LXP INDUSTRIAL TRUST In this discussion, we have included statements that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements may relate to our future plans and objectives, among other things. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed above in "Risk Factors" in Part I, Item 1A of this Annual Report and "Cautionary Statements Concerning Forward-Looking Statements" in the beginning of this Annual Report.
Introduction
The following is a discussion and analysis of the consolidated financial condition and results of operations ofLexington Realty Trust for the years endedDecember 31, 2020 and 2019, and significant factors that could affect its prospective financial condition and results of operations. This discussion should be read together with our accompanying consolidated financial statements included herein and notes thereto. COVID-19 Impact. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. OnMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. Our management continues to monitor events and is taking steps to mitigate the potential impact and risks to us. We have received a limited number of, and may in the future receive, rent relief requests from our tenants. However, as ofDecember 31, 2020 , we do not believe that these rent relief requests will have a material impact on our rental revenues. A limited number of our other tenants, particularly retail tenants and those with businesses tied to the aviation industry, continue to be impacted by COVID-19 and related government restrictions and social distancing requirements. We continue to believe that the impacts of COVID-19 on our portfolio are mitigated due to our focus on warehouse and distribution properties and the diversity of our tenant base, both geographically and by industry exposure. While our acquisition activity has recovered from the reduced level experienced earlier in 2020, we believe that there continues to be limited financing available for potential purchasers of certain of our properties, which has impacted our disposition activities. In addition, there is increased competition for investment in warehouses and distribution properties due to the resilience of this part of the industrial sector during the COVID-19 pandemic. We remain unable to estimate the long-term impacts COVID-19 will have on our financial condition. Investment Trends General. Over the last several years, we have focused our investment activity primarily on income producing single-tenant warehouse and distribution assets. In 2020, we acquired$611.8 million of warehouse and distribution assets, which is a decrease of$92.0 million compared to 2019 investment activity of$703.8 million . The decrease was primarily due to the COVID-19 "stay-at-home" orders and increased competition. As ofDecember 31, 2020 , our percentage of gross book value from industrial assets increased to 90.8% compared to 81.5% as ofDecember 31, 2019 as a result of our acquisition and capital recycling efforts. We expect to continue to recycle our non-industrial assets into warehouse and distribution facilities. While our capital recycling strategy has had and may continue to have a near-term dilutive impact on earnings due to the sales of revenue-producing properties, we believe this strategy will benefit shareholder value in the long term. The industrial real estate market was one of the most resilient real estate markets during the COVID-19 pandemic. The main driver of growth in the industrial real estate market has been e-commerce. We believe that growth will also be driven by companies increasing their inventories inthe United States to keep up with demand and to protect against future disruptions in the supply chain. While we believe the industrial market will continue to grow, there continues to be an increase in competition for the acquisition of industrial properties, specifically warehouse/distribution properties, which drives up the cost of the assets we buy 40
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and drives down the yield we are able to obtain. This trend was highlighted when initial capitalization rates compressed further during 2020. Lease Term. We primarily acquire assets subject to intermediate and long-term leases with escalating rents, which we believe strengthen our future cash flows and provide a partial hedge against rising interest rates. We intend to maintain a weighted-average lease term longer than many comparable companies and balance our lease expiration schedule. Our industrial investment underwriting focuses less on tenant credit than our historical office investment underwriting as we focus on real estate characteristics such as location and related demographic and local economic trends. This has allowed us to acquire certain short-term leased warehouse/distribution assets, which may be acquired at a discount compared to long-term leased warehouse/distribution assets and allow for a value-add strategy through the lease renewal or a multi-tenanting process. Development. As a result of the competition for income producing single-tenant warehouse/distribution assets, in 2017, we began selectively investing in development projects. We believe we can achieve higher yields from development projects than we can by purchasing existing properties. Our development activities have been focused on speculative development. Our target markets are experiencing low vacancy rates. Despite an increase in construction in recent years, we believe there is sufficient tenant demand for our development projects. LeasingGeneral. Re -leasing properties that are currently vacant or as leases expire at favorable effective rates is a primary area of focus for our asset management. Renewals of industrial leases, particularly for warehouse/distribution facilities, are generally dependent on location and occupancy alternatives for our tenants. We believe our older industrial assets face more challenges than our newer industrial assets because the location of our older industrial assets is generally tied to the specific tenant need as opposed to the national or regional distribution supply chain. In addition, our older industrial assets may need to be renovated to meet current market specs. If a property cannot be re-let to a single user and the property can be adapted to multi-tenant use, we determine whether the costs of adapting the property to multi-tenant use outweigh the benefit of funding operating costs while searching for a single-tenant and whether selling a vacant property, which limits operating costs and allows us to redeploy capital, is in the best interest of our shareholders. During 2020, we entered into 20 new leases and lease extensions encompassing approximately 5.2 million square feet. The average base rent on these extended leases was approximately$4.73 per square foot compared to the average base rent on these leases before extension of$4.61 per square foot. The weighted-average cost of tenant improvements and lease commissions during 2020 was approximately$2.57 per square foot for new leases and$3.45 per square foot for extended leases. As ofDecember 31, 2020 , we had six single-tenant leases in our industrial portfolio where the lease term is scheduled to expire in 2021, covering approximately 3.7 million square feet. Inherent Growth. Many leases have scheduled fixed rent increases or rent increases based upon the consumer price index. As ofDecember 31, 2020 , 86% of our single-tenant industrial leases had scheduled rent increases. The average escalation rate of these leases was 2.1% as ofDecember 31, 2020 . A majority of our leases require tenants to pay operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses. However, certain of our leases provide for some level of landlord responsibility for capital repairs and replacements, the cost of which is generally factored into the rental rate. Our motivation to release vacant space requires us to meet market demands with respect to rental rates, tenant concessions and landlord responsibilities. Developers are similarly motivated when signing leases with tenants due to the significant competition in the industrial space. As a result, the obligations of our property owner subsidiaries on new leases and newly renewed or extended leases may increase to include, among other items, some form of responsibility for operating expenses and/or capital repairs and replacements. Tenant Credit. We continue to monitor the credit of tenants of properties in which we have an interest by (1) subscribing to rating agency information, so that we can monitor changes in the ratings of our rated tenants, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports regarding our tenants and their respective businesses, (4) monitoring the timeliness of rent collections and (5) meeting with our tenants. During 2020, this credit monitoring was essential to allow us to differentiate between legitimate rent relief requests and opportunistic rent relief requests. 41
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We continue to recycle out of our non-industrial investments. As ofDecember 31, 2020 , our non-industrial assets represented 9.2% of our gross book value. We have historically marketed non-industrial assets for sale when we believe we have obtained the highest possible valuation through various means, including lease renewals. As the number of non-industrial assets continues to shrink, we continue to explore ways to accelerate the sale of the remaining non-industrial assets. Non-Recourse Mortgage Loan Resolutions During 2020, we conveyed three properties in foreclosure or via a deed-in-lieu of foreclosure due to the balance of the non-recourse mortgage loans encumbering the properties being in excess of the value of the property collateral. Since we have a limited number of industrial properties subject to non-recourse mortgages, we do not expect many foreclosures in the future. Impairment charges During 2020 and 2019, we incurred impairment charges on certain of our assets of$14.5 million and$5.3 million , respectively, due to each asset's carrying value being below its estimated fair value. Most of the impairment charges in 2020 and 2019 were incurred on non-core assets due to anticipated shortened holding periods. We cannot estimate if we will incur, or the amount of, future impairment charges on our assets. See Part I, Item 1A "Risk Factors", of this Annual Report. Critical Accounting Policies Our accompanying consolidated financial statements have been prepared in accordance with GAAP, which requires our management to make estimates that affect the amounts of revenues, expenses, assets and liabilities reported and related disclosures of contingent assets and liabilities. A summary of our significant accounting policies which are important to the portrayal of our financial condition and results of operations is set forth in note 2 to the Consolidated Financial Statements, which are included in "Financial Statements and Supplementary Data" in Part II, Item 8 of this Annual Report. The following is a summary of our critical accounting policies, which require some of management's most difficult, subjective and complex judgments. Acquisition of Real Estate. The fair value of the real estate acquired, which includes the impact of fair value adjustments for assumed mortgage debt related to property acquisitions, is allocated to the acquired tangible assets, consisting of land, building and improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, based in each case on their fair values. The fair value of the tangible assets of an acquired property (which includes land, building and improvements and fixtures and equipment) is determined by valuing the property as if it were vacant. The "as-if-vacant" value is then allocated to land and building and improvements based on our management's determination of relative fair values of these assets. Factors considered by our management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, our management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Our management also estimates costs to execute similar leases including leasing commissions. Our management generally retains a third party to assist in the allocations. In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market lease values are recorded based on the difference between the current in-place lease rent and management's estimate of current market rents. Below-market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the non-cancelable periods and bargain renewal periods of the respective leases. Above-market leases are recorded as part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases. The aggregate value of other acquired intangible assets, which may consist of in-place leases and/or tenant relationship values, is measured by the excess of (1) the purchase price paid for a property over (2) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationship values based on management's evaluation of the specific characteristics of each tenant's lease. The value of in-place leases is amortized to expense over the remaining non-cancelable periods and any bargain renewal periods of the respective leases. The value of tenant relationships is amortized to expense over the applicable lease term plus expected renewal periods. 42
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Revenue Recognition. We recognize lease revenue on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. Revenue is recognized on a contractual basis for leases with escalations tied to a consumer price index with no floor. We evaluate the collectability of our rental payments and recognize revenue on a cash basis when we believe it is no longer probable that we will receive substantially all of the remaining lease payments. Renewal options in leases with rental terms that are lower than those in the primary term are excluded from the calculation of straight line rent if the renewals are not reasonably assured. In those instances in which we fund tenant improvements and the improvements are deemed to be owned by us, revenue recognition will commence when the improvements are substantially completed and possession or control of the space is turned over to the tenant. When we determine that the tenant allowances are lease incentives, we commence revenue recognition when possession or control of the space is turned over to the tenant for tenant work to begin. The lease incentive is recorded as a deferred expense and amortized as a reduction of revenue on a straight-line basis over the respective lease term. We recognize lease termination fees as rental revenue in the period received and write off unamortized leases related intangibles and other lease related account balances, provided that there are no further obligations under the lease. Otherwise, such fees and balances are recognized on a straight-line basis over the remaining obligation period. Impairment of Real Estate. We evaluate the carrying value of all tangible and intangible real estate assets held for investment for possible impairment when an event or change in circumstance has occurred that indicates its carrying value may not be recoverable. We consider the strategic decisions regarding the future plans to sell properties and other market factors. We regularly update significant estimates and assumptions including rental rates, capitalization rates and discount rates, which are included in the anticipated future undiscounted cash flows derived from the asset. If such cash flows are less than the asset's carrying value, an impairment charge is recognized to the extent by which the asset's carrying value exceeds its estimated fair value, which may be below the balance of any non-recourse financing. Estimating future cash flows and fair values is highly subjective and such estimates could differ materially from actual results. New Accounting Pronouncements For a discussion of new accounting pronouncements, see note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in this report. Cybersecurity While we have yet to experience a cyber attack that disrupted our operations in any material respect, all companies, including ours, are increasing the resources allocated to address and protect against cybersecurity threats. Due to the small size of our organization, we rely on third-parties to provide advice and services with respect to cybersecurity, which is not currently, but could become, a material cost.
Environmental, Social and Governance
ESG matters are becoming a central focus for our shareholders, employees, tenants, suppliers, creditors, and communities. We expect our ESG objectives and the resources allocated to ESG matters will continue to evolve over time as we assess strategies that are most appropriate for our organization.
Liquidity
General. Our principal sources of liquidity have been (1) undistributed cash
flows generated from our investments, (2) the public and private equity and debt
markets, (3) property specific debt, (4) corporate level borrowings, (5)
commitments from co-investment partners and (6) proceeds from the sales of our
investments. We believe our ratio of dividends to Adjusted Company Funds From
Operations is conservative, and allows us to retain cash flow for internal
growth.
Our ability to incur additional debt to fund acquisitions is dependent upon our
existing leverage, the value of the assets we are attempting to leverage and
general economic and credit market conditions, which may be outside of
management's control or influence.
Cash Flows. We believe that cash flows from operations will continue to provide
adequate capital to fund our operating and administrative expenses, regular debt
service obligations and all dividend payments in accordance with applicable REIT
requirements in both the short-term and long-term. However, our cash flow from
operations may be negatively affected in the near term if we grant tenant rent
relief packages or experience tenant defaults as a result of the effects of
COVID-19. In addition, we anticipate that cash on hand, borrowings under our
unsecured revolving credit facility, capital recycling proceeds, issuances of
equity, mortgage proceeds and other debt, as well as other available
alternatives, will provide the necessary capital required by our business.
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Cash flows from operations as reported in the Consolidated Statements of Cash Flows totaled$201.8 million for 2020 and$192.2 million for 2019. The increase was primarily related to the impact of cash flow generated from acquiring properties, partially offset by property sales and vacancies. The underlying drivers that impact our working capital, and therefore cash flows from operations, are the timing of collection of rents, including reimbursements from tenants, payment of interest on mortgage debt and payment of operating and general and administrative costs. We believe the net-lease structure of the leases encumbering a majority of the properties in which we have an interest mitigates the risks of the timing of cash flows from operations since the payment and timing of operating costs related to the properties are generally borne directly by the tenant. The collection and timing of tenant rents are closely monitored by management as part of our cash management program. Net cash used in investing activities totaled$(494.4) million in 2020 and$(187.0) million in 2019. Cash used in investing activities related primarily to acquisitions of real estate, investments in real estate under construction, capital expenditures, lease costs, investments in non-consolidated entities and changes in real estate deposits, net. Cash provided by investing activities related primarily to proceeds from the sale of properties, distributions from non-consolidated entities and changes in real estate deposits, net. Net cash provided by (used in) financing activities totaled$342.6 million in 2020 and$(53.2) million in 2019. Cash provided by financing activities related primarily to the issuance of our 2030 Senior Notes, revolving credit facility borrowings and issuances of common shares. Cash used in financing activities was primarily attributable to the repurchase of a portion of the 2023 Senior Notes and 2024 Senior Notes through a tender offer, dividend and distribution payments, repayment of debt obligations and repurchases of common shares. Public and Private Equity and Debt Markets. We access the public and private equity and debt markets on an opportunistic basis when we (1) believe conditions are favorable and (2) have a compelling use of proceeds. We expect to continue to access debt and equity markets in the future to implement our business strategy and to fund future growth when market conditions are favorable. However, the volatility in the capital markets primarily resulting from the effects of the COVID-19 pandemic may negatively affect our ability to access these capital markets. Equity: At-The-Market Offering Program. We maintain an At-The-Market offering program, or ATM program, under which we can issue common shares. The following table summarizes common share issuances under the ATM program for the years endedDecember 31, 2020 and 2019, respectively: Year ended December 31, 2020 Shares Sold Net Proceeds 2020 ATM Issuances 5,950,882$ 61.0 million Year ended December 31, 2019 Shares Sold Net Proceeds 2019 ATM Issuances 9,668,748$ 102.3 million Under the ATM program, we may also enter into forward sales agreements. During 2020, we entered into forward sales transactions for the sale of 5.0 million common shares that have not yet been settled. Subject to our right to elect cash or net share settlement, we expect to settle the forward sales transactions by the various maturity dates betweenAugust 2021 andNovember 2021 . The shares had a then aggregate settlement price of$55.1 million atDecember 31, 2020 , which is subject to adjustment in accordance with the forward sales contracts.
As of
Underwritten Common Stock Offerings. During 2020, we issued 17,250,000 common shares at a public offering price of$9.60 per common share in an underwritten offering and generated net proceeds of approximately$164.0 million . 44
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Direct Share Purchase Plan. We maintain a direct share purchase plan, which has two components, (i) a dividend reinvestment component and (ii) a direct share purchase component. Under the dividend reinvestment component, common shareholders and holders of OP units may elect to automatically reinvest their dividends and distributions to purchase our common shares. Under the direct share purchase component, our current investors and new investors can make optional cash purchases of our common shares. The administrator of the plan,Computershare Trust Company, N.A. , purchases common shares for the accounts of the participants under the plan, at our discretion, either directly from us, on the open market or through a combination of those two options. No shares were purchased from us under the plan in 2020, 2019 and 2018. Share Repurchase Program. During 2015, ourBoard of Trustees authorized the repurchase of up to 10.0 million common shares and increased this authorization by 10.0 million common shares in 2018. The share repurchase program does not expire. During 2020 and 2019, we repurchased and retired approximately 1.3 million and 0.4 million common shares, respectively, at an average price of$8.28 and$8.13 , respectively, per common share under the repurchase program. Approximately 9.0 million common shares remain available for repurchase atDecember 31, 2020 . We have continued to, and in the future may, repurchase our common shares in the context of our overall capital plan, and to the extent we believe market volatility offers prudent investment opportunities based on our common share price versus net asset value per share. Operating Partnership Units. In recent years there has not been a great demand for OP units as consideration and, as a result, we expect the percentage of common shares that will be outstanding in the future relative to OP units will increase, and income attributable to noncontrolling interests should be expected to decrease, as such OP units are redeemed for our common shares. Furthermore, our credit agreement requires us to own at least 95.5% of a subsidiary for the assets of such subsidiary to be included in the calculation of our credit agreement covenants, which incents us to maintain our percentage ownership in LCIF and not issue additional OP units. As ofDecember 31, 2020 , there were 2.5 million OP units outstanding not owned by us which were convertible on a one OP unit for approximately 1.13 common shares basis into an aggregate of 2.9 million common shares assuming we satisfied redemptions entirely with common shares. All outstanding OP units are entitled to a distribution equal to the dividend on our common shares or a stated distribution that may adjust based on our commons share dividend amount.
Debt:
Corporate Borrowings. Due to lower borrowing costs, we issued$400.0 million aggregate principal amount of our 2030 Senior Notes. We used a portion of the net proceeds from the offering of the 2030 Senior Notes to repurchase$61.2 million and$51.1 million aggregate principal balance of our outstanding 2023 Senior Notes and 2024 Senior Notes, respectively, through a tender offer. We did not access the public debt markets in 2019.
The following Senior Notes were outstanding as of
Issue Date Face Amount (millions) Interest Rate Maturity Date Issue Price
August 2020 $ 400.0 2.70 % September 2030 99.233 %
May 2014 198.9 4.40 % June 2024 99.883 %
June 2013 188.8 4.25 % June 2023 99.026 %
$ 787.7
The Senior Notes are unsecured and pay interest semi-annually in arrears. We may
redeem the Senior Notes at our option at any time prior to maturity in whole or
in part by paying the principal amount of the Senior Notes being redeemed plus a
make-whole premium.
A summary of the maturity dates and interest rates of our unsecured credit
agreement, as of December 31, 2020 , are as follows:
Maturity Date Interest Rate
$600.0 Million Revolving Credit Facility(1) 02/2023 LIBOR + 0.90%$300.0 Million Term Loan(2) 01/2025 LIBOR + 1.00% (1) Maturity date of the revolving credit facility can be extended to February 2024 at our option. The interest rate ranges from LIBOR plus 0.775% to 1.45%. AtDecember 31, 2020 , we had no borrowings outstanding and availability of$600.0 million , subject to covenant compliance. (2) The LIBOR portion of the interest rate was swapped to obtain a current fixed rate of 2.732% per annum. 45
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As ofDecember 31, 2020 , we were in compliance with the financial covenants contained in our corporate level debt agreements. During 2007, we issued$200.0 million in Trust Preferred Securities, which bore interest at a fixed rate of 6.804% throughApril 2017 and, thereafter, bears interest at a variable rate of three month LIBOR plus 170 basis points. These securities are (1) classified as debt, (2) due in 2037 and (3) currently redeemable by us. As ofDecember 31, 2020 , there were$129.1 million of these securities outstanding. Property Specific Debt. As ofDecember 31, 2020 , we have a limited number of properties subject to mortgages, one of which was satisfied inJanuary 2021 . As ofDecember 31, 2020 , one of our property owner subsidiaries has a balloon payment of$10.4 million maturing in 2021. Our property owner subsidiaries do not have additional mortgage maturities with balloon payments due until 2025. With respect to mortgages encumbering properties where the expected lease rental revenues are sufficient to provide an estimated property value in excess of the mortgage balance, we believe our property owner subsidiaries have sufficient sources of liquidity to meet these obligations through future cash flows from operations, the credit markets and, if determined appropriate by us, a capital contribution from us from either cash on hand ($178.8 million atDecember 31, 2020 ), property sale proceeds or borrowing capacity on our primary credit facility ($600.0 million as ofDecember 31, 2020 , subject to covenant compliance). In 2019, we assumed through our consolidated property owner subsidiary a$41.9 million non-recourse mortgage loan with an interest rate of 4.3% and maturing in 2031. We did not obtain or assume any mortgage debt in 2020. Our secured debt decreased to approximately$138.4 million atDecember 31, 2020 compared to$393.9 million atDecember 31, 2019 . We expect to continue to use property specific, non-recourse mortgages in certain situations as we believe that by properly matching a debt obligation, including the balloon maturity risk, with the terms of a lease, our cash-on-cash returns increase and the exposure to residual valuation risk is reduced. In addition, we may procure credit tenant lease financing in certain situations where we are able to monetize all or a significant portion of the rental revenues of a property at an attractive rate.Co-investment Programs and Joint Ventures . We have entered into co-investment programs and joint ventures with institutional investors and other real estate companies to mitigate our risk in certain assets and increase our return on equity to the extent we earn management or other fees. However, investments in certain co-investment programs and joint ventures limit our ability to make investment decisions unilaterally relating to the assets and limit our ability to deploy capital. Due to our size, we do not expect to enter into co-investment programs and joint ventures seeking future investments, except with developers for industrial development projects.Capital Recycling . Part of our strategy to effectively manage our balance sheet involves pursuing and executing well on property dispositions and recycling of capital. During 2020, we disposed of our interests in 16 properties for an aggregate gross price of$432.8 million . Additionally, we disposed of two properties in a non-consolidated joint venture for aggregate proceeds to us of$1.7 million . These proceeds were primarily used to (1) retire indebtedness encumbering properties in which we have an interest and corporate debt obligations and (2) make investments in real property. As we near the completion of the capital recycling of our non-industrial assets, we expect to continue our recycling efforts with respect to our older industrial assets, including our manufacturing assets, where we believe we can take advantage of the strong current market. We believe capital recycling (1) provides cost effective and timely capital support for our investment activities and (2) allows us to maintain line capacity and cash in advance of what we expect to be a growing investment pipeline. Liquidity Needs. Our principal liquidity needs are the contractual obligations set forth under the heading "Contractual Obligations," below, and the payment of dividends to our shareholders and distributions to the holders of OP units. As we grow our development pipeline, we expect that development activities will become a greater part of our liquidity needs. As ofDecember 31, 2020 , we had approximately$1.4 billion of indebtedness, consisting of mortgages and notes payable outstanding, a term loan, 2.70%, 4.40% and 4.25% Senior Notes and Trust Preferred Securities, with a weighted-average interest rate of approximately 3.3%. The ability of a property owner subsidiary to make debt service payments depends upon the rental revenues of its property and its ability to refinance the mortgage related thereto, sell the related property, or access capital from us or other sources. A property owner subsidiary's ability to accomplish such goals will be affected by numerous economic factors affecting the real estate industry, including the risks described under "Risk Factors" in Part I, Item 1A of this Annual Report. If we are unable to satisfy our contractual obligations and other operating costs with our cash flow from operations, we intend to use borrowings and proceeds from issuances of equity or debt securities. If a property owner subsidiary is unable to satisfy its contractual obligations and other operating costs, it may default on its obligations and lose its assets in foreclosure or through bankruptcy proceedings. 46
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In connection with our intention to continue to qualify as a REIT for federal income tax purposes, we expect to continue paying regular dividends to our shareholders. These dividends are expected to be paid from operating cash flows and/or from other sources. Since cash used to pay dividends reduces amounts available for capital investments, we generally intend to maintain a conservative dividend payout ratio, reserving such amounts as we consider necessary for the maintenance or expansion of properties in our portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as ourBoard of Trustees considers appropriate. We paid approximately$118.4 million in cash dividends to our common and preferred shareholders in 2020. Although our property owner subsidiaries receive the majority of our base rental payments on a monthly basis, we intend to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution are invested by us in short-term money market or other suitable instruments. Capital Resources General. Due to the net-lease structure of a majority of our investments, our property owner subsidiaries historically have not incurred significant expenditures in the ordinary course of business to maintain the properties in which we have an interest. As leases expire, we expect our property owner subsidiaries to incur costs in extending the existing tenant leases, re-tenanting the properties with a single-tenant, or converting the property to multi-tenant use. The amounts of these expenditures can vary significantly depending on tenant negotiations, market conditions, rental rates and property type.Single-Tenant Properties . We do not anticipate significant capital expenditures at the single-tenant properties in which we have an interest that are subject to net or similar leases since the tenants at these properties generally bear all or substantially all of the cost of property operations, maintenance and repairs. However, at certain properties subject to net leases, our property owner subsidiaries are responsible for replacement and/or repair of certain capital items, which may or may not be reimbursed. In addition, at certain single-tenant properties that are not subject to a net lease, our property owner subsidiaries have a level of property operating expense responsibility, which may or may not be reimbursed.Multi-Tenant Properties . Primarily as a result of non-renewals at single-tenant net-lease properties, we have interests in multi-tenant properties in our consolidated portfolio. While tenants of these properties are generally responsible for increases over base year expenses, our property owner subsidiaries are generally responsible for the base-year expenses and capital expenditures, and are responsible for all expenses related to vacant space, at these properties.Vacant Properties . To the extent there is a vacancy in a property, our property owner subsidiary would be obligated for all operating expenses, including capital expenditures, real estate taxes and insurance. When a property is vacant, our property owner subsidiary may incur substantial capital expenditure and releasing costs to re-tenant the property. However, we believe that, over the long term, our focus on industrial assets will result in significant savings compared to investing in office assets due to the lower operating and retenanting costs of industrial assets compared to office assets. Property Expansions. Under certain leases, tenants have the right to expand the facility located on a property in which we have an interest. We expect our property owner subsidiaries may fund these property expansions with either additional secured borrowings, the repayment of which will be funded out of rental increases under the leases covering the expanded properties, or capital contributions from us. Ground Leases. The tenants of properties in which we have an interest generally pay the rental obligations on ground leases either directly to the fee holder or to our property owner subsidiary as increased rent. However, our property owner subsidiaries are responsible for these payments (1) under certain leases without reimbursement and (2) at vacant properties. Environmental Matters. Based upon management's ongoing review of the properties in which we have an interest, management is not aware of any environmental condition with respect to any of these properties that would be reasonably likely to have a material adverse effect on us. There can be no assurance, however, that (1) the discovery of environmental conditions, which were previously unknown, (2) changes in law, (3) the conduct of tenants or (4) activities relating to properties in the vicinity of the properties in which we have an interest, will not expose us to material liability in the future. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of the tenants of properties in which we have an interest. 47
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Results of Operations
Year endedDecember 31, 2020 compared withDecember 31, 2019 . The decrease in net income attributable to common shareholders of$96.4 million was primarily due to the items discussed below. The increase in total gross revenues of$4.5 million was primarily a result of an increase in rental revenue attributable to assets acquired subsequent toDecember 31, 2019 , partially offset by a decrease in rental revenue due to property sales. The increase in depreciation and amortization expense of$14.0 million was primarily due to acquisition activity. The decrease in non-operating income of$1.5 million was primarily related to funds received in 2019 related to a bankruptcy claim and funds received to settle a tenant's deferred maintenance obligation, with no comparable income in 2020. The decrease in interest and amortization expense of$9.9 million related primarily to a decrease in the amount of our mortgage debt outstanding and a decrease in our overall borrowing rate. The increase in debt satisfaction gains, net, of$26.0 million was primarily related to the recognition of aggregate debt satisfaction gains of$34.5 million upon the foreclosure of three office properties, offset by a$10.1 million debt satisfaction charge incurred as a result of the repurchase of a portion of the 2023 Senior Notes and 2024 Senior Notes pursuant to a tender offer and a$2.9 million charge recognized upon the sale of ourLake Jackson, Texas property. During 2019, we incurred an aggregate of$4.5 million of debt satisfaction charges upon the sale of two properties. The increase in impairment charges of$9.1 million was primarily due to the timing of impairment charges taken on certain properties. The decrease in gains on sales of properties of$111.9 million was related to the timing of property dispositions. The decrease in equity in earnings of non-consolidated entities of$3.1 million was primarily related to the timing of gains recognized on the sale of joint venture assets. The decrease in net income attributable to noncontrolling interests of$2.3 million was primarily a result of a decrease in earnings of LCIF, primarily, as a result of recognizing gains on sold properties in 2019. The increase in net income or decrease in net loss in future periods will be closely tied to the level of acquisitions made by us. Without acquisitions, the sources of growth in net income are limited to fixed rent adjustments and index adjustments (such as the consumer price index), reduced interest expense on amortizing mortgages and variable rate indebtedness and by controlling other variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, changes in economic conditions such as the recent economic uncertainty primarily caused by the COVID-19 pandemic, increased interest rates and tenant monetary defaults and the other risks described in this Annual Report. The analysis of the results of operations for the year endedDecember 31, 2019 compared withDecember 31, 2018 is included in our 2019 Annual Report on Form 10-K, which was filed with theSecurities and Exchange Commission , onFebruary 20, 2020 . 48
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Same-Store Results Same-store net operating income, or NOI, which is a non-GAAP measure, represents the NOI for consolidated properties that were owned and included in our portfolio for two comparable reporting periods. We define NOI as operating revenues (rental income (less GAAP rent adjustments and lease termination income), and other property income) less property operating expenses. As same-store NOI excludes the change in NOI from acquired and disposed of properties, it highlights operating trends such as occupancy levels, rental rates and operating costs on properties. Other REITs may use different methodologies for calculating same-store NOI, and accordingly same-store NOI may not be comparable to other REITs. Management believes that same-store NOI is a useful supplemental measure of our operating performance. However, same-store NOI should not be viewed as an alternative measure of our financial performance since it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other nonproperty income and losses, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact our results from operations. We believe that net income is the most directly comparable GAAP measure to same-store NOI. The following presents our consolidated same-store NOI, for the years endedDecember 31, 2020 and 2019 ($000): 2020 2019 Total cash base rent$ 206,898 $ 203,515 Tenant reimbursements 20,609 21,095 Property operating expenses (26,727) (26,963) Same-store NOI$ 200,780 $ 197,647 Our reported same-store NOI increased from 2019 to 2020 by 1.6% primarily due to an increase in cash base rents. As ofDecember 31, 2020 and 2019, our historical same-store square footage leased was 97.6% and 99.0%, respectively. 49
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Below is a reconciliation of net income to same-store NOI for periods presented:
Twelve Months ended
2020 2019
Net income $ 186,391 $ 285,293
Interest and amortization expense 55,201 65,095
Provision for income taxes 1,584 1,379
Depreciation and amortization 161,592 147,594
General and administrative 30,371 30,785
Transaction costs 255 202
Non-operating/advisory income (4,569) (6,180)
Gains on sales of properties (139,039) (250,889)
Impairment charges 14,460 5,329
Debt satisfaction (gains) charges, net (21,452) 4,517
Equity in (earnings) of non-consolidated entities 169 (2,890)
Lease termination income (857) (2,226)
Straight-line adjustments (13,654) (14,502)
Lease incentives 921 1,191
Amortization of above/below market leases (1,580) (443)
NOI 269,793 264,255
Less NOI:
Acquisitions and dispositions (69,013) (66,608)
Same-Store NOI $ 200,780 $ 197,647 Funds From Operations
We believe that Funds from Operations, or FFO, which is a non-GAAP measure, is a widely recognized and appropriate measure of the performance of an equity REIT. We believe FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. As a result, FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not necessarily be apparent from net income.The National Association of Real Estate Investment Trusts , or NAREIT, defines FFO as "net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sales of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. The reconciling items include amounts to adjust earnings from consolidated partially-owned entities and equity in earnings of unconsolidated affiliates to FFO." FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs. We present FFO available to common shareholders and unitholders - basic and also present FFO available to all equityholders and unitholders - diluted on a company-wide basis as if all securities that are convertible, at the holder's option, into our common shares, are converted at the beginning of the period. We also present Adjusted Company FFO available to all equityholders and unitholders - diluted, which adjusts FFO available to all equityholders and unitholders - diluted for certain items which we believe are not indicative of the operating results of our real estate portfolio. We believe this is an appropriate presentation as it is frequently requested by securities analysts, investors and other interested parties. Since others do not calculate these measures in a similar fashion, these measures may not be comparable to similarly titled measures as reported by others. These measures should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. 50
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The following presents a reconciliation of net income attributable to common
shareholders to FFO available to common shareholders and unitholders and
Adjusted Company FFO available to all equityholders and unitholders for 2020 and
2019 (dollars in thousands, except share and per share amounts):
2020 2019
FUNDS FROM OPERATIONS:
Basic and Diluted:
Net income attributable to common shareholders $ 176,788 $ 273,225
Adjustments:
Depreciation and amortization 158,655 144,792
Impairment charges - real estate 14,460 5,329
Noncontrolling interests - OP units 2,347 4,376
Amortization of leasing commissions 2,937 2,802
Joint venture and noncontrolling interest adjustment 8,578 9,449
Gains on sales of properties, includingnon-consolidated entities
and net of tax (139,596) (255,048)
FFO available to common shareholders and unitholders - basic 224,169 184,925
Preferred dividends 6,290 6,290
Amount allocated to participating securities 224 395
FFO available to all equityholders and unitholders - diluted 230,683 191,610
Debt satisfaction (gains) charges, net, including non-consolidated
entities (21,396) 4,773
Transaction costs 255 202
Adjusted Company FFO available to all equityholders and unitholders - diluted $ 209,542 $ 196,585
Per Common Share and Unit Amounts
Basic:
FFO $ 0.83 $ 0.77
Diluted:
FFO $ 0.84 $ 0.78
Adjusted Company FFO $ 0.76 $ 0.80
Weighted-Average Common Shares:
Basic:
Weighted-average common shares outstanding - basic EPS 266,914,843 237,642,048
Operating partnership units(1) 3,083,320 3,490,147
Weighted-average common shares outstanding - basic FFO 269,998,163 241,132,195
Diluted:
Weighted-average common shares outstanding - diluted EPS 268,182,552 237,934,515 Unvested share-based payment awards 17,180 22,813 Operating partnership units(1) 3,083,320 3,490,147 Preferred shares - Series C 4,710,570 4,710,570 Weighted-average common shares outstanding - diluted FFO 275,993,622 246,158,045
(1) Includes OP units other than OP units held by us.
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Off-Balance Sheet Arrangements
As ofDecember 31, 2020 , we had investments in various real estate entities with varying structures. The real estate investments owned by these entities are generally financed with non-recourse debt. Non-recourse debt is generally defined as debt whereby the lenders' sole recourse with respect to borrower defaults is limited to the value of the assets collateralized by the debt. The lender generally does not have recourse against any other assets owned by the borrower or any of the members or partners of the borrower, except for certain specified exceptions listed in the particular loan documents. These exceptions generally relate to "bad boy" acts, including fraud, prohibited transfers and breaches of material representations. We have guaranteed such obligations for certain of our non-consolidated entities.
Contractual Obligations
The following summarizes our principal contractual obligations as of
2026 and
2021 2022 2023 2024 2025 Thereafter Total
Mortgages and notes payable(1) $ 24,119 $ 12,224 $ 13,267 $ 6,431 $ 6,576 $ 75,795 $ 138,412
Term loans payable - - - - 300,000 - 300,000
Senior notes payable - - 188,756 198,932 - 400,000 787,688
Trust preferred securities - - - - - 129,120 129,120
Interest payable(2) 44,272 43,123 38,284 29,460 17,586 97,480 270,205
Development contracts(3) 75,985 - - - - - 75,985
Operating lease obligations(4) 4,843 4,854 4,999 5,021 5,021 17,472 42,210
$ 149,219 $ 60,201 $ 245,306 $ 239,844 $ 329,183 $ 719,867 $ 1,743,620
1. Consists of principal and balloon payments.
2. Consists of fixed-rate debt and variable-rate debt at the rate in effect at
December 31, 2020 . Variable-rate debt as of December 31, 2020 is comprised of
$129.1 million Trust Preferred Securities (90-day LIBOR plus 1.7% and matures
2037).
3. Represents contractual obligations for consolidated development projects and
does not contemplate all costs expected to be incurred for such developments.
This table does not include contractual obligations for our non-consolidated
joint venture developments, which are described below.
4. Includes ground lease, office rents and equipment lease payments. Amounts
disclosed do not include rents that adjust to fair market value. In addition,
certain ground lease payments due under bond leases allow for a right of offset
between the lease obligation and the debt service and accordingly are not
included.
In addition, from time to time we may guarantee certain tenant improvement
allowances and lease commissions on behalf of certain property owner
subsidiaries when required by the related tenant or lender. However, we do not
believe these guarantees are material to us as the obligations under and risks
associated with such guarantees are priced into the rent under the lease or the
value of the property.
We had two non-consolidated development projects as of December 31, 2020 , which
are described in "Properties" in Part I, Item 2 of this Annual Report. Due to
the early stage of development of each project and the uncertainty of
construction schedules at such stage, we are unable to estimate the timing of
the required fundings for development projects.
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