|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2018 | | 2017 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
| Net income | | $ | 19,232 |
| | $ | 20,356 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation | | 4,478 |
| | 4,407 |
|
| Net amortization of debt issuance costs and premiums | | 311 |
| | (73 | ) |
| Amortization of acquired real estate leases and assumed real estate lease obligations | | 2,105 |
| | 2,110 |
|
| Amortization of deferred leasing costs | | 194 |
| | 203 |
|
| Provision for losses on rents receivable | | 400 |
| | 23 |
|
| Straight line rental income | | (1,194 | ) | | (1,470 | ) |
| Other non-cash expenses | | 104 |
| | — |
|
| Change in assets and liabilities: | | | | |
| Rents receivable | | (321 | ) | | 698 |
|
| Deferred leasing costs | | (9 | ) | | (322 | ) |
| Due from related persons | | (4,133 | ) | | — |
|
| Other assets | | 599 |
| | (3,419 | ) |
| Accounts payable and other liabilities | | 788 |
| | 207 |
|
| Rents collected in advance | | 2,632 |
| | 1,252 |
|
| Security deposits | | 56 |
| | 24 |
|
| Due to related persons | | (3,149 | ) | | — |
|
| Net cash provided by operating activities | | 22,093 |
| | 23,996 |
|
| | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
| Real estate acquisitions | | — |
| | (277 | ) |
| Real estate improvements | | (1,347 | ) | | (1,244 | ) |
| Net cash used in investing activities | | (1,347 | ) | | (1,521 | ) |
| | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
| Proceeds from issuance of common shares, net | | 444,309 |
| | — |
|
| Borrowings under revolving credit facility | | 7,000 |
| | — |
|
| Repayment of mortgage notes payable | | — |
| | (8 | ) |
| Repayments of revolving credit facility | | (455,000 | ) | | — |
|
| Payment of debt issuance costs | | (4,183 | ) | | — |
|
| Contributions | | 16,162 |
| | 17,910 |
|
| Distributions | | (9,187 | ) | | (40,377 | ) |
| Net cash used in financing activities | | (899 | ) | | (22,475 | ) |
| | | | | |
| Increase in cash and cash equivalents | | 19,847 |
| | — |
|
| Cash and cash equivalents at beginning of period | | — |
| | — |
|
| Cash and cash equivalents at end of period | | $ | 19,847 |
| | $ | — |
|
| | | | | |
| SUPPLEMENTAL DISCLOSURES: | | | | |
| Interest paid | | $ | 3,196 |
| | $ | 628 |
|
See accompanying notes
INDUSTRIAL LOGISTICS PROPERTIES TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | |
| | | | Nine Months Ended September 30, |
| | | | | | | 2022 | | 2021 |
| SUPPLEMENTAL DISCLOSURES: | | | | | | | | | |
| Interest paid | | | | | | | $ | 113,748 | | | $ | 24,708 | |
| Income taxes paid | | | | | | | $ | 223 | | | $ | 386 | |
| Interest capitalized | | | | | | | $ | 68 | | | $ | — | |
| | | | | | | | | |
| NON-CASH INVESTING ACTIVITIES: | | | | | | | | | |
| Real estate acquired by assumption of mortgage notes payable | | | | | | | $ | 323,432 | | | $ | — | |
| Real estate improvements accrued, not paid | | | | | | | $ | 7,165 | | | $ | 799 | |
| | | | | | | | | |
| NON-CASH FINANCING ACTIVITIES: | | | | | | | | | |
| Assumption of mortgage notes payable | | | | | | | $ | (323,432) | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH: |
| | | | | | | | | |
| The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows: |
| | | | | | | As of September 30, |
| | | | | | | 2022 | | 2021 |
| Cash and cash equivalents | | | | | | | $ | 26,381 | | | $ | 44,093 | |
Restricted cash (1) | | | | | | | 100,288 | | | — | |
| Total cash, cash equivalents and restricted cash shown in the statements of cash flows | | | | | | | $ | 126,669 | | | $ | 44,093 | |
(1) Restricted cash consists of amounts escrowed for capital expenditures at certain of our mortgaged properties and cash held for the operations of our consolidated joint venture arrangement in which we own a 61% equity interest.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)
Note 1. Organization and Basis of Presentation
Industrial Logistics Properties Trust, or, collectively with its consolidated subsidiaries, we, us or our, is a real estate investment trust, or REIT, formed under Maryland law in 2017 as a wholly owned subsidiary of Select Income REIT, or SIR. On January 17, 2018, we completed an initial public offering and listing on The Nasdaq Stock Market LLC, or Nasdaq, of 20,000,000 of our common shares, or our IPO.
The accompanying condensed consolidated financial statements of Industrial Logistics Properties Trust and its consolidated subsidiaries, or the Company, ILPT, we, us or our, are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2017,2021, or our 2021 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Because
On February 25, 2022, we acquired Monmouth Real Estate Investment Corporation, or MNR, pursuant to the merger of MNR with and into one of our wholly owned subsidiaries, or the Merger, as further described below. In connection with the Merger, we entered into a new joint venture arrangement for 95 of the significant changes resulting fromacquired MNR properties, including two then committed, but not yet then completed, property acquisitions, located in the mainland United States, in which we retained a 61% equity interest. We have determined that this joint venture is not a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, and we evaluated such entity under the voting model and concluded we should consolidate the entity. Under the voting model, we consolidate the entity if we determine that we, directly or indirectly, have greater than 50% of the voting rights and that other equity holders do not have substantive participating rights. The other joint venture investor’s interest in this consolidated entity is reflected as noncontrolling interest in our IPO on January 17, 2018, thecondensed consolidated financial results reported may not be indicative of our expected future results. For periods prior to January 17, 2018, our historical operatingstatements. See Notes 2, 9 and 11 for further information and financial position have been derived from the financial statements of SIR.
regarding this joint venture.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include the allowance for doubtful accounts, purchase price allocations, useful lives of fixed assets, and the assessments of the carrying values and impairments of long lived assets.real estate and related intangibles.
Note 2. Recent Accounting Pronouncements
On January 1, 2018, we adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2014-09 (and related clarifying guidance issued by the FASB), Revenue From Contracts With Customers, which outlines a comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASU No. 2014-09 states that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU No. 2014-09. We have adopted ASU No. 2014-09 using the modified retrospective approach. The adoption of ASU No. 2014-09 did not have a material impact on the amount or timing of our revenue recognition in our condensed consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have in our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. We are currently assessing the potential impact the adoption of ASU No. 2016-13 will have in our condensed consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.
Note 3. Real Estate PropertiesInvestments
As of March 31, 2018, we owned 266September 30, 2022, our portfolio was comprised of 413 consolidated properties with a total ofcontaining approximately 28,540,00059,962,000 rentable square feet, including 226 buildings, leasable land parcels and easements with a total ofcontaining approximately 16,834,00016,729,000 rentable square feet that areof primarily industrial lands located on the island of Oahu, HI,Hawaii, or our Hawaii Properties, and 40 buildings with a total of187 properties containing approximately 11,706,00043,233,000 rentable square feet that areof industrial and logistics properties located in 2438 other states, or our Mainland Properties.
Properties, which includes 94 properties owned by a consolidated joint venture arrangement in which we own a 61% equity interest. As of September 30, 2022, we also owned a 22% equity interest in an unconsolidated joint venture which owns 18 properties located in 12 states totaling approximately 11,726,000 rentable square feet.
We operate in one business segment: ownership and leasing of properties that include industrial and logistics buildings and leased industrial lands. For the three months ended March 31, 2018September 30, 2022 and 2017,2021, approximately 60.7%26.8% and 59.8%50.5%, respectively, of our total revenues wererental income was from our Hawaii Properties. In addition, two subsidiaries of Amazon.com, Inc.For the nine months ended September 30, 2022 and 2021, approximately 30.6% and 50.7%, which are tenantsrespectively, of our Mainland Properties, accounted for $4,267, or 10.5%, and $4,145, or 10.2%,rental income was from our Hawaii properties.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
As of September 30, 2022, we had a concentration of properties leased to tenants, including their applicable subsidiaries, that leased over 5% of our total revenuesrentable square footage. The impact of these tenants on our revenue are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted | | | | | | | | | | | | |
| | % of | | | | Average | | | | | | | | | | | | |
| | Rentable | | Number | | Remaining | | | | | | | | | | | | |
| | Square | | of | | Lease Term | | Rental Income | | Rental Income |
| | Feet | | States | | (in years) | | Three Months Ended | | Nine Months Ended |
| Tenant | | As of September 30, 2022 | | 9/30/2022 | | 9/30/2021 | | 9/30/2022 | | 9/30/2021 |
| Federal Express Corporation/ FedEx Ground Package System, Inc. | | 22.0 | % | | 34 | | 7.3 | | $ | 31,697 | | 30.7 | % | | $ | 2,706 | | 4.9 | % | | $ | 76,227 | | 27.0 | % | | $ | 8,152 | | 5.0 | % |
| Amazon.com Services, Inc./ Amazon.com Services LLC | | 7.7 | % | | 6 | | 6.2 | | 7,244 | | 7.0 | % | | 5,231 | | 9.5 | % | | 20,095 | | 7.1 | % | | 16,117 | | 9.9 | % |
| Home Depot U.S.A., Inc. | | 5.7 | % | | 3 | | 26.3 | | 3,346 | | 3.2 | % | | 1,322 | | 2.4 | % | | 10,169 | | 3.6 | % | | 3,948 | | 2.4 | % |
| Total | | 35.4 | % | | 34 | | 13.3 | | $ | 42,287 | | 40.9 | % | | $ | 54,982 | | 16.8 | % | | $ | 106,491 | | 37.7 | % | | $ | 163,378 | | 17.3 | % |
Acquisition Activities
On February 25, 2022, we completed the acquisition of MNR pursuant to the Agreement and Plan of Merger, dated as of November 5, 2021 and as amended on February 7, 2022, or the Merger Agreement, by and among us, Maple Delaware Merger Sub LLC, a Delaware limited liability company and our wholly owned subsidiary, or Merger Sub, and MNR. At the effective time on February 25, 2022, or the Effective Time, MNR merged with and into Merger Sub, with Merger Sub continuing as the surviving entity, and the separate existence of MNR ceased. MNR’s portfolio included 124 Class A, single tenant, net leased, e-commerce focused industrial properties containing approximately 25,745,000 rentable square feet and two then committed, but not yet then completed, property acquisitions. The aggregate value of the consideration paid in the Merger was $3,739,048, including the assumption of $323,432 aggregate principal amount of former MNR mortgage debt, the repayment of $885,269 of MNR debt and the payment of certain transaction fees and expenses, net of MNR’s cash on hand, and excluding two then pending property acquisitions for an aggregate purchase price of $78,843, excluding acquisition related costs.
Pursuant to the terms set forth in the Merger Agreement, at the Effective Time, each share of common stock, par value $0.01 per share, of MNR that was issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive $21.00 per share in cash, or the Common Stock Consideration, and each share of 6.125% Series C Cumulative Redeemable Preferred Stock, par value $0.01 per share, of MNR, that was issued and outstanding immediately prior to the Effective Time was automatically converted into the right to receive an amount in cash equal to $25.00 plus accumulated and unpaid dividends, or the Preferred Stock Consideration.
At the Effective Time, each MNR stock option and restricted stock award outstanding immediately prior to the Effective Time, whether vested or unvested, became fully vested and converted into the right to receive, in the case of stock options, the difference between the Common Stock Consideration and the exercise price and, in the case of restricted stock awards, the Common Stock Consideration. Any out-of-money stock options were canceled for no consideration.
Immediately following the closing of the Merger, we entered into a joint venture arrangement with an institutional investor for 95 MNR properties, including two then committed, but not yet then completed, property acquisitions. The investor acquired a 39% equity interest in the joint venture from us for $589,411, as of the completion of this transaction, and we retained the remaining 61% equity interest in the joint venture. In connection with the transaction, the joint venture assumed $323,432 aggregate principal amount of former MNR mortgage debt secured by 11 properties and entered into a $1,400,000 floating rate CMBS loan secured by 82 properties, or the Floating Rate Loan. The Floating Rate Loan matures in March 2024, subject to three one year extension options, and requires that interest be paid at an annual rate based on the secured overnight financing rate, or SOFR, plus a premium of 2.77%. See Notes 4, 9, 10 and 11 for more information regarding this joint venture and related loans.
In connection with the closing of the Merger, we entered into a $1,385,158 bridge loan facility secured by 109 of our properties, or the Bridge Loan. We also entered into a $700,000 fixed rate CMBS loan secured by 17 of our properties, or the Fixed Rate Loan.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
The Bridge Loan was scheduled to mature in February 2023 and required that interest be paid at an annual rate of SOFR plus a weighted average premium of 2.92%. The Bridge Loan was repaid in full on September 22, 2022. The Fixed Rate Loan matures in March 2032 and requires that interest be paid at a weighted average annual interest rate of 4.42%. The Floating Rate Loan, the Bridge Loan and the Fixed Rate Loan are collectively referred to as the Loans. See Note 4 for more information regarding the Loans.
We used the proceeds from our sale of the equity interest in our joint venture in which we retained a 61% equity interest to partially fund our acquisition of MNR. We funded our equity interest in that joint venture and the balance of the acquisition of MNR with proceeds from the Bridge Loan and the Fixed Rate Loan.
In connection with the Merger and the Loans, we repaid the outstanding principal balance under our $750,000 unsecured revolving credit facility and then terminated the agreement governing the facility, which was scheduled to expire in June 2022, in accordance with its terms and without penalty.
The following table summarizes the purchase price allocation for the threeMerger:
| | | | | | | | |
| Land | | $ | 430,818 | |
| Buildings | | 3,035,309 | |
Acquired real estate leases (1) | | 294,576 | |
| | |
| Cash | | 8,814 | |
| Other assets, net | | 14,194 | |
Securities available for sale (2) | | 146,550 | |
| Total assets | | 3,930,261 | |
| Mortgage notes payable, at fair value | | (323,432) | |
| Accounts payable and other liabilities | | (25,327) | |
| Assumed real estate lease obligations | | (17,829) | |
| | |
| Equity attributable to noncontrolling interest on the joint venture | | (3,827) | |
| Net assets acquired | | 3,559,846 | |
| Assumed working capital | | (144,230) | |
| Assumed mortgage notes payable, principal | | 323,432 | |
| Purchase price | | $ | 3,739,048 | |
(1)As of the date of acquisition, the weighted average amortization periods for the above market lease values, lease origination value and capitalized below
market lease values were 11.05 years, 8.50 years and 7.83 years, respectively.
(2)As part of the Merger, we acquired a portfolio of marketable securities and classified them as available for sale. During the nine months ended March 31, 2018September 30, 2022, we sold all of these securities with a cost of $146,550 for net proceeds of $140,792, resulting in a $5,758 realized loss on sale of equity securities for the nine months ended September 30, 2022.
In July 2022, our consolidated joint venture acquired a property located in Augusta, GA containing 226,000 rentable square feet for a purchase price of approximately $38,053, including acquisition related costs of $53. This property is 100% leased to a single tenant with a remaining lease term of approximately 14.9 years at the time of acquisition.
We allocated the purchase price for this acquisition based on the estimated fair value of the acquired assets as follows:
| | | | | | | | | | | | | | | | | | | | |
| Purchase | | | | Buildings and | | Acquired Real Estate |
| Price | | Land | | Improvements | | Leases |
| $ | 38,053 | | | $ | 3,818 | | | $ | 30,780 | | | $ | 3,455 | |
This property was one of two committed MNR property acquisitions at the time of the Merger and 2017, respectively.
was acquired directly by our consolidated joint venture. In September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition.
During the threenine months ended March 31, 2018,September 30, 2022, we committed $68$15,304 for expenditures related to tenant improvements and leasing related costs for approximately 296,000 square feet of leases executed during the period.
Committedperiod for approximately 6,442,000 square feet. As of September 30, 2022, committed, but unspent, tenant related obligations based on existing leases aswere $25,939.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
Certain of our industrial lands in Hawaii may require environmental remediation, especially if the use of those lands is changed;changes; however, we do not have any present plans to change the use of those lands or to undertake this environmental remediation.lands. As of both March 31, 2018September 30, 2022 and December 31, 2017,2021, accrued environmental remediation costs of $7,002$6,940 were included in accounts payable and other liabilities in our condensed consolidated balance sheets. These accrued environmental remediation costs relate to the maintenance of our properties for their current uses, and, because of the indeterminable timing of the remediation, these amounts have not been discounted to present value. In general, we do not have any insurance designated to limit any losses that we may incur as a result of known or unknown environmental conditions which are not caused by an insured event, such as fire or flood, although some of our tenants may maintain such insurance that may benefit us. AlthoughWhile we do not believe that there are environmental conditions at any of our properties that will have a material adverse effect on us, we cannot be sure that such conditions are not present at our properties or that costs we incur to remediate any contamination will not have a material adverse effect on our business or financial condition. Charges for environmental remediation costs, if any, are included in other operating expenses in our condensed consolidated statements of comprehensive income.income (loss).
Disposition Activities
During the nine months ended September 30, 2022, we recorded a $100,747 loss on impairment of real estate to adjust the carrying value of 25 properties to their estimated fair value, due to a change in plans to sell and the reclassification of those properties from held for sale to held and used. See Note 5 for further information on these properties.
Joint Venture Activities
As of September 30, 2022, we have equity investments in our joint ventures that consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | ILPT Carrying Value | | | | | | |
| | | | ILPT | | of Investment | | Number of | | | | Square |
| Joint Venture | | Presentation | | Ownership | | at September 30, 2022 | | Properties | | Location | | Feet |
| Mountain Industrial REIT LLC | | Consolidated | | 61% | | N/A | | | | 94 | | Various | | 20,981,000 | |
| The Industrial Fund REIT LLC | | Unconsolidated | | 22% | | $ | 145,693 | | | | | 18 | | | Various | | 11,726,000 | |
The following table provides a summary of the mortgages of our joint ventures:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Principal Balance |
| | Interest | | | | at September 30, |
| Joint Venture (Consolidated) | | Rate | | Maturity Date | | 2022 (1) |
| Mortgage notes payable (secured by 11 properties in 10 states) | | 3.67% | (2) | Various | | $ | 310,842 | |
| Mortgage notes payable (secured by 82 properties in 25 states) | | 5.62% | | 3/9/2024 | | 1,400,000 | |
| | | | | | |
| Weighted average/total | | 5.27% | | | | $ | 1,710,842 | |
(1)Amounts are not adjusted for our interest; none of the debt is recourse to us, subject to certain limitations.
(2)Represents weighted average interest rate as of September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Principal Balance | |
| | Interest | | | | at September 30, | |
| Joint Venture (Unconsolidated) | | Rate | | Maturity Date | | 2022 (1) | |
| Mortgage notes payable (secured by one property in Florida) | | 3.60% | (2) | 10/1/2023 | | $ | 56,980 | | |
| Mortgage notes payable (secured by 11 other properties in eight states) | | 3.33% | (2) | 11/7/2029 | | 350,000 | | |
| Mortgage notes payable (secured by 5 properties in four states) | | 4.22% | | 10/1/2027 | | 97,000 | | |
| Weighted average/total | | 3.53% | (2) | | | $ | 503,980 | | |
(1)Amounts are not adjusted for our minority interest; none of the debt is recourse to us.
(2)Includes the effect of mark to market purchase accounting.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
Consolidated Joint Venture - Mountain Industrial REIT LLC
Immediately following the closing of the Merger, we entered into a joint venture arrangement with an institutional investor for 95 of the acquired MNR properties in 27 states, including two then committed, but not yet then completed, property acquisitions. The investor acquired a 39% noncontrolling equity interest in the joint venture from us for $589,411, as of the completion of this transaction, and we retained the remaining 61% equity interest in the joint venture. The joint venture assumed $323,432 aggregate principal amount of former MNR mortgage debt on certain of the properties. In July 2022, our consolidated joint venture completed one of the two committed MNR property acquisitions, and in September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition. We control this joint venture and therefore account for the properties on a consolidated basis in our condensed consolidated financial statements.
We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three and nine months ended September 30, 2022. The portion of this joint venture's net loss not attributable to us, or $38,318 and $49,360 for the three and nine months ended September 30, 2022, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). During the nine months ended September 30, 2022, this joint venture made aggregate cash distributions of $1,365 to the other joint venture investor, which is reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. No distributions were made during the three months ended September 30, 2022. See Notes 1, 4, 5, 9, 10 and 11 for more information regarding this joint venture.
Unconsolidated Joint Venture - The Industrial Fund REIT LLC
As of September 30, 2022 and December 31, 2021, we also owned a 22% interest in an unconsolidated joint venture with 18 properties in 12 states. We account for the unconsolidated joint venture under the equity method of accounting under the fair value option.
We recorded a change in the fair value of our investment in the unconsolidated joint venture of $3,297 and $998 for the three months ended September 30, 2022 and 2021, respectively, and $6,634 and $5,455 for the nine months ended September 30, 2022 and 2021, respectively, as equity in earnings of unconsolidated joint venture in our condensed consolidated statements of comprehensive income (loss). In addition, the unconsolidated joint venture made aggregate cash distributions to us of $1,320 and $660 during the three months ended September 30, 2022 and 2021, respectively, and $3,962 and $1,980, during the nine months ended September 30, 2022 and 2021, respectively. In October 2022, the unconsolidated joint venture made a cash distribution to us of $20,900, including amounts related to a debt financing.
See Notes 1, 4, 5, 9, 10 and 11 for more information regarding our joint ventures.
Note 3. Leases
We are a lessor of industrial and logistics properties. Our leases provide our tenants with the contractual right to use and economically benefit from all the physical space specified in their respective leases; therefore, we have determined to evaluate our leases as lease arrangements.
Our leases provide for base rent payments and may also include variable payments. Rental income from operating leases, including any payments derived by index or market-based indices, is recognized on a straight line basis over the lease term when we have determined that the collectability of substantially all of the lease payments is probable. Some of our leases have options to extend or terminate the lease exercisable at the option of our tenants, which are considered when determining the lease term. We do not include in our measurement of our lease receivables certain variable payments, including payments determined by changes in the index or market-based indices after the inception of the lease, certain tenant reimbursements and other income until the specific events that trigger the variable payments have occurred. Such payments totaled $16,664 and $9,478 for the three months ended September 30, 2022 and 2021, respectively, of which tenant reimbursements totaled $16,419 and $9,233, respectively, and $46,071 and $28,341 for the nine months ended September 30, 2022 and 2021, respectively, of which tenant reimbursements totaled $45,336 and $27,606, respectively.
We increased rental income to record revenue on a straight line basis by $3,794 and $1,678 for the three months ended September 30, 2022 and 2021, respectively, and $8,170 and $5,673 for the nine months ended September 30, 2022 and 2021, respectively.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
Right of use asset and lease liability. In connection with our acquisition of MNR, we assumed the lease for MNR’s former corporate headquarters, which expires on December 31, 2029, and three of the properties we acquired as part of the MNR acquisition were subject to ground leases under which we are the lessee. For leases under which we are the lessee, we are required to record a right of use asset and lease liability for all leases with a term greater than 12 months. As of September 30, 2022, the value of the right of use asset and related liability representing our future obligations under the lease arrangements under which we are the lessee were $4,959 and $5,019, respectively. The right of use asset and related lease liability are included in other assets, net and accounts payable and other liabilities, respectively, in our condensed consolidated balance sheets.
Generally, payments of ground lease obligations are made by our tenants. However, if a tenant does not perform obligations under a ground lease or does not renew any ground lease, we may have to perform obligations under, or renew, the ground lease in order to protect our investment in the affected property.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
Note 4. Indebtedness
OurAs of September 30, 2022, our outstanding indebtedness consisted of the following:
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| | | | | | Principal Balance as of | | | | | | of Collateral |
| | | | | | September 30, | | December 31, | | Interest | | | | At September 30, |
| Entity | | Type | | Secured By: | | 2022 (1) | | 2021 (1) | | Rate | | Maturity | | 2022 |
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| ILPT | | Revolving credit facility (2) | | Unsecured | | $ | — | | | $ | 182,000 | | | N/A | | N/A | | $ | — | |
| ILPT | | Floating Rate - Interest only (3) | | 104 Properties | | 1,235,000 | | | — | | | 6.18 | % | | Oct 2024 | | 1,077,796 | |
| ILPT | | Fixed Rate - Interest only | | 186 Properties | | 650,000 | | | 650,000 | | | 4.31 | % | | Feb 2029 | | 490,602 | |
| ILPT | | Fixed Rate - Interest only | | 17 Properties | | 700,000 | | | — | | | 4.42 | % | | Mar 2032 | | 521,785 | |
Mountain (4) | | Floating Rate - Interest only (5) | | 82 Properties | | 1,400,000 | | | — | | | 5.62 | % | | Mar 2024 | | 1,923,147 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 14,074 | | | — | | | 3.76 | % | | Oct 2028 | | 63,829 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 5,008 | | | — | | | 3.77 | % | | Apr 2030 | | 40,002 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 5,295 | | | — | | | 3.85 | % | | Apr 2030 | | 40,002 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 14,793 | | | — | | | 3.56 | % | | Sep 2030 | | 51,100 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 13,012 | | | — | | | 3.67 | % | | May 2031 | | 30,962 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 14,443 | | | — | | | 4.14 | % | | Jul 2032 | | 45,094 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 31,517 | | | — | | | 4.02 | % | | Oct 2033 | | 87,730 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 43,999 | | | — | | | 4.13 | % | | Nov 2033 | | 131,986 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 26,602 | | | — | | | 3.10 | % | | June 2035 | | 48,049 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 42,743 | | | — | | | 2.95 | % | | Jan 2036 | | 102,593 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 46,659 | | | — | | | 4.27 | % | | Nov 2037 | | 113,839 | |
Mountain (4) | | Fixed Rate - Amortizing | | One Property | | 52,697 | | | — | | | 3.25 | % | | Jan 2038 | | 117,386 | |
| | Total indebtedness | | | | 4,295,842 | | | 832,000 | | | | | | | $ | 4,885,902 | |
| | Unamortized debt issuance costs | | | | (52,571) | | | (3,876) | | | | | | | |
| | Total indebtedness, net | | | | $ | 4,243,271 | | | $ | 828,124 | | | | | | | |
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(1)The principal debt obligationsbalances are the amounts stated in contracts. In accordance with GAAP, our carrying values and recorded interest expense may be different because of market conditions at March 31, 2018 were: (1) $302,000the time we assumed certain of these debts.
(2)In February 2022, we repaid the outstanding borrowingsprincipal balance under our $750,000 unsecured revolving credit facility;facility and (2)then terminated the agreement governing the facility in accordance with its terms and without penalty.
(3)This loan matures in October 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a mortgage noteweighted average premium of 3.93%. We also purchased an interest rate cap through October 2024 with a SOFR strike rate equal to 2.25%.
(4)Mountain is Mountain Industrial REIT LLC, our consolidated joint venture, in which we own a 61% equity interest.
(5)This loan matures in March 2024, subject to three, one year extension options, and requires that interest be paid at an outstanding principal amountannual rate of $48,750.SOFR plus a premium of 2.77%. We also purchased an interest rate cap through March 2024 with a SOFR strike rate equal to 3.40%.
OnAs of December 29, 2017,31, 2021, we obtained a $750,000 secured revolving credit facility which initially had a maturity date of March 29, 2018. Upon the completion of our IPO, our secured revolving credit facility became a $750,000 unsecured revolving credit facility and the maturity datethat was extended to December 29, 2021. Following our IPO, borrowings under our revolving credit facility are available for our general business purposes, including acquisitions. Interest on borrowings under ourThe maturity date of this revolving credit facility is calculated at floating rates based on LIBOR plus a premium that varies based on our leverage ratio. We have thewas June 29, 2022 and had an option to extend the maturity date of our revolving credit facility for twoone, six month periods,period, subject to payment of extension fees and satisfaction of other conditions. If we later achieve an investment grade credit rating, we will then be able to elect to continue to have the interest premium based on our leverage ratio or we may instead elect to have the interest premium based on our credit rating, or a ratings election. We are also required to pay a commitment fee on the unused portion of our revolving credit facility until and if such time as we make a ratings election, and thereafter we will be required to pay a facility fee in lieu of such commitment fee based on the maximum amount of our revolving credit facility. We may borrow, repay and reborrow funds under our revolving credit facility until maturity, and no principal repayment is due until maturity. The agreement governing our revolving credit facility, or our credit agreement, also includes a feature under which the maximum borrowing availability under our revolving credit facility may be increased to up to $1,500,000 in certain circumstances. In addition, during the first quarter of 2018, we completed the syndication of our revolving credit facility with a group of institutional lenders. As of March 31, 2018 and December 31, 2017,2021, the annual interest rate payable on borrowings under ourthis revolving credit facility was 3.23%1.41%. The weighted average annual interest rate for borrowings under this revolving credit facility was 1.42% for the three months ended September 30, 2021 and 2.89%,1.41% and 1.46% for the period from January 1, 2022 to February 25, 2022 and the nine months ended September 30, 2021, respectively. In connection with the closing of the Merger, we entered into the Loans, and repaid the outstanding principal balance under this revolving credit facility and then terminated the agreement governing the facility in accordance with its terms and without penalty. During the nine months ended September 30, 2022, we recorded a $828 loss on early extinguishment of debt to write off unamortized costs related to this facility.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
On February 25, 2022, subsidiaries of our consolidated joint venture entered into a loan agreement with a group of institutional lenders, or the Floating Rate Lenders, pursuant to which this joint venture obtained the Floating Rate Loan. Also on February 25, 2022, our consolidated joint venture entered into a guaranty in favor of the Floating Rate Lenders, pursuant to which this joint venture guaranteed certain limited recourse obligations of its subsidiaries with respect to the Floating Rate Loan. The Floating Rate Loan matures in March 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.25%. Effective in March 2022, the Floating Rate Lenders exercised their option to increase the premium in connection with the securitization of the Floating Rate Loan, resulting in an increase of 51.5 basis points in the premium. We also purchased an interest rate cap through March 2024 with a SOFR strike rate equal to 3.40%. As of September 30, 2022, the weighted average annual interest rate payable under the Floating Rate Loan was 5.62% and the weighted average interest rate for borrowings under our revolving credit facilitythe Floating Rate Loan was 2.97%4.94% and 4.23% for the three months ended September 30, 2022 and the period from February 25, 2022 to September 30, 2022, respectively.
Also on February 25, 2022, certain of our subsidiaries entered into a loan agreement with a group of institutional lenders, or the Bridge Lenders, and a mezzanine loan agreement with an institutional lender, or the Bridge Mezz Lender, together pursuant to which we obtained the Bridge Loan. Also on February 25, 2022, we entered into a guaranty in favor of the Bridge Lenders and the Bridge Mezz Lender, pursuant to which we guaranteed certain limited recourse obligations of its subsidiaries with respect to the Bridge Loan. The Bridge Loan was scheduled to mature in February 2023 and required that interest only be paid at an annual rate of SOFR plus a premium of 1.75% under the loan agreement and a premium of 8.0% under the mezzanine loan agreement. We also purchased an interest rate cap with a SOFR strike rate equal to 2.70%. The Bridge Loan was repaid in full on September 22, 2022 with cash on hand and proceeds from our $1,235,000 floating rate loan, which is further described below. During the three and nine months ended September 30, 2022, we recorded a $22,231 loss on early extinguishment of debt to write off unamortized costs related to the Bridge Loan and related interest rate cap. The weighted average annual interest rate for borrowings under the Bridge Loan was 5.01% and 4.24% for the period from July 1, 2022 to September 22, 2022 and the period from February 25, 2022 to September 22, 2022, respectively.
Also on February 25, 2022, certain of our subsidiaries entered into a loan agreement with a group of institutional lenders, or the Fixed Rate Lenders, and mezzanine loan agreements with a separate group of institutional lenders, or the Fixed Mezz Lenders, pursuant to which we obtained the Fixed Rate Loan. Also on February 25, 2022, we entered into a guaranty in favor of the Fixed Rate Lenders and the Fixed Mezz Lenders, pursuant to which we guaranteed certain limited recourse obligations of our subsidiaries with respect to the Fixed Rate Loan. The interest only Fixed Rate Loan matures in March 31, 2018. As2032 and requires that interest be paid at a weighted average annual fixed rate of 4.42%.
We used the aggregate net proceeds from the Loans to partially fund the acquisition of MNR. Principal payments on the Floating Rate Loan and Fixed Rate Loan are not required prior to the end of their respective initial terms, subject to certain conditions set forth in the applicable loan agreement. Subject to the satisfaction of certain stated conditions, we have the option under the applicable loan agreement: (1) to prepay up to $280,000 of the Floating Rate Loan after March 31, 20182023, at par with no premium, and April 26, 2018,to prepay the balance of the Floating Rate Loan at any time, subject to a premium; and (2) to prepay the Fixed Rate Loan in full or part at any time, subject to a premium, and beginning in September 2031, without a premium.
On September 22, 2022, certain of our subsidiaries entered into a loan agreement with a group of institutional lenders, or the ILPT Floating Rate Lenders, and a mezzanine loan agreement with a separate group of institutional lenders, or the ILPT Floating Rate Mezz Lenders, pursuant to which we obtained the ILPT Floating Rate Loan, secured by 104 of our properties. The ILPT Floating Rate Loan is comprised of a $1,100,000 mortgage loan and a $135,000 mezzanine loan. Also, on September 22, 2022, we entered into a guaranty in favor of the ILPT Floating Rate Lenders and the ILPT Floating Rate Mezz Lenders, pursuant to which we guaranteed certain limited recourse obligations of our subsidiaries with respect to the ILPT Floating Rate Loan. The interest only ILPT Floating Rate Loan matures on October 9, 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR, which is capped at an annual rate of 2.25% for the initial term of the ILPT Floating Rate Loan, plus a weighted average premium of 3.93%. The weighted average interest rate payable under the ILPT Floating Rate Loan as of September 30, 2022 and for the period from September 22, 2022 to September 30, 2022 was 6.18%. See Notes 5 and 10 for further information on our interest rate caps.
had $302,000The agreements governing the Floating Rate Loan, Fixed Rate Loan and $292,000, respectively, outstanding under our revolving credit facility,the ILPT Floating Rate Loan contain customary covenants and $448,000 and $458,000, respectively, available to borrow under our revolving credit facility.
Our credit agreement providesprovide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, such as a changedefault.
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in certain circumstances, and generally requires us to maintain certain financial ratios. We believe we were in compliancethousands, except per share data)
In connection with the terms and conditionsMerger, our consolidated joint venture, in which we own a 61% equity interest, assumed an aggregate of the covenants under our credit agreement at March 31, 2018.
As$323,432 of March 31, 2018, the principal amount outstanding under our mortgage note was $48,750. This mortgage note wasformer MNR mortgages secured by one11 properties which are owned by this joint venture. These amortizing mortgages require monthly payments of our properties with a net bookprincipal and interest until maturity. The value of $66,166. This mortgage note is non-recourse, subject to certain limited exceptions,these mortgages approximated their estimated fair value on the date of acquisition.
See Notes 2 and does not contain any material financial covenants.5 for further information regarding our acquisition of MNR.
Note 5. Fair Value of Assets and Liabilities
Our financial instruments include cash and cash equivalents, restricted cash, rents receivable, our revolving credit facility, athe Floating Rate Loan, the ILPT Floating Rate Loan, the Fixed Rate Loan, mortgage notenotes payable, accounts payable, rents collected in advance, interest rate caps, security deposits and amounts due from or to related persons. At March 31, 2018September 30, 2022 and December 31, 2017,2021, the fair value of our financial instruments approximated their carrying values in our condensed consolidated financial statements, due to their short term nature or variablefloating interest rates, except as follows:
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| | | At September 30, 2022 | | At December 31, 2021 |
| | | Carrying | | Estimated | | Carrying | | Estimated |
| | | Value (1) | | Fair Value | | Value (1) | | Fair Value |
| Fixed rate loan, 4.31% interest rate, due in 2029 | | $ | 646,532 | | | $ | 587,730 | | | $ | 646,124 | | | $ | 709,198 | |
ILPT Floating Rate Loan, 6.18% weighted average interest rate, due in 2024 (2) | | 1,213,336 | | | 1,213,336 | | | — | | | — | |
Floating Rate Loan, 5.62% interest rate, due in 2024 (3) | | 1,378,000 | | | 1,378,000 | | | — | | | — | |
| Fixed Rate Loan, 4.42% interest rate, due in 2032 | | 694,561 | | | 626,128 | | | — | | | — | |
| Fixed rate loan, 3.76% interest rate, due in 2028 | | 14,074 | | | 13,105 | | | — | | | — | |
| Fixed rate loan, 3.77% interest rate, due in 2030 | | 5,008 | | | 4,637 | | | — | | | — | |
| Fixed rate loan, 3.85% interest rate, due in 2030 | | 5,295 | | | 4,918 | | | — | | | — | |
| Fixed rate loan, 3.56% interest rate, due in 2030 | | 14,793 | | | 13,551 | | | — | | | — | |
| Fixed rate loan, 3.67% interest rate, due in 2031 | | 13,012 | | | 11,900 | | | — | | | — | |
| Fixed rate loan, 4.14% interest rate, due in 2032 | | 14,443 | | | 13,355 | | | — | | | — | |
| Fixed rate loan, 4.02% interest rate, due in 2033 | | 31,517 | | | 28,715 | | | — | | | — | |
| Fixed rate loan, 4.13% interest rate, due in 2033 | | 43,999 | | | 40,292 | | | — | | | — | |
| Fixed rate loan, 3.10% interest rate, due in 2035 | | 26,602 | | | 22,671 | | | — | | | — | |
| Fixed rate loan, 2.95% interest rate, due in 2036 | | 42,743 | | | 35,855 | | | — | | | — | |
| Fixed rate loan, 4.27% interest rate, due in 2037 | | 46,659 | | | 42,183 | | | — | | | — | |
| Fixed rate loan, 3.25% interest rate, due in 2038 | | 52,697 | | | 44,184 | | | — | | | — | |
| | $ | 4,243,271 | | | $ | 4,080,560 | | | $ | 646,124 | | | $ | 709,198 | |
(1)Includes unamortized debt issuance costs of $52,571 and $3,876 as of September 30, 2022 and December 31, 2021, respectively.
(2)The ILPT Floating Rate Loan matures in October 2024, subject to three, one year extension options.
(3)The Floating Rate Loan, entered into by our consolidated joint venture, matures in March 2024, subject to three, one year extension options.
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| | | At March 31, 2018 | | At December 31, 2017 |
| | | Carrying | | Estimated | | Carrying | | Estimated |
| | | Value (1) | | Fair Value | | Value (1) | | Fair Value |
| Mortgage note payable | | $ | 49,369 |
| | $ | 48,527 |
| | $ | 49,427 |
| | $ | 48,919 |
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(1) | Includes unamortized premiums of $619 and $677 as of March 31, 2018 and December 31, 2017, respectively. |
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
We estimate the fair value of our mortgage notenotes payable using discounted cash flow analysisanalyses and currentlycurrent prevailing market rates as of the measurement date (Level 3 inputs). BecauseAs Level 3 inputs are unobservable, our estimated fair value may differ materially from the actual fair value.
The table below presents certain of our assets measured on a recurring basis at fair value at September 30, 2022, categorized by the level of inputs as defined in the fair value hierarchy under GAAP, used in the valuation of each asset:
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| | | | Quoted Prices in | | Significant Other | | Significant |
| | | | Active Markets for | | Observable | | Unobservable |
| | | | Identical Assets | | Inputs | | Inputs |
| | | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Recurring fair value measurements | | | | | | | | |
Investment in unconsolidated joint venture (1) | | $ | 145,693 | | | $ | — | | | $ | — | | | $ | 145,693 | |
Interest rate cap derivatives (2) | | $ | 67,998 | | | $ | — | | | $ | 67,998 | | | $ | — | |
| Non-recurring fair value measurements | | | | | | | | |
Real estate properties (3) | | $ | 555,123 | | | $ | — | | | $ | — | | | $ | 555,123 | |
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(1)We own a 22% equity interest in a joint venture that owns 18 properties and is included in investment in unconsolidated joint venture in our condensed consolidated balance sheet, and is reported at fair value, which is based on significant unobservable inputs (Level 3 inputs). The significant unobservable inputs used in the fair value are discount rates of between 5.25% and 7.00%, exit capitalization rates of between 4.50% and 6.00%, direct capitalization rates of between 4.00% and 4.50%, holding periods of approximately 10 years and market rents. Our assumptions are based on the location, type and nature of each property, and current and anticipated market conditions, which are derived from appraisers, industry publications and our experience. See Note 2 for further information regarding our investment in this joint venture.
(2)Our derivative assets are carried at fair value as required by GAAP. The estimated fair values of the derivative assets are based on current market prices in secondary markets for similar derivative contracts, (Level 2 inputs). See Note 10 for more information regarding our derivatives and hedging activities.
(3)We recorded a loss on impairment of real estate of $100,747 to reduce the carrying value of 25 properties in our condensed consolidated balance sheet to their estimated fair value (Level 3 inputs as defined in the fair value hierarchy under GAAP). See Note 3 for more information.
Note 6. Shareholders’ Equity
Common Share Issuances:
Awards:
On January 17, 2018, we issued 20,000,000 of our common shares in our IPO at a price to the public of $24.00 per common share, raising net proceeds of $444,309, after deducting the underwriting discounts and commissions and expenses.
On March 27, 2018,June 1, 2022, in accordance with our Trustee compensation arrangements, we granted 1,000awarded to each of our seven Trustees 3,500 of our common shares, valued at $20.87$15.07 per share, the closing price of our common shares on The Nasdaq Stock Market LLC, or Nasdaq, on that day.
On September 14, 2022, we awarded under our equity compensation plan an aggregate of 173,300 of our common shares, valued at $6.83 per share, the closing price of our common shares on Nasdaq on that day, to eachour officers and certain other employees of The RMR Group LLC, or RMR.
Common Share Purchases:
During the three and nine months ended September 30, 2022, we purchased an aggregate of 31,455 and 31,788 of our five Trustees as partcommon shares, respectively, valued at a weighted average price of their annual compensation.
$7.40 and $7.56 per common share, respectively, from our officers and certain other current and former officers and employees of RMR, in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares.
Distributions:
During the nine months ended September 30, 2022, we declared and paid regular quarterly distributions to common shareholders as follows:
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
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| Declaration Date | | Record Date | | Payment Date | | Distribution Per Share | | Total Distribution |
| January 13, 2022 | | January 24, 2022 | | February 17, 2022 | | $ | 0.33 | | | $ | 21,584 | |
| April 14, 2022 | | April 25, 2022 | | May 19, 2022 | | 0.33 | | | 21,583 | |
| July 14, 2022 | | July 25, 2022 | | August 18, 2022 | | 0.01 | | | 654 | |
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| | | | | | $ | 0.67 | | | $ | 43,821 | |
On April 19, 2018,October 13, 2022, we declared a proratedquarterly distribution of $0.27 perto common share, or approximately $17,600, for the period from January 17, 2018 (the date we completed our IPO) through March 31, 2018 to shareholders of record on April 30, 2018. This prorated distribution is based upon a quarterly distributionOctober 24, 2022 in the amount of $0.33$0.01 per common share, ($1.32 per common share per year).or approximately $656. We expect to pay this distribution to our shareholders on or about May 14, 2018.November 17, 2022.
Additional Paid in Capital Adjustments:
Until January 17, 2018, we were a wholly owned subsidiary of SIR and SIR managed and controlled our cash management function through a series of commingled centralized accounts. As a result, the cash receipts collected by SIR on our behalf have been accounted for as distributions within shareholders' equity and the cash disbursements paid by SIR on our behalf have been accounted for as contributions within shareholders' equity. During the period from January 1, 2018 to January 16, 2018, we recorded net contributions from SIR of $6,975 as an increase to additional paid in capital.
Note 7. Earnings perPer Common Share Amounts
We calculate basic earnings per common share by dividing net income (loss) attributable to common shareholders by the weighted average number of our common shares outstanding during the period. Basic earnings per share equalWe calculate diluted earnings per share as there are nousing the more dilutive of the two class method or the treasury stock method. Unvested common share equivalent securities outstanding.
Note 8. Income Taxes
Until January 17, 2018, we were a wholly owned subsidiary of SIR, which is taxed as a REIT underawards, and the Internal Revenue Code of 1986, as amended, or the IRC. Accordingly, until January 17, 2018, we were a qualified REIT subsidiary and a disregarded entity for federal income tax purposes. We intend to qualify for taxation as a REIT under the IRC for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2018 and to maintain such qualification thereafter. Accordingly, we generally are not, and will not be, subject to U.S. federal income taxes provided that we distribute our taxable income and meet certain other requirements to qualify for taxation as a REIT. We are subject to certain state and local taxes, certain of which amounts are reported as income taxes in our condensed consolidated statements of comprehensive income. We do not currently expect recent amendments to the IRC to have a significantrelated impact on us; however,earnings, are considered when calculating dilutive earnings per share. The calculation of basic and diluted earnings per share is as follows:
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Numerators: | | | | | | | | |
| Net (loss) income attributable to common shareholders | | $ | (45,627) | | | $ | 18,307 | | | $ | (195,680) | | | $ | 56,475 | |
| Loss attributable to unvested share awards | | (2) | | | (43) | | | (128) | | | (140) | |
| Net (loss) income attributable to common shareholder used in calculating earnings per share | | $ | (45,629) | | | $ | 18,264 | | | $ | (195,808) | | | $ | 56,335 | |
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| Denominators: | | | | | | | | |
| Weighted average common shares for basic earnings per share | | 65,250 | | | 65,178 | | | 65,228 | | | 65,154 | |
Effect of dilutive securities: unvested share awards (1) | | — | | | 52 | | | — | | | 51 | |
| Weighted average common shares for diluted earnings per share | | 65,250 | | | 65,230 | | | 65,228 | | | 65,205 | |
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| Net (loss) income attributable to common shareholders per common share - basic | | $ | (0.70) | | | $ | 0.28 | | | $ | (3.00) | | | $ | 0.86 | |
| Net (loss) income attributable to common shareholders per common share - diluted | | $ | (0.70) | | | $ | 0.28 | | | $ | (3.00) | | | $ | 0.86 | |
(1) For purposes of calculating diluted earnings per share, we will monitor future interpretationsdid not include 205 and 196 of such amendments as they develop, and accordingly, our estimates and disclosures may change.
Note 9. Certain Historical Arrangements and Operations Prior to our IPO
In connection with our IPO, on September 29, 2017, SIR contributed to us 266 properties with a total of approximately 28,540,000 rentable square feet, or our Initial Properties, consisting of our Hawaii Properties and our Mainland Properties. In connection with our formation and this contribution from SIR, we issued to SIR 45,000,000 of our common shares and a $750,000 non-interest bearing demand note, or the SIR Note, and we assumed three mortgage notes totaling $63,069, as of September 30, 2017, that were secured by three of our Initial Properties. In December 2017, we obtained a $750,000 secured revolving credit facility, and we used the proceeds of an initial borrowing of $750,000 under this credit facility to pay the SIR Note in full. Also in December 2017, SIR prepaid on our behalf two of the mortgage notes totaling approximately $14,319 that had encumbered two of our Initial Properties. In connection with our IPO, we reimbursed SIR for approximately $7,271 of costs that SIR incurred in connection with our formation and preparation for our IPO, $1,047 of which was due to SIR and included in due to related persons in our condensed consolidated balance sheet as of March 31, 2018. In addition, SIR collected rents from our tenants for the period subsequent to our IPO of $4,133, which are presented as due from related persons in our condensed consolidated balance sheet as of March 31, 2018. These amounts due to and from SIR were paid in April 2018.
Neither we nor SIR have any employees. As a wholly owned subsidiary of SIR, until the completion of our IPO, we had received services from RMR LLC under SIR’s business and property management agreements with RMR LLC. For periods prior to the completion of our IPO on January 17, 2018, base management fees payable by SIR under SIR’s business management agreement with RMR LLC were calculated based on the historical costs of our Initial Properties and incentive management fees and internal audit costs payable by SIR and allocated to us were based on the percentage of our base management fees compared to the total base management fees paid by SIR. During the period from January 1, 2018 to January 16, 2018, the base management fees payable by SIR and allocated to us were $308. During the three months ended March 31, 2017, the base management fees, internal audit costs and estimated incentive management fees payable by SIR allocated to us were $1,701, $21 and $2,409, respectively. The property management and construction supervision fees payable by SIR under SIR’s property management agreement with RMR LLC that were allocated to us for services to our Initial Properties for the period from January 1, 2018 to January 16, 2018 andunvested share awards for the three and nine months ended March 31, 2017 were $230 and $1,030, respectively. These amounts are included in other operating expenses orSeptember 30, 2022, respectively, because to do so would have been capitalized, as appropriate, in our condensed consolidated financial statements. For the period from January 1, 2018 to January 16, 2018 and for the three months ended March 31, 2017, the total property management related reimbursements paid under SIR’s business management agreement with RMR LLC for costs incurred by RMR LLC with respect to our Initial Properties were $120 and $632, respectively. These amounts are included in other operating expenses in our condensed consolidated statements of comprehensive income. All these management fees and reimbursements allocated to us for periods prior to January 17, 2018 were paid by SIR and not us.antidilutive.
In connection with our IPO, we entered into two agreements with RMR LLC to provide management services to us. See Notes 10 and 11 for further information regarding our relationships, agreements and transactions with RMR LLC and SIR.
Note 10.8. Business and Property Management Agreements with RMR LLC
We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC.RMR. We have two agreements with RMR LLC to provide management services to us, which we entered on January 17, 2018 in connection with the completion of our IPO:us: (1) a business management agreement, which relates to our business generally; and (2) a property management agreement, which relates to our property level operations.
Pursuant to our business management agreement with RMR, LLC, we recognized net business management fees of $1,482$6,465 and $17,821 for the three and nine months ended September 30, 2022, respectively, and $2,708 and $7,832 for the three and nine months ended September 30, 2021, respectively. Based on our common share total return, as defined in our business management agreement, as of September 30, 2022 and 2021, no incentive fees are included in the net business management fees we recognized for the three and nine months ended September 30, 2022 or 2021. The actual amount of annual incentive fees for 2022, if any, will be based on our common share total return, as defined in our business management agreement, for the three-year period fromending December 31, 2022, and will be payable in January 17, 2018 through March2023. We did not incur any incentive fee payable to RMR for the year ended December 31, 2018. This amount is included2021. We include business management fees in general and administrative expenses in our condensed consolidated statements of comprehensive income. income (loss). RMR provides management services to our two
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
joint ventures. See Note 9 for further information regarding our joint ventures’ management arrangements with RMR and the related impact on our management fees payable to RMR.
We and RMR amended our business management agreement effective August 1, 2021 to provide that (i) for periods beginning on and after August 1, 2021, the MSCI U.S. REIT/Industrial REIT Index will be used to calculate benchmark returns per share for purposes of determining any incentive management fee payable by us to RMR and (ii) for periods prior to August 1, 2021, the SNL U.S. REIT Industrial Index will continue to be used. This change of index was due to S&P Global ceasing to publish the SNL U.S. REIT Industrial Index.
Pursuant to our property management agreement with RMR, LLC, we recognized aggregate property management and construction supervision fees of $967$3,270 and $8,797 for the period from January 17, 2018 through March 31, 2018. This amount is included inthree and nine months ended September 30, 2022, respectively, and $1,675 and $4,860 for the three and nine months ended September 30, 2021, respectively. Of these amounts, for the three and nine months ended September 30, 2022, $2,976 and $8,104, respectively, were expensed to other operating expenses or has been capitalized, as appropriate, in our condensed consolidated financial statements.
statements and $294 and $693, respectively, were capitalized as building improvements in our condensed consolidated balance sheets. For the three and nine months ended September 30, 2021, $1,598 and $4,751, respectively, were expensed to other operating expenses in our condensed consolidated financial statements and $77 and $109, respectively, were capitalized as building improvements in our condensed consolidated balance sheets. The amounts capitalized are being depreciated over the estimated useful lives of the related capital assets.
We are generally responsible for all of our operating expenses, including certain expenses incurred or arranged by RMR LLC on our behalf. We are generally not responsible for payment of RMR’s employment, office or administrative expenses incurred to provide management services to us, except for the employment and related expenses of RMR’s employees assigned to work exclusively or partly at our properties, our share of the wages, benefits and other related costs of RMR’s centralized accounting personnel, our share of RMR’s costs for providing our internal audit function, or as otherwise agreed. Our property level operating expenses are generally incorporated into the rents charged to our tenants, including certain payroll and related costs incurred by RMR LLC, are generally incorporated into rents charged to our tenants.RMR. We reimbursed RMR LLC $542$1,847 and $5,155 for property management relatedthese expenses and costs for the period from January 17, 2018 through March 31, 2018, which amount isthree and nine months ended September 30, 2022, respectively, and $1,184 and $3,451 for the three and nine months ended September 30, 2021, respectively. These amounts are included in other operating expenses and general and administrative expenses, as applicable, in our condensed consolidated statements of comprehensive income. In addition, we are responsible for our share of RMR LLC’s costs for providing our internal audit function. The amount recognized as expense for internal audit costs was $52 for the period from January 17, 2018 through March 31, 2018, which amount is included in general and administrative expenses in our condensed consolidated statements of comprehensive income.
income (loss).
See NotesNote 9 and 11 for further information regarding our relationships, agreements and transactions with RMR LLC.RMR.
Note 11.9. Related Person Transactions
We have relationships and historical and continuing transactions with RMR, LLC, SIRThe RMR Group Inc., or RMR Inc., and others related to them, including other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors andor officers who are also our Trustees or officers. RMR is a majority owned subsidiary of RMR Inc. The Chair of our Board of Trustees and one of our Managing Trustees, Adam Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., chair of the board of directors, a managing director and the president and chief executive officer of RMR Inc. and an officer and employee of RMR. Matthew Jordan, our other Managing Trustee, is an executive vice president and the chief financial officer and treasurer of RMR Inc. and an officer and employee of RMR. John Murray, one of our Managing Trustees until June 1, 2022 and our President and Chief Executive Officer until March 31, 2022, also serves as an officer and employee of RMR, and each of our other officers is also an officer and employee of RMR. Some of our Independent Trustees also serve as independent trustees or independent directors of other public companies to which RMR or its subsidiaries provide management services. Adam Portnoy serves as chair of the boards and as a managing trustee or managing director of those companies. Other officers of RMR, including Messrs. Jordan and Murray and certain of our other officers, serve as managing trustees, managing directors or officers of certain of these companies.
See Note 6 for information relating to the awards of our common shares we made in September 2022 to our officers and certain other employees of RMR and common shares we purchased from our officers and certain other current and former officers and employees of RMR in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of our common shares. We include amounts recognized as expense for awards of our common shares to our officers and RMR employees in general and administrative expenses in our condensed consolidated statements of comprehensive income (loss).
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
Our Manager, RMR LLC. We have two agreements with RMR LLC to provide management services to us. See Note 108 for further information regarding our management agreements with RMR LLC.RMR.
Joint Ventures. We have two separate joint venture arrangements. One of these joint ventures is with two, third party institutional investors. This joint venture owns 18 properties. We own a 22% equity interest in this joint venture. We entered into this joint venture prior to January 1, 2021.
SIR. SIRThe other joint venture we entered into in connection with the Merger is our largest shareholder. Aswith one, third party institutional investor. This joint venture owns 94 properties. We own a 61% equity interest in the joint venture and the other joint venture investor acquired a 39% equity interest in the joint venture from us for $589,411, as of March 31, 2018, SIR owned 45,000,000the completion of our common shares, or approximately 69.2% of our outstanding common shares. We were SIR’s wholly owned subsidiary until we completed our IPO on January 17, 2018. Adam D. Portnoy, one of our Managing Trustees, is also a managing trustee of SIR. John C. Popeo, our other Managing Trustee and our President and Chief Operating Officer, also serves asthis transaction, in connection with the chief financial officer and treasurer of SIR. joint venture’s formation in February 2022.
RMR LLC provides management services to SIRboth of these joint ventures. We do not include our 18 property joint venture as a consolidated subsidiary and, us. as a result, we are not obligated to pay management fees to RMR under our management agreements with RMR for the services it provides regarding that joint venture. Our 94 property joint venture is our consolidated subsidiary and, as a result, we are obligated to pay management fees to RMR under our management agreements with RMR for the services it provides regarding that joint venture; however, that joint venture pays management fees directly to RMR, and any such fees paid by that joint venture are credited against the fees payable by us to RMR.
In December 2021, we sold six properties to our then existing joint venture. We received proceeds of approximately $160,516 from the other equity investors in that joint venture in connection with this sale. We and the other equity investors maintained our IPO,respective percentage equity interests in that joint venture following this transaction. As of December 31, 2021 and September 30, 2022, we entered a transaction agreement with SIRowed $225 and $554, respectively, to that governsjoint venture for rents that we collected on behalf of that joint venture. These amounts are presented as due to related persons in our separation from and relationship with SIR. The transaction agreement provides that, among other things, (1) our current assets and current liabilities,condensed consolidated balance sheet. We paid the amounts we owed as of December 31, 2021 in January 2022 and the timeamounts we owed as of closing of our IPO, were settled so that SIR retained all pre-closing current assetsSeptember 30, 2022 in October 2022.
See Notes 2, 4, 5 and pre-closing current liabilities and we assumed all post-closing current assets and post-closing current liabilities, (2) we will indemnify SIR with respect to any of our liabilities, and SIR will indemnify us with respect to any of SIR’s liabilities, after giving effect to the settlement between us and SIR of our current assets and current liabilities, and (3) we and SIR will cooperate to enforce the ownership limitations in our and SIR’s respective declaration of trust as may be appropriate to qualify for and maintain qualification for taxation as a REIT under the IRC, and otherwise to ensure each receives the economics of its assets and liabilities and to file future tax returns, including appropriate allocations of taxable income, expenses and other tax attributes. See Note 911 for further information regarding our IPOjoint ventures.
TA. In May 2021, we acquired a property located in the Dallas, Texas market from TravelCenters of America Inc., or TA, for a purchase price of $2,319, including acquisition related costs of $119. RMR provides management services to TA and Mr. Portnoy serves as the chair of the board of directors and as a managing director of TA.
For further information about these and other such relationships and certain other related person transactions, see our relationships,2021 Annual Report.
Note 10. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
We are exposed to certain risks relating to our ongoing business operations, including the impact of changes in interest rates. The only risk currently managed by us using derivative instruments is a part of our interest rate risk. We have an interest rate cap agreement to manage our interest rate risk exposure on each of the ILPT Floating Rate Loan and the Floating Rate Loan, both with interest payable at a rate equal to SOFR plus a premium. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, we only enter into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which we or our related parties may also have other financial relationships. We do not anticipate that any of the counterparties will fail to meet their obligations.
Cash Flow Hedges of Interest Rate Risk
As required by ASC 815, Derivatives and Hedging, we record all derivatives on the balance sheet at fair value. The following table summarizes the terms of our outstanding interest rate cap agreements designated as cash flow hedges of interest rate risk as of September 30, 2022:
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest Rate Derivative | | Balance Sheet Line Item | | Underlying Instrument | | Number of Instruments | | Strike Rate | | Notional Amount | | Fair Value at September 30, 2022 |
| Interest Rate Cap | | Other assets | | Floating Rate Loan (1) | | 1 | | 3.40% | | $ | 1,400,000 | | | $ | 19,485 | |
| Interest Rate Cap | | Other assets | | ILPT Floating Rate Loan | | 2 | | 2.25% | | $ | 1,235,000 | | | $ | 48,513 | |
| | | | | | | | | | | | |
(1)The Floating Rate Loan was entered into by our consolidated joint venture.
Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. For derivatives designated and transactionsqualifying as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with SIR.our accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our applicable debt.
In September 2022, in conjunction with the repayment of the Bridge Loan, we sold two interest rate cap instruments with an aggregate notional amount of $1,385,158, a strike rate equal to 2.70% and an original expiration date of March 15, 2023 for $7,740. As the underlying debt instrument that these interest rate caps were intended to hedge was repaid in its entirety and the related interest expense was no longer probable to occur, these interest rate caps were no longer designated as cash flow hedges and the remaining deferred gain was reclassified from cumulative other comprehensive income as a reduction of loss on early extinguishment of debt.
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | | | |
| Amount of gain recognized in cumulative other comprehensive income | | $ | 15,047 | | | $ | 24,200 | |
| Amount reclassified from cumulative other comprehensive income into interest expense | | 761 | | | 1,678 | |
| Amount reclassified from cumulative other comprehensive income into loss on early extinguishment of debt | | (6,961) | | | (6,961) | |
| Unrealized gain on derivative instrument recognized in cumulative other comprehensive income | | $ | 8,847 | | | $ | 18,917 | |
Note 11. Noncontrolling Interest
On February 25, 2022, we completed the acquisition of MNR. In connection with the Merger, we entered into a joint venture arrangement with an institutional investor for 95 of the acquired MNR properties, including two then committed, but not yet then completed, property acquisitions. The investor acquired a 39% noncontrolling equity interest in the joint venture for $589,411, as of the completion of this transaction, and we retained the remaining 61% equity interest in the joint venture. The joint venture assumed $323,432 aggregate principal amount of former MNR mortgage debt on certain of the properties. In July 2022, our consolidated joint venture completed one of the two committed MNR property acquisitions, and in September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition. We control this joint venture and therefore account for the properties on a consolidated basis in our condensed consolidated financial statements.
We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three and nine months ended September 30, 2022. The portion of this joint venture's net loss not attributable to us, or $38,318 and $49,360 for the three and nine months ended September 30, 2022, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). During the nine months ended September 30, 2022, this joint venture made aggregate cash distributions of $1,365 to the other joint venture investor, which is reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. No distributions were made during the three months ended September 30, 2022. See Notes 1, 2, 4, 5, 9 and 11 for further information regarding this joint venture.
An unrelated third party owns an approximate 33% tenancy in common interest in one of the properties we acquired as part of the MNR acquisition located in Somerset, New Jersey, and we own the remaining 67% tenancy in common interest in this property. The portion of this property’s net loss not attributable to us, or $29 and $42 for the three and nine months ended September 30, 2022, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income (loss).
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and with our 2021 Annual Report.
OVERVIEW (dollars in thousands, except per share and per square foot data)
We are a real estate investment trust, or REIT, organized under Maryland law. As of March 31, 2018, we owned 266September 30, 2022, our portfolio was comprised of 413 consolidated properties withcontaining approximately 28.5 million59,962,000 rentable square feet located in 39 states, including 226 buildings, leasable land parcels and easements withcontaining approximately 16.8 million16,729,000 rentable square feet located on the island of Oahu, HI,Hawaii, and 40 buildings with187 properties containing approximately 11.7 million43,233,000 rentable square feet located in 2438 other states. As of March 31, 2018,September 30, 2022, our 413 consolidated properties include 94 properties that we own in a consolidated joint venture arrangement in which we own a 61% equity interest. As of September 30, 2022, we also owned a 22% equity interest in an unconsolidated joint venture, which owns 18 properties located in 12 states containing approximately 11,726,000 rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 5.9 years. As of September 30, 2022, our consolidated properties were approximately 99.9%99.2% leased (based on rentable square feet) to 243305 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 11.28.9 years. We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of March 31, 2018,September 30, 2022, including straight line rent adjustments and excluding lease value amortization, adjusted for tenant concessions including free rent and amounts reimbursed to tenants, plus estimated recurring expense reimbursements from tenants.
Investing and Financing Activities
On February 25, 2022, we completed the acquisition of MNR. MNR’s portfolio included 124 Class A, single tenant, net leased, e-commerce focused industrial properties located in 32 states containing approximately 25,745,000 rentable square feet and two committed, but not yet then completed, property acquisitions. The aggregate value of the consideration paid in the Merger was $3,739,048, including the assumption of $323,432 aggregate principal amount of former MNR mortgage debt, the repayment of $885,269 of MNR debt and the payment of certain transaction fees and expenses, net of MNR’s cash on hand, and excluding two then pending property acquisitions for an aggregate purchase price of $78,843, excluding acquisition related costs. The 124 MNR properties were 97.9% leased to various tenants and had a remaining weighted average (by rental revenues) lease term of eight years as of the date of the acquisition.
In connection with the closing of the Merger, we entered into the $1,385,158 Bridge Loan, secured by 109 of our properties. The Bridge Loan was scheduled to mature in February 2023 and required that interest only be paid at an annual rate of SOFR plus a premium of 1.75% under the loan agreement and a premium of 8.0% under the mezzanine loan agreement. We also entered into the $700,000 Fixed Rate Loan secured by 17 of our properties. The Fixed Rate loan matures in March 2032 and requires that interest be paid at a weighted average annual fixed rate of 4.42%.
Immediately following the closing of the Merger, we entered into a joint venture arrangement with an institutional investor for 95 of the acquired MNR properties, including two then committed, but not yet then completed, property acquisitions. The investor acquired a 39% noncontrolling equity interest in the joint venture from us for $589,411, as of the completion of this transaction, and we retained the remaining 61% equity interest in the joint venture. In connection with the transaction, the joint venture assumed $323,432 aggregate principal amount of former MNR mortgage debt on certain of the properties and entered into the $1,400,000 Floating Rate Loan secured by 82 properties. The Floating Rate Loan matures in March 2024, subject to three one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.77%. During the nine months ended September 30, 2022, this joint venture made aggregate cash distributions of $1,365 to the other joint venture investor.
In July 2022, our consolidated joint venture acquired a property located in Augusta, GA containing 226,000 rentable square feet for a purchase price of approximately $38,053, including acquisition related costs of $53. This property is 100% leased to a single tenant with a remaining lease term of approximately 14.9 years at the time of acquisition. This property was one of two committed MNR property acquisitions at the time of the Merger and was acquired directly by our consolidated joint venture. In September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition.
In September 2022, we entered into the $1,235,000 ILPT Floating Rate Loan, secured by 104 of our properties. The interest only ILPT Floating Rate Loan matures in October 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR, which is capped at an annual rate of 2.25% for the initial term of the ILPT Floating Rate Loan, plus a weighted average premium of 3.93%. The Bridge Loan was repaid in full on September 22, 2022 with cash on hand and proceeds from the ILPT Floating Rate Loan.
As of September 30, 2022, we also own an interest in an unconsolidated joint venture that owns 18 properties. We account for the unconsolidated joint venture under the equity method of accounting under the fair value option. During the three and nine months ended September 30, 2022, we recorded the change in the fair value of our investment in the unconsolidated joint venture of $3,297 and $6,634, respectively, in our condensed consolidated statements of comprehensive income (loss). In addition, during the three and nine months ended September 30, 2022, the unconsolidated joint venture made aggregate cash distributions of $1,320 and $3,962, respectively, to us. In October 2022, the unconsolidated joint venture made a cash distribution to us of $20,900, including amounts related to a debt financing.
For further information regarding our investing and financing activities, see Notes 2, 4, 5, 9 10, and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Investing and Financing Liquidity and Resources” of this Quarterly Report on Form 10-Q.
In response to inflationary pressures, the U.S. Federal Reserve increased the federal funds rate by 300 basis points over five consecutive meetings from March 2022 to September 2022 and has signaled that further large increases are likely to occur. These inflationary pressures and rising interest rates in the United States and globally have given rise to increasing concerns that the U.S. economy is now in, or may soon enter, an economic recession and they have caused disruptions in the financial markets. An economic recession, or continued or intensified disruptions in the financial markets could adversely affect our financial condition and that of our tenants, could adversely impact the ability of our tenants to renew our leases or pay rent to us, may restrict our access to, and would likely increase our cost of capital, and may cause the values of our properties and of our securities to decline.
Property Operations
As of March 31, 2018, 99.9% of our rentable square feet was leased, compared to 99.6% of our rentable square feet as of March 31, 2017. Occupancy data for our properties as of March 31, 2018September 30, 2022 and 20172021 is as follows (square feet in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | All Properties | | Comparable Properties (1) |
| | As of September 30, | | As of September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Total properties | | 413 | | | 294 | | | 286 | | | 286 | |
Total rentable square feet (2) | | 59,962 | | | 36,488 | | | 33,634 | | | 33,631 | |
Percent leased (3) | | 99.2 | % | | 99.0 | % | | 99.3 | % | | 98.9 | % |
(1)Consists of properties that we owned continuously since January 1, 2021 and excludes 18 properties owned by an unconsolidated joint venture in which we own a 22% equity interest. |
| | | | | | |
| | | All Properties (1) |
| | | As of March 31, |
| | | 2018 | | 2017 |
| Total properties | | 266 |
| | 266 |
|
Total rentable square feet (2) | | 28,540 |
| (4) | 28,505 |
|
Percent leased (3) | | 99.9 | % | | 99.6 | % |
| |
(1) | Consists of properties that we owned (including for the period SIR owned our properties prior to our IPO) continuously since January 1, 2017. All of our properties have been continuously owned by us and SIR since January 1, 2017. |
| |
(2) | Subject to modest adjustments when space is re-measured or re-configured for new tenants and when land leases are converted to building leases. |
| |
(3) | Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of March 31, 2018, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
| |
(4) | Includes a 35 rentable square foot expansion for a lease that commenced on September 1, 2017. |
(3)Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of September 30, 2022, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.
The average effective rental rates per square foot, as defined below, for our properties for the three and nine months ended March 31, 2018September 30, 2022 and 20172021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | | 2022 | | 2021 | | 2022 | | 2021 |
Average effective rental rates per square foot leased: (1) | | | | | | | | | | | | |
| All properties | | | | | | $ | 6.96 | | | $ | 6.22 | | | $ | 6.96 | | | $ | 6.28 | |
Comparable properties (2) | | | | | | $ | 6.32 | | | $ | 6.26 | | | $ | 6.46 | | | $ | 6.31 | |
(1)Average effective rental rates per square foot leased represents annualized rental income during the period specified divided by the average rentable square feet leased during the period specified.
(2)Consists of properties that we owned continuously since July 1, 2021 and January 1, 2021, respectively, and excludes properties owned by an unconsolidated joint venture.
|
| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2018 | | 2017 |
Average effective rental rates per square foot leased (1) | | $ | 5.69 |
| | $ | 5.58 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| New Leases | | Renewals | | Totals |
| Square feet leased during the period (in thousands) | 543 | | | 1,142 | | | 1,685 | |
| Weighted average rental rate change (by rentable square feet) | 280.7 | % | | 26.1 | % | | 77.5 | % |
Weighted average lease term by square feet (years) (2) | 7.4 | | | 3.7 | | | 4.9 | |
Total leasing costs and concession commitments (1) | $ | 3,570 | | | $ | 992 | | | $ | 4,562 | |
Total leasing costs and concession commitments per square foot (1) | $ | 6.58 | | | $ | 0.87 | | | $ | 2.71 | |
Total leasing costs and concession commitments per square foot per year (1) | $ | 0.89 | | | $ | 0.24 | | | $ | 0.55 | |
| | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2022 |
| New Leases | | Renewals | | Totals |
| Square feet leased during the period (in thousands) | 3,476 | | | 2,772 | | | 6,248 | |
| Weighted average rental rate change (by rentable square feet) | 122.0 | % | | 24.6 | % | | 56.5 | % |
Weighted average lease term by square feet (years) (2) | 23.8 | | | 6.4 | | | 16.1 | |
Total leasing costs and concession commitments (1) | $ | 8,951 | | | $ | 6,354 | | | $ | 15,305 | |
Total leasing costs and concession commitments per square foot (1) | $ | 2.57 | | | $ | 2.29 | | | $ | 2.45 | |
Total leasing costs and concession commitments per square foot per year (1) | $ | 0.11 | | | $ | 0.36 | | | $ | 0.15 | |
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(1) | Average effective rental rates per square foot leased represents annualized total revenues during the period specified divided by the average rentable square feet leased during the period specified. | | | | |
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During the three months ended March 31, 2018, we entered lease renewals(1)Includes commitments made for leasing expenditures and new leases for approximately 296,000 square feet atconcessions, such as leasing commissions, tenant improvements or other tenant inducements.
(2)The weighted average (per(by square foot) rental ratesfeet) lease term for leases that were approximately 45.9% higher than prior ratesin effect for the same land area or building area (with leasing rate increasesduring the prior lease term was 4.9 years for vacant space based upon the most recent rental rate for the same space). Consolidated portfolio occupancy increased from 99.6% as of March 31, 2017 to 99.9% as of March 31, 2018. Commitments for tenant improvements, leasing costs and concessions for leases entered during the three months ended March 31, 2018 totaled $68,000, or $0.01 perSeptember 30, 2022 and 16.1 years for the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, we completed rent resets for approximately 194,000 square foot per yearfeet of land, respectively, at our Hawaii Properties at rental rates that were approximately 36.8% higher than the new weighted average lease term.
prior rental rates.
As shown in the table below, approximately 1.1%1.0% of our total rentedleased square feet and approximately 0.8%1.0% of our total annualized rental revenues as of March 31, 2018September 30, 2022 are included in leases scheduled to expire by December 31, 2018. 2022.
As of March 31, 2018,September 30, 2022, our lease expirations by year are as follows (dollars and square feet in thousands):
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| | | | | | | | | | | | % of Total | | Cumulative |
| | | | | | % of Total | | Cumulative % | | Annualized | | Annualized | | % of Total |
| | | | Leased | | Leased | | of Total Leased | | Rental | | Rental | | Annualized |
| | Number of | | Square Feet | | Square Feet | | Square Feet | | Revenues | | Revenues | | Rental Revenues |
| Period / Year | | Tenants | | Expiring (1) | | Expiring (1) | | Expiring (1) | | Expiring | | Expiring | | Expiring |
| 10/1/2022-12/31/2022 | | 12 | | | 593 | | | 1.0 | % | | 1.0 | % | | $ | 4,210 | | | 1.0 | % | | 1.0 | % |
| 2023 | | 36 | | | 3,146 | | | 5.3 | % | | 6.3 | % | | 22,287 | | | 5.3 | % | | 6.3 | % |
| 2024 | | 49 | | | 4,855 | | | 8.2 | % | | 14.5 | % | | 32,699 | | | 7.8 | % | | 14.1 | % |
| 2025 | | 32 | | | 4,794 | | | 8.1 | % | | 22.6 | % | | 27,683 | | | 6.6 | % | | 20.7 | % |
| 2026 | | 24 | | | 3,524 | | | 5.9 | % | | 28.5 | % | | 22,708 | | | 5.4 | % | | 26.1 | % |
| 2027 | | 37 | | | 8,795 | | | 14.8 | % | | 43.3 | % | | 52,046 | | | 12.4 | % | | 38.5 | % |
| 2028 | | 27 | | | 4,876 | | | 8.2 | % | | 51.5 | % | | 34,085 | | | 8.1 | % | | 46.6 | % |
| 2029 | | 17 | | | 3,428 | | | 5.8 | % | | 57.3 | % | | 16,644 | | | 4.0 | % | | 50.6 | % |
| 2030 | | 14 | | | 2,155 | | | 3.6 | % | | 60.9 | % | | 18,303 | | | 4.4 | % | | 55.0 | % |
| 2031 | | 16 | | | 3,265 | | | 5.5 | % | | 66.4 | % | | 25,606 | | | 6.1 | % | | 61.1 | % |
| Thereafter | | 134 | | | 20,038 | | | 33.6 | % | | 100.0 | % | | 163,710 | | | 38.9 | % | | 100.0 | % |
| Total | | 398 | | | 59,469 | | | 100.0 | % | | | | $ | 419,981 | | | 100.0 | % | | |
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| Weighted average remaining lease term (in years): | | 8.6 | | | | | | | 8.9 | | | | | |
(1)Leased square feet is pursuant to existing leases as of September 30, 2022 and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.
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| | | | | | | | | | | | | % of Total | | Cumulative |
| | | | | | | % of Total | | Cumulative % | | Annualized | | Annualized | | % of Total |
| | | | | Rented | | Rented | | of Total Rented | | Rental | | Rental | | Annualized |
| | | Number of | | Square Feet | | Square Feet | | Square Feet | | Revenues | | Revenues | | Rental Revenues |
| Period/Year | | Tenants | | Expiring (1) | | Expiring (1) | | Expiring (1) | | Expiring | | Expiring | | Expiring |
| 4/1/2018 - 12/31/2018 | | 16 |
| | 314 |
| | 1.1 | % | | 1.1 | % | | $ | 1,177 |
| | 0.8 | % | | 0.8 | % |
| 2019 | | 16 |
| | 1,534 |
| | 5.4 | % | | 6.5 | % | | 4,410 |
| | 2.8 | % | | 3.6 | % |
| 2020 | | 19 |
| | 848 |
| | 3.0 | % | | 9.5 | % | | 4,292 |
| | 2.7 | % | | 6.3 | % |
| 2021 | | 20 |
| | 1,224 |
| | 4.3 | % | | 13.8 | % | | 7,139 |
| | 4.6 | % | | 10.9 | % |
| 2022 | | 63 |
| | 2,762 |
| | 9.7 | % | | 23.5 | % | | 20,823 |
| | 13.3 | % | | 24.2 | % |
| 2023 | | 18 |
| | 1,538 |
| | 5.4 | % | | 28.9 | % | | 11,665 |
| | 7.5 | % | | 31.7 | % |
| 2024 | | 12 |
| | 4,750 |
| | 16.6 | % | | 45.5 | % | | 15,698 |
| | 10.0 | % | | 41.7 | % |
| 2025 | | 8 |
| | 619 |
| | 2.2 | % | | 47.7 | % | | 3,115 |
| | 2.0 | % | | 43.7 | % |
| 2026 | | 3 |
| | 637 |
| | 2.2 | % | | 49.9 | % | | 3,472 |
| | 2.2 | % | | 45.9 | % |
| 2027 | | 12 |
| | 4,887 |
| | 17.1 | % | | 67.0 | % | | 23,840 |
| | 15.2 | % | | 61.1 | % |
| Thereafter | | 81 |
| | 9,421 |
| | 33.0 | % | | 100.0 | % | | 60,877 |
| | 38.9 | % | | 100.0 | % |
| Total | | 268 |
| | 28,534 |
| | 100.0 | % | | | | $ | 156,508 |
| | 100.0 | % | | |
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| Weighted average remaining lease term (in years): | | 10.3 |
| | | | | | 11.2 |
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(1) | Rented square feet is pursuant to existing leases as of March 31, 2018, and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
We generally receive rents from our tenants monthly and in advance. As of March 31, 2018,September 30, 2022, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):
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| | | | | | | | | | | % of Total |
| | | | | No. of | | Leased | | % of Total | | Annualized Rental |
| Tenant | | | States | | Properties | | Sq. Ft. (1) | | Leased Sq. Ft. (1) | | Revenues |
| 1 | Federal Express Corporation/ FedEx Ground Package System, Inc. | | | Various (34 states) | | 84 | | 13,109 | | | 22.0 | % | | 29.6 | % |
| 2 | Amazon.com Services, Inc./ Amazon.com Services LLC | | | AL, IN, OK, SC, TN, VA | | 8 | | 4,539 | | | 7.6 | % | | 6.8 | % |
| 3 | Home Depot U.S.A., Inc. | | | GA, HI, IL | | 4 | | 3,365 | | | 5.7 | % | | 4.4 | % |
| 4 | UPS Supply Chain Solutions, Inc. | | | NH, NY | | 3 | | 794 | | | 1.3 | % | | 1.6 | % |
| 5 | Restoration Hardware, Inc. | | | MD | | 1 | | 1,195 | | | 2.0 | % | | 1.5 | % |
| 6 | Servco Pacific, Inc. | | | HI | | 7 | | 629 | | | 1.1 | % | | 1.4 | % |
| 7 | American Tire Distributors, Inc. | | | CO, LA, NE, NY, OH | | 5 | | 722 | | | 1.2 | % | | 1.3 | % |
| 8 | TD SYNNEX Corporation | | | OH | | 2 | | 939 | | | 1.6 | % | | 1.1 | % |
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| Total | | | | | 114 | | 25,292 | | | 42.5 | % | | 47.7 | % |
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| | | | | | | | | % of Total |
| | | | | Rented | | % of Total | | Annualized Rental |
| Tenant | | Property Type | | Sq. Ft. (1) | | Rented Sq. Ft. (1) | | Revenues |
| 1. | Amazon.com.dedc, LLC / Amazon.com.kydc LLC | | Mainland Industrial | | 3,048 |
| | 10.7 | % | | 10.2 | % |
| 2. | Restoration Hardware, Inc. | | Mainland Industrial | | 1,195 |
| | 4.2 | % | | 3.8 | % |
| 3. | Federal Express Corporation / FedEx Ground Package System, Inc. | | Mainland Industrial | | 674 |
| | 2.4 | % | | 3.6 | % |
| 4. | American Tire Distributors, Inc. | | Mainland Industrial | | 722 |
| | 2.5 | % | | 3.2 | % |
| 5. | Par Hawaii Refining, LLC | | Hawaii Land and Easement | | 3,148 |
| | 11.0 | % | | 2.8 | % |
| 6. | Servco Pacific Inc. | | Hawaii Land and Easement | | 537 |
| | 1.9 | % | | 2.3 | % |
| 7. | Shurtech Brands, LLC | | Mainland Industrial | | 645 |
| | 2.3 | % | | 2.2 | % |
| 8. | BJ's Wholesale Club, Inc. | | Mainland Industrial | | 634 |
| | 2.2 | % | | 2.2 | % |
| 9. | Safeway Inc. | | Hawaii Land and Easement | | 146 |
| | 0.5 | % | | 2.1 | % |
| 10. | Exel Inc. | | Mainland Industrial | | 945 |
| | 3.3 | % | | 2.0 | % |
| 11. | Trex Company, Inc. | | Mainland Industrial | | 646 |
| | 2.3 | % | | 1.9 | % |
| 12. | Avnet, Inc. | | Mainland Industrial | | 581 |
| | 2.0 | % | | 1.8 | % |
| 13. | Manheim Remarketing, Inc. | | Hawaii Land and Easement | | 338 |
| | 1.2 | % | | 1.7 | % |
| 14. | Warehouse Rentals Inc. | | Hawaii Land and Easement | | 278 |
| | 1.0 | % | | 1.6 | % |
| 15. | Coca-Cola Bottling of Hawaii, LLC | | Hawaii Land and Easement | | 351 |
| | 1.2 | % | | 1.6 | % |
| 16. | A.L. Kilgo Company, Inc. | | Hawaii Land and Easement | | 310 |
| | 1.1 | % | | 1.5 | % |
| 17. | The Net-A-Porter Group LLC | | Mainland Industrial | | 167 |
| | 0.6 | % | | 1.4 | % |
| 18. | General Mills Operations, LLC | | Mainland Industrial | | 158 |
| | 0.6 | % | | 1.4 | % |
| 19. | Honolulu Warehouse Co., Ltd. | | Hawaii Land and Easement | | 298 |
| | 1.0 | % | | 1.4 | % |
| 20. | AES Hawaii, Inc. | | Hawaii Land and Easement | | 1,242 |
| | 4.4 | % | | 1.2 | % |
| 21. | Bradley Shopping Center Company | | Hawaii Land and Easement | | 334 |
| | 1.2 | % | | 1.1 | % |
| 22. | Kaiser Foundation Health Plan, Inc. | | Hawaii Land and Easement | | 217 |
| | 0.8 | % | | 1.1 | % |
| 23. | The Toro Company | | Mainland Industrial | | 450 |
| | 1.6 | % | | 1.1 | % |
| | Total | | | | 17,064 |
| | 60.0 | % | | 53.2 | % |
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(1) | Rented square feet is pursuant to existing leases as of March 31, 2018, and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. |
(1)Leased square feet is pursuant to existing leases as of September 30, 2022 and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.
Tenant Concentration. We have a concentration of properties leased to tenants, including their applicable subsidiaries that leased over 5% of our total rentable square footage as follows:
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| | | | | | Weighted | | | | | | | | | | | | |
| | | | | | Average | | | | | | | | | | | | |
| | % of | | Number | | Remaining | | Rental Income | | Rental Income |
| | Rentable | | of | | Lease Term | | Three Months Ended | | Nine Months Ended |
| Tenant | | Square Feet | | States | | (in years) | | 9/30/2022 | | 9/30/2021 | | 9/30/2022 | | 9/30/2021 |
| Federal Express Corporation/ FedEx Ground Package System, Inc. | | 22.0 | % | | 34 | | 7.3 | | $ | 31,697 | | 30.7 | % | | $ | 2,706 | | 4.9 | % | | $ | 76,227 | | 27.0 | % | | $ | 8,152 | | 5.0 | % |
| Amazon.com Services, Inc./ Amazon.com Services LLC | | 7.7 | % | | 6 | | 6.2 | | 7,244 | | 7.0 | % | | 5,231 | | 9.5 | % | | 20,095 | | 7.1 | % | | 16,117 | | 9.9 | % |
| Home Depot U.S.A., Inc. | | 5.7 | % | | 3 | | 26.3 | | 3,346 | | 3.2 | % | | 1,322 | | 2.4 | % | | 10,169 | | 3.6 | % | | 3,948 | | 2.4 | % |
| Total | | 35.4 | % | | 34 | | 13.3 | | $ | 42,287 | | 40.9 | % | | $ | 54,982 | | 16.8 | % | | $ | 106,491 | | 37.7 | % | | $ | 163,378 | | 17.3 | % |
Mainland Properties. As of September 30, 2022, our Mainland Properties represented approximately 71.5% of our annualized rental revenues. We generally will seek to renew or extend the terms of leases at our Mainland Properties when they expire. Because ofas their expirations approach. Due to the capital that many of the tenants in our Mainland Properties have invested in these properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases when they expire.prior to their expirations. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties and the terms of any leases we may enter may be less favorable to us than the terms of our existing leases for those properties.
Hawaii Properties. Approximately 60.3% As of September 30, 2022, our Hawaii Properties represented approximately 28.5% of our annualized rental revenues as of March 31, 2018 were derived from our Hawaii Properties.revenues. As of March 31, 2018, a significant portionSeptember 30, 2022, certain of our Hawaii Properties are lands leased for rents that are periodically reset based on fair market values, generally every five or ten years. Revenues from our Hawaii Properties have generally increased under our or our predecessors’ ownership as rents under the leases for those properties have been reset or renewed. Lease renewals, lease extensions, new leases and rental rates for which available space may be relet at our Hawaii Properties in the future will depend on prevailing market conditions when these lease renewals, lease extensions, new leases and rental rates are set. As rent reset dates or lease expirations approach at our Hawaii Properties, we generally negotiate with existing or new tenants for new lease terms. If we are unable to reach an agreement with a tenant on a rent reset, our Hawaii Properties’ leases typically provide that rent is reset based on an appraisal process. Despite our and our predecessors'predecessors’ prior experience with rent resets, lease extensions and new leases and rent resets in Hawaii, our ability to increase rents when rents reset, leases are extended, or leases expire depends upon market conditions which are beyond our control. Accordingly, we cannot be sure that the historical increases achieved at our Hawaii Properties will continue in the future.
The following chart shows the annualized rental revenues as of March 31, 2018September 30, 2022 scheduled to reset at our Hawaii Properties:
Scheduled Rent Resets at Hawaii Properties
(dollars in thousands)
| | | | | | | | |
| | Annualized |
| | Rental Revenues as of |
| | September 30, 2022 |
| | Scheduled to Reset |
| | |
| 10/1/2022-12/31/2022 | | $ | — | |
| 2023 | | 2,114 | |
| 2024 | | 1,273 | |
| 2025 | | 831 | |
| 2026 | | 1,307 | |
| 2027 and thereafter | | 17,596 | |
| Total | | $ | 23,121 | |
|
| | | | |
| | | Annualized |
| | | Rental Revenues as of |
| | | March 31, 2018 |
| | | Scheduled to Reset |
| 2018 | | $ | 237 |
|
| 2019 | | 10,903 |
|
| 2020 | | 2,500 |
|
| 2021 and thereafter | | 19,723 |
|
| Total | | $ | 33,363 |
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Since the leases at certainAs of September 30, 2022, $20,740, or 4.9%, of our Hawaii Properties were originally entered,annualized rental revenues are included in leases scheduled to expire through September 30, 2023 and 0.8% of our rentable square feet are currently vacant. Rental rates for which available space may be leased in the future will depend on prevailing market conditions when lease extensions, lease renewals or new leases are negotiated. Whenever we extend, renew or enter new leases for our properties, we intend to seek rents that are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control.
Tenant Review Process. Our manager, RMR, employs a tenant review process for us. RMR assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR evaluates the creditworthiness of a tenant based on information that is provided by the tenant and, in some cases, as long as 40information that is publicly available or 50 years ago,obtained from third party sources. RMR also may use a third party service to monitor the characteristicscredit ratings of the neighborhoods in the vicinity of some of those properties have changed. In such circumstances, we and our predecessors have sometimes engaged in redevelopment activities to change the character of certain properties in order to increase rents. Because our Hawaii Properties are currently experiencing strong demand for their current uses, we do not currently expect redevelopment efforts in Hawaii to become a major activity of ours in the foreseeable future; however, we may undertake such activities on a selective basis.
Investment Activities
Our strategy related to property acquisitions and dispositions is materially unchanged from that disclosed in our Annual Report. Our target investments include all industrial and logistics buildings in top tier markets. In addition to top tier markets, our focus is on newer buildings, high credit quality tenants and longer lease terms. We expect to use the extensive nationwide resources of RMR LLC to locate and acquire properties.
For further information regarding our investment activities, see Note 3 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Financing Activities (dollars in thousands)
On January 17, 2018, we completed our IPO, in which we issued 20,000,000debt securities of our common shares for net proceedsexisting tenants whose debt securities are rated by a nationally recognized credit rating agency.
For further information regarding our financing activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Investment and Financing Liquidity and Resources” of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2018,September 30, 2022, Compared to Three Months Ended March 31, 2017September 30, 2021 (dollars and share amounts in thousands, except per share data)
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| Comparable Properties Results (1) | | Non-Comparable Properties Results (2) | | Consolidated Results |
| Three Months Ended September 30, | | Three Months Ended September 30, | | Three Months Ended September 30, |
| | | | | $ | | % | | | | | | $ | | | | | | $ | | % |
| 2022 | | 2021 | | Change | | Change | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | | Change |
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| Rental income | $ | 53,357 | | | $ | 52,590 | | | $ | 767 | | | 1.5% | | $ | 49,858 | | | $ | 2,391 | | | $ | 47,467 | | | $ | 103,215 | | | $ | 54,981 | | | $ | 48,234 | | | 87.7% |
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| Operating expenses: | | | | | | | | | | | | | | | | | | | | | |
| Real estate taxes | 7,713 | | | 7,307 | | | 406 | | | 5.6% | | 6,036 | | | 310 | | | 5,726 | | | 13,749 | | | 7,617 | | | 6,132 | | | 80.5% |
Other operating
expenses | 4,630 | | | 4,160 | | | 470 | | | 11.3% | | 3,823 | | | 257 | | | 3,566 | | | 8,453 | | | 4,417 | | | 4,036 | | | 91.4% |
Total operating
expenses | 12,343 | | | 11,467 | | | 876 | | | 7.6% | | 9,859 | | | 567 | | | 9,292 | | | 22,202 | | | 12,034 | | | 10,168 | | | 84.5% |
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Net operating income (3) | $ | 41,014 | | | $ | 41,123 | | | $ | (109) | | | (0.3%) | | $ | 39,999 | | | $ | 1,824 | | | $ | 38,175 | | | 81,013 | | | 42,947 | | | 38,066 | | | 88.6% |
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| Other expenses: | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | 48,519 | | | 12,694 | | | 35,825 | | | N/M |
| Acquisition and other transaction related costs | | 586 | | | — | | | 586 | | | —% |
| General and administrative | | 9,110 | | | 4,728 | | | 4,382 | | | 92.7% |
| | | | | | | | |
| Total other expenses | | 58,215 | | | 17,422 | | | 40,793 | | | N/M |
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| Interest and other income | | 1,068 | | | — | | | 1,068 | | | —% |
| Interest expense | | (89,739) | | | (9,084) | | | (80,655) | | | N/M |
| Gain on sale of real estate | | — | | | 940 | | | (940) | | | (100.0%) |
| | | | | | | | |
| Loss on early extinguishment of debt | | (21,370) | | | — | | | (21,370) | | | — |
| (Loss) income before income tax expense and equity in earnings of unconsolidated joint venture | | (87,243) | | | 17,381 | | | (104,624) | | | N/M |
| Income tax expense | | (28) | | | (72) | | | 44 | | | (61.1%) |
| Equity in earnings of unconsolidated joint venture | | 3,297 | | | 998 | | | 2,299 | | | 230.4% |
| Net (loss) income | | (83,974) | | | 18,307 | | | (102,281) | | | N/M |
| Net loss attributable to noncontrolling interest | | 38,347 | | | — | | | 38,347 | | | —% |
| Net (loss) income attributable to common shareholders | | $ | (45,627) | | | $ | 18,307 | | | $ | (63,934) | | | N/M |
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| Weighted average common shares outstanding - basic | | 65,250 | | | 65,178 | | | 72 | | | 0.1% |
| Weighted average common shares outstanding - diluted | | 65,250 | | | 65,230 | | | 20 | | | —% |
| | | | | | | | |
| Per common share data (basic and diluted): | | | | | | | | |
| Net (loss) income attributable to common shareholders | | $ | (0.70) | | | $ | 0.28 | | | $ | (0.98) | | | N/M |
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| | | Three Months Ended March 31, |
| | | | | | | $ | | % |
| | | 2018 | | 2017 | | Change | | Change |
| Revenues: | | | | | | | | |
| Rental income | | $ | 34,809 |
| | $ | 33,870 |
| | $ | 939 |
| | 2.8 | % |
| Tenant reimbursements and other income | | 5,796 |
| | 5,570 |
| | 226 |
| | 4.1 | % |
| Total revenues | | 40,605 |
| | 39,440 |
| | 1,165 |
| | 3.0 | % |
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| Operating expenses: | | | | | | | | |
| Real estate taxes | | 4,585 |
| | 4,339 |
| | 246 |
| | 5.7 | % |
| Other operating expenses | | 3,545 |
| | 2,732 |
| | 813 |
| | 29.8 | % |
| Total operating expenses | | 8,130 |
| | 7,071 |
| | 1,059 |
| | 15.0 | % |
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Net operating income (1) | | 32,475 |
| | 32,369 |
| | 106 |
| | 0.3 | % |
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| Other expenses: | | | | | | | | |
| Depreciation and amortization | | 6,873 |
| | 6,811 |
| | 62 |
| | 0.9 | % |
| General and administrative | | 2,574 |
| | 4,636 |
| | (2,062 | ) | | (44.5 | )% |
| Total other expenses | | 9,447 |
| | 11,447 |
| | (2,000 | ) | | (17.5 | )% |
| Operating income | | 23,028 |
| | 20,922 |
| | 2,106 |
| | 10.1 | % |
| Interest income | | 13 |
| | — |
| | 13 |
| | 100.0 | % |
| Interest expense | | (3,802 | ) | | (555 | ) | | (3,247 | ) | | 585.0 | % |
| Income before income tax expense | | 19,239 |
| | 20,367 |
| | (1,128 | ) | | (5.5 | )% |
| Income tax expense | | (7 | ) | | (11 | ) | | 4 |
| | (36.4 | )% |
| Net income | | $ | 19,232 |
| | $ | 20,356 |
| | $ | (1,124 | ) | | (5.5 | )% |
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| Weighted average common shares outstanding - basic and diluted | | 61,445 |
| | 45,000 |
| | 16,445 |
| | 36.5 | % |
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| Net income per common share - basic and diluted | | $ | 0.31 |
| | $ | 0.45 |
| | $ | (0.14 | ) | | (31.1 | )% |
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Reconciliation of Net Income to Net Operating Income (1): | | |
| Net income | $ | 19,232 |
| | $ | 20,356 |
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| Income tax expense | 7 |
| | 11 |
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| Income before income tax expense | 19,239 |
| | 20,367 |
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| Interest expense | 3,802 |
| | 555 |
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| Interest income | (13 | ) | | — |
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| Operating income | | 23,028 |
| | 20,922 |
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| General and administrative | 2,574 |
| | 4,636 |
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| Depreciation and amortization | 6,873 |
| | 6,811 |
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| NOI | | $ | 32,475 |
| | $ | 32,369 |
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| NOI: | | | | | | | | |
| Hawaii Properties | | $ | 18,922 |
| | $ | 18,568 |
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| Mainland Properties | | 13,553 |
| | 13,801 |
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| NOI | | $ | 32,475 |
| | $ | 32,369 |
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Reconciliation of Net Income to Funds From Operations and Normalized Funds From Operations (2): |
| Net income | $ | 19,232 |
| | $ | 20,356 |
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| Plus: depreciation and amortization | 6,873 |
| | 6,811 |
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| FFO | 26,105 |
| | 27,167 |
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Plus: estimated business management incentive fees (3) | — |
| | 2,409 |
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| Normalized FFO | $ | 26,105 |
| | $ | 29,576 |
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| FFO per common share - basic and diluted | $ | 0.42 |
| | $ | 0.60 |
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| Normalized FFO per common share - basic and diluted | $ | 0.42 |
| | $ | 0.66 |
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(1)Consists of properties that we owned continuously since July 1, 2021 and excludes properties owned by an unconsolidated joint venture.
(2)Consists of 131 properties including (i) properties we acquired during the period from July 1, 2021 to September 30, 2022, including 94 properties we contributed to a consolidated joint venture in which we own a 61% equity interest, and (ii) properties we sold in December 2021 to our 18 property unconsolidated joint venture in which we own a 22% equity interest.
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(1) | The calculation of net operating income, or NOI, excludes certain components of net income in order to provide results that are more closely related to our property level results of operations. We calculate NOI as shown above. We define NOI as income from our rental of real estate less our property operating expenses. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization. We consider NOI to be an appropriate supplemental measure to net income because it may help both investors and management to understand the operations of our properties. We use NOI to evaluate individual and company wide property level performance, and we believe that NOI provides useful information to investors regarding our results of operations because it reflects only those income and expense items that are generated and incurred at the property level and may facilitate comparisons of our operating performance between periods and with other REITs. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income or operating income as an indicator of our operating performance or as a measure of our liquidity. This measure should be considered in conjunction with net income and operating income as presented in our condensed consolidated statements of comprehensive income. Other real estate companies and REITs may calculate NOI differently than we do. |
(3)See our definition of NOI and our reconciliation of net income (loss) to NOI below under the heading “Non-GAAP Financial Measures.”
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(2) | We calculate funds from operations, or FFO, and normalized funds from operations, or Normalized FFO, as shown above. FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, or Nareit, which is net income, calculated in accordance with GAAP, plus real estate depreciation and amortization, as well as certain other adjustments currently not applicable to us. Our calculation of Normalized FFO differs from Nareit’s definition of FFO because we include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. We consider FFO and Normalized FFO to be appropriate supplemental measures of operating performance for a REIT, along with net income and operating income. We believe that FFO and Normalized FFO provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation expense, FFO and Normalized FFO may facilitate a comparison of our operating performance between periods and with other REITs. FFO and Normalized FFO are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to qualify for taxation as a REIT, limitations in our credit agreement, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. FFO and Normalized FFO do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income or operating income as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income and operating income as presented in our condensed consolidated statements of comprehensive income. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. |
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(3) | Incentive fees under our and SIR's business management agreements with RMR LLC are payable after the end of each calendar year, are calculated based on common share total return, as defined in the respective agreements, and are included in general and administrative expense in our condensed consolidated statements of income. In calculating net income in accordance with GAAP, we recognize estimated business management incentive fee expense, if any, in the first, second and third quarters. Although we recognize this expense, if any, in the first, second and third quarters for purposes of calculating net income, we do not include such expense in the calculation of Normalized FFO until the fourth quarter, when the amount of the business management incentive fee expense for the calendar year, if any, is determined. Normalized FFO for the three months ended March 31, 2017 excludes $2,409, which represents the portion of SIR's estimated business management incentive fee allocated to us for the period during which we were SIR's wholly owned subsidiary. |
References to changes in the income and expense categories below relate to the comparison of results for the three months ended March 31, 2018,September 30, 2022 compared to the three months ended March 31, 2017.September 30, 2021.
Rental income. The increase in rental income wasis primarily a result of an increase in occupancy during 2017our acquisition and disposition activities, which includes our acquisition of MNR. Rental income increased at certain of our comparable properties primarily due to increases from leasing activity and rent resets at certain of our Hawaii Properties.resets. Rental income includes non-cash straight line rent adjustments totaling approximately $1,194of $3,794 and $1,678 for the 2018 period2022 and approximately $1,470 for the 2017 period,2021 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $102of $250 and $174 for the 2018 period2022 and approximately $96 for the 2017 period.2021 periods, respectively.
Tenant reimbursements and other income. The increase in tenant reimbursements and other income primarily reflects increases in real estate tax and other operating expense reimbursements from tenants at certain of our properties, partially offset by insurance proceeds and tenant escalation true-ups recognized in the 2017 period.
Real estate taxes. The increase in real estate taxes primarily reflects tax valuationour acquisition and tax rate increasesdisposition activities. Real estate taxes at our comparable properties increased primarily due to higher assessed values at certain of our properties.
Other operating expenses. Other operating expenses primarily include propertyrepairs and maintenance, environmental remediation, utilities, insurance, bad debt,snow removal, legal and property management fees. The increase in other operating expenses is primarily reflectsdue to our acquisition and disposition activities. Other operating expenses increased primarily due to increases in rent reservesrepairs and snow removal costsmaintenance and insurance expenses at certain of our properties in the 2018 period, compared to lower than usual amounts for these expenses in the 2017 period.comparable properties.
Depreciation and amortization. The increase in depreciation and amortization primarily reflects increased depreciationour acquisition and disposition activities.
Acquisition and other transaction related costs. Acquisition and other transaction related costs primarily consists of capital improvements at our properties.costs related to potential acquisition and disposition activities that were not completed.
General and administrative. Subsequent to our IPO, general General and administrative expenses primarily include fees paid under our business management agreement with RMR, legal fees, audit fees, Trustee cash fees and expenses and equity compensation expense. Prior to our IPO, general and administrative expenses were primarily allocated to us by SIR based on the historical cost of our
properties as a percentage of SIR's historical cost of all of its properties. The decreaseincrease in general and administrative expenses is primarily reflects our allocated portion of estimateddue to an increase in business management incentive fees recognized by SIRas a result of our net acquisition activity.
Interest and other income. The increase in interest and other income is primarily due to higher cash balances during the 20172022 period partially offset by increased costs relatedas compared to our becoming a separate public company.the 2021 period and distributions we received on certain equity securities we held during the 2022 period.
Interest income. Interest income represents interest earned on our cash balances.
Interest expense. The increase in interest expense is due to higher average interest rates and higher average outstanding debt balances in the 2022 period as compared to the 2021 period, primarily reflectsrelated to our acquisition of MNR.
Gain on sale of real estate. Gain on sale of real estate represents the changenet gain from the sale of a portion of a land parcel as a result of an eminent domain taking in our capital structure, including our IPO, which resultedthe 2021 period.
Loss on early extinguishment of debt. Loss on early extinguishment of debt primarily relates to the write off of unamortized costs related to the repayment of the Bridge Loan in changes in borrowings under our revolving credit facility during the 2018 period, partially offset by the prepayment of certain mortgage notes in December 2017.September 2022.
Income tax expense. Income tax expense primarily reflects state income taxes payable in certain jurisdictions despitejurisdictions.
Equity in earnings of unconsolidated joint venture. Equity in earnings of unconsolidated joint venture is the change in the fair value of our expected status as a REITinvestment in the unconsolidated joint venture.
Net (loss) income. The net loss for federal income tax purposes.
Net income. The decrease inthe 2022 period compared to the net income for the 2018 period compared to the 20172021 period reflects the changes noted above.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest represents the net loss attributable to the 39% equity interest in our consolidated joint venture that we did not own during the 2022 period.
Weighted average common shares outstanding - basic and diluted. The increase in weighted average common shares outstanding primarily reflects the issuance of 20,000,000 of our common shares in connection withawarded under our IPO.equity compensation plan since July 1, 2021.
Net (loss) income attributable to common shareholders per common share - basic and diluted. Net income The net loss attributable to common shareholders per common share for the 2022 period compared to the net income attributable to common shareholders per share for the 2021 period reflects the changes to net income attributable to common shareholders and weighted average common shares noted above.
Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 (dollars and share amounts in thousands, except per share data)
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| Comparable Properties Results (1) | | Non-Comparable Properties Results (2) | | Consolidated Results |
| Nine Months Ended September 30, | | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | | | | $ | | % | | | | | | $ | | | | | | $ | | % |
| 2022 | | 2021 | | Change | | Change | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | | Change |
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| Rental income | $ | 161,921 | | | $ | 156,971 | | | $ | 4,950 | | | 3.2% | | $ | 119,891 | | | $ | 6,407 | | | $ | 113,484 | | | $ | 281,812 | | | $ | 163,378 | | | $ | 118,434 | | | 72.5% |
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| Operating expenses: | | | | | | | | | | | | | | | | | | | | | |
| Real estate taxes | 22,278 | | | 21,616 | | | 662 | | | 3.1% | | 14,182 | | | 737 | | | 13,445 | | | 36,460 | | | 22,353 | | | 14,107 | | | 63.1% |
Other operating
expenses | 13,652 | | | 13,055 | | | 597 | | | 4.6% | | 8,626 | | | 679 | | | 7,947 | | | 22,278 | | | 13,734 | | | 8,544 | | | 62.2% |
Total operating
expenses | 35,930 | | | 34,671 | | | 1,259 | | | 3.6% | | 22,808 | | | 1,416 | | | 21,392 | | | 58,738 | | | 36,087 | | | 22,651 | | | 62.8% |
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Net operating income (3) | $ | 125,991 | | | $ | 122,300 | | | $ | 3,691 | | | 3.0% | | $ | 97,083 | | | $ | 4,991 | | | $ | 92,092 | | | $ | 223,074 | | | $ | 127,291 | | | $ | 95,783 | | | 75.2% |
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| Other expenses: | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | 114,096 | | | 37,202 | | | 76,894 | | | 206.7% |
| Acquisition and other transaction related costs | | 586 | | | 646 | | | (60) | | | (9.3%) |
| General and administrative | | 24,896 | | | 12,718 | | | 12,178 | | | 95.8% |
| Loss on impairment of real estate | | 100,747 | | | — | | | 100,747 | | | —% |
| Total other expenses | | 240,325 | | | 50,566 | | | 189,759 | | | N/M |
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| Interest and other income | | 1,900 | | | — | | | 1,900 | | | —% |
| Interest expense | | (208,286) | | | (26,468) | | | (181,818) | | | N/M |
| (Loss) gain on sale of real estate | | (10) | | | 940 | | | (950) | | | (101.1%) |
| Loss on equity securities | | (5,758) | | | — | | | (5,758) | | | —% |
| Loss on early extinguishment of debt | | (22,198) | | | — | | | (22,198) | | | —% |
| (Loss) income before income tax expense and equity in earnings of unconsolidated joint venture | | (251,603) | | | 51,197 | | | (302,800) | | | N/M |
| Income tax expense | | (113) | | | (177) | | | 64 | | | (36.2%) |
| Equity in earnings of unconsolidated joint venture | | 6,634 | | | 5,455 | | | 1,179 | | | 21.6% |
| Net (loss) income | | (245,082) | | | 56,475 | | | (200,810) | | | N/M |
| Net loss attributable to noncontrolling interest | | 49,402 | | | — | | | 49,402 | | | —% |
| Net (loss) income attributable to common shareholders | | $ | (195,680) | | | $ | 56,475 | | | $ | (252,155) | | | N/M |
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| Weighted average common shares outstanding - basic | | 65,228 | | | 65,154 | | | 74 | | | 0.1% |
| Weighted average common shares outstanding - diluted | | 65,228 | | | 65,205 | | | 23 | | | —% |
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| Per common share data (basic and diluted): | | | | | | | | |
| Net (loss) income attributable to common shareholders | | $ | (3.00) | | | 0.86 | | | (3.86) | | | N/M |
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N/M - Not Meaningful
(1)Consists of properties that we owned continuously since January 1, 2021 and excludes properties owned by an unconsolidated joint venture.
(2)Consists of 133 properties including (i) properties we acquired during the period from January 1, 2021 to September 30, 2022, including 94 properties we contributed to a consolidated joint venture in which we own a 61% equity interest, and (ii) properties we sold in December 2021 to our 18 property unconsolidated joint venture in which we own a 22% equity interest.
(3)See our definition of NOI and our reconciliation of net income (loss) to NOI below under the heading “Non-GAAP Financial Measures.”
References to changes in the income and expense categories below relate to the comparison of results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Rental income. The increase in rental income is primarily a result of our acquisition and disposition activities, which includes our acquisition of MNR. Rental income increased at certain of our comparable properties primarily due to increases from leasing activity and rent resets and a $3,428 write off of capitalized below market lease value related to a terminated tenant. Rental income includes non-cash straight line rent adjustments of $8,170 and $5,673 for the 2022 and 2021 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations of $4,265 and $525 for the 2022 and 2021 periods, respectively.
Real estate taxes. The increase in real estate taxes primarily reflects our acquisition and disposition activities.
Other operating expenses. The increase in other operating expenses is primarily due to our acquisition and disposition activities. Other operating expenses increased primarily due to increases in repairs and maintenance, snow removal and insurance expenses at certain of our comparable properties.
Depreciation and amortization. The increase in depreciation and amortization primarily reflects our acquisition and disposition activities.
Acquisition and other transaction related costs. Acquisition and other transaction related costs primarily consists of costs related to potential acquisition and disposition activities that were not completed.
General and administrative. The increase in general and administrative expenses is primarily due to an increase in business management fees as a result of our net acquisition activity.
Loss on impairment of real estate. We recorded a $100,747 loss on impairment of real estate in the 2022 period to reduce the carrying value of 25 properties we reclassified from held for sale to held and used in June 2022 to their estimated fair values.
Interest and other income. The increase in interest and other income is primarily due to higher cash balances during the 2022 period as compared to the 2021 period and distributions we received on certain equity securities we held during the 2022 period.
Interest expense. The increase in interest expense is due to higher average interest rates and higher average outstanding debt balances in the 2022 period as compared to the 2021 period, primarily related to our acquisition of MNR.
Loss (gain) on sale of real estate. Loss (gain) on sale of real estate in the 2022 period includes an adjustment to the gain from the sale of six properties to our joint venture during December 2021 and a net gain from the sale of a portion of a land parcel as a result of an eminent domain taking in the 2021 period.
Loss on equity securities. Loss on equity securities represents the realized loss of $5,758 on the sale of certain equity securities we acquired as part of our acquisition of MNR.
Loss on early extinguishment of debt. Loss on early extinguishment of debt primarily relates to our write off of unamortized costs related to the repayment of the Bridge Loan in September 2022 and terminating our unsecured revolving credit facility in February 2022.
Income tax expense. Income tax expense primarily reflects state income taxes payable in certain jurisdictions.
Equity in earnings of unconsolidated joint venture. Equity in earnings of unconsolidated joint venture is the change in the fair value of our investment in the unconsolidated joint venture.
Net (loss) income. The net loss for the 2022 period compared to the net income for the 2021 period reflects the changes noted above.
Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest represents the net loss attributable to the 39% equity interest in our consolidated joint venture that we did not own during the 2022 period.
Weighted average common shares outstanding - basic and diluted. The increase in weighted average common shares outstanding primarily reflects common shares awarded under our equity compensation plan since January 1, 2021.
Net (loss) income attributable to common shareholders per common share - basic and diluted. The net loss attributable to common shareholders per common share for the 2022 period compared to the net income attributable to common shareholders per share for the 2021 period reflects the changes to net income attributable to common shareholders and weighted average common shares noted above.
Non-GAAP Financial Measures
We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the Securities and Exchange Commission, or SEC, including net operating income, or NOI, funds from operations, or FFO, attributable to common shareholders and normalized funds from operations, or Normalized FFO, attributable to common shareholders. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) or net income (loss) attributable to common shareholders as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) and net income (loss) attributable to common shareholders as presented in our condensed consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss) and net income (loss) attributable to common shareholders. We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties.
Net Operating Income
We calculate NOI as shown below. We define NOI as income from our rental of real estate less our property operating expenses. The calculation of NOI excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do.
The following table presents the reconciliation of net (loss) income to NOI for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands):
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Reconciliation of Net (Loss) Income to NOI: | | | | | | | | |
| Net (loss) income | $ | (83,974) | | | $ | 18,307 | | | $ | (245,082) | | | $ | 56,475 | |
| Equity in earnings of unconsolidated joint venture | (3,297) | | | (998) | | | (6,634) | | | (5,455) | |
| Income tax expense | 28 | | | 72 | | | 113 | | | 177 | |
| (Loss) income before income tax expense and equity in earnings of unconsolidated joint venture | (87,243) | | | 17,381 | | | (251,603) | | | 51,197 | |
| Loss on early extinguishment of debt | 21,370 | | | — | | | 22,198 | | | — | |
| Interest and other income | (1,068) | | | — | | | (1,900) | | | — | |
| Interest expense | 89,739 | | | 9,084 | | | 208,286 | | | 26,468 | |
| Loss (gain) on sale of real estate | — | | | (940) | | | 10 | | | (940) | |
| Loss on equity securities | — | | | — | | | 5,758 | | | — | |
| General and administrative | | 9,110 | | | 4,728 | | | 24,896 | | | 12,718 | |
| Acquisition and other transaction related costs | 586 | | | — | | | 586 | | | 646 | |
| Loss on impairment of real estate | — | | | — | | | 100,747 | | | — | |
| Depreciation and amortization | 48,519 | | | 12,694 | | | 114,096 | | | 37,202 | |
| NOI | | $ | 81,013 | | | $ | 42,947 | | | $ | 223,074 | | | $ | 127,291 | |
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| NOI: | | | | | | | | |
| Hawaii Properties | | $ | 20,049 | | | $ | 20,628 | | | $ | 64,087 | | | $ | 61,312 | |
| Mainland Properties | | 60,964 | | | 22,319 | | | 158,987 | | | 65,979 | |
| NOI | | $ | 81,013 | | | $ | 42,947 | | | $ | 223,074 | | | $ | 127,291 | |
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Funds From Operations and Normalized Funds From Operations Attributable to Common Shareholders
We calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders as shown below. FFO attributable to common shareholders is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss) attributable to common shareholders, calculated in accordance with GAAP, excluding loss on impairment of real estate, any gain or loss on sale of real estate, equity in earnings of unconsolidated joint venture and any realized and unrealized gains or losses on equity securities, plus real estate depreciation and amortization of consolidated properties and our proportionate share of FFO of unconsolidated joint venture properties and minus FFO adjustments attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO attributable to common shareholders, we adjust for the items shown below including similar adjustments for the unconsolidated joint venture, if any. FFO attributable to common shareholders and Normalized FFO attributable to common shareholders are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders differently than we do.
The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net income (loss) attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Reconciliation of Net (Loss) Income Attributable to Common Shareholders to FFO Attributable to Common Shareholders and Normalized FFO Attributable to Common Shareholders: | | | | | | | |
| Net (loss) income attributable to common shareholders | $ | (45,627) | | | $ | 18,307 | | | $ | (195,680) | | | $ | 56,475 | |
| Depreciation and amortization | 48,519 | | | 12,694 | | | 114,096 | | | 37,202 | |
| Equity in earnings of unconsolidated joint venture | (3,297) | | | (998) | | | (6,634) | | | (5,455) | |
| Loss on equity securities | — | | | — | | | 5,758 | | | — | |
| | | | | | | |
| Share of FFO from unconsolidated joint venture | 1,678 | | | 1,215 | | | 5,115 | | | 3,621 | |
| Loss on impairment of real estate | — | | | — | | | 100,747 | | | — | |
| (Gain) loss on sale of real estate | — | | | (940) | | | 10 | | | (940) | |
| FFO adjustments attributable to noncontrolling interest | (11,407) | | | — | | | (27,445) | | | — | |
| FFO attributable to common shareholders | (10,134) | | | 30,278 | | | (4,033) | | | 90,903 | |
| Loss on early extinguishment of debt | 21,370 | | | — | | | 22,198 | | | — | |
| | | | | | | |
Acquisition and other transaction related costs (1) | 32,016 | | | — | | | 80,992 | | | 646 | |
| Normalized FFO adjustments attributable to noncontrolling interest | (28,379) | | | — | | | (28,379) | | | — | |
| Normalized FFO attributable to common shareholders | $ | 14,873 | | | $ | 30,278 | | | $ | 70,778 | | | $ | 91,549 | |
| | | | | | | |
| Weighted average common shares outstanding - basic | 65,250 | | | 65,178 | | | 65,228 | | | 65,154 | |
| Weighted average common shares outstanding - diluted | 65,250 | | | 65,230 | | | 65,228 | | | 65,205 | |
| | | | | | | |
| Per common share data: | | | | | | | |
| FFO attributable to common shareholders - basic | | | | | | $ | (0.16) | | | $ | 0.46 | | | $ | (0.06) | | | $ | 1.40 | |
| FFO attributable to common shareholders - diluted | | | | | | $ | (0.16) | | | $ | 0.46 | | | $ | (0.06) | | | $ | 1.39 | |
| Normalized FFO attributable to common shareholders - basic | $ | 0.23 | | | $ | 0.46 | | | $ | 1.09 | | | $ | 1.41 | |
| Normalized FFO attributable to common shareholders - diluted | $ | 0.23 | | | $ | 0.46 | | | $ | 1.09 | | | $ | 1.40 | |
(1)Amounts for the three and nine months ended September 30, 2022 primarily include certain debt issuance costs recorded as interest expense related to the Bridge Loan and other transaction related costs expensed under GAAP.
LIQUIDITY AND CAPITAL RESOURCES
Our Operating Liquidity and Resources (dollars in thousands)
Our principal sources of funds to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders are rents from tenants at our propertiesproperties. As of September 30, 2022, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 78.1% of our annualized rental revenues and borrowings underonly 4.9% of our revolving credit facility.annualized rental revenues were from leases expiring over the next 12 months. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon our ability to:
•collect rents from our tenants when due;
•maintain the occupancy of, and maintain or increase the rental rates at, our properties;
•control our operating cost increases; and
•purchase additional properties that produce cash flows in excess of our costs of acquisition capital and property operating expenses.expenses; and
•develop properties to produce cash flows in excess of our costs of capital.
Cash
The following is a summary of our sources and uses of cash flows provided by (used in) operating, investing and financing activities were $22,093, ($1,347) and ($899), respectively, for the three months ended March 31, 2018 and $23,996, ($1,521) and ($22,475), respectively, for the three months ended March 31, 2017. periods presented, as reflected in our condensed consolidated statements of cash flows (dollars in thousands):
| | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | 2022 | | 2021 |
| Cash and cash equivalents and restricted cash at beginning of period | | $ | 29,397 | | | $ | 22,834 | |
| Net cash provided by (used in): | | | | |
| Operating activities | | 81,907 | | | 88,920 | |
| Investing activities | | (3,457,034) | | | (135,093) | |
| Financing activities | | 3,472,399 | | | 67,432 | |
| Cash and cash equivalents and restricted cash at end of period | | $ | 126,669 | | | $ | 44,093 | |
The decrease in net cash provided by operating activities for the threenine months ended March 31, 2018September 30, 2022 compared to the same2021 period in the prior year is primarily due to reimbursements to SIR for the costs it incurredchanges in connection with our formation and the preparation for our IPO. Networking capital. The increase in net cash used in investing activities for the threenine months ended March 31, 2018September 30, 2022 compared to the same2021 period inis primarily due to our acquisition of MNR during the prior year was essentially unchanged.2022 period as compared to our acquisition of four properties and one parcel of developable land during the 2021 period. The decreaseincrease in net cash used inprovided by financing activities for the threenine months ended March 31, 2018September 30, 2022 compared to the same2021 period in the prior year is primarily due to the net proceeds fromborrowings and sale of joint venture equity interests used to finance our IPO and net contributions from SIR related to our property operations prior toacquisition of MNR in the completion of our IPO, partially offset by net activities under our revolving credit facility.
2022 period.
Our InvestmentInvesting and Financing Liquidity and Resources (dollars in thousands, except per share and per square foot data)
Our future acquisitionsacquisition or development of propertiesactivity cannot be accurately projected because they dependsuch activity depends upon available opportunities that come to our attention and upon our ability to successfully acquire, develop and operate such properties.properties, financing available to us, our cost of capital, other commitments we have made and alternative uses for the amounts that would be required for the acquisition or development, the extent of our leverage, and the expected impact of the acquisition or development on our debt covenants and certain other financial metrics. We generally do not intend to purchase "turn around"“turn around” properties, or properties that do not generate positive cash flows, and, to the extentbut we may conduct construction or redevelopment activities on our properties, we currently intend to conduct those activities primarily to satisfy tenant requirements or on a build to suit basis for existing or new tenants.properties.
As of March 31, 2018,September 30, 2022, we had $19,847 of cash and cash equivalents.equivalents of $26,381. To qualifymaintain our qualification for taxation as a REIT under the Internal Revenue Code of 1986, as amended, or the IRC, we generally will beare required to distribute annually at least 90% of our REIT taxable income annually, subject to specified adjustments
and excluding any net capital gain. This distribution requirement limits our ability to retain earnings and thereby provide capital for our operations or acquisitions. In orderWe may use our cash and cash equivalents on hand, the cash flow from our operations, net proceeds from any sales of assets and net proceeds of offerings of equity or debt securities to fund cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions to pay operating or capital expenses orour shareholders. On July 14, 2022, we announced that we reduced our quarterly cash distribution rate on our common shares to fund any future property acquisitions, development or redevelopment efforts,$0.01 per share and we maintainexpect our distributions to our common shareholders in 2022 will be, together with distributions we paid earlier in 2022, at least equal to the minimum amounts required for us to remain a $750,000 unsecured revolving credit facilityREIT for federal income tax purposes.
On February 25, 2022, subsidiaries of our consolidated joint venture entered into a loan agreement with the Floating Rate Lenders, pursuant to which this joint venture obtained the Floating Rate Loan. Also on February 25, 2022, our consolidated joint venture entered into a guaranty in favor of the Floating Rate Lenders, pursuant to which this joint venture guaranteed certain limited recourse obligations of its subsidiaries with respect to the Floating Rate Loan. The Floating Rate Loan matures in March 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.25%. Effective in March 2022, the Floating Rate Lenders exercised their option to increase the premium in connection with the securitization of the Floating Rate Loan, resulting in an increase of 51.5 basis points in the premium. We also purchased an interest rate cap through March 2024 with a groupSOFR strike rate equal to 3.40%. As of lenders. The maturity dateSeptember 30, 2022, the weighted average annual interest rate payable under the Floating Rate Loan was 5.62% and the weighted average interest rate for borrowings under the Floating Rate Loan was 4.94% and 4.23% for the three months ended September 30, 2022 and the period from February 25, 2022 to September 30, 2022, respectively.
Also on February 25, 2022, certain of our revolving credit facility is December 29, 2021.subsidiaries entered into a loan agreement with the Bridge Lenders, and a mezzanine loan agreement with the Bridge Mezz Lender, together pursuant to which we obtained the Bridge Loan. Also on February 25, 2022, we entered into a guaranty in favor of the Bridge Lenders and the Bridge Mezz Lender, pursuant to which we guaranteed certain limited recourse obligations of its subsidiaries with respect to the Bridge Loan. The Bridge Loan was scheduled to mature in February 2023 and required that interest only be paid at an annual rate of SOFR plus a premium of 1.75% under the loan agreement and a premium of 8.0% under the mezzanine loan agreement. We also purchased an interest rate cap with a SOFR strike rate equal to 2.70%. The Bridge Loan was repaid in full on September 22, 2022 with cash on hand and proceeds from the ILPT Floating Rate Loan. During the three and nine months ended September 30, 2022, we also recorded a $22,231 loss on early extinguishment of debt to write off unamortized costs related to the Bridge Loan and related interest rate cap. The weighted average annual interest rate for borrowings under the Bridge Loan was 5.01% and 4.24% for the period from July 1, 2022 to September 22, 2022 and the period from February 25, 2022 to September 22, 2022, respectively.
Also on February 25, 2022, certain of our subsidiaries entered into a loan agreement with the Fixed Rate Lenders, and mezzanine loan agreements with the Fixed Mezz Lenders, pursuant to which we obtained the Fixed Rate Loan. Also on February 25, 2022, we entered into a guaranty in favor of the Fixed Rate Lenders and the Fixed Mezz Lenders, pursuant to which we guaranteed certain limited recourse obligations of our subsidiaries with respect to the Fixed Rate Loan. The interest only Fixed Rate Loan matures in March 2032 and requires that interest be paid at a weighted average annual fixed rate of 4.42%.
We used the aggregate net proceeds from the Loans to partially fund the acquisition of MNR. Principal payments on the Floating Rate Loan and Fixed Rate Loan are not required prior to the end of their respective initial terms, subject to certain conditions set forth in the applicable loan agreement. Subject to the satisfaction of certain stated conditions, we have the option under the applicable loan agreement: (1) to extendprepay up to $280,000 of the maturity dateFloating Rate Loan after March 2023, at par with no premium, and to prepay the balance of the Floating Rate Loan at any time, subject to a premium; and (2) to prepay the Fixed Rate Loan in full or part at any time, subject to a premium, and beginning in September 2031, without a premium.
On September 22, 2022, certain of our revolving credit facility for two six month periods,subsidiaries entered into a loan agreement with the ILPT Floating Rate Lenders, and a mezzanine loan agreement with the ILPT Floating Rate Mezz Lenders, pursuant to which we obtained ILPT Floating Rate loan, secured by 104 of our properties. The ILPT Floating Rate Loan is comprised of a $1,100,000 mortgage loan and a $135,000 mezzanine loan. Also, on September 22, 2022, we entered into a guaranty in favor of the ILPT Floating Rate Lenders and the ILPT Floating Rate Mezz Lenders, pursuant to which we guaranteed certain limited recourse obligations of our subsidiaries with respect to the ILPT Floating Rate Loan. The interest only ILPT Floating Rate Loan matures on October 9, 2024, subject to payment ofthree, one year extension feesoptions, and satisfaction of other conditions. We payrequires that interest on borrowings under our revolving credit facilitybe paid at thean annual rate of LIBORSOFR, which is capped at an annual rate of 2.25% for the initial term of the ILPT Floating Rate Loan, plus a weighted average premium that will vary based on our leverage ratio. If we later achieve an investment grade credit rating, we will then be able to elect to continue to have the interest premium based on our leverage ratio or we may instead elect to have the interest premium based on our credit rating, or a ratings election. We are required to pay a commitment fee on the unused portion of our revolving credit facility until and if such time as we make a ratings election, and thereafter we will be required to pay a facility fee in lieu of such commitment fee based on the maximum amount of our revolving credit facility. At March 31, 2018, the interest rate premium on our revolving credit facility was 140 basis points and our commitment fee was 25 basis points. After reporting our leverage as of March 31, 2018, the interest rate premium on our revolving credit facility will decrease to 130 basis points. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As of March 31, 2018, the3.93%. The weighted average interest rate payable on borrowings under our revolving credit facility was 3.23%. As of March 31, 2018 and April 26, 2018, we had $302,000 and $292,000, respectively, outstanding under our revolving credit facility and $448,000 and $458,000, respectively, available to borrow under our revolving credit facility.
Our credit agreement includes a feature under which the maximum borrowing availability under the facility may be increasedILPT Floating Rate Loan as of September 30, 2022 and for the period from September 22, 2022 to up to $1,500,000 in certain circumstances.
On January 17, 2018, we completed our IPO, in which we issued 20,000,000 of our common shares for net proceeds of $444,309, after deducting the underwriting discounts and commissions and expenses.September 30, 2022 was 6.18%. For further information regardingon our IPOinterest rate caps, see Notes 5 and our application of the net proceeds, see Note 910 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The agreements governing the Floating Rate Loan, Fixed Rate Loan and the ILPT Floating Rate Loan contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default.
In connection with the Merger, our consolidated joint venture, in which we own a 61% equity interest, assumed an aggregate $323,432 of former MNR mortgages secured by 11 properties which are owned by this joint venture. These amortizing mortgages require monthly payments of principal and interest until maturity. The value of these mortgages approximated their estimated fair value on the date of acquisition.
As of September 30, 2022, we have an aggregate principal amount of $4,295,842 of debt, including the Floating Rate Loan, Fixed Rate Loan and the ILPT Floating Rate Loan, scheduled to mature between 2022 and 2038.
Since committing to the acquisition of MNR, there have been unanticipated increases in interest rates and uncertainty in real estate market conditions. As a result, the debt financing used to acquire MNR has been more expensive than originally anticipated and it is taking longer than originally expected to complete our long term financing plan for the MNR acquisition. We planned to sell certain properties and to sell additional equity interests in our consolidated joint venture, which would reduce our ownership percentage in that joint venture and raise additional proceeds to reduce our outstanding indebtedness. The current economic conditions have negatively impacted the real estate market and we may not be able to sell properties or additional equity interests in our joint venture as expected or at all.
In July 2022, our consolidated joint venture acquired a property located in Augusta, GA containing 226,000 rentable square feet for a purchase price of approximately $38,053, including acquisition related costs of $53. This property is 100% leased to a single tenant with a remaining lease term of approximately 14.9 years at the time of acquisition. This property was one of two committed MNR property acquisitions at the time of the Merger and was acquired directly by our consolidated joint venture. In September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition.
For further information regarding our investing and financing activities, including our acquisition of MNR, see Notes 2, 4, 5, 9, 10 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Consolidated Joint Venture
Our debt maturity (other than our revolving credit facility)Immediately following the closing of the Merger, we entered into a joint venture arrangement with an institutional investor for 95 of the acquired MNR properties in 27 states, including two then committed, but not yet then completed, property acquisitions. The investor acquired a 39% noncontrolling equity interest in the joint venture from us for $589,411, as of Marchthe completion of this transaction, and we retained the remaining 61% equity interest in the joint venture. The joint venture assumed $323,432 aggregate principal amount of former MNR mortgage debt on certain of the properties. In July 2022, our consolidated joint venture completed one of the two committed MNR property acquisitions, and in September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition. We control this joint venture and therefore account for the properties on a consolidated basis in our condensed consolidated financial statements.
We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three and nine months ended September 30, 2022. The portion of this joint venture's net loss not attributable to us, or $38,318 and $49,360 for the three and nine months ended September 30, 2022, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). During the nine months ended September 30, 2022, this joint venture made aggregate cash distributions of $1,365 to the other joint venture investor, which is reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. No distributions were made during the three months ended September 30, 2022. We may seek to sell additional equity interests in this joint venture and use the proceeds to reduce our debt. See Notes 1, 2, 9 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this joint venture.
Unconsolidated Joint Venture
As of September 30, 2022 and December 31, 2018 was $48,7502021, we also owned a 22% interest in 2020.an unconsolidated joint venture with 18 properties in 12 states. We account for the unconsolidated joint venture under the equity method of accounting under the fair value option.
We recorded a change in the fair value of our investment in the unconsolidated joint venture of $3,297 and $998 for the three months ended September 30, 2022 and 2021, respectively, and $6,634 and $5,455 for the nine months ended September 30, 2022 and 2021, respectively, as equity in earnings of unconsolidated joint venture in our condensed consolidated
statements of comprehensive income (loss). In addition, the unconsolidated joint venture made aggregate cash distributions to us of $1,320 and $660 during the three months ended September 30, 2022 and 2021, respectively, and $3,962 and $1,980, during the nine months ended September 30, 2022 and 2021, respectively. In October 2022, the unconsolidated joint venture made a cash distribution to us of $20,900, including amounts related to a debt financing.
For further information regarding this joint venture, see Notes 2, 5 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We expect to use borrowings underpayments we may receive from the other investors in our revolving credit facilityjoint ventures in connection with any additional properties we may sell to our joint ventures, equity contributions from any third party investors in our joint ventures or any future joint ventures and net proceeds from offerings of equity or debt securities to fund any future property acquisitions, development or redevelopment efforts. We may also assume mortgage debtnotes in connection with future acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturities of our revolving credit facilitydebt approach or we desire to reduce our otherleverage or refinance debt, approach, we intend to explore refinancing alternatives.alternatives, property sales or sales of equity interests in joint ventures. Such alternatives may include incurring term debt, obtaining financing secured by mortgages on properties we own, issuing new equity or debt securities, extending the maturity date of ourobtaining a revolving credit facility, participating or participatingselling equity interests in joint venture arrangements.ventures or selling properties. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but we cannot be sure that there will be purchasers for such securities. Further, any issuances of our equity securities may be dilutive to our existing shareholders. Although we cannot be sure that we will be successful in completing any particular type of financing, we believe that we will have access to financing, such as debt andor equity offerings, to fund capital expenditures, future acquisitions, development, redevelopment and other activities and to pay our obligations.
Although we have no present intention to do so, we also may sell properties that we own or place mortgages on properties that we own to raise capital.
The completion and the costs of any future financings will depend primarily upon our success in operating our business and upon market conditions. In particular, the feasibility and cost of any future debt financings will depend primarily on our then current credit qualities and on market conditions. We have no control over market conditions. Potential lenders in future debt transactions will evaluate our ability to fund required debt service and repay principal balances when they become due by reviewing our financial condition, results of operations, business practices and plans and our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. We intend to conduct our business activities in a manner thatwhich will afford us reasonable access to capital for investmentinvesting and financing activities.
During the nine months ended September 30, 2022, we paid quarterly cash distributions to our shareholders totaling $43,821 using existing cash balances. For more information regarding these distributions we paid in 2022, see Note 6 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
On April 19, 2018,October 13, 2022, we declared a proratedquarterly distribution of $0.27$0.01 per common share, or approximately $17,600, for the period from January 17, 2018 (the date we completed our IPO) through March 31, 2018$656, to shareholders of record on April 30, 2018. This prorated distribution is based upon a quarterly distribution of $0.33 per common share ($1.32 per common share per year).October 24, 2022. We expect to pay this distribution to our shareholders on or about May 14, 2018November 17, 2022 using existing cash balances and borrowings underbalances. We reduced our revolving credit facility.
quarterly dividend to enhance our liquidity until we complete our long term financing plan for the MNR acquisition and/or our leverage profile otherwise improves.
During the three and nine months ended March 31, 2018September 30, 2022 and 2017,2021, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Tenant improvements and leasing costs (1) | | $ | 2,302 | | | $ | 1,819 | | | $ | 8,290 | | | $ | 3,083 | |
| | | | | | | | |
Building improvements (2) | | 1,292 | | | 1,625 | | | 1,778 | | | 2,417 | |
Development, redevelopment and other activities (3) | | 4,980 | | | — | | | 12,351 | | | 104 | |
| | $ | 8,574 | | | $ | 3,444 | | | $ | 22,419 | | | $ | 5,604 | |
(1)Tenant improvements and leasing costs include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and tenant inducements.
(2)Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.
(3)Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenues.
|
| | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | 2018 | | 2017 |
Tenant improvements (1) | | $ | 69 |
| | $ | 17 |
|
Leasing costs (2) | | 5 |
| | 429 |
|
Building improvements (3) | | 90 |
| | 309 |
|
Development, redevelopment and other activities (4) | | 378 |
| | 684 |
|
| | | $ | 542 |
| | $ | 1,439 |
|
| |
(1) | Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space. |
| |
(2) | Leasing costs include leasing related costs, such as brokerage commissions, legal costs and tenant inducements. |
| |
(3) | Building improvements generally include (i) expenditures to replace obsolete building components and (ii) expenditures that extend the useful life of existing assets. |
| |
(4) | Development, redevelopment and other activities generally include (i) capital expenditures that are identified at the time of a property acquisition and incurred within a short time period after acquiring the property and (ii) capital expenditure projects that reposition a property or result in new sources of revenues. |
As of March 31, 2018,September 30, 2022, we had estimated unspent leasing related obligations of $243.
During the three months ended March 31, 2018, commitments made for expenditures, such as tenant improvements and leasing costs in connection with leasing space, were as follows:
|
| | | | | | | | | | | |
| | New Leases | | Renewals | | Totals |
| Square feet leased during the period (in thousands) | 1 |
| | 295 |
| | 296 |
|
Total leasing costs and concession commitments (1) | $ | 33 |
| | $ | 35 |
| | $ | 68 |
|
Total leasing costs and concession commitments per square foot (1) | $ | 33.00 |
| | $ | 0.12 |
| | $ | 0.23 |
|
| Weighted average lease term by square feet (years) | 7.0 |
| | 30.4 |
| | 30.3 |
|
Total leasing costs and concession commitments per square foot per year (1) | $ | 4.71 |
| | $ | 0.00 |
| | $ | 0.01 |
|
| |
(1) | Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements. |
Off Balance Sheet Arrangements
As of March 31, 2018, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We had no swaps or hedges as of March 31, 2018.
$25,939.
Debt Covenants (dollars in thousands)
Our principal debt obligations at March 31, 2018 were borrowingsSeptember 30, 2022 were: (1) $1,235,000 outstanding under our revolving credit facility and aprincipal amount of the ILPT Floating Rate Loan secured mortgage note assumed in connection with oneby 104 of our acquisitions. Ourproperties; (2) $1,400,000 outstanding principal amount of the Floating Rate Loan secured by 82 properties owned by our consolidated joint venture; (3) $700,000 outstanding principal amount of the Fixed Rate Loan secured by 17 our properties; (4) $650,000 outstanding principal amount of a mortgage note is non-recourse, subjectloan secured by 186 of our properties; and (5) $310,842 aggregate principal amount of mortgages secured by 11 properties owned by our consolidated joint venture in which we own a 61% equity interest. For further information regarding our indebtedness, see Note 4 to certain limitations,the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
The agreements and does notrelated documents governing the ILPT Floating Rate Loan, Floating Rate Loan, Fixed Rate Loan and the $650,000 mortgage loan contain any material financial covenants. Our credit agreement providescustomary covenants, provide for acceleration of payment of all amounts outstandingdue thereunder upon the occurrence and continuation of certain events of default such as a changeand, in the case of control of us, which includes RMR LLC ceasing to act as our business and property manager. Our credit agreement contains a number of covenants which restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, restrict our ability to make distributions to our shareholders in certain circumstances and generallythe $650,000 mortgage loan, also require us to maintain certain financial ratios.a minimum consolidated net worth of at least $250,000 and liquidity of at least $15,000. As of March 31, 2018,September 30, 2022, we believe that we were in compliance with all of the covenants and other terms under the agreements governing the ILPT Floating Rate Loan, Floating Rate Loan, Fixed Rate Loan and covenants underthe $650,000 mortgage loan.
Certain of the mortgages we assumed in conjunction with our credit agreement.
Our credit agreement doesacquisition of MNR are non-recourse, subject to certain limitations, and do not contain any material financial covenants. The agreements governing the ILPT Floating Rate Loan, Floating Rate Loan, Fixed Rate Loan and the $650,000 mortgage loan contain certain exceptions to the general non-recourse provisions, including our obligation to indemnify the lenders for acceleration which could be triggered by our leverage ratio. However, under our credit agreement, our leverage ratio is used to determine the fees and interest rates we pay. Accordingly, if our leverage ratio increases above the applicable thresholds, our interest expense and related costs under our credit agreement would increase.
Our revolving credit facility has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more.
certain potential environmental losses.
Related Person Transactions
We have relationships and historical and continuing transactions with RMR, LLCRMR Inc. and others related to them. For example: we have no employees and the personnel and various services we require to operate our business are provided to us by RMR LLC pursuant to our business and property management agreements with RMR LLC; The RMR Group Inc., or RMR Inc., is the managing member of RMR LLC; and Adam D. Portnoy, one of our Managing Trustees, is the sole trustee of ABP Trust, which is the controlling shareholder of RMR Inc. We also have relationships and historical and continuing transactions with other companies to which RMR LLC or its subsidiaries provide management services and which may have trustees, directors and officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc., including: SIR, of which we were a wholly owned subsidiary until January 17, 2018 and which remains our largest shareholder, owning, at March 31, 2018, approximately 69.2% of our outstanding common shares. For further information about these and other such relationships and related person transactions, see Notes 9, 108 and 119 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2021 Annual Report, our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and our other filings with the Securities and Exchange Commission, or SEC. In addition, see the section captioned “Risk Factors” of our 2021 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships. Our filings with the SEC and copies of certain of our agreements with these related persons, including our business and property management agreements with RMR LLC and our various agreements with SIR, are available as exhibits to our filings with the SEC and accessible at the SEC’s website, www.sec.gov. We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.
Critical Accounting Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles. A discussion of our critical accounting estimates is included in our 2021 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk(dollars in thousands, except per share data)
We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring available financing alternatives. Our strategy to manage exposure to changes in interest rates is materially unchanged since December 31, 2017.2021. Other than as described below, we do not currently expect any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future.
Fixed Rate Debt
At March 31, 2018,September 30, 2022, our outstanding fixed rate debt consisted of the following mortgage notes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | Annual | | Annual | | | | Interest |
| | Principal | | Interest | | Interest | | | | Payments |
| Debt | | Balance (1) | | Rate (1) | | Expense (1) | | Maturity | | Due |
| | | | | | | | | | |
| Mortgage notes (186 properties in Hawaii) | | $ | 650,000 | | | 4.31 | % | | $ | 28,015 | | | 2029 | | Monthly |
| Mortgage notes (17 U.S. Mainland Properties ) | | 700,000 | | | 4.42 | % | | 30,940 | | | 2032 | | Monthly |
Mortgage note (2) | | 14,074 | | | 3.76 | % | | 529 | | | 2028 | | Monthly |
Mortgage note (2) | | 5,008 | | | 3.77 | % | | 189 | | | 2030 | | Monthly |
Mortgage note (2) | | 5,295 | | | 3.85 | % | | 204 | | | 2030 | | Monthly |
Mortgage note (2) | | 14,793 | | | 3.56 | % | | 527 | | | 2030 | | Monthly |
Mortgage note (2) | | 13,012 | | | 3.67 | % | | 478 | | | 2031 | | Monthly |
Mortgage note (2) | | 14,443 | | | 4.14 | % | | 598 | | | 2032 | | Monthly |
Mortgage note (2) | | 31,517 | | | 4.02 | % | | 1,267 | | | 2033 | | Monthly |
Mortgage note (2) | | 43,999 | | | 4.13 | % | | 1,817 | | | 2033 | | Monthly |
Mortgage note (2) | | 26,602 | | | 3.10 | % | | 825 | | | 2035 | | Monthly |
Mortgage note (2) | | 42,743 | | | 2.95 | % | | 1,261 | | | 2036 | | Monthly |
Mortgage note (2) | | 46,659 | | | 4.27 | % | | 1,992 | | | 2037 | | Monthly |
Mortgage note (2) | | 52,697 | | | 3.25 | % | | 1,713 | | | 2038 | | Monthly |
| | $ | 1,660,842 | | | | | $ | 70,354 | | | | | |
(1)The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed or issued this debt.
(2)Our consolidated joint venture, in which we have a 61% equity interest, assumed these former MNR mortgages, which are secured mortgage note:by 11 properties in aggregate.
|
| | | | | | | | | | | | | | | |
| | | | | Annual | | Annual | | | | Interest |
| | | Principal | | Interest | | Interest | | | | Payments |
| Debt | | Balance (1) | | Rate (1) | | Expense (1) | | Maturity | | Due |
| Mortgage note (one property in Chester, VA) | | $ | 48,750 |
| | 3.99 | % | | $ | 1,945 |
| | 2020 | | Monthly |
| |
(1) | The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract. In accordance with GAAP, our carrying value and recorded interest expense may differ from these amounts because of market conditions at the time we assumed this debt. |
Our $650,000 and $700,000 mortgage note requiresnotes require interest only payments until maturity. The remaining fixed rate mortgage notes require amortizing payment of principal and interest until maturity. Because our mortgage note requiresnotes require interest to be paid at a fixed rate, changes in market interest rates during the termterms of thethese mortgage notenotes will not affect our interest obligations. If thisthese mortgage note isnotes are refinanced at an interest rate which is 100 basis pointsone percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $488.
$16,608.
Changes in market interest rates would affect the fair value of our fixed rate debt obligations. Increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. The U.S. Federal Reserve has recently raised interest rates several times in an effort to combat inflation and may continue to do so. Based on the balance outstanding at March 31, 2018September 30, 2022 and discounted cash flow analysisanalyses through the maturity date, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligation, a hypothetical immediate 100 basisone percentage point change in the interest raterates would change the fair value of this obligation by approximately $1,208.$96,452.
Floating Rate Debt
At March 31, 2018,September 30, 2022, our outstanding floating rate debt consisted of $302,000the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Annual | | Annual | | | | Interest |
| | Principal | | Interest | | Interest | | | | Payments |
| Debt | | Balance (1) | | Rate (1) | | Expense (1) | | Maturity | | Due |
| ILPT Floating Rate Loan | | $ | 1,235,000 | | | 6.18 | % | | $ | 76,323 | | | 2024 | (2) | Monthly |
| Floating Rate Loan | | 1,400,000 | | | 5.62 | % | | 78,680 | | | 2024 | (3) | Monthly |
| | $ | 2,635,000 | | | | | $ | 155,003 | | | | | |
(1)The principal balance, annual interest rate and annual interest expense are the amounts stated in the applicable contract, as adjusted by our interest rate caps as applicable. In accordance with GAAP, our carrying values and recorded interest expense may differ from these amounts because of market conditions at the time we assumed or issued this debt.
(2)The ILPT Floating Rate Loan matures in October 2024, subject to three, one year extension options.
(3)The Floating Rate Loan matures in March 2024, subject to three, one year extension options.
At September 30, 2022, our aggregate floating rate debt was $2,635,000, consisting of the $1,400,000 outstanding underprincipal amount of the Floating Rate Loan secured by 82 properties owned by our revolving credit facility. Our revolving credit facilityconsolidated joint venture and the $1,235,000 outstanding principal amount of the ILPT Floating Rate Loan. The ILPT Floating Rate Loan matures on December 29, 2021 and,October 9, 2024, subject to the payment ofthree, one year extension feesoptions, and satisfaction of other conditions, we have the option to extend the maturity date for two six month periods. No principal repayments are required under our revolving credit facility prior to maturity, and prepayments may be made at any time without penalty.
Borrowings under our revolving credit facility are in U.S. dollars and requirerequires that interest to be paid at LIBORan annual rate of SOFR plus a premium that isof 3.93%. The Floating Rate Loan matures on March 9, 2024, subject to adjustment based upon changes to our leverage ratio. Accordingly, wethree, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.77%. We are vulnerable to changes in the U.S. dollar based short term rates, specifically LIBOR. SOFR. In conjunction with these borrowings, to hedge our exposure to risks related to changes in SOFR rates, we purchased interest rate caps with a SOFR strike rate equal to 2.25% for the ILPT Floating Rate Loan and 3.40% for the Floating Rate Loan.
In addition, upon renewal or refinancing of this obligation,these obligations, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit risk. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results. The following table presents the approximate impact a one percentage point increase in interest rates would have on our annual floating rate interest expense at March 31, 2018:September 30, 2022, excluding the impact of our interest rate caps:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Impact of an Increase in Interest Rates |
| | | | | | Total Interest | | Annual |
| | Interest Rate | | Outstanding | | Expense | | Earnings Per |
| | Per Year | | Debt | | Per Year | | Share Impact (1) |
| At September 30, 2022 | | 5.88 | % | | $ | 2,635,000 | | | $ | 155,003 | | | $ | 2.38 | |
| One percentage point increase | | 6.88 | % | | $ | 2,635,000 | | | $ | 181,288 | | | $ | 2.78 | |
(1)Based on the diluted weighted average common shares outstanding for the nine months ended September 30, 2022. |
| | | | | | | | | | | | | | | |
| | | Impact of an Increase in Interest Rates |
| | | | | | | Total Interest | | Annual |
| | | Interest Rate | | Outstanding | | Expense | | Earnings Per |
| | | Per Year | | Debt | | Per Year | | Share Impact (1) |
| At March 31, 2018 | | 3.23 | % | | $ | 302,000 |
| | $ | 9,755 |
| | $ | 0.16 |
|
| One percentage point increase | | 4.23 | % | | $ | 302,000 |
| | $ | 12,775 |
| | $ | 0.21 |
|
| |
(1) | Based on the diluted weighted average common shares outstanding for the three months ended March 31, 2018. |
The following table presents the approximate impact a one percentage point increase in interest rates would have on our annual floating rate interest expense at March 31, 2018 if we were fully drawn on our revolving credit facility:
|
| | | | | | | | | | | | | | | |
| | | Impact of an Increase in Interest Rates |
| | | | | | | Total Interest | | Annual |
| | | Interest Rate | | Outstanding | | Expense | | Earnings Per |
| | | Per Year | | Debt | | Per Year | | Share Impact (1) |
| At March 31, 2018 | | 3.23 | % | | $ | 750,000 |
| | $ | 24,225 |
| | $ | 0.39 |
|
| One percentage point increase | | 4.23 | % | | $ | 750,000 |
| | $ | 31,725 |
| | $ | 0.52 |
|
| |
(1) | Based on the diluted weighted average common shares outstanding for the three months ended March 31, 2018. |
The foregoing tables show the impact of an immediate increaseone percentage point change in floating interest rates. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amounts of our revolving credit facility and any other floating rate debt.debt we may incur.
Item 4. Controls andProcedures
As of the end of the period covered by this report,Quarterly Report on Form 10-Q, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Managing Trustees, our President and Chief Operating Officer and our Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2018September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
WARNING CONCERNING FORWARD LOOKING STATEMENTSWarning Concerning Forward-Looking Statements
THIS QUARTERLY REPORT ON FORMThis Quarterly Report on Form 10-Q CONTAINS STATEMENTS THAT CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OFcontains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 AND OTHER SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”and other securities laws. Also, whenever we use words such as “believe”, “EXPECT”“expect”, “ANTICIPATE”“anticipate”, “INTEND”“intend”, “PLAN”“plan”, “ESTIMATE”“estimate”, “WILL”“will”, “MAY” AND NEGATIVES OR DERIVATIVES OF THESE OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. FORWARD LOOKING STATEMENTS IN THIS REPORT RELATE TO VARIOUS ASPECTS OF OUR BUSINESS, INCLUDING:“may” and negatives or derivatives of these or similar expressions, we are making forward-looking statements. These forward-looking statements are based upon our present intent, beliefs or expectations, but forward-looking statements are not guaranteed to occur and may not occur. Forward-looking statements in this Quarterly Report on Form 10-Q relate to various aspects of our business, including:
THE LIKELIHOOD THAT OUR TENANTS WILL PAY RENT OR BE NEGATIVELY AFFECTED BY CYCLICAL ECONOMIC CONDITIONS,
THE LIKELIHOOD THAT OUR TENANTS WILL RENEW OR EXTEND THEIR LEASES OR THAT WE WILL BE ABLE TO OBTAIN REPLACEMENT TENANTS,
OUR ACQUISITIONS OF PROPERTIES,•Our ability to complete our long term financing plan for the acquisition of MNR,
OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,•Our tenants’ ability and willingness to pay their rent obligations to us,
THE LIKELIHOOD THAT OUR RENTS WILL INCREASE WHEN WE RENEW OR EXTEND OUR LEASES, WHEN WE ENTER NEW LEASES, OR WHEN OUR RENTS RESET AT OUR HAWAII PROPERTIES,•The likelihood that our tenants will renew or extend their leases or that we will be able to obtain replacement tenants on terms as favorable to us as the terms of our existing leases,
OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND TO SUSTAIN THE AMOUNT OF SUCH DISTRIBUTIONS,•Changes in global supply chain conditions,
THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,•Our belief that the industrial and logistics sector and many of our tenants are critical to sustaining a resilient supply chain and that our business will benefit as a result,
OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS,•Our acquisitions or sales of properties,
OUR ABILITY TO RAISE DEBT OR EQUITY CAPITAL,•Our ability to compete for tenancies and acquisitions effectively,
OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,•The likelihood that our rents will increase when we renew or extend our leases, when we enter new leases, or when our rents reset at our Hawaii Properties,
OUR ABILITY TO APPROPRIATELY BALANCE OUR USE OF DEBT AND EQUITY CAPITAL,•Our ability to pay distributions to our shareholders and to sustain the amount of such distributions,
CHANGES IN THE SECURITY OF CASH FLOWS FROM OUR PROPERTIES,•Our policies and plans regarding investments, financings and dispositions,
OUR CREDIT RATINGS,•Our ability to raise debt or equity capital,
OUR EXPECTATION THAT WE BENEFIT FROM OUR RELATIONSHIPS WITH•Our ability to pay interest on and principal of our debt or refinance such debt,
•Our ability to appropriately balance our use of debt and equity capital,
•Our ability to expand by selling additional equity interests in our existing, or enter into additional, real estate joint ventures or to attract co-venturers and benefit from our existing joint ventures or any real estate joint ventures we may enter into,
•Whether we may contribute additional properties to our joint ventures and receive proceeds from the other investors in our joint ventures in connection with any such contributions,
•Our ability to reduce our leverage,
•Our ability to sell properties for proceeds we target,
•The credit qualities of our tenants,
•Changes in the security of cash flows from our properties,
•Our expectations about our ability and the ability of the industrial and logistics properties real estate sector and our tenants to operate throughout the remainder of the COVID-19 pandemic and current economic conditions,
•Our ability to maintain sufficient liquidity,
•Our ability to prudently pursue, and successfully and profitably complete, expansion and renovation projects at our properties and to realize our expected returns on those projects,
•Our expectation that we benefit from our relationships with RMR, INC.,
OUR QUALIFICATION FOR TAXATION AS A•Our qualification for taxation as a REIT under the IRC,
CHANGES IN FEDERAL OR STATE TAX LAWS,
CHANGES IN REAL ESTATE AND ZONING LAWS AND REGULATIONS, AND INTERPRETATIONS OF THOSE LAWS AND REGULATIONS, APPLICABLE TO OUR PROPERTIES,•Changes in federal or state tax laws,
THE CREDIT QUALITIES OF OUR TENANTS,•Changes in environmental laws or in their interpretations or enforcement as a result of climate change or otherwise, or our incurring environmental remediation costs or other liabilities,
CHANGES IN ENVIRONMENTAL LAWS OR IN THEIR INTERPRETATIONS OR ENFORCEMENT AS A RESULT OF CLIMATE CHANGE OR OTHERWISE,•The development, redevelopment or repositioning of our properties, and
OUR SALES OF PROPERTIES, AND•Other matters.
OTHER MATTERS.Our actual results may differ materially from those contained in or implied by our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. Risks, uncertainties and other factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, FFO attributable to common shareholders, Normalized FFO attributable to common shareholders, NOI, cash flows, liquidity and prospects include, but are not limited to:
OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY OUR FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. FACTORS THAT COULD HAVE A•The impact of economic conditions, including increasing interest rates, inflation and a possible recession, and the capital markets on us and our tenants,
•Competition within the real estate industry, particularly for industrial and logistics properties in those markets in which our properties are located,
MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION,•Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,
•Limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification for taxation as a REIT for U.S. federal income tax purposes,
•Actual and potential conflicts of interest with our related parties, including our managing trustees, RMR and others affiliated with them, and
•Acts of terrorism, outbreaks of pandemics, war or other hostilities, further material or prolonged disruption to supply chains, or other manmade or natural disasters beyond our control.
For example:
•On July 14, 2022, we reduced our quarterly distribution rate to $0.01 per common share to enhance our liquidity. Our distribution rate may be set and reset from time to time by our Board of Trustees. Our Board of Trustees considers many factors when setting our distributions to shareholders, including FFO NORMALIZEDattributable to common shareholders, Normalized FFO NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:attributable to common shareholders, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our dividend yield and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations and other factors deemed relevant by our Board of Trustees in its discretion. Future distributions may remain at this level for an indefinite period or be eliminated. Further, in order to preserve liquidity, we may elect to pay distributions to our shareholders in part in a form other than cash, such as issuing additional common shares of ours to our shareholders, as permitted by the applicable tax rules,
THE IMPACT OF CONDITIONS AND CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,•If interest rates continue to increase and general real estate market conditions further deteriorate, the actions we have taken to date may not provide us with sufficient liquidity and our long term financing plan for the MNR acquisition may be further delayed, cost more than expected or not be completed, and we may not have sufficient liquidity absent taking additional action. Further, unanticipated events may require us to expend amounts not currently planned. As a result, we may need to take further action to enhance our liquidity and reduce our leverage. However, we may not be successful in executing any such action or achieving such results,
COMPETITION WITHIN THE REAL ESTATE INDUSTRY, PARTICULARLY IN THOSE MARKETS IN WHICH OUR PROPERTIES ARE LOCATED,•We may not resume paying regular quarterly dividends on our common shares at or close to historical levels as or when expected, and the reduction of our quarterly dividend on our common shares may extend for an indefinite period, particularly if our liquidity is not enhanced, our leverage is not reduced or operating results or prospects decline,
COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,•Our ability to make future distributions to our shareholders and to make payments of principal and interest on our indebtedness depends upon a number of factors, including our receipt of rent from our tenants, future earnings, the capital costs we incur to lease our properties and our working capital requirements. We may be unable to pay our
LIMITATIONS IMPOSED ON OUR BUSINESS AND OUR ABILITY TO SATISFY COMPLEX RULES IN ORDER FOR US TO QUALIFY FOR TAXATION AS A REIT FOR U.S. FEDERAL INCOME TAX PURPOSES,
ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING TRUSTEES,debt obligations or to maintain our current rate of distributions on our common shares and future distributions may be reduced or eliminated,
•Actual costs under our floating rate debt will be higher than the stated rate plus a premium because of fees and expenses associated with the applicable facility,
•Our existing, and any future, derivative contracts we are party to or may enter into may not have the intended or desired beneficial impact, and may expose us to additional risks such as counterparty credit risk and may involve additional costs and our approach to mitigate those risks may not be successful or avoid our incurring losses,
•We may incur additional debt. Additional debt leverage may limit our ability to make acquisitions, pay distributions and pursue other opportunities we may deem desirable. Further, increased leverage may increase our cost of capital,
•We may not be able to obtain replacement financing on desirable terms or otherwise when our debts mature,
•Our ability to grow our business and increase our distributions depends in large part upon our ability to acquire properties and lease them for rents, less their property operating costs, that exceed our capital costs. We may be unable to further grow our business by acquiring additional properties. We may be unable to identify properties that we want to acquire, and we may fail to reach agreement with the sellers and complete the purchases of any properties we do want to acquire. In addition, we might encounter unanticipated difficulties and expenditures relating to the properties we acquired in the MNR acquisition or other properties we may acquire in the future, and these properties may not provide us with rents less property operating costs that exceed our capital costs or achieve our expected returns,
•Contingencies in our acquisition and sale agreements may not be satisfied and any expected acquisitions and sales may not occur, may be delayed or the terms of such transactions may change,
•The sales of the former MNR properties we anticipated to sell have been delayed due to current market conditions and such sales may not occur, may be further delayed or may be at prices lower than the carrying values,
•We may experience declining rents or incur significant costs when we renew our leases with current tenants or lease our properties to new tenants or when our rents reset at our properties in Hawaii,
•Leasing for some of our properties depends on a single tenant and we may be adversely affected by the bankruptcy, insolvency, downturn of business or lease termination of a single tenant at these properties,
•Economic conditions in areas where our properties are located may decline in the future. Such circumstances or other conditions may reduce demand for leasing industrial space. If the demand for leasing industrial space is reduced, we may be unable to renew leases with our tenants as leases expire or enter new leases at rental rates as high as expiring rents and our financial results may decline,
•E-commerce retail sales may not continue to grow and increase the demand for industrial and logistics real estate as we expect,
•Increasing development of industrial and logistics properties may reduce the demand for, and rents from, our properties,
•We may not achieve or sustain our targeted capitalization rates for properties we acquire and we may incur losses with respect to those acquisitions,
•Our belief that there is a likelihood that tenants may renew or extend our leases prior to their expirations whenever they have made significant investments in the leased properties, or because those properties may be of strategic importance to them, may not be realized,
•Some of our tenants may not renew expiring leases, and we may be unable to obtain new tenants to maintain or increase the historical occupancy rates of, or rents from, our properties, and we may need to make significant expenditures to lease our properties,
•We may not be able to maintain good relations with, and continue to be responsive to the needs of, our significant and other tenants,
•The competitive advantages we believe we have may not in fact exist or provide us with the advantages we expect. We may fail to maintain any of these advantages or our competition may obtain or increase their competitive advantages relative to us,
•We intend to conduct our business activities in a manner that will afford us reasonable access to capital for investing and financing activities. However, we may not succeed in this regard and we may not have reasonable access to capital,
•Any existing or possible development, redevelopment or repositioning of our properties may not be successful and may cost more or take longer to complete than we currently expect or than we expected when the project commenced. In addition, we may not realize the returns we expect from these projects and we may incur losses from these projects,
•It is difficult to accurately estimate leasing related obligations and costs of development and tenant improvement costs. Our leasing related obligations, development projects and tenant improvements may cost more and may take longer to complete than we currently expect or than we expected when the project commenced, and we may incur increasing amounts for these and similar purposes in the future,
•We may spend more for capital expenditures than we currently expect and we expect to spend more than we have in the past,
•Our existing joint ventures and any additional joint ventures we may enter into in the future may not be successful, and we may not be able to sell any additional equity interests in our existing joint ventures at expected prices or at all,
•The business and property management agreements between us and RMR LLC,have continuing 20 year terms. However, those agreements permit early termination in certain circumstances. Accordingly, we cannot be sure that these agreements will remain in effect for continuing 20 year terms,
•We expect that we will benefit from RMR’s Environmental, Social and Governance, or ESG, program and initiatives. However, we may incur extensive costs and may not realize the benefits we expect from such program and initiatives and we or RMR INC.may not succeed in meeting existing or future standards, or investors’ expectations, regarding ESG, and
•We believe that our relationships with our related parties, including RMR, RMR Inc. and others affiliated with them may benefit us and provide us with competitive advantages in operating and growing our business. However, the advantages we believe we may realize from these relationships may not materialize.
Currently unexpected results could occur due to many different circumstances, some of which are beyond our control, such as acts of terrorism, war or other hostilities, pandemics, natural disasters, climate change and climate related events, changes in our tenants’ financial conditions, the market demand for leased space, economic conditions, including interest rates, high inflation and a possible recession or other changes in capital markets or the economy generally.
The information contained elsewhere in this Quarterly Report on Form 10-Q and in our 2021 Annual Report or in our other filings with the SEC, including under the caption “Risk Factors”, SIR, AFFILIATES INSURANCE COMPANY, OR AIC, AND OTHERS AFFILIATED WITH THEM, ANDor incorporated herein or therein, identifies other important factors that could cause differences from our forward-looking statements. Our filings with the SEC are available on the SEC’s website at www.sec.gov.
ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.You should not place undue reliance upon our forward-looking statements.
FOR EXAMPLE:Except as required by law, we do not intend to update or change any forward-looking statements as a result of new information, future events or otherwise.
OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS TO OUR SHAREHOLDERS AND TO MAKE PAYMENTS OF PRINCIPAL AND INTEREST ON OUR INDEBTEDNESS DEPENDS UPON A NUMBER OF FACTORS, INCLUDING OUR FUTURE EARNINGS, THE CAPITAL COSTS WE INCUR TO LEASE OUR PROPERTIES AND OUR WORKING CAPITAL REQUIREMENTS. WE MAY BE UNABLE TO PAY OUR DEBT OBLIGATIONS OR TO MAKE OR SUSTAIN DISTRIBUTIONS ON OUR COMMON SHARES AND FUTURE DISTRIBUTIONS MAY BE REDUCED OR ELIMINATED,
OUR ABILITY TO GROW OUR BUSINESS AND INCREASE OUR DISTRIBUTIONS DEPENDS IN LARGE PART UPON OUR ABILITY TO BUY PROPERTIES AND LEASE THEM FOR RENTS, LESS THEIR PROPERTY OPERATING COSTS, THAT EXCEED OUR CAPITAL COSTS. WE MAY BE UNABLE TO IDENTIFY PROPERTIES THAT WE WANT TO ACQUIRE OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES, ACQUISITION FINANCING OR LEASE TERMS FOR NEW PROPERTIES,Statement Concerning Limited Liability
CONTINGENCIES IN OUR ACQUISITION AND SALE AGREEMENTS MAY NOT BE SATISFIED AND ANY EXPECTED ACQUISITIONS AND SALES MAY NOT OCCUR, MAY BE DELAYED OR THE TERMS OF SUCH TRANSACTIONS MAY CHANGE,
RENTS THAT WE CAN CHARGE AT OUR PROPERTIES MAY DECLINE BECAUSE OF CHANGING MARKET CONDITIONS OR OTHERWISE,
MOST OF OUR HAWAII PROPERTIES ARE LANDS LEASED FOR RENTS THAT ARE PERIODICALLY RESET BASED ON THEN CURRENT FAIR MARKET VALUES. REVENUES FROM OUR PROPERTIES IN HAWAII HAVE GENERALLY INCREASED DURING OUR AND OUR PREDECESSORS’ OWNERSHIP AS THE LEASES FOR THOSE PROPERTIES HAVE BEEN RESET OR RENEWED. ALTHOUGH WE EXPECT THAT RENTS FOR OUR HAWAII PROPERTIES WILL INCREASE IN THE FUTURE, WE CANNOT BE SURE THEY WILL. FUTURE RENTS FROM THESE PROPERTIES COULD DECREASE OR NOT INCREASE TO THE EXTENT THEY HAVE IN THE PAST,
OUR POSSIBLE REDEVELOPMENT OF CERTAIN OF OUR PROPERTIES MAY NOT BE REALIZED OR BE SUCCESSFUL,
OUR LEASING RELATED OBLIGATIONS MAY COST MORE OR LESS AND MAY TAKE LONGER TO COMPLETE THAN WE EXPECT, AND OUR LEASING RELATED OBLIGATIONS MAY INCREASE IN THE FUTURE,
THE UNEMPLOYMENT RATE OR ECONOMIC CONDITIONS IN AREAS WHERE OUR PROPERTIES ARE LOCATED MAY BECOME WORSE IN THE FUTURE. SUCH CIRCUMSTANCES OR OTHER CONDITIONS MAY REDUCE DEMAND FOR LEASING INDUSTRIAL SPACE. IF THE DEMAND FOR LEASING INDUSTRIAL SPACE IS REDUCED, WE MAY BE UNABLE TO RENEW LEASES WITH OUR TENANTS AS LEASES EXPIRE OR ENTER INTO NEW LEASES AT RENTAL RATES AS HIGH AS EXPIRING RENTS AND OUR FINANCIAL RESULTS MAY DECLINE,
E-COMMERCE RETAIL SALES MAY NOT CONTINUE TO GROW AND INCREASE THE DEMAND FOR INDUSTRIAL AND LOGISTICS REAL ESTATE AS WE EXPECT,
INCREASING DEVELOPMENT OF INDUSTRIAL AND LOGISTICS PROPERTIES MAY REDUCE THE DEMAND FOR, AND OUR RENTS FROM, OUR PROPERTIES,
OUR BELIEF THAT THERE IS A LIKELIHOOD THAT TENANTS MAY RENEW OR EXTEND OUR LEASES WHEN THEY EXPIRE WHENEVER THEY HAVE MADE SIGNIFICANT INVESTMENTS IN THE LEASED PROPERTIES, OR BECAUSE THOSE PROPERTIES MAY BE OF STRATEGIC IMPORTANCE TO THEM, MAY NOT BE REALIZED,
SOME OF OUR TENANTS MAY NOT RENEW EXPIRING LEASES, AND WE MAY BE UNABLE TO OBTAIN NEW TENANTS TO MAINTAIN OR INCREASE THE HISTORICAL OCCUPANCY RATES OF, OR RENTS FROM, OUR PROPERTIES,
THE COMPETITIVE ADVANTAGES WE BELIEVE WE HAVE MAY NOT IN FACT PROVIDE US WITH THE ADVANTAGES WE EXPECT. WE MAY FAIL TO MAINTAIN THESE ADVANTAGES OR OUR COMPETITION MAY OBTAIN OR INCREASE THEIR COMPETITIVE ADVANTAGES RELATIVE TO US,
OUR INCREASED OPERATING EXPENSES AS A PUBLIC COMPANY MAY BE GREATER THAN WE EXPECT,
WE INTEND TO CONDUCT OUR BUSINESS ACTIVITIES IN A MANNER THAT WILL AFFORD US REASONABLE ACCESS TO CAPITAL FOR INVESTMENT AND FINANCING ACTIVITIES. HOWEVER, WE MAY NOT SUCCEED IN THIS REGARD AND WE MAY NOT HAVE REASONABLE ACCESS TO CAPITAL,
CONTINUED AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR SATISFYING CERTAIN FINANCIAL COVENANTS AND OTHER CREDIT FACILITY CONDITIONS THAT WE MAY BE UNABLE TO SATISFY,
ACTUAL COSTS UNDER OUR REVOLVING CREDIT FACILITY WILL BE HIGHER THAN LIBOR PLUS A PREMIUM BECAUSE OF FEES AND EXPENSES ASSOCIATED WITH SUCH DEBT,
WE MAY BE UNABLE TO REPAY OUR DEBT OBLIGATIONS WHEN THEY BECOME DUE,
THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY MAY BE INCREASED TO UP TO $1.5 BILLION IN CERTAIN CIRCUMSTANCES; HOWEVER, INCREASING THE MAXIMUM BORROWING AVAILABILITY UNDER OUR REVOLVING CREDIT FACILITY IS SUBJECT TO OUR OBTAINING ADDITIONAL COMMITMENTS FROM LENDERS, WHICH MAY NOT OCCUR,
WE HAVE THE OPTION TO EXTEND THE MATURITY DATE OF OUR REVOLVING CREDIT FACILITY UPON PAYMENT OF A FEE AND MEETING OTHER CONDITIONS. HOWEVER, THE APPLICABLE CONDITIONS MAY NOT BE MET,
OUR RIGHT TO ELECT TO HAVE INTEREST PAYABLE UNDER OUR REVOLVING CREDIT FACILITY CALCULATED AS LIBOR PLUS A PREMIUM BASED ON OUR CREDIT RATING IS SUBJECT TO OUR OBTAINING AN INVESTMENT GRADE CREDIT RATING, WHICH WE MAY NOT OBTAIN,
THE BUSINESS AND PROPERTY MANAGEMENT AGREEMENTS BETWEEN US AND RMR LLC HAVE CONTINUING 20 YEAR TERMS. HOWEVER, THOSE AGREEMENTS PERMIT EARLY TERMINATION IN CERTAIN CIRCUMSTANCES. ACCORDINGLY, WE CANNOT BE SURE THAT THESE AGREEMENTS WILL REMAIN IN EFFECT FOR CONTINUING 20 YEAR TERMS,
WE BELIEVE THAT OUR RELATIONSHIPS WITH OUR RELATED PARTIES, INCLUDING RMR LLC, RMR INC., SIR, AIC AND OTHERS AFFILIATED WITH THEM MAY BENEFIT US AND PROVIDE US WITH COMPETITIVE ADVANTAGES IN OPERATING AND GROWING OUR BUSINESS. HOWEVER, THE ADVANTAGES WE BELIEVE WE MAY REALIZE FROM THESE RELATIONSHIPS MAY NOT MATERIALIZE, AND
THE PREMIUMS USED TO DETERMINE THE INTEREST RATE PAYABLE ON OUR REVOLVING CREDIT FACILITY AND THE UNUSED FEE PAYABLE ON OUR REVOLVING CREDIT FACILITY ARE BASED ON OUR LEVERAGE. FUTURE CHANGES IN OUR LEVERAGE MAY CAUSE THE INTEREST AND FEES WE PAY TO INCREASE.
CURRENTLY UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH ARE BEYOND OUR CONTROL, SUCH AS ACTS OF TERRORISM, NATURAL DISASTERS, CHANGES IN OUR TENANTS’ FINANCIAL CONDITIONS, THE MARKET DEMAND FOR LEASED SPACE OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY.
THE INFORMATION CONTAINED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND IN OUR ANNUAL REPORT OR IN OUR OTHER FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS”, OR INCORPORATED HEREIN OR THEREIN, IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM OUR FORWARD LOOKING STATEMENTS. OUR FILINGS WITH THE SEC ARE AVAILABLE ON THE SEC’S WEBSITE AT WWW.SEC.GOV.
YOU SHOULD NOT PLACE UNDUE RELIANCE UPON OUR FORWARD LOOKING STATEMENTS.
EXCEPT AS REQUIRED BY LAW, WE DO NOT INTEND TO UPDATE OR CHANGE ANY FORWARD LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
STATEMENT CONCERNING LIMITED LIABILITY
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING INDUSTRIAL LOGISTICS PROPERTIES TRUST, DATED JANUARYThe Amended and Restated Declaration of Trust establishing Industrial Logistics Properties Trust, dated January 11, 2018, AS FILED WITH THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF INDUSTRIAL LOGISTICS PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, INDUSTRIAL LOGISTICS PROPERTIES TRUST. ALL PERSONS DEALING WITH INDUSTRIAL LOGISTICS PROPERTIES TRUST IN ANY WAY SHALL LOOK ONLY TO THE ASSETS OF INDUSTRIAL LOGISTICS PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.as amended, as filed with the State Department of Assessments and Taxation of Maryland, provides that no trustee, officer, shareholder, employee or agent of Industrial Logistics Properties Trust shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, Industrial Logistics Properties Trust. All persons dealing with Industrial Logistics Properties Trust in any way shall look only to the assets of Industrial Logistics Properties Trust for the payment of any sum or the performance of any obligation.
PART II.Other Information
Item 1A. Risk Factors
There have been no material changes to the risk factors from those we previously disclosedprovided in our 2021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities. The following table provides information about our purchases of our equity securities during the quarter ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Maximum |
| | | | | | Total Number of | | Approximate Dollar |
| | | | | | Shares Purchased | | Value of Shares that |
| | Number of | | Average | | as Part of Publicly | | May Yet Be Purchased |
| | Shares | | Price Paid | | Announced Plans | | Under the Plans or |
| Calendar Month | | Purchased (1) | | per Share | | or Programs | | Programs |
| September 2022 | | 31,455 | | | $ | 7.40 | | | — | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| Total | | 31,455 | | | $ | 7.40 | | | — | | | $ | — | |
(1) These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of our officers and certain other current and former officers and employees of RMR in connection with awards of our common shares and the vesting of those and prior awards of common shares to them. We withheld and purchased these common shares at their fair market value based upon the trading price of our common shares at the close of trading on Nasdaq on the purchase dates.
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Exhibit Number | | Description |
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| 3.1 | | |
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| 3.2 | |
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3.2 | 4.1 | |
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4.1 | | |
| | |
4.2 | 10.1 | Registration RightsLoan Agreement, dated January 17, 2018, betweenas of September 22, 2022, among certain subsidiaries of the Company, Citi Real Estate Funding Inc., UBS AG New York (1285 Avenue of the Americas) Branch, Bank of America, N.A., Bank of Montreal and Select Income REIT.Morgan Stanley Mortgage Capital Holdings LLC. (Incorporated by reference to the Company'sCompany’s Current Report on Form 8-K dated January 11, 2018).filed on September 26, 2022.) |
| 10.2 | | Mezzanine Loan Agreement, dated as of September 22, 2022, among certain subsidiaries of the Company, Citigroup Global Markets Realty Corp., UBS AG New York (1285 Avenue of the Americas) Branch, Bank of America, N.A., Bank of Montreal, and Morgan Stanley Mortgage Capital Holdings LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 26, 2022.) |
31.1 | 10.3 | |
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| 31.1 | |
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| 31.2 | | |
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32.1 | 31.3 | |
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| 31.4 | |
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| 32.1 | |
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101.1 | |
| 101.INS | The following materials fromXBRL Instance Document - the Company’s Quarterly Report on Form 10-Q forinstance document does not appear in the quarter ended March 31, 2018 formatted inInteractive Data File because its XBRL (eXtensible Business Reporting Language): (i)tags are embedded within the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes to these financial statements, tagged as blocks of text and in detail.Inline XBRL document. |
| |
| 101.SCH | XBRL Taxonomy Extension Schema Document. (Filed herewith.) |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
| |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.) |
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| 104 | Cover Page Interactive Data File. (Formatted as Inline XBRL and contained in Exhibit 101.) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| INDUSTRIAL LOGISTICS PROPERTIES TRUST |
| | |
| | |
| By: | /s/ Yael Duffy |
| | Yael Duffy |
| | President and Chief Operating Officer |
| | Dated: October 25, 2022 |
| | |
| | |
| By: | /s/ Brian E. Donley |
| | Brian E. Donley |
| | Chief Financial Officer and Treasurer |
| | |
| INDUSTRIAL LOGISTICS PROPERTIES TRUST |
| | |
| | |
| By: | /s/ John C. Popeo |
| | John C. Popeo |
| | President and Chief Operating Officer |
| | Dated: April 27, 2018 |
| | |
| | |
| By: | /s/ Richard W. Siedel, Jr. |
| | Richard W. Siedel, Jr. |
| | Chief Financial Officer and Treasurer |
| | (principal financial officer and principal accounting officer) |
| | Dated: April 27, 2018October 25, 2022 |