What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-25 compared with 2023-04-25 · 197 added, 92 removed, 250 unchanged (54% of the section changed)

3 unchanged sentences

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.

As of June 30, 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 June 30, 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 99.1% leased to 302 different tenants with a weighted average remaining lease term (by annualized rental revenues) of approximately 8.4 years.

As of June 30, 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 99.4% leased with an average remaining lease term (based on annualized rental revenues) of 6.5 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 June 30, 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.

Long term e-commerce trends and supply chain resiliency have resulted in high occupancy and increases in rents.

We believe customer service expectations, growth in the number of households and demand for supply chain resiliency will keep demand for industrial properties strong for the foreseeable future.

However, inflationary pressures and rising interest rates in the United States and globally have given rise to economic uncertainty 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.

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Property Operations

Occupancy data for our properties as of March 31, 2023 and 2022 were as follows (square feet in thousands):

Occupancy data for our properties as of June 30, 2023 and 2022 were as follows (square feet in thousands):

All Properties Comparable Properties (1)

As of March 31, As of March 31,

As of June 30, As of June 30,

2023 2022 2023 2022

4 unchanged sentences

99.1 % 98.9 % 99.1 % 99.3 %

(1) Consists of properties that we owned continuously since January 1, 2022.

(1) Consists of properties that we owned continuously since January 1, 2022 and excludes two properties classified as held for sale at June 30, 2023.

(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,

(3) Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as of June 30, 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 and six months ended June 30, 2023 and 2022 were as follows:

Three Months Ended June 30, Six Months Ended June 30,

Average effective rental rates per square foot leased:

2023 2022 2023 2022

All properties $ 7.30 $ 7.26 $ 7.38 $ 6.95

2 unchanged sentences

(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.

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

(2) Consists of properties that we owned continuously since April 1, 2022 and January 1, 2022, respectively.

During the three and six months ended June 30, 2023, we entered into new and renewal leases as summarized in the following tables:

Three Months Ended June 30, 2023

New Leases Renewals Totals

8 unchanged sentences

$ 0.51 $ 0.12 $ 0.28

Six Months Ended June 30, 2023

New Leases Renewals Totals

Square feet leased during the period (in thousands) 530 2,198 2,728

Weighted average rental rate change (by rentable square feet) 37.7 % 18.5 % 22.3 %

Weighted average lease term by square feet (years) 12.0 8.1 8.9

Total leasing costs and concession commitments (1)

$ 3,080 $ 2,752 $ 5,832

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

$ 5.81 $ 1.25 $ 2.14

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

$ 0.48 $ 0.15 $ 0.24

(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):

During the three and six months ended June 30, 2023, we completed rent resets for approximately 382 square feet of land at our Hawaii Properties at rental rates that were approximately 29.9% higher than prior rental rates.

As shown in the table below, approximately 2.0% of our total leased square feet and 2.1% of our total annualized rental revenues as of June 30, 2023 are included in leases scheduled to expire by December 31, 2023.

As of June 30, 2023, our lease expirations by year were as follows (dollars and square feet in thousands):

% of Total Cumulative

17 unchanged sentences

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.

(1) Leased square feet is pursuant to existing leases as of June 30, 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 June 30, 2023, subsidiaries of FedEx Corporation and subsidiaries of Amazon.com Services, Inc.

leased 22.0% and 7.6% of our total leased square feet, respectively, and represented 29.6% and 6.8% 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.

As of June 30, 2023, our Mainland Properties represented approximately 72.0% of our annualized rental revenues.

We generally will seek to renew or extend the terms of leases at our Mainland Properties as their expirations approach.

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Hawaii Properties.

As of 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.

As of June 30, 2023, our Hawaii Properties represented approximately 28.0% of our annualized rental revenues.

As of June 30, 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

these lease renewals, lease extensions, new leases and rental rates are set.

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.

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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:

The following chart shows the annualized rental revenues as of June 30, 2023 scheduled to reset at our Hawaii Properties:

Scheduled Rent Resets at Hawaii Properties

1 unchanged sentence

Rental Revenues

as of March 31, 2023

as of June 30, 2023

Scheduled to Reset

2 unchanged sentences

Total $ 21,363

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.

As of June 30, 2023, $22,464, or 5.2%, of our annualized rental revenues are included in leases scheduled to expire by June 30, 2024 and 0.9% 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.

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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

Disposition 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.

As of July 25, 2023, we have entered into agreements to sell three properties containing approximately 762,000 rentable square feet for an aggregate sales price of $65,265, excluding closing costs.

We expect to use the net proceeds from these sales

for the repayment of debt and for general business purposes.

These pending sales are subject to conditions;

accordingly, we cannot be sure that we will complete these sales or that these sales will not be delayed or the terms will not change.

For further information regarding our disposition activities, see Notes 2 and 5 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.

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)

Three Months Ended June 30, 2023, Compared to Three Months Ended June 30, 2022 (dollars and share amounts in thousands, except per share data)

Comparable Properties Results (1)

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Consolidated Results

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

Three Months Ended June 30, Three Months Ended June 30, Three Months Ended June 30,

2023 2022 Change Change 2023 2022 Change 2023 2022 Change Change

9 unchanged sentences

General and administrative 8,131 9,709 (1,578) (16.3)%

Loss on impairment of real estate 254 100,747 (100,493) (99.7)%

Total other expenses 53,294 153,155 (99,861) (65.2)%

Interest and other income 1,797 354 1,443 N/M

Interest expense (71,846) (77,548) 5,702 (7.4)%

Loss on sale of real estate — (10) 10 (100.0)%

Loss on equity securities — (9,450) 9,450 (100.0)%

Loss on early extinguishment of debt (359) — (359) N/M

Loss before income tax expense and equity in earnings of unconsolidated joint venture (39,278) (152,915) 113,637 (74.3)%

Income tax expense (45) (16) (29) 181.3%

Equity in earnings of unconsolidated joint venture 2,743 1,610 1,133 70.4%

Net loss (36,580) (151,321) 114,741 (75.8)%

Net loss attributable to noncontrolling interest 10,752 7,782 2,970 38.2%

Net loss attributable to common shareholders $ (25,828) $ (143,539) $ 117,711 (82.0)%

Weighted average common shares outstanding - basic and diluted 65,369 65,221 148 0.2%

Per common share data (basic and diluted):

Net loss attributable to common shareholders $ (0.40) $ (2.20) $ 1.80 (81.8)%

N/M - not meaningful

(1) Consists of properties that we owned continuously since April 1, 2022.

(2) Consists of four properties, including one property we acquired during the period from April 1, 2022 to June 30, 2023, one property under development and two properties classified as held for sale at June 30, 2023.

(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 June 30, 2023 compared to the three months ended June 30, 2022.

Rental income.

The increase in rental income is primarily a result of our acquisition activities.

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 $3,355 and $3,220 for the 2023 and 2022 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations of $242 and $3,695 for the 2023 and 2022 periods, respectively.

Real estate taxes.

Real estate taxes at certain of our comparable properties increased due to higher assessed values.

Other operating expenses .

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.

Depreciation and amortization.

The increase in depreciation and amortization primarily reflects depreciation and amortization of improvements made to certain of our properties since April 1, 2022.

General and administrative.

The decrease in general and administrative expenses is primarily due to a decrease in business management fees.

Loss on impairment of real estate.

During the 2023 period, we recorded $254 on impairment of real estate to reduce the value of one property that was classified as held for sale at June 30, 2023 to its estimated fair value.

During the 2022 period, we recorded a $100,747 loss on impairment of real estate to reduce the value of 25 properties reclassified from held for sale to held and used to their estimated fair value.

Interest and other income.

The increase in interest and other income is primarily due to higher interest earned on cash balances during the 2023 period as compared to the 2022 period.

Interest expense.

The decrease in interest expense is due to lower average interest rates and lower average outstanding indebtedness during the 2023 period as compared to the 2022 period.

Loss on sale of real estate.

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 sale of real estate during the 2022 period represents a final true up adjustment to the sale of properties during the year ended December 31, 2021.

Loss on equity securities.

Loss on equity securities represents the realized loss of $9,450 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 prepayment penalties incurred upon the repayment of four mortgage notes aggregating $35,910 in May 2023.

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.

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 April 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.

Six Months Ended June 30, 2023, Compared to Six Months Ended June 30, 2022 (dollars and share amounts in thousands, except per share data)

Comparable Properties Results (1)

Non-Comparable Properties Results (2)

Consolidated Results

Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30,

2023 2022 Change Change 2023 2022 Change 2023 2022 Change Change

Rental income $ 110,729 $ 107,732 $ 2,997 2.8% $ 107,572 $ 70,865 $ 36,707 $ 218,301 $ 178,597 $ 39,704 22.2%

Operating expenses:

Real estate taxes 15,172 14,239 933 6.6% 16,395 8,472 7,923 31,567 22,711 8,856 39.0%

Other operating expenses 9,792 9,049 743 8.2% 8,045 4,776 3,269 17,837 13,825 4,012 29.0%

Total operating expenses 24,964 23,288 1,676 7.2% 24,440 13,248 11,192 49,404 36,536 12,868 35.2%

Net operating income (3)

$ 85,765 $ 84,444 $ 1,321 1.6% $ 83,132 $ 57,617 $ 25,515 168,897 142,061 26,836 18.9%

Other expenses:

Depreciation and amortization 90,366 65,577 24,789 37.8%

General and administrative 16,038 15,786 252 1.6%

Loss on impairment of real estate 254 100,747 (100,493) (99.7)%

Total other expenses 106,658 182,110 (75,452) (41.4)%

Interest and other income 2,943 832 2,111 N/M

Interest expense (142,617) (118,547) (24,070) 20.3%

Loss on sale of real estate (974) (10) (964) N/M

Loss on equity securities — (5,758) 5,758 (100.0)%

Loss on early extinguishment of debt (359) (828) 469 (56.6)%

Loss before income tax expense and equity in earnings of unconsolidated joint venture (78,768) (164,360) 85,592 (52.1)%

1 unchanged sentence

Equity in earnings of unconsolidated joint venture 6,704 3,337 3,367 100.9%

Net loss (35,546) (9,787) (25,759) N/M

Net loss (72,126) (161,108) 88,982 (55.2)%

Net loss attributable to noncontrolling interest 21,489 11,055 10,434 94.4%

Net loss attributable to common shareholders $ (24,809) $ (6,514) $ (18,295) N/M

Net loss attributable to common shareholders $ (50,637) $ (150,053) $ 99,416 (66.3)%

Weighted average common shares outstanding - basic and diluted 65,339 65,217 122 0.2%

Per common share data (basic and diluted):

Net loss attributable to common shareholders $ (0.38) $ (0.10) $ (0.28) N/M

Net loss attributable to common shareholders $ (0.77) $ 2.30 $ 1.53 (66.5)%

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.

(2) Consists of 126 properties, including (i) properties we acquired during the period from January 1, 2022 to June 30, 2023, including 94 properties we contributed to our consolidated joint venture in which we own a 61% equity interest and (ii) two properties classified as held for sale at June 30, 2023.

(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.

References to changes in the income and expense categories below relate to the comparison of results for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Rental income.

7 unchanged sentences

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.

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, during the 2023 period.

Depreciation and amortization.

The increase in depreciation and amortization primarily reflects our acquisition activities in the 2022 period.

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

The increase in general and administrative expenses is primarily due to an increase in business management fees as a result of our acquisition activities during the 2022 period, partially offset by a decrease in business management fees as a result of a decline in our average market capitalization in the 2023 period, and an increase in professional fees in the 2023 period.

Loss on impairment of real estate.

During the 2023 period, we recorded $254 on impairment of real estate to reduce the value of one property that was classified as held for sale at June 30, 2023 to its estimated fair value.

During the 2022 period, we recorded a $100,747 loss on impairment of real estate to reduce the value of 25 properties reclassified from held for sale to held and used to their estimated fair value.

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.

The increase in interest and other income is primarily due to higher interest earned on 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.

The increase in interest expense is primarily due to higher average outstanding indebtedness during the 2023 period as compared to the 2022 period, partially offset by lower average interest rates on the outstanding debt during the 2023 period as compared to 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 sale of real estate was a result of a partial eminent domain taking at one of our properties during the 2023 period and a final true up adjustment to the sale of properties during the year ended December 31, 2021 in the 2022 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 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.

Loss on early extinguishment of debt primarily relates to prepayment penalties incurred upon the repayment of four mortgage loans totaling $35,910 in May 2023 and our write off of unamortized costs related to the termination of our unsecured revolving credit facility in February 2022.

Income tax expense.

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

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

The calculation of NOI excludes certain components of net 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.

1 unchanged sentence

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,

The following table presents the reconciliation of net loss to NOI for the three and six months ended June 30, 2023 and 2022 (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Reconciliation of Net Loss to NOI:

7 unchanged sentences

Loss on sale of real estate — 10 974 10

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

Unrealized gain on equity securities — (2,460)

Loss on equity securities — 9,450 — 5,758

General and administrative 8,131 9,709 16,038 15,786

Loss on impairment of real estate 254 100,747 254 100,747

Depreciation and amortization 44,909 42,699 90,366 65,577

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

FFO attributable to common shareholders is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net income (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.

FFO attributable to common shareholders is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is net 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.

2 unchanged sentences

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,

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 June 30, 2023 and 2022 (dollars in thousands, except per share data):

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

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

2 unchanged sentences

Equity in earnings of unconsolidated joint venture (2,743) (1,610) (6,704) (3,337)

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

Unrealized gain on equity securities — (2,460)

Loss on equity securities — 9,450 — 5,758

Share of FFO from unconsolidated joint venture 1,502 1,676 2,970 3,437

Loss on impairment of real estate 254 100,747 254 100,747

Loss on sale of real estate — 10 974 10

3 unchanged sentences

Acquisition, transaction related and certain other financing costs (1)

— 30,303 — 48,976

Normalized FFO adjustments attributable to noncontrolling interest (140) — (140) —

Normalized FFO attributable to common shareholders $ 7,594 $ 28,302 $ 15,510 $ 55,905

3 unchanged sentences

Normalized FFO attributable to common shareholders $ 0.12 $ 0.43 $ 0.24 $ 0.86

(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.

(1) Amounts for the three and six months ended June 30, 2022 primarily include certain debt issuance costs recorded as interest expense related to certain financing and other transaction related costs expensed under GAAP.

LIQUIDITY AND CAPITAL RESOURCES

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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.

As of June 30, 2023, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 77.2% of our annualized rental revenues and only 5.2% 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.

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The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our condensed consolidated statements of cash flows (dollars in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Cash and cash equivalents and restricted cash at beginning of period $ 140,780 $ 29,397

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Cash and cash equivalents and restricted cash at end of period $ 210,368 $ 436,944

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.

The decrease in net cash provided by operating activities for the three months ended June 30, 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 pursuant to our acquisition of MNR in February 2022.

The change from net cash used in investing activities in the 2022 period compared to net cash provided by investing activities in the 2023 period is primarily due to our acquisition of MNR in February 2022 as compared to no property acquisitions during the 2023 period.

The decrease in net cash provided by financing activities in the 2022 period to 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)

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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.

As of June 30, 2023, we had cash and cash equivalents of $71,695.

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.

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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%.

The interest rate payable on the ILPT Floating Rate Loan as of June 30, 2023 was 6.18%.

The weighted average interest rate payable under the ILPT Floating Rate Loan was 6.18% for both the three and six months ended June 30, 2023.

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.

The interest rate payable on the Floating Rate Loan as of June 30, 2023 was 6.17%.

The weighted average annual interest rate payable under the Floating Rate Loan was 6.17% for the three and six months ended June 30, 2023.

Subject to the satisfaction of certain conditions, we have the option to prepay up to $280,000 of the Floating Rate Loan at par with no premium, and to prepay the balance of the Floating Rate Loan at any time, subject to a premium.

In May 2023, our consolidated joint venture obtained a $91,000 fixed rate, interest only mortgage loan secured by four properties owned by our consolidated joint venture.

This mortgage loan matures in June 2030 and requires that interest be paid at an annual rate of 6.25%.

A portion of the net proceeds from this mortgage loan was used to repay four outstanding mortgage loans of our consolidated joint venture with an aggregate outstanding principal balance of $35,910 and a weighted average interest rate of 3.70%.

As of June 30, 2023, we had an aggregate principal amount of $4,334,755 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 own a 61% equity interest in Mountain Industrial REIT LLC, or 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.

We recognized a 39% noncontrolling interest in our condensed consolidated financial statements for the three months ended June 30, 2023 and 2022, for the six months ended June 30, 2023 and the period from this joint venture’s formation date, February 25, 2022 to June 30, 2022.

The portion of this joint venture's net loss not attributable to us, or $10,676 and $7,781, for the three months ended June 30, 2023 and 2022, respectively, and $21,404 and $11,042 for the six months ended June 30, 2023 and the period from this joint venture’s formation date, February 25, 2022 to June 30, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss).

As of June 30, 2023, our consolidated joint venture had total assets of $3,092,534 and total liabilities of $1,775,802.

Unconsolidated Joint Venture - The Industrial Fund REIT LLC:

We own a 22% equity interest in the unconsolidated joint venture.

We own a 22% equity interest in The Industrial Fund REIT LLC, or 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.

We recorded a change in the fair value of our investment in the unconsolidated joint venture of $2,743 and $1,610 for the three months ended June 30, 2023 and 2022, respectively, and $6,704 and $3,337 for the six months ended June 30, 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 $1,322 during the three months ended June 30, 2023 and 2022, respectively, and $1,980 and $2,642 for the six months ended June 30, 2023 and 2022, respectively.

For further information regarding these joint ventures, see Notes 2, 4, 5, 7, 8 and 9 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.

developments and redevelopments.

We may also assume mortgage loans or incur debt in connection with future acquisitions, developments and redevelopments.

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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.

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.

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We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investing and financing activities.

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.

During the six months ended June 30, 2023, we paid quarterly cash distributions to our shareholders totaling $1,312 using cash balances.

On July 13, 2023, we declared a regular quarterly distribution to common shareholders of record on July 24, 2023 of $0.01 per share, or approximately $657.

We expect to pay this distribution to our shareholders on or about August 17, 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

During the three and six months ended June 30, 2023 and 2022, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

Three Months Ended Six Months Ended

June 30, June 30,

2023 2022 2023 2022

Tenant improvements and leasing costs (1)

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Building improvements (2)

1,283 376 1,653 486

Development, redevelopment and other activities (3)

3,870 7,077 6,391 7,371

$ 7,651 $ 10,080 $ 12,582 $ 13,845

(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.

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(3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of revenues.

As of 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.

As of June 30, 2023, we had estimated unspent leasing related obligations of $23,876, of which $6,481 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:

Our principal debt obligations as of June 30, 2023 were:

(1) $1,235,000 outstanding principal amount of the ILPT Floating Rate Loan secured by 104 of our properties;

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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.

The agreements and related documents governing the ILPT Floating Rate Loan, the 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 June 30, 2023, we believe that we were in compliance with all of the covenants and other terms under the agreements governing these loans.

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.

The agreements governing the ILPT Floating Rate Loan, the 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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis