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Item 7. Management’s Discussion and Analysis

2021-02-18 compared with 2020-02-24 · 258 added, 166 removed, 225 unchanged (65% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.

The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in Part IV, Item 5 of this Annual Report on Form 10-K.

We are a REIT organized under Maryland law.

As of December 31, 2019 , we owned 300 properties with approximately 42.9 million rentable square feet, including 226 buildings, leasable land parcels and easements with approximately 16.8 million rentable square feet located on the island of Oahu, HI, and 74 properties with approximately 26.1 million rentable square feet located in 29 other states.

As of December 31, 2020, our portfolio was comprised of 289 wholly owned properties containing approximately 34.9 million rentable square feet, including 226 buildings, leasable land parcels and easements containing approximately 16.8 million rentable square feet located on the island of Oahu, HI, and 63 properties containing approximately 18.1 million rentable square feet located in 30 other states.

As of December 31, 2020, we also owned a 22% equity interest in an unconsolidated joint venture, which owns 12 properties located in nine states in the mainland United States containing approximately 9.2 million rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 7.1 years.

As of December 31, 2020, our properties were approximately 98.5% leased (based on rentable square feet) to 253 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 9.5 years.

The COVID-19 Pandemic

To date, the COVID-19 pandemic has not had a significant impact on our business as the industrial and logistics sector has fared better than some other industries thus far in response to the COVID-19 pandemic, including other real estate sectors, due to the demand for e-commerce.

We believe that demand was initially supported in part by increased demand by businesses and households to stock up on supplies as the implications of the COVID-19 pandemic and resulting governmental responses materialized and e-commerce companies have benefited from the closure of certain retail consumer outlets since the beginning of the second quarter of 2020 and the continued increased market demand for e-commerce.

We believe that our current financial resources, our portfolio of high-quality industrial and logistics assets and our strong credit quality tenants, will enable us to withstand the COVID-19 pandemic.

However, as a result of the COVID-19 pandemic and its aftermath, certain of our tenants have requested relief from their obligations to pay rent due to us.

We evaluate these requests on a tenant by tenant basis.

As of February 15, 2021, we granted requests to certain of our tenants to defer aggregate rent payments of $3.2 million with respect to leases that represent, as of December 31, 2020, approximately 9.6% of our annualized rental revenues.

As of December 31, 2020, we recognized $2.6 million in our accounts receivable related to the remaining deferred amounts.

In most cases, these tenants were obligated to pay the deferred rents in 12 equal monthly installments beginning in September 2020.

For the year ended December 31, 2020, we collected approximately 97.6% of our contractual rents due after giving effect to such rent deferrals.

For more information and risks relating to the COVID-19 pandemic on us and our business, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements," Part I, Item 1 "Business" and Part I, Item 1A, "Risk Factors."

Property Operations

As of both December 31, 2019 and 2018 , 99.3% of our rentable square feet was leased.

Occupancy data for our properties as of December 31, 2020 and 2019 is as follows (square feet in thousands):

All Properties

Comparable Properties (1)

As of December 31,

All Properties Comparable Properties (1)

As of December 31, As of December 31,

2020 2019 2020 2019

Total properties 289 300 266 266

Total rentable square feet (2)

34,870 42,939 28,273 28,273

Percent leased (3)

Consists of properties we owned (including for the period SIR owned our properties prior to our IPO) continuously since January 1, 2018.

98.5 % 99.3 % 98.3 % 98.9 %

(1) Consists of properties that we owned continuously since January 1, 2019 and excludes 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

(2) Subject to modest adjustments when space is remeasured or reconfigured for new tenants and when land leases are converted to building leases.

Percent leased includes (a) space being fitted out for occupancy pursuant to existing leases as of December 31, 2019, if any, and (b) space which is leased but is not occupied or is being offered for sublease by tenants, if any.

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of December 31, 2020, 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 years ended December 31, 2020 and 2019 are as follows:

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Comparable properties (2)

$ 6.23 $ 5.92

(1) Average effective rental rates per square foot leased represents total rental income during the period specified divided by the average rentable square feet leased during the period specified.

Comparable properties for the years ended December 31, 2019 and 2018 consist of 266 buildings, leasable land parcels and easements that we owned (including for the period that SIR owned our properties prior to our IPO) continuously since January 1, 2018.

During the year ended December 31, 2019 , we entered lease renewals and new leases for approximately 2.0 million square feet, including a 194,000 square foot expansion at an existing property, at weighted average (by square feet) rental rates that were approximately 17.1% 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).

(2) Consists of properties that we owned continuously since January 1, 2019 and excludes 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

During the year ended December 31, 2020, excluding 12 properties owned by our unconsolidated joint venture, we entered new and renewal leases for approximately 1.1 million square feet at weighted average (by square feet) rental rates that were approximately 14.7% 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).

The weighted average (by square feet) lease term for leases that were in effect for the same land area or building area during the prior lease term, was 11.4 years.

Commitments for tenant improvements, leasing costs and concessions for leases entered during the year ended December 31, 2019 totaled $ 2.6 million , or $ 0.13 per square foot per year of the new weighted average lease term.

Also, during the year ended December 31, 2019, we completed rent resets for approximately 588,000 square feet of land at our Hawaii Properties at rental rates that were approximately 30.7% higher than the prior rental rates.

Commitments for tenant improvements, leasing costs and concessions for leases entered during the year ended December 31, 2020 totaled $2.1 million, or approximately $0.17 per square foot per year of the new weighted average lease term.

Also, during the year ended December 31, 2020, we completed rent resets for approximately 1.9 million square feet of land at our Hawaii Properties at rental rates that were approximately 20.1% higher than the prior rental rates.

As shown in the table below, approximately 1.2% of our total rented square feet and approximately 1.4% of our total annualized rental revenues as of December 31, 2020 are included in leases scheduled to expire by December 31, 2021.

As of December 31, 2020, our lease expirations by year are as follows (dollars and square feet in thousands):

of Total Rented

Rental Revenues

Period / Year

% of Cumulative

% of Total Cumulative % Annualized % of

Rented Rented of Total Rented Annualized Rental Annualized

Number of Square Feet Square Feet Square Feet Rental Revenues Revenues Rental Revenues

Period / Year Tenants Expiring (1)

Expiring Expiring Expiring

2021 26 426 1.2 % 1.2 % $ 2,935 1.4 % 1.4 %

2022 63 2,848 8.3 % 9.5 % 20,276 9.8 % 11.2 %

2023 29 2,538 7.4 % 16.9 % 16,446 7.9 % 19.1 %

2024 28 6,742 19.6 % 36.5 % 28,117 13.5 % 32.6 %

2025 14 2,318 6.8 % 43.3 % 12,910 6.2 % 38.8 %

2026 6 969 2.8 % 46.1 % 6,910 3.3 % 42.1 %

2027 11 4,578 13.3 % 59.4 % 24,445 11.8 % 53.9 %

2028 19 2,568 7.5 % 66.9 % 18,840 9.1 % 63.0 %

2029 8 1,697 4.9 % 71.8 % 5,393 2.6 % 65.6 %

2030 9 1,232 3.6 % 75.4 % 9,400 4.5 % 70.1 %

Thereafter 76 8,422 24.6 % 100.0 % 62,251 29.9 % 100.0 %

Total 289 34,338 100.0 % $ 207,923 100.0 %

Weighted average remaining lease term (in years) 8.4 9.5

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As of December 31, 2020, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):

Annualized Rental

% of Total % of Total

of Rented Rented Annualized Rental

States Properties Sq.

1 Amazon.com Services, Inc.

FL, IN, SC, TN, VA

AZ, SC, TN, VA 4 3,869 11.3 % 10.0 %

2 Federal Express Corporation / FedEx Ground Package System, Inc.

AR, CO, HI, IA, ID, IL, MN, MO, NC, ND, NV, OH, OK, UT 17 952 2.8 % 4.6 %

The Procter & Gamble Distributing LLC

3 Restoration Hardware, Inc.

MD 1 1,195 3.5 % 3.0 %

4 American Tire Distributors, Inc.

CO, LA, NE, NY, OH 5 722 2.1 % 2.5 %

UPS Supply Chain Solutions, Inc.

Par Hawaii Refining, LLC

5 Servco Pacific Inc.

HI 6 590 1.7 % 2.4 %

6 UPS Supply Chain Solutions Inc.

NH 1 614 1.8 % 2.4 %

7 Par Hawaii Refining, LLC HI 3 3,148 9.2 % 2.4 %

8 EF Transit, Inc.

IN 1 535 1.6 % 1.9 %

9 BJ's Wholesale Club, Inc.

Subaru of America, Inc.

Shurtech Brands, LLC

NJ 1 634 1.8 % 1.7 %

10 Shurtech Brands, LLC OH 1 645 1.9 % 1.7 %

11 Coca-Cola Bottling of Hawaii, LLC HI 4 351 1.0 % 1.6 %

12 Safeway Inc.

HI 2 146 0.4 % 1.6 %

13 ELC Distribution Center KS 1 645 1.9 % 1.5 %

14 Manheim Remarketing, Inc.

The Toro Company

Trex Company, Inc.

HI 1 338 1.0 % 1.5 %

SC 1 945 2.8 % 1.5 %

Kilgo Company, Inc.

HI 5 310 0.9 % 1.5 %

17 Avnet, Inc.

OH 1 581 1.7 % 1.5 %

18 Warehouse Rentals Inc.

Coca-Cola Bottling of Hawaii, LLC

Whirlpool Corporation

HI 5 278 0.8 % 1.3 %

19 YNAP Corporation NJ 1 167 0.5 % 1.1 %

20 ODW Logistics, Inc.

OH 3 760 2.2 % 1.1 %

21 Refresco Beverages US Inc.

MO, SC 2 421 1.2 % 1.1 %

22 Honolulu Warehouse Co., Ltd.

HI 1 298 0.9 % 1.1 %

23 Hellmann Worldwide Logistics Inc.

FL 1 240 0.7 % 1.1 %

24 General Mills Operations, LLC MI 1 158 0.5 % 1.1 %

25 AES Hawaii, Inc.

HI 2 1,242 3.6 % 1.0 %

Total 71 19,784 57.8 % 52.2 %

(1) Rented square feet is pursuant to existing leases as of December 31, 2020 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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Because of the capital 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 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.

Hawaii Properties.

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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 December 31, 2019 subject to rent reset at our Hawaii Properties:

The following chart shows the annualized rental revenues as of December 31, 2020 scheduled to reset at our Hawaii Properties:

Scheduled Rent Resets at Hawaii Properties

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Scheduled to Reset

Resets open from prior periods

2026 and thereafter 16,990

Total $ 29,304

As of December 31, 2020, $2.9 million, or 1.4%, of our annualized rental revenues are included in leases scheduled to expire by December 31, 2021 and 1.5% 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.

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, and as noted elsewhere in this Annual Report on Form 10-K, the COVID-19 pandemic and its economic impact may adversely impact our future leasing activities and our ability to lease properties and to receive rents.

Since the leases at certain of our Hawaii Properties were originally entered, in some cases as long as 40 or 50 years ago, the characteristics of the neighborhoods in the vicinity of some of those properties have changed.

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RMR LLC also often uses a third party service to monitor the credit ratings of debt securities of our existing tenants whose debt securities are rated by a nationally recognized credit rating agency.

Investment Activities (dollars in thousands)

During the year ended December 31, 2019, we acquired 30 properties with a combined 13,288,180 rentable square feet for an aggregate purchase price of $936,750, excluding acquisition related costs of $4,800.

In February 2020, we acquired a net leased Class A e-commerce distribution center located in Goodyear, AZ with approximately 820,000 rentable square feet for a purchase price of $72,000, excluding acquisition related costs.

This property is 100% leased and has a remaining lease term of approximately six years.

For more information regarding our investment activities, see Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Financing Activities (dollars in thousands)

In January 2019, we obtained a $650,000 mortgage loan secured by 186 of our properties containing approximately 9.6 million square feet located on the island of Oahu, HI.

In October 2019, we obtained a $350,000 mortgage loan secured by 11 of our Mainland Properties containing an aggregate of approximately 8.2 million rentable square feet and are located in eight states.

We used the proceeds from these mortgage loans to reduce outstanding borrowings under our $750,000 unsecured revolving

credit facility and to fund acquisitions.

In April 2019, we assumed a $56,980 secured mortgage note in connection with one of our acquisitions.

In February 2020, we entered into agreements related to a joint venture with an Asian institutional investor for up to 12 of our Mainland Properties, including 11 properties secured by our $350,000 mortgage loan we obtained in October 2019.

The investor will contribute approximately $108,300, which includes certain costs associated with the formation of the joint venture, for a 39% equity interest in the joint venture and we retained the remaining 61% equity interest in the joint venture.

The investment amount is based on an aggregate property valuation of $680,000, less approximately $407,000 of existing mortgage debt on the properties at the time of the investment.

We closed the joint venture with 11 of the 12 properties and the investor will initially contribute approximately $82,000 with the balance contributed when the twelfth property is added.

We expect to use the net proceeds from this transaction to reduce outstanding borrowings under our revolving credit facility.

For more information regarding our financing activities, see “Liquidity and Capital Resources—Our Investment and Financing Liquidity and Resources” below.

Investing and Financing Activities (dollars in thousands)

During the year ended December 31, 2020, we acquired two properties with a combined 1,465,846 rentable square feet for an aggregate purchase price of $115,481, excluding acquisition related costs of $332.

During the year ended December 31, 2020, we sold one property located in Virginia containing 308,217 rentable square feet for a sales price of $10,775, excluding closing costs of $196.

In the first quarter of 2020, we entered into agreements related to a joint venture for 12 of our properties in the mainland United States, or our joint venture, with an Asian institutional investor.

We contributed 11 of these properties to our joint venture in February 2020 and the remaining property in March 2020.

We received proceeds from the investor in an aggregate amount of $107,942, which includes $734 of costs associated with the formation of our joint venture, for a 39% equity interest in our joint venture and we retained the remaining 61% equity interest in our joint venture.

In November 2020, we sold an additional 39% equity interest from our remaining 61% equity interest in our joint venture to a second unrelated third party institutional investor for $108,812, which includes certain costs associated with the initial formation of our joint venture.

After giving effect to the sale, we continue to own a 22% equity interest in our joint venture.

Effective as of the date of the sale, we deconsolidated our joint venture and account for our joint venture using the equity method of accounting under the fair value option.

Our initial investment amount was based on an aggregate property valuation of $680,000, less $406,980 of existing mortgage debts on the properties that our joint venture assumed.

We used the net proceeds from this transaction to reduce outstanding borrowings under our revolving credit facility.

During the year ended December 31, 2020, our joint venture made aggregate cash distributions of $14,049, $5,479 to the first joint venture investor and $8,570 to us.

In May 2020, we prepaid at par plus accrued interest a mortgage note secured by one of our properties with an outstanding principal balance of approximately $48,750, an annual interest rate of 3.48% and a maturity date in November 2020.

As a result of the prepayment of this mortgage note, we recorded a gain on early extinguishment of debt of $120 for the year ended December 31, 2020 to write off unamortized premiums.

For more information regarding our investing and financing activities, see "Business—Our Investment Policies" and "Business—Our Disposition Policies" in Part 1, Item 1 of this Annual Report on Form 10-K, “Liquidity and Capital Resources—Our Investing and Financing Liquidity and Resources” below and Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

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Comparable Properties Results (1)

Acquired Properties Results (2)

Non -Comparable Properties Results (2)

Consolidated Results

Year Ended December 31,

Year Ended December 31, Year Ended December 31, Year Ended December 31,

2020 2019 Change Change 2020 2019 Change 2020 2019 Change Change

Rental income $ 173,295 $ 165,904 $ 7,391 4.5 % $ 81,280 $ 63,330 $ 17,950 $ 254,575 $ 229,234 $ 25,341 11.1 %

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Real estate taxes

24,744 22,363 2,381 10.6 % 10,441 8,004 2,437 35,185 30,367 4,818 15.9 %

Other operating expenses

13,458 12,570 888 7.1 % 7,291 5,073 2,218 20,749 17,643 3,106 17.6 %

Total operating expenses

38,202 34,933 3,269 9.4 % 17,732 13,077 4,655 55,934 48,010 7,924 16.5 %

Net operating income (3)

$ 135,093 $ 130,971 $ 4,122 3.1 % $ 63,548 $ 50,253 $ 13,295 198,641 181,224 17,417 9.6 %

Other expenses:

Depreciation and amortization 70,518 61,927 8,591 13.9 %

Acquisition and certain other transaction related costs 200 — 200 N/M

General and administrative 19,580 17,189 2,391 13.9 %

Total other expenses 90,298 79,116 11,182 14.1 %

Gain on sale of real estate 23,996 — 23,996 N/M

Interest income 113 743 (630) (84.8)%

Interest expense (51,619) (50,848) (771) 1.5%

Income before income tax expense and equity earnings of an investee

Gain on early extinguishment of debt 120 — 120 N/M

Income before income tax expense and equity earnings of investees 80,953 52,003 28,950 55.7 %

Income tax expense (277) (171) (106) 62.0%

Equity in earnings of an investee

Equity in earnings of investees 529 666 (137) (20.6)%

Net income 81,205 52,498 28,707 54.7 %

Net loss attributable to noncontrolling interest 866 — 866 N/M

Net income attributable to common shareholders $ 82,071 $ 52,498 $ 29,573 56.3 %

Weighted average common shares outstanding - basic 65,104 65,049 55 0.1 %

Weighted average common shares outstanding - diluted 65,114 65,055 59 0.1 %

Net income per common share - basic and diluted

Per common share data (basic and diluted):

Net income attributable to common shareholders $ 1.26 $ 0.81 $ 0.45 55.6 %

N/M - not meaningful

Consists of 266 buildings leasable land parcels and easements that we owned (including for the period that SIR owned our properties prior to our IPO) continuously since January 1, 2018.

Consists of 34 properties that we acquired during the period from January 1, 2018 to December 31, 2019.

(1) Consists of properties that we owned continuously since January 1, 2019 and excludes 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

(2) Consists of 23 properties that we acquired during the period from January 1, 2019 to December 31, 2019, one property we sold in December 2020 and 12 properties we contributed in the first quarter of 2020 to a joint venture in which we currently own a 22% equity interest.

We consolidated the properties owned by the joint venture until November 2020.

(3) See our definition of NOI and our reconciliation of net income to NOI below under the heading "Non-GAAP Financial Measures."

References to changes in the income and expense categories below relate to the comparison of results for the year ended December 31, 2020, compared to the year ended December 31, 2019.

Our acquisition activity reflects our acquisition of 34 properties during the period from January 1, 2018 to December 31, 2019.

For a comparison of consolidated results for the year ended December 31, 2018 compared to the year ended December 31, 2017, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

For a comparison of consolidated results for the year ended December 31, 2019 compared to the year ended December 31, 2018, see Part II, Item 7, "Management's Discussion and

Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Rental income.

The increase in rental income is primarily a result of our acquisition activity as well as leasing activity and rent resets at certain of our comparable properties.

The increase in rental income is primarily a result of our acquisition and disposition activities, and increases from leasing activity and rent resets at certain of our comparable properties.

Rental income includes non-cash straight line rent adjustments totaling approximately $9,041 for the 2020 period and approximately $4,345 for the 2019 period, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $791 for the 2020 period and approximately $1,195 for the 2019 period.

Real estate taxes.

The increase in real estate taxes primarily reflects our acquisition activity and higher tax assessments at certain of our comparable properties.

The increase in real estate taxes primarily reflects our acquisition and disposition activities and higher tax assessments at certain of our comparable properties.

Other operating expenses.

Other operating expenses primarily include snow removal, legal and property management fees and prior to January 1, 2019, bad debt expense;

beginning January 1, 2019, the applicable accounting standards require bad debts to be recorded as a reduction of revenues rather than as an expense.

Other operating expenses also included bad debt expense in the 2018 period.

The increase in other operating expenses is primarily due to our acquisition activity, partially offset by a decrease in other operating expenses at our comparable properties.

The decrease in other operating expenses at our comparable properties is primarily due to a decrease in bad debts recorded as expense and higher snow removal expenses in the 2018 period, partially offset by increases in insurance expense and repairs and maintenance costs during the 2019 period at certain of our comparable properties.

Other operating expenses primarily include repairs and maintenance, utilities, insurance, snow removal and property management fees.

The increase in other operating expenses is primarily due to our acquisition and disposition activities.

The increase in other operating expenses at our comparable properties is primarily due to an increase in insurance expense and repair and maintenance costs in the 2020 period, partially offset by higher snow removal and legal expenses in the 2019 period.

Depreciation and amortization.

The increase in depreciation and amortization primarily reflects our acquisition activity and an increase in depreciation of capital improvements at certain of our properties after January 1, 2018.

The increase in depreciation and amortization primarily reflects our acquisition and disposition activities and an increase in depreciation and amortization of improvements made to certain of our properties after January 1, 2020, partially offset by certain leasing related assets becoming fully amortized in the 2020 period.

Acquisition and certain other transaction related costs.

Acquisition and certain other transaction related costs consist of costs related to acquisitions that were not completed.

General and administrative.

General and administrative expenses primarily include fees paid under our business management agreement, legal fees, audit fees, Trustee fees and equity compensation expense.

The increase in general and administrative expenses primarily reflects an increase in business management fees as a result of our acquisition activity as well as an increase in our equity compensation expense and increased legal and accounting expenses.

General and administrative expenses primarily include fees paid under our business management agreement with RMR LLC, legal fees, audit fees, Trustee fees and equity compensation expense.

The increase in general and administrative expenses primarily reflects an increase in business management fees as a result of our acquisition activity in the 2020 and 2019 periods as well as an increase in our equity compensation expenses.

Gain on sale of real estate.

We recorded a $23,996 aggregate gain on sale of real estate in 2020, resulting from the deconsolidation of and sale of an equity interest in our joint venture and the sale of one other property in the 2020 period.

Interest income.

Interest income represents interest earned on our cash balances.

The increase in interest income is primarily a result of a larger amount of investable cash in the 2019 period compared to the 2018 period.

The decrease in interest income is primarily due to a decrease in average investable cash and lower interest rates earned on invested cash during the 2020 period as compared to the 2019 period.

Interest expense.

The increase in interest expense in the 2019 period is primarily due to increased net borrowings used to fund our acquisition activity in the 2019 period.

Equity in earnings of an investee.

Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC, which we acquired in December 2018.

The increase in interest expense in the 2020 period is primarily due to higher average outstanding indebtedness, partially offset by a lower weighted average interest rate on outstanding indebtedness, during the 2020 period as compared to the 2019 period.

Gain on early extinguishment of debt.

We recorded a gain on early extinguishment of debt in connection with our prepayment of a mortgage note during the 2020 period.

Income tax expense.

Income tax expense primarily reflects state income taxes payable in certain jurisdictions.

The decrease in net income for the 2019 period compared to the 2018 period reflects the changes noted above.

Equity in earnings of investees.

Equity in earnings of investees includes earnings from our unconsolidated joint venture following our sale of an equity interest in that joint venture to a third party in November 2020.

Following the sale, we own a 22% equity interest in the venture.

Equity in earnings of investees also includes our proportionate share of earnings from our former investment in Affiliates Insurance Company, or AIC, in the 2019 period.

The increase in net income for the 2020 period compared to the 2019 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 joint venture that we did not own during the 2020 period when we owned a 61% equity interest in the venture.

Weighted average common shares outstanding .

The increase in weighted average common shares outstanding primarily reflects common shares granted under our equity compensation plan since our IPO.

Net income per common share - basic and diluted.

The decrease in net income per common share reflects the changes to net income and weighted average common shares noted above.

The increase in weighted average common shares outstanding primarily reflects common shares awarded under our equity compensation plan since January 1, 2019.

Net income attributable to common shareholders per common share - basic and diluted.

The increase in net income attributable to common shareholders per common share 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 applicable SEC rules, including NOI, FFO and Normalized FFO.

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income as indicators of our operating performance or as measures of our liquidity.

These measures should be considered in conjunction with net income as presented in our consolidated statements of comprehensive income.

We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income.

We present certain “non-GAAP financial measures” within the meaning of applicable SEC rules, including NOI, FFO attributable to common shareholders and Normalized FFO attributable to common shareholders.

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income or net income attributable to common shareholders as indicators of our operating performance or as measures of our liquidity.

These measures should be considered in conjunction with net income or net income attributable to common shareholders as presented in our consolidated statements of comprehensive income.

We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income and net income 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.

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Reconciliation of Net Income to NOI:

Equity in earnings of an investee

Net income $ 81,205 $ 52,498

Equity in earnings of investees (529) (666)

Income tax expense 277 171

Income before income tax expense and equity earnings of an investee

Income before income tax expense and equity in earnings of investees 80,953 52,003

Gain on early extinguishment of debt (120) —

Interest expense 51,619 50,848

Interest income (113) (743)

Gain on sale of real estate (23,996) —

General and administrative 19,580 17,189

Acquisition and certain other transaction related costs 200 —

Depreciation and amortization 70,518 61,927

$ 198,641 $ 181,224

Hawaii Properties

$ 79,028 $ 74,968

Mainland Properties

Funds From Operations and Normalized Funds From Operations

We calculate FFO and Normalized FFO as shown below.

FFO is calculated on the basis defined by The National Association of Real Estate Investment Trusts, 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.

In calculating Normalized FFO, we adjust for the items shown below, if any, and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an 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.

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 maintain our qualification for taxation as a REIT, limitations in our credit agreement, the availability to us of debt and equity capital, our dividend yield and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations.

Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do.

The following table presents our calculation of FFO and Normalized FFO and reconciliations of net income to FFO and Normalized FFO for the year ended December 31, 2019 and 2018 (dollars in thousands, except per share data) :

119,613 106,256

$ 198,641 $ 181,224

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 attributable to common shareholders, calculated in accordance with GAAP, excluding any gain or loss on sale of real estate and equity in earnings of an unconsolidated joint venture, 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 our unconsolidated joint venture, if any, and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an 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.

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 dividend yield and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations.

Other real estate companies and REITs may calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders differently than we do.

The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net income attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the year ended December 31, 2020 and 2019 (dollars in thousands, except per share data) :

Year Ended December 31,

Reconciliation of Net Income to FFO and Normalized FFO:

Reconciliation of Net Income attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders:

Net income attributable to common shareholders $ 82,071 $ 52,498

Depreciation and amortization 70,518 61,927

FFO and Normalized FFO

FFO and Normalized FFO per common share - basic and diluted

Equity in earnings of unconsolidated joint venture (529) —

Share of FFO from unconsolidated joint venture 556 —

Gain on sale of real estate (23,996) —

FFO adjustments attributable to noncontrolling interest (7,656) —

FFO attributable to common shareholders 120,964 114,425

Acquisition and certain other transaction related costs 200 —

Gain on early extinguishment of debt (120) —

Normalized FFO attributable to common shareholders $ 121,044 $ 114,425

Weighted average common shares outstanding - basic 65,104 65,049

Weighted average common shares outstanding - diluted 65,114 65,055

Per common share data (basic and diluted)

FFO attributable to common shareholders and Normalized FFO attributable to common shareholders $ 1.86 $ 1.76

LIQUIDITY AND CAPITAL RESOURCES

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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 properties and borrowings under our revolving credit facility.

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 based on our current expectations, including impacts from the COVID-19 pandemic and current economic downturn on us and our tenants and their ability to pay us rent when due.

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;

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• purchase additional properties that produce cash flows in excess of our costs of acquisition capital and property operating expenses.

Cash flows provided by (used in) operating, investing and financing activities were $116,300 , ($893,393) and $802,035 , respectively, for the year ended December 31, 2019 and $96,763 , ($135,527) and $48,372 , respectively, for the year ended December 31, 2018.

The increase in net cash provided by operating activities for the year ended December 31, 2019 compared to the prior year is primarily due to increased operating cash flow from our acquisitions of properties after our IPO and changes in our working capital.

The increase in net cash used in investing activities for the year ended December 31, 2019 compared to the prior year is primarily due to our acquisition of 30 properties in the 2019 period compared to four properties in the prior year.

The increase in cash provided by financing activities was primarily due to an increase in net borrowings to fund our acquisition activities during 2019.

Our Investment and Financing Liquidity and Resources (dollars in thousands, except per share and per square foot data)

With $529,000 of availability under our revolving credit facility as of December 31, 2020, $22,834 of cash on hand, 72.2% of our annualized rental revenues derived from investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases and only 1.4% of our annualized rental revenues as of December 31, 2020 from expiring leases over the next 12 months, we believe that we are currently well positioned to weather the present disruptions facing the real estate industry.

Further, we are hopeful that our focus on industrial and logistics properties will enable us and our tenants to outperform the broader commercial and real estate industry if the demand for e-commerce continues at levels consistent with the demand since the COVID-19 pandemic materialized in the United States during the first quarter of 2020.

However, even if that occurs, we expect that some of our tenants may experience significant downturns with respect to their businesses and liquidity.

As a result of the COVID-19 pandemic and its resulting economic downturn, certain of our tenants have requested relief from their obligations to pay rent due to us.

We evaluate these requests on a tenant by tenant basis.

As of February 15, 2021, we granted requests to certain of our tenants to defer aggregate rent payments of $3,244 with respect to leases that represent, as of December 31, 2020, approximately 9.6% of our annualized rental revenues.

In most cases, these tenants were obligated to pay the deferred rents in 12 equal monthly installments beginning in September 2020.

As of December 31, 2020, we recognized $2,630 in our accounts receivable related to the remaining deferred amounts.

For the year ended December 31, 2020, we collected approximately 97.6% of our contractual rents due after giving effect to such rent deferrals.

We expect to receive additional similar requests in the future, particularly if the current economic conditions do not continue to improve or if they worsen for an extended period.

We may determine to grant additional relief in the future, which may vary from the type of relief we have granted to date, and could include more substantial relief, if we determine it prudent or appropriate to do so.

In addition, if any of our tenants are unable to continue as going concerns as a result of the current economic conditions or otherwise, we may experience a reduction in rents received and we may be unable to find suitable replacement tenants for an extended period or at all.

The terms of our leases with those replacement tenants may not be as favorable to us as the terms of our agreements with our existing tenants.

The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows (dollars in thousands):

Year Ended December 31,

Cash and cash equivalents and restricted cash at beginning of period $ 34,550 $ 9,608

Net cash provided by (used in):

Operating activities 114,564 116,300

Investing activities (4,522) (893,393)

Financing activities (121,758) 802,035

Cash and cash equivalents and restricted cash at end of period $ 22,834 $ 34,550

The decrease in net cash provided by operating activities for the year ended December 31, 2020 compared to the prior year is primarily due to changes in our working capital.

The decrease in net cash used in investing activities for the year ended December 31, 2020 compared to the prior year is primarily due to our acquisition of 30 properties in the 2019 period compared to the acquisition of two properties in the 2020 period.

The change in net cash provided by financing activities in 2019 to net cash used in financing activities in 2020 was primarily due to net proceeds from our mortgage financing to fund acquisitions in the 2019 period, partially offset by the proceeds we received from our first joint venture transaction and a prepayment of a mortgage note in the 2020 period.

Our Investing and Financing Liquidity and Resources (dollars in thousands, except per share and per square foot data)

Our future acquisition or development activity cannot be accurately projected because such activity depends upon available opportunities that come to our attention and upon our ability to successfully acquire, develop and operate properties, financing available to us, our cost of capital, other commitments we have made and alternative uses for the amounts that would be required for the acquisition or development, the extent of our leverage, and the expected impact of the acquisition or development on our debt covenants and certain other financial metrics.

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As of December 31, 2020, we had cash and cash equivalents of $22,834.

To maintain our qualification for taxation as a REIT under the IRC, we generally are required to distribute annually at least 90% of our REIT taxable income, subject to specified adjustments and excluding any net capital gain.

To maintain our qualification for taxation as a REIT under the IRC, we generally are required to distribute 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.

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As of December 31, 2020, the annual interest rate payable on borrowings under our revolving credit facility was 1.70%.

As of December 31, 2019 and February 19, 2020, we had $310,000 and $385,000, respectively, outstanding under our revolving credit facility and $440,000 and $365,000, respectively, available to borrow under our revolving credit facility.

As of December 31, 2020 and February 15, 2021, we had $221,000 outstanding under our revolving credit facility, and $529,000 available to borrow under our revolving credit facility.

Our credit agreement includes a feature under which the maximum borrowing availability under the facility may be increased to up to $1,500,000 in certain circumstances.

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We used the proceeds from this loan to reduce outstanding borrowings under our revolving credit facility and to fund acquisitions.

In October 2019, we obtained a $350,000 mortgage loan secured by 11 of our Mainland Properties containing an aggregate of approximately 8.2 million rentable square feet and located in eight states.

This non-amortizing loan matures in November 2029 and requires monthly payments of interest at a fixed rate of 3.33% per annum.

We used the proceeds from this loan to reduce outstanding borrowings under our revolving credit facility.

In connection with the acquisition of a portfolio of 20 industrial properties in April 2019, we assumed a $56,980 mortgage note secured by one property containing approximately 1.0 million square feet located in Ruskin, FL.

This non-amortizing loan matures on October 1, 2023 and requires monthly payments of interest only at a fixed rate of 3.60% per annum.

As of December 31, 2019, including the mortgage debt described in the preceding three paragraphs, we had four mortgage notes payable with an aggregate principal amount of $1,105,730, which are scheduled to mature in 2020, 2023 and 2029.

The investment amount is based on an aggregate property valuation of $680,000, less approximately $407,000 of existing mortgage debt on the properties at the time of the investment.

We closed the joint venture with 11 of the 12 properties and the investor will initially contribute approximately $82,000 with the balance contributed when the twelfth property is added.

We expect to use the net proceeds from this transaction to reduce outstanding borrowings under our revolving credit facility.

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 more information regarding our IPO and our application of the net proceeds, see Notes 1, 8 and 10 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

In October 2019, we obtained a $350,000 mortgage loan secured by 11 of our properties located in mainland United States containing an aggregate of approximately 8.2 million rentable square feet and located in eight states.

This non-amortizing loan matures in November 2029 and requires monthly payments of interest at a fixed rate of 3.33% per annum.

We used the proceeds from this loan to reduce outstanding borrowings under our revolving credit facility.

As a result of the prepayment of this mortgage note, we recorded a gain on early extinguishment of debt of $120 for the year ended December 31, 2020 to write off unamortized debt premiums.

We no longer include the $56,980 secured mortgage note or the $350,000 mortgage loan in our consolidated balance sheet following the deconsolidation of the net assets of our formerly majority-owned joint venture.

For further information regarding our joint venture, see Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

As of December 31, 2020, we had mortgage notes payable with an aggregate principal amount of $650,000, which is scheduled to mature in 2029.

In the first quarter of 2020, we entered into agreements related to a joint venture for 12 of our properties in the mainland United States with an Asian institutional investor.

We contributed 11 of these properties to our joint venture in February 2020 and the remaining property in March 2020.

We received proceeds from the investor in an aggregate amount of $107,942, which includes $734 of costs associated with the formation of our joint venture, for a 39% equity interest in the joint venture and we retained the remaining 61% equity interest in our joint venture.

We recognized a noncontrolling interest in our consolidated balance sheet of $98,375 as of the completion of this transaction, which was equal to 39% of our aggregate carrying value of the total equity of the properties immediately prior to our respective contributions of the properties to our joint venture.

The difference between the net proceeds received from this transaction and the noncontrolling interest recognized, which was $9,567, has been reflected as an increase in additional paid in capital in our consolidated balance sheet.

The portion of our joint venture's net loss not attributable to us, or $866 for the year ended December 31, 2020, is reported as noncontrolling interest in our consolidated statements of comprehensive income.

During the year ended December 31, 2020, our joint venture made aggregate cash distributions of $14,049, $5,479 to the first joint venture investor, which was reflected as a decrease in total equity attributable to noncontrolling interest and $8,570 to us.

We determined that, while we owned a 61% equity interest in our joint venture, our joint venture was a variable interest entity, or VIE, as defined under the Consolidation Topic of the Financial Accounting Standards Board Accounting Standards Codification.

We concluded that we must consolidate this VIE, and we did so, until we sold an additional 39% equity interest in the joint venture in November 2020.

We reached this determination because we were the entity with the power to direct the activities that most significantly impacted the VIE's economic performance and we had the obligation to absorb losses of, and the right to receive benefits from, the VIE that could be significant to the VIE, and therefore were the primary beneficiary of the VIE.

The joint venture investor's interest in this consolidated entity was reflected as noncontrolling interest in our consolidated financial statements.

We deconsolidated the net assets of our joint venture and recognized a net gain on sale of $23,415 on this transaction, which is included in gain on sale of real estate in our consolidated statements of comprehensive income.

After giving effect to the sale, we continue to own a 22% equity interest in our joint venture, but have determined that we are no longer the primary beneficiary.

Effective as of the date of the sale, we deconsolidated our joint venture and, since that time, we account for our joint venture using the equity method of accounting under the fair value option.

Our initial investment amount was based on an aggregate property valuation of $680,000, less $406,980 of existing mortgage debts on the properties, that our joint venture assumed.

We used the net proceeds from this transaction to reduce outstanding borrowings under our revolving credit facility.

For more information regarding the use of the equity method for our joint venture, see Note 6 to the Notes to the Consolidated Financial Statements included in Part IV, of this Annual Report on Form 10-K.

We expect to use borrowings under our revolving credit facility and net proceeds from offerings of equity or debt securities to fund any future property acquisitions, development or redevelopment efforts.

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We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but we cannot be sure that there will be purchasers for such securities.

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 or and equity offerings, to fund capital expenditures, future acquisitions, development, redevelopment and other activities and to pay our obligations.

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 or equity offerings, to fund capital expenditures, future acquisitions, development, redevelopment and other activities and to pay our obligations.

The completion and the costs of any future financings will depend primarily upon our success in operating our business and upon market conditions.

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We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investment and financing activities.

However, as noted elsewhere in this Annual Report on Form 10-K, it is uncertain what the duration and severity of the current economic downturn resulting from the COVID-19 pandemic will be.

A protracted and extensive downturn may have various negative consequences, including a decline in financing availability and increased costs for financing.

Further, such conditions could also disrupt capital markets and limit our access to financing from public sources, particularly if the global financial markets experience significant disruptions.

During the year ended December 31, 2020, we paid quarterly cash distributions to our shareholders totaling $86,089 using existing cash balances and borrowings under our revolving credit facility.

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We paid this distribution to our shareholders on February 18, 2021 using existing cash balances and borrowings under our revolving credit facility.

We currently expect that our leasing activity and our recent acquisitions may increase our future cash flows and enhance our ability to increase our distributions to shareholders in the future.

However, even if we realize future cash flows and an enhancement in our ability to increase our distributions to shareholders, we may elect to utilize that cash for purposes other than increasing our distributions to shareholders, such as to reduce our debt.

During the years ended December 31, 2020 and 2019, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

Tenant improvements (1)

Leasing costs (2)

Year Ended December 31,

Tenant improvements and leasing costs (1)

$ 2,880 $ 1,735

Building improvements (2)

Development, redevelopment and other activities (3)

Tenant improvements include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space.

Leasing costs include leasing related costs, such as brokerage commissions, legal costs and tenant inducements.

$ 7,047 $ 19,974

(1) Tenant improvements and leasing costs include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and tenant inducements.

(2) Building improvements generally include (i) expenditures to replace obsolete building components and (ii) expenditures that extend the useful life of existing assets.

(3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenues.

As of December 31, 2019, we had estimated unspent leasing related obligations of $793 .

As of December 31, 2020, we had estimated unspent leasing related obligations of $544, of which $373 is expected to be spent during the next 12 months.

During the year ended December 31, 2020, 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) 182 920 1,102

Total leasing costs and concession commitments (1)

$ 956 $ 1,150 $ 2,106

Total leasing costs and concession commitments per square foot (1)

$ 5.25 $ 1.25 $ 1.91

Weighted average lease term by square feet (years) 10.9 11.5 11.4

Total leasing costs and concession commitments per square foot per year (1)

$ 0.48 $ 0.11 $ 0.17

(1) Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements.

As of December 31, 2019 , our contractual obligations were as follows:

Payments Due by Period

Contractual Obligations

Borrowings under revolving credit facility

Mortgage notes payable

Tenant related obligations (1)

Projected interest expense (2)

Committed tenant related obligations include leasing commissions, tenant improvements or other tenant inducements and are based on leases in effect as of December 31, 2019 .

Projected interest expense is attributable to only our debt obligations as of December 31, 2019 at existing rates and is not intended to project future interest costs which may result from debt prepayments, discounts, debt issuances or changes in interest rates.

Projected interest expense does not include interest which may become payable related to future borrowings under our revolving credit facility.

Off Balance Sheet Arrangements

As of December 31, 2019 , 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.

Debt Covenants (dollars in thousands)

Our principal debt obligations at December 31, 2019 were borrowings outstanding under our revolving credit facility, a $650,000 mortgage loan obtained in January 2019 that is secured by 186 properties, a $350,000 mortgage loan obtained in October 2019 that is secured by 11 of our Mainland Properties, a $56,980 mortgage note assumed in connection with an acquisition of a property in April 2019, and a $48,750 mortgage note assumed in connection with an acquisition of a property by SIR in 2015 that SIR contributed to us in connections with our IPO.

Our mortgage notes are non-recourse, subject to certain limitations, except that, with respect to the $650,000 mortgage loan, the applicable loan agreement contains certain exceptions to the general non-recourse provisions that obligate us to indemnify the lenders for certain potential environmental losses relating to hazardous materials and violations of environmental law.

Our principal debt obligations at December 31, 2020 were borrowings outstanding under our revolving credit facility and a $650,000 non-recourse, mortgage loan obtained in January 2019 that is secured by 186 properties.

The applicable loan agreement contains certain exceptions to the general non-recourse provisions that obligate us to indemnify the lenders for certain potential environmental losses relating to hazardous materials and violations of environmental law.

Our credit agreement provides for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as a change of control of us, which includes RMR LLC ceasing to act as our business and property manager.

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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.

The loan agreements governing our mortgage loans contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default.

In addition, pursuant to the loan agreement and related documents governing our $650,000 mortgage loan, we are required to maintain a minimum consolidated net worth of at least $250,000 and liquidity of at least $15,000.

As of December 31, 2019, we believe we were in compliance with all the covenants and other terms under the agreements governing our mortgage notes.

The loan agreement and related documents governing our $650,000 mortgage loan contain customary covenants, provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default and require us to maintain a minimum consolidated net worth of at least $250,000 and liquidity of at least $15,000.

As of December 31, 2020, we believe we were in compliance with all the covenants and other terms under this loan agreement.

Related Person Transactions

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and others related to them.

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;

is the managing member of RMR LLC;

Adam Portnoy, the Chair of our Board of Trustees and one of our Managing Trustees, is the sole trustee, an officer and the controlling shareholder of ABP Trust, which is the controlling shareholder of RMR Inc., a managing director, president and chief executive officer of RMR Inc.

and an officer and employee of RMR LLC;

John Murray, our other Managing Trustee and our President and Chief Executive Officer, also serves as an officer and employee of RMR LLC, and each of our other officers is also an officer and employee of RMR LLC.

We have relationships and historical and continuing transactions with other companies to which RMR LLC or its subsidiaries provide management services and some of which have trustees, directors or officers who are also trustees, directors or officers of us, RMR LLC or RMR Inc., including OPI (successor by merger to SIR).

For more information about these and other such relationships and related person transactions, see Notes 8, 9 and 10 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference, our other filings with the SEC, including our definitive Proxy Statement for our 2020 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2019.

For more information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward Looking Statements,” Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” 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 the Transaction Agreement, are available as exhibits to our public 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 Policies

For more information about these and other such relationships and related person transactions, see Notes 9 and 10 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, and our other filings with the SEC, including our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2020.

For more information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward Looking Statements,” Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

Critical Accounting Estimates

Our critical accounting policies are those that will have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates.

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In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own or decrease the carrying values of our assets.

Impact of Inflation

Inflation in the past several years in the United States has been modest, but recently there have been indications of inflation in the U.S.

economy and some market forecasts indicate an expectation of increased inflation in the near to intermediate term.

Future inflation might have both positive and negative impacts on our business.

Inflation might cause the value of our assets to increase.

Increases in operating costs as a result of inflation are likely to have modest, if any, impacts on our operating results.

This is because most of the operating costs arising in our business are incurred at our properties and our tenants pay most of the property operating cost increases directly or indirectly when we pass through such costs as additional rent under our leases.

Increased debt capital costs as a result of inflation are not directly or immediately paid by, or passed through, to our tenants;

therefore, such cost increases are more likely to impact our financial results.

Over time, however, inflationary debt capital cost increases may be mitigated by rent resets at our Hawaii Properties or as leases at our properties expire and new leases are entered which reflect inflationary increases in market rents.

To mitigate the adverse impact of any increased cost of debt capital in the event of material inflation, we may enter into interest rate hedge arrangements.

The decision to enter into these agreements will be based on various factors, including the amount of our floating rate debt outstanding, our belief that material interest rate increases are likely to occur, the costs of, and our expected benefit from, these agreements and upon possible requirements of our borrowing arrangements.

In periods of rapid U.S.

inflation, our tenants’ operating costs may increase faster than revenues, which may have an adverse impact upon us if our tenants’ operating income becomes insufficient to pay our rent.

To mitigate the adverse impact of tenant financial distress upon us, we require some of our tenants to provide guarantees or security for our rent.

Generally, we do not expect inflation to have a material adverse impact on our financial results for the next 12 months or for the currently foreseeable future thereafter.

Impact of Climate Change

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis