Notes 6, 7 and 8 in the accompanying Notes to Consolidated Financial Statements for further discussion of restricted shares of common stock, LTIP units, and the outperformance programs and performance units, respectively. We measure equity-based compensation expense based on the fair value of the awards on the grant date and recognize the expense ratably over the vesting period, and forfeitures are recognized in the period in which they occur.
Revenue Recognition
All current leases are classified as operating leases and rental revenue is recognized on a straight-line basis over the term of the lease (and expected bargain renewal terms or assumed exercise of early termination options) when collectability is reasonably assured. Differences between rental revenue earned and amounts due under the lease are charged or credited, as applicable, to accrued rental revenue. Additional rents from expense reimbursements for insurance, real estate taxes and certain other expenses are recognized in the period in which the related expenses are incurred.
Rental income recognition commences when the tenant takes possession of or controls the physical use of the leased space and the leased space is substantially complete and ready for its intended use. In order to determine whether the leased space is substantially complete and ready for its intended use, we determine whether we or the tenant own the tenant improvements. When it is determined that we are the owner of the tenant improvements, rental income recognition begins when the tenant takes possession of or controls the physical use of the finished space, which is generally when our owned tenant improvements are completed. In instances when it is determined that the tenant is the owner of tenant improvements, rental income recognition begins when the tenant takes possession of or controls the physical use of the leased space.