Item 2. Management’s Discussion and Analysis
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, 2022, as updated elsewhere in this report, including those set forth under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
• the risk of global or national recessions and international, national, regional, and local economic conditions;
• 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;
• the general level of interest rates and currencies;
• 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 or outbreak of infectious disease, such as the novel coronavirus disease (“COVID-19”), and other potentially catastrophic events such as acts of war and/or terrorism (including the conflict between Russia and Ukraine and the related impact on macroeconomic conditions as a result of such conflict);
• 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;
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• 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. 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:
“Cash Rent Change” means 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.
“Comparable Lease” means 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.
“GAAP” means generally accepted accounting principles in the United States.
“New Lease” means a 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.
“Occupancy rate” means 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.
“Operating Portfolio” means all buildings that were acquired stabilized or have achieved Stabilization. The Operating Portfolio excludes non-core flex/office buildings, buildings contained in the Value Add Portfolio, and buildings classified as held for sale.
“Renewal Lease” means 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.
“SL Rent Change” means 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.
“Stabilization” for properties under development or being redeveloped means 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-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.
“Total annualized base rental revenue” means the contractual monthly base rent as of September 30, 2023 (which differs from rent calculated in accordance with GAAP) multiplied by 12. If a tenant is in a free rent period as of September 30, 2023, the total annualized base rental revenue is calculated based on the first contractual monthly base rent amount multiplied by 12.
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“Value Add Portfolio” means our 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.
“Weighted Average Lease Term” means the contractual lease term in years, assuming that tenants exercise no renewal options, purchase options, or early termination rights, weighted by square footage.
Overview
We are a REIT focused on the acquisition, ownership, and operation of industrial properties throughout the United States. We seek to (i) identify properties that offer relative value across all locations, industrial property types, and tenants through the principled application of our proprietary risk assessment model, (ii) operate our properties in an efficient, cost-effective manner, and (iii) capitalize our business appropriately given the characteristics of our assets. 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 maintain our qualification 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 our acquisition activity, and (ii) internal growth, specifically our portfolio occupancy and rental rates. A variety of other factors, including those noted below, also may affect our future results of operations.
Outlook
The industrial real estate business is affected by the uncertainty regarding the current high inflationary, rising interest rate environment, disruption in the banking industry, and geopolitical tensions. These factors are key drivers of recent financial market volatility and concerns of a global recession. While U.S. gross domestic product (“GDP”) declined during the first two quarters of 2022, GDP increased more than 2% during the year ended June 30, 2023. Labor conditions also remained strong with a 3.8% unemployment rate as of September 2023. Going forward, the general consensus among economists is to expect an elevated risk of recession over the near term. While the macro-economic conditions continue to evolve and could result in tighter credit conditions, weakening tenant cash flows, and rising vacancy rates, 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 recent moves toward more regional supply chains and geopolitical tensions have accelerated a number of trends that positively impact U.S. industrial demand. However, given the current uncertainty and events discussed above, our acquisition activity slowed in 2022 and so far in 2023 has been significantly slower than our historical acquisition pace.
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 our minimal floating rate debt exposure (taking into account our hedging activities), strong banking relationships, strong liquidity, access to capital, and the fact that many of our competitors for the assets we purchase tend to be smaller local and regional investors who may be more heavily impacted by rising interest rates and lack of available capital.
Due to the COVID-19 pandemic, geopolitical uncertainty, and recent legislation supporting U.S. infrastructure, 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 which is driving higher inventory to sales ratios and greater domestic warehouse demand over the long term (i.e. the shortening and fattening of the supply chain); and
• the overall quality of the transportation infrastructure in the United States.
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Our portfolio continues to benefit from historically low availability throughout the national industrial market. Demand has moderated in 2023 relative to recent peaks, but remains solid across a broad array of our markets and vacancy and availability rates remains low by historic standards. The weakening global and U.S. economic trends could be a notable headwind and may result in relatively less demand for space and higher vacancy. We believe that the diversification of our portfolio by market, tenant industry, and tenant credit will prove to be a strength in this environment.
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.
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, 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 the Operating Portfolio leases that commenced during the three and nine months ended September 30, 2023. Any rental concessions in such leases 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 (years)
Rental Concessions per Square Foot (2)
Three months ended September 30, 2023
New Leases 716,511 $ 8.99 $ 9.79 $ 6.15 63.2 % 78.4 % 6.0 $ 1.38
Renewal Leases 1,625,630 $ 5.58 $ 5.93 $ 1.25 26.0 % 40.1 % 4.5 $ 0.05
Total/weighted average 2,342,141 $ 6.62 $ 7.11 $ 2.75 39.3 % 54.2 % 5.0 $ 0.46
Nine months ended September 30, 2023
New Leases 2,194,796 $ 7.49 $ 7.94 $ 3.92 47.0 % 58.0 % 4.7 $ 0.76
Renewal Leases 8,504,365 $ 5.22 $ 5.49 $ 1.05 24.0 % 37.0 % 4.3 $ 0.08
Total/weighted average 10,699,161 $ 5.68 $ 5.99 $ 1.65 29.5 % 42.1 % 4.3 $ 0.22
(1) “Total Costs” means 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) Represents the total rental concessions for the entire lease term.
Additionally, for the three and nine months ended September 30, 2023, leases commenced totaling 60,000 and 1,110,359 square feet related to Value Add assets and first generation leasing. These 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, which may require us to absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for certain building related expenses during the lease term, but most of the expenses are passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all expenses related to the building and its operation during the lease term. Our
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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 8.1% of our total annualized base rental revenue will expire during the period from October 1, 2023 to September 30, 2024, 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 be greater than the rates under existing leases expiring during the period October 1, 2023 to September 30, 2024, thereby resulting in an increase in revenue from the same space.
The following table summarizes lease expirations for leases in place as of September 30, 2023, plus available space, for each of the ten calendar years beginning with 2023 and thereafter in our portfolio. The information in the table assumes that tenants do not exercise renewal options or early termination rights.
Lease Expiration Year Number of Leases Expiring Total Rentable Square Feet Percentage of Total Occupied Square Feet Total Annualized Base Rental Revenue (in thousands) Percentage of Total Annualized Base Rental Revenue
Available — 2,646,482 — % $ — — %
Month-to-month leases (1)
— 40,000 — % 314 0.1 %
Remainder of 2023 (2)
9 1,036,920 0.9 % 6,963 1.2 %
2024 77 10,443,629 9.6 % 54,831 9.6 %
2025 103 13,712,119 12.5 % 66,014 11.6 %
2026 135 19,528,175 17.9 % 101,145 17.8 %
2027 110 15,601,566 14.3 % 79,917 14.1 %
2028 92 11,719,861 10.7 % 60,563 10.6 %
2029 65 10,705,072 9.8 % 51,169 9.0 %
2030 36 5,356,310 4.9 % 34,179 6.0 %
2031 43 7,529,932 6.9 % 37,264 6.6 %
2032 19 2,800,575 2.6 % 19,439 3.4 %
Thereafter 41 10,830,677 9.9 % 56,621 10.0 %
Total 730 111,951,318 100.0 % $ 568,419 100.0 %
(1) The number of month-to-month leases is zero. The month-to-month total rentable square footage refers to a secondary short-term lease occupied by a tenant whose lease count is included in their original long term suite.
(2) Leases previously scheduled to expire in 2023, totaling approximately 10.6 million square feet, have been executed as of September 30, 2023. These leases are excluded from 2023 expirations and are reflected in the new year of expiration.
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Portfolio Acquisitions
The following table summarizes our acquisitions during the three and nine months ended September 30, 2023.
Market (1)
Date Acquired Square Feet Number of Buildings Purchase Price (in thousands)
Central New Jersey, NJ April 24, 2023 101,381 1 $ 26,660
Greensboro, NC May 5, 2023 133,622 1 14,004
Three and Six months ended June 30, 2023 235,003 2 40,664
Portland, OR July 18, 2023 121,426 2 20,685
Allentown, PA July 24, 2023 222,042 3 34,859
Philadelphia, PA July 24, 2023 152,625 1 15,031
Sacramento, CA August 7, 2023 96,658 1 13,725
Chicago, IL August 10, 2023 400,088 1 41,348
Tampa, FL (2)
August 30, 2023 — — 9,572
Indianapolis, IN September 18, 2023 258,000 1 21,306
Riverside, CA September 25, 2023 157,146 2 36,095
Dallas, TX September 29, 2023 120,900 1 21,288
Three months ended September 30, 2023 1,528,885 12 213,909
Nine months ended September 30, 2023 1,763,888 14 $ 254,573
(1) As defined by CBRE-EA industrial market geographies. If the building is located outside of a CBRE-EA defined market, the city and state is reflected.
(2) The Company acquired vacant land parcels.
Portfolio Dispositions
During the nine months ended September 30, 2023, we sold nine buildings comprised of approximately 1.9 million rentable square feet with a net book value of approximately $47.9 million to third parties. Net proceeds from the sales of rental property were approximately $97.2 million and we recognized the full gain on the sales of rental property, net, of approximately $49.3 million for the nine months ended September 30, 2023.
Top Markets
The following table summarizes information about the 20 largest markets in our portfolio based on total annualized base rental revenue as of September 30, 2023.
Top 20 Markets (1)
% of Total Annualized Base Rental Revenue
Chicago, IL 7.1 %
Greenville, SC 5.2 %
Pittsburgh, PA 4.2 %
Detroit, MI 4.1 %
Minneapolis, MN 3.6 %
Columbus, OH 3.6 %
South Central, PA 3.2 %
Philadelphia, PA 3.0 %
Houston, TX 2.6 %
El Paso, TX 2.5 %
Charlotte, NC 2.1 %
Milwaukee, WI 2.1 %
Indianapolis, IN 2.1 %
Sacramento, CA 1.9 %
Cleveland, OH 1.9 %
Kansas City, KS 1.7 %
Boston, MA 1.6 %
Columbia, SC 1.5 %
Grand Rapids, MI 1.5 %
Cincinnati, OH 1.3 %
Total 56.8 %
(1) Market classification based on CBRE-EA industrial market geographies.
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Top Industries
The following table summarizes information about the 20 largest tenant industries in our portfolio based on total annualized base rental revenue as of September 30, 2023.
Top 20 Tenant Industries (1)
% of Total Annualized Base Rental Revenue
Air Freight & Logistics 11.1 %
Containers & Packaging 8.2 %
Automobile Components 7.3 %
Machinery 6.2 %
Commercial Services & Supplies 5.8 %
Trading Companies & Distribution (Industrial Goods) 5.4 %
Distributors (Consumer Goods) 4.3 %
Building Products 4.3 %
Consumer Staples Distribution 3.6 %
Broadline Retail 3.5 %
Household Durables 3.4 %
Media 3.2 %
Specialty Retail 2.7 %
Ground Transportation 2.4 %
Beverages 2.4 %
Food Products 2.2 %
Chemicals 2.0 %
Electronic Equip, Instruments 2.0 %
Health Care Equipment & Supplies 1.9 %
Textiles, Apparel, Luxury Goods 1.6 %
Total 83.5 %
(1) Industry classification based on Global Industry Classification Standard methodology.
Top Tenants
The following table summarizes information about the 20 largest tenants in our portfolio based on total annualized base rental revenue as of September 30, 2023.
Top 20 Tenants (1)
Number of Leases % of Total Annualized Base Rental Revenue
Amazon 6 2.7 %
Soho Studio, LLC 1 1.0 %
American Tire Distributors, Inc. 7 0.9 %
Eastern Metal Supply, Inc. 5 0.9 %
Tempur Sealy International, Inc. 2 0.8 %
Hachette Book Group, Inc. 1 0.8 %
Kenco Logistic Services, LLC 3 0.7 %
Yanfeng US Automotive Interior 2 0.7 %
WestRock Company 7 0.7 %
Penguin Random House, LLC 1 0.7 %
FedEx Corporation 3 0.7 %
Lippert Component Manufacturing 4 0.7 %
DS Smith North America 2 0.7 %
GXO Logistics, Inc. 2 0.7 %
DHL Supply Chain 4 0.7 %
AFL Telecommunications LLC 2 0.7 %
Carolina Beverage Group 3 0.6 %
Iron Mountain Information Management 5 0.6 %
Berlin Packaging L.L.C. 4 0.6 %
Packaging Corp of America 5 0.6 %
Total 69 16.5 %
(1) Includes tenants, guarantors, and/or non-guarantor parents.
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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, 2022 for a discussion of our critical accounting policies and estimates.
Results of Operations
The following discussion of the results of our same store (as defined below) net operating income (“NOI”) should be read in conjunction with our consolidated financial statements included in this report. 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.
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 other income adjustments. Same store properties exclude Operating Portfolio properties with expansions placed into service after December 31, 2021. On September 30, 2023, we owned 514 industrial buildings consisting of approximately 101.8 million square feet and representing approximately 91.0% of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy decreased approximately 1.0% to 98.0% as of September 30, 2023 compared to 99.0% as of September 30, 2022.
Comparison of the three months ended September 30, 2023 to the three months ended September 30, 2022
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the three months ended September 30, 2023 and 2022 (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 September 30, 2023 and 2022 with respect to the buildings acquired and sold after December 31, 2021, Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2021, flex/office buildings, Value Add buildings, and buildings classified as held for sale.
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Same Store Portfolio Acquisitions/Dispositions Other Total Portfolio
Three months ended September 30, Change Three months ended September 30, Three months ended September 30, Three months ended September 30, Change
2023 2022 $ % 2023 2022 2023 2022 2023 2022 $ %
Revenue
Operating revenue
Rental income $ 159,997 $ 150,995 $ 9,002 6.0 % $ 9,747 $ 8,406 $ 8,114 $ 5,282 $ 177,858 $ 164,683 $ 13,175 8.0 %
Other income 37 62 (25) (40.3) % 93 1,013 1,293 547 1,423 1,622 (199) (12.3) %
Total operating revenue 160,034 151,057 8,977 5.9 % 9,840 9,419 9,407 5,829 179,281 166,305 12,976 7.8 %
Expenses
Property 30,833 27,769 3,064 11.0 % 1,846 1,328 1,750 990 34,429 30,087 4,342 14.4 %
Net operating income (1)
$ 129,201 $ 123,288 $ 5,913 4.8 % $ 7,994 $ 8,091 $ 7,657 $ 4,839 144,852 136,218 8,634 6.3 %
Other expenses
General and administrative 11,097 10,884 213 2.0 %
Depreciation and amortization 69,761 69,456 305 0.4 %
Loss on impairment — 1,783 (1,783) (100.0) %
Other expenses 773 578 195 33.7 %
Total other expenses 81,631 82,701 (1,070) (1.3) %
Total expenses 116,060 112,788 3,272 2.9 %
Other income (expense)
Interest and other income 17 26 (9) (34.6) %
Interest expense (23,753) (21,155) (2,598) 12.3 %
Debt extinguishment and modification expenses — (838) 838 (100.0) %
Gain on the sales of rental property, net 11,683 33,168 (21,485) (64.8) %
Total other income (expense) (12,053) 11,201 (23,254) (207.6) %
Net income $ 51,168 $ 64,718 $ (13,550) (20.9) %
(1) For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.
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Net Income
Net income for our total portfolio decreased by approximately $13.6 million, or 20.9%, to approximately $51.2 million for the three months ended September 30, 2023 compared to approximately $64.7 million for the three months ended September 30, 2022.
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of rental income from (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 includes lease income and other billings as discussed below, increased by approximately $9.0 million, or 6.0%, to approximately $160.0 million for the three months ended September 30, 2023 compared to approximately $151.0 million for the three months ended September 30, 2022.
Same store lease income increased by approximately $5.9 million, or 4.7%, to approximately $130.5 million for the three months ended September 30, 2023 compared to approximately $124.6 million for the three months ended September 30, 2022. The increase was primarily due to an increase in lease income of approximately $6.8 million from the execution of new leases and lease renewals with existing tenants. Additionally, there was an increase in same store lease income of approximately $0.8 million which was primarily attributable to management’s evaluation of operating leases to determine the probability of collecting substantially all of the lessee's remaining lease payments under the lease term. For those that are not probable of collection, we convert to the cash basis of accounting. Management determined one tenant should be converted from the cash basis of accounting back to the accrual basis of accounting, for which approximately $1.1 million of straight-line rental income was recognized. This was partially offset by certain other tenants converting from the accrual basis of accounting to the cash basis of accounting, for which approximately $0.3 million of straight-line rental income was reversed. These increases were partially offset by the reduction of base rent of approximately $1.7 million due to tenant vacancies.
Same store other billings increased by approximately $3.1 million, or 11.7%, to approximately $29.5 million for the three months ended September 30, 2023 compared to approximately $26.4 million for the three months ended September 30, 2022. The increase in other billings was primarily attributable to an increase of approximately $2.8 million in other expense reimbursements due to an increase in corresponding expenses and occupancy of previously vacant buildings. The increase was also attributable to an increase of approximately $0.3 million of real estate tax reimbursements due to occupancy of previously vacant buildings.
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 approximately $3.1 million, or 11.0%, to approximately $30.8 million for the three months ended September 30, 2023 compared to approximately $27.8 million for the three months ended September 30, 2022. This increase was due to increases in repairs and maintenance, insurance, real estate tax, utility, and other expenses of approximately $1.1 million, $0.8 million, $0.4 million, $0.3 million, and $0.5 million, respectively.
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, 2021, we acquired 33 buildings consisting of approximately 5.0 million square feet (excluding seven buildings that were included in the Value Add Portfolio at September 30, 2023 or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2021), and sold 17 buildings consisting of approximately 3.7 million square feet. For the three months ended September 30, 2023 and 2022, the buildings acquired after December 31, 2021 contributed approximately $7.6 million and $5.4 million to NOI, respectively. For the three months ended September 30, 2023 and September 30, 2022, the buildings sold after December 31, 2021 contributed approximately $0.4 million and $2.7 million
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to NOI, respectively. Refer to Note 3 in the accompanying Notes to consolidated Financial Statements for additional discussion regarding buildings acquired or sold.
Other Net Operating Income
Other assets include our flex/office buildings, Value Add Portfolio, buildings classified as held for sale, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2021. 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.
These buildings contributed approximately $6.1 million and $3.8 million to NOI for the three months ended September 30, 2023 and 2022, respectively. Additionally, there was approximately $1.6 million and $1.0 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the three months ended September 30, 2023 and 2022, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, loss on impairment, and other expenses.
Total other expenses decreased approximately $1.1 million, or 1.3%, to approximately $81.6 million for the three months ended September 30, 2023 compared to approximately $82.7 million for the three months ended September 30, 2022. The decrease was primarily attributable to a decrease in loss on impairment of approximately $1.8 million, as there was no loss on impairment recognized during the three months ended September 30, 2023, compared to a loss on impairment recognized at one building during the three months ended September 30, 2022. The decrease was partially offset by an increase in depreciation and amortization expense of approximately $0.3 million due to an increase in the depreciable asset base from net acquisitions after September 30, 2022, as well as an increase in general and administrative expenses of approximately $0.2 million primarily 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, 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 approximately $23.3 million, or 207.6%, to approximately $12.1 million total other expense for the three months ended September 30, 2023 compared to approximately $11.2 million total other income for the three months ended September 30, 2022. This decrease was primarily a result of a decrease in the gain on the sales of rental property, net of approximately $21.5 million. This decrease was also attributable to an increase in interest expense of approximately $2.6 million which was primarily attributable to a higher average credit facility balance and an increase in one-month Term Secured Overnight Financing Rate (“Term SOFR”) for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. These decreases were partially offset by a decrease in debt and modification expenses of approximately $0.8 million, as there were no debt and modification expenses during the three months ended September 30, 2023.
Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the nine months ended September 30, 2023 and 2022 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the nine months ended September 30, 2023 and 2022 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, 2021 and our flex/office buildings, Value Add Portfolio and buildings classified as held for sale.
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Same Store Portfolio Acquisitions/Dispositions Other Total Portfolio
Nine months ended September 30, Change Nine months ended September 30, Nine months ended September 30, Nine months ended September 30, Change
2023 2022 $ % 2023 2022 2023 2022 2023 2022 $ %
Revenue
Operating revenue
Rental income $ 472,184 $ 447,890 $ 24,294 5.4 % $ 28,008 $ 20,884 $ 22,373 $ 15,567 $ 522,565 $ 484,341 $ 38,224 7.9 %
Other income 214 282 (68) (24.1) % 140 1,123 1,609 1,268 1,963 2,673 (710) (26.6) %
Total operating revenue 472,398 448,172 24,226 5.4 % 28,148 22,007 23,982 16,835 524,528 487,014 37,514 7.7 %
Expenses
Property 91,841 84,541 7,300 8.6 % 6,050 3,206 5,094 2,989 102,985 90,736 12,249 13.5 %
Net operating income (1)
$ 380,557 $ 363,631 $ 16,926 4.7 % $ 22,098 $ 18,801 $ 18,888 $ 13,846 421,543 396,278 25,265 6.4 %
Other expenses
General and administrative 35,833 35,431 402 1.1 %
Depreciation and amortization 207,199 206,101 1,098 0.5 %
Loss on impairment — 1,783 (1,783) (100.0) %
Other expenses 4,109 1,607 2,502 155.7 %
Total other expenses 247,141 244,922 2,219 0.9 %
Total expenses 350,126 335,658 14,468 4.3 %
Other income (expense)
Interest and other income 53 83 (30) (36.1) %
Interest expense (69,225) (56,310) (12,915) 22.9 %
Debt extinguishment and modification expenses — (838) 838 (100.0) %
Gain on the sales of rental property, net 49,343 57,499 (8,156) (14.2) %
Total other income (expense) (19,829) 434 (20,263) (4,668.9) %
Net income $ 154,573 $ 151,790 $ 2,783 1.8 %
(1) For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.
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Net Income
Net income for our total portfolio increased by $2.8 million, or 1.8%, to $154.6 million for the nine months ended September 30, 2023 compared to $151.8 million for the nine months ended September 30, 2022.
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 approximately $24.3 million, or 5.4%, to approximately $472.2 million for the nine months ended September 30, 2023 compared to approximately $447.9 million for the nine months ended September 30, 2022.
Same store lease income increased by approximately $16.4 million, or 4.4%, to approximately $386.7 million for the nine months ended September 30, 2023 compared to approximately $370.3 million for the nine months ended September 30, 2022. The increase was primarily due to an increase in rental income of approximately $21.6 million from the execution of new leases and lease renewals with existing tenants. This increase was partially offset by the reduction of base rent of approximately $4.4 million due to tenant vacancies, and a net increase in the amortization of net above market leases of approximately $0.3 million. Additionally, there was decrease in same store lease income of approximately $0.5 million which was primarily attributable to management’s evaluation of operating leases to determine the probability of collecting substantially all of the lessee's remaining lease payments under the lease term. For those that are not probable of collection, we convert to the cash basis of accounting. Management determined two tenants should be converted from the cash basis of accounting back to the accrual basis of accounting, for which approximately $1.4 million of straight-line rental income was recognized. This was offset by certain other tenants converting from the accrual basis of accounting to the cash basis of accounting, for which approximately $1.9 million of straight-line rental income was either reversed or was not recognized.
Same store other billings increased by approximately $7.9 million, or 10.2%, to approximately $85.5 million for the nine months ended September 30, 2023 compared to approximately $77.6 million for the nine months ended September 30, 2022. The increase was attributable to an increase of approximately $4.3 million in other expense reimbursements which was primarily due to an increase in corresponding expenses. The increase was also attributable to an increase of approximately $3.6 million of real estate tax reimbursements due to an increase in real estate taxes levied by the taxing authority for certain tenants for which we pay the real estate taxes on their behalf, changes to lease terms where we began paying the real estate taxes on behalf of tenants that had previously paid the taxes directly to the taxing authorities, and occupancy of previously vacant buildings.
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 approximately $7.3 million or 8.6% to approximately $91.8 million for the nine months ended September 30, 2023 compared to approximately $84.5 million for the nine months ended September 30, 2022. This increase was due to increases in repairs and maintenance, insurance, real estate tax, utility, and other expenses of approximately $2.3 million, $1.8 million, $1.7 million, $0.7 million, and $1.1 million, respectively. These increases were partially offset by a reduction of snow removal expense of approximately $0.3 million.
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, 2021, we acquired 33 buildings consisting of approximately 5.0 million square feet (excluding seven buildings that were included in the Value Add Portfolio at September 30, 2023 or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2021), and sold 17 buildings consisting of approximately 3.7 million
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square feet. For the nine months ended September 30, 2023 and September 30, 2022, the buildings acquired after December 31, 2021 contributed approximately $19.8 million and $10.0 million to NOI, respectively. For the nine months ended September 30, 2023 and September 30, 2022, the buildings sold after December 31, 2021 contributed approximately $2.3 million and $8.8 million to NOI, respectively. Refer 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, buildings classified as held for sale, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2021. 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.
These buildings contributed approximately $16.0 million and $10.2 million to NOI for the nine months ended September 30, 2023 and September 30, 2022, respectively. Additionally, there was approximately $2.9 million and $3.6 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the nine months ended September 30, 2023 and September 30, 2022, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, loss on impairment, and other expenses.
Total other expenses increased approximately $2.2 million, or 0.9%, to approximately $247.1 million for the nine months ended September 30, 2023 compared to approximately $244.9 million for the nine months ended September 30, 2022. The increase was attributable to an increase in other expenses of approximately $2.5 million, which was primarily attributable to the relinquishment of an acquisition deposit related to the termination of an acquisition contract in January 2023. Depreciation and amortization also increased approximately $1.1 million due to an increase in the depreciable asset base from net acquisitions after September 30, 2022, as well as an increase in general and administrative expenses of approximately $0.4 million primarily due to increases in compensation and other payroll costs. The increases were partially offset by a decrease in loss on impairment of approximately $1.8 million, as there was no loss on impairment recognized during the nine months ended September 30, 2023, compared to a loss on impairment recognized at one building during the nine months ended September 30, 2022.
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, 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 approximately $20.3 million, or 4,668.9%, to a total other expense of approximately $19.8 million for the nine months ended September 30, 2023 compared to approximately $0.4 million total other income for the nine months ended September 30, 2022. This decrease was attributable to an increase in interest expense of approximately $12.9 million which was primarily attributable to the issuance of $400.0 million of unsecured notes on June 28, 2022, an additional $50.0 million of unsecured term loans on July 26, 2022, and an increase in one-month Term SOFR. This decrease was also attributable to a decrease in the gain on the sales of rental property, net of approximately $8.2 million. These decreases were partially offset by a decrease in debt and modification expenses of approximately $0.8 million, as there were no debt and modification expenses during the nine months ended September 30, 2023.
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.
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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 September 30, Nine months ended September 30,
Reconciliation of Net Income to FFO (in thousands) 2023 2022 2023 2022
Net income $ 51,168 $ 64,718 $ 154,573 $ 151,790
Rental property depreciation and amortization 69,701 69,400 207,029 205,938
Loss on impairment — 1,783 — 1,783
Gain on the sales of rental property, net (11,683) (33,168) (49,343) (57,499)
FFO 109,186 102,733 312,259 302,012
Amount allocated to restricted shares of common stock and unvested units (132) (134) (423) (436)
FFO attributable to common stockholders and unit holders $ 109,054 $ 102,599 $ 311,836 $ 301,576
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.
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The following table sets forth a reconciliation of our NOI for the periods presented to net income, the nearest GAAP equivalent.
Three months ended September 30, Nine months ended September 30,
Reconciliation of Net Income to NOI (in thousands) 2023 2022 2023 2022
Net income $ 51,168 $ 64,718 $ 154,573 $ 151,790
General and administrative 11,097 10,884 35,833 35,431
Depreciation and amortization 69,761 69,456 207,199 206,101
Interest and other income (17) (26) (53) (83)
Interest expense 23,753 21,155 69,225 56,310
Loss on impairment — 1,783 — 1,783
Debt extinguishment and modification expenses — 838 — 838
Other expenses 773 578 4,109 1,607
Gain on the sales of rental property, net (11,683) (33,168) (49,343) (57,499)
Net operating income $ 144,852 $ 136,218 $ 421,543 $ 396,278
Cash Flows
Comparison of the nine months ended September 30, 2023 to the nine months ended September 30, 2022
The following table summarizes our cash flows for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Nine months ended September 30, Change
Cash Flows (dollars in thousands) 2023 2022 $ %
Net cash provided by operating activities $ 299,506 $ 297,869 $ 1,637 0.5 %
Net cash used in investing activities $ 233,153 $ 397,321 $ (164,168) (41.3) %
Net cash provided by (used in) financing activities $ (81,112) $ 90,707 $ (171,819) (189.4) %
Net cash provided by operating activities increased approximately $1.6 million to approximately $299.5 million for the nine months ended September 30, 2023 compared to approximately $297.9 million for the nine months ended September 30, 2022. The increase was primarily attributable to incremental operating cash flows from property acquisitions completed after September 30, 2022, and operating performance at existing properties. These increases were partially offset by the loss of cash flows from property dispositions completed after September 30, 2022 and fluctuations in working capital due to timing of payments and rental receipts.
Net cash used in investing activities decreased approximately $164.2 million to approximately $233.2 million for the nine months ended September 30, 2023 compared to approximately $397.3 million for the nine months ended September 30, 2022. The decrease was primarily attributable to the acquisition of 14 buildings and land parcels for a total cash consideration of approximately $254.5 million during the nine months ended September 30, 2023, compared to the acquisition of 25 buildings and land parcels for a total cash consideration of approximately $464.6 million for the nine months ended September 30, 2022. This decrease was partially offset by a decrease in proceeds from sales of rental property, net of approximately $33.7 million during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, as well as an increase of approximately $12.7 million in cash paid for the additions of land and buildings and improvements related to development and other capital expenditures during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
Net cash provided by (used in) financing activities decreased approximately $171.8 million to approximately $81.1 million net cash used in financing activities for the nine months ended September 30, 2023 compared to approximately $90.7 million net cash provided by financing activities for the nine months ended September 30, 2022. This decrease was primarily attributable to the funding of the $400.0 million unsecured notes on June 28, 2022 and $50.0 million unsecured term loan on July 26, 2022, that did not occur during the nine months ended September 30, 2023, as well as the redemption of $100.0 million of unsecured notes on January 5, 2023 that did not occur during the nine months ended September 30, 2022. These decreases were partially offset by an increase in net borrowings of approximately $310.0 million under our unsecured credit facility and an increase in proceeds from sales of common stock, net of approximately $14.9 million during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Additionally, we paid in full a mortgage note in the amount of approximately $46.6 million during the nine months ended September 30, 2022 that did not occur during the nine months ended September 30, 2023.
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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 from rental income, expense recoveries from tenants, and other income from operations is our principal source of funds to pay operating expenses, debt service, recurring capital expenditures, and the distributions required to maintain our REIT qualification. We primarily rely on the capital markets (common and preferred equity and debt securities) to fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality building standards 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 equity and debt financings, will continue to provide funds for our short-term and medium-term liquidity needs.
Our short-term liquidity requirements consist primarily of funds necessary 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, property acquisitions under contract, general and administrative expenses, and capital expenditures including development projects, 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 property acquisitions 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.
As of September 30, 2023, we had total immediate liquidity of approximately $682.6 million, comprised of $10.9 million of cash and cash equivalents and $671.7 million of immediate availability on our unsecured credit facility.
In addition, we require funds to pay dividends to holders of our common stock and common units in the Operating Partnership. Any future dividends on our common stock are declared in the sole discretion of our board of directors, subject to the distribution requirements to maintain our REIT status for federal income tax purposes, and may be reduced or stopped for any reason, including to use funds for other liquidity requirements.
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Indebtedness Outstanding
The following table summarizes certain information with respect to our indebtedness outstanding as of September 30, 2023.
Indebtedness (dollars in thousands) September 30, 2023 Interest Rate (1)(2)
Maturity Date Prepayment Terms (3)
Unsecured credit facility:
Unsecured Credit Facility (4)
$ 325,000 Term SOFR + 0.855% October 23, 2026 i
Total unsecured credit facility 325,000
Unsecured term loans:
Unsecured Term Loan F 200,000 2.94 % January 12, 2025 i
Unsecured Term Loan G 300,000 1.78 % February 5, 2026 i
Unsecured Term Loan A 150,000 2.14 % March 15, 2027 i
Unsecured Term Loan H 187,500 3.73 % January 25, 2028 i
Unsecured Term Loan I 187,500 3.49 % January 25, 2028 i
Total unsecured term loans 1,025,000
Total unamortized deferred financing fees and debt issuance costs (3,561)
Total carrying value unsecured term loans, net 1,021,439
Unsecured notes:
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
Series I Unsecured Notes 275,000 2.80 % September 29, 2031 ii
Series K Unsecured Notes 400,000 4.12 % June 28, 2032 ii
Series J Unsecured Notes 50,000 2.95 % September 28, 2033 ii
Total unsecured notes 1,200,000
Total unamortized deferred financing fees and debt issuance costs (4,306)
Total carrying value unsecured notes, net 1,195,694
Mortgage notes (secured debt):
Thrivent Financial for Lutherans 3,192 4.78 % December 15, 2023 iii
United of Omaha Life Insurance Company 4,589 3.71 % October 1, 2039 ii
Total mortgage notes 7,781
Net unamortized fair market value discount (139)
Total unamortized deferred financing fees and debt issuance costs —
Total carrying value mortgage notes, net 7,642
Total / weighted average interest rate (5)
$ 2,549,775 3.72 %
(1) Interest rate as of September 30, 2023. At September 30, 2023, the one-month Term SOFR was 5.31899%. 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 or discounts. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on our debt rating and leverage ratio, as defined in the respective loan agreements.
(2) Our unsecured credit facility has a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.775%, less a sustainability-related interest rate adjustment of 0.02%. Our unsecured term loans have a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.85%, less a sustainability-related interest rate adjustment of 0.02%. As of September 30, 2023, one-month Term SOFR for the Unsecured Term Loans A, F, G, H, and I was swapped to a fixed rate of 1.31%, 2.11%, 0.95%, 2.90%, and 2.66%, respectively (which includes the 0.10% adjustment). One-month Term SOFR for the Unsecured Term Loan H will be swapped to a fixed rate of 2.50% effective January 12, 2024.
(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.
(4) The capacity of our unsecured credit facility is $1.0 billion. The initial maturity date is October 24, 2025, or such later date which may be extended pursuant to two six-month extension options exercisable by us in 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. We are required to pay a facility fee on the aggregate commitment amount (currently $1.0 billion) at a rate per annum of 0.1% to 0.3%, depending on our debt rating, as defined in the credit agreement. The facility fee is due and payable quarterly.
(5) The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of $1,025.0 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.
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The aggregate undrawn nominal commitments on our unsecured credit facility and unsecured term loans as of September 30, 2023 was approximately $671.7 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 September 30, 2023, we were in compliance with the applicable financial covenants.
On January 5, 2023, we redeemed in full at maturity the $100.0 million in aggregate principal amount of the Series F Unsecured Notes with a fixed interest rate of 3.98%.
On January 19, 2023, the sustainability-related interest rate adjustment for our Unsecured Term Loan H and Unsecured Term Loan I went into effect because of the improvement in our 2022 public disclosure assessment score from the Global Real Estate Sustainability Benchmark (GRESB), as compared to our 2021 score. The interest rate adjustment, a 0.02% interest rate reduction for each instrument, will end on June 29, 2024, in accordance with the respective loan agreements.
The following table summarizes our debt capital structure as of September 30, 2023.
Debt Capital Structure September 30, 2023
Total principal outstanding (in thousands) $ 2,557,781
Weighted average duration (years) 4.5
% Secured debt 0.3 %
% Debt maturing next 12 months 0.1 %
Net Debt to Real Estate Cost Basis (1)
35.6 %
(1) “Net Debt” means amounts outstanding under our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes, less cash and cash equivalents. “Real Estate Cost Basis” means 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 fund acquisitions. 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.
Our interest rate exposure on our floating rate debt is managed through the 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
We are authorized to issue up to 20,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2023 and December 31, 2022, there were no shares of preferred stock issued or outstanding.
C ommon Stock
We are authorized to issue up to 300,000,000 shares of common stock, par value $0.01 per share.
The following table summarizes our at-the-market (“ATM”) common stock offering program as of September 30, 2023. Pursuant to the equity distribution agreements for our ATM common stock offering program, we may from time to time sell common stock through sales agents and their affiliates, including shares sold on a forward basis under forward sale agreements. There was no activity under the ATM common stock offering program during the three months ended September 30, 2023.
ATM Common Stock Offering Program Date Maximum Aggregate Offering Price (in thousands) Aggregate Available as of September 30, 2023 (in thousands)
2022 $750 million ATM February 17, 2022 $ 750,000 $ 679,463
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In addition, on May 5, 2023, we sold 725,698 shares on a forward basis under the ATM common stock offering program at a sale price of $35.0458 per share (an aggregate of approximately $25.4 million in gross sale price), or $34.6953 per share net of commissions. We did not initially receive any proceeds from the sale of shares on a forward basis. On July 27, 2023, we physically settled in full the forward sales agreements by issuing 725,698 shares of common stock for net proceeds of approximately $25.2 million, or $34.7714 per share.
On June 16, 2023, we also sold 992,295 shares on a forward basis under the ATM common stock offering program at a weighted average sale price of $36.5319 per share (an aggregate of approximately $36.3 million in gross sale price), or $36.1820 per share net of commissions. We did not initially receive any proceeds from the sale of shares on a forward basis. On July 27, 2023, we physically settled in full the forward sales agreements by issuing 992,295 shares of common stock for net proceeds of approximately $35.9 million, or $36.2046 per share.
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 September 30, 2023, we owned approximately 97.8% of the common units in the Operating Partnership, and our current and former executive officers, directors, senior employees and their affiliates, and third parties that contributed properties to us in exchange for common units in the 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 September 30, 2023, 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 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 swaps are 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 September 30, 2023, we had 21 interest rate swaps outstanding that were in an asset position of approximately $76.9 million, including any adjustment for nonperformance risk related to these agreements.
As of September 30, 2023, we had approximately $1,350.0 million of variable rate debt. As of September 30, 2023, 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 September 30, 2023, we had letters of credit related to development projects and certain other agreements of approximately $3.3 million. As of September 30, 2023, we had no other material off-balance sheet arrangements.
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