Note 1. Organization and Basis of Presentation
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, 2017,2022, or our 2022 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 of the significant changes resulting from our IPO on January 17, 2018, the financial results reported may not be indicative of our expected future results. For periods prior to January 17, 2018, our historical operating information and financial position have been derived from the financial statements of SIR.
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 assessmentsassessment of the carrying valuesimpairment of real estate and impairments of long lived assets.related intangibles.
Note 2. Recent Accounting Pronouncements
We operate in one business segment: ownership and leasing of properties that include industrial and logistics buildings and leased industrial lands. For
Note 5. Fair Value of Assets and Liabilities
Note 6. Shareholders’ Equity
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in Capital Adjustments:thousands, except per share data)
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 incomeloss 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, we will monitor future interpretationsearnings, are considered when calculating diluted earnings per share. The calculation of such amendmentsbasic and diluted earnings per share is as they develop, and accordingly, our estimates and disclosures may change.follows:
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | 2023 | | 2022 | | | | |
| Numerators: | | | | | | | | |
| Net loss attributable to common shareholders | | $ | (24,809) | | | $ | (6,514) | | | | | |
| Loss attributable to unvested participating securities | | 3 | | | — | | | | | |
| Net loss attributable to common shareholder used in calculating earnings per share | | $ | (24,806) | | | $ | (6,514) | | | | | |
| | | | | | | | |
| Denominators: | | | | | | | | |
| Weighted average common shares for basic earnings per share | | 65,309 | | | 65,212 | | | | | |
| Effect of dilutive securities: unvested share awards | | — | | | — | | | | | |
Weighted average common shares for diluted earnings per share (1) | | 65,309 | | | 65,212 | | | | | |
| | | | | | | | |
| Net loss attributable to common shareholders per common share - basic and diluted | | $ | (0.38) | | | $ | (0.10) | | | | | |
| | | | | | | | |
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. (1)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 costs2023 and estimated incentive management fees payable by SIR allocated to us2022, 257 and 18 unvested common shares, respectively, 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 and for the three months ended March 31, 2017 were $230 and $1,030, respectively. These amounts arenot included in other operating expenses orthe calculation of diluted earnings per share because doing 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$5,726 and $4,399 for the period from January 17, 2018 throughthree months ended March 31, 2018. This2023 and 2022, respectively. Based on our common share total return, as defined in our business management agreement, as of March 31, 2023 and 2022, no incentive fees are included in the net business management fees we recognized for the three months ended March 31, 2023 or 2022. The actual amount is includedof annual incentive fees for 2023, if any, will be based on our common share total return, as defined in our business management agreement, for the three-year period ending December 31, 2023, and will be payable in January 2024. We did not incur any incentive fee payable to RMR for the year ended December 31, 2022. 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 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.
Pursuant to our property management agreement with RMR, LLC, we recognized aggregate property management and construction supervision fees of $967$3,452 and $2,763 for the period from January 17, 2018 throughthree months ended March 31, 2018. This amount is included in2023 and 2022, respectively. Of these amounts, for the three months ended March 31, 2023 and 2022, $3,319 and $2,098, respectively, were expensed to other operating expenses or has been capitalized, as appropriate, in our condensed consolidated financial statements.
statements and $133 and $31, 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
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
incurred by RMR LLC, are generally incorporated into rents charged to our tenants.RMR. We reimbursed RMR LLC $542$1,841 and $1,604 for property management relatedthese expenses and costs for the period from January 17, 2018 throughthree months ended March 31, 2018, which amount is2023 and 2022, 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, weincome (loss).
Management Agreements Between Our Joint Ventures and RMR. We have two separate joint venture arrangements, our consolidated joint venture and the unconsolidated joint venture. See Notes 2, 4, 5, 9 and 10 for further information about these joint ventures.
RMR provides management services to both of these joint ventures. We are responsible fornot obligated to pay management fees to RMR under our share ofmanagement agreements with 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 generalservices it provides to the unconsolidated joint venture. We are obligated to pay management fees to RMR under our management agreements with RMR for the services it provides regarding our consolidated joint venture; however, that joint venture pays management fees directly to RMR, and administrative expenses inany such fees paid by our condensed consolidated statements of comprehensive income.
joint venture are credited against the fees payable by us to RMR.
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 D. Portnoy, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., the 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 P. Jordan, our other Managing Trustee, is an executive vice president and the chief financial officer and treasurer of RMR Inc., an officer and employee of RMR and an officer of ABP Trust. John G. 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 current 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 D. 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 officers, serve as managing trustees, managing directors or officers of certain of these companies.
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.
SIR. SIR is our largest shareholder. As of March 31, 2018, SIR owned 45,000,000 of our common shares, or approximately 69.2% of our outstanding common shares. Joint Ventures. 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 as the chief financial officer and treasurer of SIR.have two separate joint venture arrangements. RMR LLC provides management services to SIReach of these joint ventures. See Notes 2, 4, 5, 8 and us. In connection with our IPO, we entered a transaction agreement with SIR that governs our separation from and relationship with SIR. The transaction agreement provides that, among other things, (1) our current assets and current liabilities, as of the time of closing of our IPO, were settled so that SIR retained all pre-closing current assets 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 910 for further information regarding our IPOjoint ventures and RMR’s management agreements with our joint ventures. As of December 31, 2022 and March 31, 2023, we owed $616 and $640, respectively, to the unconsolidated joint venture for rents that we collected on behalf of that joint venture. These amounts are presented as due to related persons in our condensed consolidated balance sheet. We paid these amounts in January 2023 and April 2023, respectively.
For further information about these and other such relationships and certain other related person transactions, see our 2022 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
INDUSTRIAL LOGISTICS PROPERTIES TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, except per share data)
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 Accounting Standards Codification 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 March 31, 2023:
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| Interest Rate Derivative | | Balance Sheet Line Item | | Underlying Instrument | | Number of Instruments | | Strike Rate | | Notional Amount | | Fair Value at March 31, 2023 |
| Interest Rate Cap | | Other assets | | Floating Rate Loan (1) | | 1 | | 3.40% | | $ | 1,400,000 | | | $ | 18,386 | |
| Interest Rate Cap | | Other assets | | ILPT Floating Rate Loan | | 2 | | 2.25% | | $ | 1,235,000 | | | $ | 39,829 | |
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(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 (loss) 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.
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| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| | | | |
| Amount of (loss) gain recognized in cumulative other comprehensive income (loss) | | $ | (3,776) | | | $ | 5,375 | |
| Amount reclassified from cumulative other comprehensive income (loss) into interest expense | | (5,002) | | | 257 | |
| | | | |
| Unrealized (loss) gain on derivative instrument recognized in cumulative other comprehensive (loss) income, net | | $ | (8,778) | | | $ | 5,632 | |
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 2022 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 2662023, our portfolio was comprised of 413 consolidated properties withcontaining approximately 28.5 million59,983,000 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 million43,254,000 rentable square feet located in 2438 other states. As of March 31, 2018,2023, our 413 consolidated properties included 94 properties that we own in a consolidated joint venture in which we own a 61% equity interest, and our consolidated properties were approximately 99.9%98.7% leased (based on rentable square feet) to 243300 different tenants with a weighted average remaining lease term (by annualized rental revenues) of approximately 8.4 years. As of March 31, 2023, we also owned a 22% equity interest in an unconsolidated joint venture, which owns 18 properties located in 12 states in the mainland United States containing approximately 11,726,000 rentable square feet that were 99% leased with an average remaining lease term (based on annualized rental revenues) of approximately 11.25.4 years. We define the term annualized rental revenues as used in this sectionQuarterly Report on Form 10-Q as the annualized contractual rents as of March 31, 2018,2023, 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.
Inflationary pressures and rising interest rates in the United States and globally have given rise to increasing concerns that the U.S. economy may soon enter an economic recession and they have caused disruptions in the financial markets. These conditions have increased our cost of capital and negatively impacted our ability to reduce our leverage. 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 or willingness 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, may impact our ability to sell properties 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, 20182023 and 2017 is2022 were as follows (square feet in thousands):
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| | All Properties | | Comparable Properties (1) |
| | As of March 31, | | As of March 31, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Total properties | | 413 | | | 412 | | | 287 | | | 287 | |
Total rentable square feet (in thousands) (2) | | 59,983 | | | 59,736 | | | 34,012 | | | 33,991 | |
Percent leased (3) | | 98.7 | % | | 98.9 | % | | 99.0 | % | | 99.3 | % |
(1)Consists of properties that we owned continuously since January 1, 2022. |
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| | | 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 | % |
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(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. |
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(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. |
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(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. |
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(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 March 31, 2023, 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 months ended March 31, 20182023 and 2017 are2022 were as follows:
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| | | | | | Three Months Ended March 31, | | |
Average effective rental rates per square foot leased: (1) | | | | | | 2023 | | 2022 | | | | |
| All properties | | | | | | $ | 7.46 | | | $ | 6.56 | | | | | |
Comparable properties (2) | | | | | | $ | 6.73 | | | $ | 6.23 | | | | | |
(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 January 1, 2022.
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| | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2018 | | 2017 |
Average effective rental rates per square foot leased (1) | | $ | 5.69 |
| | $ | 5.58 |
|
| |
(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. |
During the three months ended March 31, 2018,2023, we entered lease renewalsinto new and newrenewal leases as summarized in the following tables: | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| New Leases | | Renewals | | Totals |
| Square feet leased during the period (in thousands) | 36 | | | 1,107 | | | 1,143 | |
| Weighted average rental rate change (by rentable square feet) | 51.4 | % | | 13.9 | % | | 15.1 | % |
| Weighted average lease term by square feet (years) | 18.0 | | | 8.6 | | | 8.9 | |
Total leasing costs and concession commitments (1) | $ | 160 | | | $ | 1,777 | | | $ | 1,937 | |
Total leasing costs and concession commitments per square foot (1) | $ | 4.44 | | | $ | 1.60 | | | $ | 1.69 | |
Total leasing costs and concession commitments per square foot per year (1) | $ | 0.25 | | | $ | 0.19 | | | $ | 0.19 | |
(1)Includes commitments made for approximately 296,000 square feet at weighted average (per square foot) rental rates that were approximately 45.9% higher than prior rates for the same land area or building area (with leasing rate increases for vacant space based upon the most recent rental rate for the same space). Consolidated portfolio occupancy increased from 99.6%expenditures and concessions, such as of March 31, 2017 to 99.9% as of March 31, 2018. Commitments forleasing commissions, tenant improvements leasing costs and concessions for leases entered during the three months ended March 31, 2018 totaled $68,000, or $0.01 per square foot per year of the new weighted average lease term.other tenant inducements.
As shown in the table below, approximately 1.1%2.8% of our total rentedleased square feet and approximately 0.8%2.9% of our total annualized rental revenues as of March 31, 20182023 are included in leases scheduled to expire by December 31, 2018.2023. As of March 31, 2018,2023, our lease expirations by year arewere as follows (dollars and square feet in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | % of Total | | Cumulative |
| | | | | | % of Total | | Cumulative % | | Annualized | | Annualized | | % of Total |
| | | | Leased | | Leased | | of Total | | 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 |
| 4/1/2023-12/31/2023 | | 27 | | | 1,678 | | | 2.8 | % | | 2.8 | % | | $ | 12,231 | | | 2.9 | % | | 2.9 | % |
| 2024 | | 47 | | | 6,758 | | | 11.4 | % | | 14.2 | % | | 34,041 | | | 8.1 | % | | 11.0 | % |
| 2025 | | 35 | | | 4,802 | | | 8.1 | % | | 22.3 | % | | 27,999 | | | 6.6 | % | | 17.6 | % |
| 2026 | | 25 | | | 3,851 | | | 6.5 | % | | 28.8 | % | | 25,608 | | | 6.1 | % | | 23.7 | % |
| 2027 | | 38 | | | 8,841 | | | 14.9 | % | | 43.7 | % | | 53,593 | | | 12.7 | % | | 36.4 | % |
| 2028 | | 32 | | | 5,489 | | | 9.3 | % | | 53.0 | % | | 39,325 | | | 9.3 | % | | 45.7 | % |
| 2029 | | 16 | | | 3,428 | | | 5.8 | % | | 58.8 | % | | 17,018 | | | 4.0 | % | | 49.7 | % |
| 2030 | | 15 | | | 2,334 | | | 3.9 | % | | 62.7 | % | | 19,582 | | | 4.6 | % | | 54.3 | % |
| 2031 | | 17 | | | 3,265 | | | 5.5 | % | | 68.2 | % | | 25,366 | | | 6.0 | % | | 60.3 | % |
| 2032 | | 37 | | | 3,615 | | | 6.1 | % | | 74.3 | % | | 35,200 | | | 8.3 | % | | 68.6 | % |
| Thereafter | | 105 | | | 15,132 | | | 25.7 | % | | 100.0 | % | | 132,443 | | | 31.4 | % | | 100.0 | % |
| Total | | 394 | | | 59,193 | | | 100.0 | % | | | | $ | 422,406 | | | 100.0 | % | | |
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| Weighted average remaining lease term (in years) | 7.3 | | | | | | | 8.4 | | | | | |
(1)Leased square feet is pursuant to existing leases as of March 31, 2023 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 | % | | |
| | | | | | | | | | | | | | | |
| Weighted average remaining lease term (in years): | | 10.3 |
| | | | | | 11.2 |
| | | | |
| |
(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 in advance. As of March 31, 2018, tenants representing 1% or more2023, subsidiaries of FedEx and subsidiaries of Amazon leased 22.1% and 7.7% of our total leased square feet, respectively, and represented 30.1% and 6.9% of our total annualized rental revenues, were as follows (square feet in thousands):respectively.
|
| | | | | | | | | | | | |
| | | | | | | | | % 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 | % |
| |
(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. |
Mainland Properties.As of March 31, 2023, our Mainland Properties represented approximately 72.2% 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 March 31, 2023, our Hawaii Properties represented approximately 27.8% of our annualized rental revenues as of March 31, 2018 were derived from our Hawaii Properties.revenues. As of March 31, 2018, a significant portion2023, 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, 20182023 scheduled to reset at our Hawaii Properties:
Scheduled Rent Resets at Hawaii Properties
(dollars in thousands)
| | | | | | | | |
| | Annualized |
| | Rental Revenues |
| | as of March 31, 2023 |
| | Scheduled to Reset |
| | |
| 4/1/2023-12/31/2023 | | $ | 1,824 | |
| 2024 | | 1,273 | |
| 2025 | | 831 | |
| 2026 | | 1,307 | |
| 2027 | | 781 | |
| 2028 and thereafter | | 17,202 | |
| Total | | $ | 23,218 | |
|
| | | | |
| | | 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 |
|
Since the leases at certainAs of March 31, 2023, $12,231, or 4.6%, of our Hawaii Properties were originally entered,annualized rental revenues are included in leases scheduled to expire by March 31, 2024 and 1.3% 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 vicinitydebt securities 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 Propertiesexisting tenants whose debt securities are currently experiencing strong demand for their current uses, we do not currently expect redevelopment efforts in Hawaii to becomerated by a major activity of ours in the foreseeable future; however, we may undertake such activities on a selective basis.nationally recognized credit rating agency.
InvestmentInvesting Activities
Our strategy related toIn March 2023, we received gross proceeds of $270 and recorded a $974 net loss on sale of real estate as a result of a partial eminent domain taking at a 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.
Everett, Washington.
For further information regarding our investmentinvesting activities, see Note 32 to the Notes toour 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 20,000,000 of our common shares for net proceeds of $444,309, after deducting the underwriting discounts and commissions and expenses. Upon the completion of our IPO, our secured revolving credit facility converted into a four year unsecured revolving credit facility, and we used substantially all of the net proceeds from our IPO to reduce amounts outstanding under our revolving credit facility. We also reimbursed SIR for costs that it incurred in connection with our formation and the preparation for our IPO.
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 InvestmentInvesting and Financing Liquidity and Resources” of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2018,2023, Compared to Three Months Ended March 31, 20172022 (dollars and share amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Comparable Properties Results (1) | | Non-Comparable Properties Results (2) | | Consolidated Results | | | |
| Three Months Ended March 31, | | Three Months Ended March 31, | | Three Months Ended March 31, | | | |
| | | | | $ | | % | | | | | | $ | | | | | | $ | | % | | | |
| 2023 | | 2022 | | Change | | Change | | 2023 | | 2022 | | Change | | 2023 | | 2022 | | Change | | Change | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Rental income | $ | 56,563 | | | $ | 52,570 | | | $ | 3,993 | | | 7.6% | | $ | 53,695 | | | $ | 18,805 | | | $ | 34,890 | | | $ | 110,258 | | | $ | 71,375 | | | $ | 38,883 | | | 54.5% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate taxes | 7,800 | | | 7,271 | | | 529 | | | 7.3% | | 8,667 | | | 2,165 | | | 6,502 | | | 16,467 | | | 9,436 | | | 7,031 | | | 74.5% | | | |
| Other operating expenses | 5,263 | | | 4,960 | | | 303 | | | 6.1% | | 4,055 | | | 1,812 | | | 2,243 | | | 9,318 | | | 6,772 | | | 2,546 | | | 37.6% | | | |
| Total operating expenses | 13,063 | | | 12,231 | | | 832 | | | 6.8% | | 12,722 | | | 3,977 | | | 8,745 | | | 25,785 | | | 16,208 | | | 9,577 | | | 59.1% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net operating income (3) | $ | 43,500 | | | $ | 40,339 | | | $ | 3,161 | | | 7.8% | | $ | 40,973 | | | $ | 14,828 | | | $ | 26,145 | | | 84,473 | | | 55,167 | | | 29,306 | | | 53.1% | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Other expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization | 45,457 | | | 22,878 | | | 22,579 | | | 98.7% | | | |
| General and administrative | 7,907 | | | 6,077 | | | 1,830 | | | 30.1% | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total other expenses | 53,364 | | | 28,955 | | | 24,409 | | | 84.3% | | | |
| Interest and other income | 1,146 | | | 478 | | | 668 | | | 139.7% | | | |
| Interest expense | (70,771) | | | (40,999) | | | (29,772) | | | 72.6% | | | |
| Loss on sale of real estate | (974) | | | — | | | (974) | | | —% | | | |
| Realized gain on sale of equity securities | — | | | 1,232 | | | (1,232) | | | (100.0)% | | | |
| Unrealized gain on equity securities | — | | | 2,460 | | | (2,460) | | | (100.0)% | | | |
| | | | | | | | | | |
| Loss on early extinguishment of debt | — | | | (828) | | | 828 | | | (100.0)% | | | |
| Loss before income tax expense and equity in earnings of unconsolidated joint venture | (39,490) | | | (11,445) | | | (28,045) | | | 245.0% | | | |
| Income tax expense | (17) | | | (69) | | | 52 | | | (75.4)% | | | |
| Equity in earnings of unconsolidated joint venture | 3,961 | | | 1,727 | | | 2,234 | | | 129.4% | | | |
| Net loss | (35,546) | | | (9,787) | | | (25,759) | | | N/M | | | |
| Net loss attributable to noncontrolling interest | 10,737 | | | 3,273 | | | 7,464 | | | 228.0% | | | |
| Net loss attributable to common shareholders | $ | (24,809) | | | $ | (6,514) | | | $ | (18,295) | | | N/M | | | |
| | | | | | | | | | |
| Weighted average common shares outstanding - basic and diluted | 65,309 | | | 65,212 | | | 97 | | | 0.1% | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Per common share data (basic and diluted): | | | | | | | | | | |
| Net loss attributable to common shareholders | $ | (0.38) | | | $ | (0.10) | | | $ | (0.28) | | | N/M | | | |
|
| | | | | | | | | | | | | | | |
| | | 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 | % |
| | | | | | | | | |
| 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 | % |
| | | | | | | | | |
Net operating income (1) | | 32,475 |
| | 32,369 |
| | 106 |
| | 0.3 | % |
| | | | | | | | | |
| 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 | )% |
| | | | | | | | | |
| Weighted average common shares outstanding - basic and diluted | | 61,445 |
| | 45,000 |
| | 16,445 |
| | 36.5 | % |
| | | | | | | | | |
| Net income per common share - basic and diluted | | $ | 0.31 |
| | $ | 0.45 |
| | $ | (0.14 | ) | | (31.1 | )% |
| | | | | |
Reconciliation of Net Income to Net Operating Income (1): | | |
| Net income | $ | 19,232 |
| | $ | 20,356 |
| | | | |
| Income tax expense | 7 |
| | 11 |
| | | | |
| Income before income tax expense | 19,239 |
| | 20,367 |
| | | | |
| Interest expense | 3,802 |
| | 555 |
| | | | |
| Interest income | (13 | ) | | — |
| | | | |
| Operating income | | 23,028 |
| | 20,922 |
| | | | |
| | | | | | | | |
| General and administrative | 2,574 |
| | 4,636 |
| | | | |
| Depreciation and amortization | 6,873 |
| | 6,811 |
| | | | |
| NOI | | $ | 32,475 |
| | $ | 32,369 |
| | | | |
| | | | | | | | | |
| NOI: | | | | | | | | |
| Hawaii Properties | | $ | 18,922 |
| | $ | 18,568 |
| | | | |
| Mainland Properties | | 13,553 |
| | 13,801 |
| | | | |
| NOI | | $ | 32,475 |
| | $ | 32,369 |
| | | | |
| | | | | | | | | |
Reconciliation of Net Income to Funds From Operations and Normalized Funds From Operations (2): |
| Net income | $ | 19,232 |
| | $ | 20,356 |
| | | | |
| Plus: depreciation and amortization | 6,873 |
| | 6,811 |
| | | | |
| FFO | 26,105 |
| | 27,167 |
| | | | |
Plus: estimated business management incentive fees (3) | — |
| | 2,409 |
| | | | |
| Normalized FFO | $ | 26,105 |
| | $ | 29,576 |
| | | | |
| | | | | | | | |
| FFO per common share - basic and diluted | $ | 0.42 |
| | $ | 0.60 |
| | | | |
| Normalized FFO per common share - basic and diluted | $ | 0.42 |
| | $ | 0.66 |
| | | | |
(1)Consists of properties that we owned continuously since January 1, 2022.
(2)Consists of 126 properties including properties we acquired during the period from January 1, 2022 to March 31, 2023, including 94 properties we contributed to our consolidated joint venture in which we own a 61% equity interest.
(3)See our definition of NOI and our reconciliation of net loss to NOI below under the heading "Non-GAAP Financial Measures."
| |
(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. |
| |
(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. |
| |
(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, 2018,2023 compared to the three months ended March 31, 2017.2022.
Rental income. The increase in rental income wasis primarily a result of an increaseour acquisition activities, which includes our acquisition of MNR in occupancy during 2017 andFebruary 2022. Rental income increased at certain of our comparable properties primarily due to increases from our 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 $3,762 and $1,156 for the 2018 period2023 and approximately $1,470 for the 2017 period,2022 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $102of $270 and $320 for the 2018 period2023 and approximately $96 for the 2017 period.2022 periods, respectively.
Tenant reimbursements and other income.Real estate taxes. The increase in tenant reimbursements and other incomereal estate taxes primarily reflects our acquisition activities. Real estate taxes at certain of our comparable properties increased due to higher assessed values.
Other operating expenses. The increase in other operating expenses is primarily due to our acquisition activities. Other operating expenses at certain of our comparable properties increased primarily due to increases in real estate taxinsurance expenses and other operating expense reimbursements from tenantsrepairs and maintenance at certain of our properties, partially offset by insurance proceeds and tenant escalation true-ups recognizeda decrease in the 2017 period.
Real estate taxes. The increase in real estate taxes primarily reflects tax valuation and tax rate increases at certain of our properties.
Other operating expenses. Other operating expenses primarily include property maintenance, environmental remediation, utilities, insurance, bad debt, legal and property management fees. The increase in other operating expenses primarily reflects increases in rent reserves and snow removal costsexpenses at certain of our properties, in the 2018 period, compared to lower than usual amounts for these expenses in the 20172023 period.
Depreciation and amortization. The increase in depreciation and amortization primarily reflects increased depreciation of capital improvements at our properties.acquisition activities in the 2022 period.
General and administrative. Subsequent to our IPO, general and administrative expenses primarily include fees paid under our business management agreement, legal fees, audit fees, Trustee cash fees 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 acquisition activity in the 2017 period, partially offset by increased costs related2022 period.
Interest and other income. The increase in interest and other income is primarily due to our becoming a separate public company.
Interest income. Interest income representshigher interest earned on ourhigher cash balances.balances during the 2023 period as compared to 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 2023 period as compared to the 2022 period, primarily reflectsrelated to our acquisition of MNR during the change2022 period.
Loss on sale of real estate. Loss on sale of real estate in the 2023 period was a result of a partial eminent domain taking at one of our capital structure, includingproperties.
Realized gain on sale of equity securities. Realized gain on sale of equity securities represents the realized gain of $1,232 on the sale of certain equity securities we acquired as part of our IPO, which resultedacquisition of MNR during the 2022 period.
Unrealized gain on equity securities. Unrealized gain on equity securities represents the increase in changes in borrowings underfair value of certain equity securities we acquired as part of our acquisition of MNR during the 2022 period.
Loss on early extinguishment of debt. Loss on early extinguishment of debt primarily relates to our write off of unamortized costs related to the termination of our unsecured revolving credit facility during the 2018 period, partially offset by the prepayment of certain mortgage notes in December 2017.February 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 REIT for federal income tax purposes.investment in the unconsolidated joint venture.
Net income.loss. The decrease in net incomeloss for the 20182023 period compared to the 2017net loss for the 2022 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.
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 January 1, 2022.
Net incomeloss attributable to common shareholders per common share - basic and diluted. Net income The increase in net loss attributable to common shareholders per common share for the 2023 period compared to the net loss attributable to common shareholders per share for the 2022 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 the 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 loss or net 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 loss and net 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 loss and net 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 to NOI for the three months ended March 31, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Reconciliation of Net Loss to NOI: | | | | |
| Net loss | | $ | (35,546) | | | $ | (9,787) | |
| Equity in earnings of unconsolidated joint venture | | (3,961) | | | (1,727) | |
| Income tax expense | | 17 | | | 69 | |
| Loss before income tax expense and equity in earnings of unconsolidated joint venture | | (39,490) | | | (11,445) | |
| Loss on early extinguishment of debt | | — | | | 828 | |
| Interest and other income | | (1,146) | | | (478) | |
| Interest expense | | 70,771 | | | 40,999 | |
| Loss on sale of real estate | | 974 | | | — | |
| Realized gain on sale of equity securities | | — | | | (1,232) | |
| Unrealized gain on equity securities | | — | | | (2,460) | |
| | | | |
| General and administrative | | 7,907 | | | 6,077 | |
| | | | |
| | | | |
| Depreciation and amortization | | 45,457 | | | 22,878 | |
| NOI | | $ | 84,473 | | | $ | 55,167 | |
| | | | |
| NOI: | | | | |
| Hawaii Properties | | $ | 22,122 | | | $ | 19,294 | |
| Mainland Properties | | 62,351 | | | 35,873 | |
| NOI | | $ | 84,473 | | | $ | 55,167 | |
Funds From Operations Attributable to Common Shareholders 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 loss attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the three months ended March 31, 2023 and 2022 (dollars in thousands, except per share data):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| Reconciliation of Net Loss Attributable to Common Shareholders to FFO Attributable to Common Shareholders and Normalized FFO Attributable to Common Shareholders: | | | | |
| Net loss attributable to common shareholders | | $ | (24,809) | | | $ | (6,514) | |
| Depreciation and amortization | | 45,457 | | | 22,878 | |
| Equity in earnings of unconsolidated joint venture | | (3,961) | | | (1,727) | |
| Realized gain on sale of equity securities | | — | | | (1,232) | |
| Unrealized gain on equity securities | | — | | | (2,460) | |
| | | | |
| Share of FFO from unconsolidated joint venture | | 1,468 | | | 1,761 | |
| | | | |
| Loss on sale of real estate | | 974 | | | — | |
| FFO adjustments attributable to noncontrolling interest | | (11,213) | | | (4,604) | |
| FFO attributable to common shareholders | | 7,916 | | | 8,102 | |
| Loss on early extinguishment of debt | | — | | | 828 | |
Acquisition, transaction related and certain other financing costs (1) | | — | | | 18,673 | |
| | | | |
| Normalized FFO attributable to common shareholders | | $ | 7,916 | | | $ | 27,603 | |
| | | | |
| Weighted average common shares outstanding - basic and diluted | | 65,309 | | | 65,212 | |
| | | | |
| | | | |
| Per common share data (basic and diluted): | | | | |
| FFO attributable to common shareholders | | $ | 0.12 | | | $ | 0.12 | |
| Normalized FFO attributable to common shareholders | | $ | 0.12 | | | $ | 0.42 | |
(1)Amount for the three months ended March 31, 2022 primarily includes certain debt issuance costs recorded as interest expense related to certain financing 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 March 31, 2023, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 77.6% of our annualized rental revenues and borrowings underonly 4.6% 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):
| | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | 2023 | | 2022 |
| Cash and cash equivalents and restricted cash at beginning of period | | $ | 140,780 | | | $ | 29,397 | |
| Net cash provided by (used in): | | | | |
| Operating activities | | 1,167 | | | 56,639 | |
| Investing activities | | 9,435 | | | (3,442,485) | |
| Financing activities | | (6,223) | | | 3,777,878 | |
| Cash and cash equivalents and restricted cash at end of period | | $ | 145,159 | | | $ | 421,429 | |
The decrease in net cash provided by operating activities for the three months ended March 31, 20182023 compared to the same period in the prior year is primarily due to reimbursementshigher interest expense paid in the 2023 period, partially offset by higher cash flows from the properties we acquired from MNR. The decrease in net cash provided by investing activities in the 2023 period compared to SIR for the costs it incurred in connection with our formation and the preparation for our IPO. Netnet cash used in investing activities for the three months ended March 31, 20182022 period is primarily due to our acquisition of MNR during the 2022 period as compared to no property acquisitions during the same period2023 period. The change from net cash provided by financing activities in the prior year was essentially unchanged. The decrease in2022 period to net cash used in financing activities for the three months ended March 31, 2018 compared to the same period in the prior year is2023 period was 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 and develop properties, financing available to us, our cost of capital, other commitments we have made and operate such properties.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 certain of our financial metrics and debt covenants. 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, 2018,2023, we had $19,847 of cash and cash equivalents.equivalents of $61,250. 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 or to fund any future property acquisitions, development or redevelopment efforts, we maintain a $750,000 unsecured revolving credit facility with a groupour shareholders.
The maturity dateILPT Floating Rate Loan secured by 104 of our revolving credit facilityproperties 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 December 29, 2021. Wecapped 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 interest rate payable on the ILPT Floating Rate Loan as of March 31, 2023 and the weighted average interest rate for the three months ended March 31, 2023 were both 6.18%. Subject to the satisfaction of certain conditions, we have the option to extendprepay up to $247,000 of the maturity dateILPT Floating Rate Loan at par with no premium, and to prepay the balance of our revolving credit facility for two six month periods,the ILPT Floating Rate Loan in full or in part at any time, subject to payment ofa premium, and beginning in October 2023, without a premium.
The Floating Rate Loan secured by 82 properties owned by our consolidated joint venture matures in March 2024, subject to three, 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 3.40% through the initial term of the Floating Rate Loan, plus a 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.2.77%. As of March 31, 2018,2023, the interest rate payable on borrowingsthe Floating Rate Loan was 6.17%. The weighted average annual interest rate payable under our revolving credit facilitythe Floating Rate Loan was 3.23%. 6.17% for the three months ended March 31, 2023, and was 3.01% for the period from February 25, 2022 to March 31, 2022. Subject to the satisfaction of certain conditions, we have the option to prepay up to $280,000 of the Floating 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.
As of March 31, 2018 and April 26, 2018,2023, we had $302,000an aggregate principal amount of $4,284,833 of debt, including the Floating Rate Loan and $292,000, respectively, outstanding under our revolving credit facilitythe ILPT Floating Rate Loan, scheduled to mature between 2024 and $448,000 and $458,000, respectively, available to borrow under our revolving credit facility.2038.
Our credit agreement includes a feature under which the maximum borrowing availability under the facility may be increased 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. For further information regarding our IPOinvesting and our application of the net proceeds,financing activities, see Note 9Notes 2 and 4 to the Notes toour Condensed Consolidated Financial Statements included in Part 1,I, Item 1 of this Quarterly Report on Form 10-Q.
Consolidated Joint Venture - Mountain Industrial REIT LLC:
Our debt maturity (other thanWe own a 61% equity interest in our revolving credit facility)consolidated joint venture. We control our consolidated joint venture and therefore account for the properties owned by this joint venture 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 months ended March 31, 2023 and for the period from this joint venture’s formation date, February 25, 2022, to March 31, 2022. The portion of this joint venture's net loss not attributable to us, or $10,728 and $3,261, for the three months ended March 31, 2023 and for the period from February 25, 2022 to March 31, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). This joint venture made no distributions for the three months ended March 31, 2023 or for the period from February 25, 2022 to March 31, 2022. As of March 31, 2018 was $48,7502023, this joint venture had total assets of $3,064,043 and total liabilities of $1,721,021.
Unconsolidated Joint Venture - The Industrial Fund REIT LLC:
We own a 22% equity interest in 2020.the unconsolidated joint venture. 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 $3,961 and $1,727 for the three months ended March 31, 2023 and 2022, 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 $990 and $1,320 during the three months ended March 31, 2023 and 2022, respectively.
For further information regarding these joint ventures, see Notes 2, 4, 5, 8, 9 and 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We expect to use borrowings underproceeds 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.developments and redevelopments. We may also assume mortgage loans or incur debt in connection with future acquisitions.acquisitions, developments and redevelopments. 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 up to $500,000 in aggregate amount of 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.
On April 19, 2018, we declared a prorated distribution of $0.27 per 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 distribution of $0.33 per common share ($1.32 per common share per year). We expect to pay this distribution on or about May 14, 2018 using existing cash balances and borrowings under our revolving credit facility.
During the three months ended March 31, 20182023, we paid quarterly cash distributions to our shareholders totaling $656 using cash balances.
On April 13, 2023, we declared a regular quarterly distribution to common shareholders of record on April 24, 2023 of $0.01 per share, or approximately $656. We expect to pay this distribution to our shareholders on or about May 18, 2023 using cash balances. For more information regarding these distributions, see Note 6 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
During the three months ended March 31, 2023 and 2017,2022, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows: | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | March 31, | | |
| | 2023 | | 2022 | | | | |
Tenant improvements and leasing costs (1) | | $ | 2,040 | | | $ | 3,361 | | | | | |
Building improvements (2) | | 370 | | | 110 | | | | | |
Development, redevelopment and other activities (3) | | 2,521 | | | 294 | | | | | |
| | $ | 4,931 | | | $ | 3,765 | | | | | |
(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. |
| | | | | | | | |
| | | 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 |
|
(3)Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenues.
| |
(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, 2018,2023, we had estimated unspent leasing related obligations of $243.
During$25,054, of which $8,365 is expected to be spent 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.
next 12 months.
Debt Covenants (dollars in thousands)
Our principal debt obligations atas of March 31, 2018 were borrowings2023 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 a mortgage note is non-recourse, subjectloan secured by 17 our properties; (4) $650,000 outstanding principal amount of a mortgage loan secured by 186 of our properties; and (5) $299,833 aggregate principal amount of mortgage loans 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,our 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, the $700,000 mortgage 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, 2018,2023, we believe that we were in compliance with all of the covenants and other terms under the agreements governing these loans.
Certain of the mortgage loans we assumed in connection with our acquisition of MNR are non-recourse, subject to certain limitations, and covenants under our credit agreement.
Our credit agreement doesdo not contain any material financial covenants. The agreements governing the ILPT Floating Rate Loan, Floating Rate Loan, the $700,000 mortgage 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 8 and 9 10 and 11 to the Notes toour Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 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 2022 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 related intangibles.
A discussion of our critical accounting estimates is included in our 2022 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2022.
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, 2017.2022. 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.
FixedFloating Rate Debt
At March 31, 2018,2023, our outstanding fixedfloating rate debt consisted of the followingfollowing:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | % | | $ | 77,383 | | | 2024 | | Monthly |
| Floating Rate Loan | | $ | 1,400,000 | | | 6.17 | % | | $ | 87,580 | | | 2024 | | Monthly |
| | $ | 2,635,000 | | | | | $ | 164,963 | | | | | |
(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.
At March 31, 2023, our aggregate floating rate debt was $2,635,000, consisting of the $1,235,000 outstanding principal amount of the ILPT Floating Rate Loan, and the $1,400,000 outstanding principal amount of the Floating Rate Loan secured mortgage note:
|
| | | | | | | | | | | | | | | |
| | | | | 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, annualby 82 properties owned by our consolidated joint venture. The ILPT Floating Rate Loan matures on October 9, 2024, subject to three, one year extension options, and requires that 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 mortgage note requires interest only payments until maturity. Because our mortgage note requires interest to be paid at an annual rate of SOFR plus a fixed rate, changes in market interest rates during the termweighted average premium of the mortgage note will not affect our interest obligations. If this mortgage note is refinanced at an interest rate which is 100 basis points higher or lower than shown above, our annual interest cost would increase or decrease by approximately $488.
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. Based on the balance outstanding at March 31, 2018 and discounted cash flow analysis 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 basis point change in the interest rate would change the fair value of this obligation by approximately $1,208.
3.93%. The Floating Rate Debt
At March 31, 2018, our floating rate debt consisted of $302,000 outstanding under our revolving credit facility. Our revolving credit facilityLoan matures on December 29, 2021 and,March 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 is subject to adjustment based upon changes to our leverage ratio. Accordingly, weof 2.77%. We are vulnerable to changes in the U.S. dollar based on 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 orand 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, 2018:2023, 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 March 31, 2023 | | 6.17 | % | | $ | 2,635,000 | | | $ | 164,963 | | | $ | 2.53 | |
| One percentage point increase | | 7.17 | % | | $ | 2,635,000 | | | $ | 191,679 | | | $ | 2.94 | |
|
| | | | | | | | | | | | | | | |
| | | 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) | (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. |
2023.
The foregoing tables showtable shows 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.
Fixed Rate Debt
At March 31, 2023, 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 Hawaii Properties) | | $ | 650,000 | | | 4.31 | % | | $ | 28,015 | | | 2029 | | Monthly |
| Mortgage notes (17 Mainland Properties) | | 700,000 | | | 4.42 | % | | 30,940 | | | 2032 | | Monthly |
Mortgage note (2) | | 13,034 | | | 3.76 | % | | 490 | | | 2028 | | Monthly |
Mortgage note (2) | | 4,720 | | | 3.77 | % | | 178 | | | 2030 | | Monthly |
Mortgage note (2) | | 4,992 | | | 3.85 | % | | 192 | | | 2030 | | Monthly |
Mortgage note (2) | | 13,987 | | | 3.56 | % | | 498 | | | 2030 | | Monthly |
Mortgage note (2) | | 12,368 | | | 3.67 | % | | 454 | | | 2031 | | Monthly |
Mortgage note (2) | | 13,842 | | | 4.14 | % | | 573 | | | 2032 | | Monthly |
Mortgage note (2) | | 30,376 | | | 4.02 | % | | 1,221 | | | 2033 | | Monthly |
Mortgage note (2) | | 42,432 | | | 4.13 | % | | 1,752 | | | 2033 | | Monthly |
Mortgage note (2) | | 25,744 | | | 3.10 | % | | 798 | | | 2035 | | Monthly |
Mortgage note (2) | | 41,425 | | | 2.95 | % | | 1,222 | | | 2036 | | Monthly |
Mortgage note (2) | | 45,553 | | | 4.27 | % | | 1,945 | | | 2037 | | Monthly |
Mortgage note (2) | | 51,360 | | | 3.25 | % | | 1,669 | | | 2038 | | Monthly |
| | $ | 1,649,833 | | | | | $ | 69,947 | | | | | |
(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 mortgage loans, which are secured by 11 properties in aggregate.
Our $650,000 and $700,000 mortgage notes require interest only payments until maturity. The remaining fixed rate mortgage notes require amortizing payment of principal and interest until maturity. Because our mortgage notes require interest to be paid at a fixed rate, changes in market interest rates during the terms of these mortgage notes will not affect our interest obligations. If these mortgage notes are refinanced at an interest rate which is one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately $16,500.
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 raised interest rates multiple times since the beginning of 2022 in an effort to combat inflation and may continue to do so. Based on the balances outstanding at March 31, 2023 and discounted cash flow analyses 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 one percentage point change in the interest rates would change the fair value of this obligation by approximately $26,716.
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, 20182023 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 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 that are subject to risks and uncertainties. These statements may include 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.
THE LIKELIHOOD THAT OUR TENANTS WILL PAY RENT OR BE NEGATIVELY AFFECTED BY CYCLICAL ECONOMIC CONDITIONS,Forward-looking statements reflect our current expectations, are based on judgments and assumptions, are inherently uncertain and are subject to risks, uncertainties and other factors, which could cause our actual results, performance or achievements to differ materially from expected future results, performance or achievements expressed or implied in those forward-looking statements. Examples of these forward-looking statements and the related risks, uncertainties and other factors include, but are not limited to, the following:
THE LIKELIHOOD THAT OUR TENANTS WILL RENEW OR EXTEND THEIR LEASES OR THAT WE WILL BE ABLE TO OBTAIN REPLACEMENT TENANTS,•Our ability and the ability of our tenants to operate under unfavorable market and economic conditions, such as rising or sustained high interest rates, high inflation, labor market challenges, dislocation and volatility in the public equity and debt markets, challenges in the commercial real estate industry generally and in the industrial logistics sector, geopolitical instability and economic recessions or downturns,
OUR ACQUISITIONS OF PROPERTIES,•Demand for industrial and logistics properties,
OUR ABILITY TO COMPETE FOR ACQUISITIONS AND TENANCIES EFFECTIVELY,•Our ability to reduce our leverage,
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 cost-effectively raise and balance our use of debt or equity capital,
OUR ABILITY TO PAY DISTRIBUTIONS TO OUR SHAREHOLDERS AND TO SUSTAIN THE AMOUNT OF SUCH DISTRIBUTIONS,•Our ability to pay interest on and principal of our debt,
THE FUTURE AVAILABILITY OF BORROWINGS UNDER OUR REVOLVING CREDIT FACILITY,•Our ability to maintain sufficient liquidity,
OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND DISPOSITIONS,•Our tenants’ ability and willingness to pay their rent obligations to us,
OUR ABILITY TO RAISE DEBT OR EQUITY CAPITAL,•Our ability to successfully compete for tenancies, the likelihood that the rents we realize will increase when we renew or extend our leases, enter new leases, or our rents reset at our properties in Hawaii,
OUR ABILITY TO PAY INTEREST ON AND PRINCIPAL OF OUR DEBT,•Whether 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 APPROPRIATELY BALANCE OUR USE OF DEBT AND EQUITY CAPITAL,•The credit qualities of our tenants,
CHANGES IN THE SECURITY OF CASH FLOWS FROM OUR PROPERTIES,•Changes in the security of cash flows from our properties,
OUR CREDIT RATINGS,•Our ability to maintain high occupancy at our properties,
OUR EXPECTATION THAT WE BENEFIT FROM OUR RELATIONSHIPS WITH•Potential defaults of our leases by our tenants,
•Changes in global supply chain conditions and emerging technologies,
•Whether the industrial and logistics sector and the extent to which our tenants’ businesses are critical to sustaining a resilient supply chain and that our business will benefit as a result,
•Our ability to pay distributions to our shareholders and to increase or sustain the amount of such distributions,
•Our ability to acquire properties that realize our targeted returns,
•Our ability to sell properties at prices we target,
•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 ability to sell additional equity interests in, or contribute additional properties to, our existing joint ventures, 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,
•The ability of our manager, RMR, INC.,to successfully manage us,
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 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 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,
THE CREDIT QUALITIES OF OUR TENANTS,•Our expected capital expenditures and leasing costs, as well as risks and uncertainties regarding the development, redevelopment or repositioning of our properties, including as a result of inflation, cost overruns, supply chain challenges, labor shortages, construction delays or inability to obtain necessary permits, and our ability to lease space at these properties at targeted returns,
CHANGES IN ENVIRONMENTAL LAWS OR IN THEIR INTERPRETATIONS OR ENFORCEMENT AS A RESULT OF CLIMATE CHANGE OR OTHERWISE,•Competition within the commercial real estate industry, particularly for industrial and logistics properties in those markets in which our properties are located,
OUR SALES OF PROPERTIES, AND•Compliance with, and changes to, federal, state and local laws and regulations, accounting rules, tax laws and similar matters,
OTHER 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,
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•Non-performance by the counterparties to our interest rate caps and the costs for renewing or replacing the interest rate caps,
•Actual and potential conflicts of interest with our related parties, including our managing trustees, RMR and others affiliated with them,
MATERIAL ADVERSE EFFECT ON OUR FORWARD LOOKING STATEMENTS AND UPON OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION, FFO, NORMALIZED FFO, NOI, CASH FLOWS, LIQUIDITY AND PROSPECTS INCLUDE, BUT ARE NOT LIMITED TO:•Acts of terrorism, outbreaks or continuation of pandemics or other significant adverse public health safety events or conditions, war or other hostilities, supply chain disruptions, climate change or other manmade or natural disasters beyond our control, and
THE IMPACT OF CONDITIONS AND CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS ON US AND OUR TENANTS,•Other matters.
COMPETITION WITHIN THE REAL ESTATE INDUSTRY, PARTICULARLY IN THOSE MARKETS IN WHICH OUR PROPERTIES ARE LOCATED,These risks, uncertainties and other factors are not exhaustive and should be read in conjunction with other cautionary statements that are included in our periodic filings. The information contained elsewhere in our filings with the SEC, including under the caption “Risk Factors” in our periodic reports, or incorporated therein, identifies important factors that could cause differences from our forward-looking statements in this Quarterly Report on Form 10-Q. Our filings with the SEC are available on the SEC’s website at www.sec.gov.
COMPLIANCE WITH, AND CHANGES TO, FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS, ACCOUNTING RULES, TAX LAWS AND SIMILAR MATTERS,You should not place undue reliance upon our forward-looking statements.
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,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.
ACTUAL AND POTENTIAL CONFLICTS OF INTEREST WITH OUR RELATED PARTIES, INCLUDING OUR MANAGING TRUSTEES, RMR LLC, RMR INC., SIR, AFFILIATES INSURANCE COMPANY, OR AIC, AND OTHERS AFFILIATED WITH THEM, AND
ACTS OF TERRORISM, OUTBREAKS OF SO CALLED PANDEMICS OR OTHER MANMADE OR NATURAL DISASTERS BEYOND OUR CONTROL.
FOR EXAMPLE:Statement Concerning Limited Liability
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,
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 2022 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 March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 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 |
| January 1, 2023 - January 31, 2023 | | 582 | | | $ | 3.50 | | | — | | | $ | — | |
| March 1, 2023 - March 31, 2023 | | 394 | | | 3.07 | | | — | | | — | |
| | | | | | | | |
| Total | | 976 | | | $ | 3.33 | | | — | | | $ | — | |
(1) These common share withholdings and purchases were made to satisfy tax withholding and payment obligations of certain 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 values based upon the trading prices 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 | | |
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4.2 | | |
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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. |
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| 101.SCH | XBRL Taxonomy Extension Schema Document. (Filed herewith.) |
| |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.) |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.) |
| |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.) |
| |
| 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 |
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| | |
| By: | /s/ John C. PopeoYael Duffy |
| | John C. PopeoYael Duffy |
| | President and Chief Operating Officer |
| | Dated: April 27, 201825, 2023 |
| | |
| | |
| By: | /s/ Richard W. Siedel, Jr.Brian E. Donley |
| | Richard W. Siedel, Jr.Brian E. Donley |
| | Chief Financial Officer and Treasurer |
| | (principal financial officerPrincipal Financial Officer and principal accounting officer)Principal Accounting Officer) |
| | Dated: April 27, 201825, 2023 |