Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10-K.
OVERVIEW (dollars in thousands, except per square foot data)
We are a REIT organized under Maryland law. As of December 31, 2023, our portfolio was comprised of 411 properties containing approximately 59,951,000 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 185 properties containing approximately 43,222,000 rentable square feet located in 38 other states. As of December 31, 2023, our properties were approximately 98.8% leased to 303 tenants with a weighted average remaining lease term (by annualized rental revenues) of approximately 8.1 years. As of December 31, 2023, our properties included 94 properties in which we owned a 61% equity interest located in 27 states containing approximately 20,981,000 rentable square feet that were 99.2% leased with an average remaining lease term (based on annualized rental revenues) of approximately 7.1 years. As of December 31, 2023, we also owned a 22% equity interest in the unconsolidated joint venture.
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During 2023, our rental income and net operating income, or NOI, increased as compared to the prior year as a result of the Merger completed in February 2022 and from leasing activity and rent resets at our properties. 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 high interest rates in the United States and globally, and global geopolitical hostilities and tensions, have given rise to economic uncertainty and 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 common shares or other securities to decline.
Property Operations
Occupancy data for our properties as of December 31, 2023 and 2022 were as follows:
All Properties Comparable Properties
as of December 31,
as of December 31, (1)
2023 2022 2023 2022
Total properties 411 413 286 286
Total rentable square feet (in thousands) (2)
59,951 59,983 33,980 33,980
Percent leased (3)
98.8 % 99.1 % 98.7 % 99.1 %
(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) Leased square feet is pursuant to existing leases as of December 31, 2023, and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied.
The average effective rental rates per square foot represents total rental income divided by the average rentable square feet leased during the periods specified for our properties. For the years ended December 31, 2023 and 2022, the average effective rental rates per square foot of our properties were as follows:
Year Ended December 31,
2023 2022
All properties $ 7.39 $ 7.01
Comparable properties (1)
$ 6.77 $ 6.45
(1) Consists of properties that we owned continuously since January 1, 2022.
During the year ended December 31, 2023, we entered into new and renewal leases as summarized in the following table:
Year Ended December 31, 2023
New Leases Renewals Totals
Square feet leased during the period (in thousands) 870 4,112 4,982
Weighted average rental rate change (by rentable square feet) 33.9 % 17.6 % 19.9 %
Weighted average lease term by square feet (years) 8.9 7.2 7.5
Total leasing costs and concession commitments (1)
$ 4,748 $ 6,175 $ 10,923
Total leasing costs and concession commitments per square foot (1)
$ 5.46 $ 1.50 $ 2.19
Total leasing costs and concession commitments per square foot per year (1)
$ 0.61 $ 0.21 $ 0.29
(1) Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements.
During the year ended December 31, 2023, we completed rent resets for approximately 420,000 square feet of land at our Hawaii Properties at rental rates that were 29.6% higher than prior rental rates.
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As of December 31, 2023, our lease expirations by year were as follows (square feet in thousands):
% of Total
Cumulative
% of Total
Cumulative %
Annualized % of Total
Leased
Leased of Total Annualized
Rental Annualized
No. of
Square Feet Square Feet Square Feet Rental Revenues Revenues Rental Revenues
Year Leases
Expiring (1)
Expiring (1)
Expiring (1)
Expiring (2)
Expiring (2)
Expiring (2)
2024 40 5,070 8.6% 8.6% $ 24,239 5.6% 5.6%
2025 36 5,015 8.5% 17.1% 28,846 6.6% 12.2%
2026 31 4,128 7.0% 24.1% 28,571 6.6% 18.8%
2027 38 8,738 14.7% 38.8% 52,823 12.2% 31.0%
2028 42 6,165 10.4% 49.2% 45,765 10.5% 41.5%
Thereafter 204 30,133 50.8% 100.0% 254,255 58.5% 100.0%
Total 391 59,249 100.0% $ 434,499 100.0%
Weighted average remaining lease term (in years) 7.0 8.1
(1) Leased square feet is pursuant to existing leases as of December 31, 2023 and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied.
(2) Annualized rental revenues are as of December 31, 2023.
As of December 31, 2023, FedEx and Amazon leased 21.7% and 7.7% of our total leased square feet, respectively, and represented 29.7% and 6.7% of our total annualized rental revenues, respectively.
Mainland Properties. As of December 31, 2023, occupancy at our Mainland Properties was 98.9% and represented 72.1% 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. A majority of the leases at our Mainland Properties include periodic set dollar amount or percentage increases that raise the cash rent payable to us. 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 December 31, 2023, occupancy at our Hawaii Properties was 98.6% and represented 27.9% of our annualized rental revenues. As of December 31, 2023, certain of our Hawaii Properties are lands leased for rents that periodically reset based on fair market values, generally every 10 years. Revenues from our Hawaii Properties have generally increased under our or our predecessors’ ownership as rents under the leases for those properties have been reset or renewed. Lease renewals, lease extensions, new leases and rental rates for our Hawaii Properties in the future will depend on prevailing market conditions when these lease renewals, lease extensions, new leases and rental rates are set. As rent reset dates or lease expirations approach at our Hawaii Properties, we generally negotiate with existing or new tenants for new lease terms. If we are unable to reach an agreement with a tenant on a rent reset, our Hawaii Properties’ leases typically provide that rent is reset based on an appraisal process. Due to the limited availability of land suitable for industrial uses that might compete with our Hawaii Properties, we believe that our Hawaii Properties offer the potential for future rent growth as a result of periodic rent resets, lease extensions and new leasing.
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The following table provides the annualized rental revenues scheduled to reset by year at our Hawaii Properties as of December 31, 2023:
Annualized
Rental Revenues
Scheduled to Reset
2024 $ 814
2025 989
2026 1,315
2027 795
2028 —
Thereafter
18,525
Total $ 22,438
As of December 31, 2023, $24,239, or 5.6%, of our annualized rental revenues are included in leases scheduled to expire by December 31, 2024 and 1.2% 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. 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.
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.
Disposition Activities
In 2023, we received gross proceeds of $25,460, excluding closing costs, and recognized a net gain on sale of real estate of $1,710 as a result of the sale of two properties and a portion of a land parcel.
For further information regarding our disposition activities, see elsewhere in this Annual Report on Form 10-K, including “Business—Our Company”, “Business—Our Investment Policies” and “Business—Our Disposition Policies” included in Part I, Item 1 of this Annual Report on Form 10-K, “Liquidity and Capital Resources—Our Investing and Financing Liquidity and Resources” below and Note 3 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
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RESULTS OF OPERATIONS
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 (dollars and share amounts in thousands, except per share data)
Comparable
Non-Comparable
Properties Results
Properties Results
Consolidated Results
Year Ended December 31, (1)
Year Ended December 31, (2)
Year Ended December 31,
$ % $ $ %
2023 2022 Change Change 2023 2022 Change 2023 2022 Change Change
Rental income $ 226,921 $ 217,528 $ 9,393 4.3 % $ 210,417 $ 170,623 $ 39,794 $ 437,338 $ 388,151 $ 49,187 12.7 %
Operating expenses:
Real estate taxes 31,743 29,958 1,785 6.0 % 28,310 20,666 7,644 60,053 50,624 9,429 18.6 %
Other operating expenses 20,445 18,439 2,006 10.9 % 17,747 12,416 5,331 38,192 30,855 7,337 23.8 %
Total operating expenses 52,188 48,397 3,791 7.8 % 46,057 33,082 12,975 98,245 81,479 16,766 20.6 %
Net operating income (3)
$ 174,733 $ 169,131 $ 5,602 3.3 % $ 164,360 $ 137,541 $ 26,819 339,093 306,672 32,421 10.6 %
Other expenses:
Depreciation and amortization 178,728 160,982 17,746 11.0 %
General and administrative 31,164 32,877 (1,713) (5.2) %
Acquisition and other transaction related costs 287 586 (299) (51.0) %
Loss on impairment of real estate 156 100,747 (100,591) (99.8) %
Total other expenses 210,335 295,192 (84,857) (28.7) %
Interest and other income 7,911 2,663 5,248 197.1 %
Interest expense (288,537) (280,051) (8,486) 3.0 %
Gain (loss) on sale of real estate 1,710 (10) 1,720 n/m
Loss on equity securities — (5,758) 5,758 (100.0) %
Loss on early extinguishment of debt (359) (22,198) 21,839 (98.4) %
Loss before income taxes and equity in earnings of unconsolidated joint venture
(150,517) (293,874) 143,357 (48.8) %
Income tax expense (104) (45) (59) 131.1 %
Equity in earnings of unconsolidated joint venture 902 7,078 (6,176) (87.3) %
Net loss (149,719) (286,841) 137,122 (47.8) %
Net loss attributable to noncontrolling interest 41,730 60,118 (18,388) (30.6) %
Net loss attributable to common shareholders $ (107,989) $ (226,723) $118,734 (52.4) %
Weighted average common shares outstanding (basic and diluted) 65,430 65,248 182 0.3 %
Per common share data (basic and diluted):
Net loss attributable to common shareholders $ (1.65) $ (3.47) $ 1.82 (52.4) %
n/m - not meaningful
(1) Consists of properties that we owned continuously since January 1, 2022.
(2) Consists of 127 properties, including 125 properties we acquired and two properties we disposed of during the period from January 1, 2022 to December 31, 2023.
(3) See our definition of NOI and our reconciliation of net loss to NOI below under the heading "Non-GAAP Financial Measures."
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References to changes in the income and expense categories below relate to the comparison of results for the year ended December 31, 2023 to the year ended December 31, 2022. For a comparison of consolidated results for the year ended December 31, 2022 to the year ended December 31, 2021, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.
Rental income. The increase in rental income is primarily a result of the Merger and leasing activity, including rent resets, at certain of our comparable properties in the 2023 period.
Real estate taxes. The increase in real estate taxes primarily reflects the Merger. Real estate taxes at certain of our comparable properties increased due to higher assessed values.
Other operating expenses . The increase in other operating expenses is primarily due to the Merger. Additionally, increases in management fees and insurance and repairs and maintenance costs were partially offset by a decrease in snow removal expenses at certain of our comparable properties during the 2023 period.
Depreciation and amortization. The increase in depreciation and amortization primarily reflects the impact of the Merger.
General and administrative. The decrease in general and administrative expenses is primarily due to decreases in business management fees and legal fees, partially offset by increases in accounting and professional fees in the 2023 period.
Acquisition and other transaction related costs. Acquisition and other transaction related costs decreased as a result of fewer acquisition and disposition activities during the 2023 period.
Loss on impairment of real estate. We recognized a loss on impairment of real estate on one property that was classified as held for sale and subsequently reclassified to held and used during the 2023 period and we recognized a loss on impairment of real estate on 25 properties acquired in the Merger during the 2022 period.
Interest and other income. The increase in interest and other income is primarily due to higher interest rates and average cash balances during the 2023 period as compared to the 2022 period.
Interest expense. The increase in interest expense is primarily due to higher average outstanding indebtedness during the 2023 period resulting from the Merger, partially offset by lower amortization of debt costs in the 2023 period as compared to the 2022 period.
Gain (loss) on sale of real estate. During the 2023 period, we recognized a gain on sale of real estate of $1,710 as a result of the sale of two properties in Asheville, NC and Mesquite, TX, and we also recognized a loss on sale of real estate of $974 as a result of the sale of a portion of a land parcel in Everett, WA. During the 2022 period, we incurred costs related to the sale of properties during the year ended December 31, 2021.
Loss on equity securities. During 2022, we recognized a loss on the equity securities we acquired, and subsequently sold, as part of the Merger.
Loss on early extinguishment of debt. Loss on early extinguishment of debt is due to prepayment penalties incurred upon the refinancing of four mortgage loans in 2023 and the write off of unamortized costs related to the refinancing of our then existing bridge loan facility and the termination of our unsecured revolving credit facility in 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.
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Non-GAAP Financial Measures (dollars in thousands, except per share data)
We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules, including NOI, FFO attributable to common shareholders and 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 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 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 from 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 years ended December 31, 2023 and 2022:
Year Ended December 31,
2023 2022
Net loss $ (149,719) $ (286,841)
Equity in earnings of unconsolidated joint venture (902) (7,078)
Income tax expense 104 45
Loss before income taxes and equity in earnings of unconsolidated joint venture
(150,517) (293,874)
Loss on early extinguishment of debt 359 22,198
Loss on equity securities — 5,758
(Gain) loss on sale of real estate (1,710) 10
Interest expense 288,537 280,051
Interest and other income (7,911) (2,663)
Loss on impairment of real estate 156 100,747
Acquisition and other transaction related costs (1)
287 586
General and administrative 31,164 32,877
Depreciation and amortization 178,728 160,982
NOI $ 339,093 $ 306,672
NOI:
Hawaii Properties $ 89,634 $ 85,145
Mainland Properties 249,459 221,527
NOI $ 339,093 $ 306,672
(1) Acquisition and other transaction related costs consist of costs related to potential acquisition and disposition activities that were not completed.
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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: (1) 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 loss on equity securities; (2) plus real estate depreciation and amortization of our properties and our proportionate share of FFO from unconsolidated joint venture properties; (3) minus FFO adjustments attributable to noncontrolling interest; and (4) certain other adjustments currently not applicable to us. In calculating Normalized FFO attributable to common shareholders, we adjust for certain non-recurring items shown below, including adjustments for such items related to 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 dividend yield, 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 years ended December 31, 2023 and 2022.
Year Ended December 31,
2023 2022
Net loss attributable to common shareholders $ (107,989) $ (226,723)
Equity in earnings of unconsolidated joint venture (902) (7,078)
Loss on equity securities — 5,758
(Gain) loss on sale of real estate (1,710) 10
Loss on impairment of real estate 156 100,747
Depreciation and amortization 178,728 160,982
Share of FFO from unconsolidated joint venture 5,783 6,406
FFO adjustments attributable to noncontrolling interest (43,031) (38,695)
FFO attributable to common shareholders 31,035 1,407
Loss on early extinguishment of debt 359 22,198
Acquisition, transaction related and certain other financing costs (1)
287 80,992
Normalized FFO adjustments attributable to noncontrolling interest (140) (28,379)
Normalized FFO attributable to common shareholders $ 31,541 $ 76,218
Weighted average common shares outstanding (basic and diluted) 65,430 65,248
Per common share data (basic and diluted):
FFO attributable to common shareholders $ 0.47 $ 0.02
Normalized FFO attributable to common shareholders $ 0.48 $ 1.17
(1) Acquisition, transaction related and certain other financing costs consist of costs related to potential acquisition and disposition activities that were not completed. In addition, certain debt issuance costs recognized as interest expense related to the then existing bridge loan facility and other transaction related costs expensed under GAAP were included for the year ended December 31, 2022.
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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 December 31, 2023, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 76.9% of our annualized rental revenues and only 5.6% 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, including interest and other financing costs;
• develop properties to produce cash flows in excess of our costs of capital; and
• purchase additional properties that produce cash flows in excess of our costs of acquisition and the cost to our capital and property operating expenses.
The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our consolidated statements of cash flows:
Year Ended December 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 6,059 83,251
Investing activities 67,740 (3,445,869)
Financing activities 31,144 3,474,001
Cash and cash equivalents and restricted cash at end of period $ 245,723 $ 140,780
The decrease in net cash provided by operating activities for the year ended December 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 pursuant to the Merger in 2022. The change in net cash provided by investing activities is primarily due to the Merger in 2022 as compared to the sale of two properties and a portion of a land parcel during the 2023 period. The decrease in net cash provided by financing activities was primarily due to proceeds from borrowings and sale of joint venture equity interests 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)
As of December 31, 2023, we had cash and cash equivalents, excluding restricted cash, of $112,341. To maintain our qualification for taxation as a REIT under 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.
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In February 2022, we completed our acquisition of MNR. 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.
In 2023, we received gross proceeds of $25,460, excluding closing costs, and recognized a net gain on sale of real estate of $1,710 as a result of the sale of two properties and a portion of a land parcel.
For further information regarding disposition activities, see Note 3 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Consolidated Joint Venture
We own a 61% equity interest in Mountain Industrial REIT LLC, which owns 94 properties in 27 states totaling approximately 20,981,000 rentable square feet. We control our consolidated joint venture and therefore account for the properties owned by this joint venture on a consolidated basis in our consolidated financial statements. We recognized net loss attributable to noncontrolling interest in our consolidated financial statements for the year ended December 31, 2023 and the period from February 25, 2022 (inception of our consolidated joint venture) to December 31, 2022 of $41,798 and $60,067, respectively. As of December 31, 2023, our consolidated joint venture had total assets of $3,026,194 and total liabilities of $1,774,380.
Unconsolidated Joint Venture
We own a 22% equity interest in The Industrial Fund REIT LLC, which owns 18 industrial properties located in 12 states totaling approximately 11,726,000 rentable square feet. We account for the unconsolidated joint venture under the equity method of accounting under the fair value option. We recognize changes in the fair value of our investment in the unconsolidated joint venture as equity in earnings of unconsolidated joint venture in our consolidated statements of comprehensive income (loss). The unconsolidated joint venture made aggregate cash distributions to us of $9,900 and $25,742 during the years ended December 31, 2023 and 2022, respectively.
For more information regarding these joint ventures, see Note 3 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Indebtedness
Our principal debt obligations as of December 31, 2023 were: (1) a $1,235,000 loan, or the ILPT Floating Rate Loan, secured by 104 of our properties; (2) a $1,400,000 loan, or the Floating Rate Loan, secured by 82 properties owned by our consolidated joint venture; (3) $700,000 outstanding principal amount of a mortgage loan, or the Fixed Rate Loan, secured by 17 of our properties; (4) $650,000 outstanding principal amount of a mortgage loan secured by 186 of our Hawaii Properties; and (5) $340,944 aggregate principal amount of mortgage loans secured by 12 properties owned by our consolidated joint venture.
The ILPT Floating Rate Loan matures in October 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of the secured overnight financing rate, or SOFR, plus a weighted average premium of 3.93%. The weighted average interest rate payable under the ILPT Floating Rate Loan was 6.18%, including the impact of our interest rate cap of 2.25%, as of December 31, 2023 and 2022, and for the year ended December 31, 2023 and the period from September 22, 2022 (the date we entered into the applicable loan agreements) to December 31, 2022. Subject to the satisfaction of certain conditions, we have the option to prepay the ILPT Floating Rate Loan in full or in part at any time at par with no premium.
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The Floating Rate Loan matures in March 2024, subject to three, one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.77%. The weighted average annual interest rate payable under the Floating Rate Loan was 6.17% for the year ended December 31, 2023, and was 6.10% for the period from February 25, 2022 (the date our consolidated joint venture entered into the applicable loan agreements) to December 31, 2022, each including the impact of our interest rate cap of 3.40%. 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. As of February 20, 2024, our consolidated joint venture intends to exercise its first option to extend the maturity of this loan.
The one year options to extend the ILPT Floating Rate Loan and the Floating Rate Loan require, among other things, that we obtain a replacement interest rate cap, as defined in the applicable agreement.
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%.
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.
As of December 31, 2023, we had an aggregate principal amount of $4,325,944 of debt, including the ILPT Floating Rate Loan, the Floating Rate Loan and the Fixed Rate Loan, scheduled to mature between 2024 and 2038.
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 December 31, 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, 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.
For further information regarding indebtedness, see Notes 5 and 11 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
We expect to fund any future property acquisitions, developments and redevelopments with proceeds we may receive 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. 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 maturing 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 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.
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During the year ended December 31, 2023, we paid quarterly cash distributions to our shareholders totaling $2,627 using cash on hand.
On January 11, 2024, we declared a regular quarterly distribution to common shareholders of record on January 22, 2024 in the amount of $0.01 per share, or approximately $658, and we paid this distribution on February 15, 2024 using cash on hand.
During the years ended December 31, 2023 and 2022, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:
Year Ended December 31,
2023 2022
Tenant improvements and leasing costs (1)
$ 8,398 $ 12,659
Building improvements (2)
6,779 3,999
Development, redevelopment and other activities (3)
8,086 13,673
$ 23,263 $ 30,331
(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 December 31, 2023, we had estimated unspent leasing related obligations of $5,947, all of which is expected to be spent during the next 12 months.
Related Person Transactions
We have relationships and historical and continuing transactions with RMR, RMR Inc. and others related to them. For more information about these and other such relationships and related person transactions, see Notes 9 and 10 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K, our other filings with the SEC, including our definitive Proxy Statement for our 2024 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2023. For more information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements”, Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services.
Critical Accounting Estimates
Our critical accounting estimates are those that will have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates have been and will be consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting estimates involve our investments in real property. These estimates affect our:
• allocation of purchase prices between various asset categories, including allocations to above and below market leases and the related impact on the recognition of rental income and depreciation and amortization expenses; and
• assessment of the carrying values and impairments of long lived assets.
We allocate the cost of each property investment to various property components such as land, buildings and improvements and intangibles based on their fair values, and each component generally has a different useful life. For acquired real estate, we record building, land and improvements, and, if applicable, the value of in-place leases, the fair market value of above or below market leases and tenant relationships at their relative fair value. We base purchase price allocations and the determination of useful lives on our estimates and, under some circumstances, studies from independent real estate appraisers to provide market information and evaluations that are relevant to our purchase price allocations and determinations of useful lives; however, our management is ultimately responsible for the purchase price allocations and determination of useful lives.
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We compute depreciation expense using the straight line method over estimated useful lives of up to 40 years for buildings and improvements, and up to seven years for personal property. We do not depreciate the allocated cost of land. We amortize capitalized above market lease values as a reduction to rental income over the terms of the respective leases. We amortize capitalized below market lease values as an increase to rental income over the terms of the respective leases. We amortize the value of acquired in-place leases exclusive of the value of above market and below market acquired in-place leases to depreciation and amortization over the periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off. Purchase price allocations require us to make certain assumptions and estimates. Incorrect assumptions and estimates may result in inaccurate charges to rental income and depreciation and amortization over future periods.
We periodically evaluate our properties for impairment. Impairment indicators may include declining tenant occupancy, our concerns about a tenant's financial condition (which may be affected by a rent default or other information which comes to our attention) or our decision to dispose of an asset before the end of its estimated useful life and legislative, as well as market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the related property by comparing it to the expected future undiscounted cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its fair value. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If we misjudge or estimate incorrectly or if future tenant operations, market or industry factors differ from our expectations, we may record an impairment charge that is inappropriate or fail to record a charge when we should have done so, or the amount of any such charges may be inaccurate.
These accounting estimates involve significant judgments made based upon our experience and the experience of our management and our Board of Trustees, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability and willingness of our tenants to perform their obligations to us, current and future economic conditions and competitive factors in the markets in which our properties are located. Competition, economic conditions and other factors may cause occupancy declines in the future. In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own or decrease the carrying values of our assets.
Impact of Climate Change
Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our properties to increase. We do not expect the direct impact of these increases to be material to our results of operations because the increased costs either would be the responsibility of our tenants directly or in the longer term, passed through and paid by tenants of our properties. Although we do not believe it is likely in the foreseeable future, laws enacted to mitigate climate change may make some of our properties obsolete or cause us to make material investments in our properties, which could materially and adversely affect our financial condition or the financial condition of our tenants and their ability to pay rent to us.
In an effort to reduce the effects of any increased energy costs in the future, we continuously study ways to improve the energy efficiency at all of our properties. Our property manager, RMR, is a member of the ENERGY STAR program, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy that is focused on promoting energy efficiency at commercial properties through its “ENERGY STAR” partner program, and a member of the U.S. Green Building Council, a nonprofit organization focused on promoting energy efficiency at commercial properties through its leadership in energy and environmental design, or LEED ® , green building program. RMR’s annual Sustainability Report summarizes the ESG initiatives of RMR and its client companies, including us. RMR's Sustainability Report may be accessed on RMR Inc.'s website at www.rmrgroup.com/corporate-sustainability/default.aspx. The information on or accessible through RMR Inc.'s website is not incorporated into this Annual Report on Form 10-K.
Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather may have an adverse effect on certain properties we own. Rising sea levels could cause flooding at some of our properties, including some of our Hawaii Properties, which may have an adverse effect on individual properties we own. We mitigate these risks by procuring, or requiring our tenants to procure, insurance coverage we believe adequate to protect us from material damages and losses resulting from the consequences of losses caused by climate change. However, we cannot be sure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on our financial results.
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