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Item 2. Management’s Discussion and Analysis

2024-04-30 compared with 2023-10-25 · 132 added, 260 removed, 168 unchanged (70% of the section changed)

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The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and with our 2023 Annual Report.

OVERVIEW (dollars in thousands, except per share and per square foot data)

OVERVIEW (dollars in thousands, except per square foot data)

We are a real estate investment trust, or REIT, organized under Maryland law.

As of September 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 September 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 98.9% leased to 304 different tenants with a weighted average remaining lease term (by annualized rental revenues) of approximately 8.2 years.

As of September 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 6.4 years.

We define annualized rental revenues as the annualized contractual base rents from our tenants pursuant to our lease agreements as of the measurement date, including straight line rent adjustments and estimated recurring expense reimbursements to be paid to us, and excluding lease value amortization.

As of March 31, 2024, our portfolio was comprised of 411 properties containing approximately 59,893,000 rentable square feet located in 39 states with 99.0% occupancy leased to 301 different tenants.

As of March 31, 2024, we also owned a 22% equity interest in the unconsolidated joint venture.

Our portfolio as of March 31, 2024 is summarized below (square feet in thousands):

Number of Rentable Remaining

Ownership Properties States Square Feet Occupancy Lease Term (1)

Hawaii Properties 100% 226 Hawaii

16,729 99.0% 13.1

Consolidated joint venture properties 61% 94 27 States

20,981 99.2% 6.9

Wholly owned Mainland Properties

100% 90 34 States

22,119 98.9% 5.0

Other 67% 1 New Jersey

64 100.0% 4.2

Total/weighted average 411 59,893 99.0% 8.0

(1) Based on annualized rental revenues as of March 31, 2024.

During the three months ended March 31, 2024, our rental income and net operating income, or NOI, increased compared to the 2023 period primarily due to 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 rising 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.

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.

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Property Operations

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

Occupancy data for our properties as of March 31, 2024 and 2023 were as follows:

All Properties Comparable Properties

As of September 30, As of September 30,

as of March 31,

as of March 31, (1)

2024 2023 2024 2023

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99.0 % 98.7 % 99.0 % 98.7 %

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

(1) Consists of properties that we owned continuously since January 1, 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 September 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 nine months ended September 30, 2023 and 2022 were as follows:

Three Months Ended

Nine Months Ended

September 30,

2023 2022 2023 2022

Average effective rental rates per square foot leased:

(3) Leased square feet is pursuant to existing leases as of March 31, 2024, and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied, if any.

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 three months ended March 31, 2024 and 2023, the average effective rental rates per square foot of our properties were as follows:

Three Months Ended March 31,

All properties $ 7.58 $ 7.46

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$ 7.58 $ 7.46

(1) Average effective rental rates per square foot leased represents annualized rental revenues during the period specified divided by the average rentable square feet leased during the period specified.

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

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

Three Months Ended September 30, 2023

New Leases Renewals Totals

Square feet leased during the period (in thousands) 64 694 758

Weighted average rental rate change (by rentable square feet) (15.7) % 16.9 % 13.5 %

Weighted average lease term by square feet (years) 4.9 4.0 4.1

Total leasing costs and concession commitments (1)

$ 140 $ 1,301 $ 1,441

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

$ 2.21 $ 1.87 $ 1.90

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

$ 0.45 $ 0.47 $ 0.46

Nine Months Ended September 30, 2023

(1) Consists of properties that we owned continuously since January 1, 2023.

During the three months ended March 31, 2024, we entered into new and renewal leases as summarized in the following table:

Three Months Ended March 31, 2024

New Leases Renewals Totals

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(1) Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements.

During the nine months ended September 30, 2023, we completed rent resets for approximately 382,000 square feet of land at our Hawaii Properties at rental rates that were approximately 29.9% higher than prior rental rates.

There were no rent resets during the three months ended September 30, 2023.

As shown in the table below, approximately 0.8% of our total leased square feet and 0.9% of our total annualized rental revenues as of September 30, 2023 are included in leases scheduled to expire by December 31, 2023.

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

During the three months ended March 31, 2024, we completed rent resets for approximately 106,000 square feet of land at our Hawaii Properties at rental rates that were approximately 27.5% higher than prior rental rates.

As of March 31, 2024, our remaining lease expirations by year were as follows (square feet in thousands):

% of Total Cumulative

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Leased Leased of Total Rental Rental Annualized

Number of Square Feet Square Feet Square Feet Revenues Revenues Rental Revenues

Tenants Expiring (1)

Expiring Expiring Expiring

9 489 0.8 % 0.8 % $ 3,903 0.9 % 0.9 %

2024 45 5,909 10.0 % 10.8 % 29,702 6.9 % 7.8 %

2025 35 4,802 8.1 % 18.9 % 28,591 6.6 % 14.4 %

2026 30 4,147 7.0 % 25.9 % 28,247 6.5 % 20.9 %

2027 37 8,694 14.7 % 40.6 % 52,333 12.1 % 33.0 %

of Square Feet Square Feet Square Feet Revenues Revenues Rental Revenues

Period/Year Leases Expiring (1)

32 4,017 6.8 % 6.8 % $ 20,420 4.6 % 4.6 %

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Weighted average remaining lease term (in years) 7.0 8.0

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

leased 21.9% and 7.7% of our total leased square feet, respectively, and represented 29.8% and 6.7% of our total annualized rental revenues, respectively.

(1) Leased square feet is pursuant to existing leases as of March 31, 2024, and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied, if any.

(2) Annualized rental revenues are as of March 31, 2024.

As of March 31, 2024, subsidiaries of FedEx and Amazon leased 21.7% and 7.7% of our total leased square feet, respectively, and represented 28.9% and 6.7% of our total annualized rental revenues, respectively.

Mainland Properties.

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

As of March 31, 2024, occupancy at our Mainland Properties was 99.0% and represented 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.

A majority of the leases at our Mainland Properties include periodic set dollar amount or percentage increases that increase 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.

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Hawaii Properties.

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

As of September 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.

As of March 31, 2024, occupancy at our Hawaii Properties was 99.0% and represented 28.0% of our annualized rental revenues.

As of March 31, 2024, 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 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.

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If we are unable to reach an agreement with a tenant on a rent reset, our Hawaii Properties’ leases typically provide that rent is reset based on an appraisal process.

Despite our and our predecessors’ prior experience with rent resets, lease extensions and new leases in Hawaii, our ability to increase rents when rents reset, leases are extended, or leases expire depends upon market conditions which are beyond our control.

Accordingly, we cannot be sure that the historical increases achieved at our Hawaii Properties will continue in the future.

The following table provides the annualized rental revenues scheduled to reset at our Hawaii Properties as of September 30, 2023:

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.

The following table provides the annualized rental revenues scheduled to reset at our Hawaii Properties as of March 31, 2024:

Rental Revenues

Scheduled to Reset

Scheduled Rent Reset Year for Hawaii Properties

as of September 30, 2023

2028 and thereafter 17,605

Thereafter 19,338

Total $ 22,450

As of September 30, 2023, $28,031, or 6.5%, of our annualized rental revenues are included in leases scheduled to expire by September 30, 2024 and 1.1% of our rentable square feet are currently vacant.

As of March 31, 2024, $24,430, or 5.5%, of our annualized rental revenues are included in leases scheduled to expire by March 31, 2025 and 1.0% of our rentable square feet are currently vacant.

Rental rates for which available space may be leased in the future will depend on prevailing market conditions when lease extensions, lease renewals or new leases are negotiated.

Whenever we extend, renew or enter new leases for our properties, we intend to seek rents that are equal to or higher than our historical rents for the same properties.

however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control.

Despite our 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.

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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.

Disposition Activities

In March 2023, we received gross proceeds of $270 and recognized a $974 net loss on sale of real estate as a result of a property in Everett, Washington partially taken by eminent domain.

As of September 30, 2023, we had three Mainland Properties with an aggregate carrying value of $56,944, classified as held for sale in our condensed consolidated balance sheet.

As of October 25, 2023, one of these properties is under agreement to sell for a sales price of $21,500, excluding closing costs.

This pending sale is subject to conditions;

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

We terminated agreements to sell two of these properties for an aggregate sales price of $43,765 and we continue to market one of these two properties for sale.

For further information regarding our disposition 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.

RESULTS OF OPERATIONS

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

Comparable Properties Results (1)

Non-Comparable Properties Results (2)

Consolidated Results

Three Months Ended September 30, Three Months Ended September 30, Three Months Ended September 30,

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 (dollars and share amounts in thousands, except per share data)

Comparable Non-Comparable

Properties Results Properties Results Consolidated Results

Three Months Ended March 31, (1)

Three Months Ended March 31, (2)

Three Months Ended March 31,

2024 2023 Change Change 2024 2023 Change 2024 2023 Change Change

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General and administrative 7,689 7,907 (218) (2.8)%

Acquisition and other transaction related costs — 586 (586) (100.0)%

Total other expenses 51,266 53,364 (2,098) (3.9)%

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Interest expense (73,230) (70,771) (2,459) 3.5%

Loss on early extinguishment of debt — (21,370) 21,370 (100.0)%

Loss before income tax expense and equity in earnings of unconsolidated joint venture (36,859) (87,243) 50,384 (57.8)%

Income tax expense (51) (28) (23) 82.1%

Equity in earnings of unconsolidated joint venture 719 3,297 (2,578) (78.2)%

Net loss (36,191) (83,974) 47,783 (56.9)%

Net loss attributable to noncontrolling interest 10,079 38,347 (28,268) (73.7)%

Net loss attributable to common shareholders $ (26,112) $ (45,627) $ 19,515 (42.8)%

Weighted average common shares outstanding (basic and diluted)

65,488 65,250 238 0.4%

Per common share data (basic and diluted):

Net loss attributable to common shareholders $ (0.40) $ (0.70) $ 0.30 (42.9)%

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

(2) Consists of three properties classified as held for sale at September 30, 2023 and one property we acquired during the period from July 1, 2022 to September 30, 2023.

(3) See our definition of net operating income, or 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 September 30, 2023 compared to the three months ended September 30, 2022.

Rental income.

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 $3,414 and $3,794 for the 2023 and 2022 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations of $252 and $250 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 expense and repairs and maintenance at certain of our properties.

Depreciation and amortization.

The decrease in depreciation and amortization primarily reflects a decrease in the amortization of leasing costs relating to certain lease expirations since July 1, 2022 and the impact on depreciation expense of certain properties classified as held for sale in the comparable periods, partially offset by an increase in depreciation and amortization related to capital expenditures made since July 1, 2022.

General and administrative.

The decrease in general and administrative expenses is primarily due to decreases in business management fees as a result of a decline in our average market capitalization and in professional fees in the 2023 period.

Acquisition and other transaction related costs.

Acquisition and other transaction related costs primarily consist of costs related to acquisition and disposition activities that were not completed.

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

Loss on early extinguishment of debt.

Loss on early extinguishment of debt primarily relates to the write off of unamortized costs related to the repayment of our $1,385,158 bridge loan facility in September 2022.

Income tax expense.

Income tax expense primarily reflects state income taxes payable in certain jurisdictions.

Equity in earnings of unconsolidated joint venture.

Equity in earnings of unconsolidated joint venture represents the change in the fair value of our investment in the unconsolidated joint venture.

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

Comparable Properties Results (1)

Non-Comparable Properties Results (2)

Consolidated Results

Nine Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30,

2023 2022 Change Change 2023 2022 Change 2023 2022 Change Change

Rental income $ 166,912 $ 160,004 $ 6,908 4.3% $ 161,531 $ 121,808 $ 39,723 $ 328,443 $ 281,812 $ 46,631 16.5%

Operating expenses:

Real estate taxes 23,087 21,761 1,326 6.1% 23,406 14,699 8,707 46,493 36,460 10,033 27.5%

Other operating expenses 14,944 13,611 1,333 9.8% 12,800 8,667 4,133 27,744 22,278 5,466 24.5%

Total operating expenses 38,031 35,372 2,659 7.5% 36,206 23,366 12,840 74,237 58,738 15,499 26.4%

Net operating income (3)

Loss on sale of real estate — (974) 974 (100.0)%

Loss before income taxes and equity in earnings of unconsolidated joint venture

(35,592) (39,490) 3,898 (9.9)%

Other expenses:

Depreciation and amortization 134,278 114,096 20,182 17.7%

General and administrative 23,750 24,896 (1,146) (4.6)%

Acquisition and other transaction related costs — 586 (586) (100.0)%

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

Total other expenses 158,282 240,325 (82,043) (34.1)%

Interest and other income 5,340 1,900 3,440 181.1%

Interest expense (215,558) (208,286) (7,272) 3.5%

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) (22,198) 21,839 (98.4)%

Loss before income tax expense and equity in earnings of unconsolidated joint venture (115,627) (251,603) 135,976 (54.0)%

Income tax expense (33) (17) (16) 94.1%

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Weighted average common shares outstanding (basic and diluted) 65,556 65,309 247 0.4%

65,389 65,228 161 0.2%

Per common share data (basic and diluted):

Net loss attributable to common shareholders $ (0.36) $ (0.38) $ 0.02 (5.3)%

n/m - not meaningful

(1) Consists of properties that we owned continuously since January 1, 2023.

(2) Consists of three properties held for sale as of September 30, 2023 and 125 properties we acquired during the period from January 1, 2022 to September 30, 2023.

(2) Consists of two properties we disposed of during the period from January 1, 2023 to March 31, 2024.

(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 nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

References to changes in the income and expense categories below relate to the comparison of results for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Rental income.

The increase in rental income is primarily a result of our acquisition activities, which includes our acquisition of MNR in February 2022.

Rental income increased at certain of our comparable properties primarily due to increases from our leasing activity and rent resets.

Rental income includes non-cash straight line rent adjustments of $10,531 and $8,170 for the 2023 and 2022 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations of $764 and $4,265 for the 2023 and 2022 periods, respectively.

Rental income increased primarily due to increases from our leasing activity and rent resets.

Real estate taxes.

The increase in real estate taxes primarily reflects our acquisition of MNR.

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

Real estate taxes decreased primarily due to lower assessed values as a result of successful real estate tax appeals.

Other operating expenses .

The increase in other operating expenses is primarily due to our acquisition of MNR and 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.

Other operating expenses increased primarily due to increases in insurance and repairs and maintenance costs and snow removal expenses at certain of our properties.

Depreciation and amortization.

The increase in depreciation and amortization primarily reflects the impact of the acquisition of MNR during the 2022 period.

The decrease in depreciation and amortization primarily reflects certain leasing related assets becoming fully amortized and our disposition related activities after April 1, 2023, partially offset by an increase in depreciation of improvements made to certain of our properties after April 1, 2023.

General and administrative.

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

Acquisition and other transaction related costs.

Acquisition and other transaction related costs primarily consists of costs related to potential acquisition and disposition activities that were not completed.

Loss on impairment of real estate.

During the 2023 period, we recognized a loss on impairment of real estate on one property that was classified as held for sale at September 30, 2023.

During the 2022 period, we recognized a loss on impairment of real estate on 25 properties assumed in the acquisition of MNR.

The decrease in general and administrative expenses is primarily due to decreases in accounting fees and leasing costs, partially offset by an increase in other professional fees in the 2024 period.

Interest and other income.

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Interest expense.

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 amortization of debt costs in the 2023 period as compared to the 2022 period.

The increase in interest expense is primarily due to refinancing activities from our consolidated joint venture in May 2023, resulting in higher debt balances and interest rate and costs related to the purchase of an interest rate cap during the 2024 period.

Loss on sale of real estate.

Loss on sale of real estate was a result of a property in Everett, Washington partially taken by eminent domain during the 2023 period and a final 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 on the sale of certain equity securities we acquired as part of the acquisition of MNR during the 2022 period.

Loss on early extinguishment of debt.

Loss on early extinguishment of debt primarily relates to prepayment penalties incurred upon the repayment of four mortgage loans in May 2023, the write off of unamortized costs related to the repayment of our $1,385,158 bridge loan facility in September 2022 and the write off of unamortized costs related to the termination of our unsecured revolving credit facility in February 2022.

During the 2023 period, we 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, Washington.

Income tax expense.

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Equity in earnings of unconsolidated joint venture.

Equity in earnings of unconsolidated joint venture represents the change in the fair value of our investment in the unconsolidated joint venture.

Non-GAAP Financial Measures

We present certain “non-GAAP financial measures” within the meaning of the applicable rules of the Securities and Exchange Commission, or the SEC, including NOI, funds from operations, or FFO, attributable to common shareholders and normalized funds from operations, or Normalized FFO, attributable to common shareholders.

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net loss or net loss attributable to common shareholders as indicators of our operating performance or as measures of our liquidity.

Equity in earnings of unconsolidated joint venture is the change in the fair value of our investment in the unconsolidated joint venture.

Non-GAAP Financial Measures (dollars in thousands, except per share data)

We present certain “non-GAAP financial measures” within the meaning of the applicable Securities and Exchange Commission, or SEC, rules, including NOI, funds from operations, or FFO, attributable to common shareholders and normalized funds from operations, or Normalized FFO, attributable to common shareholders.

These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net loss or net loss attributable to common shareholders, as indicators of our operating performance or as measures of our liquidity.

These measures should be considered in conjunction with net loss and net loss attributable to common shareholders as presented in our condensed consolidated statements of comprehensive income (loss).

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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.

NOI excludes depreciation and amortization expense.

We use NOI to evaluate individual and company-wide property level performance.

Other real estate companies and REITs may calculate NOI differently than we do.

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

The following table presents the reconciliation of net loss to NOI for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,

Net loss $ (33,902) $ (35,546)

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Income tax expense 33 17

Loss before income tax expense and equity in earnings of unconsolidated joint venture (36,859) (87,243) (115,627) (251,603)

Loss on early extinguishment of debt — 21,370 359 22,198

Interest and other income (2,397) (1,068) (5,340) (1,900)

Interest expense 72,941 89,739 215,558 208,286

Loss before income taxes and equity in earnings of unconsolidated joint venture (35,592) (39,490)

Loss on sale of real estate — 974

Loss on equity securities — — — 5,758

Interest expense 73,230 70,771

Interest and other income (2,852) (1,146)

General and administrative 7,689 7,907

Acquisition and other transaction related costs — 586 — 586

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

Depreciation and amortization 43,577 45,457

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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 loss attributable to common shareholders, calculated in accordance with GAAP, excluding loss on impairment of real estate, any gain or loss on sale of real estate, equity in earnings of unconsolidated joint venture and any realized and unrealized gains or losses on equity securities, plus real estate depreciation and amortization of consolidated properties and our proportionate share of FFO of unconsolidated joint venture properties and minus FFO adjustments attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us.

In calculating Normalized FFO attributable to common shareholders, we adjust for the items shown below including similar adjustments for the unconsolidated joint venture, if any.

FFO attributable to common shareholders 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 any gain or loss on sale of real estate and equity in earnings of unconsolidated joint venture;

(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.

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

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Net loss attributable to common shareholders $ (23,403) $ (24,809)

Depreciation and amortization 43,912 48,519 134,278 114,096

Equity in earnings of unconsolidated joint venture (1,723) (3,961)

Loss on equity securities — — — 5,758

Share of FFO from unconsolidated joint venture 1,446 1,678 4,416 5,115

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

Loss on sale of real estate — 974

Depreciation and amortization 43,577 45,457

Share of FFO from unconsolidated joint venture 1,459 1,468

FFO adjustments attributable to noncontrolling interest (10,460) (11,213)

FFO attributable to common shareholders 7,945 (10,134) 23,236 (4,033)

Loss on early extinguishment of debt — 21,370 359 22,198

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

— 32,016 — 80,992

Normalized FFO adjustments attributable to noncontrolling interest — (28,379) (140) (28,379)

Normalized FFO attributable to common shareholders $ 7,945 $ 14,873 $ 23,455 $ 70,778

FFO and Normalized FFO attributable to common shareholders $ 9,450 $ 7,916

Weighted average common shares outstanding (basic and diluted) 65,556 65,309

65,488 65,250 65,389 65,228

Per common share data (basic and diluted):

FFO attributable to common shareholders $ 0.12 $ (0.16) $ 0.36 $ (0.06)

Normalized FFO attributable to common shareholders $ 0.12 $ 0.23 $ 0.36 $ 1.09

(1) Amounts for the three and nine months ended September 30, 2022 primarily include certain debt issuance costs recognized as interest expense related to the then existing bridge loan facility and other transaction related costs expensed under GAAP.

FFO and Normalized FFO attributable to common shareholders $ 0.14 $ 0.12

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 September 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 6.5% of our annualized rental revenues were from leases expiring over the next 12 months.

As of March 31, 2024, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 76.6% of our annualized rental revenues and only 5.5% 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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• control our operating cost increases, including interest and other financing costs;

• purchase additional properties that produce cash flows in excess of our costs of acquisition capital and property operating expenses;

• develop properties to produce cash flows in excess of our costs of capital;

• 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 condensed consolidated statements of cash flows:

Nine Months Ended September 30,

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

Three Months Ended March 31,

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period $ 245,723 $ 140,780

Net cash provided by (used in):

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Financing activities (5,465) (6,223)

Cash and cash equivalents and restricted cash at end of period $ 222,503 $ 126,669

The decrease in net cash provided by operating activities for the nine months ended September 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 in net cash provided by investing activities is primarily due to our acquisition of MNR in February 2022 as compared to no acquisitions 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.

Cash and cash equivalents and restricted cash and cash equivalents at end of period $ 236,477 $ 145,159

The increase in net cash provided by operating activities for the three months ended March 31, 2024 compared to the 2023 period is primarily due to higher cash flows from our properties and favorable changes in working capital in the 2024 period.

The change in net cash used in investing activities for the 2024 period compared to net cash provided by investing activities for the 2023 period is primarily due to costs associated with the purchase of an interest rate cap for $26,175 in the 2024 period.

The decrease in net cash used in financing activities was primarily due to a decrease in principal repayments on our amortizing loans.

Our Investing and Financing Liquidity and Resources (dollars in thousands, except per share and per square foot data)

Our future acquisition or development activity cannot be accurately projected because such activity depends upon available opportunities that come to our attention, our ability to successfully acquire and develop properties, financing available to us, our cost of capital, other commitments we have made and alternative uses for the amounts that would be required for the acquisition or development, the extent of our leverage, and the expected impact of the acquisition or development on certain of our financial metrics and debt covenants.

We generally do not intend to purchase “turn around” properties, or properties that do not generate positive cash flows, but we may conduct construction or redevelopment activities on our properties.

As of September 30, 2023, we had cash and cash equivalents, excluding restricted cash, of $83,283.

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.

As of March 31, 2024, we had cash and cash equivalents, excluding restricted cash and cash equivalents, of $128,394.

To maintain our qualification for taxation as a REIT under the Internal Revenue Code of 1986, as amended, 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.

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 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 on SOFR of 2.25%, for both the three and nine months ended September 30, 2023.

Beginning in October 2023, 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.

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%, including the impact of our interest rate cap on SOFR of 3.40%, for both the three and nine months ended September 30, 2023.

The weighted average annual interest rate payable under the Floating Rate Loan was 4.94% and 4.23% for the three months ended September 30, 2022 and the period from February 25, 2022 to September 30, 2022, respectively.

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.

The one year options to extend the Floating Rate Loan and the ILPT 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%.

As of September 30, 2023, we had an aggregate principal amount of $4,330,370 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

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 condensed consolidated financial statements.

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

The portion of this joint venture's net loss not attributable to us, or $10,238 and $38,318, for the three months ended September 30, 2023 and 2022, respectively, and $31,642 and $49,360 for the nine months ended September 30, 2023 and for the period from February 25, 2022 to September 30, 2022, respectively, is reported as net loss attributable to noncontrolling interest in our condensed consolidated statements of comprehensive income (loss).

As of September 30, 2023, our consolidated joint venture had total assets of $3,065,834 and total liabilities of $1,781,222.

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 condensed consolidated statements of comprehensive income (loss).

In addition, the unconsolidated joint venture made aggregate cash distributions to us of $5,390 and $1,320 during the three months ended September 30, 2023 and 2022, respectively, and $7,370 and $3,962 for the nine months ended September 30, 2023 and 2022, respectively.

For further information regarding these joint ventures, see Note 2 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We expect to use proceeds we may receive from the other investors in our joint ventures in connection with any additional properties we may sell to our joint ventures, equity contributions from any third party investors in our joint ventures or any future joint ventures and net proceeds from offerings of equity or debt securities to fund any future property acquisitions, developments and redevelopments.

We 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 debt, we intend to explore refinancing alternatives, property sales or sales of equity interests in joint ventures.

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.

The completion and the costs of any future financings will depend primarily upon our success in operating our business and upon market conditions.

In particular, the feasibility and cost of any future debt financings will depend primarily on our then current credit qualities and on market conditions.

We have no control over market conditions.

Potential lenders in future debt transactions will evaluate our ability to fund required debt service and repay principal balances when they become due by reviewing our financial condition, results of operations, business practices and plans and our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes.

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

During the nine months ended September 30, 2023, we paid quarterly cash distributions to our shareholders totaling $1,968 using cash balances.

On October 12, 2023, we declared a regular quarterly distribution to common shareholders of record on October 23, 2023 of $0.01 per share, or approximately $658.

We expect to pay this distribution to our shareholders on or about November 16, 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 and nine months ended September 30, 2023 and 2022, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows:

Three Months Ended Nine Months Ended

September 30, September 30,

2023 2022 2023 2022

Real Estate Activities

During the three months ended March 31, 2024 and 2023, amounts capitalized for tenant improvements and leasing costs, building improvements and development and redevelopment activities were as follows:

Three Months Ended March 31,

Tenant improvements and leasing costs (1)

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Building improvements (2)

2,720 1,292 4,373 1,778

Development, redevelopment and other activities (3)

$ 3,373 $ 4,931

$ 5,275 $ 8,574 $ 17,857 $ 22,419

(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 September 30, 2023, we had estimated unspent leasing related obligations of $5,923, of which $3,529 is expected to be spent during the next 12 months.

Debt Covenants (dollars in thousands)

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

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

(2) $1,400,000 outstanding principal amount of the Floating Rate Loan secured by 82 properties owned by our consolidated joint venture;

(3) $700,000 outstanding principal amount of a mortgage loan secured by 17 our properties;

(4) $650,000 outstanding principal amount of a mortgage loan secured by 186 of our Hawaii Properties;

and (5) $345,370 aggregate principal amount of mortgage loans secured by 12 properties owned by our consolidated joint venture in which we own a 61% equity interest.

For further information regarding our indebtedness, see Note 4 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The agreements and related documents governing the ILPT Floating Rate Loan, 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 September 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, 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.

As of March 31, 2024, we had estimated unspent leasing related obligations of $5,981, all of which is expected to be spent during the next 12 months.

Consolidated Joint Venture

We own a 61% equity interest in our consolidated joint venture, 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.

We recognized net loss attributable to noncontrolling interest of our consolidated joint venture in our condensed consolidated financial statements for the three months ended March 31, 2024 and 2023 of $10,514 and $10,728, respectively.

As of March 31, 2024, our consolidated joint venture had total assets of $2,991,343 and total liabilities of $1,771,327.

Unconsolidated Joint Venture

We own a 22% equity interest in the unconsolidated joint venture, 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 the unconsolidated joint venture in our condensed consolidated statements of comprehensive income (loss).

The unconsolidated joint venture made aggregate cash distributions to us of $990 during the three months ended March 31, 2024 and 2023, respectively.

For further information regarding these joint ventures, see Note 3 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The ILPT Floating Rate Loan, which is 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 plus a weighted average premium of 3.93%.

The weighted average interest rate under the ILPT Floating Rate Loan was 6.18%, including the impact of our interest rate cap on SOFR of 2.25%, as of March 31, 2024 and December 31, 2023, and for the three months ended March 31, 2024 and 2023.

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.

The Mountain Floating Rate Loan was scheduled to mature in March 2024, subject to three, one year extension options, and required that interest be paid at an annual rate of SOFR plus a premium of 2.77%.

In March 2024, our consolidated joint venture exercised the first of its three, one year options to extend the maturity date of this loan.

As part of the extension, our consolidated joint venture purchased a one year interest rate cap for $26,175 with a SOFR strike rate equal to 3.04%, which replaced the previous interest rate cap with a SOFR strike rate equal to 3.40%.

As of March 31, 2024 and December 31, 2023, the interest rate under the Mountain Floating Rate Loan was 5.81% and 6.17%, respectively.

The weighted average interest rate under the Mountain Floating Rate Loan was 6.09% and 6.17% for the three months ended March 31, 2024 and 2023, respectively, including the impact of our interest rate caps.

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

The one year options to extend the ILPT Floating Rate Loan and the Mountain Floating Rate Loan require, among other things, that we obtain a replacement interest rate cap, as defined in the applicable agreement.

As of March 31, 2024, we had an aggregate principal amount of $4,321,478 of indebtedness, including the ILPT Floating Rate Loan, the Mountain Floating Rate Loan, the $700,000 mortgage loan and the $650,000 mortgage loan, scheduled to mature between 2024 and 2038.

The agreements and related documents governing the ILPT Floating Rate Loan, the Mountain Floating Rate Loan, our $700,000 mortgage loan and our $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, 2024, we believe that we were in compliance with all of the covenants and other terms under the agreements governing these loans.

For further information regarding our indebtedness, see Notes 5 and 6 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Distributions

During the three months ended March 31, 2024, we paid quarterly cash distributions to our shareholders totaling $658 using cash on hand.

On April 11, 2024, we declared a regular quarterly distribution to common shareholders of record on April 22, 2024 of $0.01 per share, or approximately $658.

We expect to pay this distribution to our shareholders on or about May 16, 2024 using cash on hand.

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