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Item 2. Management’s Discussion and Analysis

2022-04-27 compared with 2021-10-27 · 221 added, 305 removed, 187 unchanged (74% of the section changed)

3 unchanged sentences

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

As of September 30, 2021, our portfolio was comprised of 294 wholly owned properties containing approximately 36.5 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 68 properties containing approximately 19.8 million rentable square feet located in 32 other states.

As of September 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 September 30, 2021, our consolidated properties were approximately 99.0% leased (based on rentable square feet) to 261 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 9.0 years.

We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of September 30, 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, 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 October 25, 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 September 30, 2021, approximately 1.7% of our annualized rental revenues.

As of September 30, 2021, we recognized $1,168 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 or nine months ended September 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 remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic.

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

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

As of March 31, 2022, our portfolio was comprised of 412 consolidated properties containing approximately 59.7 million rentable square feet located in 39 states, including 226 buildings, leasable land parcels and easements containing approximately 16.7 million rentable square feet located on the island of Oahu, Hawaii, and 186 properties containing approximately 43.0 million rentable square feet located in 38 other states.

Our 412 consolidated properties include 93 properties that we own in a consolidated joint venture arrangement in which we own a 61% equity interest.

As of March 31, 2022, we also owned a 22% equity interest in an unconsolidated joint venture, which owns 18 properties located in 12 states containing approximately 11.7 million rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 6.4 years.

As of March 31, 2022, our consolidated properties were approximately 98.9% leased (based on rentable square feet) to 304 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 8.6 years.

We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of March 31, 2022, 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.

On February 25, 2022, we completed the acquisition of MNR as a result of which we acquired 124 Class A, single tenant, net leased, e-commerce focused industrial properties located in 32 states containing approximately 25,745,000 rentable square feet and two committed, but not yet completed, property acquisitions.

The aggregate value of the consideration paid in the Merger was $3,734,485, including the assumption of $323,432 aggregate principal amount of existing MNR mortgage debt, the repayment of $885,269 of MNR debt and the payment of certain transaction fees and expenses, net of MNR’s cash on hand, and excluding two pending property acquisitions for an aggregate purchase price of $78,843, excluding acquisition related costs.

The 124 MNR properties were 97.9% leased to various tenants and had a remaining weighted average (by rental revenues) lease term of eight years as of the date of the acquisition.

Immediately following the closing of the Merger, we entered into a joint venture arrangement with an institutional investor for 95 MNR properties, including two committed, but not yet completed, property acquisitions.

The investor acquired a 39% equity interest in the joint venture from us for $587,440, and we retained the remaining 61% equity interest in the joint venture.

The joint venture assumed $323,432 aggregate principal amount of existing MNR mortgage debt on certain of the properties.

Property Operations

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

Occupancy data for our properties as of March 31, 2022 and 2021 is as follows (square feet in thousands):

All Properties Comparable Properties (1)

As of September 30, As of September 30,

As of March 31, As of March 31,

2022 2021 2022 2021

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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 September 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 nine months ended September 30, 2021 and 2020 are as follows:

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

2021 2020 2021 2020

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of March 31, 2022, 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, 2022 and 2021 are as follows:

Three Months Ended March 31,

Average effective rental rates per square foot leased:

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

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

Comparable properties for the nine months ended September 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 nine months ended September 30, 2021, we entered into new and renewal leases as summarized in the following tables:

Three Months Ended September 30, 2021

New Leases Renewals Totals

Square feet leased during the period (in thousands) 17 754 771

Weighted average rental rate change (by rentable square feet) 24.2 % 19.3 % 19.5 %

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

Total leasing costs and concession commitments (1)

$ 21 $ 2,505 $ 2,526

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

$ 1.20 $ 3.33 $ 3.28

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

$ 0.15 $ 0.41 $ 0.40

Nine Months Ended September 30, 2021

(2) Consists of properties that we owned continuously since January 1, 2021 and excludes properties owned by an unconsolidated joint venture.

During the three months ended March 31, 2022, we entered into new and renewal leases as summarized in the following tables:

Three Months Ended March 31, 2022

New Leases Renewals Totals

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

(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 8.2 years for the three months ended September 30, 2021 and 9.2 years for the nine months ended September 30, 2021.

During the three and nine months ended September 30, 2021, we completed rent resets for approximately 47,000 and 127,000 square feet of land at our Hawaii Properties, respectively, at rental rates that were approximately 34.5% and 36.3%, respectively, higher than the prior rental rates.

As shown in the table below, approximately 0.1% of our total leased square feet and approximately 0.2% of our total annualized rental revenues as of September 30, 2021 are included in leases scheduled to expire by December 31, 2021.

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

(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 8.9 years for the three months ended March 31, 2022 and 11.7 years for the three months ended March 31, 2021.

During the three months ended March 31, 2022, we entered into new and renewal leases for approximately 829,000 square feet at weighted average (by square feet) rental rates that were approximately 31.0% higher than prior rental rates for the same space (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 space during the prior lease term was 8.9 years.

Commitments for tenant improvements, leasing costs and concessions for leases entered into during the three months ended March 31, 2022 totaled $4,772, or approximately $0.65 per square foot per year of the new weighted average lease term.

During the three months ended March 31, 2022, we completed rent resets for approximately 56,000 square feet of land at our Hawaii Properties at rental rates that were approximately 35.8% higher than the prior rental rates.

As shown in the table below, approximately 3.3% of our total leased square feet and 3.6% of our total annualized rental revenues as of March 31, 2022 are included in leases scheduled to expire by December 31, 2022.

As of March 31, 2022, 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 September 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 September 30, 2021, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):

(1) Leased square feet is pursuant to existing leases as of March 31, 2022 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 and in advance.

As of March 31, 2022, tenants representing 1% or more of our total annualized rental revenues were as follows (square feet in thousands):

of Leased % of Total Annualized Rental

Tenant States Properties Sq.

1 Amazon.com Services, Inc./ Amazon.com Services LLC AZ, SC, TN, VA 4 3,869 10.7 % 9.5 %

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

AR, CO, HI, IA, ID, IL, MN, MO, NC, ND, NV, OH, OK, UT 17 952 2.6 % 4.3 %

AL, AR, CO, FL, GA, HI, IA, ID, IL, IN, KS, LA, MD, MI, MN, MO, MS, NC, ND, NE, NJ, NV, NY, OH, OK, PA, SC, TN, TX, UT, VA, VT, WA, WI 83 12,883 21.8 % 29.6 %

2 Amazon.com Services, Inc./ Amazon.com Services LLC AL,IN, OK, SC, TN, VA 8 4,539 7.7 % 7.0 %

3 Home Depot U.S.A., Inc.

GA, IL 2 829 1.4 % 1.8 %

4 UPS Supply Chain Solutions, Inc.

NH, NY 3 794 1.3 % 1.6 %

5 Restoration Hardware, Inc.

MD 1 1,195 2.0 % 1.6 %

4 American Tire Distributors, Inc.

CO, LA, NE, NY, OH 5 722 2.0 % 2.4 %

6 Servco Pacific, Inc.

HI 7 629 1.1 % 1.5 %

7 American Tire Distributors, Inc.

CO, LA, NE, NY, OH 5 722 1.2 % 1.3 %

8 Par Hawaii Refining, LLC HI 3 3,148 5.3 % 1.2 %

7 UPS Supply Chain Solutions, Inc.

NH 1 614 1.7 % 2.2 %

9 TD SYNNEX Corporation OH 2 939 1.6 % 1.2 %

10 EF Transit, Inc.

IN 1 535 0.9 % 1.0 %

9 BJ's Wholesale Club, Inc.

NJ 1 634 1.8 % 1.6 %

10 Shurtech Brands, LLC OH 1 645 1.8 % 1.6 %

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

12 Safeway Inc.

HI 2 146 0.4 % 1.5 %

13 ELC Distribution Center LLC KS 1 645 1.8 % 1.5 %

14 Manheim Remarketing, Inc.

HI 1 338 0.9 % 1.4 %

SC 1 945 2.6 % 1.4 %

16 Avnet, Inc.

OH 1 581 1.6 % 1.4 %

17 StyleCraft Home Collection, Inc.

MS 1 603 1.7 % 1.3 %

18 Warehouse Rentals Inc.

HI 5 278 0.8 % 1.2 %

19 YNAP Corporation NJ 1 167 0.5 % 1.1 %

20 ODW Logistics, Inc.

OH 3 760 2.1 % 1.1 %

21 Refresco Beverages US Inc.

MO, SC 2 421 1.2 % 1.0 %

22 Honolulu Warehouse Co., Ltd.

HI 1 298 0.8 % 1.0 %

23 Hellmann Worldwide Logistics, Inc.

FL 1 240 0.7 % 1.0 %

24 Flextronics International Holding LLC TN 1 438 1.2 % 1.0 %

11 Shaw Industries, Inc.

GA 1 832 1.4 % 1.0 %

12 Mercedes Benz US International, Inc.

AL 1 530 0.9 % 1.0 %

OH, SC 2 703 1.2 % 1.0 %

Total 119 28,278 47.8 % 50.8 %

Tenant Concentration.

We have a concentration of Mainland Properties leased to FDX, which as of March 31, 2022, consisted of approximately 21.8% of our rentable square feet located in 34 states, with a weighted average remaining lease term of 7.5 years.

For the three months ended March 31, 2022, approximately $13,468, or 18.9% of our rental income was from FDX.

Other than FDX, the only other tenants that leased over 5% of our total rentable square footage were subsidiaries of Amazon.com, Inc.

at certain of our Mainland Properties.

Subsidiaries of Amazon.com, Inc.

accounted for $5,615 and $5,538, or 7.9% and 10.2%, of our rental income for the three months ended March 31, 2022 and 2021, respectively.

Mainland Properties.

As of September 30, 2021, our Mainland Properties represented approximately 50.7% of our annualized rental revenues.

As of March 31, 2022, our Mainland Properties represented approximately 72.7% 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 September 30, 2021, our Hawaii Properties represented approximately 49.3% of our annualized rental revenues.

As of September 30, 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 March 31, 2022, our Hawaii Properties represented approximately 27.3% of our annualized rental revenues.

As of March 31, 2022, 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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As rent reset dates or lease expirations approach at our Hawaii Properties, we generally negotiate with existing or new tenants for new lease terms.

If we are unable to reach an agreement with a tenant on a rent reset, our Hawaii Properties’ leases typically provide that rent is reset based on an appraisal process.

Despite our and our predecessors’ 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.

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

Despite our and our predecessors’ prior experience with rent resets, lease extensions and new leases in Hawaii, our ability to increase rents when rents reset, leases are extended, or leases expire depends upon market conditions which are beyond our control.

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

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

The following chart shows the annualized rental revenues as of March 31, 2022 scheduled to reset at our Hawaii Properties:

Scheduled Rent Resets at Hawaii Properties

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Rental Revenues as of

September 30, 2021

March 31, 2022

Scheduled to Reset

2 unchanged sentences

Total $ 26,336

As of September 30, 2021, $4,306, or 1.9%, of our annualized rental revenues are included in leases scheduled to expire through September 30, 2022 and 1.0% of our rentable square feet are currently vacant.

As of March 31, 2022, $16,591, or 4.1%, of our annualized rental revenues are included in leases scheduled to expire through March 31, 2023 and 1.1% 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.

2 unchanged sentences

Tenant Review Process.

Our manager, RMR LLC, employs a tenant review process on our behalf.

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

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

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

Our manager, RMR, employs a tenant review process for us.

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

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

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

Investing and Financing Activities (dollars in thousands)

During the nine months ended September 30, 2021, we acquired four industrial properties and one parcel of developable land containing 1,644,508 rentable square feet for an aggregate purchase price of $134,730, including acquisition related costs of $1,030.

As a result of eminent domain taking in September 2021, we sold a portion of a land parcel located in Rock Hill, South Carolina for $1,400, excluding closing costs, resulting in a net gain on sale of real estate of $940.

In October 2021, we entered into an agreement to acquire a recently built property located in Detroit, Michigan market area containing approximately 1,009,000 rentable square feet and net leased to a single e-commerce tenant for a purchase price of $120,000, excluding acquisition related costs.

This acquisition is expected to close during the fourth 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 nine months ended September 30, 2020, we entered into agreements related to our 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 $108,676 from that investor for a 39% equity interest in our joint venture and we retained the remaining 61% equity interest in our joint venture.

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

The portion of our joint venture's net loss not attributable to us, or $275 and $691 for the three and nine months ended September 30, 2020, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income.

During the three and nine months ended September 30, 2020, our joint

venture made aggregate cash distributions of $5,402 and $10,269, respectively, including $2,107 and $4,005, respectively, 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 and nine months ended September 30, 2021, we recorded an increase in the fair value of our investment in our joint venture of $998 and $5,455, respectively, as equity in earnings of investees in our condensed consolidated statements of comprehensive income.

In addition, during the three and nine months ended September 30, 2021, our joint venture made aggregate cash distributions of $660 and $1,980, respectively, to us.

As previously disclosed, on February 25, 2022, we completed the acquisition of MNR.

MNR’s portfolio included 124 Class A, single tenant, net leased, e-commerce focused industrial properties located in 32 states containing approximately 25,745,000 rentable square feet with a remaining weighted average (by rental revenues) lease term of eight years as of the date of the acquisition, and two committed, but not yet completed, property acquisitions.

Immediately following the closing of the Merger, we entered into a joint venture arrangement with an institutional investor for 95 of the acquired MNR properties, including two committed, but not yet completed, property acquisitions.

The investor acquired a 39% noncontrolling equity interest in the joint venture from us for $587,440, and we retained the remaining 61% equity interest in the joint venture.

The joint venture assumed $323,432 aggregate principal amount of existing MNR mortgage debt on certain of the properties and entered into a $1,400,000 floating rate CMBS loan secured by 82 properties.

The Floating Rate Loan matures in March 2024, subject to three one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.765%.

In connection with the closing of the Merger, we entered into a $1,385,158 bridge loan facility, secured by 109 properties not owned by the joint venture in which we retained a 61% equity interest.

We also entered into a $700,000 fixed rate CMBS loan secured by 17 of our properties.

We control this joint venture and therefore account for the properties on a consolidated basis in our condensed consolidated financial statements.

As of March 31, 2022, we also own an interest in an unconsolidated joint venture that owns 18 properties.

We account for our 18 property unconsolidated joint venture under the equity method of accounting under the fair value option.

During the three months ended March 31, 2022, we recorded the change in the fair value of our investment in our unconsolidated joint venture of $1,727 in our condensed consolidated statements of comprehensive income (loss).

In addition, during the three months ended March 31, 2022, our unconsolidated joint venture made aggregate cash distributions of $1,320 to us.

For further information regarding our investing and financing activities, see Notes 2, 4, 5, 9 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Our Investing and Financing Liquidity and Resources” of this Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

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

Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021 (dollars and share amounts in thousands, except per share data)

Comparable Properties Results (1)

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Consolidated Results

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

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

2022 2021 Change Change 2022 2021 Change 2022 2021 Change Change

10 unchanged sentences

Depreciation and amortization 22,878 12,678 10,200 80.5 %

Acquisition and certain other transaction related costs — 178 (178) (100.0 %)

General and administrative 6,077 3,756 2,321 61.8 %

Total other expenses 28,955 16,434 12,521 76.2 %

Gain on sale of real estate 940 — 940 N/M

Interest expense (9,084) (12,886) 3,802 (29.5 %)

Income before income tax expense and equity in earnings of investees 17,381 13,827 3,554 25.7 %

Income tax expense (72) (13) (59) N/M

Equity in earnings of investees 998 — 998 N/M

Net income 18,307 13,814 4,493 32.5 %

Net loss attributable to noncontrolling interest — 275 (275) (100.0 %)

Net income attributable to common shareholders $ 18,307 $ 14,089 $ 4,218 29.9 %

Weighted average common shares outstanding - basic 65,178 65,112 66 0.1 %

Weighted average common shares outstanding - diluted 65,230 65,129 101 0.2 %

Per common share data (basic and diluted):

Net income attributable to common shareholders $ 0.28 $ 0.22 $ 0.06 27.3 %

N/M - Not Meaningful

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

(2) Consists of six properties that we acquired during the period from July 1, 2020 to September 30, 2021, one property we sold in 2020 and 12 properties we contributed during the nine months ended September 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 September 30, 2021 compared to the three months ended September 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 $1,678 for the 2021 period and approximately $2,120 for the 2020 period, and net

amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $174 for the 2021 period and approximately $202 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.

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 and decreases in repairs and maintenance costs at certain of our comparable properties in the 2021 period.

Depreciation and amortization.

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

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 in the 2020 period.

Gain on sale of real estate.

Gain on sale of real estate represents the net gain from the sale of a portion of a land parcel as a result of an eminent domain taking in the 2021 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.

Realized gain on sale of equity securities 1,232 — 1,232 — %

Unrealized gain on equity securities 2,460 — 2,460 — %

Dividend income 478 — 478 — %

Interest expense (40,999) (8,741) (32,258) N/M

Loss on early extinguishment of debt (828) — (828) N/M

Income (loss) before income tax expense and equity in earnings of investees (11,445) 16,819 (28,264) (168.0 %)

Income tax expense (69) (63) (6) 9.5 %

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

Equity in earnings of investees 1,727 2,581 (854) (33.1 %)

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

The increase in net income for the 2021 period compared to the 2020 period reflects the changes noted above.

Net loss attributable to noncontrolling interest.

Net loss attributable to noncontrolling interest represents the net loss attributable to the 39% equity interest 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 - basic and diluted.

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

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

Comparable Properties Results (1)

Non-Comparable Properties Results (2)

Consolidated Results

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

2021 2020 Change Change 2021 2020 Change 2021 2020 Change Change

Rental income $ 156,226 $ 151,488 $ 4,738 3.1 % $ 7,152 $ 43,006 $ (35,854) $ 163,378 $ 194,494 $ (31,116) (16.0 %)

Operating expenses:

Real estate taxes

21,608 20,969 639 3.0 % 745 5,810 (5,065) 22,353 26,779 (4,426) (16.5 %)

Other operating expenses

13,112 11,810 1,302 11.0 % 622 3,923 (3,301) 13,734 15,733 (1,999) (12.7 %)

Total operating expenses

34,720 32,779 1,941 5.9 % 1,367 9,733 (8,366) 36,087 42,512 (6,425) (15.1 %)

Net operating income (3)

$ 121,506 $ 118,709 $ 2,797 2.4 % $ 5,785 $ 33,273 $ (27,488) 127,291 151,982 (24,691) (16.2 %)

Other expenses:

Depreciation and amortization

37,202 55,303 (18,101) (32.7 %)

Acquisition and certain other transaction related costs 646 178 468 N/M

General and administrative

12,718 14,857 (2,139) (14.4 %)

Total other expenses 50,566 70,338 (19,722) (28.1 %)

Gain on sale of real estate 940 — 940 N/M

Interest income — 113 (113) (100.0 %)

Interest expense (26,468) (40,610) 14,142 (34.8 %)

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

Income before income tax expense and equity in earnings of investees 51,197 41,267 9,930 24.1 %

Income tax expense (177) (202) 25 (12.4 %)

Equity in earnings of investees 5,455 — 5,455 N/M

Net income 56,475 41,065 15,410 37.5 %

Net (loss) income (9,787) 19,337 (29,124) (150.6 %)

Net loss attributable to noncontrolling interest 3,273 — 3,273 — %

Net income attributable to common shareholders $ 56,475 $ 41,756 $ 14,719 35.3 %

Net (loss) income attributable to common shareholders $ (6,514) $ 19,337 $ (25,851) (133.7 %)

Weighted average common shares outstanding - basic 65,212 65,139 73 0.1 %

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Per common share data (basic and diluted):

Net income attributable to common shareholders $ 0.86 $ 0.64 $ 0.22 34.4 %

Net (loss) income attributable to common shareholders $ (0.10) $ 0.30 $ (0.40) (133.3 %)

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 seven properties that we acquired during the period from January 1, 2020 to September 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 nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

(1) Consists of properties that we owned continuously since January 1, 2021 and excludes properties owned by an unconsolidated joint venture.

(2) Consists of 131 properties that we acquired during the period from January 1, 2021 to March 31, 2022, including 93 properties we contributed to a consolidated joint venture in which we own a 61% equity interest and six properties we sold in December 2021 to our 18 property unconsolidated joint venture in which we own a 22% equity interest.

(3) See our definition of NOI and our reconciliation of net income (loss) 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, 2022 compared to the three months ended March 31, 2021.

Rental income.

Rental income includes non-cash straight line rent adjustments totaling approximately $5,673 for the 2021 period and approximately $6,183 for the 2020 period, and net

amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $525 for the 2021 period and approximately $606 for the 2020 period.

The increase in rental income is primarily a result of our acquisition and disposition activities, which includes our acquisition of MNR.

The increase also reflects our leasing activity and rent resets at certain of our comparable properties.

Rental income at our comparable properties decreased primarily due to the sale of six properties to our unconsolidated joint venture in December 2021.

Rental income includes non-cash straight line rent adjustments totaling approximately $1,156 for the 2022 period and approximately $2,044 for the 2021 period, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately $320 for the 2022 period and approximately $180 for the 2021 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.

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

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.

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

The increase in other operating expenses is primarily due to our acquisition and disposition activities, as well as an increase in insurance costs at certain of our comparable properties in the 2022 period.

Depreciation and amortization.

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.

The increase in depreciation and amortization primarily reflects our acquisition and disposition activities.

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.

Gain on real estate.

Gain on sale of real estate represents the net gain from the sale of a portion of a land parcel as a result of an eminent domain taking in the 2021 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.

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

The increase in general and administrative expenses is primarily due to an increase in business management fees as a result of our net acquisition activity since January 2021.

Realized gain on sale of equity securities.

Realized gain on sale of equity securities represents the realized gain of $1,232 on the sale of certain equity securities we acquired as part of our acquisition of MNR.

Unrealized gain on equity securities.

Unrealized gain on equity securities represents the increase in fair value of certain equity securities we acquired as part of our acquisition of MNR for the period from February 25, 2022 to March 31, 2022.

Dividend income.

Dividend income represents the distributions received on certain equity securities we held during the period from February 25, 2022 to March 31, 2022.

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.

The increase in interest expense is due to higher average interest rates incurred on larger average outstanding balances in the 2022 period as compared to the 2021 period, primarily due to our acquisition of MNR.

Loss on early extinguishment of debt.

Loss on extinguishment of debt relates to unamortized costs related the termination of our $750,000 unsecured credit facility during the 2022 period.

Income tax expense.

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

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

Equity in earnings of investees.

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

The increase in net income for the 2021 period compared to the 2020 period reflects the changes noted above.

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

Net (loss) income.

The net loss for the 2022 period compared to the net income for the 2021 period reflects the changes noted above.

Net loss attributable to noncontrolling interest.

Net loss attributable to noncontrolling interest represents the net loss attributable to the 39% equity interest in our consolidated joint venture that we did not own during the 2022 period.

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, 2021.

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.

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

The net loss attributable to common shareholders per common share for the 2022 period compared to the net income attributable to common shareholders per share for the 2021 period reflects the changes to net income attributable to common shareholders and weighted average common shares noted above.

Non-GAAP Financial Measures

We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the Securities and Exchange Commission, or 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.

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

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

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

These measures should be considered in conjunction with net income (loss) and net income (loss) attributable to common shareholders as presented in our condensed consolidated statements of comprehensive income (loss).

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

We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties.

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We define NOI as income from our rental of real estate less our property operating expenses.

The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our property level results of operations.

The calculation of NOI excludes certain components of net income (loss) in order to provide results that are more closely related to our property level results of operations.

NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense.

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

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

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

2021 2020 2021 2020

Reconciliation of Net Income to NOI:

Net income $ 18,307 $ 13,814 $ 56,475 $ 41,065

The following table presents the reconciliation of net income to NOI for the three months ended March 31, 2022 and 2021 (dollars in thousands):

Three Months Ended March 31,

Reconciliation of Net (Loss) Income to NOI:

Net (loss) income $ (9,787) $ 19,337

Equity in earnings of investees (1,727) (2,581)

Income tax expense 69 63

Income before income tax expense and equity in earnings of investees 17,381 13,827 51,197 41,267

Gain on sale of real estate (940) — (940) —

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

Income (loss) before income tax expense and equity in earnings of investees (11,445) 16,819

Loss on early extinguishment of debt 828 —

Interest expense 40,999 8,741

Interest income — — — (113)

Realized gain on sale of equity securities (1,232) —

Unrealized gain on equity securities (2,460) —

Dividend income (478) —

General and administrative 6,077 3,756

Acquisition and transaction related costs — 178 646 178

Depreciation and amortization 22,878 12,678

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We calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders as shown below.

FFO attributable to common shareholders is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income attributable to common shareholders, calculated in accordance with GAAP, excluding any gain or loss on sale of real estate and equity in earnings of an unconsolidated joint venture, plus real estate depreciation and amortization of consolidated properties and our proportionate share of FFO of unconsolidated joint venture

properties and minus FFO adjustments attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us.

In calculating Normalized FFO attributable to common shareholders, we adjust for the items shown below including similar adjustments for our unconsolidated joint venture, if any.

FFO attributable to common shareholders is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (loss) attributable to common shareholders, calculated in accordance with GAAP, excluding any gain or loss on sale of real estate, equity in earnings of an unconsolidated joint venture and realized and unrealized gain on equity securities, plus real estate depreciation and amortization of consolidated properties and our

proportionate share of FFO of unconsolidated joint venture properties and minus FFO adjustments attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us.

In calculating Normalized FFO attributable to common shareholders, we adjust for the items shown below including similar adjustments for our unconsolidated joint venture, if any, and exclude acquisition and transaction costs expensed under GAAP.

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

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

Three Months Ended September 30, Nine Months Ended September 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:

Net income attributable to common shareholders $ 18,307 $ 14,089 $ 56,475 $ 41,756

The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net income (loss) attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the three months ended March 31, 2022 and 2021 (dollars in thousands, except per share data):

Three Months Ended March 31,

Reconciliation of Net Income (Loss) Attributable to Common Shareholders to FFO Attributable to Common Shareholders and Normalized FFO Attributable to Common Shareholders:

Net (loss) income attributable to common shareholders $ (6,514) $ 19,337

Depreciation and amortization 22,878 12,678

Equity in earnings of unconsolidated joint venture (1,727) (2,581)

Realized gain on sale of equity securities (1,232) —

Unrealized gain on equity securities (2,460) —

Share of FFO from unconsolidated joint venture 1,761 1,236

Gain on sale of real estate (940) — (940) —

FFO adjustments attributable to noncontrolling interest (4,604) —

FFO attributable to common shareholders 8,102 30,670

Acquisition and certain other transaction related costs — 178 646 178

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

Loss on early extinguishment of debt 828 —

Acquisition and certain other transaction costs 18,673 —

Normalized FFO attributable to common shareholders $ 27,603 $ 30,670

Per common share data:

FFO attributable to common shareholders - basic $ 0.46 $ 0.46 $ 1.40 $ 1.39

FFO attributable to common shareholders - diluted $ 0.46 $ 0.46 $ 1.39 $ 1.39

Normalized FFO attributable to common shareholders - basic $ 0.46 $ 0.46 $ 1.41 $ 1.40

Normalized FFO attributable to common shareholders - diluted $ 0.46 $ 0.46 $ 1.40 $ 1.40

Weighted average common shares outstanding - basic 65,212 65,139

Weighted average common shares outstanding - diluted 65,212 65,177

Per common share data (basic and diluted):

FFO attributable to common shareholders $ 0.12 $ 0.47

Normalized FFO attributable to common shareholders $ 0.42 $ 0.47

LIQUIDITY AND CAPITAL RESOURCES

Our Operating Liquidity and Resources (dollars in thousands)

Our principal sources of funds to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders are rents from tenants at our properties and borrowings under our revolving credit facility.

With $423,000 of availability under our revolving credit facility as of October 25, 2021, 70.9% 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 1.9% of our annualized rental revenues as of September 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 the foreseeable future thereafter.

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.

With $275,075 of cash on hand, 77.3% 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 4.1% of our annualized rental revenues as of March 31, 2022 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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The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows (dollars in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Cash and cash equivalents and restricted cash at beginning of period $ 29,397 $ 22,834

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Cash and cash equivalents and restricted cash at end of period $ 421,429 $ 26,147

The decrease in net cash provided by operating activities for the nine months ended September 30, 2021 compared to the 2020 period is primarily due to changes in our working capital.

The increase in net cash used in investing activities for the nine months ended September 30, 2021 compared to the 2020 period is primarily due to our acquisition of four properties and one parcel of developable land for an aggregate purchase price of $134,730 during the 2021 period as compared to one property for a purchase price of $71,628 during the 2020 period.

The increase in net cash provided by financing activities for the nine months ended September 30, 2021 compared to the 2020 period is primarily due to higher net borrowings under our revolving credit facility during the 2021 period to fund acquisitions.

The increase in net cash provided by operating activities for the three months ended March 31, 2022 compared to the 2021 period is primarily due to increased operating cash flow from the acquisition of MNR and changes in our working capital.

The increase in net cash used in investing activities for the three months ended March 31, 2022 compared to the 2021 period is primarily due to our acquisition of MNR during the 2022 period as 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, 2022 to net cash used in financing activities during the 2021 period is primarily due to the net borrowings and sale of joint venture equity interests used to finance our acquisition of MNR in the 2022 period.

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

Our future acquisition or development activity cannot be accurately projected because such activity depends upon available opportunities to, and 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 undertake construction or redevelopment activities on our properties.

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

We expect to spend approximately $16,600 to construct a building for lease on this land.

As of September 30, 2021, we had cash and cash equivalents of $44,093.

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.

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, 2022, we had cash and cash equivalents of $275,075.

To maintain our qualification for taxation as a REIT under the Internal Revenue Code of 1986, as amended, or the IRC, we generally are required to distribute at least 90% of our REIT taxable income annually, subject to specified adjustments and excluding any net capital gain.

This distribution requirement limits our ability to retain earnings and thereby provide capital for our operations or acquisitions.

In order to fund cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions, to pay operating or capital expenses or to fund any future property acquisitions, development or redevelopment efforts, we maintain a $750,000 unsecured revolving credit facility with a group of lenders.

We pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium that varies based on our leverage ratio.

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

At September 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 September 30, 2021, the annual interest rate payable on borrowings under our revolving credit facility was 1.39%.

As of September 30, 2021 and October 25, 2021, we had $354,000 and $327,000, respectively, outstanding under our revolving credit facility, and $396,000 and $423,000 respectively, available to borrow under our revolving credit facility.

The maturity date of our revolving credit facility is December 29, 2021.

We have the option to extend the maturity date of our revolving credit facility for two, six month periods, subject to payment of extension fees and satisfaction of other conditions.

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

As of September 30, 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 $108,676 from that investor for a 39% equity interest in our joint venture and we retained the remaining 61% equity interest in our joint venture.

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

During the three and nine months ended September 30, 2020, our joint venture made aggregate cash distribution of $5,402 and $10,269, respectively, including $2,107 and $4,005, respectively, 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 and nine months ended September 30, 2021, we recorded an increase in the fair value of our investment in our joint venture of $998 and $5,455, respectively, as equity in earnings of investees in our condensed consolidated statements of comprehensive income.

In addition, during the three and nine months ended September 30, 2021, our joint venture made aggregate cash distributions of $660 and $1,980, 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 of this Quarterly Report on Form 10-Q.

We expect to use borrowings under our revolving credit facility, payments we may receive for equity contributions from any third party investors in our joint venture or any future joint ventures we may enter into and net proceeds from offerings of equity or debt securities to fund any future property acquisitions, development or redevelopment efforts.

We may use our cash and cash equivalents on hand, the cash flow from our operations, net proceeds from any sales of assets and net proceeds of offerings of equity or debt securities to fund our distributions to our shareholders.

We currently expect to reduce our debt with the proceeds from the sale of 30 properties we have classified as held for sale as of March 31, 2022.

On February 25, 2022, subsidiaries of our consolidated joint venture entered into a loan agreement with Citi Real Estate Funding Inc., UBS AG, Bank of America, N.A., Bank of Montreal and Morgan Stanley Bank, N.A., or collectively, the Floating Rate Lenders, pursuant to which this joint venture obtained the Floating Rate Loan.

Also on February 25, 2022, our consolidated joint venture entered into a guaranty in favor of the Floating Rate Lenders, pursuant to which this joint venture guaranteed certain limited recourse obligations of its subsidiaries with respect to the Floating Rate Loan.

The Floating Rate Loan matures in March 2024, subject to three, one year extension options, and requires that interest be paid at a rate of SOFR plus a premium of 2.25%.

Effective in March 2022, the Floating Rate Lenders exercised their option to increase the premium in connection with the securitization of the Floating Rate Loan resulting in an increase of 51.5 basis points in the premium.

As of March 31, 2022, the weighted average annual interest rate payable under our Floating Rate Loan was 3.060% and the weighted average interest rate for borrowings under the Floating Rate Loan was 3.011% for the period from February 25, 2022 to March 31, 2022.

Also on February 25, 2022, certain of our subsidiaries entered into a loan agreement with Citibank, N.A., UBS AG, Bank of America, N.A., Bank of Montreal and Morgan Stanley Bank, N.A., or collectively, the Bridge Lenders, and a mezzanine loan agreement with an institutional lender, or the Bridge Mezz Lender, together pursuant to which we obtained the Bridge Loan.

Also on February 25, 2022, we entered into a guaranty in favor of the Bridge Lenders and the Bridge Mezz Lender, pursuant to which we guaranteed certain limited recourse obligations of its subsidiaries with respect to the Bridge Loan.

The Bridge Loan matures in February 2023 and requires that interest be paid at an annual rate of SOFR plus a premium of 1.75% under the loan agreement and a premium of 8.0% under the mezzanine loan agreement.

As of March 31, 2022, the weighted average annual interest rate payable under our Bridge Loan was 3.214% and the weighted average annual interest rate for borrowings under the Bridge Loan was 3.143% for the period from February 25, 2022 to March 31, 2022.

Also on February 25, 2022, certain of our subsidiaries entered into a loan agreement with Citi Real Estate Funding Inc., UBS AG, Bank of America, N.A., Bank of Montreal and Morgan Stanley Bank, N.A., or collectively, the Fixed Rate Lenders, and mezzanine loan agreements with Citigroup Global Markets Realty Corp., UBS AG, Bank of America, N.A., Bank of Montreal and Morgan Stanley Mortgage Capital Holdings LLC, or collectively the Fixed Mezz Lenders, pursuant to which we obtained the Fixed Rate Loan.

Also on February 25, 2022, we entered into a guaranty in favor of the Fixed Rate Lenders and the Fixed Mezz Lenders, pursuant to which we guaranteed certain limited recourse obligations of our subsidiaries with respect to the Fixed Rate Loan.

The Fixed Rate Loan matures in March 2032 and requires that interest be paid at a weighted average annual fixed rate of 4.417%.

We used the aggregate net proceeds from the Loans to fund the acquisition of MNR.

Principal payments on the Loans are not required prior to the end of the respective initial term, subject to certain conditions set forth in the applicable loan agreement.

Subject to the satisfaction of certain stated conditions, we have the option under the applicable loan agreement:

(1) to prepay up to $280,000 of the Floating Rate Loan after March 2023, at par with no premium, and to prepay the balance of the Floating Rate Loan at any time, subject to a premium;

(2) to prepay the Bridge Loan, in full or in part at any time, subject to breakage costs;

and (3) to prepay the Fixed Rate Loan in full or part at any time, subject to a premium, and beginning in September 2031, without a premium.

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

In connection with the Merger, our consolidated joint venture in which we own a 61% equity interest assumed an aggregate $323,432 of existing MNR mortgages secured by 11 properties which are owned by this joint venture.

These amortizing mortgages require monthly payments of principal and interest until maturity.

The value of these mortgages approximated their estimated fair value on the date of acquisition.

As of March 31, 2022, we have an aggregate principal amount of $4,456,808 of debt, including the Loans, scheduled to mature between 2022 and 2038.

For further information regarding our investing and financing activities, including our acquisition of MNR, see Notes 2, 4, 5, 9 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Consolidated Joint Venture

The investor acquired a 39% noncontrolling equity interest in the joint venture from us for $587,440, and we retained the remaining 61% equity interest in the joint venture.

The joint venture assumed $323,432 aggregate principal amount of existing MNR mortgages on certain of the properties.

We account for this joint venture on a consolidated basis in our condensed consolidated financial statements.

We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three months ending March 31, 2022.

The portion of this joint venture's net loss not attributable to us, or $3,261 for the three months ended March 31, 2022, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income (loss).

There were no distributions made by this joint venture during the three months ended March 31, 2022.

We may seek to sell additional equity interests in this joint venture and use the proceeds to reduce our debt.

See Notes 1, 9 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this joint venture.

Unconsolidated Joint Venture

As of March 31, 2022 and December 31, 2021, we also owned an interest in an unconsolidated joint venture.

We account for the unconsolidated joint venture under the equity method of accounting under the fair value option.

During the three months ended March 31, 2022 and 2021, we recorded the change in the fair value of our investment in our unconsolidated joint venture of $1,727 and $2,581, respectively, as equity in earnings of investees in our condensed consolidated statements of comprehensive income (loss).

In addition, during the three months ended March 31, 2022 and 2021, our unconsolidated joint venture made aggregate cash distributions of $1,320 and $660, respectively, to us.

For further information regarding this joint venture, see Notes 2, 5 and 11 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We expect to use payments we may receive from the other investors in our joint ventures in connection with any additional properties we may sell to our joint ventures, equity contributions from any third party investors in our joint ventures or any future joint ventures and net proceeds from offerings of equity or debt securities to fund any future property acquisitions, development or redevelopment efforts.

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

When significant amounts are outstanding under our revolving credit facility or the maturities of our revolving credit facility or our other debt approach, we intend to explore refinancing alternatives.

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.

When the maturities of our debt approach, we intend to explore refinancing alternatives.

Such alternatives may include incurring term debt, obtaining financing secured by mortgages on properties we own, issuing new equity or debt securities, obtaining a 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.

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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, there remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic and its impact on the economy and public health as well as our business.

A protracted and extensive economic downturn resulting from the COVID-19 pandemic or otherwise 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.

During the nine months ended September 30, 2021, we paid quarterly cash distributions to our shareholders totaling $64,653 using existing cash balances and borrowings under our revolving credit facility.

During the three months ended March 31, 2022, we paid a quarterly cash distribution to our shareholders totaling $21,584 using existing cash balances.

For more information regarding the distribution we paid in 2022, see Note 6 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

On October 14, 2021, we declared a regular quarterly distribution to common shareholders of record on October 25, 2021 of $0.33 per common share, or approximately $21,600 in aggregate.

We expect to pay this distribution to our shareholders on or about November 18, 2021 using existing cash balances and borrowings under our revolving credit facility.

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

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

On April 14, 2022, we declared a regular quarterly distribution of $0.33 per common share, or approximately $21,600, to shareholders of record on April 25, 2022.

We expect to pay this distribution to our shareholders on or about May 19, 2022 using existing cash balances.

During the three months ended March 31, 2022 and 2021, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

Three Months Ended

Tenant improvements and leasing costs (1)

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Building improvements (2)

1,625 1,000 2,417 2,978

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 September 30, 2021, we had estimated unspent leasing related obligations of $2,315.

As of March 31, 2022, we had estimated unspent leasing related obligations of $28,700.

Debt Covenants (dollars in thousands)

Our principal debt obligations at September 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.

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

Our credit agreement contains covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, restrict our ability to make distributions to our shareholders in certain circumstances and generally require us to maintain certain financial ratios.

As of September 30, 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.

However, under our credit agreement, our leverage ratio is used to determine the interest rates for calculating the amount of interest payable on outstanding borrowings and the fees we pay.

Accordingly, if our leverage ratio increases above the applicable thresholds, our interest expense and related costs under our credit agreement would increase.

Our revolving credit facility has cross default provisions to other indebtedness that is recourse of $25,000 or more and indebtedness that is non-recourse of $50,000 or more.

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

Our principal debt obligations at March 31, 2022 were:

(1) $1,385,158 outstanding principal amount of the Bridge Loan;

(2) $1,400,000 outstanding principal amount of the Floating Rate Loan;

(3) $700,000 outstanding principal amount of the Fixed Rate Loan;

(4) $650,000 outstanding principal amount of a mortgage loan secured by 186 of our properties;

and (5) $321,650 aggregate principal amount of mortgages secured by 11 properties owned by our consolidated joint venture in which we own a 61% equity interest.

For further information regarding our indebtedness, see Note 4 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The agreements and related documents governing the Loans and the $650,000 mortgage loan contain customary covenants, provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default and, in the case of the $650,000 mortgage loan, also 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, 2022, we believe we were in compliance with all the covenants and other terms under the agreements governing the Loans and the $650,000 mortgage loan.

Certain of the mortgages we assumed in conjunction with our acquisition of MNR are non-recourse, subject to certain limitations, and do not contain any material financial covenants.

The agreements governing the Loans and the $650,000 mortgage loan contain certain exceptions to the general non-recourse provisions, including our obligation to indemnify the lenders for certain potential environmental losses .

Related Person Transactions

We have relationships and historical and continuing transactions with RMR LLC, RMR Inc.

We have relationships and historical and continuing transactions with RMR, RMR Inc.

and others related to them.

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In addition, see the section captioned “Risk Factors” of our 2021 Annual Report for a description of risks that may arise as a result of these and other related person transactions and relationships.

We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis