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, 2023, 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 Russia’s invasion of Ukraine and the Israel-Hamas war, the risk of such conflicts widening and the related impact on macroeconomic conditions as a result of such conflicts);
• 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, 2024 (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, 2024, the total annualized base rental revenue is calculated based on the first contractual monthly base rent amount multiplied by 12.
“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.
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“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. Our platform is designed to (i) identify properties for acquisition that offer relative value across CBRE-EA Tier 1 industrial property types and tenants through the principled application of our proprietary risk assessment model, (ii) provide growth through sophisticated industrial operation and an attractive opportunity set, 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 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.
Outlook
The industrial real estate business is affected by general macro-economic trends including recent changes in interest rates, inflation, and geopolitical tensions. These factors are key drivers of financial market volatility and raise concerns about a slowing global economy. While U.S. gross domestic product (“GDP”) declined during the first two quarters of 2022, real GDP has increased for eight consecutive quarters with the most recent measure showing 3.0% growth in the second quarter of 2024. Labor conditions are slowing, but holding solid with a 4.1% unemployment rate as of September 2024. Going forward, the general consensus among economists is to expect low growth in the United States with a continued historically elevated risk of recession. 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 since 2022 relative to 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 have been more heavily impacted by rising interest rates and lack of available capital.
Due to demographic/consumer trends, 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 continued growth 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 have strong occupancy and benefits from geographic diversity throughout the national industrial market. Demand across the industrial market is moderating relative to recent peaks. Vacancy and availability rates, while rising, remain low by historical standards in many markets. The supply pipeline remains robust, albeit smaller and more notably concentrated in very large warehouses. Construction starts continue to decline as a result of both moderating demand and volatile capital markets. The weakening global and U.S. economic trends could be a notable headwind and may potentially result in relatively less demand for space, increased credit loss, 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.
On October 22, 2024, one of our tenants, American Tire Distributors, Inc. (“ATD”), that accounts for approximately 1% of our total annualized base rental revenue as of September 30, 2024, voluntarily filed for reorganization under Chapter 11 of the United States Bankruptcy Code. ATD leases seven buildings from us totaling 840,658 square feet. Annualized base rental revenue for the seven buildings is approximately $6.1 million as of September 24, 2024. ATD’s bankruptcy filings indicated an intent to continue operations and pursue an orderly sale of its assets either to its current lender group or to a third party. The contemplated transaction would also eliminate a significant amount of debt and provide access to new capital. ATD is current on its rent obligations to us. While the reorganization may not be successful and pursuant to the reorganization ATD could affirm or reject any or all of the seven leases, we do not currently believe that the tenant’s bankruptcy is reasonably likely to have a material adverse effect on our results of operations or financial condition.
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, 2024. 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, 2024
New Leases 1,294,282 $ 5.46 $ 5.47 $ 1.44 22.1 % 27.4 % 3.8 $ 0.82
Renewal Leases 2,009,016 $ 6.61 $ 7.02 $ 1.45 26.0 % 38.0 % 4.4 $ 0.09
Total/weighted average 3,303,298 $ 6.16 $ 6.41 $ 1.45 24.6 % 34.3 % 4.2 $ 0.38
Nine months ended September 30, 2024
New Leases 2,582,265 $ 5.66 $ 5.81 $ 1.96 23.4 % 32.2 % 4.5 $ 0.95
Renewal Leases 8,536,341 $ 6.12 $ 6.47 $ 1.28 32.8 % 46.9 % 4.6 $ 0.16
Total/weighted average 11,118,606 $ 6.01 $ 6.32 $ 1.43 30.6 % 43.5 % 4.6 $ 0.34
(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.
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Additionally, for the three and nine months ended September 30, 2024, leases related to the Value Add Portfolio and first generation leasing, with a total of 11,660 and 402,432 square feet, respectively, 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, as well as leases with expense caps, 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 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 7.3% of our total annualized base rental revenue will expire during the period from October 1, 2024 to September 30, 2025, 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, 2024 to September 30, 2025, 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, 2024, plus available space, for each of the ten calendar years beginning with 2024 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 — 3,280,559 — % $ — — %
Month-to-month leases 2 130,009 0.1 % 974 0.2 %
Remainder of 2024 (1)
8 962,742 0.9 % 5,385 0.9 %
2025 86 10,423,580 9.4 % 52,364 8.5 %
2026 141 19,716,509 17.7 % 108,198 17.7 %
2027 128 16,974,315 15.3 % 91,838 15.0 %
2028 103 12,948,104 11.6 % 71,630 11.7 %
2029 101 15,893,363 14.3 % 88,190 14.4 %
2030 51 8,190,091 7.4 % 48,254 7.9 %
2031 53 9,613,271 8.6 % 49,109 8.0 %
2032 23 3,387,205 3.0 % 23,639 3.9 %
2033 17 2,407,266 2.2 % 14,680 2.4 %
Thereafter 41 10,579,395 9.5 % 57,917 9.4 %
Total 754 114,506,409 100.0 % $ 612,178 100.0 %
(1) Leases previously scheduled to expire in 2024, totaling approximately 13.0 million square feet, have been executed as of September 30, 2024. These leases are excluded from 2024 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, 2024.
Market (1)
Date Acquired Square Feet Number of Buildings Purchase Price (in thousands)
Cincinnati, OH March 18, 2024 697,500 1 $ 50,073
Three months ended March 31, 2024 697,500 1 50,073
Milwaukee, WI April 8, 2024 150,002 1 16,062
Portland, OR April 15, 2024 99,136 1 17,058
Louisville, IN April 16, 2024 592,800 1 52,352
Portland, OR (2)
June 6, 2024 — — 8,178
El Paso, TX June 10, 2024 254,103 1 32,182
Chicago, IL June 24, 2024 947,436 5 87,560
Columbus, OH June 26, 2024 150,207 1 20,408
Three months ended June 30, 2024 2,193,684 10 233,800
Reno, NV (2)
July 25, 2024 — — 1,896
Reno, NV (3)
August 8, 2024 — — 8,959
LaGrange, GA September 9, 2024 323,368 1 34,870
Boston, MA September 12, 2024 290,471 5 78,127
Three months ended September 30, 2024 613,839 6 123,852
Nine months ended September 30, 2024 3,505,023 17 $ 407,725
(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) We acquired a vacant land parcel.
(3) We acquired a vacant land parcel through a consolidated joint venture.
On August 8, 2024, we formed a joint venture with a third party that is primarily engaged in the development and operation of an industrial real estate property located in Reno, Nevada. At September 30, 2024, we held a 95% interest and the third party held the remaining 5% interest in the joint venture.
Portfolio Dispositions
During the nine months ended September 30, 2024, we sold eight buildings comprised of approximately 1.3 million rentable square feet with a net book value of approximately $74.4 million to third parties. Net proceeds from the sales of rental property were approximately $97.7 million and we recognized the full gain on the sales of rental property, net, of approximately $23.3 million for the nine months ended September 30, 2024. The gain on the sales of rental property, net, is inclusive of a loss on the sale of rental property, net, of approximately $2.0 million.
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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, 2024.
Top 20 Markets (1)
% of Total Annualized Base Rental Revenue
Chicago, IL 7.4 %
Greenville, SC 5.1 %
Pittsburgh, PA 4.1 %
Detroit, MI 4.0 %
Columbus, OH 3.9 %
Minneapolis, MN 3.5 %
South Central, PA 3.1 %
Philadelphia, PA 3.0 %
Boston, MA 2.8 %
El Paso, TX 2.6 %
Milwaukee, WI 2.3 %
Houston, TX 2.1 %
Charlotte, NC 2.0 %
Indianapolis, IN 2.0 %
Sacramento, CA 1.9 %
Cincinnati, OH 1.8 %
Cleveland, OH 1.8 %
Kansas City, MO 1.7 %
Columbia, SC 1.4 %
Grand Rapids, MI 1.4 %
Total 57.9 %
(1) Market classification based on CBRE-EA industrial market geographies.
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, 2024.
Top 20 Tenant Industries (1)
% of Total Annualized Base Rental Revenue
Air Freight & Logistics 11.3 %
Containers & Packaging 8.2 %
Automobile Components 6.5 %
Machinery 6.3 %
Commercial Services & Supplies 5.6 %
Trading Companies & Distribution (Industrial Goods) 5.3 %
Distributors (Consumer Goods) 4.7 %
Building Products 4.4 %
Consumer Staples Distribution 3.8 %
Broadline Retail 3.8 %
Household Durables 3.2 %
Media 3.0 %
Specialty Retail 2.7 %
Beverages 2.6 %
Chemicals 2.0 %
Ground Transportation 1.9 %
Food Products 1.8 %
Electronic Equip, Instruments 1.8 %
Electrical Equipment 1.7 %
Leisure Products 1.5 %
Total 82.1 %
(1) Industry classification based on Global Industry Classification Standard methodology.
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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, 2024.
Top 20 Tenants (1)
Number of Leases % of Total Annualized Base Rental Revenue
Amazon 7 3.0 %
American Tire Distributors, Inc. 7 1.0 %
Soho Studio, LLC 1 0.9 %
Schneider Electric USA, Inc. 4 0.9 %
Tempur Sealy International, Inc. 2 0.8 %
The Coca-Cola Company 3 0.7 %
Iron Mountain Information Management 6 0.7 %
Hachette Book Group, Inc. 1 0.7 %
Penguin Random House, LLC 1 0.7 %
Kenco Logistic Services, LLC 3 0.7 %
FedEx Corporation 4 0.7 %
Penske Truck Leasing Co. LP 3 0.7 %
WestRock Company 6 0.7 %
Lippert Component Manufacturing 4 0.7 %
DHL Supply Chain 4 0.6 %
GXO Logistics, Inc. 2 0.6 %
DS Smith North America 2 0.6 %
Carolina Beverage Group 3 0.6 %
AFL Telecommunications LLC 2 0.6 %
Packaging Corp of America 5 0.6 %
Total 70 16.5 %
(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, 2023 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 January 1, 2023. On September 30, 2024, we owned 539 industrial buildings consisting of approximately 107.2 million square feet and representing approximately 93.7% of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy decreased approximately 0.2% to 97.7% as of September 30, 2024 compared to 97.9% as of September 30, 2023.
Comparison of the three months ended September 30, 2024 to the three months ended September 30, 2023
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the three months ended September 30, 2024 and 2023 (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, 2024 and 2023 with respect to the buildings acquired and sold after January 1, 2023, Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after January 1, 2023, 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
2024 2023 $ % 2024 2023 2024 2023 2024 2023 $ %
Revenue
Operating revenue
Rental income $ 175,563 $ 170,817 $ 4,746 2.8 % $ 9,789 $ 3,653 $ 4,934 $ 3,388 $ 190,286 $ 177,858 $ 12,428 7.0 %
Other income 113 37 76 205.4 % 29 397 311 989 453 1,423 (970) (68.2) %
Total operating revenue 175,676 170,854 4,822 2.8 % 9,818 4,050 5,245 4,377 190,739 179,281 11,458 6.4 %
Expenses
Property 34,799 33,271 1,528 4.6 % 2,445 620 771 538 38,015 34,429 3,586 10.4 %
Net operating income (1)
$ 140,877 $ 137,583 $ 3,294 2.4 % $ 7,373 $ 3,430 $ 4,474 $ 3,839 152,724 144,852 7,872 5.4 %
Other expenses
General and administrative 11,978 11,097 881 7.9 %
Depreciation and amortization 72,506 69,761 2,745 3.9 %
Other expenses 545 773 (228) (29.5) %
Total other expenses 85,029 81,631 3,398 4.2 %
Total expenses 123,044 116,060 6,984 6.0 %
Other income (expense)
Interest and other income 14 17 (3) (17.6) %
Interest expense (28,705) (23,753) (4,952) 20.8 %
Debt extinguishment and modification expenses (36) — (36) 100.0 %
Gain on involuntary conversion 3,568 — 3,568 100.0 %
Gain on the sales of rental property, net 195 11,683 (11,488) (98.3) %
Total other income (expense) (24,964) (12,053) (12,911) 107.1 %
Net income $ 42,731 $ 51,168 $ (8,437) (16.5) %
(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 $8.4 million, or 16.5%, to approximately $42.7 million for the three months ended September 30, 2024 compared to approximately $51.2 million for the three months ended September 30, 2023.
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 $4.7 million, or 2.8%, to approximately $175.6 million for the three months ended September 30, 2024 compared to approximately $170.8 million for the three months ended September 30, 2023.
Same store lease income increased by approximately $4.4 million, or 3.2%, to approximately $143.3 million for the three months ended September 30, 2024 compared to approximately $138.9 million for the three months ended September 30, 2023. The increase was primarily due to the execution of new leases and lease renewals with existing tenants of approximately $8.0 million. This increase was partially offset by the reduction of base rent of approximately $2.0 million due to tenant vacancies and a net increase in the amortization of net above market leases of approximately $0.2 million. Additionally, there was a decrease in same store lease income 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. During the three months ended September 30, 2024, management determined certain tenants should be converted from the accrual basis of accounting to the cash basis of accounting, which accounts for approximately $0.3 million of the decrease during the three months September 30, 2024 as compared to the three months ended September 30, 2023. Additionally, 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 during the three months ended September 30, 2023.
Same store other billings increased by approximately $0.4 million, or 1.3%, to approximately $32.3 million for the three months ended September 30, 2024 compared to approximately $31.9 million for the three months ended September 30, 2023. The increase in other billings was primarily attributable to an increase in real estate tax reimbursements of approximately $1.3 million 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 and occupancy of previously vacant buildings. Additionally, the increase was offset by a decrease of approximately $0.9 million of other expense reimbursements due to a decrease in the corresponding expenses and vacancy of previously occupied 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 $1.5 million, or 4.6%, to approximately $34.8 million for the three months ended September 30, 2024 compared to approximately $33.3 million for the three months ended September 30, 2023. This increase was primarily due to increases in real estate tax, other expenses and insurance expense of approximately $1.8 million, $0.3 million and $0.2 million, respectively. These increases were partially offset by decreases to repairs and maintenance and utility expenses of approximately $0.7 million and $0.1 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 January 1, 2023, we acquired 26 buildings consisting of approximately 4.5 million square feet (excluding seven buildings that were included in the Value Add Portfolio at September 30, 2024, or sold or transferred from the Value Add
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Portfolio to the Operating Portfolio after January 1, 2023), and sold 18 buildings consisting of approximately 3.3 million square feet. For the three months ended September 30, 2024 and 2023, the buildings acquired after January 1, 2023 contributed approximately $7.6 million and $1.3 million to NOI, respectively. For the three months ended September 30, 2024 and September 30, 2023, the buildings sold after January 1, 2023 contributed approximately $(0.2) million and $2.1 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
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 January 1, 2023. 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 $3.7 million and $2.5 million to NOI for the three months ended September 30, 2024 and 2023, respectively. Additionally, there was approximately $0.8 million and $1.3 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the three months ended September 30, 2024 and 2023, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, and other expenses.
Total other expenses increased approximately $3.4 million, or 4.2%, to approximately $85.0 million for the three months ended September 30, 2024 compared to approximately $81.6 million for the three months ended September 30, 2023. The increase was primarily attributable to an increase in depreciation and amortization expense of approximately $2.7 million due to an increase in the depreciable asset base from net acquisitions after September 30, 2023. Additionally, general and administrative expenses increased by approximately $0.9 million primarily due to increases in compensation and other payroll costs. These increases were partially offset by a decrease of approximately $0.2 million in other expenses due to a decrease in state income taxes for the three months ended September 30, 2024, compared to the three months ended September 30, 2023.
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 expense increased approximately $12.9 million, or 107.1%, to approximately $25.0 million for the three months ended September 30, 2024 compared to approximately $12.1 million for the three months ended September 30, 2023. This increase was primarily attributable to an decrease in the gain on the sales of rental property, net of approximately $11.5 million. This increase was also attributable to an increase in interest expense of approximately $5.0 million which was primarily attributable to the issuance of $450.0 million of unsecured notes on May 28, 2024, as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements. These increases were partially offset by a gain on involuntary conversion of approximately $3.6 million during the three months ended September 30, 2024, as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the three months ended September 30, 2023.
Comparison of the nine months ended September 30, 2024 to the nine months ended September 30, 2023
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the nine months ended September 30, 2024 and 2023 (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, 2024 and 2023 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 January 1, 2023, Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after January 1, 2023, 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
Nine months ended September 30, Change Nine months ended September 30, Nine months ended September 30, Nine months ended September 30, Change
2024 2023 $ % 2024 2023 2024 2023 2024 2023 $ %
Revenue
Operating revenue
Rental income $ 526,404 $ 503,100 $ 23,304 4.6 % $ 21,219 $ 11,364 $ 16,532 $ 8,101 $ 564,155 $ 522,565 $ 41,590 8.0 %
Other income 138 233 (95) (40.8) % 297 515 3,469 1,215 3,904 1,963 1,941 98.9 %
Total operating revenue 526,542 503,333 23,209 4.6 % 21,516 11,879 20,001 9,316 568,059 524,528 43,531 8.3 %
Expenses
Property 105,074 99,736 5,338 5.4 % 5,167 1,904 4,323 1,345 114,564 102,985 11,579 11.2 %
Net operating income (1)
$ 421,468 $ 403,597 $ 17,871 4.4 % $ 16,349 $ 9,975 $ 15,678 $ 7,971 453,495 421,543 31,952 7.6 %
Other expenses
General and administrative 36,758 35,833 925 2.6 %
Depreciation and amortization 219,213 207,199 12,014 5.8 %
Loss on impairment 4,967 — 4,967 100.0 %
Other expenses 1,703 4,109 (2,406) (58.6) %
Total other expenses 262,641 247,141 15,500 6.3 %
Total expenses 377,205 350,126 27,079 7.7 %
Other income (expense)
Interest and other income 39 53 (14) (26.4) %
Interest expense (81,498) (69,225) (12,273) 17.7 %
Debt extinguishment and modification expenses (703) — (703) 100.0 %
Gain on involuntary conversion 9,285 — 9,285 100.0 %
Gain on the sales of rental property, net 23,281 49,343 (26,062) (52.8) %
Total other income (expense) (49,596) (19,829) (29,767) 150.1 %
Net income $ 141,258 $ 154,573 $ (13,315) (8.6) %
(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 $13.3 million, or 8.6%, to $141.3 million for the nine months ended September 30, 2024 compared to $154.6 million for the nine months ended September 30, 2023.
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 $23.3 million, or 4.6%, to approximately $526.4 million for the nine months ended September 30, 2024 compared to approximately $503.1 million for the nine months ended September 30, 2023.
Same store lease income increased by approximately $16.9 million, or 4.1%, to approximately $427.4 million for the nine months ended September 30, 2024 compared to approximately $410.5 million for the nine months ended September 30, 2023. The increase was primarily due to an increase in rental income of approximately $24.3 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 $4.7 million due to tenant vacancies, and a net increase in the amortization of net above market leases of approximately $0.7 million. Additionally, there was a decrease in same store lease income of approximately $2.0 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. During the nine months ended September 30, 2024, management determined certain tenants should be converted from the accrual basis of accounting to the cash basis of accounting, which accounts for approximately $0.6 million of the decrease during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023. Additionally, management converted two tenants from the cash basis of accounting back to the accrual basis of accounting during the nine months ended September 30, 2023, for which approximately $1.4 million of straight-line accrued rental balance was reinstated.
Same store other billings increased by approximately $6.4 million, or 6.9%, to approximately $99.0 million for the nine months ended September 30, 2024 compared to approximately $92.6 million for the nine months ended September 30, 2023. The increase was attributable to an increase of approximately $3.5 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 $2.9 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 $5.3 million or 5.4% to approximately $105.1 million for the nine months ended September 30, 2024 compared to approximately $99.7 million for the nine months ended September 30, 2023. This increase was due to increases in real estate tax, other expenses, insurance, and snow removal of approximately $3.6 million, $1.3 million, $0.8 million, and $0.4 million, respectively. These increases were partially offset by a reduction of repairs and maintenance and utility expense of approximately $0.4 million and $0.3 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 January 1, 2023, we acquired 26 buildings consisting of approximately 4.5 million square feet (excluding seven buildings that were included in the Value Add Portfolio at September 30, 2024, or sold or transferred from the Value Add
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Portfolio to the Operating Portfolio after January 1, 2023), and sold 18 buildings consisting of approximately 3.3 million square feet. For the nine months ended September 30, 2024 and September 30, 2023, the buildings acquired after January 1, 2023 contributed approximately $16.6 million and $1.6 million to NOI, respectively. For the nine months ended September 30, 2024 and September 30, 2023, the buildings sold after January 1, 2023 contributed approximately $(0.3) million and $8.4 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 January 1, 2023. 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 $11.4 million and $5.4 million to NOI for the nine months ended September 30, 2024 and September 30, 2023, respectively. Additionally, there was approximately $4.3 million and $2.6 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the nine months ended September 30, 2024 and September 30, 2023, 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 $15.5 million, or 6.3%, to approximately $262.6 million for the nine months ended September 30, 2024 compared to approximately $247.1 million for the nine months ended September 30, 2023. The increase was primarily attributable to an increase in depreciation and amortization expense of approximately $12.0 million due to an increase in the depreciable asset base from net acquisitions after September 30, 2023. Additionally, a loss on impairment of approximately $5.0 million was recognized during the nine months ended September 30, 2024, as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the nine months ended September 30, 2023. Additionally, general and administrative expenses increased by approximately $0.9 million primarily due to increases in compensation and other payroll costs. These increases were partially offset by a decrease in other expenses of approximately $2.4 million, which was primarily attributed to the relinquishment of an acquisition deposit of approximately $2.5 million related to the termination of an acquisition contract during the nine months ended September 30, 2023 that did not recur during the nine months ended September 30, 2024.
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 expense increased approximately $29.8 million, or 150.1%, to approximately $49.6 million for the nine months ended September 30, 2024 compared to approximately $19.8 million for the nine months ended September 30, 2023. This increase was primarily a result of a decrease in the gain on the sales of rental property, net of approximately $26.1 million. This increase was also attributable to an increase in interest expense of approximately $12.3 million which was primarily attributable to the issuance of $450.0 million of unsecured notes on May 28, 2024, as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements, and an increase in one-month Term Secured Overnight Financing Rate (“Term SOFR”) for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. This increase was also attributable to an increase in debt extinguishment and modification expenses of approximately $0.7 million related to the unsecured term loan amendment and the 2024 Credit Agreement (as defined below) amendment during the nine months ended September 30, 2024, as discussed in Note 4 of the accompany Notes to Consolidated Financial Statements. These increases were partially offset by an increase in gain on involuntary conversion of approximately $9.3 million during the nine months ended September 30, 2024, as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the nine months ended September 30, 2023.
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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.
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) 2024 2023 2024 2023
Net income $ 42,731 $ 51,168 $ 141,258 $ 154,573
Rental property depreciation and amortization 72,421 69,701 219,002 207,029
Loss on impairment — — 4,967 —
Gain on the sales of rental property, net (195) (11,683) (23,281) (49,343)
FFO 114,957 109,186 341,946 312,259
Amount allocated to restricted shares of common stock and unvested units (130) (132) (415) (423)
FFO attributable to common stockholders and unit holders $ 114,827 $ 109,054 $ 341,531 $ 311,836
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, real estate tax expense and insurance expense. 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) 2024 2023 2024 2023
Net income $ 42,731 $ 51,168 $ 141,258 $ 154,573
General and administrative 11,978 11,097 36,758 35,833
Depreciation and amortization 72,506 69,761 219,213 207,199
Interest and other income (14) (17) (39) (53)
Interest expense 28,705 23,753 81,498 69,225
Loss on impairment — — 4,967 —
Gain on involuntary conversion (3,568) — (9,285) —
Debt extinguishment and modification expenses 36 — 703 —
Other expenses 545 773 1,703 4,109
Gain on the sales of rental property, net (195) (11,683) (23,281) (49,343)
Net operating income $ 152,724 $ 144,852 $ 453,495 $ 421,543
Cash Flows
Comparison of the nine months ended September 30, 2024 to the nine months ended September 30, 2023
The following table summarizes our cash flows for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.
Nine months ended September 30, Change
Cash Flows (dollars in thousands) 2024 2023 $ %
Net cash provided by operating activities $ 355,363 $ 299,506 $ 55,857 18.6 %
Net cash used in investing activities $ 390,521 $ 233,153 $ 157,368 67.5 %
Net cash provided by (used in) financing activities $ 84,434 $ (81,112) $ 165,546 204.1 %
Net cash provided by operating activities increased approximately $55.9 million to approximately $355.4 million for the nine months ended September 30, 2024 compared to approximately $299.5 million for the nine months ended September 30, 2023. The increase was primarily attributable to incremental operating cash flows from property acquisitions completed after September 30, 2023, and operating performance at existing properties. These increases were partially offset by the loss of cash flows from property dispositions completed after September 30, 2023 and fluctuations in working capital due to timing of payments and rental receipts.
Net cash used in investing activities increased approximately $157.4 million to approximately $390.5 million for the nine months ended September 30, 2024 compared to approximately $233.2 million for the nine months ended September 30, 2023. The increase was primarily attributable to the acquisition of 17 buildings and three parcels of land for a total cash consideration of approximately $404.9 million during the nine months ended September 30, 2024, whereas there were 14 buildings and two land parcels acquired for a total cash consideration of approximately $254.5 million for the nine months ended September 30, 2023. Additionally, there was an increase in cash paid for additions of land and buildings and improvements related to development and other capital expenditures of approximately $5.2 million, during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023. These increases were partially offset by an increase in proceeds from sales of rental property, net of approximately $0.5 million during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.
Net cash provided by (used in) financing activities increased approximately $165.5 million to approximately $84.4 million net cash provided by financing activities for the nine months ended September 30, 2024 compared to approximately $81.1 million net cash used in financing activities for the nine months ended September 30, 2023. This increase was primarily attributable to the issuance of $450.0 million of unsecured notes on May 28, 2024, as discussed in Note 4 in the accompanying Notes to Consolidated Financial Statements. The increase was also attributable to the redemption of $100.0 million of unsecured notes on January 5, 2023 that did not occur during the nine months ended September 30, 2024. These increases were partially offset by a decrease in net borrowings of approximately $296.0 million under our unsecured credit facility, an increase of approximately $6.7 million in dividends and distributions paid, and a decrease of approximately $70.0 million due to a reduction of proceeds from the sales of common stock during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Additionally, there was an increase of approximately $12.1 million in payments of loan fees and costs during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, which
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was primarily attributable to the 2024 Credit Agreement (as defined below) that was entered into on September 10, 2024, as discussed in Note 4 to the accompanying Notes to Consolidated Financial Statements.
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 (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, 2024, we had total immediate liquidity of approximately $810.0 million, comprised of approximately $70.0 million of cash and cash equivalents and approximately $740.0 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, 2024.
Indebtedness (dollars in thousands) September 30, 2024 Interest Rate (1)(2)
Maturity Date Prepayment Terms (3)
Unsecured credit facility:
Unsecured Credit Facility (4)
$ 256,000 Term SOFR + 0.875% September 7, 2029 i
Total unsecured credit facility 256,000
Unsecured term loans:
Unsecured Term Loan G 300,000 1.80 % February 5, 2026 i
Unsecured Term Loan A 150,000 2.16 % March 15, 2027 i
Unsecured Term Loan H 187,500 3.35 % January 25, 2028 i
Unsecured Term Loan I 187,500 3.51 % January 25, 2028 i
Unsecured Term Loan F (5)
200,000 2.96 % March 23, 2029 i
Total unsecured term loans 1,025,000
Total unamortized deferred financing fees and debt issuance costs (3,487)
Total carrying value unsecured term loans, net 1,021,513
Unsecured notes:
Series A Unsecured Notes (6)
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 L Unsecured Notes 175,000 6.05 % May 28, 2029 ii
Series M Unsecured Notes 125,000 6.17 % May 28, 2031 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
Series N Unsecured Notes 150,000 6.30 % May 28, 2034 ii
Total unsecured notes 1,650,000
Total unamortized deferred financing fees and debt issuance costs (6,179)
Total carrying value unsecured notes, net 1,643,821
Mortgage notes (secured debt):
United of Omaha Life Insurance Company 4,376 3.71 % October 1, 2039 ii
Total mortgage notes 4,376
Net unamortized fair market value discount (129)
Total carrying value mortgage notes, net 4,247
Total / weighted average interest rate (7)
$ 2,925,581 3.97 %
(1) Interest rate as of September 30, 2024. At September 30, 2024, the one-month Term SOFR was 4.84570%. 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%. 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%. As of September 30, 2024, 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%, 2.50%, and 2.66%, respectively (which includes the 0.10% adjustment). The Unsecured Term Loan F provides for the election of Daily Simple Secured Overnight Financing Rate (“Daily SOFR”), and effective January 15, 2025, Daily SOFR will be swapped to a fixed rate of 3.98%.
(3) Prepayment terms consist of (i) pre-payable with no penalty; and (ii) pre-payable with penalty.
(4) The capacity of our unsecured credit facility is $1.0 billion. The initial maturity date is September 8, 2028, 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 2024 Credit Agreement (as defined below). The facility fee is due and payable quarterly.
(5) The initial maturity date is March 25, 2027, or such later date which may be extended pursuant to two one-year extension options exercisable by us in our discretion upon advance written notice. Exercise of each one-year 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
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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.
(6) Subsequent to September 30, 2024, we redeemed in full at maturity the $50.0 million in aggregate principal amount of the Series A Unsecured Notes.
(7) 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.
The aggregate undrawn nominal commitments on our unsecured credit facility and unsecured term loans as of September 30, 2024 was approximately $740.0 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.
On September 10, 2024, we entered into the second amended and restated credit agreement for our unsecured credit facility (the “2024 Credit Agreement”) to, (i) extend the maturity date to September 8, 2028, or such later date which may be extended pursuant to two six-month extension options exercisable by us at our discretion, subject to certain conditions, including the payment of a fee, and (ii) provide that borrowings under our unsecured credit facility will, at our election, bear interest based on a Base Rate, Adjusted Term SOFR or Adjusted Daily Simple SOFR (each as defined in the 2024 Credit Agreement), which interest rate will be increased by 0.10% for any SOFR Loan (as defined in the 2024 Credit Agreement), plus an applicable spread based on our debt rating and leverage ratio (each as defined in the 2024 Credit Agreement). Other than the increase in the borrowing commitments and the interest rate provisions described above, the material terms of our unsecured credit facility remain unchanged.
On June 29, 2024, the sustainability-related interest rate reduction of 0.02% on our unsecured credit facility and each of our unsecured term loans ended in accordance with the respective loan agreements.
On March 25, 2024, we entered into a second amended and restated term loan agreement for the Unsecured Term Loan F to (i) extend the maturity date to March 25, 2027, with two one-year extension options, subject to certain conditions, that would extend the maturity date to March 23, 2029 if both exercised, and (ii) provide that borrowings under the Unsecured Term Loan F will, at our election, bear interest based on a Base Rate, Adjusted Term SOFR, or Adjusted Daily Simple SOFR (each as defined in the loan agreement), which interest rate will be increased by 0.10% for any SOFR Loan (as defined in the loan agreement), plus an applicable spread based on our debt rating and leverage ratio (each as defined in the loan agreement), less a sustainability-related adjustment. Other than the maturity and interest rate provisions described above, the material terms remain unchanged.
On March 13, 2024, we entered into a note purchase agreement (the “March 2024 NPA”) for the private placement by the Operating Partnership of $175.0 million senior unsecured notes maturing May 28, 2029, with a fixed annual interest rate of 6.05%, $125.0 million senior unsecured notes maturing May 28, 2031, with a fixed annual interest rate of 6.17%, and $150.0 million senior unsecured notes maturing May 28, 2034, with a fixed annual interest rate of 6.30%. The March 2024 NPA contains a number of financial covenants substantially similar to the financial covenants contained in our unsecured credit facility and other unsecured notes, 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 wholly owned subsidiaries of the Operating Partnership are guarantors of the unsecured notes. On May 28, 2024, we issued all of the notes under the March 2024 NPA.
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, 2024, we were in compliance with the applicable financial covenants.
The following table summarizes our debt capital structure as of September 30, 2024.
Debt Capital Structure September 30, 2024
Total principal outstanding (in thousands) $ 2,935,376
Weighted average duration (years) 4.6
% Secured debt 0.1 %
% Debt maturing next 12 months 7.7 %
Net Debt to Real Estate Cost Basis (1)
37.9 %
(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.
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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, 2024 and December 31, 2023, 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, 2024. 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.
ATM Common Stock Offering Program Date Maximum Aggregate Offering Price (in thousands) Aggregate Available as of September 30, 2024 (in thousands)
2022 $750 million ATM February 17, 2022 $ 750,000 $ 513,722
The following table summarizes the activity for shares sold on a forward basis under the ATM common stock offering program during the nine months ended September 30, 2024. We did not receive any proceeds from the sales of such shares on a forward basis.
Forward Sale Agreements
Trade date September 16, 2024 September 5, 2024 August 16, 2024 April 1, 2024 January 9, 2024
Shares sold 492,000 1,000,203 842,047 227,146 567,112
Gross sale price per share $ 39.9592 $ 39.9792 $ 39.7381 $ 39.1020 $ 38.8818
Gross sale price (in thousands) $ 19,660 $ 39,987 $ 33,461 $ 8,882 $ 22,050
Net sale price per share $ 39.5888 $ 39.5514 $ 39.3407 $ 38.6621 $ 38.5058
Maturity date September 22, 2025 September 5, 2025 September 30, 2025 March 31, 2025 January 9, 2025
We expect to fully physically settle the applicable forward sale agreements on one or more dates prior to the respective scheduled maturity dates, at which point we would receive the proceeds net of certain costs; provided, however, we may elect to cash settle or net share settle such forward sale agreements at any time through the respective scheduled maturity dates.
In addition to the forward sale agreements discussed above, at September 30, 2024, there was an additional outstanding forward sale agreement that we entered into during the year ended December 31, 2023 for 1,100,000 shares sold on a forward basis under the ATM common stock offering program. We expect to fully physically settle such forward sale agreement on one or more dates prior to the scheduled maturity date of December 14, 2024, at which point we would receive the proceeds net of certain costs; provided, however, we may elect to cash settle or net share settle such forward sale agreement.
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, 2024, we owned approximately 98.0% 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 2.0%.
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On August 8, 2024, we formed a joint venture with a third party that is primarily engaged in the development and operation of an industrial real estate property located in Reno, Nevada. At September 30, 2024, we held a 95% interest and the third party held the remaining 5% interest in the joint venture.
Interest Rate Risk
We use interest rate swaps to fix the rate of our variable rate debt. As of September 30, 2024, 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, 2024, 17 of our interest rate swaps outstanding were in an asset position of approximately $29.0 million and four of our forward-starting interest rate swaps were in a liability position of approximately $3.0 million, including any adjustment for nonperformance risk related to these agreements.
During the nine months ended September 30, 2024, we entered into four interest rate swaps with an aggregate notional value of $200.0 million which fix Daily SOFR at 3.98% effective January 15, 2025 and mature on March 25, 2027.
As of September 30, 2024, we had approximately $1,281.0 million of variable rate debt. As of September 30, 2024, all of our outstanding variable rate debt, with the exception of our unsecured credit facility, was fixed with interest rate swaps through initial 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, 2024, we had letters of credit related to development projects and certain other agreements of approximately $4.0 million. As of September 30, 2024, we had no other material off-balance sheet arrangements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.