STAG Industrial, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion with the financial statements and related notes included elsewhere in Item 1 of this report and the audited financial statements and related notes thereto included in our most recent Annual Report on Form 10-K. As used herein, except where the context otherwise requires, “Company,” “we,” “our” and “us,” refer to STAG Industrial, Inc. and our consolidated subsidiaries and partnerships, including our operating partnership, STAG Industrial Operating Partnership, L.P. (the “Operating Partnership”). Forward-Looking Statements This report contains “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. Forward-looking statements in this report include, among others, statements about our future financial condition, results of operations, capitalization rates on future acquisitions, our business strategy and objectives, including our acquisition strategy, occupancy and leasing rates and trends, and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation: • the factors included in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, including those set forth under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” • the ongoing adverse effects of the public health crisis of the novel coronavirus disease (“COVID-19”) pandemic, or any future pandemic, epidemic or outbreak of infectious disease, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets; • our ability to raise equity capital on attractive terms; • the competitive environment in which we operate; • real estate risks, including fluctuations in real estate values, the general economic climate in local markets and competition for tenants in such markets, and the repurposing or redevelopment of retail properties into industrial properties (in part or whole); • decreased rental rates or increased vacancy rates; • potential defaults (including bankruptcies or insolvency) on or non-renewal of leases by tenants; • acquisition risks, including our ability to identify and complete accretive acquisitions and/or failure of such acquisitions to perform in accordance with projections; • the timing of acquisitions and dispositions; • technological developments, particularly those affecting supply chains and logistics; • potential natural disasters, epidemics, pandemics, and other potentially catastrophic events such as acts of war and/or terrorism; 26 Table of Contents • international, national, regional and local economic conditions; • the general level of interest rates and currencies; • potential changes in the law or governmental regulations and interpretations of those laws and regulations, including changes in real estate and zoning laws or real estate investment trust (“REIT”) or corporate income tax laws, and potential increases in real property tax rates; • financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all; • credit risk in the event of non-performance by the counterparties to the interest rate swaps and revolving and unfunded debt; • how and when pending forward equity sales may settle; • lack of or insufficient amounts of insurance; • our ability to maintain our qualification as a REIT; • our ability to retain key personnel; • litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and • possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Certain Definitions In this report: We define “GAAP” as generally accepted accounting principles in the United States. We define “total annualized base rental revenue” as the contractual monthly base rent as of June 30, 2021 (which differs from rent calculated in accordance with GAAP) multiplied by 12. If a tenant is in a free rent period as of June 30, 2021, the total annualized base rental revenue is calculated based on the first contractual monthly base rent amount multiplied by 12. We define “occupancy rate” as the percentage of total leasable square footage for which either revenue recognition has commenced in accordance with GAAP or the lease term has commenced as of the close of the reporting period, whichever occurs earlier. We define the “Value Add Portfolio” as properties that meet any of the following criteria: (i) less than 75% occupied as of the acquisition date; (ii) will be less than 75% occupied due to known move-outs within two years of the acquisition date; (iii) out of service with significant physical renovation of the asset; or (iv) development. We define “Stabilization” for properties under development or being redeveloped as the earlier of achieving 90% occupancy or 12 months after completion. With respect to properties acquired and immediately added to the Value Add Portfolio, (i) if acquired with less than 75% occupancy as of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy or 12 months from the acquisition date; or (ii) if acquired and will be less than 75% occupied due to known move- 27 Table of Contents outs within two years of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy after the known move-outs have occurred or 12 months after the known move-outs have occurred. We define the “Operating Portfolio” as all warehouse and light manufacturing assets that were acquired stabilized or have achieved Stabilization. The Operating Portfolio excludes non-core flex/office assets, assets contained in the Value Add Portfolio, and assets classified as held for sale. We define a “Comparable Lease” as a lease in the same space with a similar lease structure as compared to the previous in-place lease, excluding new leases for space that was not occupied under our ownership. We define “SL Rent Change” as the percentage change in the average monthly base rent over the term of the lease that commenced during the period compared to the Comparable Lease for assets included in the Operating Portfolio. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses, and this calculation excludes the impact of any holdover rent. We define “Cash Rent Change” as the percentage change in the base rent of the lease commenced during the period compared to the base rent of the Comparable Lease for assets included in the Operating Portfolio. The calculation compares the first base rent payment due after the lease commencement date compared to the base rent of the last monthly payment due prior to the termination of the lease, excluding holdover rent. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses. We define “New Lease” as any lease that is signed for an initial term equal to or greater than 12 months for any vacant space, including a lease signed by a new tenant or an existing tenant that is expanding into new (additional) space. We define “Renewal Lease” as a lease signed by an existing tenant to extend the term for 12 months or more, including (i) a renewal of the same space as the current lease at lease expiration, (ii) a renewal of only a portion of the current space at lease expiration, or (iii) an early renewal or workout, which ultimately does extend the original term for 12 months or more. Overview We are a REIT focused on the acquisition, ownership, and operation of single-tenant, industrial properties throughout the United States. We are a Maryland corporation and our common stock is publicly traded on the New York Stock Exchange under the symbol “STAG.” We are organized and conduct our operations to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and generally are not subject to federal income tax to the extent we currently distribute our income to our stockholders and maintain our qualification as a REIT. We remain subject to state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed income. Factors That May Influence Future Results of Operations Our ability to increase revenues or cash flow will depend in part on our (i) external growth, specifically acquisition activity, and (ii) internal growth, specifically occupancy and rental rates on our portfolio. A variety of other factors, including those noted below, also affect our future results of operations. COVID-19 Pandemic Since March 2020, the COVID-19 pandemic has severely harmed global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the pandemic continues to evolve and many countries, including the United States, continue to react by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry, including the real estate industry and the industries of our tenants, directly or indirectly. The rapid development and fluidity of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact the pandemic may have on our business, financial condition, results of operations and cash flows. We did not incur significant disruptions from the COVID-19 pandemic during the three and six months ended June 30, 2021. In addition, we did not enter into any rent deferral agreements during the three and six months ended June 30, 2021. We will continue to evaluate tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modified agreements, nor are we foregoing our contractual rights under our lease agreements. 28 Table of Contents The COVID-19 pandemic or a future pandemic, epidemic or outbreak of infectious disease affecting states or regions in which we or our tenants operate could have material and adverse effects on our business, financial condition, results of operations and cash flows due to, among other factors: health or other government authorities requiring the closure of offices or other businesses or instituting quarantines of personnel as the result of, or in order to avoid, exposure to a contagious disease; disruption in supply and delivery chains; a general decline in business activity and demand for real estate; reduced economic activity, general economic decline or recession, which may impact our tenants’ businesses, financial condition and liquidity and may cause one or more of our tenants to be unable to make rent payments to us timely, or at all, or to otherwise seek modifications of lease obligations; difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis; and the potential negative impact on the health of our personnel, particularly if a significant number of our employees are impacted, which would result in a deterioration in our ability to ensure business continuity during a disruption. The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows. Outlook Our business is affected by the uncertainty regarding the current COVID-19 pandemic, the effectiveness of policies introduced to neutralize the disease, and the impact of those policies on economic activity. In June 2020, the National Bureau of Economic Research announced that the United States entered into a recession in February 2020. More recent economic measurements show that the U.S. economy is recovering. The ultimate shape of the recovery will depend on many factors, including the length and severity of the COVID-19 pandemic. While there has been a negative impact to our tenants, we believe we will continue to benefit from having a well-diversified portfolio across various markets, tenant industries, and lease terms. Additionally, we believe that the COVID-19 pandemic is accelerating a number of trends that positively impact industrial demand. Over the course of the COVID-19 pandemic, the U.S. federal and state governments, as well as the Federal Reserve, responded to the profoundly uncertain outlook with a series of policies to ease the economic burden of COVID-19 closures on businesses and individuals. In March 2021, the latest major U.S. congressional policy action known as the American Rescue Plan, allocated $1.9 trillion in federal aid focused on individuals and state and local governments. The Federal Reserve continues to be accommodative since it completed two emergency federal funds rate cuts in March 2020 to a range between 0% to 0.25%. Additionally, since entering office in January 2021, the Biden administration and health organizations are heavily focused on curbing the spread of COVID-19 through vaccinations and have made progress toward reaching a large portion of the population. We expect supportive fiscal and monetary policy to continue as needed. We believe that the current economic environment, while volatile, will provide us with an opportunity to demonstrate the diversification of our portfolio. Specifically, we believe our existing portfolio should benefit from competitive rental rates and strong occupancy. In addition to our diversified portfolio, we believe that certain characteristics of our business and capital structure should position us well in an uncertain environment, including the fact that we have minimal floating rate debt exposure (taking into account our hedging activities) and strong liquidity and access to capital, and that many of our competitors for the assets we purchase tend to be smaller local and regional investors who are likely to be more heavily impacted by interest rates and availability of capital. Due to the COVID-19 pandemic, we expect acceleration in a number of industrial specific trends to support stronger long-term demand, including: • the rise of e-commerce (as compared to the traditional retail store distribution model) and the concomitant demand by e-commerce industry participants for well-located, functional distribution space; • the increasing attractiveness of the United States as a manufacturing and distribution location because of the size of the U.S. consumer market, an increase in overseas labor costs, a desire for greater supply chain resilience and redundancy and the overall cost of supplying and shipping goods (i.e. the shortening and fattening of the supply chain); and • the overall quality of the transportation infrastructure in the United States. 29 Table of Contents Our portfolio continues to benefit from historically low availability throughout the national industrial market. The COVID-19 pandemic has caused both positive and negative impacts at varying levels across different industries and geographies. Ultimately, the acceleration in e-commerce brought on by the COVID-19 pandemic, actions taken by federal and state governments and the Federal Reserve in response to the pandemic, and the recent economic recovery has helped industrial space demand remain strong. We believe that the diversification of our portfolio by market, tenant industry, and tenant credit will prove to be a strength in this environment. Industrial development continues to be concentrated in the larger primary markets, and after a brief deceleration it has returned to pre-COVID-19 pandemic levels. We will continue to monitor the supply and demand fundamentals for industrial real estate and assess its impact on our business. Conditions in Our Markets The buildings in our portfolio are located in markets throughout the United States. Positive or negative changes in economic or other conditions, new supply, adverse weather conditions, natural disasters, epidemics, and other factors in these markets may affect our overall performance. Rental Income We receive income primarily in the form of rental income from the tenants who occupy our buildings. The amount of rental income generated by the buildings in our portfolio depends principally on occupancy and rental rates. As of June 30, 2021, our Operating Portfolio was approximately 97.2% leased and our SL Rent Change on New Leases and Renewal Leases in our Operating Portfolio together grew approximately 15.1% and 16.5% during the three and six months ended June 30, 2021, respectively. Our Cash Rent Change on New Leases and Renewal Leases in our Operating Portfolio together grew approximately 8.1% and 8.7% during the three and six months ended June 30, 2021. Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, including those brought on by the COVID-19 pandemic, could adversely affect our ability to maintain or increase rental rates at our buildings. Our ability to lease our properties and the attendant rental rate is dependent upon, among other things, (i) the overall economy, (ii) the supply/demand dynamic in our markets, (iii) the quality of our properties, including age, clear height, and configuration, and (iv) our tenants’ ability to meet their contractual obligations to us. The following table summarizes our Operating Portfolio leases that commenced during the three and six months ended June 30, 2021. Certain leases contain rental concessions; any such rental concessions are accounted for on a straight-line basis over the term of the lease. Operating Portfolio Square Feet Cash Basis Rent Per Square Foot SL Rent Per Square Foot Total Costs Per Square Foot(1) Cash Rent Change SL Rent Change Weighted Average Lease Term(2) (years) Rental Concessions per Square Foot(3) Three months ended June 30, 2021 New Leases 1,128,576 $ 4.16 $ 4.33 $ 1.83 7.3 % 13.6 % 7.1 $ 0.65 Renewal Leases 2,732,292 $ 4.14 $ 4.36 $ 1.10 8.4 % 15.7 % 6.4 $ — Total/weighted average 3,860,868 $ 4.15 $ 4.35 $ 1.32 8.1 % 15.1 % 6.6 $ 0.19 Six months ended June 30, 2021 New Leases 1,468,264 $ 4.10 $ 4.32 $ 2.25 7.5 % 15.3 % 7.2 $ 0.60 Renewal Leases 4,984,685 $ 4.28 $ 4.49 $ 1.12 9.0 % 16.9 % 5.8 $ 0.07 Total/weighted average 6,452,949 $ 4.24 $ 4.45 $ 1.38 8.7 % 16.5 % 6.1 $ 0.19 (1) We define Total Costs as the costs for improvements of vacant and renewal spaces, as well as the contingent-based legal fees and commissions for leasing transactions. Total Costs per square foot represent the total costs expected to be incurred on the leases that commenced during the period and do not reflect actual expenditures for the period. (2) We define weighted average lease term as the contractual lease term in years, assuming that tenants exercise no renewal options, purchase options, or early termination rights, weighted by square footage. (3) Represents the total rental concessions for the entire lease term. 30 Table of Contents Additionally, for the three and six months ended June 30, 2021, leases commenced totaling 32,864 and 139,064 square feet, respectively, related to the Value Add Portfolio and first generation leasing and are excluded from the Operating Portfolio statistics above. Property Operating Expenses Our property operating expenses generally consist of utilities, real estate taxes, management fees, insurance, and site repair and maintenance costs. For the majority of our tenants, our property operating expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance and maintenance costs, but typically excluding roof and building structure. However, we also have modified gross leases and gross leases in our building portfolio. The terms of those leases vary and on some occasions we may absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for some building related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all costs related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through property operating expenses to our tenants. Scheduled Lease Expirations Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately 9.2% of our annualized base rental revenue will expire during the period from July 1, 2021 to June 30, 2022, excluding month-to-month leases. We assume, based upon internal renewal probability estimates that some of our tenants will renew and others will vacate and the associated space will be re-let subject to downtime assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases will generally be the same as the rates under existing leases expiring during the period July 1, 2021 to June 30, 2022, thereby resulting in approximately the same revenue from the same space. The following table summarizes lease expirations for leases in place as of June 30, 2021, plus available space, for each of the ten calendar years beginning with 2021 and thereafter in our portfolio. The information in the table assumes that tenants exercise no renewal options and no early termination rights. Lease Expiration Year Number of Leases Expiring Total Rentable Square Feet % of Total Occupied Square Feet Total Annualized Base Rental Revenue (in thousands) % of Total Annualized Base Rental Revenue Available — 3,229,878 — — — Month-to-month leases 4 231,953 0.2 % $ 1,110 0.2 % Remainder of 2021 22 4,345,132 4.5 % 20,023 4.5 % 2022 78 8,667,176 9.0 % 39,282 8.8 % 2023 95 13,325,167 13.8 % 56,558 12.7 % 2024 81 12,294,728 12.7 % 55,844 12.6 % 2025 67 11,148,944 11.5 % 49,643 11.2 % 2026 66 10,475,464 10.8 % 50,530 11.4 % 2027 39 6,914,427 7.1 % 31,044 7.0 % 2028 27 4,929,994 5.1 % 21,854 4.9 % 2029 26 5,890,825 6.1 % 27,549 6.2 % 2030 23 4,111,782 4.2 % 21,371 4.8 % Thereafter 57 14,508,634 15.0 % 69,900 15.7 % Total 585 100,074,104 100.0 % $ 444,708 100.0 % 31 Table of Contents Portfolio Summary The following table summarizes information relating to diversification by building type in our portfolio as of June 30, 2021. Square Footage Annualized Base Rental Revenue Building Type Number of Buildings Amount % Occupancy Rate Amount (in thousands) % Warehouse/Distribution 418 90,960,967 90.9 % 97.0 % $ 400,040 90.0 % Light Manufacturing 73 8,379,905 8.4 % 98.7 % 42,446 9.5 % Total Operating Portfolio/weighted average 491 99,340,872 99.3 % 97.2 % $ 442,486 99.5 % Value Add/Other 3 331,537 0.3 % 53.4 % 825 0.2 % Flex/Office 7 401,695 0.4 % 37.4 % 1,397 0.3 % Total portfolio/weighted average 501 100,074,104 100.0 % 96.8 % $ 444,708 100.0 % Portfolio Acquisitions The following table summarizes our acquisitions during the three and six months ended June 30, 2021. Market (1) Date Acquired Square Feet Number of Buildings Purchase Price (in thousands) Omaha/Council Bluffs, NE-IA January 21, 2021 370,000 1 $ 24,922 Minneapolis/St Paul, MN February 24, 2021 80,655 1 10,174 Long Island, NY February 25, 2021 64,224 1 8,516 Sacramento, CA February 25, 2021 267,284 1 25,917 Little Rock/N Little Rock March 1, 2021 300,160 1 24,317 Cleveland, OH March 18, 2021 170,000 1 6,382 Three months ended March 31, 2021 1,252,323 6 100,228 Indianapolis, IN May 17, 2021 154,440 1 13,655 Baltimore, MD May 17, 2021 46,851 1 6,228 Detroit, MI June 1, 2021 248,040 1 23,786 Green Bay, WI June 7, 2021 152,000 1 7,249 Phoenix, AZ June 14, 2021 41,504 1 8,670 Cleveland, OH June 17, 2021 179,577 1 19,602 Reno/Sparks, NV June 30, 2021 183,435 1 13,892 Washington, DC June 30, 2021 193,420 1 17,521 Stockton/Modesto, CA June 30, 2021 150,000 1 16,118 Three months ended June 30, 2021 1,349,267 9 126,721 Six months ended June 30, 2021 2,601,590 15 $ 226,949 (1) As defined by CoStar Realty Information Inc (“CoStar”). If the building is located outside of a CoStar defined market, the city and state is reflected. Portfolio Dispositions During the six months ended June 30, 2021, we sold six buildings comprised of approximately 0.9 million rentable square feet with a net book value of approximately $27.2 million to third parties. Net proceeds from the sales of rental property were approximately $39.6 million and we recognized the full gain on the sales of rental property, net, of approximately $12.4 million for the six months ended June 30, 2021. 32 Table of Contents Geographic Diversification The following table summarizes information about the 20 largest markets in our portfolio based on total annualized base rental revenue as of June 30, 2021. Top 20 Markets (1) % of Total Annualized Base Rental Revenue Chicago, IL 7.0 % Philadelphia, PA 6.0 % Greenville/Spartanburg, SC 5.1 % Pittsburgh, PA 4.7 % Detroit, MI 4.5 % Milwaukee/Madison, WI 4.4 % Minneapolis/St Paul, MN 4.2 % Columbus, OH 3.8 % Houston, TX 3.3 % Charlotte, NC 2.9 % West Michigan, MI 2.4 % Boston, MA 2.3 % Indianapolis, IN 2.3 % El Paso, TX 2.1 % Cincinnati/Dayton, OH 2.0 % Cleveland, OH 1.9 % Raleigh/Durham, NC 1.6 % Columbia, SC 1.6 % Westchester/So Connecticut, CT/NY 1.6 % Kansas City, MO 1.5 % Total 65.2 % (1) As defined by CoStar. Industry Diversification The following table summarizes information about the 20 largest tenant industries in our portfolio based on total annualized base rental revenue as of June 30, 2021. Top 20 Tenant Industries (1) % of Total Annualized Base Rental Revenue Air Freight & Logistics 10.9 % Containers & Packaging 9.0 % Auto Components 7.8 % Internet & Direct Mkt Retail 5.5 % Trading Companies & Distributors (Industrial Goods) 5.4 % Commercial Services & Supplies 5.1 % Machinery 4.9 % Household Durables 4.1 % Media 4.1 % Food & Staples Retailing 4.1 % Distributors (Consumer Goods) 3.6 % Building Products 3.1 % Food Products 2.8 % Specialty Retail 2.1 % Beverages 2.1 % Electronic Equip, Instruments 2.0 % Textiles, Apparel, Luxury Good 2.0 % Chemicals 1.8 % Electrical Equipment 1.7 % Health Care Equipment & Supplies 1.7 % Total 83.8 % (1) Industry classification based on Global Industry Classification Standard methodology. 33 Table of Contents Tenant Diversification The following table summarizes information about the 20 largest tenants in our portfolio based on total annualized base rental revenue as of June 30, 2021. Top 20 Tenants (1) Number of Leases % of Total Annualized Base Rental Revenue Amazon 7 3.9 % XPO Logistics, Inc. 5 1.2 % Eastern Metal Supply, Inc. 5 1.1 % FedEx Corporation 4 1.0 % American Tire Distributors Inc 6 0.9 % Westrock Company 7 0.9 % Penguin Random House LLC 1 0.9 % DS Smith North America 2 0.8 % Lippert Component Manufact 4 0.8 % Ford Motor Company 1 0.8 % Carolina Beverage Group 2 0.8 % Hachette Book Group, Inc. 1 0.8 % Costco Wholesale Corporation 2 0.7 % Packaging Corp of America 5 0.7 % Yanfeng US Automotive Interior 2 0.7 % Schneider Electric USA, Inc. 3 0.7 % Kenco Logistic Services, LLC 2 0.7 % Perrigo Company 2 0.7 % TriMas Corporation 3 0.7 % Generation Brands 1 0.6 % Total 65 19.4 % (1) Includes tenants, guarantors, and/or non-guarantor parents. Critical Accounting Policies See “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of our critical accounting policies and estimates. Incentive and Equity-Based Employee Compensation Plans On January 7, 2021, we adopted the STAG Industrial, Inc. Employee Retirement Vesting Program (the “Vesting Program”) to provide supplemental retirement benefits for eligible employees. For those employees who are retirement eligible or will become retirement eligible during the applicable vesting period under the terms of the Vesting Program, we accelerate equity-based compensation through the employee’s six-month retirement notification period or retirement eligibility date, respectively. The adoption of the Vesting Program resulted in an increase to general and administrative expenses of approximately $1.4 million and $2.9 million for the three and six months ended June 30, 2021, respectively, due to the acceleration of equity-based compensation expense for certain eligible employees. We estimate that the adoption of the Vesting Program will result in an increase in general and administrative expenses of approximately $2.4 million for the year ending December 31, 2021. Results of Operations The following discussion of our results of our same store (as defined below) net operating income (“NOI”) should be read in conjunction with our consolidated financial statements. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below. Same store results are considered to be useful to investors in evaluating our performance because they provide information relating to changes in building-level operating performance without taking into account the effects of acquisitions or dispositions. We encourage the reader to not only look at our same store results, but also our total portfolio results, due to historic and future growth. 34 Table of Contents We define same store properties as properties that were in the Operating Portfolio for the entirety of the comparative periods presented. The results for same store properties exclude termination fees, solar income, and revenue associated with one-time tenant reimbursements of capital expenditures. Same store properties exclude Operating Portfolio properties with expansions placed into service after December 31, 2019. On June 30, 2021, we owned 421 industrial buildings consisting of 85.0 million square feet, which represents approximately 84.9% of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy decreased approximately 0.8% to 96.8% as of June 30, 2021 compared to 97.6% as of June 30, 2020. Comparison of the three months ended June 30, 2021 to the three months ended June 30, 2020 The following table summarizes selected operating information for our same store portfolio and our total portfolio for the three months ended June 30, 2021 and 2020 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the three months ended June 30, 2021 and 2020 with respect to the buildings acquired and disposed of and Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019 and our flex/office buildings, Value Add Portfolio, and buildings classified as held for sale. 35 Table of Contents Same Store Portfolio Acquisitions/Dispositions Other Total Portfolio Three months ended June 30, Change Three months ended June 30, Three months ended June 30, Three months ended June 30, Change 2021 2020 $ % 2021 2020 2021 2020 2021 2020 $ % Revenue Operating revenue Rental income $ 114,243 $ 106,963 $ 7,280 6.8 % $ 18,376 $ 6,779 $ 5,186 $ 3,729 $ 137,805 $ 117,471 $ 20,334 17.3 % Other income 142 112 30 26.8 % 30 17 450 17 622 146 476 326.0 % Total operating revenue 114,385 107,075 7,310 6.8 % 18,406 6,796 5,636 3,746 138,427 117,617 20,810 17.7 % Expenses Property 20,348 17,757 2,591 14.6 % 3,631 1,541 1,377 1,094 25,356 20,392 4,964 24.3 % Net operating income (1) $ 94,037 $ 89,318 $ 4,719 5.3 % $ 14,775 $ 5,255 $ 4,259 $ 2,652 113,071 97,225 15,846 16.3 % Other expenses General and administrative 12,578 9,406 3,172 33.7 % Depreciation and amortization 57,332 53,606 3,726 7.0 % Other expenses 511 588 (77) (13.1) % Total other expenses 70,421 63,600 6,821 10.7 % Total expenses 95,777 83,992 11,785 14.0 % Other income (expense) Interest and other income 30 156 (126) (80.8) % Interest expense (15,273) (15,333) 60 (0.4) % Debt extinguishment and modification expenses — (834) 834 (100.0) % Gain on involuntary conversion — 657 (657) (100.0) % Gain on the sales of rental property, net 5,976 1,045 4,931 471.9 % Total other income (expense) (9,267) (14,309) 5,042 (35.2) % Net income $ 33,383 $ 19,316 $ 14,067 72.8 % (1) For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below. 36 Table of Contents Net Income Net income for our total portfolio increased by $14.1 million, or 72.8%, to $33.4 million for the three months ended June 30, 2021, compared to $19.3 million for the three months ended June 30, 2020. Same Store Total Operating Revenue Same store total operating revenue consists primarily of rental income consisting of (i) fixed lease payments, variable lease payments, straight-line rental income, and above and below market lease amortization from our properties (“lease income”), and (ii) other tenant billings for insurance, real estate taxes and certain other expenses (“other billings”). For a detailed reconciliation of our same store total operating revenue to net income, see the table above. Same store rental income, which is comprised of lease income and other billings as discussed below, increased by $7.3 million, or 6.8%, to $114.2 million for the three months ended June 30, 2021 compared to $107.0 million for the three months ended June 30, 2020. Same store lease income increased by $4.3 million, or 4.7%, to $95.2 million for the three months ended June 30, 2021 compared to $90.9 million for the three months ended June 30, 2020. The increase is primarily due to an increase in rental income of approximately $3.0 million due to the execution of new leases and lease renewals with existing tenants, an increase of approximately $1.5 million due the to impact of inheriting the ownership of a solar panel array on one of our buildings, and a net decrease in the amortization of net above market leases of approximately $0.3 million. These increases were also attributable to an increase in rental income of approximately $1.4 million at properties in which, during the three months ended June 30, 2020, we determined that the future collectability was not reasonably assured, and accordingly, we converted to the cash basis of accounting and reversed any accounts receivable and accrued rent balances into rental income and did not recognize revenue for payments that were not received from the tenants. These reversals of accounts receivable and accrued rent balances decreased during the three months ended June 30, 2021. These increases were partially offset by the reduction of base rent of approximately $1.9 million due to tenant vacancy. Same store other billings increased by $2.9 million, or 18.7%, to $19.0 million for the three months ended June 30, 2021 compared to $16.1 million for the three months ended June 30, 2020. The increase was attributable to an increase of approximately $1.3 million related to other expense reimbursements due to an increase in corresponding expenses. Additionally, there was an increase in real estate taxes levied by the taxing authority of approximately of approximately $1.6 million. Same Store Operating Expenses Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance. For a detailed reconciliation of our same store operating expenses to net income, see the table above. Total same store property operating expenses increased by $2.6 million, or 14.6%, to $20.3 million for the three months ended June 30, 2021 compared to $17.8 million for the three months ended June 30, 2020. This increase was primarily related to an increase in real estate taxes levied by the taxing authority of approximately $1.5 million, an increase of $0.8 million related to insurance, utility, and other expenses, and an increase of $0.3 million in repairs and maintenance expense. Acquisitions and Dispositions Net Operating Income For a detailed reconciliation of our acquisitions and dispositions NOI to net income, see the table above. Subsequent to December 31, 2019, we acquired 61 buildings consisting of approximately 12.2 million square feet (excluding two buildings that were included in the Value Add Portfolio at June 30, 2021 or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019), and sold 13 buildings consisting of approximately 4.3 million square feet. For the three months ended June 30, 2021 and 2020, the buildings acquired after December 31, 2019 contributed approximately $14.7 million and $2.3 million to NOI, respectively. For the three months ended June 30, 2021 and 2020, the buildings sold after December 31, 2019 contributed approximately $0.1 million and $3.0 million to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold. 37 Table of Contents Other Net Operating Income Our other assets include our flex/office buildings, Value Add Portfolio, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019. Other NOI also includes termination, solar, and other income adjustments from buildings in our same store portfolio. For a detailed reconciliation of our other NOI to net income, see the table above. At June 30, 2021, we owned seven flex/office buildings consisting of approximately 0.4 million square feet, two buildings in our Value Add Portfolio consisting of approximately 0.2 million square feet, one building classified as held for sale consisting of approximately 0.1 million square feet, and nine buildings consisting of approximately 2.2 million square feet that were Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019. These buildings contributed approximately $3.4 million and $2.0 million to NOI for the three months ended June 30, 2021 and 2020, respectively. Additionally, there was approximately $0.9 million and $0.7 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the three months ended June 30, 2021 and 2020, respectively. Total Other Expenses Total other expenses consist of general and administrative expenses, depreciation and amortization, and other expenses. Total other expenses increased $6.8 million, or 10.7%, for the three months ended June 30, 2021 to $70.4 million compared to $63.6 million for the three months ended June 30, 2020. The increase is primarily a result of an increase in depreciation and amortization of approximately $3.7 million due to an increase in the depreciable asset base as a result of net acquisitions. Additionally, general and administrative expenses increased by approximately $3.2 million primarily due to the acceleration of equity-based compensation expense for certain eligible employees related to the adoption of the Vesting Program in the amount of approximately $1.4 million. General and administrative expenses also increased due to increases in compensation and other payroll costs. Total Other Income (Expense) Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, gain on involuntary conversion, and gain on the sales of rental property, net. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs, and amortization of fair market value adjustments associated with the assumption of debt. Total net other expense decreased $5.0 million, or 35.2%, for the three months ended June 30, 2021 to $9.3 million compared $14.3 million for the three months ended June 30, 2020. This decrease is primarily a result of an increase in the gain on the sales of rental property, net of approximately $4.9 million. Comparison of the six months ended June 30, 2021 to the six months ended June 30, 2020 The following table summarizes selected operating information for our same store portfolio and our total portfolio for the six months ended June 30, 2021 and 2020 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the six months ended June 30, 2021 and 2020 with respect to the buildings acquired and disposed of and Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019 and our flex/office buildings, Value Add Portfolio and buildings classified as held for sale. 38 Table of Contents Same Store Portfolio Acquisitions/Dispositions Other Total Portfolio Six months ended June 30, Change Six months ended June 30, Six months ended June 30, Six months ended June 30, Change 2021 2020 $ % 2021 2020 2021 2020 2021 2020 $ % Revenue Operating revenue Rental income $ 226,675 $ 216,444 $ 10,231 4.7 % $ 35,693 $ 12,717 $ 9,262 $ 6,649 $ 271,630 $ 235,810 $ 35,820 15.2 % Other income 198 283 (85) (30.0) % 144 21 450 51 792 355 437 123.1 % Total operating revenue 226,873 216,727 10,146 4.7 % 35,837 12,738 9,712 6,700 272,422 236,165 36,257 15.4 % Expenses Property 42,201 36,796 5,405 14.7 % 7,186 3,145 2,971 2,398 52,358 42,339 10,019 23.7 % Net operating income (1) $ 184,672 $ 179,931 $ 4,741 2.6 % $ 28,651 $ 9,593 $ 6,741 $ 4,302 220,064 193,826 26,238 13.5 % Other expenses General and administrative 25,368 19,779 5,589 28.3 % Depreciation and amortization 115,739 106,294 9,445 8.9 % Other expenses 1,363 1,064 299 28.1 % Total other expenses 142,470 127,137 15,333 12.1 % Total expenses 194,828 169,476 25,352 15.0 % Other income (expense) Interest and other income 62 235 (173) (73.6) % Interest expense (30,631) (30,197) (434) 1.4 % Debt extinguishment and modification expenses (679) (834) 155 (18.6) % Gain on involuntary conversion — 657 (657) (100.0) % Gain on the sales of rental property, net 12,385 47,804 (35,419) (74.1) % Total other income (expense) (18,863) 17,665 (36,528) (206.8) % Net income $ 58,731 $ 84,354 $ (25,623) (30.4) % (1) For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below. 39 Table of Contents Net Income Net income for our total portfolio decreased by $25.6 million, or 30.4%, to $58.7 million for the six months ended June 30, 2021 compared to $84.4 million for the six months ended June 30, 2020. Same Store Total Operating Revenue Same store total operating revenue consists primarily of rental income consisting of (i) fixed lease payments, variable lease payments, straight-line rental income, and above and below market lease amortization from our properties (“lease income”), and (ii) other tenant billings for insurance, real estate taxes and certain other expenses (“other billings”). For a detailed reconciliation of our same store total operating revenue to net income, see the table above. Same store rental income, which is comprised of lease income and other billings as discussed below, increased by $10.2 million, or 4.7%, to $226.7 million for the six months ended June 30, 2021 compared to $216.4 million for the six months ended June 30, 2020. Same store lease income increased by $5.6 million, or 3.0%, to $189.3 million for the six months ended June 30, 2021 compared to $183.7 million for the six months ended June 30, 2020. Approximately $4.9 million of the increase was attributable to rental increases due to the execution of new leases and lease renewals with existing tenants, an increase of approximately $1.5 million due the to impact of inheriting the ownership of a solar panel array on one of our buildings, and a net decrease in the amortization of net above market leases of approximately $0.5 million. These increases were also attributable to an increase in rental income of approximately $2.2 million at properties in which, during the six months ended June 30, 2020, we determined that the future collectability was not reasonably assured, and accordingly, we converted to the cash basis of accounting and reversed any accounts receivable and accrued rent balances into rental income and did not recognize revenue for payments that were not received from the tenants. These reversals of accounts receivable and accrued rent balances decreased during the six months ended June 30, 2021. These increases were partially offset by the reduction of base rent of approximately $3.5 million due to tenant vacancy. Same store other billings increased by $4.7 million, or 14.2%, to $37.4 million for the six months ended June 30, 2021 compared to $32.7 million for the six months ended June 30, 2020. The increase was attributable to an increase of approximately $2.2 million related to other expense reimbursements due to an increase in corresponding expenses. Additionally, there was an increase in real estate taxes levied by the taxing authority and changes to lease terms where we began paying the real estate taxes on behalf of tenants that had previously paid its taxes and operating expenses directly to respective vendors of approximately of approximately $2.5 million. Same Store Operating Expenses Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance. For a detailed reconciliation of our same store operating expenses to net income, see the table above. Total same store operating expenses increased by $5.4 million or 14.7% to $42.2 million for the six months ended June 30, 2021 compared to $36.8 million for the six months ended June 30, 2020. This increase was primarily related to an increase in real estate taxes levied by the taxing authority of approximately $2.9 million, an increase of $0.8 million related to snow removal expense, an increase of $1.3 million in utility, insurance, and other expense, and an increase of $0.4 million in repairs and maintenance expense. Acquisitions and Dispositions Net Operating Income For a detailed reconciliation of our acquisitions and dispositions NOI to net income, see the table above. Subsequent to December 31, 2019, we acquired 61 buildings consisting of approximately 12.2 million square feet (excluding two buildings that were included in the Value Add Portfolio at June 30, 2021 or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019), and sold 13 buildings consisting of approximately 4.3 million square feet. For the six months ended June 30, 2021 and June 30, 2020, the buildings acquired after December 31, 2019 contributed approximately $28.4 million and $3.8 million to NOI, respectively. For the six months ended June 30, 2021 and June 30, 2020, the buildings sold after December 31, 2019 contributed approximately $0.3 million and $5.8 million to NOI, respectively. Refer 40 Table of Contents to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold. Other Net Operating Income Our other assets include our flex/office buildings, Value Add Portfolio, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019. Other NOI also includes termination, solar, and other income adjustments from buildings in our same store portfolio. For a detailed reconciliation of our other NOI to net income, see the table above. At June 30, 2021, we owned seven flex/office buildings consisting of approximately 0.4 million square feet, two buildings in our Value Add Portfolio consisting of approximately 0.2 million square feet, one building classified as held for sale consisting of approximately 0.1 million square feet, and nine buildings consisting of approximately 2.2 million square feet that were Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2019. These buildings contributed approximately $6.3 million and $3.5 million to NOI for the six months ended June 30, 2021 and June 30, 2020, respectively. Additionally, there was $0.4 million and $0.8 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the six months ended June 30, 2021 and June 30, 2020, respectively. Total Other Expenses Total other expenses consist of general and administrative expenses, depreciation and amortization, and other expenses. Total other expenses increased $15.3 million, or 12.1%, to $142.5 million for the six months ended June 30, 2021 compared to $127.1 million for the six months ended June 30, 2020. This is primarily a result of an increase in depreciation and amortization of approximately $9.4 million as a result of net acquisitions that increased the depreciable asset base. Additionally, general and administrative expenses increased by approximately $5.6 million primarily due to the acceleration of equity-based compensation expense for certain eligible employees related to the adoption of the Vesting Program in the amount of approximately $2.9 million. General and administrative expenses also increased due to increases in compensation and other payroll costs. Additionally, other expenses increased approximately $0.3 million that was primarily due to the settlement of litigation related to a terminated acquisition contract during the COVID-19 pandemic. Total Other Income (Expense) Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, gain on involuntary conversion, and gain on the sales of rental property, net. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs, and amortization of fair market value adjustments associated with the assumption of debt. Total other income (expense) decreased $36.5 million, or 206.8%, to a total net other expense of $18.9 million for the six months ended June 30, 2021 compared to $17.7 million total net other income for the six months ended June 30, 2020. This decrease is primarily the result of an decrease in gain on the sales of rental property, net of approximately $35.4 million and a decrease in gain on involuntary conversion of approximately $0.7 million related to an eminent domain taking of a portion of a parcel of land that occurred during the six months ended June 30, 2020. Additionally, there was an decrease of approximately $0.2 million in interest and other income due to a decreased cash and cash equivalents balance during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. There was also an increase in interest expense of approximately $0.4 million which was primarily attributable to the funding of the Unsecured Term Loan F on March 25, 2020. Non-GAAP Financial Measures In this report, we disclose funds from operations (“FFO”) and NOI, which meet the definition of “non-GAAP financial measures” as set forth in Item 10(e) of Regulation S-K promulgated by the Securities and Exchange Commission (“SEC”). As a result, we are required to include in this report a statement of why management believes that presentation of these measures provides useful information to investors. 41 Table of Contents Funds From Operations FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, and we believe that to understand our performance further, FFO should be compared with our reported net income (loss) in accordance with GAAP, as presented in our consolidated financial statements included in this report. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO represents GAAP net income (loss), excluding gains (or losses) from sales of depreciable operating buildings, land sales, impairment write-downs of depreciable real estate, real estate related depreciation and amortization (excluding amortization of deferred financing costs and fair market value of debt adjustment) and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental performance measure because it is a widely recognized measure of the performance of REITs. FFO may be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our buildings that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our buildings, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other REITs may not calculate FFO in accordance with the NAREIT definition, and, accordingly, our FFO may not be comparable to such other REITs’ FFO. FFO should not be used as a measure of our liquidity, and is not indicative of funds available for our cash needs, including our ability to pay dividends. The following table sets forth a reconciliation of our FFO attributable to common stockholders and unit holders for the periods presented to net income, the nearest GAAP equivalent. Three months ended June 30, Six months ended June 30, Reconciliation of Net Income to FFO (in thousands) 2021 2020 2021 2020 Net income $ 33,383 $ 19,316 $ 58,731 $ 84,354 Rental property depreciation and amortization 57,291 53,537 115,630 106,154 Gain on the sales of rental property, net (5,976) (1,045) (12,385) (47,804) FFO 84,698 71,808 161,976 142,704 Preferred stock dividends — (1,289) (1,289) (2,578) Redemption of preferred stock — — (2,582) — Amount allocated to restricted shares of common stock and unvested units (224) (196) (461) (406) FFO attributable to common stockholders and unit holders $ 84,474 $ 70,323 $ 157,644 $ 139,720 Net Operating Income We consider NOI to be an appropriate supplemental performance measure to net income (loss) because we believe it helps investors and management understand the core operations of our buildings. NOI is defined as rental income, which includes billings for common area maintenance, real estate taxes and insurance, less property expenses and real estate taxes and insurance. NOI should not be viewed as an alternative measure of our financial performance since it excludes expenses which could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI. 42 Table of Contents The following table sets forth a reconciliation of our NOI for the periods presented to net income, the nearest GAAP equivalent. Three months ended June 30, Six months ended June 30, Reconciliation of Net Income to NOI (in thousands) 2021 2020 2021 2020 Net income $ 33,383 $ 19,316 $ 58,731 $ 84,354 General and administrative 12,578 9,406 25,368 19,779 Transaction costs 59 8 79 59 Depreciation and amortization 57,332 53,606 115,739 106,294 Interest and other income (30) (156) (62) (235) Interest expense 15,273 15,333 30,631 30,197 Gain on involuntary conversion — (657) — (657) Debt extinguishment and modification expenses — 834 679 834 Other expenses 452 580 1,284 1,005 Gain on the sales of rental property, net (5,976) (1,045) (12,385) (47,804) Net operating income $ 113,071 $ 97,225 $ 220,064 $ 193,826 Cash Flows Comparison of the six months ended June 30, 2021 to the six months ended June 30, 2020 The following table summarizes our cash flows for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Six months ended June 30, Change Cash Flows (dollars in thousands) 2021 2020 $ % Net cash provided by operating activities $ 162,373 $ 148,088 $ 14,285 9.6 % Net cash used in investing activities $ 202,017 $ 55,089 $ 146,928 266.7 % Net cash provided by financing activities $ 37,820 $ 9,739 $ 28,081 288.3 % Net cash provided by operating activities increased $14.3 million to $162.4 million for the six months ended June 30, 2021 compared to $148.1 million for the six months ended June 30, 2020. The increase was primarily attributable to incremental operating cash flows from property acquisitions completed after June 30, 2020, and operating performance at existing properties. These increases were partially offset by the loss of cash flows from property dispositions completed after June 30, 2020 and fluctuations in working capital due to timing of payments and rental receipts. Net cash used in investing activities increased $146.9 million to $202.0 million for the six months ended June 30, 2021 compared to $55.1 million for the six months ended June 30, 2020. The increase was primarily attributable to the acquisition of 15 buildings for a total cash consideration of approximately $221.8 million for the six months ended June 30, 2021 compared to the acquisition of 11 buildings for a total cash consideration of approximately $131.1 million for the six months ended June 30, 2020. The increase is also attributable to a decrease in proceeds from sales of rental property, net related to the disposition of six buildings during the six months ended June 30, 2021 for net proceeds of approximately $39.6 million, compared to the six months ended June 30, 2020 where we sold four buildings for net proceeds of approximately $101.9 million. Net cash provided by financing activities increased $28.1 million to $37.8 million for the six months ended June 30, 2021 compared to $9.7 million for the six months ended June 30, 2020. The increase is primarily attributable to a net cash inflow of approximately $323.0 million from our unsecured credit facility. This increase was partially offset by a decrease of net proceeds from the sales of common stock of approximately $109.3 million, the redemption of the Series C Preferred Stock (as defined below) of $75.0 million, and an increase of approximately $10.3 million in dividends paid during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Additionally, the funding of the Unsecured Term Loan F of $100.0 million did not recur during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. 43 Table of Contents Liquidity and Capital Resources We believe that our liquidity needs will be satisfied through cash flows generated by operations, disposition proceeds, and financing activities. Operating cash flow is primarily rental income, expense recoveries from tenants, and other income from operations and is our principal source of funds that we use to pay operating expenses, debt service, recurring capital expenditures and the distributions required to maintain our REIT qualification. We look to the capital markets (common equity, preferred equity, and debt) to primarily fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality standards for our buildings that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. We believe that our revenue, together with proceeds from building sales and debt and equity financings, will continue to provide funds for our short-term and medium-term liquidity needs. Our short-term liquidity requirements consist primarily of funds to pay for operating expenses and other expenditures directly associated with our buildings, including interest expense, interest rate swap payments, scheduled principal payments on outstanding indebtedness, funding of property acquisitions under contract, general and administrative expenses, and capital expenditures for tenant improvements and leasing commissions. Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through cash flow from operations, the issuance of equity or debt securities, other borrowings, property dispositions, or, in connection with acquisitions of certain additional buildings, the issuance of common units in the Operating Partnership. Since the COVID-19 pandemic, we have worked to ensure that we maintain adequate liquidity. On February 5, 2021 we refinanced the Unsecured Credit Facility and the Unsecured Term Loan G, as discussed in “Indebtedness Outstanding” below. As of June 30, 2021, we had total immediate liquidity of approximately $477.7 million, comprised of $14.6 million of cash and cash equivalents and $463.1 million of immediate availability on our unsecured credit facility. When incorporating the remaining undrawn balance available on our unsecured credit facility, the approximately $135.2 million of forward equity proceeds available to us at our option through November 16, 2021, and the approximately $48.9 million of forward equity proceeds available to us at our option through April 5, 2022, our total liquidity as of June 30, 2021 was approximately $661.8 million. Additionally, subsequent to June 30, 2021, on July 8, 2021, we entered into a note purchase agreement for the future private placement by the Operating Partnership of $325.0 million senior unsecured notes, which are expected to be issued on or around September 28, 2021, subject to conditions, as discussed in “Indebtedness Outstanding” below. In addition, we require funds for future dividends to be paid to our common and preferred stockholders and unit holders in the Operating Partnership. These distributions on our common stock are voluntary (at the discretion of our board of directors), to the extent we have satisfied distribution requirements in order to maintain our REIT status for federal income tax purposes, and may be reduced or stopped if needed to fund other liquidity requirements or for other reasons. The following table summarizes the dividends attributable to our outstanding common stock that had a record date during the six months ended June 30, 2021. Month Ended 2021 Declaration Date Record Date Per Share Payment Date June 30 April 12, 2021 June 30, 2021 $ 0.120833 July 15, 2021 May 31 April 12, 2021 May 28, 2021 0.120833 June 15, 2021 April 30 April 12, 2021 April 30, 2021 0.120833 May 17, 2021 March 31 January 11, 2021 March 31, 2021 0.120833 April 15, 2021 February 28 January 11, 2021 February 26, 2021 0.120833 March 15, 2021 January 31 January 11, 2021 January 29, 2021 0.120833 February 16, 2021 Total $ 0.724998 On July 13, 2021, our board of directors declared the common stock dividends for the months ending July 31, 2021, August 31, 2021, and September 30, 2021 at a monthly rate of $0.120833 per share of common stock. 44 Table of Contents During the three months ended March 31, 2021, we declared quarterly cumulative dividends on the 6.875% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) at a rate equivalent to the fixed annual rate of $1.71875 per share. The following table summarizes the dividends on the Series C Preferred Stock during the six months ended June 30, 2021. Quarter Ended 2021 Declaration Date Series C Preferred Stock Per Share Payment Date March 31 January 11, 2021 $ 0.4296875 March 31, 2021 Total $ 0.4296875 On March 1, 2021, we gave notice to redeem all 3,000,000 issued and outstanding shares of the Series C Preferred Stock on March 31, 2021. We redeemed the Series C Preferred Stock on March 31, 2021 at a cash redemption price of $25.00 per share, plus accrued and unpaid dividends to, but excluding, the redemption date. 45 Table of Contents Indebtedness Outstanding The following table summarizes certain information with respect to our indebtedness outstanding as of June 30, 2021. Loan Principal Outstanding as of June 30, 2021 (in thousands) Interest Rate (1)(2) Maturity Date Prepayment Terms (3) Unsecured credit facility: Unsecured Credit Facility (4) $ 284,000 L + 0.90% January 12, 2024 i Total unsecured credit facility 284,000 Unsecured term loans: Unsecured Term Loan A 150,000 3.38 % March 31, 2022 i Unsecured Term Loan D 150,000 2.85 % January 4, 2023 i Unsecured Term Loan E 175,000 3.92 % January 15, 2024 i Unsecured Term Loan F 200,000 3.11 % January 12, 2025 i Unsecured Term Loan G 300,000 1.28 % February 5, 2026 i Total unsecured term loans 975,000 Total unamortized deferred financing fees and debt issuance costs (4,070) Total carrying value unsecured term loans, net 970,930 Unsecured notes: Series F Unsecured Notes 100,000 3.98 % January 5, 2023 ii Series A Unsecured Notes 50,000 4.98 % October 1, 2024 ii Series D Unsecured Notes 100,000 4.32 % February 20, 2025 ii Series G Unsecured Notes 75,000 4.10 % June 13, 2025 ii Series B Unsecured Notes 50,000 4.98 % July 1, 2026 ii Series C Unsecured Notes 80,000 4.42 % December 30, 2026 ii Series E Unsecured Notes 20,000 4.42 % February 20, 2027 ii Series H Unsecured Notes 100,000 4.27 % June 13, 2028 ii Total unsecured notes 575,000 Total unamortized deferred financing fees and debt issuance costs (1,610) Total carrying value unsecured notes, net 573,390 Mortgage notes (secured debt): Wells Fargo Bank, National Association CMBS Loan 47,580 4.31 % December 1, 2022 iii Thrivent Financial for Lutherans 3,494 4.78 % December 15, 2023 iv United of Omaha Life Insurance Company 5,040 3.71 % October 1, 2039 ii Total mortgage notes 56,114 Less: Net unamortized fair market value discount (134) Total unamortized deferred financing fees and debt issuance costs (169) Total carrying value mortgage notes, net 55,811 Total / weighted average interest rate (5) $ 1,884,131 2.99 % (1) Interest rate as of June 30, 2021. At June 30, 2021, the one-month LIBOR (“L”) was 0.10050%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on the our debt rating, as defined in the respective loan agreements. (2) The unsecured term loans have a stated interest rate of one-month LIBOR plus a spread of 1.0%. As of June 30, 2021, one-month LIBOR for the Unsecured Term Loans A, D, E, F, and G was swapped to a fixed rate of 2.38%, 1.85%, 2.92%, 2.11%, and 0.28%, respectively. One-month LIBOR for the Unsecured Term Loan G will be swapped to a fixed rate of 0.94% effective April 18, 2023. (3) Prepayment terms consist of (i) pre-payable with no penalty; (ii) pre-payable with penalty; (iii) pre-payable without penalty three months prior to the maturity date, however can be defeased; and (iv) pre-payable without penalty three months prior to the maturity date. (4) The capacity of the unsecured credit facility is $750.0 million. The initial maturity date is January 15, 2023, which may be extended pursuant to two six-month extension options exercisable at our discretion upon advance written notice. Exercise of each six-month option is subject to the following conditions: (i) absence of a default immediately before the extension and immediately after giving effect to the extension, (ii) accuracy of representations and warranties as of the extension date (both immediately before and after the extension), as if made on the extension date, and (iii) payment of a fee. Neither extension option is subject to lender consent, assuming proper notice and satisfaction of the conditions. (5) The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of $975.0 million of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums or discounts. 46 Table of Contents The aggregate undrawn nominal commitments on the unsecured credit facility and unsecured term loans as of June 30, 2021 was approximately $463.1 million, including issued letters of credit. Our actual borrowing capacity at any given point in time may be less and is restricted to a maximum amount based on our debt covenant compliance. Our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes are subject to ongoing compliance with a number of financial and other covenants. As of June 30, 2021, we were in compliance with the applicable financial covenants. Subsequent to June 30, 2021, on July 8, 2021, we entered into a note purchase agreement for the future private placement by the Operating Partnership of $275.0 million senior unsecured notes, maturing September 29, 2031, with a fixed annual interest rate of 2.80%, and $50.0 million senior unsecured notes, maturing September 28, 2033, with a fixed annual interest rate of 2.95%. The notes are expected to be issued on or around September 28, 2021, subject to conditions. The note purchase agreement contains a number of financial covenants substantially similar to the financial covenants contained in our unsecured credit facility, plus a financial covenant that requires us to maintain a minimum interest coverage ratio of not less than 1.50:1.00. The Company and certain of its subsidiaries will guarantee the obligations under the notes. On February 25, 2021, we assumed a mortgage note with United of Omaha Life Insurance Company of approximately $5.1 million in connection with the acquisition of the property located in Long Island, NY, which serves as collateral for the debt. The debt matures on October 1, 2039 and bears interest at 3.71% per annum. The assumed debt was recorded at fair value and a fair value discount of approximately $0.2 million was recorded. The fair value of debt was determined by discounting the future cash flows using the current rate of approximately 4.10% at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities, terms, and loan-to-value ratios. The fair value of the debt is based on Level 3 inputs and is a nonrecurring fair value measurement. On February 5, 2021, we entered into an amendment to the unsecured credit facility (the “Credit Facility Amendment”). The Credit Facility Amendment provides for an increase in the aggregate commitments available for borrowing under the unsecured credit facility from $500 million to up to $750 million. As of June 30, 2021, the unsecured credit facility bore an interest rate of LIBOR plus a spread of 0.90% based on our debt rating, as defined in the loan agreement. In connection with the Credit Facility Amendment, we incurred approximately $1.2 million in costs which are being deferred and amortized through the maturity date of the unsecured credit facility. Other than the increase in the borrowing commitments, the material terms of the unsecured credit facility remain unchanged. On February 5, 2021, we entered into an amendment to the Unsecured Term Loan G (the “Amendment to Unsecured Term Loan G”). The Amendment to Unsecured Term Loan G provides for an extension of the maturity date to February 5, 2026 and a reduced stated interest rate of one-month LIBOR plus a spread that ranges from 0.85% to 1.65% for LIBOR borrowings based on our debt ratings. The Amendment to Unsecured Term Loan G also amended the provision for a minimum interest rate, or floor, for LIBOR borrowings to 0.00% and for Base Rate borrowings to 1.00%. As of June 30, 2021, borrowings under the Unsecured Term Loan G bore interest at LIBOR plus 1.00%. In connection with the Amendment to Unsecured Term Loan G, we incurred approximately $1.6 million in costs which are being deferred and amortized through the new maturity date of February 5, 2026. We also incurred approximately $0.7 million of modification expenses which were recognized in debt extinguishment and modification expenses in the accompanying Consolidated Statements of Operations. Additionally, we reversed the previously accrued extension fees of approximately $1.1 million from an amendment to the Unsecured Term Loan G that was entered into on April 17, 2020, which resulted in a decrease to interest expense of approximately $0.3 million. Other than the maturity and interest rate provisions described above, the material terms of the Unsecured Term Loan G remain unchanged. The following table summarizes our debt capital structure as of June 30, 2021. Debt Capital Structure June 30, 2021 Total principal outstanding (in thousands) $ 1,890,114 Weighted average duration (years) 3.3 % Secured debt 3.0 % % Debt maturing next 12 months 7.9 % Net Debt to Real Estate Cost Basis (1) 34.8 % (1) We define Net Debt as our amounts outstanding under our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes, less cash and cash equivalents. We define Real Estate Cost Basis as the book value of rental property and deferred leasing intangibles, exclusive of the related accumulated depreciation and amortization. We regularly pursue new financing opportunities to ensure an appropriate balance sheet position. As a result of these dedicated efforts, we are confident in our ability to meet future debt maturities and building acquisition funding needs. We believe that our current balance sheet is in an adequate position at the date of this filing, despite possible volatility in the credit markets. 47 Table of Contents Our interest rate exposure as it relates to interest expense payments on our floating rate debt is managed through our use of interest rate swaps, which fix the rate of our long term floating rate debt. For a detailed discussion on our use of interest rate swaps, see “Interest Rate Risk” below. Equity Preferred Stock On March 1, 2021, we gave notice to redeem all 3,000,000 issued and outstanding shares of the Series C Preferred Stock on March 31, 2021. We redeemed the Series C Preferred Stock on March 31, 2021 at a cash redemption price of $25.00 per share, plus accrued and unpaid dividends to, but excluding, the redemption date. We have no outstanding preferred stock issuances as of June 30, 2021. C ommon Stock The following table summarizes our at-the-market (“ATM”) common stock offering program as of June 30, 2021. We may from time to time sell common stock through sales agents under the program. ATM Common Stock Offering Program Date Maximum Aggregate Offering Price (in thousands) Aggregate Common Stock Available as of June 30, 2021 (in thousands) 2019 $600 million ATM February 14, 2019 $ 600,000 $ 204,023 The table below sets forth the activity for the ATM common stock offering programs during the three months ended June 30, 2021 (in thousands, except share data). Three months ended June 30, 2021 ATM Common Stock Offering Program (1) Shares Sold Weighted Average Price Per Share Sales Agents’ Fees Net Proceeds 2019 $600 million ATM 1,208,014 $ 34.95 $ 422 $ 41,799 Total/weighted average 1,208,014 $ 34.95 $ 422 $ 41,799 (1) Includes transactions settled during the period and excludes ATM issuances on a forward basis. On April 5, 2021, we sold 1,446,760 shares on a forward basis under the ATM common stock offering program at a price of $34.56 per share, or $50.0 million, and $34.2144 per share net of sales agent fees. We do not initially receive any proceeds from the sale of shares on a forward basis. We may elect to cash settle or net share settle the forward sale agreement at any time through the scheduled maturity date of April 5, 2022. Subsequent to June 30, 2021, we sold 1,719,849 shares under the ATM common stock offering program at a price of $37.98 per share, or $65.3 million, and $37.67 per share net of sales agent fees. Noncontrolling Interest We own our interests in all of our properties and conduct substantially all of our business through the Operating Partnership. We are the sole member of the sole general partner of the Operating Partnership. As of June 30, 2021, we owned approximately 97.8% of the Operating Partnership, and our current and former executive officers, directors, senior employees and their affiliates, and third parties who contributed properties to us in exchange for common units in our Operating Partnership, owned the remaining 2.2%. Interest Rate Risk We use interest rate swaps to fix the rate of our variable rate debt. As of June 30, 2021, all of our outstanding variable rate debt, with the exception of our unsecured credit facility, was fixed with interest rate swaps through maturity. We recognize all derivatives on the balance sheet at fair value. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income (loss), which is a 48 Table of Contents component of equity. Derivatives that are not designated as hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. We have established criteria for suitable counterparties in relation to various specific types of risk. We only use counterparties that have a credit rating of no lower than investment grade at swap inception from Moody’s Investor Services, Standard & Poor’s, or Fitch Ratings or other nationally recognized rating agencies. The following table details our outstanding interest rate swaps as of June 30, 2021. Interest Rate Derivative Counterparty Trade Date Effective Date Notional Amount (in thousands) Fair Value (in thousands) Pay Fixed Interest Rate Receive Variable Interest Rate Maturity Date Wells Fargo Bank, N.A. Jan-08-2015 Mar-20-2015 $ 25,000 $ (324) 1.8280 % One-month L Mar-31-2022 The Toronto-Dominion Bank Jan-08-2015 Feb-14-2020 $ 25,000 $ (441) 2.4535 % One-month L Mar-31-2022 Regions Bank Jan-08-2015 Feb-14-2020 $ 50,000 $ (891) 2.4750 % One-month L Mar-31-2022 Capital One, N.A. Jan-08-2015 Feb-14-2020 $ 50,000 $ (912) 2.5300 % One-month L Mar-31-2022 The Toronto-Dominion Bank Jul-20-2017 Oct-30-2017 $ 25,000 $ (637) 1.8485 % One-month L Jan-04-2023 Royal Bank of Canada Jul-20-2017 Oct-30-2017 $ 25,000 $ (638) 1.8505 % One-month L Jan-04-2023 Wells Fargo Bank, N.A. Jul-20-2017 Oct-30-2017 $ 25,000 $ (638) 1.8505 % One-month L Jan-04-2023 PNC Bank, N.A. Jul-20-2017 Oct-30-2017 $ 25,000 $ (637) 1.8485 % One-month L Jan-04-2023 PNC Bank, N.A. Jul-20-2017 Oct-30-2017 $ 50,000 $ (1,273) 1.8475 % One-month L Jan-04-2023 The Toronto-Dominion Bank Apr-20-2020 Sep-29-2020 $ 75,000 $ (64) 0.2750 % One-month L Apr-18-2023 Wells Fargo Bank, N.A. Apr-20-2020 Sep-29-2020 $ 75,000 $ (70) 0.2790 % One-month L Apr-18-2023 The Toronto-Dominion Bank Apr-20-2020 Mar-19-2021 $ 75,000 $ (64) 0.2750 % One-month L Apr-18-2023 Wells Fargo Bank, N.A. Apr-20-2020 Mar-19-2021 $ 75,000 $ (71) 0.2800 % One-month L Apr-18-2023 The Toronto-Dominion Bank Jul-24-2018 Jul-26-2019 $ 50,000 $ (3,243) 2.9180 % One-month L Jan-12-2024 PNC Bank, N.A. Jul-24-2018 Jul-26-2019 $ 50,000 $ (3,243) 2.9190 % One-month L Jan-12-2024 Bank of Montreal Jul-24-2018 Jul-26-2019 $ 50,000 $ (3,243) 2.9190 % One-month L Jan-12-2024 U.S. Bank, N.A. Jul-24-2018 Jul-26-2019 $ 25,000 $ (1,622) 2.9190 % One-month L Jan-12-2024 Wells Fargo Bank, N.A. May-02-2019 Jul-15-2020 $ 50,000 $ (2,932) 2.2460 % One-month L Jan-15-2025 U.S. Bank, N.A. May-02-2019 Jul-15-2020 $ 50,000 $ (2,932) 2.2459 % One-month L Jan-15-2025 Regions Bank May-02-2019 Jul-15-2020 $ 50,000 $ (2,930) 2.2459 % One-month L Jan-15-2025 Bank of Montreal Jul-16-2019 Jul-15-2020 $ 50,000 $ (1,990) 1.7165 % One-month L Jan-15-2025 U.S. Bank, N.A. Feb-17-2021 Apr-18-2023 $ 150,000 $ 848 0.9385 % One-month L Feb-5-2026 Wells Fargo Bank, N.A. Feb-17-2021 Apr-18-2023 $ 75,000 $ 428 0.9365 % One-month L Feb-5-2026 The Toronto-Dominion Bank Feb-17-2021 Apr-18-2023 $ 75,000 $ 428 0.9360 % One-month L Feb-5-2026 The swaps outlined in the above table were all designated as cash flow hedges of interest rate risk, and all are valued as Level 2 financial instruments. Level 2 financial instruments are defined as significant other observable inputs. As of June 30, 2021, the fair value of three of our interest rate swaps were in an asset position of approximately $1.7 million, including any adjustment for nonperformance risk related to these agreements. The remaining 21 interest rate swaps were in a liability position of approximately $28.8 million, including any adjustment for nonperformance risk related to these agreements. As of June 30, 2021, we had $1,259.0 million of variable rate debt. As of June 30, 2021, all of our outstanding variable rate debt, with the exception of our unsecured credit facility, was fixed with interest rate swaps through maturity. To the extent interest rates increase, interest costs on our floating rate debt not fixed with interest rate swaps will increase, which could adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our security holders. From time to time, we may enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. In addition, an increase in interest rates could decrease the amounts third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions. Off-balance Sheet Arrangements As of June 30, 2021, we had letters of credit related to development projects and certain other agreements of approximately $2.9 million. As of June 30, 2021, we had no other material off-balance sheet arrangements. 49 Table of Contents