All statements contained herein, other than historical facts, may 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 "Exchange Act"). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our business, financial condition, liquidity, results of operations, funds from operations or prospects to be materially different from any future business, financial condition, liquidity, results of operations, funds from operations or prospects expressed or implied by such forward-looking statements. For further information about these and other factors that could affect our future results, please see the captions titled "Forward-Looking Statements" and "Risk Factors" in this report and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q.
All references to "we," "our," "us" and the "Company" in this Report mean
General
We are an externally-advised real estate investment trust ("REIT") that was incorporated under the General Corporation Law of theState of Maryland onFebruary 14, 2003 . We focus on acquiring, owning, and managing primarily office and industrial properties. Our properties are geographically diversified and our tenants cover a broad cross section of business sectors and range in size from small to very large private and public companies, many of which are corporations that do not have publicly-rated debt. We have historically entered into, and intend in the future to enter into, purchase agreements primarily for real estate having net leases with remaining terms of approximately seven to 15 years and contractual rental rate increases. Under a net lease, the tenant is required to pay most or all operating, maintenance, repair and insurance costs and real estate taxes with respect to the leased property. We actively communicate with buyout funds, real estate brokers and other third parties to locate properties for potential acquisition or to provide mortgage financing in an effort to build our portfolio. We target secondary growth markets that possess favorable economic growth trends, diversified industries, and growing population and employment.
All references to annualized generally accepted accounting principles ("GAAP") rent are rents that each tenant pays in accordance with the terms of its respective lease reported evenly over the non-cancelable term of the lease.
As of
•we owned 133 properties totaling 16.6 million square feet of rentable space, located in 27 states; •our occupancy rate was 97.2%; •the weighted average remaining term of our mortgage debt was 3.7 years and the weighted average interest rate was 4.11%; and •the average remaining lease term of the portfolio was 7.1 years. 23 -------------------------------------------------------------------------------- Table of Contents Business Environment Since the onset of the COVID-19 pandemic inMarch 2020 , authorities throughoutthe United States and the world have implemented at various time widespread measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, the promotion of social distancing and limitations on business activity. Generally, certain restrictive measures that were implemented during certain periods of 2021 have been limited during the first part of 2022, and the prevalence and scale of closures and operating limitations are far less severe as compared to 2020. These measures and the pandemic generally caused significant national and global economic disruption, including disrupted business operations, such as those of certain of our tenants, and continue to have an adverse effect on office demand for space in the short term, at a minimum. Economic recovery inthe United States and various other regions of the world has continued but may be threatened by the continued adverse effects of COVID-19 and other factors. The demand for industrial space has continued due to the continuing growth of e-commerce and appears to be partially counterbalancing the adverse effects of COVID-19 on the commercial real estate industry. However, product delivery delays caused by supply chain disruption, and the apparent labor shortage we are facing nationally, have resulted in inflation and higher costs for both industrial and office construction projects. Industrial absorption increased on a nominal basis in 2020, compared to 2019, according to research reports and continues to be strong through the fourth quarter of 2021 averaging approximately 100 million square feet of absorption each quarter. Construction activity for the industrial sector remains strong as both third quarter and year end 2021 estimates have approximately$500.0 million of properties under construction with over 30% of that space pre-leased. Research reports also reflect that the office sector experienced negative absorption for each of the first three quarters and only approximately 10 million square feet of positive absorption in the fourth quarter of 2021. Office space available for sublease has increased and is placing downward pressure on office rental rates. Interest rates remain volatile in response to competing concerns about inflationary pressures and the spread and effect of COVID-19 variants and are expected to increase. The yield on the 10 year US Treasury Note has increased since the beginning of 2021, and finished 2021 at 1.51%, and has significantly increased during the first quarter of 2022. After completing the 11th year of the current cycle, some national research firms had been estimating that both pricing and investment sales volume would be peaking and the national economy would be slowing in the near term. Global recessionary conditions may occur over the next 12-24 months in part by the COVID-19 pandemic and geopolitical conditions, although the actual timeline, impact and duration are unknown. See "Impact of COVID-19 on Our Business," below.
From a more macro-economic perspective, there continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the ongoing impact of COVID-19 on business and economic activity.
Impact of COVID-19 on Our Business
The extent to which the COVID-19 pandemic and subsequent inflationary pressures and supply chain disruption may impact our business, financial condition, liquidity, results of operations, funds from operations or prospects will depend on numerous evolving factors that we are not able to predict at this time, including the impact on economic activity from the pandemic (such as the effect on market rental rates and commercial real estate values) and actions taken in response; the effect on our tenants and their businesses; the ability of our tenants to make their rental payments; any closures of our tenants' properties; and our ability to secure debt financing, service future debt obligations or pay distributions to our stockholders. Any of these events could materially adversely impact our business, financial condition, liquidity, results of operations, funds from operations or prospects.
As of
We believe we currently have adequate liquidity in the near term, and we believe the availability on our Credit Facility (defined in "Other Business Environment Considerations" below) is sufficient to cover all near-term debt obligations and operating expenses and to continue our industrial growth strategy. We are in compliance with all of our debt covenants. We amended our Credit Facility in 2019 to increase our borrowing capacity and extend its maturity date. In addition, onFebruary 11, 2021 , we added a new$65.0 million term loan component. We have had numerous conversations with lenders, and credit continues to be available for well capitalized borrowers. We continue to monitor our portfolio and intend to maintain a reasonably conservative liquidity position for the foreseeable future. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our personnel, tenants and stockholders. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic, will have on our business, financial condition, liquidity, results of operations, funds from operations or prospects, we 24 -------------------------------------------------------------------------------- Table of Contents believe that it is important to share where we stand today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 continues.
Other Business Environment Considerations
The short-term and long-term economic implications are unknown, in relation to recent world events, including inflation, supply chain disruptions, labor shortages, rapidly rising interest rates, the ongoing COVID-19 pandemic and associated government response in addition to any subsequent shift in policy, geopolitical conditions, new regulations or the long-term impact of social and infrastructure spending and tax reform in theU.S. Finally, the continuing uncertainty surrounding the ability of the federal government to address its fiscal condition in both the near and long term, as well as other geopolitical issues relating to the global economic slowdown has increased domestic and global instability. These developments could cause interest rates and borrowing costs to be volatile, which may adversely affect our ability to access both the equity and debt markets and could have an adverse impact on our tenants as well. All of our variable rate debt is based upon one-month London Interbank Offered Rate ("LIBOR"), although LIBOR is currently anticipated to be phased out byJune 2023 . LIBOR is expected to transition to a new standard rate, Secured Overnight Financing Rate ("SOFR"), which will incorporate repo data collected from multiple data sets. The intent is to adjust the SOFR to minimize differences between the interest that a borrower would be paying using LIBOR versus what it will be paying using SOFR. We are currently monitoring the transition as SOFR becomes the standard benchmark for variable rate debt. During the transition further changes or reforms to the determination of supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based debt, or the value of our portfolio of LIBOR-indexed, floating-rate debt. We continue to focus on re-leasing vacant space, renewing upcoming lease expirations, re-financing upcoming loan maturities, and acquiring additional properties with associated long-term leases. Currently, we have eight partially vacant buildings and two fully vacant buildings. Our available vacant space atMarch 31, 2022 represents 3.0% of our total square footage and the annual carrying costs on the vacant space, including real estate taxes and property operating expenses, are approximately$3.6 million . We continue to actively seek new tenants for these properties. We believe our lease expiration schedule for 2022 is quite manageable, as it equates to 4.2% of our lease revenue and the expirations are due to occur at the end of June, July, and October. Property acquisitions since the beginning of 2019 have totaled nearly$375.0 million and all transactions were industrial in nature, with a weighted average lease term of 12.6 years and a current weighted average lease term today of 10.6 years. Our ability to make new investments is highly dependent upon our ability to procure financing. Our principal sources of financing generally include the issuance of equity securities, long-term mortgage loans secured by properties, borrowings under our$100.0 million senior unsecured revolving credit facility ("Revolver"), withKeyBank National Association ("KeyBank"), which matures inJuly 2023 , our$160.0 million term loan facility ("Term Loan A"), which matures inJuly 2024 and our$65.0 million term loan facility ("Term Loan B"), which matures inFebruary 2026 . We refer to the Revolver, Term Loan A and Term Loan B collectively herein as the Credit Facility. While lenders' credit standards have tightened, we continue to look to national and regional banks, insurance companies and non-bank lenders, in addition to the collateralized mortgage backed securities market ("CMBS"), to issue mortgages to finance our real estate activities. Recent Developments Acquisition Activity
During the three months ended
Aggregate Aggregate Weighted Average Capitalized Annualized GAAP Remaining Lease Term Aggregate Purchase Acquisition Fixed Lease Aggregate Square Footage at Time of Acquisition Price Expenses Payments 136,000 10.2 years $ 13,463 $ 163$ 876 OnMay 4, 2022 , we purchased a 260,719 square foot, two property portfolio inCleveland, Ohio andFort Payne, Alabama , for$19.3 million . These properties are fully leased to one tenant on a triple net basis with a remaining lease term of 11.4 years. 25 -------------------------------------------------------------------------------- Table of Contents Leasing Activity
During and subsequent to the three months ended
Aggregate
Annualized
Weighted Average GAAP Fixed Lease Aggregate Tenant Aggregate Leasing Aggregate Square Footage Remaining Lease Term Payments Improvement Commissions 257,978 10.6 years $ 2,856 $ 3,771 $ 963
On
During the three months ended
Aggregate Accelerated Rent
Recognized through March 31, Aggregate Square Footage Reduced Aggregate Accelerated Rent 2022 155,984 $ 2,138 $ 356 Financing Activity
On
OnApril 27, 2022 , we refinanced$14.8 million of fixed rate debt coming due onMay 1, 2022 with a new$15.0 million note, collateralized by two properties, at a variable interest rate of SOFR plus 2.50%, subject to a 3.25% minimum, and a two year term. OnMay 4, 2022 , we issued$10.0 million of fixed rate debt in connection with the two property portfolio acquired on the same date, with a term of 5.0 years and interest rate of 4.0%. Equity Activities Common Stock ATM Program During the three months endedMarch 31, 2022 , we sold 0.9 million shares of common stock, raising$20.3 million in net proceeds under our At-the-Market Equity Offering Sales Agreements (the "Common Stock Sales Agreement") with sales agentsRobert W. Baird & Co. Incorporated ("Baird"),Goldman Sachs & Co. LLC ("Goldman Sachs"),Stifel, Nicolaus & Company, Incorporated ("Stifel"),BTIG, LLC , andFifth Third Securities, Inc. ("Fifth Third"), OnFebruary 22, 2022 , we entered into Amendment No. 1 to our existing At-the-Market Equity Offering Sales Agreement (the "Common Stock Sales Agreement"), with Baird, Goldman Sachs, Stifel, BTIG, and Fifth Third (the "Common Stock Sales Agents"), datedDecember 3, 2019 . The amendment permits shares of common stock to be issued pursuant to the Common Stock Sales Agreement under the Company's Registration Statement on Form S-3 (File No. 333-236143) and future registration statements on Form S-3 (the "Common Stock ATM Program"). As ofMarch 31, 2022 , we had remaining capacity to sell up to$47.0 million of common stock pursuant to the Common Stock ATM Program under the 2020 Universal Shelf (as defined below).
Universal Shelf Registration Statements
OnJanuary 11, 2019 , we filed a universal registration statement on Form S-3, File No. 333-229209, and an amendment thereto on Form S-3/A onJanuary 24, 2019 (collectively referred to as the "2019 Universal Shelf"). The 2019 Universal Shelf allowed us to issue up to$500.0 million of securities and expired onFebruary 13, 2022 . 26 -------------------------------------------------------------------------------- Table of Contents OnJanuary 29, 2020 , we filed an additional universal registration statement on Form S-3, File No. 333-236143 (the "2020 Universal Shelf"). The 2020 Universal Shelf was declared effective onFebruary 11, 2020 and, at the time, was in addition to the 2019 Universal Shelf. The 2020 Universal Shelf allows us to issue up to an additional$800.0 million of securities. Of the$800.0 million of available capacity under our 2020 Universal Shelf, approximately$636.5 million is reserved for the sale of our 6.00% Series F Cumulative Redeemable Preferred Stock, par value$0.001 per share (the "Series F Preferred Stock") and$63.0 million is reserved for our Common Stock ATM Program. As ofMarch 31, 2022 , we had the ability to issue up to$671.8 million of securities under the 2020 Universal Shelf. Series F Preferred Stock OnFebruary 20, 2020 , we filed with theMaryland Department of Assessments and Taxation Articles Supplementary (i) setting forth the rights, preferences and terms of the Series F Preferred Stock and (ii) reclassifying and designating 26,000,000 shares of our authorized and unissued shares of Common Stock as shares of Series F Preferred Stock. The reclassification decreased the number of shares classified as common stock from 86,290,000 shares immediately prior to the reclassification to 60,290,000 shares immediately after the reclassification. We sold 62,883 shares of our Series F Preferred Stock, raising$1.4 million in net proceeds during the three months endedMarch 31, 2022 . As ofMarch 31, 2022 , we had remaining capacity to sell up to$624.3 million of Series F Preferred Stock.
Non-controlling Interest in
As of
As of
27 -------------------------------------------------------------------------------- Table of Contents Diversity of Our PortfolioGladstone Management Corporation , aDelaware corporation (our "Adviser"), seeks to diversify our portfolio to avoid dependence on any one particular tenant, industry or geographic market. By diversifying our portfolio, our Adviser intends to reduce the adverse effect on our portfolio of a single under-performing investment or a downturn in any particular industry or geographic market. For the three months endedMarch 31, 2022 , our largest tenant comprised only 4.4% of total lease revenue. The table below reflects the breakdown of our total lease revenue by tenant industry classification for the three months endedMarch 31, 2022 and 2021 (dollars in thousands): For the three months ended March 31, 2022 2021 Lease Percentage of Lease Percentage of Lease Industry Classification Revenue Revenue Lease Revenue Revenue Telecommunications$ 5,609 15.8 %$ 5,586 16.0 % Automotive 4,636 13.0 2,721 7.8 Diversified/Conglomerate Services 4,537 12.8 4,690 13.5 Healthcare 3,984 11.2 4,248 12.3 Diversified/Conglomerate Manufacturing 2,626 7.4 1,998 5.8 Banking 2,608 7.3 2,543 7.3 Buildings and Real Estate 2,338 6.6 2,343 6.8 Personal, Food & Miscellaneous Services 1,548 4.4 2,475 7.1 Beverage, Food & Tobacco 1,381 3.9 1,477 4.3 Chemicals, Plastics & Rubber 1,205 3.4 1,088 3.1 Information Technology 1,045 2.9 1,652 4.8 Machinery 976 2.7 991 2.9 Containers, Packaging & Glass 869 2.4 593 1.7 Personal & Non-Durable Consumer Products 859 2.4 617 1.8 Childcare 573 1.6 573 1.7 Printing & Publishing 229 0.6 348 1.0 Education 204 0.6 201 0.6 Electronics 181 0.5 412 1.2 Home & Office Furnishings 123 0.5 121 0.3 Total$ 35,531 100.0 %$ 34,677 100.0 %
The tables below reflect the breakdown of total lease revenue by state for the
three months ended
Lease Revenue Number of Lease Revenue Number of for the three Leases for the for the three Leases for the months ended three months months ended three months March 31, Percentage of ended March 31, March 31, Percentage of ended March 31, State 2022 Lease Revenue 2022 2021 Lease Revenue 2021 Texas$ 5,167 14.5 % 14$ 4,130 11.9 % 13 Florida 4,236 11.9 9 4,223 12.2 11 Pennsylvania 3,733 10.5 10 3,821 11.0 10 Ohio 3,585 10.1 15 3,760 10.8 16 Georgia 2,908 8.2 10 2,669 7.7 9 North Carolina 1,887 5.3 9 1,850 5.3 7 Michigan 1,609 4.5 6 1,573 4.5 6 Alabama 1,556 4.4 5 1,585 4.6 5 South Carolina 1,393 3.9 2 1,202 3.5 2 Utah 1,322 3.7 3 1,891 5.5 4 All Other States 8,135 23.0 49 7,973 23.0 46 Total$ 35,531 100.0 % 132$ 34,677 100.0 % 129 28
-------------------------------------------------------------------------------- Table of Contents Our Adviser and Administrator Our Adviser is led by a management team with extensive experience purchasing real estate and originating mortgage loans. OurAdviser and Gladstone Administration, LLC , aDelaware limited liability company (our "Administrator") are controlled by Mr.David Gladstone , who is also our chairman and chief executive officer.Mr. Gladstone also serves as the chairman and chief executive officer of both our Adviser and Administrator, as well as president and chief investment officer of our Adviser. Mr.Terry Lee Brubaker , our vice chairman and chief operating officer, is also the vice chairman and chief operating officer of our Adviser and Administrator and assistant secretary of our Adviser. Mr.Robert Cutlip , our co-president, also serves as executive vice president of commercial and industrial real estate of our Adviser. Our Administrator employs our chief financial officer, treasurer, chief compliance officer, general counsel and secretary,Michael LiCalsi (who also serves as our Administrator's president, general counsel, and secretary, as well as executive vice president of administration of our Adviser) and their respective staffs. Our Adviser and Administrator also provide investment advisory and administrative services, respectively, to certain of our affiliates, including, but not limited to, Gladstone Capital Corporation and Gladstone Investment Corporation, both publicly-traded business development companies, as well as Gladstone Land Corporation, a publicly-traded REIT that primarily invests in farmland. With the exception of Mr.Gary Gerson , our chief financial officer, Mr.Jay Beckhorn , our treasurer, and Messrs.Robert Cutlip andArthur "Buzz" Cooper , our co-presidents, all of our executive officers and all of our directors serve as either directors or executive officers, or both, of Gladstone Capital Corporation and Gladstone Investment Corporation. In addition, with the exception ofMr. Cutlip , Mr. Cooper andMr. Gerson , all of our executive officers and all of our directors, serve as either directors or executive officers, or both, of Gladstone Land Corporation.Mr. Cutlip , Mr. Cooper andMr. Gerson do not put forth any material efforts in assisting affiliated companies. In the future, our Adviser may provide investment advisory services to other companies, both public and private.
Advisory and Administration Agreements
We are externally managed pursuant to contractual arrangements with our Adviser and our Administrator, which collectively employ all of our personnel and pay their salaries, benefits and other general expenses directly. Both our Adviser and Administrator are affiliates of ours, as their parent company is owned and controlled by Mr.David Gladstone , our chairman and chief executive officer. We have entered into an advisory agreement with our Adviser, as amended from time to time (the "Advisory Agreement"), and an administration agreement with our Administrator (the "Administration Agreement"). The services and fees under the Advisory Agreement and Administration Agreement are described below. Under the terms of the Advisory Agreement, we are responsible for all expenses incurred for our direct benefit. Examples of these expenses include legal, accounting, interest, directors' and officers' insurance, stock transfer services, stockholder-related fees, consulting and related fees. In addition, we are also responsible for all fees charged by third parties that are directly related to our business, which include real estate brokerage fees, mortgage placement fees, lease-up fees and transaction structuring fees (although we may be able to pass all or some of such fees on to our tenants and borrowers). Our entrance into the Advisory Agreement and each amendment thereto has been approved unanimously by our Board of Directors. Our Board of Directors reviews and considers renewing the agreement with our Adviser each July. During itsJuly 2021 meeting, our Board of Directors reviewed and renewed the Advisory Agreement and Administration Agreement for an additional year, throughAugust 31, 2022 .
Base Management Fee
OnJuly 14, 2020 , we amended and restated the previous Advisory Agreement by entering into the Sixth Amended and Restated Investment Advisory Agreement between us and the Adviser (the "Sixth Amended Advisory Agreement"). The Sixth Amended Advisory Agreement replaced the previous calculation of the base management fee with a calculation based onGross Tangible Real Estate . The revised base management fee will be payable quarterly in arrears and calculated at an annual rate of 0.425% (0.10625% per quarter) of the prior calendar quarter's "Gross Tangible Real Estate ," defined in the Sixth Amended Advisory Agreement as the current gross value of our property portfolio (meaning the aggregate of each property's original acquisition price plus the cost of any subsequent capital improvements thereon). The calculation of the other fees in the Amended Agreement remain unchanged. Our Adviser does not charge acquisition or disposition fees when we acquire or dispose of properties as is common in other externally managed REITs; however, our Adviser may earn fee income from our borrowers, tenants or other sources. 29 -------------------------------------------------------------------------------- Table of Contents Incentive Fee Pursuant to the Advisory Agreement, the calculation of the incentive fee rewards the Adviser in circumstances where our quarterly Core FFO (defined at the end of this paragraph), before giving effect to any incentive fee, or pre-incentive fee Core FFO, exceeds 2.0% quarterly, or 8.0% annualized, of adjusted total stockholders' equity (after giving effect to the base management fee but before giving effect to the incentive fee). We refer to this as the hurdle rate. The Adviser will receive 15.0% of the amount of our pre-incentive fee Core FFO that exceeds the hurdle rate. However, in no event shall the incentive fee for a particular quarter exceed by 15.0% (the cap) the average quarterly incentive fee paid by us for the previous four quarters (excluding quarters for which no incentive fee was paid). Core FFO (as defined in the Advisory Agreement) is GAAP net income (loss) available to common stockholders, excluding the incentive fee, depreciation and amortization, any realized and unrealized gains, losses or other non-cash items recorded in net income (loss) available to common stockholders for the period, and one-time events pursuant to changes in GAAP.
Capital Gain Fee
Under the Advisory Agreement, we will pay to the Adviser a capital gain-based incentive fee that will be calculated and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement). In determining the capital gain fee, we will calculate aggregate realized capital gains and aggregate realized capital losses for the applicable time period. For this purpose, aggregate realized capital gains and losses, if any, equals the realized gain or loss calculated by the difference between the sales price of the property, less any costs to sell the property and the current gross value of the property (equal to the property's original acquisition price plus any subsequent non-reimbursed capital improvements) of the disposed property. At the end of the fiscal year, if this number is positive, then the capital gain fee payable for such time period shall equal 15.0% of such amount. No capital gain fee was recognized during the three months endedMarch 31, 2022 or 2021.
Termination Fee
The Advisory Agreement includes a termination fee clause whereby, in the event of our termination of the agreement without cause (with 120 days' prior written notice and the vote of at least two-thirds of our independent directors), a termination fee would be payable to the Adviser equal to two times the sum of the average annual base management fee and incentive fee earned by the Adviser during the 24-month period prior to such termination. A termination fee is also payable if the Adviser terminates the agreement after the Company has defaulted and applicable cure periods have expired. The agreement may also be terminated for cause by us (with 30 days' prior written notice and the vote of at least two-thirds of our independent directors), with no termination fee payable. Cause is defined in the agreement to include if the Adviser breaches any material provisions of the agreement, the bankruptcy or insolvency of the Adviser, dissolution of the Adviser and fraud or misappropriation of funds.
Administration Agreement
Under the terms of the Administration Agreement, we pay separately for our allocable portion of our Administrator's overhead expenses in performing its obligations to us including, but not limited to, rent and our allocable portion of the salaries and benefits expenses of our Administrator's employees, including, but not limited to, our chief financial officer, treasurer, chief compliance officer, general counsel and secretary (who also serves as our Administrator's president, general counsel and secretary), and their respective staffs. Our allocable portion of the Administrator's expenses are generally derived by multiplying our Administrator's total expenses by the appropriate percentage of time the Administrator's employees perform services for us in relation to their time spent performing services for all companies serviced by our Administrator under contractual agreements.
Significant Accounting Policies and Estimates
The preparation of our financial statements in accordance with GAAP requires management to make judgments that are subjective in nature to make certain estimates and assumptions. Application of these accounting policies involves the exercise of judgment regarding the use of assumptions as to future uncertainties, and as a result, actual results could materially differ from these estimates. A summary of all of our significant accounting policies is provided in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed by us with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 15, 2022 (our "2021 Form 10-K"). There were no material changes to our critical accounting policies or estimates during the three months endedMarch 31, 2022 . 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations The weighted average yield on our total portfolio, which was 7.4% and 8.1% as ofMarch 31, 2022 and 2021, respectively, is calculated by taking the annualized straight-line rents plus operating expense recoveries, reflected as lease revenue on our condensed consolidated statements of operations and other comprehensive income, less property operating expenses, of each acquisition since inception, as a percentage of the acquisition cost plus subsequent capital improvements. The weighted average yield does not account for the interest expense incurred on the mortgages placed on our properties.
A comparison of our operating results for the three months ended
For
the three months ended
2022 2021 $ Change % Change Operating revenues Lease revenue$ 35,531 $ 34,677 $ 854 2.5 % Total operating revenues$ 35,531 $ 34,677 $ 854 2.5 % Operating expenses Depreciation and amortization$ 14,689 $ 16,710 $ (2,021) (12.1) % Property operating expenses 6,623 6,561 62 0.9 % Base management fee 1,547 1,444 103 7.1 % Incentive fee 1,340 1,236 104 8.4 % Administration fee 462 297 165 55.6 % General and administrative 997 656 341 52.0 % Total operating expenses$ 25,658 $ 26,904 $ (1,246) (4.6) % Other (expense) income Interest expense$ (6,586) $ (7,164) $ 578 (8.1) % Loss on sale of real estate, net - (882) 882 (100.0) % Other income 104 311 (207) (66.6) % Total other expense, net$ (6,482) $ (7,735) $ 1,253 (16.2) % Net income$ 3,391 $ 38 $ 3,353 8,823.7 % Distributions attributable to Series D, E, F, and G preferred stock (2,946) (2,847) (99) 3.5 % Distributions attributable to senior common stock (116) (187) 71 (38.0) % Loss on extinguishment of Series F preferred stock (5) - (5) 100.0 % Net income (loss) available (attributable) to common stockholders and Non-controlling OP Unitholders $ 324$ (2,996) $ 3,320 (110.8) % Net income (loss) available (attributable) to common stockholders and Non-controlling OP Unitholders per weighted average share and unit - basic & diluted$ 0.01 $ (0.08) $ 0.09 (112.5) %
FFO available to common stockholders and
Non-controlling OP Unitholders - basic (1)
2.9 % FFO available to common stockholders and Non-controlling OP Unitholders - diluted (1)$ 15,129 $ 14,783 $ 346 2.3 % FFO per weighted average share of common stock and Non-controlling OP Units - basic (1)$ 0.39 $ 0.40 $ (0.01) (2.5) % FFO per weighted average share of common stock and Non-controlling OP Units - diluted (1)$ 0.39 $ 0.40 $ (0.01) (2.5) % (1)Refer to the "Funds from Operations" section below within the Management's Discussion and Analysis section for the definition of FFO and FFO adjusted for comparability. Same Store Analysis For the purposes of the following discussion, same store properties are properties we owned as ofJanuary 1, 2021 , which have not been subsequently vacated, or disposed of. Acquired and disposed of properties are properties which were acquired, disposed of or classified as held for sale at any point subsequent toDecember 31, 2020 . Properties with vacancy are properties that were fully vacant or had greater than 5.0% vacancy, based on square footage, at any point subsequent toJanuary 1, 2021 . 31 --------------------------------------------------------------------------------
Table of Contents Operating Revenues For the three months ended March 31, (Dollars in Thousands) Lease Revenues 2022 2021 $ Change % Change Same Store Properties$ 29,258 $ 30,163 $ (905) (3.0) % Acquired & Disposed Properties 1,842 528 1,314 248.9 % Properties with Vacancy 4,431 3,986 445 11.2 %$ 35,531 $ 34,677 $ 854 2.5 % Lease revenues consist of rental income and operating expense recoveries earned from our tenants. Lease revenues from same store properties decreased for the three months endedMarch 31, 2022 , primarily due to accelerated rent recognized during the three months endedMarch 31, 2021 from two tenants that terminated their leases early, partially offset by increased rent from lease amendments executed subsequent toMarch 31, 2021 . We fully re-leased the space from the two terminations with no downtime. Lease revenues increased for acquired and disposed of properties for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , because we acquired 12 properties subsequent toMarch 31, 2021 . This increase was partially offset by a loss of lease revenues from one property we sold subsequent toMarch 31, 2021 . Lease revenues increased for our properties with vacancy for the three months endedMarch 31, 2022 due to vacant space being leased.
Operating Expenses
Depreciation and amortization decreased for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , due to accelerated depreciation and amortization related to two tenants with early lease terminations during the three months endedMarch 31, 2021 , partially offset by an increase in depreciation on the 12 properties we acquired subsequent toMarch 31, 2021 . For the three months ended March 31, (Dollars in Thousands) Property Operating Expenses 2022 2021 $ Change % Change Same Store Properties$ 4,451 $ 4,312 $ 139 3.2 % Acquired & Disposed Properties 19 146 (127) (87.0) % Properties with Vacancy 2,153 2,103 50 2.4 %$ 6,623 $ 6,561 $ 62 0.9 % Property operating expenses consist of franchise taxes, property management fees, insurance, ground lease payments, property maintenance and repair expenses paid on behalf of certain of our properties. The increase in property operating expenses for same store properties for the three months endedMarch 31, 2022 , from the comparable 2021 period, is a result of our tenants having more employees on site during the three months endedMarch 31, 2022 due to fewer COVID-19 restrictions in most states in theU.S. The decrease in property operating expenses for acquired and disposed of properties for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , is primarily a result of our sale of two fully vacant properties during the three months endedMarch 31, 2021 . The increase in property operating expenses for properties with vacancy for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , is a result of our tenants having more employees on site during the three months endedMarch 31, 2022 , from the comparable 2021 period due to fewer COVID-19 restrictions in most states in theU.S. The base management fee paid to the Adviser increased for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , due to an increase inGross Tangible Real Estate over the three months endedMarch 31, 2022 as compared to the increase inGross Tangible Real Estate during the three months endedMarch 31, 2021 . The calculation of the base management fee is described in detail above in "Advisory and Administration Agreements." The incentive fee paid to the Adviser increased for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , due to a higher pre-incentive fee Core FFO. The increase in Core FFO is a result of an increase in operating revenues, coupled with a decrease in interest expense. The calculation of the incentive fee is described in detail above in "Advisory and Administration Agreements." 32 -------------------------------------------------------------------------------- Table of Contents The administration fee paid to the Administrator increased for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , due to our Administrator incurring greater costs that are allocated to us. The calculation of the administration fee is described in detail above in "Advisory and Administration Agreements."
General and administrative expenses increased for the three months ended
Other Income and Expenses
Interest expense decreased for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 . This decrease was primarily a result of costs incurred to repay outstanding mortgage debt during the three months endedMarch 31, 2021 , partially offset by an increase in interest expense on our Credit Facility due to higher outstanding balances. We did not sell any properties during the three months endedMarch 31, 2022 , and as a result, incurred no gain or loss. Loss on sale of real estate, net, for the three months endedMarch 31, 2021 , is attributable to two non-core office assets located inRancho Cordova, California andChampaign, Illinois , being sold during the period. Other income decreased for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , primarily due to a cancelled sale fee we earned during the three months endedMarch 31, 2021 .
Net Income (Loss) Available (Attributable) to Common Stockholders and Non-controlling OP Unitholders
Net income available to common stockholders and Non-controlling OP Unitholders increased for the three months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 , primarily due to the increase in operating revenues due to asset acquisition activity during and subsequent toMarch 31, 2021 , coupled with a decrease in interest expense due to costs incurred to repay outstanding mortgage debt during the three months endedMarch 31, 2021 .
Liquidity and Capital Resources
Overview
Our sources of liquidity include cash flows from operations, cash and cash equivalents, borrowings under our Credit Facility and issuing additional equity securities. Our available liquidity as ofMarch 31, 2022 , was$35.2 million , consisting of approximately$9.6 million in cash and cash equivalents and available borrowing capacity of$25.6 million under our Credit Facility. Our available borrowing capacity under the Credit Facility decreased to$21.7 million as ofMay 4, 2022 .
Future Capital Needs
We actively seek conservative investments that are likely to produce income to pay distributions to our stockholders. We intend to use the proceeds received from future equity raised and debt capital borrowed to continue to invest in industrial and office real property, make mortgage loans, or pay down outstanding borrowings under our Revolver. Accordingly, to ensure that we are able to effectively execute our business strategy, we routinely review our liquidity requirements and continually evaluate all potential sources of liquidity. Our short-term liquidity needs include proceeds necessary to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages, refinancing maturing debt and fund our current operating costs. Our long-term liquidity needs include proceeds necessary to grow and maintain our portfolio of investments. We believe that our available liquidity is sufficient to fund our distributions to stockholders, pay the debt service costs on our existing long-term mortgages and fund our current operating costs in the near term. We also believe we will be able to refinance our mortgage debt as it matures. Additionally, to satisfy our short-term obligations, we may request credits to our management fees that are issued from our Adviser, although our Adviser is under no obligation to provide any such credits, either in whole or in part. We further believe that our cash flow from operations coupled with the financing capital available to us in the future are sufficient to fund our long-term liquidity needs.
Equity Capital
During the three months endedMarch 31, 2022 , we raised net proceeds of$20.3 million of common equity under our Common Stock ATM Program at a net weighted average per share price of$21.51 . We used these proceeds to fund acquisitions, pay down outstanding debt and for other general corporate purposes. We did not sell any of our Series E Preferred Stock under our 33 -------------------------------------------------------------------------------- Table of Contents Series E Preferred Stock Sales Agreement during the three months endedMarch 31, 2022 . We raised net proceeds of$1.4 million from sales of our Series F Preferred Stock during the three months endedMarch 31, 2022 . As ofMay 4, 2022 , we had the ability to raise up to$669.3 million of additional equity capital through the sale and issuance of securities that are registered under the 2020 Universal Shelf, in one or more future public offerings. Of the$669.3 million of available capacity under our 2020 Universal Shelf, approximately$45.0 million is reserved for additional sales under our Common Stock ATM Program, and approximately$623.8 million is reserved for the sale of our Series F Preferred Stock as ofMay 4, 2022 . We expect to continue to use our Common Stock ATM Program as a source of liquidity for the remainder of 2022.Debt Capital As ofMarch 31, 2022 , we had 52 mortgage notes payable in the aggregate principal amount of$449.4 million , collateralized by a total of 67 properties with a remaining weighted average maturity of 3.7 years. The weighted-average interest rate on the mortgage notes payable as ofMarch 31, 2022 was 4.19%.
We continue to see banks and non-bank lenders willing to issue mortgages. Consequently, we are focused on obtaining mortgages through regional banks, non-bank lenders and the CMBS market.
As ofMarch 31, 2022 , we had mortgage debt in the aggregate principal amount of$101.7 million payable during the remainder of 2022 and$72.7 million payable during 2023. The 2022 principal amount payable includes both amortizing principal payments and nine balloon principal payments due during the remaining nine months of 2022. We anticipate being able to refinance our mortgages that come due during 2022 and 2023 with a combination of new mortgage debt, availability under our Credit Facility and the issuance of additional equity securities. In addition, we have raised substantial equity under our at-the-market programs and plan to continue to use these programs.
Operating Activities
Net cash provided by operating activities during the three months endedMarch 31, 2022 , was$17.2 million , as compared to net cash provided by operating activities of$16.9 million for the three months endedMarch 31, 2021 . This change was primarily a result of an increase in operating revenues from our 12 property acquisitions completed subsequent toMarch 31, 2021 , coupled with a decrease in interest expense, partially offset by an increase in general and administrative expenses due to higher legal costs. The majority of cash from operating activities is generated from the lease revenues that we receive from our tenants. We utilize this cash to fund our property-level operating expenses and use the excess cash primarily for debt and interest payments on our mortgage notes payable, interest payments on our Credit Facility, distributions to our stockholders, management fees to our Adviser, Administration fees to our Administrator and other entity-level operating expenses.
Investing Activities
Net cash used in investing activities during the three months endedMarch 31, 2022 , was$17.6 million , which primarily consisted of two property acquisitions, coupled with capital improvements performed at certain of our properties. Net cash used in investing activities during the three months endedMarch 31, 2021 , was$6.5 million , which primarily consisted of one property acquisition, coupled with capital improvements performed at certain of our properties, partially offset by proceeds from the sale of two properties.
Financing Activities
Net cash provided in financing activities during the three months endedMarch 31, 2022 , was$1.9 million , which primarily consisted of the issuance of$22.2 million of common and preferred equity, partially offset by the repayment of$3.5 million of outstanding mortgage debt, and distributions paid to common, senior common and preferred shareholders. Net cash used in financing activities for the three months endedMarch 31, 2021 , was$11.8 million , which primarily consisted of$7.5 million of mortgage principal repayments, and distributions paid to common, senior common and preferred shareholders, partially offset by$5.5 million in new mortgage borrowings coupled with the issuance of$11.5 million of equity.
Credit Facility
OnJuly 2, 2019 , we amended, extended and upsized our Credit Facility, expanding Term Loan A from$75.0 million to$160.0 million , and increasing our Revolver from$85.0 million to$100.0 million . Term Loan A has a maturity date ofJuly 2, 2024 , and the Revolver has a maturity date ofJuly 2, 2023 . The interest rate for the Credit Facility is equal to LIBOR plus a spread 34 -------------------------------------------------------------------------------- Table of Contents ranging from 125 to 215 basis points depending on our leverage. We entered into multiple interest rate cap agreements on Term Loan A, which cap LIBOR ranging from 2.50% to 2.75%, to hedge our exposure to variable interest rates. The bank syndicate is comprised ofKeyBank ,Fifth Third Bank ,U.S. Bank National Association ,The Huntington National Bank ,Goldman Sachs Bank USA , andWells Fargo Bank, National Association . OnFebruary 11, 2021 , we added Term Loan B, a new$65.0 million term loan component to our Credit Facility. Term Loan B has a maturity date ofFebruary 11, 2026 and a LIBOR floor of 25 basis points plus a spread ranging from 140 to 225 basis points depending on our leverage. We entered into multiple interest rate cap agreements on Term Loan B, which cap LIBOR from 1.50% to 1.75%. We incurred fees of approximately$0.5 million in connection with issuing Term Loan B. As ofMarch 31, 2022 , there was$65.0 million outstanding under Term Loan B, and we used all net proceeds to repay all outstanding borrowings on the Revolver. As ofMarch 31, 2022 , there was$259.6 million outstanding under our Credit Facility at a weighted average interest rate of approximately 2.35% and$20.5 million outstanding under letters of credit at a weighted average interest rate of 1.90%. As ofMay 4, 2022 , the maximum additional amount we could draw under the Credit Facility was$21.7 million . We were in compliance with all covenants under the Credit Facility as ofMarch 31, 2022 .
For discussion on the impact COVID-19 has had on our liquidity and capital resources, refer to the Impact of COVID-19 on Our Business section under Business Environment.
Contractual Obligations
The following table reflects our material contractual obligations as of
Payments Due by Period Contractual Obligations Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Debt Obligations (1)$ 708,956 $ 121,447
75,199 21,516 30,194 15,613 7,876 Operating Lease Obligations (3) 9,152 491 986 994 6,681 Purchase Obligations (4) 8,109 4,337 3,772 - -$ 801,416 $ 147,791$ 345,337 $ 181,044 $ 127,244 (1)Debt obligations represent borrowings under our Revolver, which represents$34.6 million of the debt obligation due in 2023, our Term Loan A, which represents$160.0 million of the debt obligation due in 2024, our Term Loan B, which represents$65.0 million of the debt obligation due in 2026 and mortgage notes payable that were outstanding as ofMarch 31, 2022 . This figure does not include$(0.1) million of premiums and (discounts), net and$3.5 million of deferred financing costs, net, which are reflected in mortgage notes payable, net and borrowings under Term Loan, net on the condensed consolidated balance sheets. (2)Interest on debt obligations includes estimated interest on borrowings under our Revolver and Term Loan and mortgage notes payable. The balance and interest rate on our Revolver and Term Loan A and Term Loan B is variable; thus, the interest payment obligation calculated for purposes of this table was based upon rates and balances as ofMarch 31, 2022 . (3)Operating lease obligations represent the ground lease payments due on four of our properties. (4)Purchase obligations consist of tenant and capital improvements at 12 of our properties.
Off-Balance Sheet Arrangements
We did not have any material off-balance sheet arrangements as of
Funds from Operations
The National Association of Real Estate Investment Trusts ("NAREIT") developed Funds from Operations ("FFO") as a relevant non-GAAP supplemental measure of operating performance of an equity REIT to recognize that income-producing real estate historically has not depreciated on the same basis determined under GAAP. FFO, as defined by NAREIT, is net income (computed in accordance with GAAP), excluding gains or losses from sales of property and impairment losses on property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash flows from operating activities in accordance with GAAP, which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income. FFO should not be considered an alternative 35 -------------------------------------------------------------------------------- Table of Contents to net income as an indication of our performance or to cash flows from operations as a measure of liquidity or ability to make distributions. Comparison of FFO, using the NAREIT definition, to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. FFO available to common stockholders is FFO adjusted to subtract distributions made to holders of preferred stock and senior common stock. We believe that net income available to common stockholders is the most directly comparable GAAP measure to FFO available to common stockholders. Basic funds from operations per share ("Basic FFO per share"), and diluted funds from operations per share ("Diluted FFO per share"), is FFO available to common stockholders divided by the number of weighted average shares of common stock outstanding and FFO available to common stockholders divided by the number of weighted average shares of common stock outstanding on a diluted basis, respectively, during a period. We believe that FFO available to common stockholders, Basic FFO per share and Diluted FFO per share are useful to investors because they provide investors with a further context for evaluating our FFO results in the same manner that investors use net income and earnings per share ("EPS"), in evaluating net income available to common stockholders. In addition, because most REITs provide FFO available to common stockholders, Basic FFO and Diluted FFO per share information to the investment community, we believe these are useful supplemental measures when comparing us to other REITs. We believe that net income is the most directly comparable GAAP measure to FFO, Basic EPS is the most directly comparable GAAP measure to Basic FFO per share, and that Diluted EPS is the most directly comparable GAAP measure to Diluted FFO per share. 36 -------------------------------------------------------------------------------- Table of Contents The following table provides a reconciliation of our FFO available to common stockholders for the three months endedMarch 31, 2022 and 2021, respectively, to the most directly comparable GAAP measure, net income available to common stockholders, and a computation of basic and diluted FFO per weighted average share of common stock: For the three months endedMarch 31 , (Dollars in Thousands, Except for Per Share Amounts) 2022 2021
Calculation of basic FFO per share of common stock and Non-controlling OP Unit Net income
$ 3,391 $ 38
Less: Distributions attributable to preferred and senior common stock
(3,062) (3,034) Less: Loss on extinguishment of Series F preferred stock (5) -
Net income (loss) available (attributable) to common stockholders and Non-controlling OP Unitholders
$ 324$ (2,996) Adjustments: Add: Real estate depreciation and amortization $
14,689
Add: Loss on sale of real estate, net - 882
FFO available to common stockholders and Non-controlling OP Unitholders - basic
$ 15,013 $ 14,596 Weighted average common shares outstanding - basic 37,902,653 35,714,107 Weighted average Non-controlling OP Units outstanding 256,994 500,299 Total common shares and Non-controlling OP Units 38,159,647 36,214,406
Basic FFO per weighted average share of common stock and Non-controlling OP Unit
$ 0.39 $ 0.40 Calculation of diluted FFO per share of common stock and Non-controlling OP Unit Net income $ 3,391 $ 38
Less: Distributions attributable to preferred and senior common stock
(3,062) (3,034) Less: Loss on extinguishment of Series F preferred stock (5) -
Net income (loss) available (attributable) to common stockholders and Non-controlling OP Unitholders
$ 324$ (2,996) Adjustments: Add: Real estate depreciation and amortization $
14,689
Add: Income impact of assumed conversion of senior common stock
116 187 Add: Loss on sale of real estate, net - 882
FFO available to common stockholders and Non-controlling OP Unitholders plus assumed conversions
$ 15,129 $ 14,783 Weighted average common shares outstanding - basic 37,902,653 35,714,107 Weighted average Non-controlling OP Units outstanding 256,994 500,299 Effect of convertible senior common stock 374,123 592,156
Weighted average common shares and Non-controlling OP Units outstanding - diluted
38,533,770 36,806,562
Diluted FFO per weighted average share of common stock and Non-controlling OP Unit
$
0.39 $ 0.40
Distributions declared per share of common stock and Non-controlling OP Unit
$ 0.37620 $ 0.37545 37
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