FIRST INDUSTRIAL REALTY TRUST, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections of this Form 10-K titled "Forward-Looking Statements" and "Selected Financial Data" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-K. Summary of 2020 Despite the COVID-19 pandemic, our operating results remained strong in 2020. Our year-end occupancy was 95.7% and during 2020 we grew cash rental rates by 13.5%, which is the second highest annual increase in our history. We collected 99% of our monthly rental billings from April through December of 2020. We granted$1.0 million of rent deferral requests during the year, all of which have now been collected. However, our accounts receivable reserves were higher than our bad debt experience over the past several years. During the year endedDecember 31, 2020 , we recorded a reserve on accounts receivable (or did not recognize rental revenue due to converting certain tenants to cash basis) of$1.8 million and also recorded a reserve of$1.7 million related to our deferred rent receivables. During the first quarter of 2020, we temporarily suspended all new speculative vertical development projects other than completing development and redevelopment properties that were already in progress and expenditures required to obtain permits and other horizontal construction work. During the fourth quarter of 2020, we resumed speculative development activity in our target markets due to favorable market conditions. Although the impact of COVID-19 pandemic had an overall minimal impact on us in 2020, with the continued uncertainty regarding the COVID-19 pandemic and its impact on the economy we cannot predict the future impact the COVID-19 pandemic may have on our business, future financial condition and operating results. In 2020, we completed the following significant activities: •We acquired eight industrial properties comprised of approximately 1.5 million square feet of GLA located in our Baltimore/Washington,Northern California ,Phoenix andSouthern California markets for an aggregate purchase price of$154.4 million . These properties were 92% leased atDecember 31, 2020 . •We added to our development pipeline 128.8 acres of land located in ourCentral Florida ,Seattle ,South Florida andSouthern California markets for an aggregate purchase price of$69.6 million . •We placed in-service, 10 industrial properties comprising approximately 2.5 million square feet of GLA located in ourDallas/Ft. Worth ,Houston ,Phoenix ,South Florida andSouthern California markets at an estimated total cost of$221.7 million . These properties were 79% leased atDecember 31, 2020 . •We commenced development for five development projects totaling approximately 1.0 million square feet of GLA at an estimated total investment of$135.3 million . •We sold 29 industrial properties comprised of approximately 1.9 million square feet of GLA for total gross sales proceeds of$153.4 million . Included in these sales were our remaining industrial properties located inIndianapolis, IN andTampa, FL. •One of our joint ventures sold 93.5 acres of land and a newly constructed 0.6 million square foot building (of which we were the purchaser) located inPhoenix, AZ for gross proceeds of$60.0 million . •We entered into a new joint venture through which we acquired, for a purchase price of$70.5 million , approximately 569 net developable acres of land located inPhoenix for the purpose of developing, leasing, and operating industrial properties and potentially selling land. 30 -------------------------------------------------------------------------------- We completed the following financing activities during the year endedDecember 31, 2020 : •We issued 1,842,281 shares of our common stock, through "at-the-market" ("ATM") offerings, resulting in net proceeds of$78.7 million . •We issued$100.0 million of ten-year private placement notes at a rate of 2.74% and$200.0 million of twelve-year private placement notes at a rate of 2.84%. •We entered into a new unsecured term loan facility that refinanced our$200.0 million term loan facility previously scheduled to mature inJanuary 2021 . The new loan has an initial maturity ofJuly 15, 2021 and includes two, one-year extension options at our election. The new loan provides for interest only payments and currently bears an interest rate based of LIBOR plus 150 basis points. •We paid off$25.4 million in mortgage loans payable. •We declared an annual cash dividend of$1.00 per common share or Unit, an increase of 8.7% from 2019. 31 -------------------------------------------------------------------------------- Results of Operations Comparison of Year EndedDecember 31, 2020 to Year EndedDecember 31, 2019 Our net income was$200.2 million and$243.9 million for the years endedDecember 31, 2020 and 2019, respectively. The tables below summarize our revenues, property expenses and depreciation and other amortization by various categories for the years endedDecember 31, 2020 and 2019. Same store properties are properties owned prior toJanuary 1, 2019 and held as an in-service property throughDecember 31, 2020 and developments and redevelopments that were placed in service prior toJanuary 1, 2019 . Properties which are at least 75% occupied at acquisition are placed in service, unless we anticipate the tenants to move out within the first two years of ownership. Acquisitions that are less than 75% occupied at the date of acquisition, developments and redevelopments are placed in service as they reach the earlier of a) stabilized occupancy (defined as 90% occupied), or b) one year subsequent to acquisition or development/redevelopment construction completion. Acquired properties with occupancy greater than 75% at acquisition, but with tenants that we anticipate will move out within two years of ownership, will be placed in service upon the earlier of reaching 90% occupancy or twelve months after move out. Properties are moved from the same store classification to the redevelopment classification when capital expenditures for a project are estimated to exceed 25% of the undepreciated gross book value of the property. Acquired properties are properties that were acquired subsequent toDecember 31, 2018 and held as an operating property throughDecember 31, 2020 . Sold properties are properties that were sold subsequent toDecember 31, 2018 . (Re)Developments include developments and redevelopments that were not: a) substantially complete 12 months prior toJanuary 1, 2019 ; or b) stabilized prior toJanuary 1, 2019 . Other revenues are derived from the operations of properties not placed in service under one of the categories discussed above, the operations of our maintenance company and other miscellaneous revenues. Other property expenses are derived from the operations of properties not placed in service under one of the categories discussed above, the operations of our maintenance company, vacant land expenses and other miscellaneous regional expenses. During the year endedDecember 31, 2018 , one industrial property, comprising approximately 0.1 million square feet of GLA, was taken out of service for redevelopment. As a result of taking this industrial property out of service, the results of operations related to this property were reclassified from the same store property classification to the (re)development classification. During the year endedDecember 31, 2018 , we completed the redevelopment of this property and as ofDecember 31, 2018 , the property was 100% leased. This property returned to the same store classification in the first quarter 2020. During the year endedDecember 31, 2016 , one industrial property, comprising approximately 28 thousand square feet of GLA, was taken out of service due to a fire which caused complete destruction of the building. The results of this property are included in the (re)development classification. During the year endedDecember 31, 2019 , we completed the rebuild of this property and as ofDecember 31, 2019 , the property was 100% leased. This property will return to the same store classification in the first quarter 2021. Our future financial condition and results of operations, including rental revenues, may be impacted by the future acquisition, (re)development and sale of properties. Our future revenues and expenses may vary materially from historical rates. For the years endedDecember 31, 2020 and 2019, the average occupancy rates of our same store properties were 97.1% and 97.7%, respectively. 32 --------------------------------------------------------------------------------
2020 2019 $ Change % Change
(In thousands)
REVENUES
Same Store Properties $ 376,511 $ 366,952 $ 9,559 2.6 %
Acquired Properties 8,132 1,711 6,421 375.3 %
Sold Properties 12,947 44,210 (31,263) (70.7) %
(Re) Developments 35,139 7,361 27,778 377.4 %
Other 15,299 5,750 9,549 166.1 %
Total Revenues $ 448,028 $ 425,984 $ 22,044 5.2 %
Revenues from same store properties increased $9.6 million primarily due to an
increase in rental rates as well as tenant recoveries, offset by a decrease in
occupancy and an increase in reserves taken on accounts receivable and deferred
rent receivable amounts for tenants due to our assessment that full collection
of future contractual lease payments was no longer probable. Revenues from
acquired properties increased $6.4 million due to the 17 industrial properties
acquired subsequent to December 31, 2018 totaling approximately 2.1 million
square feet of GLA. Revenues from sold properties decreased $31.3 million due to
the 69 industrial properties sold subsequent to December 31, 2018 totaling
approximately 7.8 million square feet of GLA. Revenues from (re)developments
increased $27.8 million due to an increase in occupancy and tenant recoveries as
well as $1.1 million of final insurance proceeds received and recorded as
revenue related to a property that was destroyed by fire in 2016. Revenues from
other increased $9.5 million primarily due to final insurance settlement
proceeds of $5.4 million received and recorded as revenue related to a property
that was destroyed by fire in 2017, the acquisition of partially occupied
properties during 2018 that were not yet stabilized at December 31, 2018 and
therefore are not yet included in the same store pool and the acquisition of a
land site during 2019 on which we intend to develop industrial buildings in the
future but currently are leasing to tenants and collecting ground lease rent.
2020 2019 $ Change % Change
(In thousands)
PROPERTY EXPENSES
Same Store Properties $ 92,588 $ 90,476 $ 2,112 2.3 %
Acquired Properties 2,386 598 1,788 299.0 %
Sold Properties 3,495 13,048 (9,553) (73.2) %
(Re) Developments 10,328 2,570 7,758 301.9 %
Other 10,398 9,893 505
5.1 %
Total Property Expenses
Property expenses include real estate taxes, repairs and maintenance, property management, utilities, insurance and other property related expenses. Property expenses from same store properties increased$2.1 million primarily due to an increase in real estate taxes and insurance, partially offset by a decrease in repairs and maintenance and snow removal costs. Property expenses from acquired properties increased$1.8 million due to properties acquired subsequent toDecember 31, 2018 . Property expenses from sold properties decreased$9.6 million due to properties sold subsequent toDecember 31, 2018 . Property expenses from (re)developments increased$7.8 million primarily due to the substantial completion of developments. Property expenses from other increased$0.5 million primarily due to an increase in real estate tax expense on developable land and on a land site we acquired during 2019 on which we intend to develop industrial buildings in the future but currently we are leasing it to tenants and collecting ground lease rent and certain miscellaneous expenses, offset by a decrease in maintenance company expenses. General and administrative expense increased by$4.3 million , or 15.0%, primarily due to an increase in incentive compensation as well as severance expense of$0.9 million associated with the closing of ourIndianapolis regional office during the year endedDecember 31, 2020 . 33 -------------------------------------------------------------------------------- 2020 2019 $ Change % Change (In thousands) DEPRECIATION AND OTHER AMORTIZATION Same Store Properties$ 104,308 $ 101,714 $ 2,594 2.6 % Acquired Properties 4,883 1,451 3,432 236.5 % Sold Properties 2,459 10,652 (8,193) (76.9) % (Re) Developments 14,075 4,484 9,591 213.9 %
2,928 985 33.6 %
Total Depreciation and Other Amortization $ 129,638 $ 121,229 $ 8,409 6.9 %
Depreciation and other amortization from same store properties increased $2.6
million primarily due to accelerated depreciation and amortization taken during
the year ended December 31, 2020 attributable the early termination of certain
tenants' leases. Depreciation and other amortization from acquired properties
increased $3.4 million due to properties acquired subsequent to December 31,
2018 . Depreciation and other amortization from sold properties decreased $8.2
million due to properties sold subsequent to December 31, 2018 . Depreciation and
other amortization from (re)developments increased $9.6 million primarily due to
an increase in depreciation and amortization related to completed developments.
Depreciation from corporate furniture, fixtures and equipment and other
increased $1.0 million primarily due to depreciation related to properties
acquired during 2018 that were not yet stabilized at December 31, 2018 and
therefore are not yet included in the same store pool as well as depreciation on
land improvements related to the acquisition of a land site during 2019. We
intend to develop industrial buildings on such land site in the future, but we
are currently leasing the property to tenants and collecting ground lease rent.
For the year ended December 31, 2020 , we recognized $86.8 million of gain on
sale of real estate related to the sale of 29 industrial properties comprising
approximately 1.9 million square feet of GLA. For the year ended December 31,
2019 , we recognized $124.9 million of gain on sale of real estate related to the
sale of 40 industrial properties comprising approximately 5.9 million square
feet of GLA and several land parcels. Included in the 40 industrial properties
sold during the year ended December 31, 2019 was a gain related to the
reclassification of an operating lease to a sales-type lease which was triggered
by a tenant that exercised an option in its lease to purchase a 0.6 million
square foot building from us located in the Phoenix market. The sale of this
property occurred during the year ended December 31, 2020 .
Interest expense increased $1.0 million , or 2.0%, primarily due to an increase
in the weighted average debt balance outstanding for the year ended December 31,
2020 ($1,593.5 million ) as compared to the year ended December 31, 2019
($1,397.6 million ), offset by an increase in capitalized interest of $1.1
million for the year ended December 31, 2020 as compared to the year ended
December 31, 2019 , as well as a decrease in the weighted average interest rate
for the year ended December 31, 2020 (3.65%) as compared to the year ended
December 31, 2019 (4.01%).
Amortization of debt issuance costs increased $0.2 million , or 6.5%, primarily
due to debt issuance costs incurred related to the refinancing of a $200 million
unsecured term loan in July 2020 , the issuance of $150.0 million of private
placement notes in July 2019 and the issuance of $300.0 million of private
placement notes in September 2020 .
Equity in income of Joint Ventures for the year ended December 31, 2020
decreased $12.0 million , or 74.1% primarily due to a decrease in our pro-rata
share of gain related to the sale of real estate and accrued incentive fees
during the year ended December 31, 2020 as compared to the year ended December
31, 2019 .
Income tax expense decreased $1.0 million , or 29.3%, primarily due to a decrease
in our pro-rata share of gain from the sale of real estate by the Joint Ventures
as well as accrued incentive fees we earned from the Joint Ventures. Our equity
ownership in the Joint Ventures is owned through a wholly-owned TRS.
34
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Comparison of Year Ended
A discussion of changes in our results of operations between 2019 and 2018 can be found in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Comparison of Year EndedDecember 31, 2019 to Year EndedDecember 31, 2018 " of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Critical Accounting Policies A critical accounting policy is one that involves an estimate or assumption that is subjective and requires management judgment about the effect of a matter that is inherently uncertain and material to an entity's financial condition and results of operations. Of the significant accounting policies discussed in Note 2 to the Consolidated Financial Statements, we believe the the following policies relate to the more significant judgments and estimates used in the preparation of our consolidated financial statements: •Acquisitions of Real Estate Assets: We allocate the purchase price of acquired real estate, including real estate acquired as a portfolio, based upon the fair value of the assets acquired and liabilities assumed, which generally consists of land, buildings, tenant improvements, construction in progress, leasing commissions and lease intangibles including in-place leases and above market and below market lease assets and liabilities. The purchase price is allocated to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The determination of fair value includes the use of significant assumptions such as land comparables, discount rates, terminal capitalization rates and market rent assumptions. Acquired above and below market lease intangibles are valued based on the present value of the difference between prevailing market rental rates and the in-pace rental rates measured over a period equal to the remaining term of the lease for above market leases or the remaining term of the lease plus the term of any below market fixed rate renewal options for below market leases. The purchase price is further allocated to in-place lease values based on an estimate of the lease revenue received during a reasonable lease-up period as if the property was vacant on the date of acquisition. •Impairment of Real Estate Assets: We review our tangible and intangible real estate assets held for use for possible impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. The judgments regarding the existence of indicators of impairment are based on the operating performance, market conditions, as well as our ability to hold and our intent with regard to each property. The judgments regarding whether the carrying amounts of these assets may not be recoverable are based on estimates of future undiscounted cash flows from properties which include estimates of future operating performance and market conditions. If any real estate investment is considered permanently impaired, a loss is recorded to reduce the carrying value of the property to its estimated fair value. The impairment assessment and fair value measurement requires the use of estimates and assumptions related to the timing and amounts of cash flow projections, discount rates and terminal capitalization rates. 35 -------------------------------------------------------------------------------- Liquidity and Capital Resources AtDecember 31, 2020 , our cash and cash equivalents and restricted cash were approximately$162.1 million and$37.6 million , respectively. Restricted cash is comprised of gross proceeds from the sales of certain industrial properties. These sale proceeds will be disbursed as we exchange industrial properties under Section 1031 of the Code. We also had$724.6 million available for additional borrowings under our Unsecured Credit Facility as ofDecember 31, 2020 . We have considered our short-term (throughDecember 31, 2021 ) liquidity needs and the adequacy of our estimated cash flow from operations and other expected liquidity sources to meet these needs. We have a$200.0 million term loan maturing inJuly 2021 . In connection with this maturity, we have two, one-year extension options at our election, subject to the satisfaction of certain conditions. Also, our Unsecured Credit Facility matures inOctober 2021 ; however, it is extendable for one year, at our election, subject to the satisfaction of certain conditions. Lastly, we have$58.8 million in mortgage loans payable outstanding atDecember 31, 2020 maturing inOctober 2021 . We expect to satisfy these payment obligations on or prior to the maturity dates by extending the term of the Unsecured Credit Facility and/or the$200.0 million term loan or through the issuance of other debt or equity securities. With the exception of the$200.0 million term loan, the Unsecured Credit Facility and the mortgage maturities, we believe that our principal short-term liquidity needs are to fund normal recurring expenses, property acquisitions, developments, renovations, expansions and other nonrecurring capital improvements, debt service requirements, the minimum distributions required to maintain the Company's REIT qualification under the Code and distributions approved by the Company's Board of Directors. We anticipate that these needs will be met with cash flows provided by operating activities as well as the disposition of select assets. These needs may also be met by the issuance of other debt or equity securities, subject to market conditions or borrowings under our Unsecured Credit Facility. We expect to meet long-term (afterDecember 31, 2021 ) liquidity requirements such as property acquisitions, developments, scheduled debt maturities, major renovations, expansions and other nonrecurring capital improvements through long-term unsecured and secured indebtedness, the disposition of select assets and the issuance of additional equity or debt securities, subject to market conditions. As ofFebruary 15, 2021 , we had approximately$724.6 million available for additional borrowings under our Unsecured Credit Facility. Our Unsecured Credit Facility contains certain financial covenants including limitations on incurrence of debt and debt service coverage. Our access to borrowings may be limited if we fail to meet any of these covenants. We believe that we were in compliance with our financial covenants as ofDecember 31, 2020 , and we anticipate that we will be able to operate in compliance with our financial covenants in 2021. As ofDecember 31, 2020 , our senior unsecured notes have been assigned credit ratings fromStandard & Poor's , Moody's and Fitch Ratings of BBB/Stable, Baa2/Stable and BBB/Stable, respectively. A securities rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating organization. In the event of a downgrade, we believe we would continue to have access to sufficient capital; however, our cost of borrowing would increase and our ability to access certain financial markets may be limited. 36 -------------------------------------------------------------------------------- Cash Flow Activity The following table summarizes our cash flow activity for the Company for the years endedDecember 31, 2020 and 2019: Year EndedDecember 31, 2020 2019 (In thousands)
Net cash provided by operating activities
Net cash used in investing activities (251,738) (205,386)
Net cash provided by financing activities 58,248 62,198
The following table summarizes our cash flow activity for the
Year Ended December 31,
2020 2019
(In thousands)
Net cash provided by operating activities
Net cash used in investing activities (251,738) (205,386)
Net cash provided by financing activities 57,597 62,111
Changes in cash flow for the year endedDecember 31, 2020 , compared to the prior year are described as follows: Operating Activities: Cash provided by operating activities decreased$5.1 million for the Company (decreased$4.5 million for theOperating Partnership ), primarily due to the following: •decrease in accounts payable, accrued expenses, other liabilities, rents received in advance and security deposits due to timing of cash payments; and •decrease in operating distributions from our Joint Ventures of$11.7 million in 2020 as compared to 2019; offset by •decrease in tenant accounts receivable, prepaid expenses and other assets due to timing of cash receipts; •decrease in payments to settle derivative instruments of$3.1 million ; and •increase in net operating income from same store properties, acquired properties, and recently developed properties of$32.1 million , offset by decreases in net operating income due to property disposals of approximately$21.7 million . Investing Activities: Cash used in investing activities increased$46.4 million , primarily due to the following: •increase of$67.5 million related to the acquisition of real estate; •increase of$31.3 million related to net contributions made to our Joint Ventures in 2020 as compared to 2019; •decrease of$50.6 million in net proceeds received from the disposition of real estate and collection of a sales-type lease receivable in 2020 as compared to 2019; offset by •decrease of$96.1 million related to the development of real estate and payments for improvements and leasing commissions in 2020 as compared to 2019; •decrease of$8.2 million in escrow balances; and •increase of$6.5 million related to the collection of insurance settlement proceeds. 37 -------------------------------------------------------------------------------- Financing Activities: Cash provided by financing activities decreased$4.0 million for the Company (decreased$4.5 million for theOperating Partnership ), primarily due to the following: •increase in net repayments of our Unsecured Credit Facility of$316.0 million in 2020 compared to 2019; and •increase in dividend and unit distributions of$10.1 million due to the Company raising the dividend rate in 2020; offset by •increase of$150.0 million related to the issuance of unsecured notes in a private placement in 2020; •decrease in repayments of mortgage loans payable of$93.1 million ; and •increase of$78.7 million related to net proceeds from the issuance of 1,842,281 shares of the Company's common stock under our ATM in 2020. Contractual Obligations and Commitments The following table lists our contractual obligations and commitments as ofDecember 31, 2020 : Payments Due by Period (In thousands) Less Than Total 1 Year
1-3 Years 3-5 Years Over 5 Years Rent Payments Due on Operating and Ground Leases
$ 71,277 $ 2,610
92,000 - - -
Long Term Debt 1,602,785 261,891 332,345 684 1,007,865
Interest Expense on Long Term
Debt(A)(C) 366,070 55,403 88,969 81,747 139,951
Unsecured Credit Facility(D) 909 909 - - -
Total $ 2,133,041 $ 412,813 $ 426,337 $ 86,720 $ 1,207,171
_______________
(A)Not on balance sheet.
(B)Represents estimated remaining payments on the completion of development
projects under construction. Estimated remaining costs include all costs
necessary to place the properties into service and could extend beyond one year.
(C)Includes interest expense on our unsecured term loans, inclusive of the
impact of interest rate swaps which effectively swap the variable interest rate
to a fixed interest rate. Excludes interest expense on our Unsecured Credit
Facility.
(D)Represents fees on our Unsecured Credit Facility which has a contractual
maturity in October 2021 .
Off-Balance Sheet Arrangements
At December 31, 2020 , we had letters of credit and performance bonds outstanding
amounting to $22.0 million in the aggregate. The letters of credit and
performance bonds are not reflected as liabilities on our balance sheet. We have
no other off-balance sheet arrangements, as defined in Item 303 of
Regulation S-K, other than those disclosed on the Contractual Obligations and
Commitments table above that have or are reasonably likely to have a current or
future effect on our financial condition, results of operation or liquidity and
capital resources.
Environmental
We paid approximately $1.1 million and $0.3 million during the years ended
December 31, 2020 and 2019, respectively, related to environmental expenditures.
We estimate 2021 expenditures of approximately $2.3 million which has been
accrued at December 31, 2020 . We estimate that the aggregate expenditures which
need to be expended in 2021 and beyond with regard to currently identified
environmental issues will not exceed approximately $5.0 million which has been
accrued at December 31, 2020 .
Inflation
For the last several years, inflation has not had a significant impact on us
because of the relatively low inflation rates in our markets of operation. 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, our leases have a weighted average lease length of
7.2 years which may enable us to replace existing leases with new leases at
higher base rentals if rents of existing leases are below the then-existing
market rate.
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Market Risk
The following discussion about our risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
Our business subjects us to market risk from interest rates, as described below.
Interest Rate Risk
The following analysis presents the hypothetical gain or loss in earnings, cash
flows or fair value of the financial instruments and derivative instruments
which are held by us at December 31, 2020 that are sensitive to changes in
interest rates. While this analysis may have some use as a benchmark, it should
not be viewed as a forecast.
In the normal course of business, we also face risks that are either
non-financial or non-quantifiable. Such risks principally include credit risk
and legal risk and are not represented in the following analysis.
At December 31, 2020 , $1,602.7 million or 100% of our total debt, excluding
unamortized debt issuance costs, was fixed rate debt. At December 31, 2019 ,
$1,332.9 million or 89.4% of our total debt, excluding unamortized debt issuance
costs, was fixed rate debt. As of the same date, $158.0 million or 10.6% of our
total debt, excluding unamortized debt issuance costs, was variable rate debt.
Fixed rate debt for both years includes $460.0 million of variable-rate debt
that has been effectively swapped to a fixed rate through the use of derivative
instruments.
For fixed rate debt, changes in interest rates generally affect the fair value
of the debt, but not our earnings or cash flows. Conversely, for variable rate
debt, changes in the base interest rate used to calculate the all-in interest
rate generally do not impact the fair value of the debt, but would affect our
future earnings and cash flows. The interest rate risk and changes in fair
market value of fixed rate debt generally do not have a significant impact on us
until we are required to refinance such debt. See Note 4 to the Consolidated
Financial Statements for a discussion of the maturity dates of our various fixed
rate debt.
Our variable rate debt is subject to risk based upon prevailing market interest
rates. If the LIBOR rates relevant to our variable rate debt were to have
increased 10%, we estimate that our interest expense during the years ended
December 31, 2020 and 2019 would have increased by approximately $0.09 million
and $0.23 million , respectively, based on our average outstanding floating-rate
debt during the years ended December 31, 2020 and 2019. Additionally, if
weighted average interest rates on our fixed rate debt were to have increased by
10% due to refinancing, interest expense would have increased by approximately
$5.7 million and $5.3 million during the years ended December 31, 2020 and 2019.
As of December 31, 2020 and 2019, the estimated fair value of our debt was
approximately $1,703.2 million and $1,554.7 million , respectively, based on our
estimate of the then-current market interest rates.
The use of derivative financial instruments allows us to manage risks of
increases in interest rates with respect to the effect these fluctuations would
have on our earnings and cash flows. As of December 31, 2020 and 2019, we had
derivative instruments with a notional aggregate amount outstanding of $460.0
million which mitigate our exposure to our unsecured term loans' variable
interest rates, which are based upon LIBOR (the "Term Loan Swaps"). We
designated the Term Loan Swaps as cash flow hedges. See Note 12 to the
Consolidated Financial Statements for a more detailed discussion of these
derivative instruments. Currently, we do not enter into financial instruments
for trading or other speculative purposes.
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Supplemental Earnings Measure
Investors in and industry analysts following the real estate industry utilize
funds from operations ("FFO") and net operating income ("NOI") as supplemental
operating performance measures of an equity REIT. Historical cost accounting for
real estate assets in accordance with accounting principles generally accepted
in the United States of America ("GAAP") implicitly assumes that the value of
real estate assets diminishes predictably over time through depreciation. Since
real estate values instead have historically risen or fallen with market
conditions, many industry analysts and investors prefer to supplement operating
results that use historical cost accounting with measures such as FFO and NOI,
among others. We provide information related to FFO and same store NOI ("SS
NOI") both because such industry analysts are interested in such information,
and because our management believes FFO and SS NOI are important performance
measures. FFO and SS NOI are factors used by management in measuring our
performance, including for purposes of determining the compensation of our
executive officers under our 2020 incentive compensation plan.
Neither FFO nor SS NOI should be considered as a substitute for net income, or
any other measures derived in accordance with GAAP. Neither FFO nor SS NOI
represents cash generated from operating activities in accordance with GAAP and
neither should be considered as an alternative to cash flow from operating
activities as a measure of our liquidity, nor is either indicative of funds
available for our cash needs, including our ability to make cash distributions.
Funds From Operations
The National Association of Real Estate Investment Trusts ("NAREIT") has
recognized and defined for the real estate industry a supplemental measure of
REIT operating performance, FFO, that excludes historical cost depreciation,
among other items, from net income determined in accordance with GAAP. FFO is a
non-GAAP financial measure. FFO is calculated by us in accordance with the
definition adopted by the Board of Governors of NAREIT and therefore may not be
comparable to other similarly titled measures of other companies.
Management believes that the use of FFO available to common stockholders and
participating securities, combined with net income (which remains the primary
measure of performance), improves the understanding of operating results of
REITs among the investing public and makes comparisons of REIT operating results
more meaningful. Management believes that, by excluding gains or losses related
to sales of real estate assets, real estate asset depreciation and amortization
and impairment of real estate, investors and analysts are able to identify the
operating results of the long-term assets that form the core of a REIT's
activity and use these operating results for assistance in comparing these
operating results between periods or to those of different companies.
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The following table shows a reconciliation of net income available to common
stockholders and participating securities to the calculation of FFO available to
common stockholders and participating securities as follows:
Year Ended December 31,
2020 2019 2018 2017 2016
(In thousands)
Net Income Available to
$ 195,989 $
238,775
120,516 115,659 115,617 116,506
Impairment of Real Estate (A) - - 2,285 - -
Gain on Sale of Real Estate (A) (86,751) (124,942) (80,909) (131,058) (68,202)
Gain on Sale of Real Estate from Joint Ventures (A) (4,443) (16,714)
- - -
Income Tax Provision - Allocable to Gain on Sale of Real Estate, including Joint Ventures (A)
2,198 3,095 - - -
Noncontrolling Interest Share of Adjustments (843) 406 (883) 481 (1,725)
Funds from Operations Available to
$ 234,964 $
221,136
(A) InDecember 2018 , NAREIT issued a white paper restating the definition of FFO. The restated definition provides an option to include or exclude gains and losses as well as impairment of non-depreciable real estate if the sales are deemed incidental. Prior toJanuary 1, 2019 , we included gains and losses on sales and impairment of our non-depreciable real estate in our calculation of NAREIT FFO. OnJanuary 1, 2019 we adopted the restated definition of NAREIT FFO on a prospective basis and now exclude gains and losses on sales and impairment of our non-depreciable real estate that we deem incidental. We also exclude the same adjustments from our share of net income from unconsolidated joint ventures. 41 -------------------------------------------------------------------------------- Same Store Net Operating Income SS NOI is a non-GAAP financial measure that provides a measure of rental operations and, as calculated by us, that does not factor in depreciation and amortization, general and administrative expense, interest expense, impairment charges, equity in income and loss from joint ventures, income tax benefit and expense, gains and losses on retirement of debt and gains and losses on the sale of real estate. We define SS NOI as revenues minus property expenses such as real estate taxes, repairs and maintenance, property management, utilities, insurance and other expenses, minus the NOI of properties that are not same store properties and minus the impact of straight-line rent, the amortization of above/below market leases and lease termination fees. As so defined, SS NOI may not be comparable to same store net operating income or similar measures reported by other REITs that define same store properties or NOI differently. The major factors influencing SS NOI are occupancy levels, rental rate increases or decreases and tenant recoveries increases or decreases. Our success depends largely upon our ability to lease space and to recover the operating costs associated with those leases from our tenants. The following table shows a reconciliation of the same store revenues and property expenses disclosed in the results of operations (and reconciled to revenues and expenses reflected on the statements of operations) to SS NOI for the years endedDecember 31, 2020 and 2019. Year Ended December 31, 2020 2019 (In thousands) Same Store Revenues$ 376,511 $ 366,952 Same Store Property Expenses (92,588) (90,476) Same Store Net Operating Income Before Same Store Adjustments$ 283,923 $ 276,476
Same Store Adjustments:
Straight-line Rent (1,034) (5,141) Above (Below) Market Lease Amortization (941) (1,056) Lease Termination Fees (713) (1,012) Same Store Net Operating Income$ 281,235 $ 269,267 Subsequent Events FromJanuary 1, 2021 toFebruary 15, 2021 , we acquired two land parcels for a purchase price of approximately$9.8 million , excluding transaction costs. In addition, we sold one industrial property for approximately$0.7 million , excluding transaction costs. Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Response to this item is included in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" above. Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements and Financial Statement Schedule included in Item 15.
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