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Item 1. Business

2024-02-15 compared with 2023-02-15 · 125 added, 160 removed, 650 unchanged (30% of the section changed)

We are a real estate investment trust, or REIT, formed in 2009 under Maryland law.

As of December 31, 2022, our wholly owned properties were comprised of 160 properties containing approximately 21.0 million rentable square feet (all square footage amounts included within this Annual Report on Form 10-K are unaudited) and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 0.4 million rentable square feet.

As of December 31, 2023, our wholly owned properties were comprised of 152 properties containing approximately 20.5 million rentable square feet (all square footage amounts included within this Annual Report on Form 10-K are unaudited) and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that owned three properties containing approximately 0.5 million rentable square feet.

As of December 31, 2023, our properties have an undepreciated carrying value of approximately $4.1 billion and a depreciated carrying value of approximately $3.4 billion, excluding properties classified as held for sale.

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Our Business Strategy

Our business plan is to focus on acquiring, owning, developing and leasing high-quality office and mixed-use properties in select, growth-oriented U.S.

Our business plan is to focus on owning and leasing high-quality office and mixed-use properties in select, growth-oriented U.S.

We seek to diversify our revenue base across geographies with ownership in central business district, urban infill and suburban locations.

Our approach emphasizes properties, markets or locations with high barriers to entry, qualities and characteristics to attract and retain talent and investment toward sustainability efforts.

Our internal growth strategy is to increase the rents and corresponding cash flows we receive from our current properties and to increase occupancy by leasing vacant space.

To achieve these increases, we may invest in our properties through improvements requested by existing tenants or induce lease renewals or new tenant leases when our current leases expire or through development, redevelopment or repositioning activities.

As our lease expirations approach, we will attempt to evaluate the highest and best use for a property and focus on proactive asset management to renew our leases with existing tenants or to enter leases with new tenants to enhance long-term cash flow growth and asset values.

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We believe that if a property previously occupied by a single or majority tenant becomes vacant, it may be capital and time intensive to restabilize, redevelop or reposition depending on various factors including market conditions.

We expect to selectively sell properties from time to time when we determine we have maximized value, our continued ownership or ongoing required capital expenditures will not achieve desired returns or when we believe we can successfully pursue more desirable opportunities than retaining those properties.

We also expect to use sales proceeds to manage leverage levels and to acquire new properties or portfolios that we believe will help diversify our revenue base, improve the average age of our properties, lengthen our weighted average lease term, reduce our ongoing capital requirements and/or increase our distributions to shareholders.

We refer to this as our capital recycling program.

Our Growth Strategy

Our internal growth strategy is to attempt to increase the rents and corresponding cash flows we receive from our current properties and to increase occupancy by leasing vacant space.

To achieve these increases, we may invest in our properties through development, redevelopment or repositioning activities or through improvements requested by existing tenants or to induce lease renewals or new tenant leases when our current leases expire or vacant space is leased.

However, as noted above, our ability to increase occupancy or to maintain or increase the rents and corresponding cash flows we receive from our current properties will depend in large part upon market conditions, which are beyond our control.

Our external growth strategy is defined by our investment policies, including our capital recycling program, and our acquisition, disposition and financing policies.

Our external growth strategy is defined by our acquisition, disposition and financing policies as described below.

Our investment, financing and disposition policies and business strategies are established by our Board of Trustees and may be changed by our Board of Trustees at any time without shareholder approval.

Commercial Real Estate and Capital Markets

Certain changes in office space utilization, including increased remote work arrangements and tenants consolidating their real estate footprint, continue to impact the market.

The utilization and demand for office space continues to face headwinds and the duration and ultimate impact of current trends on the demands for office space at our properties remains uncertain and subject to change.

Accordingly, we do not yet know what the full extent of the impacts will be on our or our tenants’ businesses and operations nor the long-term outlook for leasing our properties.

Higher interest rates, inflationary pressures, geopolitical hostilities and tensions, and concerns that the U.S.

economy may enter an economic recession have caused disruptions in the financial markets and these factors could adversely affect our and our tenants’ financial condition and the ability or willingness of our tenants to renew our leases or pay rent to us.

Deteriorating office fundamentals, high interest rates and market sentiment towards the office sector may restrict our access to, and would likely increase our cost of, capital and may cause the values of our properties and our securities to decline.

Our Investment Policies

Our primary investment objectives include acquiring properties or portfolios that enhance our overall portfolio composition and produce greater returns than those properties or portfolios we are disposing in connection with our capital recycling program.

We intend to acquire properties or portfolios with a goal of improving our asset diversification, our geographical footprint and the average age of our properties, lengthening the weighted average term of our leases and increasing tenant

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retention, and increasing our distributions to shareholders.

Our primary investment objectives include increasing cash flows from operations from stable and diverse sources.

We seek to acquire properties or portfolios that enhance our overall portfolio composition and produce greater returns than those

properties or portfolios we may sell.

We intend to acquire properties or portfolios with a goal of improving our asset diversification, our geographical footprint and the average age of our properties and lengthening the weighted average term of our leases and increasing tenant retention.

To achieve these objectives, we seek to:

(a) invest in institutional quality properties with an emphasis on high credit quality tenants;

(b) use proceeds from our capital recycling program to manage leverage levels and to fund additional investments we believe appropriate;

(b) use proceeds from asset sales to manage leverage levels and to fund additional investments we believe appropriate;

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We also expect to seek investments primarily in first generation properties where we believe there is a reasonably high likelihood of renewing the tenants in place and where we expect ongoing capital needs to be relatively modest when compared to older properties.

We expect to use the extensive nationwide resources of our manager, The RMR Group LLC, or RMR, to locate and manage the acquisition of such properties.

We expect to use the extensive nationwide resources of our manager, RMR, to locate and manage the acquisition of such properties.

We expect most of our future acquisitions will be office properties;

however, we may consider acquiring other types of properties, including properties with specialty uses and properties which have a mix of retail or housing uses, or acquiring properties with the purpose of redeveloping them in conjunction with properties we own.

however, we may consider acquiring other types of properties.

We also expect to further diversify our sources of rents, which we expect would improve the security of our revenues.

In implementing our acquisition strategy, we consider a range of factors relating to proposed property purchases, including:

• the return on the properties being sold to finance acquisitions or property developments, redevelopments or repositionings compared to the projected returns we may realize by owning the property we would acquire or develop, redevelop or reposition;

• our cost of capital compared to the projected returns we may realize by owning the property;

• the pricing of comparable properties as evidenced by recent arm’s length market sales;

• the strategic fit of the property with the rest of our properties and how it may strategically improve key attributes of our portfolio, including alignment with our Environmental, Social and Governance, or ESG, principles;

• the ongoing and expected capital requirements for the property;

• the market location of the property and our assessment of rent growth for that market;

• the likelihood of the tenant(s) renewing at lease expiration;

• the type of property (e.g., single tenant, multi-tenant, specialty use, etc.);

• the growth, tax and regulatory environments of the market in which the property is located;

• the occupancy and demand for similar properties in the same or nearby markets;

• the current or potential market position of the property;

• the historic and projected rents received and likely to be received from the property;

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• the remaining term of the lease(s) at the property and other lease terms;

• the industry(ies) in which the tenant(s) operate;

• the experience and credit quality of the property’s tenant(s);

• the pricing of comparable properties as evidenced by recent arm’s length market sales;

• the price at which the property may be acquired or redeveloped;

• the existence of alternative sources, uses or needs for our capital, including our debt leverage;

• the ongoing and expected capital requirements for the property;

• the current or potential market position of the property;

• the type of property (e.g., single tenant, multi-tenant, specialty use, etc.);

• the likelihood of the tenant(s) renewing at lease expiration;

• the market location of the property and our assessment of rent growth for that market;

• the industry(ies) in which the tenant(s) operate;

• the current and expected future space utilization at the property by its tenant(s);

• the construction quality, physical condition, age and design of the property;

• the use and size of the property;

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• the price at which the property may be acquired or redeveloped;

• the construction quality, physical condition, age and design of the property;

• the growth, tax and regulatory environments of the market in which the property is located;

• the occupancy and demand for similar properties in the same or nearby markets;

• the estimated replacement cost of the property.

• the existence of alternative sources, uses or needs for our capital, including our debt leverage.

Other Acquisitions.

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However, we may invest in leaseholds, joint ventures, mortgages and other real estate interests.

We currently own 51% and 50% interests in two unconsolidated joint ventures.

As of December 31, 2023, we owned 51% and 50% interests in two unconsolidated joint ventures.

In the future, we may invest in or enter into additional real estate joint ventures if we conclude that by doing so we may benefit from the participation of co-venturers, or that our opportunity to participate in the investment is contingent on the use of a joint venture structure or that pre-existing joint venture arrangements may be part of an acquisition we wish to make.

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• the existence of alternative sources, uses or needs for capital, including our debt leverage.

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Our Board of Trustees may change our disposition policies without a vote of, or notice to, our shareholders.

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Accordingly, we generally will not be able to retain sufficient cash to fund our operations, repay our debts, invest in our properties and fund acquisitions and development, redevelopment and repositioning efforts.

We expect to use proceeds from our capital recycling program to fund acquisitions and development, redevelopment and repositioning efforts and to manage leverage at levels we believe appropriate.

We also expect to repay our debts, invest in our properties and fund acquisitions and development, redevelopment and repositioning efforts with borrowings under our revolving credit facility (as defined below), proceeds from debt or equity securities we may issue or retained cash from operations that may exceed our distributions paid.

We expect to repay our debts, invest in our properties and fund acquisitions and development, redevelopment and repositioning efforts with borrowings under our revolving credit facility, proceeds from debt or equity securities we may issue, proceeds from our asset sales or retained cash from operations that may exceed our distributions paid.

To the extent we obtain additional debt financing, we may do so on an unsecured or a secured basis.

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We may also finance acquisitions by assuming debt or through the issuance of equity or other securities.

The proceeds from any of our financings may be used to pay distributions, to provide working capital, to refinance existing indebtedness or to finance acquisitions or property developments, redevelopments or repositionings.

Although there are no limitations in our organizational documents on the type or amount of indebtedness we may incur, the borrowing limitations established by the covenants in the credit agreement governing our revolving credit facility, or our credit agreement, and our senior unsecured notes indentures and their supplements currently restrict our ability to incur indebtedness and require us to comply with certain financial and other covenants.

However, we may seek to amend these covenants or seek replacement financings with less restrictive covenants.

In the future, we may decide to seek changes in the financial covenants which currently restrict our debt leverage based upon then current economic conditions, the relative availability and costs of debt versus equity capital and our need for capital to take advantage of acquisition opportunities or otherwise.

We currently have a $750.0 million unsecured revolving credit facility, or our revolving credit facility, that we use for working capital and general business purposes, including to fund acquisitions and development, redevelopment and repositioning efforts on an interim basis until we may refinance with term debt or equity.

In some instances, we may assume outstanding mortgage debt in connection with our acquisitions or place new mortgages on properties we own.

For more information regarding our financing sources and activities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K.

Generally, we intend to manage our leverage in a way that may allow us to achieve and maintain “investment grade” ratings from nationally recognized rating organizations.

However, we cannot be sure that we will be able to achieve and maintain our investment grade ratings in the future.

The proceeds from any of our financings may be used to provide working capital, to refinance existing indebtedness or to finance acquisitions or property developments, redevelopments or repositionings or pay distributions.

Although there are no limitations in our organizational documents on the type or amount of indebtedness we may incur, the borrowing limitations established by the covenants in our credit agreement (as defined below) and our senior notes indentures and their supplements currently restrict our ability to incur indebtedness and require us to comply with certain financial and other covenants.

Generally, we intend to manage our leverage in a way that may allow us to achieve “investment grade” ratings from nationally recognized rating organizations.

However, we cannot be sure that we will be able to achieve investment grade ratings in the future.

Our Board of Trustees may change our financing policies at any time without a vote of, or notice to, our shareholders.

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RMR has a principal place of business at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and its telephone number is (617) 796-8390.

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RMR is an alternative asset management company that is focused on commercial real estate and related businesses.

RMR or its subsidiaries also act as a manager to other publicly traded real estate companies, privately held real estate funds and real estate related operating businesses.

As of the date of this Annual Report on Form 10-K, the executive officers of RMR are:

As of February 14, 2024, the executive officers of RMR are:

Portnoy, President and Chief Executive Officer;

Christopher J.

Bilotto, Executive Vice President;

Clark, Executive Vice President, General Counsel and Secretary;

Francis, Executive Vice President, Matthew P.

Jordan, Executive Vice President, Chief Financial Officer and Treasurer;

Murray, Executive Vice President.

and Jonathan M.

Pertchik, Executive Vice President.

Our President and Chief Operating Officer, Christopher J.

Bilotto, is a Senior Vice President of RMR.

Our Chief Financial Officer and Treasurer, Matthew C.

Brown, is also a Senior Vice President of RMR.

Other officers of RMR also serve as officers of other companies to which RMR or its subsidiaries provide management services.

Our President and Chief Operating Officer, Yael Duffy, and our Chief Financial Officer

and Treasurer, Brian E.

Donley, are Senior Vice Presidents of RMR.

Donley and other officers of RMR also serve as officers of other companies to which RMR or its subsidiaries provide management services.

Corporate Sustainability.

Since our inception in 2009, we have been guided by ESG principles, and believe corporate sustainability must be a strategic focus as part of our focus on operational practices, enhancing our competitive position, development and redevelopment efforts and economic performance.

Our manager, RMR, periodically publishes its Sustainability Report, which summarizes the environmental, social and governance initiatives employed by RMR and its client companies, including us.

RMR’s Sustainability Report may be accessed on the RMR Inc.

website at www.rmrgroup.com/corporate-sustainability/default.aspx.

The information on or accessible through RMR Inc.’s website is not incorporated by reference into this Annual Report on Form 10-K.

We believe corporate sustainability is a strategic part of our focus on operational practices, enhancing our competitive position, development and redevelopment efforts and economic performance.

Our sustainability practices, which align with those of our manager, RMR — minimizing our impact on the environment, embracing the communities where we operate and attracting top professionals — are critical elements supporting our long-term success.

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Our environmental sustainability strategies and best practices help to mitigate our properties’ environmental footprint, optimize operational efficiency and enhance our competitiveness in the marketplace.

We seek to obtain certifications that measure progress in environmental sustainability, which helps to benchmark performance and mitigate risk.

In July 2022, RMR announced its zero emissions goal pursuant to which it has pledged to reduce scope 1 and 2 emissions by 2050 with a 50% reduction commitment by 2030 from a 2019 baseline.

We and our manager, RMR, drive value, manage risk and benchmark the performance of our properties by effectively capturing and managing data through real-time energy monitoring, or RTM.

RTM facilitates advanced data analytics and access to detect faults and inefficiencies in equipment operations faster meanwhile enhancing building system control in a cost-effective and scalable way.

RMR’s RTM program captures 38 of our properties totaling approximately 56% of our annual electricity spend and generated $1.7 million in cumulative savings to date, of which $0.2 million was generated in 2022.

Our energy performance programs drive down energy consumption and reduce carbon emissions of our properties.

Lower energy use and emissions reduce our properties' potential exposure to policies that call for a carbon tax or other emissions-based penalties.

Our existing business practices are intended to align with the Task Force on Climate-related Financial Disclosures framework across both physical and transition risks and opportunities.

With respect to our development and redevelopment activities, RMR considers how to best incorporate ESG as part of the overall goal of any development or redevelopment project at our properties.

Each potential project’s design phase begins with an evaluation of potential environmental certifications, including Leadership in Energy and Environmental Design, or LEED®, and the WELL Building Standard criteria, among others.

This process also includes sustained outreach to the respective municipality and surrounding communities to garner feedback and understand local concerns.

Project requirements are then aligned with planning objectives established by neighborhood associations and permitting boards.

In reaction to the Energy Policy Act of 2005, the U.S.

government has instituted “green lease” policies which include the “Promotion of Energy Efficiency and Use of Renewable Energy” as one of the factors it considers when leasing property.

The Energy Independence and Security Act of 2007 also allows the General Services Administration to give preference to properties for lease that have received an “ENERGY STAR” certification.

Our sustainability and community engagement strategies focus on a complementary set of objectives, including the following:

• Responsible Investment.

We seek to invest capital in our properties that both improves environmental performance and enhances asset value.

During the property acquisition due diligence and annual budgeting processes, RMR assesses, among other things, environmental sustainability opportunities and physical and policy driven climate related risks.

• Environmental Stewardship.

We seek to improve the environmental footprint of our properties, including by reducing carbon emissions, energy consumption and water usage, especially when doing so may reduce operating costs and exposure to policies that call for a carbon tax or other emissions-based penalties and enhance the properties’ competitive position.

Our existing business practices are intended to align with the Task Force on Climate-Related Financial Disclosures framework across both the physical and transition risks and opportunities.

With respect to our development and redevelopment activities, RMR considers how to best incorporate sustainability goals as part of the overall goal of any development or redevelopment project at our properties.

In 2022, RMR announced its commitment to a goal of net zero emissions by 2050 with a 50% reduction commitment by 2030 from a 2019 baseline as it relates to Scope 1 and 2 emissions for all properties for which it directly manages energy.

We and our manager, RMR, drive value, manage risk and benchmark the performance of our properties by effectively capturing and managing data and by achieving environmental and energy efficiency certifications and designations.

RMR’s real-time energy monitoring program, or RTM, facilitates advanced data analytics to detect faults and inefficiencies in equipment operations while enhancing building system control in a cost-effective and scalable way.

RMR’s RTM program captures 53 of our properties totaling approximately 72% of our annual electricity spend and generating approximately $1.7 million in annual savings.

Furthermore, properties that reach specified levels of sustainability and energy efficiency may receive potential environmental designations and certifications, such as Leadership in Energy and Environmental Design, or LEED®, designations and/or “ENERGY STAR” certifications.

LEED designations are administered by the U.S.

Green Building Council.

The ENERGY STAR program is a joint program of the U.S.

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Department of Energy which is focused on promoting energy efficient products and properties.

Properties that reach a specified level of energy efficiency may receive the ENERGY STAR recognition for a period of 12 months before the requirement that they be recertified.

Furthermore, certain properties are not eligible for ENERGY STAR certification.

For example, lab uses, medical office properties and properties less than 50% occupied cannot be ENERGY STAR certified.

In May 2022, we were recognized as an Energy Star Partner of the Year for the fifth consecutive year and a Sustained Excellence honoree for the third consecutive year.

As of December 31, 2022, 43 of our properties containing 6.6 million rentable square feet (28.5% and 33.6% of our eligible properties and eligible rentable square feet, respectively) are ENERGY STAR certified.

Government’s “green lease” policies also permit government tenants to require LEED® designation in selecting new premises or renewing leases at existing premises.

The LEED® designation program is administered by the U.S.

Green Building Council, a nonprofit organization focused on promoting environmental sustainability for the built environment.

Properties that reach specified levels of sustainability may receive a LEED® designation.

As of December 31, 2022, 37 of our

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properties containing 6.1 million rentable square feet (23.1% and 28.9% of our total properties and total rentable square feet, respectively) were LEED® designated.

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 manager, RMR, is a member of the “ENERGY STAR” partner program, and a member of the U.S.

Green Building Council.

In June 2022, we were selected by the U.S.

Department of Energy’s Better Buildings Alliance and Institute for Market Transformation as a Gold Level Green Lease Leader, which highlights our commitment to environmental stewardship.

We believe our efforts to obtain additional ENERGY STAR labels, LEED® and/or other designations and managing our properties in a sustainable manner benefits our business while also bettering the environment.

Additionally, RMR releases an annual Sustainability Report, which summarizes the ESG initiatives RMR and its clients, including OPI, employ.

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 by reference into this Annual Report on Form 10-K.

For more information, see “Risk Factors—Risks Related to Our Business—ESG initiatives, requirements and market expectations may impose additional costs and expose us to new risks” included in Part I, Item 1A of this Annual Report on Form 10-K.

Environmental Matters.

Ownership of real estate is subject to risks associated with environmental matters.

Prior to acquiring properties, we perform environmental site assessments during due diligence and where there are concerns we do additional monitoring and periodic assessments.

We require our tenants to maintain compliance with environmental laws and we also monitor any known conditions.

Although we do not believe that there are environmental conditions at any of our properties that will materially and adversely affect us, we cannot be sure that such conditions or costs we may be required to incur in the future to address environmental contamination will not materially and adversely affect us.

Board Diversity.

Government’s “green lease” policies permit government tenants to require LEED® designation in selecting new premises or renewing leases at existing premises and the General Services Administration gives preference to properties for lease that have received an ENERGY STAR certification.

As of December 31, 2023, our LEED designations and ENERGY STAR certifications were as follows:

49 properties containing 7.2 million rentable square feet (32.2% and 35.1% of our total properties and total rentable square feet, respectively).

• ENERGY STAR:

43 properties containing 6.7 million rentable square feet (30.5% and 35.2% of our eligible properties and eligible rentable square feet, respectively).

In March 2023, we were recognized as an Energy Star Partner of the Year for the sixth consecutive year and a Sustained Excellence honoree for the fourth consecutive year.

• Investments in Human Capital.

We have no employees.

We rely on our manager, RMR, to hire, train, and develop a workforce that meets the needs of our business, contributes positively to our society and helps reduce our impact on the natural environment.

• Corporate Citizenship.

We seek to be a responsible corporate citizen and to strengthen the communities in which we own properties.

Our manager, RMR, regularly encourages its employees to engage in a variety of charitable and community programs, including participation in a company-wide service day and a charitable giving matching program.

• Diversity & Inclusion.

We value a diversity of backgrounds, experience and perspectives.

As of December 31, 2023, our Board of Trustees was comprised of nine Trustees, of which seven were independent trustees, four, or approximately 44%, were female and one, or approximately 11%, was a member of under-represented communities.

RMR is an equal opportunity employer, with all qualified applicants receiving consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability or protected veteran status.

For more information, see “Risk Factors—Risks Related to Our Business—Sustainability initiatives, requirements and market expectations may impose additional costs and expose us to new risks.” included in Part I, Item 1A of this Annual Report on Form 10-K.

Investing in and operating real estate properties is a highly competitive business.

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government, state governments and other government tenants as well as non-government tenants.

Some of our leases allow government and non-government tenants to vacate the leased premises before the stated expirations of their leases with little or no liability, or with penalty, by exercising early termination rights.

Some of our leases allow tenants to vacate the leased premises before the stated expirations of their leases with little or no liability, or with penalty, by exercising early termination rights.

For additional information about our tenants’ rights to terminate leases early, see “Risk Factors—Risks Related to Our Business—Some tenants have the right to terminate their leases prior to their lease expiration date” included in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Property Operations” included in Part II, Item 7 of this Annual Report on Form 10-K.

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For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 and our Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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Internet Website.

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We also have a policy outlining procedures for handling concerns or complaints about accounting, internal accounting controls or auditing matters and a governance hotline accessible on our website that shareholders can use to report concerns or complaints about accounting, internal accounting controls or auditing matters or violations or possible violations of our Code of Conduct.

We make available, free of charge, through the “Investors” section of our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to the Securities and Exchange Commission, or SEC.

Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to the Securities and Exchange Commission, or SEC.

Any material we file with or furnish to the SEC is also maintained on the SEC website, www.sec.gov.

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Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

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The sections of the IRC that govern the federal income tax qualification and treatment of a REIT and its shareholders are complex.

This presentation is a summary of applicable IRC provisions, related rules and regulations, and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect.

This presentation is a summary of applicable IRC provisions, related rules and regulations, and administrative and

judicial interpretations, all of which are subject to change, possibly with retroactive effect.

Future legislative, judicial or administrative actions or decisions could also affect the accuracy of statements made in this summary.

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For all these reasons, we urge you and any holder of or prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares.

Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of the date of this Annual Report on Form 10-K.

Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations that are in effect as of February 14, 2024.

If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs.

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Your federal income tax consequences generally will differ depending on whether or not you are a “U.S.

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Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, of which there are none outstanding at this time, and thereafter to distributions made on our common shares.

For all these purposes, our distributions include cash distributions, any in kind distributions of property that we might make, and deemed or constructive distributions resulting from capital market activities (such as some redemptions), as described below.

For all these purposes, our

distributions include cash distributions, any in kind distributions of property that we might make, and deemed or constructive distributions resulting from capital market activities (such as some redemptions), as described below.

Our counsel, Sullivan & Worcester LLP, is of the opinion that we have been organized and have qualified for taxation as a REIT under the IRC for our 2009 through 2023 taxable years, and that our current and anticipated investments and plan of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT under the IRC.

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The opinions of our counsel are based upon the law as it exists today, but the law may change in the future, possibly with retroactive effect.

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LLP nor we can be sure that we will qualify as or be taxed as a REIT for any particular year.

Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, neither Sullivan & Worcester LLP nor we can be sure that we will qualify as or be taxed as a REIT for any particular year.

Any opinion of Sullivan & Worcester LLP as to our qualification or taxation as a REIT will be expressed as of the date issued.

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• We will be taxed at regular corporate income tax rates on any undistributed “real estate investment trust taxable income,” determined by including our undistributed ordinary income and net capital gains, if any.

We may elect to retain and pay inc ome tax on our net capital gain.

We may elect to retain and pay income tax on our net capital gain.

In addition, if we so elect by making a timely designation to our shareholders, a shareholder would be taxed on its proportionate share of our undistributed capital gain and would generally be expected to receive a credit or refund for its proportionate share of the tax we paid.

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• If we acquire a REIT asset where our adjusted tax basis in the asset is determined by reference to the adjusted tax basis of the asset in the hands of a C corporation, under specified circumstances we may be subject to federal income taxation on all or part of the built-in gain (calculated as of the date the property ceased being owned by the C corporation) on such asset.

We generally do not expect to sell assets if doing so would result in the imposition of a

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material built-in gains tax liability;

We generally do not expect to sell assets if doing so would result in the imposition of a material built-in gains tax liability;

but if and when we do sell assets that may have associated built-in gains tax exposure, then we expect to make appropriate provision for the associated tax liabilities on our financial statements.

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Accordingly, we have complied and will continue to comply with these regulations, including by requesting annually from holders of significant percentages of our shares information regarding the ownership of our shares.

Under our declaration of trust, our shareholders are required to respond to

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these requests for information.

Under our declaration of trust, our shareholders are required to respond to these requests for information.

A shareholder that fails or refuses to comply with the request is required by Treasury regulations to submit a statement with its federal income tax return disclosing its actual ownership of our shares and other information.

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When a subsidiary qualifies for taxation as a REIT separate and apart from its REIT parent, the subsidiary’s shares are qualifying real estate assets for purposes of the REIT parent’s 75% asset test described below.

However, failure of the subsidiary to separately satisfy the various REIT qualification requirements described in this summary or that are otherwise applicable (and failure to qualify for the applicable relief provisions) would generally result in (a) the subsidiary being subject to regular U.S.

However, failure of the subsidiary to separately

satisfy the various REIT qualification requirements described in this summary or that are otherwise applicable (and failure to qualify for the applicable relief provisions) would generally result in (a) the subsidiary being subject to regular U.S.

corporate income tax, as described above, and (b) the REIT parent’s ownership in the subsidiary (i) ceasing to be qualifying real estate assets for purposes of the 75% asset test and (ii) becoming subject to the 5% asset test, the 10% vote test and the 10% value test, each as described below, generally applicable to a REIT’s ownership in corporations other than REITs and TRSs.

In such a situation, the REIT parent’s own qualification and taxation as a REIT could be jeopardized on account of the subsidiary’s failure cascading up to the REIT parent, all as described below under the heading “—Asset Tests”.

We have made and expect to make protective TRS elections with respect to our subsidiary REITs and may implement other protective arrangements intended to avoid a cascading REIT failure if any of our intended subsidiary REITs were not to qualify for taxation as a REIT, but we cannot be sure that such protective elections or other arrangements will be effective to avoid or mitigate the resulting adverse consequences to us.

We have made and expect to make protective TRS elections with respect to any subsidiary REIT that we form or acquire and may implement other protective arrangements intended to avoid a cascading REIT failure if any of our intended subsidiary REITs were not to qualify for taxation as a REIT, but we cannot be sure that such protective elections or other arrangements will be effective to avoid or mitigate the resulting adverse consequences to us.

Taxable REIT Subsidiaries.

As a REIT, we are permitted to own any or all of the securities of a TRS, provided that no more than 20% of the total value of our assets, at the close of each quarter, is comprised of our investments in the stock or other securities of our TRSs.

Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or

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indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS.

Very generally, a TRS is a subsidiary corporation other than a REIT in which a REIT directly or indirectly holds stock and that has made a joint election with such REIT to be treated as a TRS.

A TRS is taxed as a regular C corporation, separate and apart from any affiliated REIT.

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Second, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test, other types of interest and dividends, gain from the sale or disposition of stock or securities, or any combination of these.

Gross income from our sale of property that we hold primarily for sale to customers in the ordinary course of business, income and gain from specified “hedging transactions” that are clearly and timely identified as such, and income from the repurchase or discharge of indebtedness is excluded from both the numerator and the denominator in both gross income tests.

gross income tests.

In addition, specified foreign currency gains will be excluded from gross income for purposes of one or both of the gross income tests.

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Our declaration of trust generally disallows transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our qualification for taxation as a REIT under the IRC.

Nevertheless, we cannot be sure that these restrictions will be

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effective to prevent our qualification for taxation as a REIT from being jeopardized under the 10% affiliated tenant rule.

Nevertheless, we cannot be sure that these restrictions will be effective to prevent our qualification for taxation as a REIT from being jeopardized under the 10% affiliated tenant rule.

Furthermore, we cannot be sure that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of our shares attributed to them under the IRC’s attribution rules.

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Thus, if a REIT should lease foreclosure property in exchange for rent that qualifies as “rents from real property” as described above, then that rental income is not subject to the foreclosure property income tax.

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Property generally ceases to be foreclosure property at the end of the third taxable year following the taxable year in which the REIT acquired the property, or longer if an extension is obtained from the IRS.

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If we fail to satisfy one or both of the 75% gross income test or the 95% gross income test in any taxable year, we may nevertheless qualify for taxation as a REIT for that year if we satisfy the following requirements:

(a) our failure to meet the test is due to reasonable cause and not due to willful neglect;

(a) our failure to meet the test

is due to reasonable cause and not due to willful neglect;

and (b) after we identify the failure, we file a schedule describing each item of our gross income included in the 75% gross income test or the 95% gross income test for that taxable year.

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Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the 75% and 95% gross income tests outlined above on a continuing basis beginning with our first taxable year as a REIT.

Asset Tests .

At the close of each calendar quarter of each taxable year, we must also satisfy the following asset percentage tests in order to qualify for taxation as a REIT for federal income tax purposes:

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“publicly offered REITs” as defined in Section 562(c)(2) of the IRC, government securities and temporary investments of new capital (that is, any stock or debt instrument that we hold that is attributable to any amount received by us (a) in exchange for our shares or (b) in a public offering of our five-year or longer debt instruments, but in each case only for the one-year period commencing with our receipt of the new capital).

• At least 75% of the value of our total assets must consist of “real estate assets,” defined as real property (including interests in real property and interests in mortgages on real property or on interests in real property), ancillary personal property to the extent that rents attributable to such personal property are treated as rents from real property in accordance with the rules described above, cash and cash items, shares in other REITs, debt instruments issued by “publicly offered REITs” as defined in Section 562(c)(2) of the IRC, government securities and temporary investments of new capital (that is, any stock or debt instrument that we hold that is attributable to any amount received by us (a) in exchange for our shares or (b) in a public offering of our five-year or longer debt instruments, but in each case only for the one-year period commencing with our receipt of the new capital).

• Not more than 25% of the value of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test.

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Based on the discussion above, we believe that we have satisfied, and will continue to satisfy, the REIT asset tests outlined above on a continuing basis beginning with our first taxable year as a REIT.

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Annual Distribution Requirements.

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We will be treated as having sufficient earnings and profits to treat as a dividend any distribution by us up to the amount required to be distributed in order to avoid imposition of the 4% excise tax.

If we do not have enough cash or other liquid assets to meet our distribution requirements, or if we so choose, we may find it necessary or desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our qualification for taxation as a REIT.

maintain our qualification for taxation as a REIT.

We cannot be sure that financing would be available for these purposes on favorable terms, or at all.

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In addition, if we so elect by making a timely designation to our shareholders, our shareholders would include their proportionate share of such undistributed capital gain in their taxable income, and they would receive a corresponding credit for their share of the federal corporate income tax that we pay thereon.

Our shareholders would then increase the adjusted tax basis of their shares

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by the difference between (a) the amount of capital gain dividends that we designated and that they included in their taxable income, and (b) the tax that we paid on their behalf with respect to that capital gain.

Our shareholders would then increase the adjusted tax basis of their shares by the difference between (a) the amount of capital gain dividends that we designated and that they included in their taxable income, and (b) the tax that we paid on their behalf with respect to that capital gain.

Acquisitions of C Corporations

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We will generally depreciate our depreciable real property on a straight-line basis over forty years and our personal property over the applicable shorter periods.

These depreciation schedules, and our initial tax bases, may vary for properties that we acquire through tax-free or carryover basis acquisitions, or that are the subject of cost segregation analyses.

depreciation schedules, and our initial tax bases, may vary for properties that we acquire through tax-free or carryover basis acquisitions, or that are the subject of cost segregation analyses.

We are entitled to depreciation deductions from our properties only if we are treated for federal income tax purposes as the owner of the properties.

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Shareholders.”

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Section 302 of the IRC treats a redemption of our shares for cash only as a distribution under Section 301 of the IRC, and hence taxable as a dividend to the extent of our available current or accumulated earnings and profits, unless the redemption satisfies one of the tests set forth in Section 302(b) of the IRC enabling the redemption to be treated as a sale or exchange of the shares.

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shareholders that we do not designate as a capital gain dividend generally will be treated as an ordinary income dividend to the extent of our available current or accumulated earnings and profits (subject to the lower effective tax rates applicable to qualified REIT dividends via the deduction-without-outlay mechanism of Section 199A of the IRC, which is generally available to our noncorporate U.S.

shareholders that meet specified holding period requirements for taxable years before 2026).

shareholders that meet

specified holding period requirements for taxable years before 2026).

Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends generally will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year.

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shareholders at preferential maximum rates (including any qualified dividend income and any capital gains attributable to real estate depreciation recapture that are subject to a maximum 25% federal income tax rate) so that the designations will be proportionate among all outstanding classes of our shares.

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We may elect to retain and pay income taxes on some or all of our net capital gain.

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These Treasury regulations are written quite broadly, and apply to many routine and simple transactions.

A reportable transaction currently includes, among other things, a sale or exchange of our shares resulting in a tax loss in excess of (a) $10 million in any single year or $20 million in a prescribed combination of taxable years in the case of our shares held by a C corporation or by a partnership with only C corporation partners or (b) $2 million in any single year or $4 million in a prescribed combination of taxable years in the case of our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals.

our shares held by any other partnership or an S corporation, trust or individual, including losses that flow through pass through entities to individuals.

A taxpayer discloses a reportable transaction by filing IRS Form 8886 with its federal income tax return and, in the first year of filing, a copy of Form 8886 must be sent to the IRS’s Office of Tax Shelter Analysis.

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however, distributions treated as a nontaxable return of the shareholder’s basis will not enter into the computation of net investment income.

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Taxation of Tax-Exempt U.S.

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federal income tax liability only in the unlikely event that the non-U.S.

shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below under the heading “—Dispositions of Our Shares.” A non-U.S.

shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed

below under the heading “—Dispositions of Our Shares.” A non-U.S.

shareholder may seek a refund from the IRS of amounts withheld on distributions to it in excess of such shareholder’s allocable share of our current and accumulated earnings and profits.

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Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from U.S.

corporations may not apply to ordinary income dividends from a

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REIT or may apply only if the REIT meets specified additional conditions.

corporations may not apply to ordinary income dividends from a REIT or may apply only if the REIT meets specified additional conditions.

shareholder must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits.

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If, contrary to our expectation, a gain on the sale of our shares is subject to U.S.

federal income taxation (for example, because neither of the above exemptions were then available, i.e.

, that class of our shares were not then listed on a U.S.

federal income taxation (for example, because neither of the above exemptions were then available, i.e., that class of our shares were not then listed on a U.S.

national securities exchange and we were not a “domestically controlled” REIT), then (a) a non-U.S.

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shareholder with respect to its gain (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals), (b) the non-U.S.

shareholder would also be subject to fulsome U.S.

shareholder would also be

subject to fulsome U.S.

federal income tax return reporting requirements, and (c) a purchaser of that class of our shares from the non-U.S.

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federal income tax required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of the property that the shareholder would otherwise receive or own, and the shareholder may bear brokerage or other costs for this withholding procedure.

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Amounts withheld under backup withholding are generally not an additional tax and may be refunded by the IRS or credited against the shareholder’s federal income tax liability, provided that such shareholder timely files for a refund or credit with the IRS.

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The foregoing withholding regime generally applies to payments of dividends on our shares.

In general, to avoid withholding, any non-U.S.

In general, to avoid withholding, any

intermediary through which a shareholder owns our shares must establish its compliance with the foregoing regime, and a non-U.S.

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No prediction can be made as to the likelihood of passage of new tax legislation or other provisions, or the direct or indirect effect on us and our shareholders.

Revisions to tax laws and interpretations of these laws could adversely affect our ability to qualify and be taxed as a REIT, as well as the tax or other

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consequences of an investment in our shares.

Revisions to tax laws and interpretations of these laws could adversely affect our ability to qualify and be taxed as a REIT, as well as the tax or other consequences of an investment in our shares.

We and our shareholders may also be subject to taxation by state, local or other jurisdictions, including those in which we or our shareholders transact business or reside.

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Sales and other transactions between an ERISA Plan or a Non-ERISA Plan and disqualified persons or parties in interest, as applicable, are prohibited transactions and result in adverse consequences absent an exemption.

The particular facts concerning the sponsorship, operations and other investments of an ERISA Plan or Non-ERISA Plan may cause a wide range of persons to be treated as disqualified persons or parties in interest with respect to it.

The particular facts concerning the

sponsorship, operations and other investments of an ERISA Plan or Non-ERISA Plan may cause a wide range of persons to be treated as disqualified persons or parties in interest with respect to it.

A non-exempt prohibited transaction, in addition to imposing potential personal liability upon ERISA Plan fiduciaries, may also result in the imposition of an excise tax under the IRC or a penalty under ERISA upon the disqualified person or party in interest.

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“Plan Assets” Considerations

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investment company registered under the Investment Company Act of 1940, as amended, the assets of the ERISA Plan or Non-ERISA Plan include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant.

Department of Labor has issued a regulation defining “plan assets.” The regulation, as subsequently modified by ERISA, generally provides that when an ERISA Plan or a Non-ERISA Plan otherwise subject to Title I of ERISA and/or Section 4975 of the IRC acquires an interest in an entity that is neither a “publicly offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, as amended, the assets of the ERISA Plan or Non-ERISA Plan include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant.

We are not an investment company registered under the Investment Company Act of 1940, as amended.

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This opinion is conditioned upon certain assumptions and representations, as discussed above under the heading “Material United States Federal Income Tax Considerations—Taxation as a REIT.”

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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-K

Item 1. Business