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 September 30, 2022, our portfolio was comprised of 413 consolidated properties containing approximately 59,962,000 rentable square feet located in 39 states, including 226 buildings, leasable land parcels and easements containing approximately 16,729,000 rentable square feet located on the island of Oahu, Hawaii, and 187 properties containing approximately 43,233,000 rentable square feet located in 38 other states. As of September 30, 2022, our 413 consolidated properties include 94 properties that we own in a consolidated joint venture arrangement in which we own a 61% equity interest. As of September 30, 2022, we also owned a 22% equity interest in an unconsolidated joint venture, which owns 18 properties located in 12 states containing approximately 11,726,000 rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 5.9 years. As of September 30, 2022, our consolidated properties were approximately 99.2% leased (based on rentable square feet) to 305 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 8.9 years. We define the term annualized rental revenues as used in this section as the annualized contractual rents, as of September 30, 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. Investing and Financing Activities 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 and two committed, but not yet then completed, property acquisitions. The aggregate value of the consideration paid in the Merger was $3,739,048, including the assumption of $323,432 aggregate principal amount of former 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 then 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. In connection with the closing of the Merger, we entered into the $1,385,158 Bridge Loan, secured by 109 of our properties. The Bridge Loan was scheduled to mature in February 2023 and required that interest only 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. We also entered into the $700,000 Fixed Rate Loan secured by 17 of our properties. The Fixed Rate loan matures in March 2032 and requires that interest be paid at a weighted average annual fixed rate of 4.42%. 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 then committed, but not yet then completed, property acquisitions. The investor acquired a 39% noncontrolling equity interest in the joint venture from us for $589,411, as of the completion of this transaction, and we retained the remaining 61% equity interest in the joint venture. In connection with the transaction, the joint venture assumed $323,432 aggregate principal amount of former MNR mortgage debt on certain of the properties and entered into the $1,400,000 Floating Rate 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 2.77%. During the nine months ended September 30, 2022, this joint venture made aggregate cash distributions of $1,365 to the other joint venture investor. In July 2022, our consolidated joint venture acquired a property located in Augusta, GA containing 226,000 rentable square feet for a purchase price of approximately $38,053, including acquisition related costs of $53. This property is 100% leased to a single tenant with a remaining lease term of approximately 14.9 years at the time of acquisition. This property was one of two committed MNR property acquisitions at the time of the Merger and was acquired directly by our consolidated joint venture. In September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition. In September 2022, we entered into the $1,235,000 ILPT Floating Rate Loan, secured by 104 of our properties. The interest only ILPT Floating Rate Loan matures in October 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR, which is capped at an annual rate of 2.25% for the initial term of the ILPT Floating Rate Loan, plus a weighted average premium of 3.93%. The Bridge Loan was repaid in full on September 22, 2022 with cash on hand and proceeds from the ILPT Floating Rate Loan. 24 Table of Contents As of September 30, 2022, we also own an interest in an unconsolidated joint venture that owns 18 properties. We account for the unconsolidated joint venture under the equity method of accounting under the fair value option. During the three and nine months ended September 30, 2022, we recorded the change in the fair value of our investment in the unconsolidated joint venture of $3,297 and $6,634, respectively, in our condensed consolidated statements of comprehensive income (loss). In addition, during the three and nine months ended September 30, 2022, the unconsolidated joint venture made aggregate cash distributions of $1,320 and $3,962, respectively, to us. In October 2022, the unconsolidated joint venture made a cash distribution to us of $20,900, including amounts related to a debt financing. For further information regarding our investing and financing activities, see Notes 2, 4, 5, 9 10, 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. In response to inflationary pressures, the U.S. Federal Reserve increased the federal funds rate by 300 basis points over five consecutive meetings from March 2022 to September 2022 and has signaled that further large increases are likely to occur. These inflationary pressures and rising interest rates in the United States and globally have given rise to increasing concerns that the U.S. economy is now in, or may soon enter, an economic recession and they have caused disruptions in the financial markets. An economic recession, or continued or intensified disruptions in the financial markets could adversely affect our financial condition and that of our tenants, could adversely impact the ability of our tenants to renew our leases or pay rent to us, may restrict our access to, and would likely increase our cost of capital, and may cause the values of our properties and of our securities to decline. Property Operations Occupancy data for our properties as of September 30, 2022 and 2021 is as follows (square feet in thousands): All Properties Comparable Properties (1) As of September 30, As of September 30, 2022 2021 2022 2021 Total properties 413 294 286 286 Total rentable square feet (2) 59,962 36,488 33,634 33,631 Percent leased (3) 99.2 % 99.0 % 99.3 % 98.9 % (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 September 30, 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 and nine months ended September 30, 2022 and 2021 are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Average effective rental rates per square foot leased: (1) All properties $ 6.96 $ 6.22 $ 6.96 $ 6.28 Comparable properties (2) $ 6.32 $ 6.26 $ 6.46 $ 6.31 (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 July 1, 2021 and January 1, 2021, respectively, and excludes properties owned by an unconsolidated joint venture. 25 Table of Contents During the three and nine months ended September 30, 2022, we entered into new and renewal leases as summarized in the following tables: Three Months Ended September 30, 2022 New Leases Renewals Totals Square feet leased during the period (in thousands) 543 1,142 1,685 Weighted average rental rate change (by rentable square feet) 280.7 % 26.1 % 77.5 % Weighted average lease term by square feet (years) (2) 7.4 3.7 4.9 Total leasing costs and concession commitments (1) $ 3,570 $ 992 $ 4,562 Total leasing costs and concession commitments per square foot (1) $ 6.58 $ 0.87 $ 2.71 Total leasing costs and concession commitments per square foot per year (1) $ 0.89 $ 0.24 $ 0.55 Nine months ended September 30, 2022 New Leases Renewals Totals Square feet leased during the period (in thousands) 3,476 2,772 6,248 Weighted average rental rate change (by rentable square feet) 122.0 % 24.6 % 56.5 % Weighted average lease term by square feet (years) (2) 23.8 6.4 16.1 Total leasing costs and concession commitments (1) $ 8,951 $ 6,354 $ 15,305 Total leasing costs and concession commitments per square foot (1) $ 2.57 $ 2.29 $ 2.45 Total leasing costs and concession commitments per square foot per year (1) $ 0.11 $ 0.36 $ 0.15 (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 4.9 years for the three months ended September 30, 2022 and 16.1 years for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, we completed rent resets for approximately 194,000 square feet of land, respectively, at our Hawaii Properties at rental rates that were approximately 36.8% higher than the prior rental rates. As shown in the table below, approximately 1.0% of our total leased square feet and 1.0% of our total annualized rental revenues as of September 30, 2022 are included in leases scheduled to expire by December 31, 2022. As of September 30, 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 10/1/2022-12/31/2022 12 593 1.0 % 1.0 % $ 4,210 1.0 % 1.0 % 2023 36 3,146 5.3 % 6.3 % 22,287 5.3 % 6.3 % 2024 49 4,855 8.2 % 14.5 % 32,699 7.8 % 14.1 % 2025 32 4,794 8.1 % 22.6 % 27,683 6.6 % 20.7 % 2026 24 3,524 5.9 % 28.5 % 22,708 5.4 % 26.1 % 2027 37 8,795 14.8 % 43.3 % 52,046 12.4 % 38.5 % 2028 27 4,876 8.2 % 51.5 % 34,085 8.1 % 46.6 % 2029 17 3,428 5.8 % 57.3 % 16,644 4.0 % 50.6 % 2030 14 2,155 3.6 % 60.9 % 18,303 4.4 % 55.0 % 2031 16 3,265 5.5 % 66.4 % 25,606 6.1 % 61.1 % Thereafter 134 20,038 33.6 % 100.0 % 163,710 38.9 % 100.0 % Total 398 59,469 100.0 % $ 419,981 100.0 % Weighted average remaining lease term (in years): 8.6 8.9 (1) Leased square feet is pursuant to existing leases as of September 30, 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. 26 Table of Contents We generally receive rents from our tenants monthly and in advance. As of September 30, 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. Various (34 states) 84 13,109 22.0 % 29.6 % 2 Amazon.com Services, Inc./ Amazon.com Services LLC AL, IN, OK, SC, TN, VA 8 4,539 7.6 % 6.8 % 3 Home Depot U.S.A., Inc. GA, HI, IL 4 3,365 5.7 % 4.4 % 4 UPS Supply Chain Solutions, Inc. NH, NY 3 794 1.3 % 1.6 % 5 Restoration Hardware, Inc. MD 1 1,195 2.0 % 1.5 % 6 Servco Pacific, Inc. HI 7 629 1.1 % 1.4 % 7 American Tire Distributors, Inc. CO, LA, NE, NY, OH 5 722 1.2 % 1.3 % 8 TD SYNNEX Corporation OH 2 939 1.6 % 1.1 % Total 114 25,292 42.5 % 47.7 % (1) Leased square feet is pursuant to existing leases as of September 30, 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 properties leased to tenants, including their applicable subsidiaries that leased over 5% of our total rentable square footage as follows: Weighted Average % of Number Remaining Rental Income Rental Income Rentable of Lease Term Three Months Ended Nine Months Ended Tenant Square Feet States (in years) 9/30/2022 9/30/2021 9/30/2022 9/30/2021 Federal Express Corporation/ FedEx Ground Package System, Inc. 22.0 % 34 7.3 $ 31,697 30.7 % $ 2,706 4.9 % $ 76,227 27.0 % $ 8,152 5.0 % Amazon.com Services, Inc./ Amazon.com Services LLC 7.7 % 6 6.2 7,244 7.0 % 5,231 9.5 % 20,095 7.1 % 16,117 9.9 % Home Depot U.S.A., Inc. 5.7 % 3 26.3 3,346 3.2 % 1,322 2.4 % 10,169 3.6 % 3,948 2.4 % Total 35.4 % 34 13.3 $ 42,287 40.9 % $ 54,982 16.8 % $ 106,491 37.7 % $ 163,378 17.3 % Mainland Properties. As of September 30, 2022, our Mainland Properties represented approximately 71.5% 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 that many of the tenants in our Mainland Properties have invested in these properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to their expirations. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties and the terms of any leases we may enter may be less favorable to us than the terms of our existing leases for those properties. Hawaii Properties. As of September 30, 2022, our Hawaii Properties represented approximately 28.5% of our annualized rental revenues. As of September 30, 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 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. 27 Table of Contents The following chart shows the annualized rental revenues as of September 30, 2022 scheduled to reset at our Hawaii Properties: Scheduled Rent Resets at Hawaii Properties (dollars in thousands) Annualized Rental Revenues as of September 30, 2022 Scheduled to Reset 10/1/2022-12/31/2022 $ — 2023 2,114 2024 1,273 2025 831 2026 1,307 2027 and thereafter 17,596 Total $ 23,121 As of September 30, 2022, $20,740, or 4.9%, of our annualized rental revenues are included in leases scheduled to expire through September 30, 2023 and 0.8% 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 may use 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. 28 Table of Contents RESULTS OF OPERATIONS Three Months Ended September 30, 2022, Compared to Three Months Ended September 30, 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 September 30, Three Months Ended September 30, Three Months Ended September 30, $ % $ $ % 2022 2021 Change Change 2022 2021 Change 2022 2021 Change Change Rental income $ 53,357 $ 52,590 $ 767 1.5% $ 49,858 $ 2,391 $ 47,467 $ 103,215 $ 54,981 $ 48,234 87.7% Operating expenses: Real estate taxes 7,713 7,307 406 5.6% 6,036 310 5,726 13,749 7,617 6,132 80.5% Other operating expenses 4,630 4,160 470 11.3% 3,823 257 3,566 8,453 4,417 4,036 91.4% Total operating expenses 12,343 11,467 876 7.6% 9,859 567 9,292 22,202 12,034 10,168 84.5% Net operating income (3) $ 41,014 $ 41,123 $ (109) (0.3%) $ 39,999 $ 1,824 $ 38,175 81,013 42,947 38,066 88.6% Other expenses: Depreciation and amortization 48,519 12,694 35,825 N/M Acquisition and other transaction related costs 586 — 586 —% General and administrative 9,110 4,728 4,382 92.7% Total other expenses 58,215 17,422 40,793 N/M Interest and other income 1,068 — 1,068 —% Interest expense (89,739) (9,084) (80,655) N/M Gain on sale of real estate — 940 (940) (100.0%) Loss on early extinguishment of debt (21,370) — (21,370) — (Loss) income before income tax expense and equity in earnings of unconsolidated joint venture (87,243) 17,381 (104,624) N/M Income tax expense (28) (72) 44 (61.1%) Equity in earnings of unconsolidated joint venture 3,297 998 2,299 230.4% Net (loss) income (83,974) 18,307 (102,281) N/M Net loss attributable to noncontrolling interest 38,347 — 38,347 —% Net (loss) income attributable to common shareholders $ (45,627) $ 18,307 $ (63,934) N/M Weighted average common shares outstanding - basic 65,250 65,178 72 0.1% Weighted average common shares outstanding - diluted 65,250 65,230 20 —% Per common share data (basic and diluted): Net (loss) income attributable to common shareholders $ (0.70) $ 0.28 $ (0.98) N/M N/M - Not Meaningful (1) Consists of properties that we owned continuously since July 1, 2021 and excludes properties owned by an unconsolidated joint venture. (2) Consists of 131 properties including (i) properties we acquired during the period from July 1, 2021 to September 30, 2022, including 94 properties we contributed to a consolidated joint venture in which we own a 61% equity interest, and (ii) 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 September 30, 2022 compared to the three months ended September 30, 2021. Rental income. The increase in rental income is primarily a result of our acquisition and disposition activities, which includes our acquisition of MNR. Rental income increased at certain of our comparable properties primarily due to increases from leasing activity and rent resets. Rental income includes non-cash straight line rent adjustments of $3,794 and $1,678 for the 2022 and 2021 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations of $250 and $174 for the 2022 and 2021 periods, respectively. Real estate taxes. The increase in real estate taxes primarily reflects our acquisition and disposition activities. Real estate taxes at our comparable properties increased primarily due to higher assessed values at certain of our properties. 29 Table of Contents 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. Other operating expenses increased primarily due to increases in repairs and maintenance and insurance expenses at certain of our comparable properties. Depreciation and amortization. The increase in depreciation and amortization primarily reflects our acquisition and disposition activities. Acquisition and other transaction related costs. Acquisition and other transaction related costs primarily consists of costs related to potential acquisition and disposition activities that were not completed. 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. Interest and other income. The increase in interest and other income is primarily due to higher cash balances during the 2022 period as compared to the 2021 period and distributions we received on certain equity securities we held during the 2022 period. Interest expense. The increase in interest expense is due to higher average interest rates and higher average outstanding debt balances in the 2022 period as compared to the 2021 period, primarily related to our acquisition of MNR. 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. Loss on early extinguishment of debt. Loss on early extinguishment of debt primarily relates to the write off of unamortized costs related to the repayment of the Bridge Loan in September 2022. Income tax expense. Income tax expense primarily reflects state income taxes payable in certain jurisdictions. Equity in earnings of unconsolidated joint venture. Equity in earnings of unconsolidated joint venture is the change in the fair value of our investment in the 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 July 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. 30 Table of Contents Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021 (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, $ % $ $ % 2022 2021 Change Change 2022 2021 Change 2022 2021 Change Change Rental income $ 161,921 $ 156,971 $ 4,950 3.2% $ 119,891 $ 6,407 $ 113,484 $ 281,812 $ 163,378 $ 118,434 72.5% Operating expenses: Real estate taxes 22,278 21,616 662 3.1% 14,182 737 13,445 36,460 22,353 14,107 63.1% Other operating expenses 13,652 13,055 597 4.6% 8,626 679 7,947 22,278 13,734 8,544 62.2% Total operating expenses 35,930 34,671 1,259 3.6% 22,808 1,416 21,392 58,738 36,087 22,651 62.8% Net operating income (3) $ 125,991 $ 122,300 $ 3,691 3.0% $ 97,083 $ 4,991 $ 92,092 $ 223,074 $ 127,291 $ 95,783 75.2% Other expenses: Depreciation and amortization 114,096 37,202 76,894 206.7% Acquisition and other transaction related costs 586 646 (60) (9.3%) General and administrative 24,896 12,718 12,178 95.8% Loss on impairment of real estate 100,747 — 100,747 —% Total other expenses 240,325 50,566 189,759 N/M Interest and other income 1,900 — 1,900 —% Interest expense (208,286) (26,468) (181,818) N/M (Loss) gain on sale of real estate (10) 940 (950) (101.1%) Loss on equity securities (5,758) — (5,758) —% Loss on early extinguishment of debt (22,198) — (22,198) —% (Loss) income before income tax expense and equity in earnings of unconsolidated joint venture (251,603) 51,197 (302,800) N/M Income tax expense (113) (177) 64 (36.2%) Equity in earnings of unconsolidated joint venture 6,634 5,455 1,179 21.6% Net (loss) income (245,082) 56,475 (200,810) N/M Net loss attributable to noncontrolling interest 49,402 — 49,402 —% Net (loss) income attributable to common shareholders $ (195,680) $ 56,475 $ (252,155) N/M Weighted average common shares outstanding - basic 65,228 65,154 74 0.1% Weighted average common shares outstanding - diluted 65,228 65,205 23 —% Per common share data (basic and diluted): Net (loss) income attributable to common shareholders $ (3.00) 0.86 (3.86) N/M 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 133 properties including (i) properties we acquired during the period from January 1, 2021 to September 30, 2022, including 94 properties we contributed to a consolidated joint venture in which we own a 61% equity interest, and (ii) 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 nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Rental income. The increase in rental income is primarily a result of our acquisition and disposition activities, which includes our acquisition of MNR. Rental income increased at certain of our comparable properties primarily due to increases from leasing activity and rent resets and a $3,428 write off of capitalized below market lease value related to a terminated tenant. Rental income includes non-cash straight line rent adjustments of $8,170 and $5,673 for the 2022 and 2021 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations of $4,265 and $525 for the 2022 and 2021 periods, respectively. Real estate taxes. The increase in real estate taxes primarily reflects our acquisition and disposition activities. 31 Table of Contents Other operating expenses. The increase in other operating expenses is primarily due to our acquisition and disposition activities. Other operating expenses increased primarily due to increases in repairs and maintenance, snow removal and insurance expenses at certain of our comparable properties. Depreciation and amortization. The increase in depreciation and amortization primarily reflects our acquisition and disposition activities. Acquisition and other transaction related costs. Acquisition and other transaction related costs primarily consists of costs related to potential acquisition and disposition activities that were not completed. General and administrative. 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. Loss on impairment of real estate. We recorded a $100,747 loss on impairment of real estate in the 2022 period to reduce the carrying value of 25 properties we reclassified from held for sale to held and used in June 2022 to their estimated fair values. Interest and other income. The increase in interest and other income is primarily due to higher cash balances during the 2022 period as compared to the 2021 period and distributions we received on certain equity securities we held during the 2022 period. Interest expense. The increase in interest expense is due to higher average interest rates and higher average outstanding debt balances in the 2022 period as compared to the 2021 period, primarily related to our acquisition of MNR. Loss (gain) on sale of real estate. Loss (gain) on sale of real estate in the 2022 period includes an adjustment to the gain from the sale of six properties to our joint venture during December 2021 and a net gain from the sale of a portion of a land parcel as a result of an eminent domain taking in the 2021 period. Loss on equity securities. Loss on equity securities represents the realized loss of $5,758 on the sale of certain equity securities we acquired as part of our acquisition of MNR. Loss on early extinguishment of debt. Loss on early extinguishment of debt primarily relates to our write off of unamortized costs related to the repayment of the Bridge Loan in September 2022 and terminating our unsecured revolving credit facility in February 2022. Income tax expense. Income tax expense primarily reflects state income taxes payable in certain jurisdictions. Equity in earnings of unconsolidated joint venture. Equity in earnings of unconsolidated joint venture is the change in the fair value of our investment in the 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. 32 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 (loss) income to NOI for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of Net (Loss) Income to NOI: Net (loss) income $ (83,974) $ 18,307 $ (245,082) $ 56,475 Equity in earnings of unconsolidated joint venture (3,297) (998) (6,634) (5,455) Income tax expense 28 72 113 177 (Loss) income before income tax expense and equity in earnings of unconsolidated joint venture (87,243) 17,381 (251,603) 51,197 Loss on early extinguishment of debt 21,370 — 22,198 — Interest and other income (1,068) — (1,900) — Interest expense 89,739 9,084 208,286 26,468 Loss (gain) on sale of real estate — (940) 10 (940) Loss on equity securities — — 5,758 — General and administrative 9,110 4,728 24,896 12,718 Acquisition and other transaction related costs 586 — 586 646 Loss on impairment of real estate — — 100,747 — Depreciation and amortization 48,519 12,694 114,096 37,202 NOI $ 81,013 $ 42,947 $ 223,074 $ 127,291 NOI: Hawaii Properties $ 20,049 $ 20,628 $ 64,087 $ 61,312 Mainland Properties 60,964 22,319 158,987 65,979 NOI $ 81,013 $ 42,947 $ 223,074 $ 127,291 33 Table of Contents 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 loss on impairment of real estate, any gain or loss on sale of real estate, equity in earnings of unconsolidated joint venture and any realized and unrealized gains or losses 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 the unconsolidated joint venture, if any. FFO attributable to common shareholders and Normalized FFO attributable to common shareholders are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our distribution rate as a percentage of the trading price of our common shares, or dividend yield, and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders differently than we do. The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net income (loss) 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, 2022 and 2021 (dollars in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of Net (Loss) Income Attributable to Common Shareholders to FFO Attributable to Common Shareholders and Normalized FFO Attributable to Common Shareholders: Net (loss) income attributable to common shareholders $ (45,627) $ 18,307 $ (195,680) $ 56,475 Depreciation and amortization 48,519 12,694 114,096 37,202 Equity in earnings of unconsolidated joint venture (3,297) (998) (6,634) (5,455) Loss on equity securities — — 5,758 — Share of FFO from unconsolidated joint venture 1,678 1,215 5,115 3,621 Loss on impairment of real estate — — 100,747 — (Gain) loss on sale of real estate — (940) 10 (940) FFO adjustments attributable to noncontrolling interest (11,407) — (27,445) — FFO attributable to common shareholders (10,134) 30,278 (4,033) 90,903 Loss on early extinguishment of debt 21,370 — 22,198 — Acquisition and other transaction related costs (1) 32,016 — 80,992 646 Normalized FFO adjustments attributable to noncontrolling interest (28,379) — (28,379) — Normalized FFO attributable to common shareholders $ 14,873 $ 30,278 $ 70,778 $ 91,549 Weighted average common shares outstanding - basic 65,250 65,178 65,228 65,154 Weighted average common shares outstanding - diluted 65,250 65,230 65,228 65,205 Per common share data: FFO attributable to common shareholders - basic $ (0.16) $ 0.46 $ (0.06) $ 1.40 FFO attributable to common shareholders - diluted $ (0.16) $ 0.46 $ (0.06) $ 1.39 Normalized FFO attributable to common shareholders - basic $ 0.23 $ 0.46 $ 1.09 $ 1.41 Normalized FFO attributable to common shareholders - diluted $ 0.23 $ 0.46 $ 1.09 $ 1.40 (1) Amounts for the three and nine months ended September 30, 2022 primarily include certain debt issuance costs recorded as interest expense related to the Bridge Loan and other transaction related costs expensed under GAAP. 34 Table of Contents 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. As of September 30, 2022, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 78.1% of our annualized rental revenues and only 4.9% of our annualized rental revenues were from leases expiring 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; • 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 costs 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): Nine Months Ended September 30, 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 81,907 88,920 Investing activities (3,457,034) (135,093) Financing activities 3,472,399 67,432 Cash and cash equivalents and restricted cash at end of period $ 126,669 $ 44,093 The decrease in net cash provided by operating activities for the nine months ended September 30, 2022 compared to the 2021 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, 2022 compared to the 2021 period is primarily due to our acquisition of MNR during the 2022 period as compared to our acquisition of four properties and one parcel of developable land during the 2021 period. The increase in net cash provided by financing activities for the nine months ended September 30, 2022 compared to 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. 35 Table of Contents As of September 30, 2022, we had cash and cash equivalents of $26,381. 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. On July 14, 2022, we announced that we reduced our quarterly cash distribution rate on our common shares to $0.01 per share and we expect our distributions to our common shareholders in 2022 will be, together with distributions we paid earlier in 2022, at least equal to the minimum amounts required for us to remain a REIT for federal income tax purposes. On February 25, 2022, subsidiaries of our consolidated joint venture entered into a loan agreement with 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 an annual 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. We also purchased an interest rate cap through March 2024 with a SOFR strike rate equal to 3.40%. As of September 30, 2022, the weighted average annual interest rate payable under the Floating Rate Loan was 5.62% and the weighted average interest rate for borrowings under the Floating Rate Loan was 4.94% and 4.23% for the three months ended September 30, 2022 and the period from February 25, 2022 to September 30, 2022, respectively. Also on February 25, 2022, certain of our subsidiaries entered into a loan agreement with the Bridge Lenders, and a mezzanine loan agreement with 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 was scheduled to mature in February 2023 and required that interest only 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. We also purchased an interest rate cap with a SOFR strike rate equal to 2.70%. The Bridge Loan was repaid in full on September 22, 2022 with cash on hand and proceeds from the ILPT Floating Rate Loan. During the three and nine months ended September 30, 2022, we also recorded a $22,231 loss on early extinguishment of debt to write off unamortized costs related to the Bridge Loan and related interest rate cap. The weighted average annual interest rate for borrowings under the Bridge Loan was 5.01% and 4.24% for the period from July 1, 2022 to September 22, 2022 and the period from February 25, 2022 to September 22, 2022, respectively. Also on February 25, 2022, certain of our subsidiaries entered into a loan agreement with the Fixed Rate Lenders, and mezzanine loan agreements with 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 interest only Fixed Rate Loan matures in March 2032 and requires that interest be paid at a weighted average annual fixed rate of 4.42%. We used the aggregate net proceeds from the Loans to partially fund the acquisition of MNR. Principal payments on the Floating Rate Loan and Fixed Rate Loan are not required prior to the end of their respective initial terms, 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; and (2) 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. On September 22, 2022, certain of our subsidiaries entered into a loan agreement with the ILPT Floating Rate Lenders, and a mezzanine loan agreement with the ILPT Floating Rate Mezz Lenders, pursuant to which we obtained ILPT Floating Rate loan, secured by 104 of our properties. The ILPT Floating Rate Loan is comprised of a $1,100,000 mortgage loan and a $135,000 mezzanine loan. Also, on September 22, 2022, we entered into a guaranty in favor of the ILPT Floating Rate Lenders and the ILPT Floating Rate Mezz Lenders, pursuant to which we guaranteed certain limited recourse obligations of our subsidiaries with respect to the ILPT Floating Rate Loan. The interest only ILPT Floating Rate Loan matures on October 9, 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR, which is capped at an annual rate of 2.25% for the initial term of the ILPT Floating Rate Loan, plus a weighted average premium of 3.93%. The weighted average interest rate payable under the ILPT Floating Rate Loan as of September 30, 2022 and for the period from September 22, 2022 to September 30, 2022 was 6.18%. For further information on our interest rate caps, see Notes 5 and 10 to the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 36 Table of Contents The agreements governing the Floating Rate Loan, Fixed Rate Loan and the ILPT Floating Rate 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. In connection with the Merger, our consolidated joint venture, in which we own a 61% equity interest, assumed an aggregate $323,432 of former 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 September 30, 2022, we have an aggregate principal amount of $4,295,842 of debt, including the Floating Rate Loan, Fixed Rate Loan and the ILPT Floating Rate Loan, scheduled to mature between 2022 and 2038. Since committing to the acquisition of MNR, there have been unanticipated increases in interest rates and uncertainty in real estate market conditions. As a result, the debt financing used to acquire MNR has been more expensive than originally anticipated and it is taking longer than originally expected to complete our long term financing plan for the MNR acquisition. We planned to sell certain properties and to sell additional equity interests in our consolidated joint venture, which would reduce our ownership percentage in that joint venture and raise additional proceeds to reduce our outstanding indebtedness. The current economic conditions have negatively impacted the real estate market and we may not be able to sell properties or additional equity interests in our joint venture as expected or at all. In July 2022, our consolidated joint venture acquired a property located in Augusta, GA containing 226,000 rentable square feet for a purchase price of approximately $38,053, including acquisition related costs of $53. This property is 100% leased to a single tenant with a remaining lease term of approximately 14.9 years at the time of acquisition. This property was one of two committed MNR property acquisitions at the time of the Merger and was acquired directly by our consolidated joint venture. In September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition. For further information regarding our investing and financing activities, including our acquisition of MNR, see Notes 2, 4, 5, 9, 10 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 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 in 27 states, including two then committed, but not yet then completed, property acquisitions. The investor acquired a 39% noncontrolling equity interest in the joint venture from us for $589,411, as of the completion of this transaction, and we retained the remaining 61% equity interest in the joint venture. The joint venture assumed $323,432 aggregate principal amount of former MNR mortgage debt on certain of the properties. In July 2022, our consolidated joint venture completed one of the two committed MNR property acquisitions, and in September 2022, our consolidated joint venture terminated the agreement for the other committed MNR property acquisition. We control this joint venture and therefore account for the properties 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 and nine months ended September 30, 2022. The portion of this joint venture's net loss not attributable to us, or $38,318 and $49,360 for the three and nine months ended September 30, 2022, respectively, is reported as noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). During the nine months ended September 30, 2022, this joint venture made aggregate cash distributions of $1,365 to the other joint venture investor, which is reflected as a decrease in total equity attributable to noncontrolling interest in our condensed consolidated balance sheets. No distributions were made during the three months ended September 30, 2022. We may seek to sell additional equity interests in this joint venture and use the proceeds to reduce our debt. See Notes 1, 2, 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 September 30, 2022 and December 31, 2021, we also owned a 22% interest in an unconsolidated joint venture with 18 properties in 12 states. We account for the unconsolidated joint venture under the equity method of accounting under the fair value option. We recorded a change in the fair value of our investment in the unconsolidated joint venture of $3,297 and $998 for the three months ended September 30, 2022 and 2021, respectively, and $6,634 and $5,455 for the nine months ended September 30, 2022 and 2021, respectively, as equity in earnings of unconsolidated joint venture in our condensed consolidated 37 Table of Contents statements of comprehensive income (loss). In addition, the unconsolidated joint venture made aggregate cash distributions to us of $1,320 and $660 during the three months ended September 30, 2022 and 2021, respectively, and $3,962 and $1,980, during the nine months ended September 30, 2022 and 2021, respectively. In October 2022, the unconsolidated joint venture made a cash distribution to us of $20,900, including amounts related to a debt financing. 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 or we desire to reduce our leverage or refinance debt, we intend to explore refinancing alternatives, property sales or sales of equity interests in joint ventures. 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 or selling equity interests 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 nine months ended September 30, 2022, we paid quarterly cash distributions to our shareholders totaling $43,821 using existing cash balances. For more information regarding these distributions 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 13, 2022, we declared a quarterly distribution of $0.01 per common share, or approximately $656, to shareholders of record on October 24, 2022. We expect to pay this distribution to our shareholders on or about November 17, 2022 using cash balances. We reduced our quarterly dividend to enhance our liquidity until we complete our long term financing plan for the MNR acquisition and/or our leverage profile otherwise improves. During the three and nine months ended September 30, 2022 and 2021, 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, 2022 2021 2022 2021 Tenant improvements and leasing costs (1) $ 2,302 $ 1,819 $ 8,290 $ 3,083 Building improvements (2) 1,292 1,625 1,778 2,417 Development, redevelopment and other activities (3) 4,980 — 12,351 104 $ 8,574 $ 3,444 $ 22,419 $ 5,604 (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. 38 Table of Contents As of September 30, 2022, we had estimated unspent leasing related obligations of $25,939. Debt Covenants (dollars in thousands) Our principal debt obligations at September 30, 2022 were: (1) $1,235,000 outstanding principal amount of the ILPT Floating Rate Loan secured by 104 of our properties; (2) $1,400,000 outstanding principal amount of the Floating Rate Loan secured by 82 properties owned by our consolidated joint venture; (3) $700,000 outstanding principal amount of the Fixed Rate Loan secured by 17 our properties; (4) $650,000 outstanding principal amount of a mortgage loan secured by 186 of our properties; and (5) $310,842 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 ILPT Floating Rate Loan, Floating Rate Loan, Fixed Rate Loan 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 September 30, 2022, we believe that we were in compliance with all of the covenants and other terms under the agreements governing the ILPT Floating Rate Loan, Floating Rate Loan, Fixed Rate Loan 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 ILPT Floating Rate Loan, Floating Rate Loan, Fixed Rate Loan 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. Critical Accounting Estimates The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. Significant estimates in the condensed consolidated financial statements include purchase price allocations, useful lives of fixed assets and assessment of impairment of real estate and the related intangibles. A discussion of our critical accounting estimates is included in our 2021 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2021.