What changed in this filing

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Item 1. Business

2022-02-15 compared with 2021-02-18 · 102 added, 148 removed, 657 unchanged (28% of the section changed)

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We own and lease industrial and logistics properties throughout the United States.

We have qualified for taxation as a REIT for U.S.

federal income tax purposes beginning with our taxable year ended December 31, 2018.

As of December 31, 2021, our portfolio was comprised of 288 wholly owned properties that were approximately 99.2% leased to 259 tenants with a weighted average (by annualized rental revenues) remaining lease term of approximately 9.4 years.

The 289 properties consisted of 226 buildings, leasable land parcels and easements containing approximately 16.8 million rentable square feet (all square footage amounts included within this Annual Report on Form 10-K are unaudited) that were primarily industrial lands located on the island of Oahu, HI, or our Hawaii Properties, and 63 buildings containing approximately 18.1 million rentable square feet that were industrial and logistics properties located in 30 other states, or our Mainland Properties.

The 288 properties consisted of 226 buildings, leasable land parcels and easements containing approximately 16.7 million rentable square feet (all square footage amounts included within this Annual Report on Form 10-K are unaudited) that were primarily industrial lands located on the island of Oahu, HI, or our Hawaii Properties, and 62 properties containing approximately 17.3 million rentable square feet that were industrial and logistics properties located in 30 other states, or our Mainland Properties.

As of December 31, 2021, our Hawaii Properties represented 52.9% of our annualized rental revenues and our Mainland Properties represented 47.1% of our annualized rental revenues.

We define the term annualized rental revenues as used in this Annual Report on Form 10-K as the annualized contractual rents as of December 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 December 31, 2020, we also owned a 22% equity interest in an unconsolidated joint venture that owns 12 properties located in nine states in the mainland United States containing approximately 9.2 million rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 7.1 years.

As of December 31, 2021, we also owned a 22% equity interest in an unconsolidated joint venture that owns 18 properties located in 12 states in the mainland United States containing approximately 11.7 million rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 6.6 years.

In November 2021, we, our wholly owned subsidiary and Monmouth entered into the Merger Agreement, pursuant to which we have agreed to acquire all of the outstanding shares of Monmouth for $21.00 per Monmouth share in cash, in a transaction valued at approximately $4.0 billion, including the assumption of existing Monmouth mortgage debt, as well as transaction costs, referred to as the Monmouth Transaction.

The Monmouth Transaction will add 126 new, Class A, single tenant, net leased, e-commerce focused industrial properties containing over 26 million square feet with a weighted average remaining lease term of approximately eight years to our portfolio.

We intend to finance the Monmouth Transaction by entering into a joint venture with one or more institutional investors for equity investments and with proceeds from new mortgage debt and the assumption of existing Monmouth mortgage debt.

Depending on the ultimate amount of the joint venture equity investments, we may also use proceeds from the sale of some of Monmouth’s properties to finance the Monmouth Transaction.

In addition, in connection with the financing of the Monmouth Transaction, we have obtained commitments from lenders to make a bridge loan of up to $4.0 billion available to us.

The Monmouth Transaction is subject to the satisfaction of conditions, including the receipt of requisite approval by Monmouth’s stockholders, and is expected to close in the first quarter of 2022.

For more information regarding the Monmouth Transaction and the associated risks, see elsewhere in this Annual Report on Form 10-K.

Our principal executive offices are located at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and our telephone number is (617) 219-1460.

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We intend to expand our business by acquiring additional industrial and logistics properties in the United States that may benefit from the growth of e-commerce or demand for logistics properties.

External Growth through Acquisitions.

Our external growth strategy is to acquire industrial and logistics properties that we believe will produce NOI in excess of our cost of capital used to purchase the properties.

We intend to grow our business by investing primarily in industrial and logistics properties that serve the growing needs of e-commerce.

We believe that e-commerce sales will continue to grow, in dollar value and volume of units sold and as a percentage of total retail sales, and that this will create strong demand for industrial and logistics properties and rental growth for the next several years.

We are focused on acquiring industrial and logistics properties that are of strategic importance to our tenants’ businesses, such as build to suit properties, strategic distribution hubs or other properties in which tenants have invested a significant amount of capital.

We target occupied properties, where tenants are financially responsible for all, or substantially all, property operating expenses, including increases with respect thereto.

As there are a limited number of industrial and logistics properties in Hawaii, we expect that most of our acquisitions will be in other states.

Our external growth strategy is further defined by our investment policies.

Internal Growth through Rent Resets and Leasing Activity, Fixed Increases in Our Leases and Selective Development.

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Since our predecessors began acquiring our Hawaii Properties in December 2003, our Hawaii Properties have remained over 96% leased, and periodic rent resets, together with lease extensions and new leasing activity following lease expirations, at our Hawaii Properties have resulted in significant rent increases.

Because of the limited availability of land suitable for industrial uses that might compete with our Hawaii Properties, we believe that our Hawaii Properties offer the potential for rent growth as a result of periodic rent resets, lease extensions and new leasing.

Due to the limited availability of land suitable for industrial uses that might compete with our Hawaii Properties, we believe that our Hawaii Properties offer the potential for rent growth as a result of periodic rent resets, lease extensions and new leasing.

In addition to the internal rent growth which may result from our rent resets and lease expirations at our Hawaii Properties, a majority of the leases at our Mainland Properties and certain leases at our Hawaii Properties include periodic set dollar amount or percentage increases that raise the cash rent payable to us.

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

In such circumstances, we and our predecessors have sometimes engaged in redevelopment activities to change the character of certain properties in order to increase rents.

Because our Hawaii Properties are currently experiencing strong demand for their current uses, we do not currently expect redevelopment efforts in Hawaii to become a major activity of ours in the near term;

Since the time, in some cases 40 to 50 years ago, certain of our Hawaii Properties’ leases were originally entered into, the characteristics of the neighborhoods in the vicinity of some of those properties have changed.

In such circumstances, we have sometimes engaged in redevelopment activities to change the character of certain properties in order to increase rents.

As our Hawaii Properties are currently experiencing strong demand for their current uses, we do not currently expect redevelopment efforts in Hawaii to become a major activity in the near term;

however, we may undertake such activities on a selective basis.

Also, we and our predecessors have sometimes built expansions for tenants at our Mainland Properties in return for lease extensions and rent increases, and we expect to continue such activities.

External Growth through Acquisitions.

Our external growth strategy is to acquire additional industrial and logistics properties that we believe will produce NOI in excess of our cost of capital used to purchase the properties.

We intend to grow our business by investing primarily in industrial and logistics properties that serve the growing needs of e-commerce.

We believe that e-commerce sales will continue to grow, in both dollar value and as a percentage of total retail sales, and that this will create strong demand for industrial and logistics properties and rental growth for the next several years.

We target occupied properties, where tenants are financially responsible for all, or substantially all, property operating expenses, including increases with respect thereto.

Because there are a limited number of industrial and logistics properties in Hawaii, we expect that most of our acquisitions will be in other states.

Our external growth strategy is further defined by our investment policies.

The following is an overview of the general lease terms for our properties.

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Many of our Mainland Properties’ leases require us to maintain the roof, exterior walls, foundation and other structural elements of the buildings at our expense;

however, because we believe our Mainland Properties have been well maintained, we do not believe these expenses will be material to us during the remaining lease terms.

Our Mainland Properties remain over 99% leased.

however, as we believe our Mainland Properties are being well maintained, we do not believe these expenses will be material to us during the remaining lease terms.

Our Mainland Properties are currently 100% leased.

We expect to have opportunities to raise rents or redevelop these properties as lease expirations at these properties approach.

Also, some of the tenant renewal options at our Mainland Properties provide for rents to be reset to fair market values, and we may be able to raise rents if and as these options are exercised.

Also, some of the tenant renewal options at our Mainland Properties provide for rents to be reset to fair market values, and we may be able to raise rents if and when these options are exercised.

We regularly confer with tenants at our Mainland Properties to determine if they are interested in our expanding or otherwise improving their leased properties in return for increased rents and extended terms.

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In the appraisal process for land leases that are periodically reset based on a percentage of the fair market value of the land, the appraisers are required to determine the fair market value of the land, usually exclusive of improvements, with such fair market value being based on the highest and best use of such land and as though unencumbered by the lease, and then the appraisers apply a rent return rate to the land value which may be set in the lease or determined by the appraisers based on market conditions.

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.

Various governmental 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.

To varying degrees, states and municipalities across the United States have generally allowed most businesses to re-open and have generally eased 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 recently have re-imposed certain restrictions in response to increases in COVID-19 infections.

Economic data have indicated that the U.S.

economy has improved since the lowest periods experienced in March and April 2020, although the U.S.

gross domestic product remains below pre-pandemic levels.

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 would be on human health and safety, the economy, our tenants or our business.

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 responses materialized and e-commerce companies have benefited from the closure of certain retail consumer outlets since the beginning of the second quarter of 2020 and the continued increased market demand for e-commerce.

We believe that 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 improve or if they worsen, including in response to any increase in the number or severity of COVID-19 infections or 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;

• actively communicating with our tenants and other key constituents and stakeholders in order to help assess market conditions, opportunities and 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 December 31, 2020, we had:

• $529.0 million of availability under our revolving credit facility and $22.8 million of cash on hand;

• no outstanding debt scheduled to mature until the maturity of our revolving credit facility in December 2021, which maturity is subject to two six month extensions at our option;

• 72.2% of our annualized rental revenues, as of December 31, 2020, derived from investment grade rated tenants, subsidiaries of investment grade rated parent entities or Hawaii land leases;

• only 1.4% of our annualized rental revenues, as of December 31, 2020, scheduled to expire in 2021.

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

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

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

These deferred amounts did not negatively impact our financial results for the year ended December 31, 2020.

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

We do not have any employees and the personnel and various services we require to operate our business are provided to us by The RMR Group LLC, or 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.

With respect to our properties, RMR LLC has implemented protocols and procedures at our properties based on recommended guidelines from the U.S.

Centers for Disease Control and Prevention and other regulatory agencies for the

purpose of mitigating the potential for spreading of COVID-19 infections.

RMR LLC property management and engineering personnel have been trained on COVID-19 precaution procedures and RMR LLC's property management teams have also established business continuity plans to ensure operational stability at our properties.

Included among the protocols and procedures implemented by RMR LLC are the following:

• 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;

• making changes to 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 vendors' employees and requiring vendors' 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.

Additionally, as our properties experience lower tenant utilization rates, RMR LLC has 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 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.

RMR LLC's regional management offices are currently limiting walk-in visitors and maintaining maximum office occupancy limits as required by state and local guidelines, including weekly rotations of employees as needed.

There are extensive uncertainties surrounding the COVID-19 pandemic.

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 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 more information and risks relating to the COVID-19 pandemic on us and our business, see Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.

Historically, this process has resulted in significant reset amounts.

Our Investment Policies

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Outside of top tier markets, our focus is on newer buildings, high credit quality tenants and longer lease terms.

We target estimated capitalization rates of 5% - 7% for new investments.

We target estimated capitalization rates of 4% to 7% for new investments.

If and as market conditions change, or in certain other instances, our target investments and target estimated capitalization rates may change.

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• the occupancy and demand for similar properties in the same or nearby locations;

• the construction quality, physical condition and design of the property;

• the construction quality, physical condition and design of the property, including various environmental sustainability factors;

• the expected capital expenditures that may be needed at the property;

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• the existence of alternative sources, uses or needs for our capital;

• the tenants’ historic and expected adoption of environmental sustainability in connection with their operations.

Also, we may invest in or enter into real estate joint ventures.

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In the future, we may invest in or enter into additional real estate joint ventures, or acquire additional properties with the intention of contributing such properties to our existing joint venture, if we conclude that by doing so we may benefit from the participation of co-venturers or that our opportunity to participate in the investment is contingent on the use of a joint venture structure or to take advantage of property valuation differences among private and public sources of equity capital.

As noted above, we intend to enter a joint venture in connection with the financing of the Monmouth Transaction.

We have no limitations on the amount or percentage of our total assets that may be invested in any one property and no limits on the concentration of investments in any one location.

However, we believe it is prudent to seek portfolio diversification, not concentration.

Our Board of Trustees may change our acquisition and investment policies at any time without a vote of, or advance notice to, our shareholders.

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In addition, in January 2019, we obtained a $650.0 million mortgage loan secured by 186 properties containing 9.6 million rentable square feet located on the island of Oahu, HI.

In April 2019, we assumed a $57.0 million secured mortgage note in connection with one of our acquisitions.

In October 2019, we obtained a $350.0 million mortgage loan secured by 11 of our properties located in mainland United States containing an aggregate of approximately 8.2 million rentable square feet located in eight states.

We no longer include the $57.0 million secured mortgage note or the $350.0 million mortgage loan in our consolidated balance sheet following the deconsolidation of the net assets of our formerly majority-owned joint venture.

Resources” of this Annual Report on Form 10-K and Note 3 to the Notes to the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

In connection with the financing of the Monmouth Transaction, we have obtained commitments from lenders to make a bridge loan of up to $4.0 billion available to us, and may enter into an agreement for such bridge loan facility if necessary to fund the Monmouth Transaction.

Also, as noted above, we intend to enter a joint venture in connection with the financing of the Monmouth Transaction.

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

We do not have policies limiting the amount of debt we may incur or the number or amount of mortgages that may be placed on our properties.

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We require our tenants to maintain compliance with environmental laws and we also monitor any known conditions and in some cases have set up reserves for potential environmental liabilities.

Although we do not believe that there are environmental conditions at any of our properties that will materially and adversely affect us, we cannot be sure that such conditions or costs we may be required to incur in the future to address environmental contamination will not materially and adversely affect us.

Although we do not believe that there are environmental

conditions at any of our properties that will materially and adversely affect us, we cannot be sure that such conditions or costs we may be required to incur in the future to address environmental contamination will not materially and adversely affect us.

Investing in and operating real estate is a very competitive business.

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RMR LLC has a principal place of business at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and its telephone number is (617) 796-8390.

RMR LLC or its subsidiaries also act as the manager to Diversified Healthcare Trust, or DHC, Office Properties Income Trust, or OPI, RMR Mortgage Trust (formerly known as RMR Real Estate Income Fund), or RMRM, Service Properties Trust, or SVC, and Tremont Mortgage Trust, or TRMT, and provides management and other services to other private and public companies, including Five Star Senior Living Inc., or Five Star, TravelCenters of America Inc., or TA, and Sonesta International Hotels Corporation, or Sonesta.

RMR LLC also provides management services to our existing joint venture.

RMR LLC is an alternative asset management company that is focused on commercial real estate and related businesses.

RMR LLC or its subsidiaries also act as a manager to other publicly traded real estate companies, privately held real estate funds and real estate related operating businesses.

In addition, RMR LLC provides management services to our existing joint venture.

As of the date of this Annual Report on Form 10-K, the executive officers of RMR LLC are:

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Our Chief Financial Officer and Treasurer, Richard W.

Siedel, Jr., is a Senior Vice President of RMR LLC, and our Chief Operating Officer and Vice President, Yael Duffy, is a Vice President of RMR LLC.

Siedel, Jr., and our Chief Operating Officer and Vice President, Yael Duffy, are Senior Vice Presidents of RMR LLC.

Murray and Siedel and other officers of RMR LLC also serve as officers of other companies to which RMR LLC or its subsidiaries provide management services.

In July 2020, our manager, RMR LLC, released its first annual Sustainability Report, which summarizes the environmental, social and governance initiatives RMR LLC and its client companies, including ILPT, employ.

RMR LLC’s Sustainability Report may be accessed on The RMR Group Inc.'s, or RMR Inc., website at www.rmrgroup.com/corporate-sustainability/default.aspx.

The information on or accessible through RMR Inc.'s website is not incorporated by reference into this Annual Report on Form 10-K.

We have no employees.

Services which would otherwise be provided to us by employees are provided by RMR LLC and by our Managing Trustees and officers.

As of December 31, 2020, RMR LLC had more than 600 full time employees in its headquarters and regional offices located throughout the United States.

As of December 31, 2021, RMR LLC had nearly 600 full time employees in its headquarters and regional offices located throughout the United States.

Board Diversity

As of December 31, 2021, our Board of Trustees was comprised of six Trustees, of which four were independent trustees.

Our Board of Trustees is comprised of 16.7% women and 16.7% members of underrepresented minorities.

Corporate Sustainability

Our business strategy incorporates a focus on sustainable approaches to operating our properties in a manner that benefits our shareholders, tenants and the communities in which we are located.

We seek to operate our properties in ways that improve the economic performance of their operations, while simultaneously ensuring tenant comfort and safety, managing energy and water consumption, as well as greenhouse gas emissions.

Our ESG initiatives are primarily implemented by our manager, RMR LLC, and focus on a complementary set of objectives, including responsible investment, environmental stewardship and investments in human capital.

RMR LLC’s annual Sustainability Report may be accessed on RMR Inc.’s website at www.rmrgroup.com/corporate-sustainability/default.aspx.

The information on or accessible through RMR Inc.'s website is not incorporated by reference into this Annual Report on Form 10-K.

The leases for our properties generally provide that our tenants are responsible for the costs of insurance for the properties we lease to them and the operations conducted on them, including for casualty, liability, fire, extended coverage and rental or business interruption losses.

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Any material we file with or furnish to the SEC is also maintained on the SEC website, www.sec.gov.

Securityholders may send communications to our Board of Trustees or individual Trustees by writing to the party for whom the communication is intended at c/o Secretary, Industrial Logistics Properties Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634 or by email at secretary@ilptreit.com.

Security holders may send communications to our Board of Trustees or individual Trustees by writing to the party for whom the communication is intended at c/o Secretary, Industrial Logistics Properties Trust, Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634 or by email at secretary@ilptreit.com.

Our website address is included several times in this Annual Report on Form 10-K as a textual reference only.

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While we believe that we have satisfied and will satisfy these tests, our counsel does not review compliance with these tests on a continuing basis.

If we fail to qualify for taxation as a REIT in any year, we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of regular C corporations, meaning that federal income tax generally will be applied at both the corporate and shareholder levels.

If we fail to qualify for taxation as a REIT in any year, then we will be subject to federal income taxation as if we were a corporation taxed under subchapter C of the IRC, or a C corporation, and our shareholders will be taxed like shareholders of regular C corporations, meaning that federal income tax

generally will be applied at both the corporate and shareholder levels.

In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders could be reduced or eliminated.

If we continue to qualify for taxation as a REIT and meet the tests described below, we generally will not pay federal income tax on amounts we distribute to our shareholders.

If we continue to qualify for taxation as a REIT and meet the tests described below, then we generally will not pay federal income tax on amounts that we distribute to our shareholders.

However, even if we continue to qualify for taxation as a REIT, we may still be subject to federal tax in the following circumstances, as described below:

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• Our subsidiaries that are C corporations, including our “taxable REIT subsidiaries”, as defined in Section 856(l) of the IRC, or TRSs, generally will be required to pay federal corporate income tax on their earnings, and a 100% tax may be imposed on any transaction between us and one of our TRSs that does not reflect arm’s length terms.

• If following our acquisition of Monmouth it is determined that Monmouth failed to satisfy one or more of the REIT tests described below, the IRS might allow us, as Monmouth’s successor, the same opportunity for relief as though we were the remediating REIT.

In such case, Monmouth would be deemed to have retained its qualification for taxation as a REIT and the relevant penalties or sanctions for remediation would fall upon us in a manner comparable to the above.

• As discussed below, we are invested in real estate through a subsidiary that we believe qualifies for taxation as a REIT.

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If we comply with applicable Treasury regulations to ascertain the ownership of our outstanding shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6).

Accordingly, we have complied and will continue to comply with these regulations, including by requesting annually from holders of significant percentages of our shares information regarding the ownership of our shares.

Accordingly, we have complied and will continue to comply with these regulations, including by requesting annually from holders of significant percentages of our shares

information regarding the ownership of our shares.

Under our declaration of trust, our shareholders are required to respond to these requests for information.

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The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT’s.

We believe that each of our direct and indirect wholly owned subsidiaries, other than the TRSs discussed below (and entities owned in whole or in part by the TRSs), will be either a qualified REIT subsidiary within the meaning of Section 856(i)(2) of the IRC or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under Treasury regulations issued under Section 7701 of the IRC, each such entity referred to as a QRS.

We believe that each of our direct and indirect wholly owned subsidiaries, other than the TRSs discussed below (and entities whose equity is owned in whole or in part by such TRSs), will be either a qualified REIT subsidiary within the meaning of Section 856(i)(2) of the IRC or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under Treasury regulations issued under Section 7701 of the IRC, each such entity referred to as a QRS.

Thus, in applying all of the REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our QRSs are treated as ours, and our investment in the stock and other securities of such QRSs will be disregarded.

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However, failure of the subsidiary to separately satisfy the various REIT qualification requirements described in this summary or that are otherwise applicable (and failure to qualify for the applicable relief provisions) would generally result in (a) the subsidiary being subject to regular U.S.

corporate income tax, as described above, and (b) the REIT parent’s ownership in the subsidiary (i) ceasing to be qualifying real estate assets for purposes of the 75% asset test, (ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test generally applicable to a REIT’s ownership in corporations other than REITs and TRSs, and (iii) thereby jeopardizing the REIT parent’s own REIT qualification

and taxation on account of the subsidiary’s failure cascading up to the REIT parent, all as described below under the heading “—Asset Tests”.

We joined with our subsidiary REIT in filing a protective TRS election, effective for the first quarter of 2020, and we have reaffirmed this protective election with this subsidiary as of January 2021, and we may continue to do so unless and until our ownership of this subsidiary falls below 10%.

corporate income tax, as described above, and (b) the REIT parent’s ownership in the subsidiary (i) ceasing to be qualifying real estate assets for purposes of the 75% asset test and (ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test generally applicable to a REIT’s ownership in corporations other than REITs and TRSs.

In such a situation, the REIT parent’s own REIT qualification and taxation could be jeopardized on account of the subsidiary’s failure cascading up to the REIT parent, all as described below under the heading “—Asset Tests”.

We joined with our subsidiary REIT in filing a protective TRS election, effective for the first quarter of 2020.

We have subsequently reaffirmed this protective election with this subsidiary every January thereafter and we may continue to do so unless and until our ownership of this subsidiary falls below 10%.

Pursuant to this protective TRS election, we believe that if our subsidiary is not a REIT for some reason, then it would instead be considered one of our TRSs, and as such its value would fit within our REIT gross asset tests described below.

We expect to make similar protective TRS elections with respect to any other subsidiary REIT that we form or acquire.

We expect to make similar protective TRS elections with respect to any

other subsidiary REIT that we form or acquire.

We do not expect protective TRS elections to impact our compliance with the 75% and 95% gross income tests described below, because we do not expect our gains and dividends from a subsidiary REIT’s shares to jeopardize compliance with these tests even if for some reason the subsidiary is not a REIT.

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As a REIT, we are permitted to own any or all of the securities of a TRS, provided that no more than 20% of the total value of our assets, at the close of each quarter, is comprised of our investments in the stock or other securities of our TRSs.

Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or indirectly holds stock and that has made a joint election with its affiliated REIT to be treated as a TRS.

A TRS is taxed as a regular C corporation, separate and apart from its affiliated REIT.

Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS.

A TRS is taxed as a regular C corporation, separate and apart from any affiliated REIT.

Our ownership of stock and other securities in our TRSs is exempt from the 5% asset test, the 10% vote test and the 10% value test discussed below.

In addition, any corporation (other than a REIT) in which a TRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities is automatically a TRS.

Subject to the discussion below, we believe that we and each of our TRSs have complied with, and will continue to comply with, the requirements for TRS status at all times during which we intend for the subsidiary’s TRS election to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.

In addition, any corporation (other than a REIT and other than a QRS) in which a TRS directly or indirectly owns more than 35% of the voting power or value of the outstanding securities is automatically a TRS (excluding, for this purpose, certain “straight debt” securities).

Subject to the discussion below, we believe that we and each of our TRSs have complied with, and will continue to comply with, the requirements for TRS status at all times during which the subsidiary’s TRS election is intended to be in effect, and we believe that the same will be true for any TRS that we later form or acquire.

As discussed below, TRSs can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% gross income test or the 95% gross income test discussed below.

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Second, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities, or any combination of these.

Gross income from our sale of property that we hold primarily for sale to customers in the ordinary course of business, income and gain from specified “hedging transactions” that are clearly and timely identified as such, and income from the repurchase or discharge of indebtedness is excluded from both the numerator and the denominator in both

gross income tests.

In addition, specified foreign currency gains will be excluded from gross income for purposes of one or both of the gross income tests.

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We attempt to structure our activities to avoid transactions that are prohibited transactions, or otherwise conduct such activities through TRSs;

but, we cannot be sure whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax.

but, we cannot be sure whether or not the IRS might successfully assert that we are subject to the 100% penalty tax with respect to any particular transaction.

Gains subject to the 100% penalty tax are excluded from the 75% and 95% gross income tests, whereas real property gains that are not dealer gains or that are exempted from the 100% penalty tax on account of the safe harbors are considered qualifying gross income for purposes of the 75% and 95% gross income tests.

We believe that any gain from dispositions of assets that we might make in the future, including through any partnerships, will generally qualify as income that satisfies the 75% and 95% gross income tests, and will not be dealer gains or subject to the 100% penalty tax.

We believe that any gain that we have recognized, or will recognize, in connection with our disposition of assets and other transactions, including through any partnerships, will generally qualify as income that satisfies the 75% and 95% gross income tests, and will not be dealer gains or subject to the 100% penalty tax.

This is because our general intent has been and is to:

(a) own our assets for investment with a view to long-term income production and capital appreciation;

(a) own our assets for investment (including through joint ventures) with a view to long-term income production and capital appreciation;

(b) engage in the business of developing, owning, leasing and managing our existing properties and acquiring, developing, owning, leasing and managing new properties;

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Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the 75% and 95% gross income tests outlined above on a continuing basis beginning with our first taxable year as a REIT.

Asset Tests .

At the close of each calendar quarter of each taxable year, we must also satisfy the following asset percentage tests in order to qualify for taxation as a REIT for federal income tax purposes:

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Any deduction in excess of the limitation is carried forward and may be used in a subsequent year, subject to that year’s 30% limitation.

The Coronavirus Aid, Relief, and Economic Security Act changed the limitation on adjusted taxable income, increasing it from 30% to 50%, but only for 2019 and 2020.

Moreover, taxpayers can elect to use their adjusted taxable income from their 2019 tax year for their adjusted taxable income in their 2020 tax year for purposes of calculating the limitation.

Provided a taxpayer makes an election (which is irrevocable), the applicable limitation on the deductibility of net interest expense does not apply to a trade or business involving real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage, within the meaning of Section 469(c)(7)(C) of the IRC.

Provided a taxpayer makes an election (which is irrevocable), the limitation on the deductibility of net interest expense does not apply to a trade or business involving real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage, within the meaning of Section 469(c)(7)(C) of the IRC.

Treasury regulations provide that a real property trade or business includes a trade or business conducted by a REIT.

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Shareholders”.

Tax Consequences of the Monmouth Transaction

As discussed above, we intend to complete the Monmouth Transaction, which will include a cash payment by us to the holders of the Monmouth common shares.

As a result of the Monmouth Transaction, we will be treated for federal income tax purposes as acquiring the assets of Monmouth for the cash we pay plus the assumption of Monmouth’s liabilities, after which Monmouth will be treated as liquidating and distributing the cash to its shareholders.

Monmouth will recognize gain or loss on the disposition of its assets based on the sum of the cash paid by us and the value of the liabilities assumed by us, but this gain or loss plus Monmouth’s operating income is expected to be offset fully by the dividends paid deduction available to liquidating REITs in their final taxable year.

Our holding period in the assets we acquire from Monmouth will begin on the day following the completion of the Monmouth Transaction and our initial tax basis in the assets of Monmouth will be equal to the sum of the cash we pay to the holders of Monmouth common shares in conjunction with the Monmouth Transaction, the value of Monmouth’s liabilities that we assume, and the acquisition costs that we capitalize for income tax purposes.

The assets that we acquire in the Monmouth Transaction are generally expected to (a) qualify as real estate assets that satisfy the REIT asset tests that are described above under the heading “—REIT Qualification Requirements—Asset Tests,” and (b) generate gross income that satisfies the REIT gross income tests that are described above under the heading “—REIT Qualification Requirements—Income Tests.” As a result, we believe that our acquisition of Monmouth’s assets will not materially impact our qualification for taxation as a REIT.

If the Monmouth Transaction is not completed, then under specified circumstances we may be entitled to receive a termination fee from Monmouth over time.

The timing for the payment of the termination fee has been structured so that we can manage successfully the REIT gross income tests that we must satisfy.

In addition, if we become entitled to termination fee payments then we may seek an IRS private letter ruling or opinion of counsel that enables us to receive the termination fee on an accelerated basis while still complying with the REIT gross income tests.

In sum, we believe that our receipt of termination fee payments would not materially impact our qualification for taxation as a REIT.

As a condition of the closing of the Monmouth Transaction, Monmouth’s counsel will provide us with an opinion that Monmouth has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the IRC.

If, contrary to that opinion and our expectation, Monmouth has failed or fails to qualify for taxation as a REIT for U.S.

federal income tax purposes, then we may inherit significant tax liabilities in the Monmouth Transaction because, as the successor by merger to Monmouth, we would generally inherit any corporate income tax liabilities of Monmouth, including penalties and interest.

It is unclear whether the IRC provisions that are generally available to remediate REIT compliance failures will be available to us as a successor in respect of any determination that Monmouth failed to qualify for taxation as a REIT.

If and to the extent the remedial provisions are available to us to address Monmouth’s REIT qualification and taxation for the applicable period prior to or including the Monmouth Transaction, we may incur significant cash outlays in connection with the remediation, possibly including (a) required distribution payments to shareholders and associated interest payments to the IRS and (b) tax and interest payments to the IRS and state and local tax authorities.

Monmouth’s failure before the Transaction to qualify for taxation as a REIT and our efforts to remedy any such failure could have an adverse effect on our results of operations and financial condition.

Depreciation and Federal Income Tax Treatment of Leases

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We will generally depreciate our depreciable real property on a straight-line basis over forty years and our personal property over the applicable shorter periods.

These depreciation schedules, and our initial tax bases, may vary for properties that we acquire through tax-free or carryover basis acquisitions (for example, our initial properties contributed to us by Select Income REIT, or SIR, as discussed below), or that are the subject of cost segregation analyses.

The initial tax bases and depreciation schedules for the assets we held immediately after we separated from SIR depend upon whether the deemed exchange that resulted for federal income tax purposes from that separation, or the Deemed Exchange, was an exchange governed by Sections 351(a), 351(b) and 357(a) of the IRC.

Our counsel, Sullivan & Worcester LLP, is of the opinion that the Deemed Exchange should be treated as an exchange governed by Sections 351(a) and 357(a) of the IRC, except for a modest amount of gain recognized by SIR under Section 351(b) of the IRC in respect of our obligation to reimburse SIR for certain offering costs, and we agreed with SIR to perform all of our tax reporting accordingly.

This opinion is conditioned upon the assumption that the transaction agreement between us and SIR that governed our relationship with SIR has been and will be complied with by all parties thereto, upon the accuracy and completeness of the factual matters described in our Registration Statement on Form S-11 filed in connection with our initial public offering and listing on The Nasdaq Stock Market LLC, or Nasdaq, of 20,000,000 of our common shares, and upon representations made by us and SIR as to specified factual matters.

Therefore, we carried over SIR’s tax basis and depreciation schedule in each of the assets that we received from SIR, as adjusted by the gain SIR recognized under Section 351(b) of the IRC in the Deemed Exchange.

This conclusion regarding the applicability of Sections 351(a), 351(b) and 357(a) of the IRC is dependent upon favorable determinations with regard to each of the following three issues:

(a) Section 351(e) of the IRC did not apply to the Deemed Exchange, or else it would have disqualified the Deemed Exchange from Section 351(a) and 351(b) treatment altogether;

(b) Section 357(a) of the IRC rather than Section 357(b) of the IRC applied to the Deemed Exchange, or else the liabilities assumed by us from SIR in the Deemed Exchange would have been taxable consideration (up to the amount of actual realized gains) to SIR;

and (c) a judicial recharacterization rule, developed in Waterman Steamship v.

Commissioner , 430 F.2d 1185 (5th Cir.

1970), and subsequent tax cases, did not apply to recharacterize our pre-transaction distributions paid to SIR as a taxable sale by SIR for cash.

We cannot be sure that the IRS or a court would reach the same conclusion.

If, contrary to our belief and the opinion of our counsel, the Deemed Exchange was taxable to SIR because Sections 351(a), 351(b) or 357(a) of the IRC did not apply, then we would be treated as though we acquired our initial assets from SIR in a mostly or fully taxable acquisition, thereby acquiring aggregate tax bases in our assets at such deemed acquisition cost, which would be greater than the amount that would have otherwise carried over from SIR but also very possibly depreciable over longer depreciable lives.

In that event, our aggregate depreciation deductions beginning with our first taxable year and for many taxable years thereafter may be lower than we have reported and are anticipating from a carryover transaction.

If the IRS were to successfully challenge our reported depreciation methods and the associated tax reporting, then, including for purposes of qualifying for taxation as a REIT, we could be required to amend our tax reporting, including tax information reporting sent to our shareholders, or could be required to pay deficiency dividends, including the associated interest charge, as discussed above.

These depreciation schedules, and our initial tax bases, may vary for properties that we acquire through tax-free or carryover basis acquisitions, or that are the subject of cost segregation analyses.

We are entitled to depreciation deductions from our properties only if we are treated for federal income tax purposes as the owner of the properties.

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We will similarly designate the portion of any dividend that is to be taxed to noncorporate U.S.

shareholders at preferential maximum rates (including any qualified dividend income and any capital gains attributable to real estate depreciation recapture that are subject to a maximum 25% federal income tax rate) so that the designations will be proportionate among all outstanding classes of our shares.

shareholders at preferential maximum rates (including any qualified dividend

income and any capital gains attributable to real estate depreciation recapture that are subject to a maximum 25% federal income tax rate) so that the designations will be proportionate among all outstanding classes of our shares.

Distributions in excess of our current or accumulated earnings and profits will not be taxable to a U.S.

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If you are a tax-exempt shareholder, we urge you to consult your own tax advisor to determine the impact of federal, state, local and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your acquisition of or investment in our shares.

Our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts or other qualifying tax-exempt entities should not constitute UBTI, provided that the shareholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the IRC, that the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity, and that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit or otherwise hold mortgage assets or conduct mortgage securitization activities that generate “excess inclusion” income.

We expect that shareholders that are tax-exempt pension plans, individual retirement accounts or other qualifying tax-exempt entities, and that receive (a) distributions from us, or (b) proceeds from the sale of our shares, should not have such amounts treated as UBTI, provided in each case (x) that the shareholder has not financed its acquisition of our shares with “acquisition indebtedness” within the meaning of the IRC, (y) that the shares are not otherwise used in an unrelated trade or

business of the tax-exempt entity, and (z) that, consistent with our present intent, we do not hold a residual interest in a real estate mortgage investment conduit or otherwise hold mortgage assets or conduct mortgage securitization activities that generate “excess inclusion” income.

Taxation of Non-U.S.

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This expectation and a number of the determinations below are predicated on our shares being listed on a U.S.

national securities exchange, such as Nasdaq.

national securities exchange, such as The Nasdaq Stock Market LLC, or Nasdaq.

Each class of our shares has been listed on a U.S.

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shareholder that we make and do not designate as a capital gain dividend.

Notwithstanding this potential withholding on distributions in excess of our current and accumulated earnings and profits, these

excess portions of distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S.

Notwithstanding this potential withholding on distributions in excess of our current and accumulated earnings and profits, these excess portions of distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S.

shareholder’s adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares.

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shareholder holding those shares would be taxed as if the distribution was gain effectively connected with a trade or business in the United States conducted by the non-U.S.

In addition, the applicable withholding agent would be required to withhold from a distribution to such a non-U.S.

In addition, the applicable withholding agent would be required to withhold from

a distribution to such a non-U.S.

shareholder, and remit to the IRS, up to 21% of the maximum amount of any distribution that was or could have been designated as a capital gain dividend.

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If, contrary to our expectation, a gain on the sale of our shares is subject to U.S.

federal income taxation (for example, because neither of the above exemptions were then available, i.e.

, that class of our shares were not then listed on a U.S.

federal income taxation (for example, because neither of the above exemptions were then available, i.e., that class of our shares were not then listed on a U.S.

national securities exchange and we were not a “domestically controlled” REIT), then (a) a non-U.S.

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shareholder must provide specified documentation (usually an applicable IRS Form W-8) containing information about its identity, its status, and if required, its direct and indirect U.S.

shareholders and

shareholders who hold our shares through a non-U.S.

shareholders and shareholders who hold our shares through a non-U.S.

intermediary are encouraged to consult their own tax advisors regarding foreign account tax compliance.

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• any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer.

We believe that the restrictions imposed under our declaration of trust on the transfer of shares do not result in the failure of our shares to be “freely transferable.” Furthermore, we believe that there exist no other facts or circumstances limiting the transferability of our shares that are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer that would not be among the enumerated permissible limitations or restrictions.

In addition, we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer that would not be among the enumerated permissible limitations or restrictions.

Assuming that each class of our shares will be “widely held” and that no other facts and circumstances exist that restrict transferability of these shares, our counsel, Sullivan & Worcester LLP, is of the opinion that our shares will not fail to be “freely transferable” for purposes of the regulation due to the restrictions on transfer of our shares in our declaration of trust and that under the regulation each class of our currently outstanding shares is publicly offered and our assets will not be deemed to be “plan assets” of any ERISA Plan or Non-ERISA Plan that acquires our shares in a public offering.

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

What changed 10-K

Item 1. Business