The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand our operations and our present business environment. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the notes thereto contained in Part I, Item 1 of this Report, and the consolidated financial statements and notes thereto contained in Part IV, Item 15 of our 2019 Annual Report. Cautionary Notice Regarding Forward-Looking Statements Certain statements contained in or incorporated by reference into this Report, including, without limitation, those related to our future operations and those related to our expectations concerning the effects of the COVID-19 pandemic on our future operations and balance sheet, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "believe," "estimate," "expect," "anticipate," "intend," "plan," "strategy," "continue," "seek," "may," "could" and similar expressions or statements regarding future periods are intended to identify forward-looking statements, although not all forward-looking statements may contain such words. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this Report or in the information incorporated by reference into this Report. Some of the risks, uncertainties and other important factors that may affect future results include, among others: •The impact of the COVID-19 pandemic on our business, our tenants and the economy in general, including the measures taken by governmental authorities to address it; •Changes in general economic and business conditions, including the financial condition of our tenants and the value of our real estate assets; •TheGeneral Partner's continued qualification as a REIT forU.S. federal income tax purposes; •Heightened competition for tenants and potential decreases in property occupancy; •Potential changes in the financial markets and interest rates; •Volatility in the General Partner's stock price and trading volume; •Our continuing ability to raise funds on favorable terms, or at all; •Our ability to successfully identify, acquire, develop and/or manage properties on terms that are favorable to us; •Potential increases in real estate construction costs including construction cost increases as the result of trade disputes and tariffs on goods imported inthe United States ; •Our real estate asset concentration in the industrial sector and potential volatility in this sector; •Our ability to successfully dispose of properties on terms that are favorable to us; •Our ability to successfully integrate our acquired properties; •Our ability to retain our current credit ratings; •Inherent risks related to disruption of information technology networks and related systems and cyber security attacks; •Inherent risks in the real estate business, including, but not limited to, tenant defaults, potential liability relating to environmental matters and liquidity of real estate investments; and •Other risks and uncertainties described herein, as well as those risks and uncertainties discussed from time to time in our other reports and other public filings with theSecurities and Exchange Commission (the "SEC"). 24 -------------------------------------------------------------------------------- Although we presently believe that the plans, expectations and anticipated results expressed in or suggested by the forward-looking statements contained in or incorporated by reference into this Report are reasonable, all forward-looking statements are inherently subjective, uncertain and subject to change, as they involve substantial risks and uncertainties, including those beyond our control. New factors emerge from time to time, and it is not possible for us to predict the nature, or assess the potential impact, of each new factor on our business. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements. We undertake no obligation to update or revise any of our forward-looking statements for events or circumstances that arise after the statement is made, except as otherwise may be required by law. The above list of risks and uncertainties is only a summary of some of the most important factors and is not intended to be exhaustive. Additional information regarding risk factors that may affect us is included in our 2019 Annual Report and in Part II, Item 1A, "Risk Factors" in this Report. The risk factors contained in our 2019 Annual Report are updated by us from time to time in Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings that we make with theSEC . Business Overview The General Partner and Partnership collectively specialize in the ownership, management and development of industrial real estate. The General Partner is a self-administered and self-managed REIT that began operations in 1986 and is the sole general partner of the Partnership. The Partnership is a limited partnership formed in 1993, at which time all of the properties and related assets and liabilities of the General Partner, as well as proceeds from a secondary offering of the General Partner's common shares, were contributed to the Partnership. Simultaneously, the Partnership completed the acquisition ofDuke Associates , a full-service commercial real estate firm operating in the Midwest whose operations began in 1972. We operate the General Partner and the Partnership as one enterprise, and therefore, our discussion and analysis refers to the General Partner and its consolidated subsidiaries, including the Partnership, collectively. A more complete description of our business, and of management's philosophy and priorities, is included in our 2019 Annual Report. AtSeptember 30, 2020 , we: •Owned or jointly controlled 529 primarily industrial properties, of which 517 properties with 151.8 million square feet were in service and 12 properties with 7.0 million square feet were under development. The 517 in-service properties were comprised of 478 consolidated properties with 140.6 million square feet and 39 unconsolidated joint venture properties with 11.1 million square feet. The 12 properties under development consisted of 11 consolidated properties with 6.6 million square feet and one unconsolidated joint venture property with 358,000 square feet. •Owned directly, or through ownership interests in unconsolidated joint ventures (with acreage not adjusted for our percentage ownership interest), approximately 1,120 acres of land and controlled approximately 900 acres through purchase options. Our overall strategy is to continue to increase our investment in quality industrial properties primarily through development, on both a speculative and build-to-suit basis, supplemented with acquisitions in higher barrier markets with the highest growth potential.
COVID-19
As the result of the COVID-19 pandemic, we have made various changes to our operations in order to support the health and safety of our associates and the communities in which we operate. The pandemic has had a far-reaching impact on the global economy but the demand for industrial real estate continues to be healthy, especially as the demand for industrial space to support e-commerce has accelerated. 25 -------------------------------------------------------------------------------- As ofSeptember 30, 2020 , we have executed deferral agreements with certain tenants that will eventually allow for$8.1 million of total scheduled rental payments to be deferred and repaid in future periods. The substantial majority of these agreements require repayment of the deferred amounts within twelve months of their execution. The tenants with whom we have executed agreements allowing for deferral of rental payments have paid all amounts due under their revised billing schedules throughSeptember 30, 2020 . During the third quarter of 2020, we resumed speculative development activity in certain targeted markets based on our leasing activity to date, the resilience of the industrial real estate sector during the COVID-19 pandemic and our belief that we will be able to continue to lease our speculative space.
The pandemic's impact on the overall global economy is continuing and the ultimate impact is unknown at this time. Please see Part II, Item 1A, "Risk Factors" below for additional information about the potential impacts the pandemic may have on our business and results of operations.
Key Performance Indicators Our operating results depend primarily upon rental income from our Rental Operations. The following discussion highlights the metrics that drive the performance of our Rental Operations, which management uses to operate the business, and that we consider to be critical drivers of future revenues. Occupancy Analysis Occupancy is an important metric for management and our investors for understanding our financial performance. Our ability to maintain high occupancy rates is among the principal drivers of maintaining and increasing rental revenue. The following table sets forth percent leased and average net effective rent information regarding our in-service portfolio of rental properties atSeptember 30, 2020 and 2019, respectively: Total Square Feet Percent of (in thousands) Total Square Feet Percent Leased* Average Annual Net Effective Rent** Type 2020 2019 2020 2019 2020 2019 2020 2019 Industrial 140,437 135,096 99.8 % 99.8 % 97.0 % 96.1 %$5.18 $4.90 Non-reportable Rental Operations 211 211 0.2 % 0.2 % 80.5 % 77.3 %$24.27 $24.76 Total Consolidated 140,648 135,307 100.0 % 100.0 % 97.0 % 96.0 %$5.21 $4.93 Unconsolidated Joint Ventures 11,109 12,656 97.5 % 97.6 %$4.26
Total Including Unconsolidated Joint Ventures 151,757 147,963 97.0 % 96.2 %
* Represents the percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced. **Average annual net effective rent represents average annual base rental payments per leased square foot, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. This amount excludes additional amounts paid by tenants as reimbursement for operating expenses.
The higher leased percentage in our industrial portfolio at
26 -------------------------------------------------------------------------------- Vacancy Activity The following table sets forth vacancy activity, shown in square feet, from our in-service rental properties for the nine months endedSeptember 30, 2020 (in thousands): Unconsolidated Joint Total Including Unconsolidated Consolidated Properties Venture Properties Joint Venture Properties Vacant square feet at December 31, 2019 4,540 406 4,946 Vacant space in completed developments 1,138 - 1,138 Expirations 2,697 299 2,996 Early lease terminations 1,448 - 1,448 Property structural changes/other 14 - 14 Leasing of previously vacant space (5,607) (430) (6,037) Vacant square feet at September 30, 2020 4,230 275 4,505 Total Leasing Activity Our ability to maintain and improve occupancy and net effective rents primarily depends upon our continuing ability to lease vacant space. The volume and quality of our leasing activity is closely scrutinized by management in operation of the business and provides useful information regarding future performance. The initial leasing of development projects or vacant space in acquired properties is referred to as first generation lease activity. The leasing of such space that we have previously held under lease to a tenant is referred to as second generation lease activity. Second generation lease activity may be in the form of renewals of existing leases or new second generation leases of previously leased space. The total leasing activity for our consolidated and unconsolidated industrial rental properties, expressed in square feet of leases signed, is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 New Leasing Activity - First Generation 2,406 2,111 5,440 6,775 New Leasing Activity - Second Generation 1,405 984 2,978 1,841 Renewal Leasing Activity 899 3,131 3,494 7,717 Early Renewal Leasing Activity * 1,265 148 2,576 2,063 Short-Term New Leasing Activity ** 125 216 1,194 924 Short-Term Renewal Leasing Activity ** 677 - 1,615 619Non-Reportable Rental Operations Leasing Activity - 3 1 4 Total Consolidated Leasing Activity 6,777 6,593 17,298 19,943 Unconsolidated Joint Venture Leasing Activity 561 1,832 1,689 2,042 Total Including Unconsolidated Joint Venture Leasing Activity 7,338 8,425 18,987 21,985
* Early renewals represent renewals executed more than two years in advance of a lease's originally scheduled end date. ** Short-term leases represent leases with a term of less than twelve months.
27 -------------------------------------------------------------------------------- Second Generation Leases The following table sets forth the estimated costs of tenant improvements and leasing commissions, on a per square foot basis, that we are obligated to fulfill under the second generation industrial leases signed for our rental properties during the three and nine months endedSeptember 30, 2020 and 2019: Square Feet of Leases Percent of Expiring Leases (in thousands) Renewed Average Term in Years Estimated Tenant Improvement Cost per Square Foot Leasing Costs per Square Foot 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Three Months Consolidated - New Second Generation 1,405 984 6.4 5.5$1.78 $2.21 $3.76 $2.10 Unconsolidated Joint Ventures - New Second Generation 257 49 1.0 10.2 -$3.49 $0.38 $4.57 Total - New Second Generation 1,662 1,033 5.6 5.7$1.51 $2.27 $3.23 $2.22 Consolidated - Renewal 899 3,131 42.3 % 82.2 % 3.5 4.3$0.72 $0.46 $0.92 $1.14 Unconsolidated Joint Ventures - Renewal 131 459 100.0 % 90.3 % 1.0 5.9 -$0.95 $0.29 $2.29 Total - Renewal 1,030 3,590 45.7 % 83.1 % 3.2 4.5$0.63 $0.52 $0.84 $1.29 Nine Months Consolidated - New Second Generation 2,978 1,841 5.2 5.7$2.02 $2.75 $2.79 $2.22 Unconsolidated Joint Ventures - New Second Generation 257 165 1.0 7.2 -$1.82 $0.38 $2.75 Total - New Second Generation 3,235 2,006 4.8 5.8$1.87 $2.67 $2.60 $2.26 Consolidated - Renewal 3,494 7,717 59.9 % 82.3 % 4.6 4.4$1.01 $0.71 $1.45 $1.30 Unconsolidated Joint Ventures - Renewal 628 554 90.2 % 85.6 % 3.7 6.0$0.38 $0.92 $1.42 $2.32 Total - Renewal 4,122 8,271 63.2 % 82.5 % 4.5 4.5$0.91 $0.72 $1.45 $1.37
Growth in average annual net effective rents for new second generation and renewal leases, on a combined basis, for our consolidated and unconsolidated industrial rental properties, is as follows:
Three Months Ended September 30, Nine Months Ended September 30, Ownership Type 2020 2019 2020 2019 Consolidated properties 32.3 % 22.5 % 28.9 % 25.0 % Unconsolidated joint venture properties 29.5 % 44.9 % 39.0 % 38.2 % 28
--------------------------------------------------------------------------------
© Edgar Online, source