What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-07-28 compared with 2021-04-26 · 211 added, 110 removed, 274 unchanged (54% of the section changed)

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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.

As of June 30, 2021, our portfolio was comprised of 291 wholly owned properties containing approximately 35.2 million rentable square feet, including 226 buildings, leasable land parcels and easements containing approximately 16.7 million rentable square feet located on the island of Oahu, Hawaii, and 65 properties containing approximately 18.5 million rentable square feet located in 31 other states.

As of June 30, 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 7.7 years.

As of June 30, 2021, our consolidated properties were approximately 99.0% leased (based on rentable square feet) to 259 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 9.2 years.

We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of June 30, 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 during the COVID-19 pandemic, including other real estate sectors, due to the demand for e-commerce.

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, in part, 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.

As of July 26, 2021, we granted requests to certain of our tenants to defer aggregate rent payments of $3,753 with respect to leases that represent, as of June 30, 2021, approximately 1.8% of our annualized rental revenues.

As of June 30, 2021, we recognized $1,383 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 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.

These deferred amounts did not negatively impact our operating results for the three or six months ended June 30, 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.

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.

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Property Operations

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

Occupancy data for our properties as of June 30, 2021 and 2020 is as follows (square feet in thousands):

All Properties Comparable Properties (1)

As of March 31, As of March 31,

As of June 30, As of June 30,

2021 2020 2021 2020

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(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 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,

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of June 30, 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 and six months ended June 30, 2021 and 2020 are as follows:

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

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) 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):

(2) Comparable properties for the three months ended June 30, 2021 and 2020 consist of 288 buildings, leasable land parcels and easements that we owned continuously since April 1, 2020 and exclude 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

Comparable properties for the six months ended June 30, 2021 and 2020 consist of 287 buildings, leasable land parcels and easements that are owned continuously since January 1, 2020 and exclude 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

During the three and six months ended June 30, 2021, we entered into new and renewal leases as summarized in the following tables:

Three Months Ended June 30, 2021

New Leases Renewals Totals

Square feet leased during the period (in thousands) 114 371 485

Weighted average rental rate change (by rentable square feet) 12.3 % 14.7 % 14.2 %

Weighted average lease term by square feet (years) (2)

Total leasing costs and concession commitments (1)

$ 691 $ 600 $ 1,291

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

$ 6.06 $ 1.62 $ 2.66

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

$ 0.51 $ 0.26 $ 0.35

Six Months Ended June 30, 2021

New Leases Renewals Totals

Square feet leased during the period (in thousands) 387 718 1,105

Weighted average rental rate change (by rentable square feet) 11.9 % 16.9 % 15.2 %

Weighted average lease term by square feet (years) (2)

Total leasing costs and concession commitments (1)

$ 2,655 $ 1,892 $ 4,547

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

$ 6.86 $ 2.64 $ 4.11

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

$ 0.72 $ 0.26 $ 0.42

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

(2) 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 7.6 years for the three months ended June 30, 2021 and 9.9 years for the six months ended June 30, 2021.

During the three and six months ended June 30, 2021, we completed rent resets for approximately 79,000 square feet of land at our Hawaii Properties at rental rates that were approximately 37.4% higher than the prior rental rates.

As shown in the table below, approximately 0.2% of our total leased square feet and approximately 0.4% of our total annualized rental revenues as of June 30, 2021 are included in leases scheduled to expire by December 31, 2021.

As of June 30, 2021, our lease expirations by year are as follows (dollars and square feet in thousands):

% of Total Cumulative

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Weighted average remaining lease term (in years):

(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.

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

As of June 30, 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

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1 Amazon.com Services, Inc.

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

/ Amazon.com Services LLC AZ, SC, TN, VA 4 3,869 11.1 % 9.9 %

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

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FL 1 240 0.7 % 1.1 %

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

24 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 56.1 % 49.7 %

Mainland Properties.

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

As of June 30, 2021, our Mainland Properties represented approximately 49.4% 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.

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Hawaii Properties.

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.

As of June 30, 2021, our Hawaii Properties represented approximately 50.6% of our annualized rental revenues.

As of June 30, 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.

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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.

beyond our control.

Accordingly, we cannot be sure that the historical increases achieved at our Hawaii Properties will continue in the future.

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

The following chart shows the annualized rental revenues as of June 30, 2021 scheduled to reset at our Hawaii Properties:

Scheduled Rent Resets at Hawaii Properties

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Rental Revenues as of

March 31, 2021

June 30, 2021

Scheduled to Reset

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Total $ 28,681

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.

As of June 30, 2021, $3,447, or 1.6%, of our annualized rental revenues are included in leases scheduled to expire through June 30, 2022 and 1.0% 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.

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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.

During the six months ended June 30, 2021, we acquired one parcel of developable land located in the Dallas, Texas market and one property located near the Rickenbacker intermodal terminal and airport in Columbus, Ohio containing 357,504 rentable square feet for an aggregate purchase price of $33,700, excluding acquisition related costs of $381.

During the six months ended June 30, 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.

As of June 30, 2020, we incurred transaction costs of $626 in connection with the formation of our joint venture.

We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three and six months ended June 30, 2020.

The portion of our joint venture's net loss not attributable to us, or $264 and $416 for the three and six months ended June 30, 2020, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income.

During the three and six months ended June 30, 2020, our joint venture made aggregate cash distributions of $4,867, including $1,898 to the first joint venture investor.

In November 2020, we sold an additional 39% equity interest from our then 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.

During the three and six months ended June 30, 2021, we recorded an increase in the fair value of our investment in our joint venture of $1,876 and $4,457, respectively, as equity in earnings of investees in our condensed consolidated statements of

comprehensive income.

In addition, during the three and six months ended June 30, 2021, our joint venture made aggregate cash distributions of $660 and $1,320, respectively, 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 March 31, 2021, Compared to Three Months Ended March 31, 2020 (dollars and share amounts in thousands, except per share data)

Three Months Ended June 30, 2021, Compared to Three Months Ended June 30, 2020 (dollars and share amounts in thousands, except per share data)

Comparable Properties Results (1)

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Consolidated Results

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

Three Months Ended June 30, Three Months Ended June 30, Three Months Ended June 30,

2021 2020 Change Change 2021 2020 Change 2021 2020 Change Change

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Depreciation and amortization 11,830 18,525 (6,695) (36.1 %)

Acquisition and certain other transaction related costs 646 — 646 N/M

General and administrative 4,234 4,846 (612) (12.6 %)

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Interest expense (8,643) (13,205) 4,562 (34.5 %)

Gain on early extinguishment of debt — 120 (120) (100.0 %)

Income before income tax expense and equity in earnings of investees 16,997 14,683 2,314 15.8 %

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N/M - Not Meaningful

(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.

(1) Consists of 288 properties that we owned continuously since April 1, 2020 and excludes 12 properties owned by an unconsolidated joint venture in which we own a 22% equity interest.

(2) Consists of three properties that we acquired during the period from April 1, 2020 to June 30, 2021, one property we sold in 2020 and 12 properties we contributed during the six months ended June 30, 2020 to our 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 March 31, 2021 compared to the three months ended March 31, 2020.

References to changes in the income and expense categories below relate to the comparison of results for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Rental income.

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Real estate taxes.

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

The decrease in real estate taxes primarily reflects our acquisition and disposition activities, partially offset by higher tax assessments at certain of our comparable properties.

Other operating expenses.

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

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.

The decrease in other operating expenses is primarily due to our acquisition and disposition activities and higher insurance costs during the 2020 period, partially offset by an increase in repairs and maintenance costs at certain of our comparable properties.

Depreciation and amortization.

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.

The decrease in depreciation and amortization primarily reflects our acquisition and disposition activities and an increase in depreciation of improvements made to certain of our properties after April 1, 2020, partially offset by certain leasing related assets becoming fully amortized in the 2021 period.

Acquisition and certain other transaction related costs.

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

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 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.

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 in the 2020 period.

Interest income.

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

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

Equity in earnings of investees.

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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.

Weighted average common shares outstanding - basic and diluted.

The increase in weighted average common shares outstanding primarily reflects common shares awarded under our equity compensation plan since January 1, 2020.

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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.

Six Months Ended June 30, 2021, Compared to Six Months Ended June 30, 2020 (dollars and share amounts in thousands, except per share data)

Comparable Properties Results (1)

Non-Comparable Properties Results (2)

Consolidated Results

Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30,

2021 2020 Change Change 2021 2020 Change 2021 2020 Change Change

Rental income $ 104,298 $ 100,974 $ 3,324 3.3 % $ 4,099 $ 28,414 $ (24,315) $ 108,397 $ 129,388 $ (20,991) (16.2 %)

Operating expenses:

Real estate taxes

14,310 13,904 406 2.9 % 426 3,839 (3,413) 14,736 17,743 (3,007) (16.9 %)

Other operating expenses

8,971 7,626 1,345 17.6 % 346 2,596 (2,250) 9,317 10,222 (905) (8.9 %)

Total operating expenses

23,281 21,530 1,751 8.1 % 772 6,435 (5,663) 24,053 27,965 (3,912) (14.0 %)

Net operating income (3)

$ 81,017 $ 79,444 $ 1,573 2.0 % $ 3,327 $ 21,979 $ (18,652) 84,344 101,423 (17,079) (16.8 %)

Other expenses:

Depreciation and amortization

24,508 36,815 (12,307) (33.4 %)

Acquisition and certain other transaction related costs 646 — 646 N/M

General and administrative

7,990 9,677 (1,687) (17.4 %)

Total other expenses 33,144 46,492 (13,348) (28.7 %)

Interest income — 113 (113) (100.0 %)

Interest expense (17,384) (27,724) 10,340 (37.3 %)

Gain on early extinguishment of debt — 120 (120) (100.0 %)

Income before income tax expense and equity in earnings of investees 33,816 27,440 6,376 23.2 %

Income tax expense (105) (189) 84 (44.4 %)

Equity in earnings of investees 4,457 — 4,457 N/M

Net income 38,168 27,251 10,917 40.1 %

Net loss attributable to noncontrolling interest — 416 (416) (100.0 %)

Net income attributable to common shareholders $ 38,168 $ 27,667 $ 10,501 38.0 %

Weighted average common shares outstanding - basic 65,142 65,082 60 0.1 %

Weighted average common shares outstanding - diluted 65,192 65,087 105 0.2 %

Per common share data (basic and diluted):

Net income attributable to common shareholders $ 0.58 $ 0.42 $ 0.16 38.1 %

N/M - Not Meaningful

(1) Consists of 287 buildings, leasable land parcels and easements 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 four properties that we acquired during the period from January 1, 2020 to June 30, 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 six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Rental income.

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 $3,995 for the 2021 period and approximately $4,063 for the 2020 period, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $351 for the 2021 period and approximately $404 for the 2020 period.

Real estate taxes.

The decrease in real estate taxes primarily reflects our acquisition and disposition activities, partially offset by higher tax assessments at certain of our comparable properties.

Other operating expenses.

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

Depreciation and amortization.

The decrease in depreciation and amortization primarily reflects our acquisition and disposition activities and an increase in depreciation of improvements made to certain of our properties after January 1, 2020, partially offset by certain leasing related assets becoming fully amortized in the 2021 period.

Acquisition and certain other transaction related costs.

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

General and administrative.

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 in the 2020 period.

Interest income.

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 decrease in interest expense is primarily due to lower average outstanding indebtedness during the 2021 period as compared to the 2020 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 reflects state income taxes payable in certain jurisdictions where we are subject to state income taxes.

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.

Weighted average common shares outstanding - basic and diluted.

The increase in weighted average common shares outstanding primarily reflects common shares awarded under our equity compensation plan since January 1, 2020.

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 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.

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

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income 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 months ended March 31, 2021 and 2020 (dollars in thousands):

Three Months Ended March 31,

The following table presents the reconciliation of net income to NOI for the three and six months ended June 30, 2021 and 2020 (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Reconciliation of Net Income to NOI:

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Income tax expense 42 126 105 189

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

Income before income tax expense and equity in earnings of investees 16,997 14,683 33,816 27,440

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

Interest expense 8,643 13,205 17,384 27,724

1 unchanged sentence

General and administrative 4,234 4,846 7,990 9,677

Acquisition and transaction related costs 646 — 646 —

Depreciation and amortization 11,830 18,525 24,508 36,815

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

Three Months Ended March 31,

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 six months ended June 30, 2021 and 2020 (dollars in thousands, except per share data):

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

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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FFO adjustments attributable to noncontrolling interest — (2,657) — (3,634)

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

FFO attributable to common shareholders $ 29,955 $ 30,689 $ 60,625 $ 60,848

Acquisition and certain other transaction related costs 646 — 646 —

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

Normalized FFO attributable to common shareholders $ 30,601 $ 30,569 $ 61,271 $ 60,728

Per common share data (basic and diluted)

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

FFO attributable to common shareholders $ 0.46 $ 0.47 $ 0.93 $ 0.93

Normalized FFO attributable to common shareholders $ 0.47 $ 0.47 $ 0.94 $ 0.93

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.

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.

With $506,000 of availability under our revolving credit facility as of July 26, 2021, 71.7% 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 1.6% of our annualized rental revenues as of June 30, 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;

• develop properties to produce cash flows in excess of our cost of capital.

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):

Three Months Ended March 31,

Six Months Ended June 30,

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 $ 30,512 $ 46,959

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.

The decrease in net cash provided by operating activities for the six months ended June 30, 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 six months ended June 30, 2021 compared to the 2020 period is primarily due to our acquisition of two properties for an aggregate purchase price of $34,081 during the 2021 period as compared to one property for a purchase price of $71,628 during the 2020 period.

The change in net cash used in financing activities for the six months ended June 30, 2021 from 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 and net debt repayments in the 2020 period, partially offset by higher net borrowings under our revolving credit facility during the 2021 period to fund acquisitions.

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, 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.

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

During the three months ended June 30, 2021, we acquired a developable land parcel for $2,319, including acquisition costs of $119.

We expect to spend approximately $12,700 to construct a building for lease on this land.

As of June 30, 2021, we had cash and cash equivalents of $30,512.

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

At June 30, 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 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.

As of June 30, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 1.40%.

As of June 30, 2021 and July 26, 2021, we had $244,000 outstanding under our revolving credit facility, and $506,000 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 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.

As of June 30, 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.

As of June 30, 2020, we incurred transaction costs of $626 in connection with the formation of our joint venture.

We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three and six months ended June 30, 2020.

During the three and six months ended June 30, 2020, our joint venture made aggregate cash distribution of $4,867, including $1,898 to the first joint venture investor.

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.

During the three months and six months ended June 30, 2021, we recorded an increase in the fair value of our investment in our joint venture of $1,876 and $4,457, respectively, as equity in earnings of investees in our condensed consolidated statements of comprehensive income.

In addition, during the three and six months ended June 30, 2021, our joint venture made aggregate cash distributions of $660 and $1,320, respectively, to us.

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Such alternatives may include incurring term debt, obtaining financing secured by mortgages on properties we own, issuing new equity or debt securities, extending the maturity date of our revolving credit facility, participating in joint ventures or selling properties.

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

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.

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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.

However, as noted elsewhere in this Quarterly Report on Form 10-Q, it is uncertain what the duration and severity of the current economic impact 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 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.

Further, such conditions could also disrupt capital markets and limit our access to financing from public sources.

During the six months ended June 30, 2021, we paid quarterly cash distributions to our shareholders totaling $43,099 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 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

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

We expect to pay this distribution to our shareholders on or about August 19, 2021 using existing cash balances and borrowings under our revolving credit facility.

During the three and six months ended June 30, 2021 and 2020, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

Three Months Ended Six Months Ended

June 30, June 30,

2021 2020 2021 2020

Tenant improvements and leasing costs (1)

$ 441 $ 344 $ 1,264 $ 637

Building improvements (2)

560 741 792 1,978

Development, redevelopment and other activities (3)

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(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

Square feet leased during the period (in thousands) 273 347 620

Total leasing costs and concession commitments (1)

$ 1,964 $ 1,292 $ 3,256

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

$ 7.20 $ 3.72 $ 5.25

Weighted average lease term by square feet (years) 8.5 14.2 11.7

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

$ 0.85 $ 0.26 $ 0.45

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

As of June 30, 2021, we had estimated unspent leasing related obligations of $1,730.

Debt Covenants (dollars in thousands)

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.

Our principal debt obligations at June 30, 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.

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

As of June 30, 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.

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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.

As of June 30, 2021, we believe we were in compliance with all the covenants and other terms under this mortgage loan agreement.

Related Person Transactions

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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-Q

Item 2. Management’s Discussion and Analysis