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 2022 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, 2023, our portfolio was comprised of 413 consolidated properties containing approximately 59,983,000 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 43,254,000 rentable square feet located in 38 other states. As of March 31, 2023, our 413 consolidated properties included 94 properties that we own in a consolidated joint venture in which we own a 61% equity interest, and our consolidated properties were approximately 98.7% leased to 300 different tenants with a weighted average remaining lease term (by annualized rental revenues) of approximately 8.4 years. As of March 31, 2023, we also owned a 22% equity interest in an unconsolidated joint venture, which owns 18 properties located in 12 states in the mainland United States containing approximately 11,726,000 rentable square feet that were 99% leased with an average remaining lease term (based on annualized rental revenues) of 5.4 years. We define the term annualized rental revenues as used in this Quarterly Report on Form 10-Q as the annualized contractual rents as of March 31, 2023, 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. Inflationary pressures and rising interest rates in the United States and globally have given rise to increasing concerns that the U.S. economy may soon enter an economic recession and they have caused disruptions in the financial markets. These conditions have increased our cost of capital and negatively impacted our ability to reduce our leverage. 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 or willingness 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, may impact our ability to sell properties and may cause the values of our properties and of our securities to decline. Property Operations Occupancy data for our properties as of March 31, 2023 and 2022 were as follows (square feet in thousands): All Properties Comparable Properties (1) As of March 31, As of March 31, 2023 2022 2023 2022 Total properties 413 412 287 287 Total rentable square feet (in thousands) (2) 59,983 59,736 34,012 33,991 Percent leased (3) 98.7 % 98.9 % 99.0 % 99.3 % (1) Consists of properties that we owned continuously since January 1, 2022. (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, 2023, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. The average effective rental rates per square foot, as defined below, for our properties for the three months ended March 31, 2023 and 2022 were as follows: Three Months Ended March 31, Average effective rental rates per square foot leased: (1) 2023 2022 All properties $ 7.46 $ 6.56 Comparable properties (2) $ 6.73 $ 6.23 (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, 2022. 17 Table of Contents During the three months ended March 31, 2023, we entered into new and renewal leases as summarized in the following tables: Three Months Ended March 31, 2023 New Leases Renewals Totals Square feet leased during the period (in thousands) 36 1,107 1,143 Weighted average rental rate change (by rentable square feet) 51.4 % 13.9 % 15.1 % Weighted average lease term by square feet (years) 18.0 8.6 8.9 Total leasing costs and concession commitments (1) $ 160 $ 1,777 $ 1,937 Total leasing costs and concession commitments per square foot (1) $ 4.44 $ 1.60 $ 1.69 Total leasing costs and concession commitments per square foot per year (1) $ 0.25 $ 0.19 $ 0.19 (1) Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements. As shown in the table below, approximately 2.8% of our total leased square feet and 2.9% of our total annualized rental revenues as of March 31, 2023 are included in leases scheduled to expire by December 31, 2023. As of March 31, 2023, our lease expirations by year were as follows (dollars and square feet in thousands): % of Total Cumulative % of Total Cumulative % Annualized Annualized % of Total Leased Leased of Total 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 4/1/2023-12/31/2023 27 1,678 2.8 % 2.8 % $ 12,231 2.9 % 2.9 % 2024 47 6,758 11.4 % 14.2 % 34,041 8.1 % 11.0 % 2025 35 4,802 8.1 % 22.3 % 27,999 6.6 % 17.6 % 2026 25 3,851 6.5 % 28.8 % 25,608 6.1 % 23.7 % 2027 38 8,841 14.9 % 43.7 % 53,593 12.7 % 36.4 % 2028 32 5,489 9.3 % 53.0 % 39,325 9.3 % 45.7 % 2029 16 3,428 5.8 % 58.8 % 17,018 4.0 % 49.7 % 2030 15 2,334 3.9 % 62.7 % 19,582 4.6 % 54.3 % 2031 17 3,265 5.5 % 68.2 % 25,366 6.0 % 60.3 % 2032 37 3,615 6.1 % 74.3 % 35,200 8.3 % 68.6 % Thereafter 105 15,132 25.7 % 100.0 % 132,443 31.4 % 100.0 % Total 394 59,193 100.0 % $ 422,406 100.0 % Weighted average remaining lease term (in years) 7.3 8.4 (1) Leased square feet is pursuant to existing leases as of March 31, 2023 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. As of March 31, 2023, subsidiaries of FedEx and subsidiaries of Amazon leased 22.1% and 7.7% of our total leased square feet, respectively, and represented 30.1% and 6.9% of our total annualized rental revenues, respectively. Mainland Properties. As of March 31, 2023, our Mainland Properties represented approximately 72.2% 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 March 31, 2023, our Hawaii Properties represented approximately 27.8% of our annualized rental revenues. As of March 31, 2023, 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 18 Table of Contents 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. The following chart shows the annualized rental revenues as of March 31, 2023 scheduled to reset at our Hawaii Properties: Scheduled Rent Resets at Hawaii Properties (dollars in thousands) Annualized Rental Revenues as of March 31, 2023 Scheduled to Reset 4/1/2023-12/31/2023 $ 1,824 2024 1,273 2025 831 2026 1,307 2027 781 2028 and thereafter 17,202 Total $ 23,218 As of March 31, 2023, $12,231, or 4.6%, of our annualized rental revenues are included in leases scheduled to expire by March 31, 2024 and 1.3% 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. Investing Activities In March 2023, we received gross proceeds of $270 and recorded a $974 net loss on sale of real estate as a result of a partial eminent domain taking at a property in Everett, Washington. For further information regarding our investing activities, see Note 2 to our 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. 19 Table of Contents RESULTS OF OPERATIONS Three Months Ended March 31, 2023, Compared to Three Months Ended March 31, 2022 (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, $ % $ $ % 2023 2022 Change Change 2023 2022 Change 2023 2022 Change Change Rental income $ 56,563 $ 52,570 $ 3,993 7.6% $ 53,695 $ 18,805 $ 34,890 $ 110,258 $ 71,375 $ 38,883 54.5% Operating expenses: Real estate taxes 7,800 7,271 529 7.3% 8,667 2,165 6,502 16,467 9,436 7,031 74.5% Other operating expenses 5,263 4,960 303 6.1% 4,055 1,812 2,243 9,318 6,772 2,546 37.6% Total operating expenses 13,063 12,231 832 6.8% 12,722 3,977 8,745 25,785 16,208 9,577 59.1% Net operating income (3) $ 43,500 $ 40,339 $ 3,161 7.8% $ 40,973 $ 14,828 $ 26,145 84,473 55,167 29,306 53.1% Other expenses: Depreciation and amortization 45,457 22,878 22,579 98.7% General and administrative 7,907 6,077 1,830 30.1% Total other expenses 53,364 28,955 24,409 84.3% Interest and other income 1,146 478 668 139.7% Interest expense (70,771) (40,999) (29,772) 72.6% Loss on sale of real estate (974) — (974) —% Realized gain on sale of equity securities — 1,232 (1,232) (100.0)% Unrealized gain on equity securities — 2,460 (2,460) (100.0)% Loss on early extinguishment of debt — (828) 828 (100.0)% Loss before income tax expense and equity in earnings of unconsolidated joint venture (39,490) (11,445) (28,045) 245.0% Income tax expense (17) (69) 52 (75.4)% Equity in earnings of unconsolidated joint venture 3,961 1,727 2,234 129.4% Net loss (35,546) (9,787) (25,759) N/M Net loss attributable to noncontrolling interest 10,737 3,273 7,464 228.0% Net loss attributable to common shareholders $ (24,809) $ (6,514) $ (18,295) N/M Weighted average common shares outstanding - basic and diluted 65,309 65,212 97 0.1% Per common share data (basic and diluted): Net loss attributable to common shareholders $ (0.38) $ (0.10) $ (0.28) N/M N/M - not meaningful (1) Consists of properties that we owned continuously since January 1, 2022. (2) Consists of 126 properties including properties we acquired during the period from January 1, 2022 to March 31, 2023, including 94 properties we contributed to our consolidated joint venture in which we own a 61% equity interest. (3) See our definition of NOI and our reconciliation of net 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, 2023 compared to the three months ended March 31, 2022. Rental income. The increase in rental income is primarily a result of our acquisition activities, which includes our acquisition of MNR in February 2022. Rental income increased at certain of our comparable properties primarily due to increases from our leasing activity and rent resets. Rental income includes non-cash straight line rent adjustments of $3,762 and $1,156 for the 2023 and 2022 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations of $270 and $320 for the 2023 and 2022 periods, respectively. Real estate taxes. The increase in real estate taxes primarily reflects our acquisition activities. Real estate taxes at certain of our comparable properties increased due to higher assessed values. 20 Table of Contents Other operating expenses . The increase in other operating expenses is primarily due to our acquisition activities. Other operating expenses at certain of our comparable properties increased primarily due to increases in insurance expenses and repairs and maintenance at certain of our properties, partially offset by a decrease in snow removal expenses at certain of our properties, in the 2023 period. Depreciation and amortization. The increase in depreciation and amortization primarily reflects our acquisition activities in the 2022 period. 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 acquisition activity in the 2022 period. Interest and other income. The increase in interest and other income is primarily due to higher interest earned on higher cash balances during the 2023 period as compared to 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 2023 period as compared to the 2022 period, primarily related to our acquisition of MNR during the 2022 period. Loss on sale of real estate. Loss on sale of real estate in the 2023 period was a result of a partial eminent domain taking at one of our properties. 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 during the 2022 period. 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 during the 2022 period. Loss on early extinguishment of debt. Loss on early extinguishment of debt primarily relates to our write off of unamortized costs related to the termination of 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. The net loss for the 2023 period compared to the net loss for the 2022 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. 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, 2022. Net loss attributable to common shareholders per common share - basic and diluted. The increase in net loss attributable to common shareholders per common share for the 2023 period compared to the net loss attributable to common shareholders per share for the 2022 period reflects the changes to net income attributable to common shareholders and weighted average common shares noted above. 21 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 the 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 loss or net 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 loss and net 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 loss and net 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 to NOI for the three months ended March 31, 2023 and 2022 (dollars in thousands): Three Months Ended March 31, 2023 2022 Reconciliation of Net Loss to NOI: Net loss $ (35,546) $ (9,787) Equity in earnings of unconsolidated joint venture (3,961) (1,727) Income tax expense 17 69 Loss before income tax expense and equity in earnings of unconsolidated joint venture (39,490) (11,445) Loss on early extinguishment of debt — 828 Interest and other income (1,146) (478) Interest expense 70,771 40,999 Loss on sale of real estate 974 — Realized gain on sale of equity securities — (1,232) Unrealized gain on equity securities — (2,460) General and administrative 7,907 6,077 Depreciation and amortization 45,457 22,878 NOI $ 84,473 $ 55,167 NOI: Hawaii Properties $ 22,122 $ 19,294 Mainland Properties 62,351 35,873 NOI $ 84,473 $ 55,167 22 Table of Contents Funds From Operations Attributable to Common Shareholders 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 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, 2023 and 2022 (dollars in thousands, except per share data): Three Months Ended March 31, 2023 2022 Reconciliation of Net Loss Attributable to Common Shareholders to FFO Attributable to Common Shareholders and Normalized FFO Attributable to Common Shareholders: Net loss attributable to common shareholders $ (24,809) $ (6,514) Depreciation and amortization 45,457 22,878 Equity in earnings of unconsolidated joint venture (3,961) (1,727) Realized gain on sale of equity securities — (1,232) Unrealized gain on equity securities — (2,460) Share of FFO from unconsolidated joint venture 1,468 1,761 Loss on sale of real estate 974 — FFO adjustments attributable to noncontrolling interest (11,213) (4,604) FFO attributable to common shareholders 7,916 8,102 Loss on early extinguishment of debt — 828 Acquisition, transaction related and certain other financing costs (1) — 18,673 Normalized FFO attributable to common shareholders $ 7,916 $ 27,603 Weighted average common shares outstanding - basic and diluted 65,309 65,212 Per common share data (basic and diluted): FFO attributable to common shareholders $ 0.12 $ 0.12 Normalized FFO attributable to common shareholders $ 0.12 $ 0.42 (1) Amount for the three months ended March 31, 2022 primarily includes certain debt issuance costs recorded as interest expense related to certain financing and other transaction related costs expensed under GAAP. 23 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 March 31, 2023, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 77.6% of our annualized rental revenues and only 4.6% 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): Three Months Ended March 31, 2023 2022 Cash and cash equivalents and restricted cash at beginning of period $ 140,780 $ 29,397 Net cash provided by (used in): Operating activities 1,167 56,639 Investing activities 9,435 (3,442,485) Financing activities (6,223) 3,777,878 Cash and cash equivalents and restricted cash at end of period $ 145,159 $ 421,429 The decrease in net cash provided by operating activities for the three months ended March 31, 2023 compared to the prior year is primarily due to higher interest expense paid in the 2023 period, partially offset by higher cash flows from the properties we acquired from MNR. The decrease in net cash provided by investing activities in the 2023 period compared to the net cash used in the 2022 period is primarily due to our acquisition of MNR during the 2022 period as compared to no property acquisitions during the 2023 period. The change from net cash provided by financing activities in the 2022 period to net cash used in financing activities in the 2023 period was 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, our ability to successfully acquire and develop 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 certain of our financial metrics and debt covenants. 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, 2023, we had cash and cash equivalents of $61,250. 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. 24 Table of Contents The ILPT Floating Rate Loan secured by 104 of our properties 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 interest rate payable on the ILPT Floating Rate Loan as of March 31, 2023 and the weighted average interest rate for the three months ended March 31, 2023 were both 6.18%. Subject to the satisfaction of certain conditions, we have the option to prepay up to $247,000 of the ILPT Floating Rate Loan at par with no premium, and to prepay the balance of the ILPT Floating Rate Loan in full or in part at any time, subject to a premium, and beginning in October 2023, without a premium. The Floating Rate Loan secured by 82 properties owned by our consolidated joint venture matures in March 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 3.40% through the initial term of the Floating Rate Loan, plus a premium of 2.77%. As of March 31, 2023, the interest rate payable on the Floating Rate Loan was 6.17%. The weighted average annual interest rate payable under the Floating Rate Loan was 6.17% for the three months ended March 31, 2023, and was 3.01% for the period from February 25, 2022 to March 31, 2022. Subject to the satisfaction of certain conditions, we have the option 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. As of March 31, 2023, we had an aggregate principal amount of $4,284,833 of debt, including the Floating Rate Loan and the ILPT Floating Rate Loan, scheduled to mature between 2024 and 2038. For further information regarding our investing and financing activities, see Notes 2 and 4 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Consolidated Joint Venture - Mountain Industrial REIT LLC: We own a 61% equity interest in our consolidated joint venture. We control our consolidated joint venture and therefore account for the properties owned by 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 ended March 31, 2023 and for the period from this joint venture’s formation date, February 25, 2022, to March 31, 2022. The portion of this joint venture's net loss not attributable to us, or $10,728 and $3,261, for the three months ended March 31, 2023 and for the period from February 25, 2022 to March 31, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss). This joint venture made no distributions for the three months ended March 31, 2023 or for the period from February 25, 2022 to March 31, 2022. As of March 31, 2023, this joint venture had total assets of $3,064,043 and total liabilities of $1,721,021. Unconsolidated Joint Venture - The Industrial Fund REIT LLC: We own a 22% equity interest in the unconsolidated joint venture. 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 $3,961 and $1,727 for the three months ended March 31, 2023 and 2022, respectively, as equity in earnings of unconsolidated joint venture in our condensed consolidated statements of comprehensive income (loss). In addition, the unconsolidated joint venture made aggregate cash distributions to us of $990 and $1,320 during the three months ended March 31, 2023 and 2022, respectively. For further information regarding these joint ventures, see Notes 2, 4, 5, 8, 9 and 10 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We expect to use proceeds 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, developments and redevelopments. We may also assume mortgage loans or incur debt in connection with future acquisitions, developments and redevelopments. 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 up to $500,000 in aggregate amount of 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 25 Table of Contents 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, 2023, we paid quarterly cash distributions to our shareholders totaling $656 using cash balances. On April 13, 2023, we declared a regular quarterly distribution to common shareholders of record on April 24, 2023 of $0.01 per share, or approximately $656. We expect to pay this distribution to our shareholders on or about May 18, 2023 using cash balances. For more information regarding these distributions, see Note 6 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. During the three months ended March 31, 2023 and 2022, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows: Three Months Ended March 31, 2023 2022 Tenant improvements and leasing costs (1) $ 2,040 $ 3,361 Building improvements (2) 370 110 Development, redevelopment and other activities (3) 2,521 294 $ 4,931 $ 3,765 (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, 2023, we had estimated unspent leasing related obligations of $25,054, of which $8,365 is expected to be spent during the next 12 months. Debt Covenants (dollars in thousands) Our principal debt obligations as of March 31, 2023 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 a mortgage loan secured by 17 our properties; (4) $650,000 outstanding principal amount of a mortgage loan secured by 186 of our properties; and (5) $299,833 aggregate principal amount of mortgage loans 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 our 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, the $700,000 mortgage 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 March 31, 2023, we believe that we were in compliance with all of the covenants and other terms under the agreements governing these loans. 26 Table of Contents Certain of the mortgage loans we assumed in connection 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, the $700,000 mortgage 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 our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our 2022 Annual Report, our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders and our other filings with the SEC. In addition, see the section captioned “Risk Factors” of our 2022 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 related intangibles. A discussion of our critical accounting estimates is included in our 2022 Annual Report. There have been no significant changes in our critical accounting estimates since the year ended December 31, 2022.