Terreno Realty Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion in conjunction with the sections of this Annual Report on Form 10-K entitled “Risk Factors”, “Forward-Looking Statements”, “Business” and our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. 30 Table of Content s Overview We acquire, own and operate industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. We invest in several types of industrial real estate, including warehouse/distribution (approximately 79.5% of our total annualized base rent as of December 31, 2021), flex (including light industrial and research and development, or R&D) (approximately 4.8%), transshipment (approximately 6.4%) and improved land (approximately 9.3%). We target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. Infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings. As of December 31, 2021, we owned a total of 253 buildings aggregating approximately 15.1 million square feet, 36 improved land parcels consisting of approximately 127.1 acres and four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres. As of December 31, 2021, our buildings and improved land parcels were approximately 95.5% and 94.8% leased (including 0.4 million square feet of vacancy acquired during the fourth quarter of 2021), respectively, to 554 customers, the largest of which accounted for approximately 4.9% of our total annualized base rent. We are an internally managed Maryland corporation and elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2010. Our Investment Strategy We acquire, own and operate industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. We invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and R&D), transshipment and improved land. We target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. We selected our target markets by drawing upon the experience of our executive management investing and operating in over 50 global industrial markets located in North America, Europe and Asia, the fundamentals of supply and demand, and in anticipation of trends in logistics patterns resulting from population changes, regulatory and physical constraints, changes in technology, e-commerce, the economic and environmental benefits of reducing vehicle miles traveled and other factors. We believe that our target markets have attractive long term investment attributes. We target assets with characteristics that include, but are not limited to, the following: • Located in high population coastal markets; • Close proximity to transportation infrastructure (such as sea ports, airports, highways and railways); • Situated in supply-constrained submarkets with barriers to new industrial development, as a result of physical and/or regulatory constraints; • Functional and flexible layout that can be modified to accommodate single and multiple tenants; • Acquisition price at a discount to the replacement cost of the property; • Potential for enhanced return through re-tenanting or operational and physical improvements; and • Opportunity for higher and better use of the property over time. In general, we prefer to utilize local third-party property managers for day-to-day property management and as a source of acquisition opportunities. We believe outsourcing property management is cost effective and provides us with operational flexibility. We may directly manage properties in the future if we determine such direct property management is in our best interest. We have no current intention to acquire undeveloped or unimproved industrial land or to pursue greenfield ground up development. Nevertheless, we pursue redevelopment, renovation and expansion opportunities of properties that we own, acquire properties and improved land parcels with the intent to redevelop in the near-term, and acquire adjacent land to expand our existing facilities. We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties. We may acquire industrial properties through the acquisition of other corporations or entities that own industrial real estate. We will opportunistically make investments in debt secured by industrial real estate that would otherwise meet our investment criteria with the intention of ultimately acquiring the underlying real estate. We currently do not intend to target specific percentages of holdings of particular types of industrial properties. This expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions. 31 Table of Content s The properties we acquire may be stabilized (fully leased) or unstabilized (have near term lease expirations, be partially or fully vacant and may require physical repositioning). We sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value and/or the market value of the property is significantly greater than its estimated replacement cost. Capital from such sales is reinvested into properties that are expected to provide better prospective returns or returned to shareholders. We have disposed of 25 properties since inception in 2010 for an aggregate sales price of approximately $407.7 million and a total gain of approximately $136.5 million. 2021 Developments COVID-19 The COVID-19 pandemic, including the emergence of various variants, has caused significant disruption to the U.S. and global economies and has contributed to significant volatility and negative pressure in financial markets. Our operations, including our occupancy, rent collections and acquisition volume, largely returned to pre-COVID levels during the year ended December 31, 2021. However, there can be no assurance that our business, and that of our tenants, will not be materially and adversely impacted by COVID-19 in the future. See "Item 1A - Risk Factors" in this Annual Report on Form 10-K for additional discussion regarding the risks to which we are and may be subject to as a result of the COVID-19 pandemic. Acquisition Activity During 2021, we acquired 34 industrial properties for a total purchase price of approximately $657.3 million. The properties were acquired from unrelated third parties using existing cash on hand, net proceeds from dispositions, net proceeds from the issuance of common stock and debt. The following table sets forth the industrial properties we acquired during 2021: Property Name Location Acquisition Date Number of Buildings Square Feet Purchase Price (in thousands) 1 Stabilized Cap Rate 2 Acreage 256 Paterson Plank Carlstadt, NJ January 13, 2021 1 16,159 $ 10,625 5.2 % — 117th Place NE Kirkland, WA February 25, 2021 1 126,721 33,750 2.9 % — Countyline #24 & #25 Hialeah, FL March 17, 2021 2 273,577 48,114 3.7 % — Edison San Leandro, CA March 31, 2021 3 112,392 17,600 5.6 % — 73rd Street Miami, FL April 6, 2021 — — 5,800 5.1 % 5.8 68th Kent Kent, WA April 13, 2021 2 67,120 10,000 5.5 % — East Gish San Jose, CA April 22, 2021 — — 8,004 4.8 % 2.2 Gramercy Place Torrance, CA May 12, 2021 1 17,407 6,290 4.7 % — Occidental Avenue Seattle, WA May 12, 2021 3 51,853 16,450 4.6 % — SW 16th Street Renton, WA June 14, 2021 — — 7,615 1.5 % 2.9 Countyline #26 Hialeah, FL July 14, 2021 1 220,942 39,409 3.7 % — 13020 & 13030 Cerise Hawthorne, CA July 14, 2021 2 21,846 8,075 5.4 % — 1150 & 1250 W. Trenton Ave Orange, CA July 30, 2021 2 34,224 9,335 3.6 % — MLK 9801 Seattle, WA August 11, 2021 — — 11,900 2.4 % 3.1 MLK 9845 Seattle, WA August 11, 2021 — — 15,750 3.4 % 3.4 MLK 9600 Seattle, WA August 11, 2021 — — 22,350 4.9 % 5.2 Foley Street Hayward, CA August 26, 2021 2 40,504 8,250 4.9 % — Paterson Plank III Carlstadt, NJ August 27, 2021 — — 17,850 4.5 % 4.9 97 Third Street Kearny, NJ September 27, 2021 — — 26,250 3.1 % 5.4 13025 Cerise Hawthorne, CA September 30, 2021 1 21,000 7,875 2.9 % — Woodinville Woodinville, WA October 1, 2021 1 84,238 23,600 3.1 % — 190 Morgan Brooklyn, NY October 12, 2021 1 11,881 4,450 4.9 % — San Pedro Gardena, CA October 15, 2021 — — 8,800 7.0 % 2.0 228 North Avenue Elizabeth, NJ October 20, 2021 1 30,978 44,000 4.8 % — Pickett Alexandria, VA October 29, 2021 1 27,683 9,000 4.5 % — Berryessa San Jose, CA October 29, 2021 — — 23,000 5.2 % 7.2 768 772 Ceres Los Angeles, CA November 18, 2021 2 16,887 7,661 3.4 % — Tuxedo Hyattsville, MD November 23, 2021 — — 8,000 5.6 % 2.9 Maple II Rancho Dominguez, CA November 30, 2021 — — 13,800 4.9 % 2.3 Eisenhower Alexandria, VA December 10, 2021 3 199,396 60,750 3.0 % — 4501 46th Street Bladensburg, MD December 13, 2021 — — 11,850 3.8 % 4.4 Countyline #27 & #28 Hialeah, FL December 15, 2021 2 401,906 74,142 3.8 % — Woodinville II Woodinville, WA December 23, 2021 2 118,310 33,500 3.7 % — Willows Redmond, WA December 27, 2021 — — 3,500 4.9 % 0.8 Total/Weighted Average 34 1,895,024 $ 657,345 4.0 % 52.5 32 Table of Content s 1 Excludes intangible liabilities and mortgage premiums, if any. The total aggregate initial investment was approximately $682.0 million, including $12.6 million in capitalized closing costs and acquisition costs and $34.2 million in assumed intangible liabilities and $22.1 million in other credits related to near term capital expenditures at the Countyline #24 & #25, Countyline #26 and Countyline #27 & #28 properties. 2 Stabilized capitalization rates, referred to herein as stabilized cap rates, are calculated, at the time of acquisition, as annualized cash basis net operating income for the property stabilized to market occupancy (generally 95%) divided by the total acquisition cost for the property. Total acquisition cost basis for the property includes the initial purchase price, the effects of marking assumed debt to market, buyer’s due diligence and closing costs, estimated near-term capital expenditures and leasing costs necessary to achieve stabilization. We define cash basis net operating income for the property as net operating income excluding straight-line rents and amortization of lease intangibles. These stabilized cap rates are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in this Annual Report on Form 10-K. Redevelopment Activity As of December 31, 2021, we had four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres with a total expected investment of approximately $75.8 million, including redevelopment costs, capitalized interest and other costs as follows: Property Name Total Expected Investment (in thousands) 1 Amount Spent to Date (in thousands) Estimated Amount Remaining to Spend (in thousands) Estimated Stabilized Cap Rate 2 Estimated Post-Development Square Feet Estimated Completion Quarter % Pre-leased December 31, 2021 Americas Gateway $ 7,429 $ 6,392 $ 1,037 5.5 % 51,800 Q4 2022 50.9 % Paterson Plank III 3 23,643 19,080 4,563 4.5 % N/A Q4 2022 — % 73rd Street 20,136 16,254 3,882 5.1 % 128,844 Q4 2022 — % Berryessa 4 24,563 23,431 1,132 5.1 % N/A Q1 2023 — % Total/Weighted Average $ 75,771 $ 65,157 $ 10,614 5.0 % 180,644 14.6 % 1 Total expected investment for the properties include the initial purchase price, buyer’s due diligence and closing costs, estimated near-term redevelopment expenditures, capitalized interest and leasing costs necessary to achieve stabilization. 2 Estimated stabilized cap rates are calculated as estimated annualized cash basis net operating income for the properties stabilized to market occupancy (generally 95%) divided by the total acquisition cost for the property. We define cash basis net operating income for the property as net operating income excluding straight-line rents and amortization of lease intangibles. These estimated stabilized cap rates are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in this Annual Report on Form 10-K. 3 Improved land parcel of approximately 4.9 acres. 4 Improved land parcel of approximately 7.2 acres. During the fourth quarter of 2021, we completed redevelopment of our Sodo Row - North & South property in Seattle, Washington, an approximately 0.2 million square foot redevelopment property. The total investment was approximately $62.8 million. We capitalized interest associated with redevelopment and expansion activities of approximately $0.7 million, $1.6 million and $3.2 million during the years ended December 31, 2021, 2020 and 2019, respectively. Disposition Activity During the year ended December 31, 2021, we sold one property located in the Seattle, Washington market for a sales price of approximately $10.3 million, resulting in a gain of approximately $3.2 million, and one property located in the New York/New Jersey market for a sales price of approximately $32.7 million, resulting in a gain of approximately $13.4 million. 33 Table of Content s The following summarizes the condensed results of operations of the properties sold during the year ended December 31, 2021 for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands): For the Year Ended December 31, 2021 2020 2019 Rental revenues $ 1,611 $ 1,690 $ 2,028 Tenant expense reimbursements 466 585 558 Property operating expenses (581) (724) (658) Depreciation and amortization (606) (936) (875) Income from operations $ 890 $ 615 $ 1,053 Public Offering On November 8, 2021, we completed a public offering of 3,500,000 shares of our common stock at a price per share of $74.50. On November 10, 2021, we sold an additional 525,000 shares upon the exercise by the underwriters of their option to purchase additional shares. The net proceeds of the offering were approximately $296.5 million after deducting the underwriting discount and offering costs of approximately $3.3 million. We intend to use the net proceeds for general corporate purposes, which may include, without limitation, working capital, repayment of indebtedness, future acquisitions and redevelopments. ATM Program We have an at-the-market equity offering program (the “$300 Million ATM Program”) pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $300.0 million ($221.4 million remaining as of December 31, 2021) in amounts and at times as we determine from time to time. Prior to the implementation of the $300 Million ATM Program, we had a previous at-the-market equity program (the “Previous $300.0 million ATM Program”), which was substantially utilized as of June 10, 2021 and which is no longer active. We intend to use the net proceeds from the offering of the shares under the $300 Million ATM Program, if any, for general corporate purposes, which may include future acquisitions, redevelopments and repayment of indebtedness, including borrowings under our revolving credit facility. During 2021, we issued an aggregate of 2,569,771 shares of common stock at a weighted average offering price of $63.23 per share under the Previous $300 Million ATM and the $300 Million ATM Program, resulting in net proceeds of approximately $160.1 million and paying total compensation to the applicable sales agents of approximately $2.4 million. Share Repurchase Program We have a share repurchase program authorizing us to repurchase up to 3,000,000 shares of our outstanding common stock from time to time through December 31, 2022. Purchases made pursuant to this program, if any, will be made in either the open market or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. As of December 31, 2021, we had not repurchased any shares of our common stock pursuant to our share repurchase program. Senior Unsecured Notes On July 15, 2021, we issued (i) $100.0 million of senior guaranteed green notes (the “Series A Notes”) and (ii) $50.0 million of senior guaranteed notes (the “Series B Notes”) in a private placement. The Series A Notes bear interest at a fixed annual interest rate of 2.41% and mature in July 2028, and the Series B Notes bear interest at a fixed annual interest rate of 2.84% and mature in July 2031. On October 28, 2021, we issued $125.0 million of senior guaranteed notes (the “2.38% Notes”) in a private placement. The 2.38% Notes bear interest at a fixed rate of 2.38% and mature in August 2030. The 2.38% Notes and, together with the Series A Notes and the Series B Notes, the “Notes”, are guaranteed by us and by substantially all of the current and to-be-formed subsidiaries of the borrower that own an unencumbered property. The Notes are not secured by our properties or by interests in the subsidiaries that hold such properties. The Notes include a series of financial and other covenants with which we must comply. Dividend and Distribution Activity 34 Table of Content s On February 8, 2022, our board of directors declared a cash dividend in the amount of $0.34 per share of our common stock payable on April 8, 2022 to the stockholders of record as of the close of business on March 25, 2022. The following table sets forth the cash dividends paid or payable per share during the year ended December 31, 2021: For the Three Months Ended Security Dividend per Share Declaration Date Record Date Date Paid March 31, 2021 Common stock $ 0.29 February 9, 2021 March 26, 2021 April 9, 2021 June 30, 2021 Common stock $ 0.29 May 4, 2021 June 30, 2021 July 14, 2021 September 30, 2021 Common stock $ 0.34 August 3, 2021 October 1, 2021 October 15, 2021 December 31, 2021 Common stock $ 0.34 November 2, 2021 December 15, 2021 January 5, 2022 Contractual Commitments As of February 8, 2022, we have outstanding contracts with third-party sellers to acquire five industrial properties for a total aggregate purchase price of $125.8 million, as described under the heading “Material Cash Commitments” in this Annual Report on Form 10-K. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions. Outlook Current operating conditions in our six markets for our business are excellent. We believe that on average, the rental rates we are likely to achieve on new or renewed leases for our 2022 expirations will be above the rates currently paid for the same space. However, new speculative development continues. This new development will slow potential rent growth from what it would be without such new development. We see attractive acquisition opportunities. Nevertheless, our acquisition volume will be dependent on both the quality and pricing of the opportunity set and the price of our stock relative to net asset value (“NAV”). Those conditions, not knowable in advance, will determine our results. We will continue to sell assets and redeploy the capital to enhance NAV per share or return the capital to shareholders. We entered 2022 with our balance sheet exceedingly well positioned for growth as we have no balance outstanding on our $250.0 million revolving credit facility and a cash balance of approximately $204.4 million. Within our six markets we have increasingly focused on urban infill locations. While our net growth will remain limited to a size where we can make directly informed operational decisions, we feel more strongly today than we did twelve years ago about the long-term investment merits of our strategy and the growth opportunities ahead. We are mindful, always, that it is per share rather than aggregate results that matter. We believe in the long-term operating prospects of our functional, extremely infill coastal assets. We believe in sound balance sheet management. We believe in the benefits of our market-leading corporate governance and exceptionally aligned executive management compensation. As a result, we are enthusiastic about the future and our ability to produce superior results for our shareholders over time. Our outlook is subject to the risks set forth in this Annual Report on Form 10-K, including the risks set form in “Item 1A - Risk Factors”. Inflation The U.S. economy has experienced an increase in inflation rates recently. A wide variety of industries and sectors are affected by increasing commodity prices. Inflation has increased construction costs, including tenant improvements and capital projects, and operating costs, recently. Most of our leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. In addition, leases with respect to approximately 66.7% of our total rentable square feet expire within five years which enables us to seek to replace existing leases with new leases at the then-existing market rate. Financial Condition and Results of Operations 35 Table of Content s We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants. Approxi mately 94.2% o f our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years. Our primary cash expenses consist of our property operating expenses, which include: real estate taxes, repairs and maintenance, management expenses, insurance, utilities, general and administrative expenses, which include compensation costs, office expenses, professional fees and other administrative expenses, acquisition costs, which include third-party costs paid to brokers and consultants, and interest expense, primarily on our revolving credit facility, term loans and senior unsecured notes. Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions at various times during the course of such periods. The results of operations of any acquired property are included in our financial statements as of the date of its acquisition. The analysis of our results below for the years ended December 31, 2021 and 2020 includes the changes attributable to same store properties. The same store pool for the comparison of the years ended December 31, 2021 and 2020 includes all properties that were owned and in operation as of December 31, 2021 and since January 1, 2020 and excludes properties that were either disposed of prior to, held for sale to a third party or in redevelopment as of December 31, 2021. As of December 31, 2021, the same store pool consisted of 210 buildings aggregating approximately 12.5 million square feet representing approximately 83.0% of our total square feet owned and 19 improved land parcels consisting of approximately 79.6 acres. As of December 31, 2021, the non-same store properties, which we acquired, redeveloped, or sold during 2020 and 2021 or were held for sale (if any) or in redevelopment as of December 31, 2021, consisted of 43 buildings aggregating approximately 2.6 million square feet, 17 improved land parcels consisting of approximately 47.5 acres and four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres. As of December 31, 2021 and 2020, our consolidated same store pool occupancy was approximately 98.2% and 98.0%, respectively. Our future financial condition and results of operations, including rental revenues, straight-line rents and amortization of lease intangibles, may be impacted by the acquisitions of additional properties, and expenses may vary materially from historical results. 36 Table of Content s Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020: For the Year Ended December 31, 2021 2020 $ Change % Change (Dollars in thousands) Rental revenues 1 Same store $ 153,569 $ 138,761 $ 14,808 10.7 % Non-same store operating properties 2 22,530 8,340 14,190 170.1 % Total rental revenues 176,099 147,101 28,998 19.7 % Tenant expense reimbursements 1 Same store 41,260 37,954 3,306 8.7 % Non-same store operating properties 2 4,571 1,829 2,742 149.9 % Total tenant expense reimbursements 45,831 39,783 6,048 15.2 % Total revenues 221,930 186,884 35,046 18.8 % Property operating expenses Same store 48,703 46,131 2,572 5.6 % Non-same store operating properties 2 7,545 2,965 4,580 154.5 % Total property operating expenses 56,248 49,096 7,152 14.6 % Net operating income 3 Same store 146,126 130,584 15,542 11.9 % Non-same store operating properties 2 19,556 7,204 12,352 171.5 % Total net operating income $ 165,682 $ 137,788 $ 27,894 20.2 % Other costs and expenses Depreciation and amortization 50,687 45,875 4,812 10.5 % General and administrative 26,964 23,489 3,475 14.8 % Acquisition costs 172 271 (99) (36.5) % Total other costs and expenses 77,823 69,635 8,188 11.8 % Other income (expense) Interest and other income 822 873 (51) (5.8) % Interest expense, including amortization (18,054) (15,997) (2,057) 12.9 % Gain on sales of real estate investments 16,627 26,766 (10,139) (37.9) % Total other income (expense) (605) 11,642 (12,247) n/a Net income $ 87,254 $ 79,795 $ 7,459 9.3 % 1 Accounting Standards Update (“ASU”) No. 2018-11, Leases (Topic 842), Targeted Improvements, allows us to elect not to separate lease and non-lease rental income. All rental income earned pursuant to tenant leases is reflected as one line, “Rental revenues and tenant expense reimbursements” on our accompanying consolidated statements of operations. We believe that the above presentation of rental revenues and tenant expense reimbursements is not, and is not intended to be, a presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We believe this information is frequently used by management, investors, and other interested parties to evaluate our performance. See “Note 2 - Significant Accounting Policies” in our notes to consolidated financial statements for more information regarding our adoption of this standard. 2 Includes 2020 and 2021 acquisitions and dispositions, seventeen improved land parcels and four properties under redevelopment as of December 31, 2021. 3 Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of net operating income and same store net operating income from net income and a discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance. 37 Table of Content s Revenues. Total revenues increased approximately $35.0 million for the year ended December 31, 2021 compared to the prior year due primarily to increased revenue on new and renewed leases, property acquisitions during 2021 and 2020. Cash rents on new and renewed leases totaling approximately 2.6 million square feet commencing during the year ended December 31, 2021 increased approximately 28.4% compared to the same period from the prior year. For the years ended December 31, 2021 and 2020, approximately $5.3 million and $4.3 million, respectively, was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants and approximately $0.3 million and $3.7 million, respectively, was recorded in lease termination revenue. Property operating expenses. Total property operating expenses increased approximately $7.2 million during the year ended December 31, 2021 compared to the prior year. The increase in total property operating expenses was primarily due to an increase of approximately $4.6 million attributable to property acquisitions during 2021 and 2020 as well as increases in real estate taxes related to annual rate increases at certain of our properties. Depreciation and amortization. Depreciation and amortization increased approximately $4.8 million during the year ended December 31, 2021 compared to the prior year primarily due to property acquisitions during 2020 and 2021. General and administrative expenses. General and administrative expenses increased approximately $3.5 million for the year ended December 31, 2021 primarily due to increased restricted stock amortization and other compensation expenses, including an increase in bonus expense of approximately $1.8 million and an increase in the number of employees compared to the prior year. Interest and other income. Interest and other income decreased approximately $0.1 million for the year ended December 31, 2021 compared to the prior year primarily due to the pay down of our outstanding senior secured loan balance. Interest expense, including amortization. Interest expense increased approximately $2.1 million for the year ended December 31, 2021 compared to the prior year. This increase was primarily due to the issuance of approximately $275 million of senior unsecured notes during 2021, partially offset by the repayment of a $32.7 million mortgage loan in 2020 and an $11.3 million mortgage loan in 2021. Gain on sales of real estate investments. Gain on sales of real estate investments decreased approximately $10.1 million for the year ended December 31, 2021 compared to the prior year. The aggregate sales price for property sales for the year ended December 31, 2021 was approximately $43.0 million as compared to approximately $73.5 million for the prior year. Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019: Discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019 was included in our Annual Report on Form 10-K for the year ended December 31, 2020 on page 34 under Part II, Item 7, “Management's Discussion and Analysis of Financial Position and Results of Operations”, which was filed with the Securities and Exchange Commission on February 10, 2021. Liquidity and Capital Resources The primary objective of our financing strategy is to maintain financial flexibility with a conservative capital structure using retained cash flows, proceeds from dispositions of properties, long-term debt and the issuance of common and perpetual preferred stock to finance our growth. Over the long-term, we intend to: • limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 35% of our total enterprise value; • maintain a fixed charge coverage ratio in excess of 2.0x; • maintain a debt-to-adjusted EBITDA ratio below 6.0x; • limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness; and • have staggered debt maturities that are aligned to our expected average lease term (5-7 years), positioning us to re-price parts of our capital structure as our rental rates change with market conditions. 38 Table of Content s We intend to preserve a flexible capital structure with a long-term goal to maintain our investment grade rating and be in a position to issue additional unsecured debt and perpetual preferred stock. Fitch Ratings assigned us an issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. There can be no assurance that we will be able to maintain our current credit rating. Our credit rating can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. In the event our current credit rating is downgraded, it may become difficult or expensive to obtain additional financing or refinance existing obligations and commitments. We intend to primarily utilize senior unsecured notes, term loans, credit facilities, dispositions of properties, and proceeds from the issuance of common stock and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value ratio. We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our revolving credit facility. We believe that our net cash provided by operations will be adequate to fund operating requirements, pay interest on any borrowings and fund distributions in accordance with the REIT requirements of the federal income tax laws. In the near-term, we intend to fund future investments in properties with cash on hand, term loans, senior unsecured notes, mortgages, borrowings under our revolving credit facility, perpetual preferred and common stock issuances and, from time to time, property dispositions. We expect to meet our long-term liquidity requirements, including with respect to other investments in industrial properties, property acquisitions, property redevelopments, renovations and expansions and scheduled debt maturities, through borrowings under our revolving credit facility, periodic issuances of common stock, perpetual preferred stock, and long-term unsecured and secured debt, and, from time to time, with proceeds from the disposition of properties. The success of our acquisition strategy may depend, in part, on our ability to obtain and borrow under our revolving credit facility and to access additional capital through issuances of equity and debt securities. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Equity Sources of Liquidity On November 8, 2021, we completed a public offering of 3,500,000 shares of our common stock at a price per share of $74.50. On November 10, 2021, we sold an additional 525,000 shares upon the exercise by the underwriters of their option to purchase additional shares. The net proceeds of the offering were approximately $296.5 million after deducting the underwriting discount and offering costs of approximately $3.3 million. We intend to use the net proceeds for general corporate purposes, which may include, without limitation, working capital, repayment of indebtedness, future acquisitions and redevelopments. The following sets forth certain information regarding our current at-the-market common stock offering program as of December 31, 2021: ATM Stock Offering Program Date Implemented Maximum Aggregate Offering Price (in thousands) Aggregate Common Stock Available (in thousands) $300 Million ATM Program June 11, 2021 $ 300,000 $ 221,434 The table below sets forth the activity under our at-the-market common stock offering programs during the years ended December 31, 2021 and 2020, respectively (in thousands, except share and price per share data): For the Year Ended December 31, Shares Sold Weighted Average Price Per Share Net Proceeds (in thousands) Sales Commissions (in thousands) December 31, 2021 2,569,771 $ 63.23 $ 160,127 $ 2,356 December 31, 2020 1,197,597 $ 54.08 $ 63,828 $ 939 39 Table of Content s Debt Sources of Liquidity On July 15, 2021, we issued (i) $100.0 million of senior guaranteed green notes (the “Series A Notes”) and (ii) $50.0 million of senior guaranteed notes (the “Series B Notes”) in a private placement. The Series A Notes bear interest at a fixed annual interest rate of 2.41% and mature in July 2028, and the Series B Notes bear interest at a fixed annual interest rate of 2.84% and mature in July 2031. On October 28, 2021, we issued $125.0 million of senior guaranteed notes (the “2.38% Notes”) in a private placement. The 2.38% Notes bear interest at a fixed rate of 2.38% and mature in August 2030. The 2.38% Notes and, together with the Series A Notes and the Series B Notes, the “Notes”, are guaranteed by us and by substantially all of the current and to-be-formed subsidiaries of the borrower that own an unencumbered property. The Notes are not secured by our properties or by interests in the subsidiaries that hold such properties. The Notes include a series of financial and other covenants with which we must comply. As of December 31, 2021, we had $50.0 million of senior unsecured notes that mature in September 2022, $100.0 million of senior unsecured notes that mature in July 2024, $50.0 million of senior unsecured notes that mature in July 2026, $50.0 million of senior unsecured notes that mature in October 2027, $100.0 million of Series A Notes, $100.0 million of senior unsecured notes that mature in December 2029, $125.0 million of 2.38% Notes, and $50.0 million of Series B Notes (collectively, the “Senior Unsecured Notes”). On August 20, 2021, our subsidiary entered into a Sixth Amended and Restated Senior Credit Agreement (the “Amended Facility”) which consists of a $250.0 million revolving credit facility that matures in August 2025 and a $100.0 million term loan that matures in January 2027. Among other things, the Amended Facility extended the maturity date of the revolving credit facility and the $100.0 million term loan. As of both December 31, 2021 and 2020, there were no borrowings outstanding on our revolving credit facility and $100.0 million of borrowings outstanding on our term loan. The aggregate amount of the Amended Facility may be increased to a total of up to $650.0 million, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. Outstanding borrowings under the Amended Facility are limited to the lesser of (i) the sum of the $100.0 million term loan and the $250.0 million revolving credit facility, or (ii) 60.0% of the value of the unencumbered properties. Interest on the Amended Facility, including the term loan is generally to be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greatest of the administrative agent’s prime rate, 0.50% above the federal funds effective rate, or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Amended Facility plus 1.25%. The applicable LIBOR margin will range from 1.00% to 1.45% (1.00% as of December 31, 2021) for the revolving credit facility and 1.15% to 1.65% (1.15% as of December 31, 2021) for the $100.0 million term loan, depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value. The Amended Facility requires quarterly payments of an annual facility fee in an amount ranging from 0.15% to 0.30%, depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value. The Amended Facility and the Senior Unsecured Notes are guaranteed by us and by substantially all of the current and to-be-formed subsidiaries of the borrower that own an unencumbered property. The Amended Facility and the Senior Unsecured Notes are not secured by our properties or by interests in the subsidiaries that hold such properties. The Amended Facility and the Senior Unsecured Notes include a series of financial and other covenants with which we must comply. We were in compliance with the covenants under the Amended Facility and the Senior Unsecured Notes as of December 31, 2021 and 2020. As of December 31, 2021 and 2020, we had an outstanding mortgage loan payable, net of deferred financing costs, of approximately $0 and $11.3 million, respectively, and held cash and cash equivalents totaling approximately $204.4 million and $107.2 million, respectively. The mortgage loan payable was fully repaid in January 2021. The following tables summarize our debt maturities and principal payments as of and for the year ended December 31, 2021, and market capitalization, capitalization ratios, Adjusted EBITDA, interest coverage, fixed charge coverage and debt ratios as of and for the years ended December 31, 2021 and 2020 (dollars in thousands, except per share data): Credit Facility Term Loan Senior Unsecured Notes Total Debt 2022 $ — $ — $ 50,000 $ 50,000 2023 — — — — 2024 — — 100,000 100,000 2025 — — — — 2026 — — 50,000 50,000 Thereafter — 100,000 425,000 525,000 Total Debt — 100,000 625,000 725,000 Deferred financing costs, net — (505) (3,825) (4,330) Total Debt, net $ — $ 99,495 $ 621,175 $ 720,670 Weighted average interest rate n/a 1.2% 3.2% 2.9% As of December 31, 2021 As of December 31, 2020 Total Debt, net $ 720,670 $ 459,118 Equity Common Stock Shares Outstanding 1 75,344,302 68,515,588 Market Price 2 $ 85.29 $ 58.51 Total Equity 6,426,116 4,008,847 Total Market Capitalization $ 7,146,786 $ 4,467,965 Total Debt-to-Total Investments in Properties 3 24.5% 20.6% Total Debt-to-Total Market Capitalization 4 10.1% 10.3% Floating Rate Debt as a % of Total Debt 5 13.8% 21.7% Unhedged Floating Rate Debt as a % of Total Debt 6 13.8% 10.9% Mortgage Loans Payable as a % of Total Debt 7 —% 2.5% Mortgage Loans Payable as a % of Total Investments in Properties 8 —% 0.5% Adjusted EBITDA 9 $ 149,094 $ 124,998 Interest Coverage 10 8.3 x 7.8 x Fixed Charge Coverage 11 8.0 x 7.1 x Total Debt-to-Adjusted EBITDA 12 4.5 x 3.6 x Weighted Average Maturity of Total Debt (years) 5.9 4.5 1 Includes 289,186 and 203,729 shares of unvested restricted stock outstanding as of December 31, 2021 and 2020, respectively. Also includes 275,727 and 139,224 shares held in the Deferred Compensation Plan as of December 31, 2021 and 2020, respectively. 2 Closing price of our shares of common stock on the New York Stock Exchange on December 31, 2021 and 2020, respectively, in dollars per share. 3 Total debt-to-total investments in properties is calculated as total debt, including premiums and net of deferred financing costs, divided by total investments in properties. 4 Total debt-to-total market capitalization is calculated as total debt, including premiums and net of deferred financing costs, divided by total market capitalization. 5 Floating rate debt as a percentage of total debt is calculated as floating rate debt, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing costs. Floating rate debt includes our $100.0 million variable-rate term loan borrowings, of which $50.0 million was subject to an interest rate cap of 4.0% plus 1.20% to 1.70%, depending on leverage, as of December 31, 2020. The interest rate cap expired on May 4, 2021. See “Note 8 - Derivative Financial Instruments” in our notes to consolidated financial statements for more information regarding our prior interest rate cap. 6 Unhedged floating rate debt as a percentage of total debt is calculated as unhedged floating rate debt, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing 40 Table of Content s costs. Hedged debt includes our $100.0 million variable-rate term loan borrowings, of which $50.0 million was subject to an interest rate cap of 4.0% plus 1.20% to 1.70%, depending on leverage, as of December 31, 2020. The interest rate cap expired on May 4, 2021. See “Note 8 - Derivative Financial Instruments” in our notes to consolidated financial statements for more information regarding our prior interest rate cap. 7 Mortgage loans payable as a percentage of total debt is calculated as mortgage loans payable, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing costs. 8 Mortgage loans payable as a percentage of total investments in properties is calculated as mortgage loans payable, including premiums and net of deferred financing costs, divided by total investments in properties. 9 Earnings before interest, taxes, gains (losses) from sales of property, depreciation and amortization, acquisition costs and stock-based compensation (“Adjusted EBITDA”) for the years ended December 31, 2021 and 2020, respectively. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance. 10 Interest coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance. 11 Fixed charge coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization plus capitalized interest. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance. 12 Total debt-to-Adjusted EBITDA is calculated as total debt, including premiums and net of deferred financing costs, divided by annualized Adjusted EBITDA. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance. The following table sets forth the cash dividends paid or payable per share during the years ended December 31, 2021 and 2020: For the Three Months Ended Security Dividend per Share Declaration Date Record Date Date Paid March 31, 2021 Common stock $ 0.29 February 9, 2021 March 26, 2021 April 9, 2021 June 30, 2021 Common stock $ 0.29 May 4, 2021 June 30, 2021 July 14, 2021 September 30, 2021 Common stock $ 0.34 August 3, 2021 October 1, 2021 October 15, 2021 December 31, 2021 Common stock $ 0.34 November 2, 2021 December 15, 2021 January 5, 2022 For the Three Months Ended Security Dividend per Share Declaration Date Record Date Date Paid March 31, 2020 Common stock $ 0.27 February 5, 2020 March 27, 2020 April 10, 2020 June 30, 2020 Common stock $ 0.27 May 5, 2020 June 30, 2020 July 14, 2020 September 30, 2020 Common stock $ 0.29 August 4, 2020 October 2, 2020 October 16, 2020 December 31, 2020 Common stock $ 0.29 November 3, 2020 December 15, 2020 January 5, 2021 Sources and Uses of Cash Our principal sources of cash are cash from operations, borrowings under loans payable, draws on our Amended Facility, common and preferred stock issuances, proceeds from property dispositions and issuances of unsecured notes. Our principal uses of cash are asset acquisitions, debt service, capital expenditures, operating costs, corporate overhead costs and common stock dividends. Cash From Operating Activities. Net cash provided by operating activities totaled approximately $132.2 million for the year ended December 31, 2021 compared to approximately $101.1 million for the year ended December 31, 2020. This increase in cash provided by operating activities is primarily attributable to additional cash flows generated from the properties acquired during 2021 and 2020, as we acquired 34 properties during year ended December 31, 2021 compared to 11 properties acquired in the prior year, and increased rents on new and renewed leases at our same store properties. Cash From Investing Activities. Net cash used in investing activities was approximately $666.4 million and $52.1 million for the years ended December 31, 2021 and 2020, respectively, which consisted primarily of cash paid for property acquisitions of approximately $645.0 million and $98.1 million, respectively, additions to capital improvements of approximately $62.6 41 Table of Content s million and $40.6 million, respectively, partially offset by net cash received for the senior secured loan of $0 and $15.9 million, respectively, and net proceeds from sales of real estate investments of approximately $41.1 million and $70.7 million, respectively, in each case for the years ended December 31, 2021 and 2020. Cash From Financing Activities. Net cash provided by financing activities was approximately $631.2 million for the year ended December 31, 2021, which consisted primarily of approximately $456.7 million in net common stock issuance proceeds and borrowings of $275.0 million in connection with our issuance of senior unsecured notes partially offset by approximately $84.6 million in equity dividend payments and approximately $11.3 million in mortgage loan payments. Net cash used in financing activities was approximately $53.9 million for the year ended December 31, 2020, which consisted primarily of approximately $63.8 million in net common stock issuance proceeds, partially offset by approximately $74.8 million in equity dividend payments and approximately $33.0 million in mortgage loan payments. Critical Accounting Policies Below is a discussion of the accounting policies that we believe are critical. We consider these policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements. Capitalization of Costs. We capitalize costs directly related to the redevelopment, renovation and expansion of our investment in real estate. Costs associated with such projects are capitalized as incurred. If the project is abandoned, these costs are expensed during the period in which the redevelopment or expansion project is abandoned. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes and insurance, if appropriate. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress. In the event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. Costs incurred for maintaining and repairing properties, which do not extend their useful lives, are expensed as incurred. Interest is capitalized based on actual capital expenditures from the period when redevelopment, renovation or expansion commences until the asset is ready for its intended use, at the weighted average borrowing rate during the period. Property Acquisitions. Business Combinations (Topic 805): Clarifying the Definition of a Business requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not considered a business. To be a business, the set of acquired activities and assets must include inputs and one or more substantive processes that together contribute to the ability to create outputs. We have determined that our real estate property acquisitions will generally be accounted for as asset acquisitions under the clarified definition. Upon acquisition of a property we estimate the fair value of acquired tangible assets (consisting generally of land, buildings and improvements) and intangible assets and liabilities (consisting generally of the above and below-market leases and the origination value of all in-place leases). We determine fair values using Level 3 inputs such as replacement cost, estimated cash flow projections and other valuation techniques and applying appropriate discount and capitalization rates based on available market information. Mortgage loans assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the date of acquisition. Acquisition-related costs associated with asset acquisitions are capitalized to individual tangible and intangible assets and liabilities assumed on a relative fair value basis and acquisition-related costs associated with business combinations are expensed as incurred. The fair value of the tangible assets is determined by valuing the property as if it were vacant. Land values are derived from current comparative sales values, when available, or management’s estimates of the fair value based on market conditions and the experience of our management team. Building and improvement values are calculated as replacement cost less depreciation, or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods. The fair value of the above and below-market leases is based on the present value of the difference between the contractual amounts to be received pursuant to the acquired leases (using a discount rate that reflects the risks associated with the acquired leases) and our estimate of the market lease rates measured over a period equal to the remaining term of the leases plus the term of any below-market fixed rate renewal options. The above and below-market lease values are amortized to rental revenues over the remaining initial term plus the term of any below-market fixed rate renewal options that are considered bargain renewal options of the respective leases. The origination value of in-place leases is based on costs to execute similar leases, including commissions and other related costs. The origination value of in-place leases also includes real estate taxes, 42 Table of Content s insurance and an estimate of lost rental revenue at market rates during the estimated time required to lease up the property from vacant to the occupancy level at the date of acquisition. Impairment. Carrying values for financial reporting purposes are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of a property may not be fully recoverable. Examples of such events or changes in circumstances may include classifying an asset to be held for sale, changing the intended hold period or when an asset remains vacant significantly longer than expected. The intended use of an asset either held for sale or held for use can significantly impact how impairment is measured. If an asset is intended to be held for the long-term, the recoverability is based on the undiscounted future cash flows. If the asset carrying value is not supported on an undiscounted future cash flow basis, then the asset carrying value is measured against the lower of cost or the present value of expected cash flows over the expected hold period. An impairment charge to earnings is recognized for the excess of the asset’s carrying value over the lower of cost or the present values of expected cash flows over the expected hold period. If an asset is intended to be sold, impairment is determined using the estimated fair value less costs to sell. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions, among other things, regarding current and future economic and market conditions and the availability of capital. We determine the estimated fair values based on its assumptions regarding rental rates, lease-up and holding periods, as well as sales prices. When available, current market information is used to determine capitalization and rental growth rates. If available, current comparative sales values may also be used to establish fair value. When market information is not readily available, the inputs are based on our understanding of market conditions and the experience of our management team. Actual results could differ significantly from our estimates. The discount rates used in the fair value estimates represent a rate commensurate with the indicated holding period with a premium layered on for risk. Revenue Recognition. We record rental revenue from operating leases on a straight-line basis over the term of the leases and maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. If tenants fail to make contractual lease payments that are greater than our allowance for doubtful accounts, security deposits and letters of credit, then we may have to recognize additional doubtful account charges in future periods. We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing their financial condition periodically as appropriate. Each period we review our outstanding accounts receivable, including straight-line rents, for doubtful accounts and provide allowances as needed. We also record lease termination fees when a tenant has executed a definitive termination agreement with us and the payment of the termination fee is not subject to any conditions that must be met or waived before the fee is due to us. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination will be deferred and recognized over the term of such tenant’s occupancy. Tenant expense reimbursement income includes payments and amounts due from tenants pursuant to their leases for real estate taxes, insurance and other recoverable property operating expenses and is recognized as revenues during the same period the related expenses are incurred. Income Taxes. We elected to be taxed as a REIT under the Code and operate as such beginning with our taxable year ended December 31, 2010. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT. Stock-Based Compensation and Other Long-Term Incentive Compensation. We follow the provisions of ASC 718, Compensation-Stock Compensation, to account for our stock-based compensation plan, which requires that the compensation cost relating to stock-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued. Our 2019 Equity Incentive Plan (the “2019 Plan”) provides for the grant of restricted stock awards, performance share awards, unrestricted shares or any combination of the foregoing. Stock-based compensation is recognized as a general and administrative expense in the financial statements and measured at the fair value of the award on the date of grant. We estimate the forfeiture rate based on historical experience as well as expected behavior. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the stock-based award. 43 Table of Content s In addition, we have awarded long-term incentive target awards (the “Performance Share awards”) under the Amended and Restated Long-Term Incentive Plan (as amended and restated, the “Amended LTIP”), which we amended and restated on January 8, 2019, to our executives that are payable in shares of our common stock after the conclusion of each pre-established performance measurement period, which is generally three years. The amount that may be earned is variable depending on the relative total shareholder return of our stock as compared to the total shareholder return of the MSCI U.S. REIT Index (RMS) and the FTSE Nareit Equity Industrial Index over the pre-established performance measurement period. Under the Amended LTIP, each participant’s Performance Share award granted on or after January 1, 2019 will be expressed as a number of shares of common stock and settled in shares of common stock. Target awards were previously expressed as a dollar amount and settled in shares of common stock. Commencing with Performance Share awards granted on or after January 1, 2019, the grant date fair value of the Performance Share awards will be determined under current accounting treatment using a Monte Carlo simulation model on the date of grant and recognized on a straight-line basis over the performance period. For Performance Share awards granted prior to January 1, 2019, we estimate the fair value of the Performance Share awards using a Monte Carlo simulation model on the date of grant and at each reporting period. The Performance Share awards granted prior to January 1, 2019 are recognized as compensation expense over the requisite performance period based on the fair value of the Performance Share awards at the balance sheet date, which varies quarter to quarter based on our relative share price performance, and are included as a component of Performance Share awards payable in the accompanying consolidated balance sheets. Material Cash Commitments As of February 8, 2022, we have five outstanding contracts with third-party sellers to acquire five industrial properties for a total aggregate purchase price of $125.8 million. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions. The following table summarizes our material cash commitments due by period as of December 31, 2021 (dollars in thousands): Material Cash Commitments Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total Debt $ 50,000 $ 100,000 $ 50,000 $ 525,000 $ 725,000 Debt interest payments 20,130 36,030 28,530 34,078 118,768 Operating lease commitments 442 916 883 1,302 3,542 Purchase obligations 1 125,775 — — — 125,775 Total $ 196,347 $ 136,946 $ 79,413 $ 560,380 $ 973,085 1 As of February 8, 2022 As of February 8, 2022, we executed four non-binding letters of intent with third-party sellers to acquire four industrial properties for a total anticipated purchase price of approximately $94.9 million. In the normal course of its business, we enter into non-binding letters of intent to purchase properties from third parties that may obligate us to make payments or perform other obligations upon the occurrence of certain events, including the execution of a purchase and sale agreement and satisfactory completion of various due diligence matters. There can be no assurance that we will enter into purchase and sale agreements with respect to these properties or otherwise complete any such prospective purchases on the terms described or at all. Non-GAAP Financial Measures We use the following non-GAAP financial measures that we believe are useful to investors as key supplemental measures of our operating performance: funds from operations, or FFO, Adjusted EBITDA, net operating income, or NOI, same store NOI and cash-basis same store NOI. FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. Further, our computation of FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI may not be comparable to FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI reported by other companies. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“Nareit”), which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property and impairment write-downs of depreciable real estate, plus depreciation and amortization on real estate assets and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We 44 Table of Content s believe that presenting FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets. We believe that FFO is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, we believe that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our operating performance. 45 Table of Content s The following table reflects the calculation of FFO reconciled from net income for the three months and years ended December 31, 2021, 2020 and 2019 (dollars in thousands except per share data): For the Three Months Ended December 31, For the Three Months Ended December 31, 2021 2020 $ Change % Change 2020 2019 $ Change % Change Net income $ 32,259 $ 13,513 $ 18,746 138.7 % $ 13,513 $ 14,821 $ (1,308) (8.8) % Gain on sales of real estate investments (13,442) — (13,442) n/a — (3,144) 3,144 n/a Depreciation and amortization 13,707 11,192 2,515 22.5 % 11,192 11,847 (655) (5.5) % Non-real estate depreciation (22) (11) (11) n/a (11) (26) 15 (57.7) % Allocation to participating securities 1 (126) (73) (53) 72.6 % (73) (150) 77 (51.3) % Funds from operations attributable to common stockholders 2 $ 32,376 $ 24,621 $ 7,755 31.5 % $ 24,621 $ 23,348 $ 1,273 5.5 % Basic FFO per common share $ 0.44 $ 0.36 $ 0.08 22.2 % $ 0.36 $ 0.35 $ 0.01 2.9 % Diluted FFO per common share $ 0.44 $ 0.36 $ 0.08 22.2 % $ 0.36 $ 0.35 $ 0.01 2.9 % Weighted average basic common shares 73,380,519 68,245,315 68,245,315 66,706,245 Weighted average diluted common shares 73,735,244 68,652,454 68,652,454 67,000,815 For the Year Ended December 31, For the Year Ended December 31, 2021 2020 $ Change % Change 2020 2019 $ Change % Change Net income $ 87,254 $ 79,795 $ 7,459 9.3 % $ 79,795 $ 55,516 $ 24,279 43.7 % Gain on sales of real estate investments (16,627) (26,766) 10,139 (37.9) % (26,766) (9,391) (17,375) 185.0 % Depreciation and amortization 50,687 45,875 4,812 10.5 % 45,875 44,015 1,860 4.2 % Non-real estate depreciation (74) (70) (4) 5.7 % (70) (108) 38 (35.2) % Allocation to participating securities 1 (428) (496) 68 (13.7) % (496) (565) 69 (12.2) % Funds from operations attributable to common stockholders 2 $ 120,812 $ 98,338 $ 22,474 22.9 % $ 98,338 $ 89,467 $ 8,871 9.9 % Basic FFO per common share 1.71 $ 1.45 $ 0.26 17.9 % 1.45 $ 1.39 $ 0.06 4.3 % Diluted FFO per common share 1.71 $ 1.44 $ 0.27 18.8 % 1.44 $ 1.38 $ 0.06 4.3 % Weighted average basic common shares 70,534,202 67,762,927 67,762,927 64,428,406 Weighted average diluted common shares 70,793,670 68,170,066 68,170,066 64,722,976 1 To be consistent with our policies of determining whether instruments granted in share-based payment transactions are participating securities and accounting for earnings per share, the FFO per common share is adjusted for FFO distributed through declared dividends (if any) and allocated to all participating securities (weighted average common shares outstanding and unvested restricted shares outstanding) under the two-class method. Under this method, allocations were made to 288,976, 203,729 and 426,985 of weighted average unvested restricted shares outstanding for the three months ended December 31, 2021, 2020 and 2019, respectively, and 245,075, 341,673 and 402,380 of weighted average unvested restricted shares outstanding for the years ended December 31, 2021, 2020 and 2019, respectively. 2 Includes performance share award expense of approximately $1.3 million, $2.9 million and $1.8 million for the three months ended December 31, 2021, 2020 and 2019, respectively, and approximately $5.3 million, $6.6 million and 46 Table of Content s $8.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. See “Note 10 – Stockholders’ Equity” in our notes to consolidated financial statements for more information regarding our performance share awards. FFO increased by approximately $7.8 million and $22.5 million for the three months and years ended December 31, 2021, respectively, compared to the same periods from the prior year due primarily to same store NOI growth of approximately $4.2 million and $15.5 million for the three months and years ended December 31, 2021, respectively, compared to the same periods from the prior year, as well as property acquisitions during 2021. The FFO increase was partially offset by increased weighted average common shares outstanding and increased general and administrative expenses due to additional headcount, for the three months and year ended December 31, 2021 compared to the same periods from the prior year. We compute Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, gain on sales of real estate investments, acquisition costs and stock-based compensation. We believe that presenting Adjusted EBITDA provides useful information to investors regarding our operating performance because it is a measure of our operations on an unleveraged basis before the effects of tax, gain (loss) on sales of real estate investments, non-cash depreciation and amortization expense, acquisition costs and stock-based compensation. By excluding interest expense, Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allows for more meaningful comparison of our operating performance between quarters and other interim periods as well as annual periods and for the comparison of our operating performance to that of other companies, both in the real estate industry and in other industries. As we are currently in a growth phase, acquisition costs are excluded from Adjusted EBITDA to allow for the comparison of our operating performance to that of stabilized companies. The following table reflects the calculation of Adjusted EBITDA reconciled from net income for the three months and years ended December 31, 2021, 2020 and 2019 (dollars in thousands): For the Three Months Ended December 31, For the Three Months Ended December 31, 2021 2020 $ Change % Change 2020 2019 $ Change % Change Net income $ 32,259 $ 13,513 $ 18,746 138.7 % $ 13,513 $ 14,821 $ (1,308) (8.8) % Gain on sales of real estate investments (13,442) — (13,442) n/a — (3,144) 3,144 n/a Depreciation and amortization 13,707 11,192 2,515 22.5 % 11,192 11,847 (655) (5.5) % Interest expense, including amortization 5,207 4,195 1,012 24.1 % 4,195 4,069 126 3.1 % Loss on extinguishment of debt — — — n/a — 189 (189) n/a Stock-based compensation 2,547 3,472 (925) (26.6) % 3,472 2,492 980 39.3 % Acquisition costs — 85 (85) n/a 85 (3) 88 n/a Adjusted EBITDA $ 40,278 $ 32,457 $ 7,821 24.1 % $ 32,457 $ 30,271 $ 2,186 7.2 % For the Year Ended December 31, For the Year Ended December 31, 2021 2020 $ Change % Change 2020 2019 $ Change % Change Net income $ 87,254 $ 79,795 $ 7,459 9.3 % $ 79,795 $ 55,516 $ 24,279 43.7 % Gain on sales of real estate investments (16,627) (26,766) 10,139 (37.9) % (26,766) (9,391) (17,375) 185.0 % Depreciation and amortization 50,687 45,875 4,812 10.5 % 45,875 44,015 1,860 4.2 % Interest expense, including amortization 18,054 15,997 2,057 12.9 % 15,997 16,338 (341) (2.1) % Loss on extinguishment of debt — — — n/a — 189 (189) n/a Stock-based compensation 9,554 9,826 (272) (2.8) % 9,826 10,644 (818) (7.7) % Acquisition costs 172 271 (99) (36.5) % 271 45 226 502.2 % Adjusted EBITDA $ 149,094 $ 124,998 $ 24,096 19.3 % $ 124,998 $ 117,356 $ 7,642 6.5 % We compute NOI as rental revenues, including tenant expense reimbursements, less property operating expenses. We compute same store NOI as rental revenues, including tenant expense reimbursements, less property operating expenses on a 47 Table of Content s same store basis. NOI excludes depreciation, amortization, general and administrative expenses, acquisition costs and interest expense, including amortization. We compute cash-basis same store NOI as same store NOI excluding straight-line rents and amortization o f lease intangibles. The same store pool for the comparison of the three months and years ended December 31, 2021 and 2020 includes all properties that were owned and in operation as of December 31, 2021 and since January 1, 2020 and excludes properties that were either disposed of prior to, held for sale to a third party or in redevelopment as of December 31, 2021. As of December 31, 2021, the same store pool consisted of 210 buildings aggregating approximately 12.5 million square feet representing approximately 83.0% of our total square feet owned and 19 improved land parcels containing approximately 79.6 acres. The same store pool for the comparison of the three months and years ended December 31, 2020 and 2019 includes all properties that were owned as of December 31, 2020 and since January 1, 2019 and excludes properties that were either disposed of prior to, held for sale to a third-party or in redevelopment as of December 31, 2020. As of December 31, 2020, the same store pool consisted of 198 buildings aggregating approximately 12.0 million square feet representing approximately 91.1% of our total square feet owned and 14 improved land parcels containing approximately 54.2 acres. We believe that presenting NOI, same store NOI and cash-basis same store NOI provides useful information to investors regarding the operating performance of our properties because NOI excludes certain items that are not considered to be controllable in connection with the management of the properties, such as depreciation, amortization, general and administrative expenses, acquisition costs and interest expense. By presenting same store NOI and cash-basis same store NOI, the operating results on a same store basis are directly comparable from period to period. The following table reflects the calculation of NOI, same store NOI and cash-basis same store NOI reconciled from net income for the three months and years ended December 31, 2021, 2020 and 2019 (dollars in thousands): For the Three Months Ended December 31, For the Three Months Ended December 31, 2021 2020 $ Change % Change 2020 2019 $ Change % Change Net income 1 $ 32,259 $ 13,513 $ 18,746 138.7 % $ 13,513 $ 14,821 $ (1,308) (8.8) % Depreciation and amortization 13,707 11,192 2,515 22.5 % 11,192 11,847 (655) (5.5) % General and administrative 7,716 6,936 780 11.2 % 6,936 6,072 864 14.2 % Acquisition costs — 85 (85) n/a 85 (3) 88 n/a Total other income and expenses (8,372) 4,127 (12,499) n/a 4,127 470 3,657 778.1 Net operating income 45,310 35,853 9,457 26.4 % 35,853 33,207 2,646 8.0 % Less non-same store NOI (7,094) 2 (1,859) 2 (5,235) 281.6 % (5,091) 3 (4,125) 3 (966) 23.4 % Same store NOI 4 $ 38,216 $ 33,994 $ 4,222 12.4 % $ 30,762 $ 29,082 $ 1,680 5.8 % Less straight-line rents and amortization of lease intangibles 5 (2,388) (2,117) (271) 12.8 % (1,257) (921) (336) 36.5 % Cash-basis same store NOI $ 35,828 $ 31,877 $ 3,951 12.4 % $ 29,505 $ 28,161 $ 1,344 4.8 % Less termination fee income (148) (75) (73) 97.3 % (75) (143) 68 (47.6) % Cash-basis same store NOI excluding termination fees $ 35,680 $ 31,802 $ 3,878 12.2 % $ 29,430 $ 28,018 $ 1,412 5.0 % 1 Includes approximately $0.1 million of lease termination income for the three months ended December 31, 2021, 2020 and 2019. 2 Includes 2020 and 2021 acquisitions and dispositions, seventeen improved land parcels consisting of approximately 47.5 acres, four properties under redevelopment and one completed redevelopment property with an aggregate book value of approximately $66.6 million as of December 31, 2021. 3 Includes 2019 and 2020 acquisitions and dispositions, eleven improved land parcels consisting of approximately 37.3 acres, one property under redevelopment and two completed redevelopment properties with an aggregate gross book value of approximately $49.3 million as of December 31, 2020. 4 Includes $0.1 million of lease termination income for the three months ended December 31, 2021, 2020 and 2019. 5 Includes straight-line rents and amortization of lease intangibles for the same store pool only. 48 Table of Content s For the Year Ended December 31, For the Year Ended December 31, 2021 2020 $ Change % Change 2020 2019 $ Change % Change Net income 1 $ 87,254 $ 79,795 $ 7,459 9.3 % $ 79,795 $ 55,516 $ 24,279 43.7 % Depreciation and amortization 50,687 45,875 4,812 10.5 % 45,875 44,015 1,860 4.2 % General and administrative 26,964 23,489 3,475 14.8 % 23,489 23,924 (435) (1.8) % Acquisition costs 172 271 (99) (36.5) % 271 45 226 502.2 % Total other income and expenses 605 (11,642) 12,247 n/a (11,642) 3,321 (14,963) n/a Net operating income 165,682 137,788 27,894 20.2 % 137,788 126,821 10,967 8.6 % Less non-same store NOI (19,556) 2 (7,204) 2 (12,352) 171.5 % (19,070) 3 (11,360) 3 (7,710) 67.9 % Same store NOI 4 $ 146,126 $ 130,584 $ 15,542 11.9 % $ 118,718 $ 115,461 $ 3,257 2.8 % Less straight-line rents and amortization of lease intangibles 5 (10,021) (4,284) (5,737) 133.9 % (447) (5,693) 5,246 (92.1) % Cash-basis same store NOI $ 136,105 $ 126,300 $ 9,805 7.8 % $ 118,271 $ 109,768 $ 8,503 7.7 % Less termination fee income (309) (3,717) 3,408 (91.7) % (3,696) (346) (3,350) 968.2 % Cash-basis same store NOI excluding termination fees $ 135,796 $ 122,583 $ 13,213 10.8 % $ 114,575 $ 109,422 $ 5,153 4.7 % 1 Includes approximately $1.0 million, $3.8 million and $0.3 million of lease termination income for the year ended December 31, 2021, 2020 and 2019, respectively. 2 Includes 2020 and 2021 acquisitions and dispositions, seventeen improved land parcels consisting of approximately 47.5 acres, four properties under redevelopment and one completed redevelopment property with an aggregate book value of approximately $66.6 million as of December 31, 2021. 3 Includes 2019 and 2020 acquisitions and dispositions, eleven improved land parcels consisting of approximately 37.3 acres, one property under redevelopment and two completed redevelopment properties with an aggregate gross book value of approximately $49.3 million as of December 31, 2020. 4 Includes approximately $0.3 million, $3.7 million and $0.3 million of lease termination income for the years ended December 31, 2021, 2020 and 2019, respectively. 5 Includes straight-line rents and amortization of lease intangibles for the same store pool only. Cash-basis same store NOI increased by approximately $4.0 million for the three months ended December 31, 2021 compared to the same period from the prior year due to increased rental revenue on new and renewed leases and contractual rent increases. For the three months ended December 31, 2021 and 2020, total contractual rent abatements of approximately $0.5 million and $0.8 million, respectively, were given to certain tenants in the same-store pool and approximately $0.1 million and $0.1 million, respectively, in lease termination income was received from certain tenants in the same store pool. In addition, approximately $0.2 million of the increase in cash-basis same store NOI for the three months ended December 31, 2021 related to properties that were acquired vacant or with near term expirations in 2019. Cash-basis same store NOI increased by approximately $9.8 million for the year ended December 31, 2021 compared to the same period from the prior year primarily due to increased rental revenue on new and renewed leases and increased occupancy. For the year ended December 31, 2021 and 2020, total contractual rent abatements of approximately $2.7 million and $3.2 million, respectively, were given to certain tenants in the same-store pool and approximately $0.3 million and $3.7 million, respectively, in lease termination income was received from certain tenants in the same store pool. In addition, approximately $2.3 million of the increase in cash-basis same store NOI for the year ended December 31, 2021 related to properties that were acquired vacant or with near term expirations in 2019. 49 Table of Content s