What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-26 compared with 2020-10-28 · 161 added, 346 removed, 223 unchanged (69% of the section changed)

1 unchanged sentence

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 2020 Annual Report.

IMPACT OF COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic and, in response to the outbreak, the U.S.

Health and Human Services Secretary declared a public health emergency in the United States and many states and municipalities declared public health emergencies.

The virus that causes COVID-19 has continued to spread throughout the United States and the world.

Various governmental and market responses attempting to contain and mitigate the spread of the virus have negatively impacted, and continue to negatively impact, the global economy, including the U.S.

As a result, most market observers believe the global economy and the U.S.

economy are in a recession.

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, 2021, 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, Hawaii, and 63 properties containing approximately 18.1 million rentable square feet located in 30 other states.

As of March 31, 2021, we also owned a 22% equity interest in an unconsolidated joint venture which owns 12 properties located in nine states containing approximately 9.2 million rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 8.0 years.

As of March 31, 2021, our consolidated properties were approximately 98.6% leased (based on rentable square feet) to 253 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 9.4 years.

We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of March 31, 2021, 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.

Our business is focused on industrial and logistics properties.

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 and market 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.

States and municipalities across the United States have generally allowed most businesses to re-open and have generally eased certain restrictions they had previously implemented in response to the COVID-19 pandemic, often in stages that are phased in over time, although some states and municipalities have imposed or re-imposed certain restrictions in response to increases in COVID-19 infections experienced since then.

Recently, economic data have indicated that the U.S.

economy has increasingly improved since the lowest periods experienced in March and April 2020, although some recent data indicate a slowing in those improvements.

It is unclear whether the increases in the number of COVID-19 infections will continue or amplify in the United States or elsewhere and, if so, what the impact of that would be on human health and safety, the economy, our tenants or our business.

We believe that the industrial and logistics sector and many of our tenants are critical to sustaining a resilient supply chain to support essential services and daily consumption across the United States.

However, if economic conditions do not continue to improve or if they worsen, including in response to any increase in the number or severity of COVID-19 infections, continued or worsening economic conditions, demand for e-commerce may also decline.

If that occurs, our tenants and their businesses may become negatively impacted, which may result in our tenants seeking assistance from us regarding their rent obligations owed to us, their being unable to pay us rent, their ceasing to pay us rent and their ceasing to continue as going concerns.

We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including:

• our tenants and their ability to withstand the current, and possible future deteriorating, economic conditions and ability to pay us rent;

• our operations, liquidity and capital needs and resources;

• conducting financial modeling and sensitivity analyses;

• actively communicating with our tenants and other key constituents and stakeholders in order to help assess market conditions, opportunities, best practices and mitigate risks and potential adverse impacts;

• monitoring, with the assistance of counsel and other specialists, possible government relief funding sources and other programs that may be available to us or our tenants to enable us and them to operate through the current economic conditions and enhance our tenants’ ability to pay us rent.

We believe that our current financial resources and our expectations as to the future performance of the industrial and logistics sector and our tenants will enable us to withstand the COVID-19 pandemic and its aftermath.

As of October 26, 2020, we had:

• $457,000 of availability under our revolving credit facility;

• no outstanding debt scheduled to mature during the remainder of 2020 and our next debt maturity being our credit facility in December 2021, which maturity is subject to two six month extensions at our option;

• 75.7% of our annualized rental revenues, as of September 30, 2020, derived from investment grade rated tenants, subsidiaries of investment grade rated parent entities or Hawaii land leases;

• only 3.3% of our annualized rental revenues, as of September 30, 2020, scheduled to expire over the next 12 months.

In light of the above resources, expectations and conditions, we believe that we are well positioned to weather the present disruptions facing the real estate industry.

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 October 23, 2020, we granted requests to certain of our tenants to defer aggregate rent payments of $3,578 with respect to leases that represent, as of September 30, 2020, approximately 8.6% of our annualized rental revenues.

As of September 30, 2020, we recognized $2,847 in our accounts receivable related to these deferred amounts.

The industrial and logistics sector has fared better than some other industries thus far during the COVID-19 pandemic, including other real estate sectors, due to the demand for e-commerce.

Although, to date, the COVID-19 pandemic has not had a significant adverse impact on our business, certain of our tenants requested relief from their obligations to pay rent due to us in response to the economic conditions resulting from the COVID-19 pandemic.

As of April 23, 2021, we granted requests to certain of our tenants to defer aggregate rent payments of $3,103 with respect to leases that represent, as of March 31, 2021, approximately 1.5% of our annualized rental revenues.

As of March 31, 2021, we recognized $1,725 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.

These deferred amounts did not negatively impact our financial results for the three and nine months ended September 30, 2020, and will continue to be reflected in our financial results in the applicable future reporting periods, assuming these tenants continue to pay the deferred rents due to us.

For the three months ended September 30, 2020, we collected approximately 98.4% of our contractual rents due after giving effect to such rent deferrals.

We do not have any 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.

RMR LLC has implemented enhanced cleaning protocols and social distancing guidelines at its corporate headquarters and its regional offices, as well as business continuity plans to ensure that RMR LLC employees remain safe and able to support us and other companies managed by RMR LLC or its subsidiaries, including providing appropriate information technology such as notebook computers, smart phones, computer applications, information technology security applications and technology support.

All RMR LLC property management and engineering personnel have been trained on COVID-19 precaution procedures.

As states and local communities across the United States moved to stay at home orders, RMR LLC worked to reduce and optimize our operating costs at our properties by:

• deferring non-emergency work;

• implementing energy reduction protocols for lighting and HVAC systems;

• reducing non-essential building services and staff;

• reducing the frequency of trash removal.

RMR LLC’s property management teams have also established business continuity plans to ensure operational stability at our properties.

RMR LLC regional management offices limit walk-in visitors and maintain maximum office occupancy limits as required by state and local guidelines, including weekly rotations of employees as needed.

As stay at home orders are lifted or loosened across the United States, RMR LLC has implemented additional procedures at our properties based on recommended guidelines from the U.S.

Centers for Disease Control and Prevention and other regulatory agencies.

• focusing on sanitizing high touch points in common areas and restrooms;

• shutting down certain building amenities;

• prudently managing the execution or deferment of tenant work orders to limit RMR LLC staff and tenant interactions at our properties;

• installing signage throughout our properties with social distancing reminders;

• changing certain building HVAC systems and equipment, including adjusting outdoor air control programs to increase the amount of outside air delivered to interior spaces and to adjust control sequences to maintain space relative humidity in order to help minimize the concentration of the virus;

• flushing domestic water systems to prepare for re-occupancy;

• performing service calls and preventative maintenance after business hours to limit social interactions;

• requiring vendors to follow best practices under COVID-19 pandemic conditions, including providing RMR LLC with documented preventative measures for their employees and requiring staff to wear appropriate personal protective equipment when working at our properties;

• altering cleaning schedules to perform vacuuming at times intended to reduce the potential airborne spread of the virus.

RMR LLC has significantly reduced non-essential work travel and its regional leadership personnel have not been allowed to work in the same locations at the same time.

RMR LLC also requires its employees who work at our properties to use personal protective equipment and business continuity bonus payments have been provided to certain essential workers at our properties.

There are extensive uncertainties surrounding the COVID-19 pandemic and its aftermath.

These uncertainties include, among others:

• the duration and severity of the negative economic impact;

• the strength and sustainability of any economic recovery;

• the timing and process for how the federal, state and local governments and other market participants may oversee and conduct the return of economic activity when the COVID-19 pandemic abates, such as what continuing restrictions and protective measures may remain in place or be added and what restrictions and protective measures may be lifted or reduced in order to foster a return of increased economic activity in the United States;

• the responses of governments, businesses and the general public to any increased level or rates of COVID-19 infections.

As a result of these uncertainties, we are unable to determine what the ultimate impact will be on our, our tenants’ and other stakeholders’ businesses, operations, financial results and financial position.

For further information and risks relating to the COVID-19 pandemic on us and our business, see Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.

We are a real estate investment trust, or REIT, organized under Maryland law.

As of September 30, 2020, we owned 301 properties with approximately 43.8 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 75 properties with approximately 27.0 million rentable square feet located in 30 other states, including 12 properties with approximately 9.2 million rentable square feet owned by a joint venture in which we own a 61% equity interest.

As of September 30, 2020, our properties were approximately 98.8% leased (based on rentable square feet) to 264 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 9.0 years.

We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of September 30, 2020, 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.

Unless otherwise noted, the data presented in this section includes the 12 properties owned by a joint venture in which we own a 61% equity interest and one property classified as held for sale as of September 30, 2020.

These deferred amounts did not negatively impact our operating results for the three months ended March 31, 2021, and will continue to be reflected in our financial results in the applicable future reporting periods, assuming these tenants continue to pay the deferred rents due to us.

Our manager, RMR LLC, has taken various actions in response to the COVID-19 pandemic to address its operating and financial impact on us and to protect the health and safety of our tenants and other persons who visit our properties.

In addition, we are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business.

See our 2020 Annual Report for further information regarding these actions and monitoring activities.

There are uncertainties surrounding the COVID-19 pandemic and, as a result of these uncertainties, we are unable to determine what the ultimate impact will be on our, our tenants’ and other stakeholders’ businesses, operations, financial results and financial position.

For further information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1, “Business—Impact of COVID-19” and Part I, Item 1A, “Risk Factors”, of our 2020 Annual Report.

Property Operations

As of September 30, 2020, 98.8% of our rentable square feet was leased, compared to 99.5% of our rentable square feet as of September 30, 2019.

Occupancy data for our properties as of September 30, 2020 and 2019 is as follows (square feet in thousands):

Occupancy data for our properties as of March 31, 2021 and 2020 is as follows (square feet in thousands):

All Properties Comparable Properties (1)

As of September 30, As of September 30,

As of March 31, As of March 31,

2021 2020 2021 2020

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98.6 % 98.9 % 98.5 % 98.5 %

(1) Consists of properties that we owned continuously since January 1, 2019 and excludes one property classified as held for sale.

(1) Consists of properties that we owned continuously since January 1, 2020 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.

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of September 30, 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 three and nine months ended September 30, 2020 and 2019 are as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of March 31, 2021, 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, 2021 and 2020 are as follows:

Three Months Ended March 31,

Average effective rental rates per square foot leased:

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(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) Comparable properties for the three months ended September 30, 2020 and 2019 consist of 297 buildings, leasable land parcels and easements that we owned continuously since July 1, 2019 and exclude one property classified as held for sale.

Comparable properties for the nine months ended September 30, 2020 and 2019 consist of 269 buildings, leasable land parcels and easements that we owned continuously since January 1, 2019 and exclude one property classified as held for sale.

During the three months ended September 30, 2020, we entered new and renewal leases for approximately 486,000 square feet at weighted average (by square feet) rental rates that were approximately 7.9% 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).

Commitments for tenant improvements, leasing costs and concessions for leases entered during the three months ended September 30, 2020 totaled $927,000, or approximately $0.44 per square foot per year of the new weighted average lease term.

Also, during the three months ended September 30, 2020, we completed rent resets for approximately 290,000 square feet of land at our Hawaii Properties at rent rates that were approximately 15.6% higher than the prior rental rates.

As shown in the table below, approximately 0.2% of both our total rented square feet and our total annualized rental revenues as of September 30, 2020 are included in leases scheduled to expire by December 31, 2020.

As of September 30, 2020, our lease expirations by year are as follows (dollars and square feet in thousands):

(2) Consists of properties that we owned continuously since January 1, 2020 and excludes 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

During the three months ended March 31, 2021, we entered new and renewal leases for approximately 620,000 square feet at weighted average (by square feet) rental rates that were approximately 16.0% 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 11.7 years.

Commitments for tenant improvements, leasing costs and concessions for leases entered during the three months ended March 31, 2021 totaled $3,256, or approximately $0.45 per square foot per year of the new weighted average lease term.

As shown in the table below, approximately 0.9% of both our total leased square feet and our total annualized rental revenues as of March 31, 2021 are included in leases scheduled to expire by December 31, 2021.

As of March 31, 2021, our lease expirations by year are as follows (dollars and square feet in thousands):

% of Total Cumulative

% of Total Cumulative % Annualized Annualized % of Total

Rented Rented of Total Rented Rental Rental Annualized

Leased Leased of Total Leased Rental Rental Annualized

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

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Weighted average remaining lease term (in years):

(1) Rented square feet is pursuant to existing leases as of September 30, 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.

The following chart shows the annualized rental revenues as of September 30, 2020 scheduled to reset at our Hawaii Properties:

Scheduled Rent Resets at Hawaii Properties

(dollars in thousands)

Rental Revenues as of

September 30, 2020

Scheduled to Reset

10/1/2020-12/31/2020 $ —

2025 and thereafter 20,105

Total $ 31,447

(1) Leased square feet is pursuant to existing leases as of March 31, 2021 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 September 30, 2020, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):

of Rented % of Total Annualized Rental

As of March 31, 2021, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):

of Leased % of Total Annualized Rental

Tenant States Properties Sq.

1 Amazon.com Services, Inc.

AZ, FL, IN, SC, TN, VA 7 6,939 16.1 % 15.9 %

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 % 4.5 %

3 The Procter & Gamble Distributing LLC OH 1 1,791 4.1 % 3.7 %

3 Restoration Hardware, Inc.

2 unchanged sentences

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

5 Servco Pacific Inc.

HI 6 590 1.7 % 2.4 %

6 UPS Supply Chain Solutions Inc.

1 unchanged sentence

7 Par Hawaii Refining, LLC HI 3 3,148 9.2 % 2.3 %

8 Servco Pacific Inc.

HI 4 537 1.2 % 1.8 %

9 SKF USA Inc.

MO 1 431 1.0 % 1.6 %

8 EF Transit, Inc.

IN 1 535 1.6 % 1.9 %

11 Subaru of America, Inc.

IN 1 963 2.2 % 1.4 %

9 BJ's Wholesale Club, Inc.

4 unchanged sentences

HI 2 146 0.4 % 1.6 %

13 ELC Distribution Center LLC KS 1 645 1.9 % 1.5 %

14 Manheim Remarketing, Inc.

1 unchanged sentence

SC 1 945 2.8 % 1.4 %

18 The Toro Company IA 1 644 1.5 % 1.2 %

19 Trex Company, Inc.

NV, VA 2 646 1.5 % 1.2 %

Kilgo Company, Inc.

HI 5 310 0.7 % 1.2 %

16 Avnet, Inc.

OH 1 581 1.7 % 1.4 %

22 Cummins Inc.

KY 1 604 1.4 % 1.1 %

17 Warehouse Rentals Inc.

HI 5 278 0.8 % 1.3 %

24 Whirlpool Corporation IN 1 805 1.9 % 1.0 %

18 YNAP Corporation NJ 1 167 0.5 % 1.2 %

19 ODW Logistics, Inc.

OH 3 760 2.2 % 1.1 %

20 Honolulu Warehouse Co., Ltd.

HI 1 298 0.9 % 1.1 %

21 Refresco Beverages US Inc.

MO, SC 2 421 1.2 % 1.1 %

22 Hellmann Worldwide Logistics Inc.

FL 1 240 0.7 % 1.1 %

23 AES Hawaii, Inc.

HI 2 1,242 3.6 % 1.0 %

24 General Mills Operations, LLC MI 1 158 0.5 % 1.0 %

Total 66 19,474 56.9 % 50.0 %

Mainland Properties.

As of September 30, 2020, our Mainland Properties represented approximately 59.3% of our annualized rental revenues.

As of March 31, 2021, our Mainland Properties represented approximately 49.2% of our annualized rental revenues.

We generally will seek to renew or extend the terms of leases at our Mainland Properties as their expirations approach.

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.

However, as noted elsewhere in this Quarterly Report on Form 10-Q, the COVID-19 pandemic has had a substantial adverse impact on the global economy.

Depending on the duration and severity of this pandemic and the resulting economic impact, our tenants’ businesses and operations may become significantly negatively impacted, which may result in their failing to pay rent to us or not renewing their leases with us upon expirations.

Due to 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 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.

As of September 30, 2020, our Hawaii Properties represented approximately 40.7% of our annualized rental revenues.

As of September 30, 2020, certain of our Hawaii Properties are lands leased for rents that periodically reset based on fair market values, generally every ten years.

As of March 31, 2021, our Hawaii Properties represented approximately 50.8% of our annualized rental revenues.

As of March 31, 2021, certain of our Hawaii Properties are lands leased for rents that periodically reset based on fair market values, generally every 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.

2 unchanged sentences

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’ prior experience with rent resets, lease extensions and new leases 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.

Despite our and our predecessors’ prior experience with rent resets, lease extensions and new leases 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.

If the tenants at our Hawaii Properties are unable to withstand the economic downturn resulting from the COVID-19 pandemic, they may not seek to renew leases with us and we may be unable to obtain new tenants for those properties for an extended period or at all and the terms of any leases we may enter may be less favorable to us than the terms of our existing leases for our Hawaii Properties.

As of September 30, 2020, $8,425, or 3.3%, of our annualized rental revenues are due to expire through September 30, 2021 and 1.2% of our rentable square feet are currently vacant.

The following chart shows the annualized rental revenues as of March 31, 2021 scheduled to reset at our Hawaii Properties:

Scheduled Rent Resets at Hawaii Properties

(dollars in thousands)

Rental Revenues as of

March 31, 2021

Scheduled to Reset

4/1/2021-12/31/2021 $ 701

2026 and thereafter 17,018

Total $ 29,332

As of March 31, 2021, $2,725, or 1.3%, of our annualized rental revenues are included in leases scheduled to expire through March 31, 2022 and 1.4% 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, and as noted elsewhere in this Quarterly Report on Form 10-Q, the COVID-19 pandemic and its economic impact may adversely impact our future leasing activities and our ability to lease our properties and to receive rents.

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.

1 unchanged sentence

RMR LLC assesses tenants on an individual basis based on various applicable credit criteria.

In general, depending on facts and circumstances, RMR LLC evaluates the creditworthiness of a tenant based on information concerning the tenant that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources.

In general, depending on facts and circumstances, RMR LLC evaluates the creditworthiness of a tenant based on information that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources.

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 nine months ended September 30, 2020, we acquired a property with 820,384 rentable square feet for a purchase price of $71,481, excluding acquisition related costs of $147.

In September 2020, we entered into an agreement to sell one property located in Virginia, for a gross sales price of $11,000, excluding closing costs.

This sale is expected to occur during the fourth quarter of 2020.

However, this sale is subject to conditions;

accordingly, we cannot be sure that we will complete this sale, that this sale will not be delayed or the terms will not change.

For further information regarding our investment activities, see Note 3 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Financing Activities (dollars in thousands)

In February and March 2020, we entered into agreements related to a joint venture for 12 of our Mainland Properties.

We received proceeds from the investor in an aggregate amount of $108,676, 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 $406,980 of existing mortgage debts on the properties at the time of the investment that the joint venture assumed.

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

During the three and nine months ended September 30, 2020, the joint venture made aggregate cash distributions of $5,402 and $10,269, respectively, including $2,107 and $4,005, respectively, to the other joint venture investor.

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 nine months ended September 30, 2020 to write off unamortized premiums.

For further information regarding our financing activities, see Notes 5 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Investment and Financing Liquidity and Resources” of this Quarterly Report on Form 10-Q.

Investing and Financing Activities (dollars in thousands)

In March 2021, we entered into an agreement to acquire a newly built property located near the Rickenbacker intermodal terminal and airport in Columbus, Ohio containing approximately 358,000 rentable square feet and net leased to a single tenant for a purchase price of $31,500, excluding acquisition related costs.

This acquisition is expected to close during the second quarter of 2021.

However, this acquisition is subject to conditions;

accordingly, we cannot be sure that we will complete this acquisition, that this acquisition will not be delayed or that the terms will not change.

During the three months ended March 31, 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 and contributed those 12 properties to our joint venture.

We received an aggregate of $108,266 from that investor for a 39% equity interest in our joint venture and we retained the remaining 61% equity interest in our joint venture.

As of March 31, 2020, we incurred transaction costs of $626 in connection with the formation of this joint venture.

We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three months ended March 31, 2020.

The portion of our joint venture's net loss not attributable to us, or $152 for the three months ended March 31, 2020, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income.

No distributions were made by our joint venture during the three months ended March 31, 2020.

In November 2020, we sold an additional 39% equity interest from our remaining 61% equity interest to a second unrelated third party institutional investor and retained a 22% equity interest in our joint venture.

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.

During the three months ended March 31, 2021, we recorded the change in the fair value of our investment in our joint venture of $2,581 in our condensed consolidated statements of comprehensive income.

In addition, during the three months ended March 31, 2021, our joint venture made aggregate cash distributions of $660 to us.

For further information regarding our investing and financing activities, see Notes 2 and 5 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Investing and Financing Liquidity and Resources” of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2020, Compared to Three Months Ended September 30, 2019 (dollars and share amounts in thousands, except per share data)

Three Months Ended March 31, 2021, Compared to Three Months Ended March 31, 2020 (dollars and share amounts in thousands, except per share data)

Comparable Properties Results (1)

1 unchanged sentence

Consolidated Results

Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30,

Three Months Ended March 31, Three Months Ended March 31, Three Months Ended March 31,

2021 2020 Change Change 2021 2020 Change 2021 2020 Change Change

10 unchanged sentences

Depreciation and amortization 12,678 18,290 (5,612) (30.7 %)

Acquisition and certain other transaction related costs 178 — 178 N/M

General and administrative 3,756 4,831 (1,075) (22.3 %)

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Interest expense (8,741) (14,519) 5,778 (39.8 %)

Income before income tax expense and equity earnings of an investee 13,827 10,902 2,925 26.8 %

Income before income tax expense and equity in earnings of investees 16,819 12,757 4,062 31.8 %

Income tax expense (63) (63) — — %

Equity in earnings of an investee — 83 (83) N/M

Equity in earnings of investees 2,581 — 2,581 N/M

Net income 19,337 12,694 6,643 52.3 %

Net loss attributable to noncontrolling interest 275 — 275 N/M

Net loss attributable to noncontrolling interest — 152 (152) (100.0 %)

Net income attributable to common shareholders $ 19,337 $ 12,846 $ 6,491 50.5 %

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N/M - Not Meaningful

(1) Consists of 297 buildings, leasable land parcels and easements that we owned continuously since July 1, 2019 and excludes one property classified as held for sale as of September 30, 2020.

(2) Consists of three properties that we acquired during the period from July 1, 2019 to September 30, 2020 and one property classified as held for sale as of September 30, 2020.

(1) Consists of properties that we owned continuously since January 1, 2020 and excludes 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

(2) Consists of two properties that we acquired during the period from January 1, 2020 to March 31, 2021, one property we sold in 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 our 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 three months ended September 30, 2020 compared to the three months ended September 30, 2019.

References to changes in the income and expense categories below relate to the comparison of results for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Rental income.

The increase in rental income is primarily a result of our acquisition activity and increases from leasing activity, rent resets and real estate tax expense reimbursements at certain of our comparable properties.

The decrease in rental income is primarily a result of our acquisition and disposition activities, which includes the contribution of 12 properties to our joint venture that was deconsolidated in November 2020, partially offset by increases from leasing activity and rent resets at certain of our comparable properties.

Rental income includes non-cash straight line rent adjustments totaling approximately $2,044 for the 2021 period and approximately $1,967 for the 2020 period, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $180 for the 2021 period and approximately $200 for the 2020 period.

Real estate taxes.

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

The decrease in real estate taxes primarily reflects our acquisition and disposition activities.

Other operating expenses.

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

The increase in other operating expenses is primarily due to increases in insurance expense and repairs and maintenance costs during the 2020 period at certain of our comparable properties and our acquisition activity.

Acquisition and certain other transaction related costs.

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

The decrease in other operating expenses is primarily due to our acquisition and disposition activities, partially offset by an increase in snow removal and insurance costs in the 2021 period at certain of our comparable properties.

Depreciation and amortization.

The increase in depreciation and amortization primarily reflects our acquisition activity and an increase in depreciation of improvements made to certain of our properties after July 1, 2019, partially offset by certain leasing related assets becoming fully amortized in the 2020 period.

The decrease in depreciation and amortization primarily reflects our acquisition and disposition activities, partially offset by certain leasing related assets becoming fully amortized in the 2021 period.

General and administrative.

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

The increase in general and administrative expenses is primarily due to increases in professional fees and business management fees as a result of our acquisition activity in the 2020 and 2019 periods.

The decrease in general and administrative expenses is primarily due to a decrease in business management fees as a result of our net disposition of properties since April 1, 2020.

Interest income.

Interest income represents interest earned on our cash balances.

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 decrease in interest expense in the 2020 period is primarily due to a lower weighted average interest rate on outstanding indebtedness as compared to the 2019 period and the prepayment of a $48,750 mortgage loan during the 2020 period.

Income tax expense.

Income tax expense reflects state income taxes payable in certain jurisdictions where we are subject to state income taxes.

Equity in earnings of an investee.

Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.

The decrease in equity in earnings of an investee is due to the dissolution of AIC in February 2020.

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 that we do not own in our joint venture for 12 of our Mainland Properties.

Weighted average common shares outstanding - basic and diluted.

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

Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019 (dollars and share amounts in thousands, except per share data)

Comparable Properties Results (1)

Non-Comparable Properties Results (2)

Consolidated Results

Nine Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30,

2020 2019 Change Change 2020 2019 Change 2020 2019 Change Change

Rental income $ 133,794 $ 128,190 $ 5,604 4.4 % $ 60,700 $ 38,845 $ 21,855 $ 194,494 $ 167,035 $ 27,459 16.4 %

Operating expenses:

Real estate taxes

18,811 16,565 2,246 13.6 % 7,968 5,081 2,887 26,779 21,646 5,133 23.7 %

Other operating expenses

10,199 9,541 658 6.9 % 5,534 2,864 2,670 15,733 12,405 3,328 26.8 %

Total operating expenses

29,010 26,106 2,904 11.1 % 13,502 7,945 5,557 42,512 34,051 8,461 24.8 %

Net operating income (3)

$ 104,784 $ 102,084 $ 2,700 2.6 % $ 47,198 $ 30,900 $ 16,298 151,982 132,984 18,998 14.3 %

Other expenses:

Depreciation and amortization

55,303 43,888 11,415 26.0 %

Acquisition and certain other transaction related costs 178 — 178 N/M

General and administrative

14,857 13,131 1,726 13.1 %

Total other expenses 70,338 57,019 13,319 23.4 %

Interest income 113 580 (467) (80.5 %)

Interest expense (40,610) (36,207) (4,403) 12.2 %

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

Income before income tax expense and equity earnings of an investee 41,267 40,338 929 2.3 %

Income tax expense (202) (131) (71) 54.2 %

Equity in earnings of an investee — 617 (617) N/M

Net income 41,065 40,824 241 0.6 %

Net loss attributable to noncontrolling interest 691 — 691 N/M

Net income attributable to common shareholders $ 41,756 $ 40,824 $ 932 2.3 %

Weighted average common shares outstanding - basic 65,092 65,042 50 0.1 %

Weighted average common shares outstanding - diluted 65,101 65,048 53 0.1 %

Per common share data (basic and diluted):

Net income attributable to common shareholders $ 0.64 $ 0.63 $ 0.01 1.6 %

N/M - Not Meaningful

(1) Consists of 269 buildings, leasable land parcels and easements that we owned continuously since January 1, 2019 and excludes one property classified as held for sale as of September 30, 2020.

(2) Consists of 31 properties that we acquired during the period from January 1, 2019 to September 30, 2020 and one property classified as held for sale as of September 30, 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 nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

Rental income.

The increase in rental income is primarily a result of our acquisition activity 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 $6,183 for the 2020 period and approximately $3,960 for the 2019 period, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $606 for the 2020 period and approximately $1,002 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.

Other operating expenses.

The increase in other operating expenses is primarily due to our acquisition activity.

The increase in other operating expenses at our comparable properties is primarily due to an increase in insurance expense, partially offset by a decrease in snow removal expenses during the 2020 period at certain of our comparable properties.

Depreciation and amortization.

The increase in depreciation and amortization primarily reflects our acquisition activity and an increase in depreciation of improvements made to certain of our properties after January 1, 2019, 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.

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

Interest income.

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.

The decrease in interest income is primarily due to a decrease in the interest rate earned on invested cash during the 2021 period as compared to the 2020 period.

Interest expense.

The increase in interest expense 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.

The decrease in interest expense is primarily due to lower average outstanding indebtedness during the 2021 period as compared to the 2020 period.

Income tax expense.

Income tax expense reflects state income taxes payable in certain jurisdictions where we are subject to state income taxes.

Equity in earnings of an investee.

Equity in earnings of an investee represents our proportionate share of earnings from our investment in AIC.

The decrease in equity in earnings of an investee is due to the dissolution of AIC in February 2020.

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

Equity in earnings of investees.

Equity in earnings of investees is the change in the fair value of our investment in our joint venture.

The increase in net income for the 2021 period compared to the 2020 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 that we do not own in our joint venture for 12 of our Mainland Properties.

Weighted average common shares outstanding - basic and diluted.

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 awarded under our equity compensation plan since January 1, 2020.

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

The decrease 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.

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 rules of the Securities and Exchange Commission, or SEC, including net operating income, or NOI, funds from operations, or FFO, attributable to common shareholders and Normalized FFO attributable to common shareholders.

We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the Securities and Exchange Commission, or SEC, including net operating income, or NOI, funds from operations, or FFO, attributable to common shareholders and Normalized 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.

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

The following table presents the reconciliation of net income to NOI for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

The following table presents the reconciliation of net income to NOI for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three Months Ended March 31,

Reconciliation of Net Income to NOI:

Net income $ 19,337 $ 12,694

Equity in earnings of an investee — (83) — (617)

Equity in earnings of investees (2,581) —

Income tax expense 63 63

Income before income tax expense and equity earnings of an investee 13,827 10,902 41,267 40,338

Gain on early extinguishment of debt — — (120) —

Income before income tax expense and equity earnings of investees 16,819 12,757

Interest expense 8,741 14,519

Interest income — (111)

Acquisition and certain other transaction related costs 178 — 178 —

General and administrative 3,756 4,831

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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, plus real estate depreciation and amortization 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, 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 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.

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.

FFO attributable to common shareholders and

Normalized FFO attributable to common shareholders are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders.

Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations.

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

The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net income attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands, except per share data):

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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 three months ended March 31, 2021 and 2020 (dollars in thousands, except per share data):

Three Months Ended March 31,

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

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Depreciation and amortization 12,678 18,290

Equity in earnings of unconsolidated joint venture (2,581) —

Share of FFO from unconsolidated joint venture 1,236 —

FFO adjustments attributable to noncontrolling interest — (977)

FFO attributable to common shareholders 29,939 28,490 90,787 84,712

Acquisition and certain other transaction related costs 178 — 178 —

Gain on early extinguishment of debt — — (120) —

Normalized FFO attributable to common shareholders $ 30,117 $ 28,490 $ 90,845 $ 84,712

FFO attributable to common shareholders and Normalized FFO attributable to common shareholders $ 30,670 $ 30,159

Weighted average common shares outstanding - basic 65,139 65,075

Weighted average common shares outstanding - diluted 65,177 65,082

Per common share data (basic and diluted)

FFO attributable to common shareholders $ 0.46 $ 0.44 $ 1.39 $ 1.30

Normalized FFO attributable to common shareholders $ 0.46 $ 0.44 $ 1.40 $ 1.30

FFO attributable to common shareholders and Normalized FFO attributable to common shareholders $ 0.47 $ 0.46

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.

With $533,000 of availability under our revolving credit facility as of April 22, 2021, 72.3% 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 1.3% of our annualized rental revenues as of March 31, 2021 from expiring leases 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:

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

We are carefully monitoring the developments of the COVID-19 pandemic and its impact on our tenants and our other stakeholders.

With $457,000 of availability under our revolving credit facility as of October 26, 2020, no debt maturities during the remainder of 2020, 75.7% 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 3.3% of our annualized rental revenues as of September 30, 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 harm, 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 October 23, 2020, we have granted requests to certain of our tenants to defer aggregate rent payments of $3,578 for leases that represent approximately 8.6% of our annualized rental revenues as of September 30, 2020.

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

As of September 30, 2020, we recognized $2,847 in our accounts receivable related to these deferred amounts.

For the three months ended September 30, 2020, we collected approximately 98.4% 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.

As a result of the uncertainties surrounding the COVID-19 pandemic and the duration and severity of the current economic downturn, we are unable to determine the ultimate impact on our tenants and their ability to pay us rent.

As a result of the uncertainties surrounding the COVID-19 pandemic, we are unable to currently assess any additional impact this pandemic will have on our future cash flows.

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):

Nine Months Ended September 30,

Three Months Ended March 31,

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

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Cash and cash equivalents and restricted cash at end of period $ 26,147 $ 31,172

The increase in net cash provided by operating activities for the nine months ended September 30, 2020 compared to the same period in the prior year is primarily due to an increase in consolidated property NOI due to our property acquisitions since January 1, 2019, partially offset by a decrease in working capital in the 2020 period.

Net cash used in investing activities for the nine months ended September 30, 2020 decreased primarily due to the acquisitions of 30 properties in the 2019 period as compared to the acquisition of one property in the 2020 period.

The decrease in net cash provided by financing activities for the nine months ended September 30, 2020 compared to the same period in the prior year is primarily due to net proceeds from our mortgage financing and borrowings under our revolving credit facility to fund acquisitions in the 2019 period compared to the proceeds we received from our joint venture transaction in the 2020 period, partially offset by the prepayment of a mortgage note in the 2020 period.

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

The increase in net cash provided by operating activities for the three months ended March 31, 2021 compared to the 2020 period is primarily due to changes in our working capital.

The decrease in net cash used in investing activities for the three months ended March 31, 2021 compared to the 2020 period is primarily due to the acquisition of one property during the 2020 period compared to no property acquisitions during the 2021 period.

The change in net cash provided by financing activities for the three months ended March 31, 2021 to net cash provided by financing activities for the 2020 period is primarily due to the proceeds we received from our sale of equity interests in our joint venture 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.

We generally do not intend to purchase “turn around” properties, or properties that do not generate positive cash flows, and, to the extent we 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.

As of September 30, 2020, we had unrestricted cash and cash equivalents of $39,105.

We generally do not intend to purchase “turn around” properties, or properties that do not generate positive cash flows, but we may conduct construction or redevelopment activities on our properties.

As of March 31, 2021, we had cash and cash equivalents of $26,147.

To maintain our qualification for taxation as a REIT under the Internal Revenue Code of 1986, as amended, 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.

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We are required to pay a commitment fee on the unused portion of our revolving credit facility.

At September 30, 2020, the interest rate premium on our revolving credit facility was 140 basis points and our commitment fee was 25 basis points.

At March 31, 2021, the interest rate premium on our revolving credit facility was 130 basis points and our commitment fee was 25 basis points.

We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity.

As of September 30, 2020, the annual interest rate payable on borrowings under our revolving credit facility was 1.56%.

As of September 30, 2020 and October 26, 2020, we had $320,000 and $293,000, respectively, outstanding under our revolving credit facility, and $430,000 and $457,000, respectively, available to borrow under our revolving credit facility.

As of March 31, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 1.41%.

As of March 31, 2021 and April 22, 2021, we had $217,000 outstanding under our revolving credit facility, and $533,000 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.

As of September 30, 2020, our debt maturities (other than our revolving credit facility), include mortgage notes with an aggregate principal amount of $1,056,980, as follows:

Debt Maturity

Total $ 1,056,980

(1) The property encumbered by this mortgage is owned by a joint venture in which we own a 61% equity interest.

(2) The properties encumbered by the $350,000 mortgage loan we obtained in October 2019 are owned by a joint venture in which we own a 61% equity interest.

In February and March 2020, we entered into agreements related to a joint venture for 12 of our Mainland Properties.

The investment amount is based on an aggregate property valuation of $680,000, less $406,980 of existing mortgage debts on the properties at the time of the investment that the joint venture assumed.

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

We may sell additional properties to the joint venture or sell some of our equity interests in the joint venture to additional investors as a source of financing in the future.

In addition, this joint venture may issue additional equity interests to other investors.

Further, we may seek to enter new joint ventures;

however, the current economic conditions may delay, limit or prevent our ability or willingness to enter additional joint ventures.

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.

As of March 31, 2021, our debt maturities (other than our revolving credit facility), consisted of mortgage notes with an aggregate principal amount of $650,000, which is scheduled to mature in 2029.

We received an aggregate of $108,266 from that investor for a 39% equity interest in our joint venture and we retained the remaining 61% equity interest in our joint venture.

As of March 31, 2020, we incurred transaction costs of $626 in connection with the formation of this joint venture.

We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three months ended March 31, 2020.

No distributions were made by our joint venture during the three months ended March 31, 2020.

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.

During the three months ended March 31, 2021, we recorded the change in the fair value of our investment in our joint venture of $2,581 as equity in earnings of investees in our condensed consolidated statements of comprehensive income.

In addition, during the three months ended March 31, 2021, our joint venture made aggregate cash distributions of $660 to us.

We expect to use borrowings under our revolving credit facility, payments we may receive for pro rata equity contributions from the other investors in our joint venture in connection with properties we may contribute to our joint venture, equity contributions from the third party investors in our joint venture and net proceeds from offerings of equity or debt securities to fund any future property acquisitions, development or redevelopment efforts.

We may also assume mortgage notes in connection with future acquisitions.

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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.

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

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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 which will afford us reasonable access to capital for investment and financing activities.

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

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

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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 nine months ended September 30, 2020, we paid quarterly cash distributions to our shareholders totaling $64,540 using existing cash balances and borrowings under our revolving credit facility.

During the three months ended March 31, 2021, we paid a quarterly cash distribution to our shareholders totaling $21,550 using existing cash balances and borrowings under our revolving credit facility.

For more information regarding the distribution we paid in 2021, see Note 6 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

On October 15, 2020, we declared a regular quarterly distribution of $0.33 per common share, or approximately $21,550, to shareholders of record on October 26, 2020.

We expect to pay this distribution on or about November 19, 2020 using existing cash balances and borrowings under our revolving credit facility.

During the three and nine months ended September 30, 2020 and 2019, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

On April 15, 2021, we declared a regular quarterly distribution of $0.33 per common share, or approximately $21,550, to shareholders of record on April 26, 2021.

We expect to pay this distribution to our shareholders on or about May 20, 2021 using existing cash balances and borrowings under our revolving credit facility.

During the three months ended March 31, 2021 and 2020, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

Three Months Ended

Tenant improvements and leasing costs (1)

$ 242 $ 495 $ 879 $ 889

Building improvements (2)

1,000 1,093 2,978 2,986

Development, redevelopment and other activities (3)

$ 1,055 $ 1,531

$ 1,252 $ 6,796 $ 3,868 $ 11,796

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

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

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

As of September 30, 2020, we had estimated unspent leasing related obligations of $499.

During the three and nine months ended September 30, 2020, commitments made for expenditures, such as tenant improvements and leasing costs in connection with leasing space, were as follows:

Three Months Ended September 30, 2020

New Leases Renewals Totals

Square feet leased during the period (in thousands) 41 445 486

Total leasing costs and concession commitments (1)

$ 237 $ 690 $ 927

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

$ 5.78 $ 1.55 $ 1.91

Weighted average lease term by square feet (years) 14.7 3.4 4.4

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

$ 0.39 $ 0.46 $ 0.44

Nine Months Ended September 30, 2020

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

As of March 31, 2021, we had estimated unspent leasing related obligations of $1,704.

During the three months ended March 31, 2021, commitments made for expenditures, such as tenant improvements and leasing costs in connection with leasing space, were as follows:

Three Months Ended March 31, 2021

New Leases Renewals Totals

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(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 September 30, 2020, 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 September 30, 2020 were borrowings outstanding under our revolving credit facility, a $650,000 mortgage loan obtained in January 2019 that is secured by 186 of our properties, a $350,000 mortgage loan obtained in October 2019 that is secured by 11 properties that are owned by a joint venture in which we own a 61% equity interest, and a $56,980 mortgage note that is secured by another property owned by such joint venture, subject to certain limitations.

Our principal debt obligations at March 31, 2021 were borrowings outstanding under our revolving credit facility and a $650,000 non-recourse, mortgage loan that is secured by 186 of our properties.

The mortgage 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.

1 unchanged sentence

Our credit agreement contains covenants, including those that 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 generally require us to maintain certain financial ratios.

As of September 30, 2020, we believe we were in compliance with all the covenants and other terms under our credit agreement.

As of March 31, 2021, we believe we were in compliance with all the covenants and other terms under our credit agreement.

Our credit agreement does not contain provisions for acceleration which could be triggered by our leverage ratio.

2 unchanged sentences

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 September 30, 2020, 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 mortgage loan contain customary covenants and provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default and require us to maintain a minimum consolidated net worth of at least $250,000 and liquidity of at least $15,000.

As of March 31, 2021, we believe we were in compliance with all the covenants and other terms under this mortgage loan agreement.

Related Person Transactions

1 unchanged sentence

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 and the 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.

and some of our Trustees and officers serve as trustees, directors or officers of these companies.

For further information about these and other such relationships and related person transactions, see Notes 8 and 9 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2020 Annual Report, our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders and our other filings with the SEC.

In addition, see the section captioned “Risk Factors” of our 2020 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 agreements with OPI, 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.

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-Q

Item 2. Management’s Discussion and Analysis