Industrial Logistics Properties Trust 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and with our 2021 Annual Report. OVERVIEW (dollars in thousands, except per share and per square foot data) We are a real estate investment trust, or REIT, organized under Maryland law. As of March 31, 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 March 31, 2022 and 2021 is as follows (square feet in thousands): All Properties Comparable Properties (1) As of March 31, As of March 31, 2022 2021 2022 2021 Total properties 412 289 286 286 Total rentable square feet (2) 59,736 34,870 33,634 33,658 Percent leased (3) 98.9 % 98.6 % 99.3 % 98.5 % (1) Consists of properties that we owned continuously since January 1, 2021 and excludes 18 properties owned by an unconsolidated joint venture in which we own a 22% equity interest. (2) Subject to modest adjustments when space is remeasured or reconfigured for new tenants and when land leases are converted to building leases. (3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of 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. 21 Table of Contents 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, 2022 2021 Average effective rental rates per square foot leased: (1) All properties $ 6.56 $ 6.31 Comparable properties (2) $ 6.25 $ 6.33 (1) Average effective rental rates per square foot leased represents annualized rental income during the period specified divided by the average rentable square feet leased during the period specified. (2) Consists of properties that we owned continuously since January 1, 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 Square feet leased during the period (in thousands) 281 548 829 Weighted average rental rate change (by rentable square feet) 60.9 % 15.7 % 31.0 % Weighted average lease term by square feet (years) (2) 12.6 6.9 8.9 Total leasing costs and concession commitments (1) $ 2,355 $ 2,417 $ 4,772 Total leasing costs and concession commitments per square foot (1) $ 8.38 $ 4.41 $ 5.76 Total leasing costs and concession commitments per square foot per year (1) $ 0.66 $ 0.64 $ 0.65 (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 8.9 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. 22 Table of Contents 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 % of Total Cumulative % Annualized Annualized % of Total Leased Leased of Total Leased Rental Rental Annualized Number of Square Feet Square Feet Square Feet Revenues Revenues Rental Revenues Period / Year Tenants Expiring (1) Expiring (1) Expiring (1) Expiring Expiring Expiring 4/1/2022-12/31/2022 38 1,977 3.3 % 3.3 % $ 14,672 3.6 % 3.6 % 2023 40 4,147 7.0 % 10.3 % 25,963 6.4 % 10.0 % 2024 48 7,052 11.9 % 22.2 % 35,217 8.7 % 18.7 % 2025 29 4,457 7.5 % 29.7 % 25,469 6.3 % 25.0 % 2026 22 2,763 4.7 % 34.4 % 20,277 5.0 % 30.0 % 2027 31 8,216 13.9 % 48.3 % 47,833 11.8 % 41.8 % 2028 27 4,749 8.0 % 56.3 % 33,377 8.2 % 50.0 % 2029 17 3,428 5.8 % 62.1 % 16,531 4.1 % 54.1 % 2030 14 2,155 3.6 % 65.7 % 18,026 4.4 % 58.5 % 2031 16 3,265 5.5 % 71.2 % 24,570 6.1 % 64.6 % Thereafter 117 16,850 28.8 % 100.0 % 144,239 35.4 % 100.0 % Total 399 59,059 100.0 % $ 406,174 100.0 % Weighted average remaining lease term (in years): 7.7 8.6 (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. 23 Table of Contents 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 Total No. of Leased % of Total Annualized Rental Tenant States Properties Sq. Ft. (1) Leased Sq. Ft. (1) Revenues 1 Federal Express Corporation/ FedEx Ground Package System, Inc. 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 % 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 % 9 TD SYNNEX Corporation OH 2 939 1.6 % 1.2 % 10 EF Transit, Inc. IN 1 535 0.9 % 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 % 13 UGN, Inc. OH, SC 2 703 1.2 % 1.0 % Total 119 28,278 47.8 % 50.8 % (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. 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 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. Due to the capital many of the tenants in our Mainland Properties have invested in these properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to their expirations. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties and the terms of any leases we may enter may be less favorable to us than the terms of our existing leases for those properties. Hawaii Properties. As of 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. Lease renewals, lease extensions, new leases and rental rates for our Hawaii Properties in the future will depend on prevailing market conditions when these lease renewals, lease extensions, new leases and rental rates are set. 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 24 Table of Contents 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. Accordingly, we cannot be sure that the historical increases achieved at our Hawaii Properties will continue in the future. The following chart shows the annualized rental revenues as of March 31, 2022 scheduled to reset at our Hawaii Properties: Scheduled Rent Resets at Hawaii Properties (dollars in thousands) Annualized Rental Revenues as of March 31, 2022 Scheduled to Reset 4/1/2022-12/31/2022 $ 1,132 2023 2,085 2024 1,266 2025 3,103 2026 1,296 2027 and thereafter 17,454 Total $ 26,336 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. Whenever we extend, renew or enter new leases for our properties, we intend to seek rents that are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. Tenant Review Process. 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) 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. 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. 25 Table of Contents 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. 26 Table of Contents RESULTS OF OPERATIONS 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) Non-Comparable Properties Results (2) Consolidated Results 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 Rental income $ 52,109 $ 52,411 $ (302) (0.6 %) $ 19,266 $ 1,806 $ 17,460 $ 71,375 $ 54,217 $ 17,158 31.6 % Operating expenses: Real estate taxes 7,242 7,045 197 2.8 % 2,194 202 1,992 9,436 7,247 2,189 30.2 % Other operating expenses 4,912 4,772 140 2.9 % 1,860 204 1,656 6,772 4,976 1,796 36.1 % Total operating expenses 12,154 11,817 337 2.9 % 4,054 406 3,648 16,208 12,223 3,985 32.6 % Net operating income (3) $ 39,955 $ 40,594 $ (639) (1.6 %) $ 15,212 $ 1,400 $ 13,812 55,167 41,994 13,173 31.4 % Other expenses: Depreciation and amortization 22,878 12,678 10,200 80.5 % General and administrative 6,077 3,756 2,321 61.8 % Total other expenses 28,955 16,434 12,521 76.2 % 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 % Equity in earnings of investees 1,727 2,581 (854) (33.1 %) Net (loss) income (9,787) 19,337 (29,124) (150.6 %) Net loss attributable to noncontrolling interest 3,273 — 3,273 — % 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 % Weighted average common shares outstanding - diluted 65,212 65,177 35 0.1 % Per common share data (basic and diluted): Net (loss) income attributable to common shareholders $ (0.10) $ 0.30 $ (0.40) (133.3 %) N/M - Not Meaningful (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. 27 Table of Contents Rental income. 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 increase in real estate taxes primarily reflects our acquisition and disposition activities. Other operating expenses. Other operating expenses primarily include repairs and maintenance, utilities, insurance, snow removal, legal and property management fees. The increase in other operating expenses is primarily due to 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. The increase in depreciation and amortization primarily reflects our acquisition and disposition activities. General and administrative. 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 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 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 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 (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. 28 Table of Contents 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 (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. Net Operating Income We calculate NOI as shown below. 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 (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. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do. The following table presents the reconciliation of net income to NOI for the three months ended March 31, 2022 and 2021 (dollars in thousands): Three Months Ended March 31, 2022 2021 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 (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 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 Depreciation and amortization 22,878 12,678 NOI $ 55,167 $ 41,994 NOI: Hawaii Properties $ 19,294 $ 19,992 Mainland Properties 35,873 22,002 NOI $ 55,167 $ 41,994 Funds From Operations and Normalized Funds From Operations Attributable to Common Shareholders We calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders as shown below. FFO attributable to common shareholders is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (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 29 Table of Contents 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. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders differently than we do. The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net income (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, 2022 2021 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 FFO adjustments attributable to noncontrolling interest (4,604) — FFO attributable to common shareholders 8,102 30,670 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 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. 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: • collect rents from our tenants when due; • maintain the occupancy of, and maintain or increase the rental rates at, our properties; 30 Table of Contents • control our operating cost increases; • purchase additional properties that produce cash flows in excess of our costs of acquisition capital and property operating expenses; and • develop properties to produce cash flows in excess of our cost of capital. The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows (dollars in thousands): Three Months Ended March 31, 2022 2021 Cash and cash equivalents and restricted cash at beginning of period $ 29,397 $ 22,834 Net cash provided by (used in): Operating activities 56,639 29,652 Investing activities (3,442,485) (789) Financing activities 3,777,878 (25,550) Cash and cash equivalents and restricted cash at end of period $ 421,429 $ 26,147 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 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. 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. 31 Table of Contents 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. 32 Table of Contents Consolidated Joint Venture 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 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 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. Further, any issuances of our equity securities may be dilutive to our existing shareholders. Although we cannot be sure that we will be successful in completing any particular type of financing, we believe that we will have access to financing, such as debt or equity offerings, to fund capital expenditures, future acquisitions, development, redevelopment and other activities and to pay our obligations. The completion and the costs of any future financings will depend primarily upon our success in operating our business and upon market conditions. In particular, the feasibility and cost of any future debt financings will depend primarily on our then current credit qualities and on market conditions. We have no control over market conditions. Potential lenders in future debt transactions will evaluate our ability to fund required debt service and repay principal balances when they become due by reviewing our financial condition, results of operations, business practices and plans and our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investing and financing activities. 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 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. 33 Table of Contents 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 March 31, 2022 2021 Tenant improvements and leasing costs (1) $ 3,361 $ 823 Building improvements (2) 110 232 Development, redevelopment and other activities (3) 294 — $ 3,765 $ 1,055 (1) Tenant improvements and leasing costs include capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and tenant inducements. (2) Building improvements generally include expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets. (3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenues. 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 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, RMR Inc. and others related to them. For further information about these and other such relationships and related person transactions, see Notes 8 and 9 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2021 Annual Report, our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders and our other filings with the SEC. 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 or its subsidiaries provide management services.