STAG INDUSTRIAL, INC.
The following discussion of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and
related notes included elsewhere in this report. For the definitions of certain
terms used in the following discussion, refer to Item 1, "Business - Certain
Definitions" included elsewhere in this Annual Report on Form 10-K.
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Overview
We are a REIT focused on the acquisition, ownership, and operation of industrial
properties throughout the United States . We seek to (i) identify properties that
offer relative value across all locations, industrial property types, and
tenants through the principled application of our proprietary risk assessment
model, (ii) operate our properties in an efficient, cost-effective manner, and
(iii) capitalize our business appropriately given the characteristics of our
assets. We are a Maryland corporation and our common stock is publicly traded on
the NYSE under the symbol "STAG."
We are organized and conduct our operations to qualify as a REIT under
Sections 856 through 860 of the Code, and generally are not subject to federal
income tax to the extent we currently distribute our income to our stockholders
and maintain our qualification as a REIT. We remain subject to state and local
taxes on our income and property and to U.S. federal income and excise taxes on
our undistributed income.
Our qualification and taxation as a REIT depend upon our ability to meet on a
continuing basis, through actual annual operating results, qualification tests
in the federal income tax laws. Those tests involve the percentage of income
that we earn from specified sources, the percentage of our assets that falls
within specified categories, the diversity of our capital stock ownership and
the percentage of our earnings that we distribute.
As of December 31, 2021 , we owned 544 buildings in 40 states with approximately
108.6 million rentable square feet, consisting of 459 warehouse/distribution
buildings, 74 light manufacturing buildings, two flex/office buildings, and nine
Value Add Portfolio buildings. We own both single- and multi-tenant properties,
although the majority of our portfolio is single-tenant.
As of December 31, 2021 , our buildings were approximately 96.9% leased to 532
tenants, with no single tenant accounting for more than approximately 3.2% of
our total annualized base rental revenue and no single industry accounting for
more than approximately 11.3% of our total annualized base rental revenue.
We own the interests in all of our properties and conduct substantially all of
our business through our Operating Partnership . We are the sole member of the
sole general partner of our Operating Partnership . As of December 31, 2021 , we
owned approximately 98.1% of the common units in our Operating Partnership , and
our current and former executive officers, directors, senior employees and their
affiliates, and other third parties owned the remaining 1.9% of the common
units.
Factors That May Influence Future Results of Operations
Our ability to increase revenues or cash flow will depend in part on our (i) external growth, specifically acquisition activity, and (ii) internal growth, specifically occupancy and rental rates on our portfolio. A variety of other factors, including those noted below, also affect our future results of operations.
COVID-19 Pandemic
SinceMarch 2020 , the COVID-19 pandemic has severely harmed global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the pandemic continues to evolve and many countries, includingthe United States , continue to react by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry, including the real estate industry and the industries of our tenants, directly or indirectly. The rapid development and fluidity of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact the pandemic may have on our business, financial condition, results of operations and cash flows. We did not incur significant disruptions from the COVID-19 pandemic during the year endedDecember 31, 2021 . In addition, we did not enter into any rent deferral agreements during the year endedDecember 31, 2021 . We will continue to evaluate tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modified agreements, nor are we foregoing our contractual rights under our lease agreements. The COVID-19 pandemic or a future pandemic, epidemic or outbreak of infectious disease affecting states or regions in which we or our tenants operate could have material and adverse effects on our business, financial condition, results of operations and cash flows due to, among other factors: health or other government authorities requiring the closure of offices or other businesses or instituting quarantines of personnel as the result of, or in order to avoid, exposure to a contagious disease; disruption in supply and delivery chains; a general decline in business activity and demand for real estate; reduced economic activity, general economic decline or recession, which may impact our tenants' businesses, financial condition and liquidity and 36 -------------------------------------------------------------------------------- Table of Contents may cause one or more of our tenants to be unable to make rent payments to us timely, or at all, or to otherwise seek modifications of lease obligations; difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis; and the potential negative impact on the health of our personnel, particularly if a significant number of our employees are impacted, which would result in a deterioration in our ability to ensure business continuity during a disruption. The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows.
Outlook
Our business is affected by the uncertainty regarding the current COVID-19 pandemic, the effectiveness of policies introduced to neutralize the disease, and the impact of those policies on economic activity. InJune 2020 , theNational Bureau of Economic Research announced thatthe United States entered into a recession inFebruary 2020 . More recent economic measurements show that theU.S. economy is recovering. The ultimate shape of the recovery will depend on many factors, including the length and severity of the COVID-19 pandemic and its side-effects such as supply-chain bottlenecks and inflation. While the pandemic continues to evolve and impact our tenants, we believe we will continue to benefit from having a well-diversified portfolio across various markets, tenant industries, and lease terms. Additionally, we believe that the COVID-19 pandemic is accelerating a number of trends that positively impact industrial demand. Over the course of the COVID-19 pandemic, theU.S. federal and state governments, as well as theFederal Reserve , responded to the profoundly uncertain outlook with a series of policies to ease the economic burden of COVID-19 closures on businesses and individuals. InMarch 2021 , theU.S. congressional policy action known as the American Rescue Plan, allocated$1.9 trillion in federal aid focused on individuals and state and local governments. Then, inNovember 2021 , a$1.0 trillion infrastructure bill was passed to support the economy and job growth. In addition to fiscal support, theFederal Reserve completed two emergency fed funds rate cuts inMarch 2020 to a range between 0% to 0.25% and continued to be accommodative throughout pandemic. Given recent high inflation levels and strong employment reports, we expect monetary policy to shift toward a tightening stance with higher interest rates. Fiscal policy is likely to remain accommodative, as needed, to counteract COVID-19 variants. We believe that the current economic environment, while volatile, will provide us with an opportunity to demonstrate the diversification of our portfolio. Specifically, we believe our existing portfolio should benefit from competitive rental rates and strong occupancy. In addition to our diversified portfolio, we believe that certain characteristics of our business and capital structure should position us well in an uncertain environment, including the fact that we have minimal floating rate debt exposure (taking into account our hedging activities) and strong liquidity and access to capital, and that many of our competitors for the assets we purchase tend to be smaller local and regional investors who are likely to be more heavily impacted by interest rates and availability of capital.
Due to the COVID-19 pandemic and recent
•the rise of e-commerce (as compared to the traditional retail store distribution model) and the concomitant demand by e-commerce industry participants for well-located, functional distribution space; •the increasing attractiveness ofthe United States as a manufacturing and distribution location because of the size of theU.S. consumer market, an increase in overseas labor costs, a desire for greater supply chain resilience and redundancy and the overall cost of supplying and shipping goods (i.e. the shortening and fattening of the supply chain); and •the overall quality of the transportation infrastructure inthe United States . Our portfolio continues to benefit from historically low availability throughout the national industrial market. The COVID-19 pandemic has caused both positive and negative impacts at varying levels across different industries and geographies. Ultimately, the acceleration in e-commerce brought on by the COVID-19 pandemic, actions taken by federal and state governments and theFederal Reserve in response to the pandemic, and the recent economic recovery has helped industrial space demand remain strong. We believe that the diversification of our portfolio by market, tenant industry, and tenant credit will prove to be a strength in this environment. Industrial development continues to be concentrated in the larger primary 37 -------------------------------------------------------------------------------- Table of Contents markets, and after a brief deceleration it has returned to pre-COVID-19 pandemic levels. We will continue to monitor the supply and demand fundamentals for industrial real estate and assess its impact on our business.
Conditions in Our Markets
The buildings in our portfolio are located in markets throughout
Rental Income
We receive income primarily in the form of rental income from the tenants who occupy our buildings. The amount of rental income generated by the buildings in our portfolio depends principally on occupancy and rental rates. Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, including those brought on by the COVID-19 pandemic, could adversely affect our ability to maintain or increase rental rates at our buildings. Our ability to lease our properties and the attendant rental rate is dependent upon, among other things, (i) the overall economy, (ii) the supply/demand dynamic in our markets, (iii) the quality of our properties, including age, clear height, and configuration, and (iv) our tenants' ability to meet their contractual obligations to us. The following table summarizes our Operating Portfolio leases that commenced during the year endedDecember 31, 2021 . Certain leases contain rental concessions; any such rental concessions are accounted for on a straight-line basis over the term of the lease. Cash Total Costs Basis Rent Per Weighted Average Lease Per SLRent Per Square Cash SL Rent Term(2) Rental Concessions Operating Portfolio Square Feet Square Foot Square Foot Foot(1) Rent Change Change (years) per Square Foot(3) Year endedDecember 31, 2021 New Leases 4,257,914$ 4.19 $ 4.33 $ 2.07 9.6 % 14.9 % 5.3 $ 0.48 Renewal Leases 9,448,145$ 4.64 $ 4.83 $ 1.11 10.7 % 18.6 % 5.2 $ 0.16 Total/weighted average 13,706,059$ 4.50 $ 4.67 $ 1.40 10.4 % 17.6 % 5.2 $ 0.26 (1)We define Total Costs as the costs for improvements of vacant and renewal spaces, as well as the contingent-based legal fees and commissions for leasing transactions. Total Costs per square foot represent the total costs expected to be incurred on the leases that commenced during the period and do not reflect actual expenditures for the period. (2)We define weighted average lease term as the contractual lease term in years, assuming that tenants exercise no renewal options, purchase options, or early termination rights, weighted by square footage. (3)Represents the total rental concessions for the entire lease term.
Additionally, for the year ended
Property Operating Expenses
Our property operating expenses generally consist of utilities, real estate taxes, management fees, insurance, and site repair and maintenance costs. For the majority of our tenants, our property operating expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance and maintenance costs, but typically excluding roof and building structure. However, we also have modified gross leases and gross leases in our building portfolio. The terms of those leases vary and on some occasions we may absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for some building related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all costs related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through property operating expenses to our tenants.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately 6.3% of our total annualized base rental revenue will expire during the period fromJanuary 1, 2022 toDecember 31, 2022 , 38 -------------------------------------------------------------------------------- Table of Contents excluding month-to-month leases. We assume, based upon internal renewal probability estimates, that some of our tenants will renew and others will vacate and the associated space will be re-let subject to downtime assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases will generally be moderately higher than the rates under existing leases expiring during the periodJanuary 1, 2022 toDecember 31, 2022 , thereby resulting in a moderate increase in revenue from the same space. Critical Accounting Estimates The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Certain estimates, judgments and assumptions are inherently subjective and based on the existing business and market conditions, and are therefore continually evaluated based upon available information and experience. The following items require significant estimation or judgement. Purchase Price Accounting We have determined that judgments regarding the allocation of the purchase price of properties based upon the fair value of the assets acquired and liabilities assume represents a critical accounting estimate that has the potential to be material in future periods and has been material in all periods presented in this Form 10-K. As discussed below in "Critical Accounting Policies," we allocate the purchase price of properties based upon the fair value of the assets acquired and liabilities assumed, which generally consist of land, buildings, tenant improvements, mortgage debt assumed, and deferred leasing intangibles, which includes in-place leases, above market and below market leases, and tenant relationships, and is therefore subject to subjective analysis and uncertainty. The process for determining the allocation to these components requires estimates and assumptions, including rental rates, discount rates, exit capitalization rates, and land value per square foot. We do not believe that the conclusions we reached regarding the allocation of the purchase price of properties, in the current economic and operating environment, would result in a materially different conclusion within any reasonable range of assumptions that could have been applied. As discussed below, we continuously assess our portfolio for the impairment of tangible and intangible rental property and deferred leasing intangible liabilities.
Rental Property and Deferred Leasing Intangible Liabilities Impairment Assessment
We have determined that judgments regarding the impairment of tangible and intangible rental property and deferred leasing intangible liabilities represents a critical accounting estimate that has the potential to be material in future periods and has been material in certain periods presented in this Form 10-K. As discussed below in "Critical Accounting Policies," we evaluate the carrying value of all tangible and intangible rental property assets and deferred leasing intangible liabilities (collectively, the "property") held for use for possible impairment when an event or change in circumstance has occurred that indicates their carrying value may not be recoverable. The evaluation includes estimating and reviewing anticipated future undiscounted cash flows to be derived from the property. If such cash flows are less than the property's carrying value, an impairment charge is recognized to the extent by which the asset's carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective and is based in part on assumptions related to anticipated hold period, future occupancy, rental rates, capital requirements, and exit capitalization rates that could differ from actual results. The discount rate used to present value the cash flows for determining fair value is also subjective. We do not believe that the conclusions we reached regarding the assessment of our rental property assets for impairment, in the current economic and operating environment, would result in a materially different conclusion within any reasonable range of assumptions that could have been applied. Should economic conditions worsen, and the values of industrial assets decline in future periods, then the assumptions and estimates we may make in future impairment analyses, and potential future measurement of impairment charges, could be sensitive and could result in a material change in the range of potential outcomes.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires
management to use judgment in the application of accounting policies, including
making estimates and assumptions. We base our estimates on historical experience
and on various other assumptions believed to be reasonable under the
circumstances. These judgments affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. If our judgment or interpretation of the facts and
circumstances relating to various transactions had been different, it is
possible that different accounting policies would have been applied resulting in
a different presentation of our financial statements. From time to time, we
evaluate our estimates and assumptions. In the event estimates or assumptions
prove to be different from actual results, adjustments are made in subsequent
periods to
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reflect more current information. Below is a discussion of accounting policies
that we consider critical in that they may require complex judgment in their
application or require estimates about matters that are inherently uncertain.
Rental Property and Deferred Leasing Intangibles
Rental property is carried at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. We capitalize costs directly and indirectly related to the development, pre-development, redevelopment, or improvement of rental property. Real estate taxes, compensation costs of development personnel, insurance, interest, and other directly related costs during construction periods are capitalized as incurred, with depreciation commencing with the date the property is substantially completed. Such costs begin to be capitalized to the development projects from the point we are undergoing the necessary activities to get the development project ready for its intended use and cease when the development projects are substantially completed and held available for occupancy. Interest is capitalized based on actual capital expenditures from the period when development or redevelopment commences until the asset is ready for its intended use, at the weighted average borrowing rate of our unsecured indebtedness during the period. For properties classified as held for sale, we cease depreciating and amortizing the rental property and value the rental property at the lower of depreciated and amortized cost or fair value less costs to dispose. We present those properties classified as held for sale with any qualifying assets and liabilities associated with those properties as held for sale in the accompanying Consolidated Balance Sheets. Using information available at the time of acquisition, we allocate the purchase price of properties acquired based upon the fair value of the assets acquired and liabilities assumed, which generally consist of land, buildings, tenant improvements, mortgage debt assumed, and deferred leasing intangibles, which includes in-place leases, above market and below market leases, and tenant relationships. The process for determining the allocation to these components requires estimates and assumptions, including rental rates, discount rates and exit capitalization rates, and land value per square foot, as well as available market information, and is therefore subject to subjective analysis and uncertainty. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. The portion of the purchase price that is allocated to above and below market leases is valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease term plus the term of any bargain renewal options. The purchase price is further allocated to in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant's lease and its overall relationship with the respective tenant. The above and below market lease values are amortized into rental income over the remaining lease term. The value of in-place lease intangibles and tenant relationships are amortized over the remaining lease term (and expected renewal period of the respective lease for tenant relationships) as increases to depreciation and amortization expense. The remaining lease terms are adjusted for bargain renewal options or assumed exercises of early termination options, as applicable. If a tenant subsequently terminates its lease, any unamortized portion of above and below market leases is accelerated into rental income and the in-place lease value and tenant relationships are accelerated into depreciation and amortization expense over the shortened lease term. The purchase price allocated to deferred leasing intangible assets are included in rental property, net on the accompanying Consolidated Balance Sheets and the purchase price allocated to deferred leasing intangible liabilities are included in deferred leasing intangibles, net on the accompanying Consolidated Balance Sheets under the liabilities section.
In determining the fair value of the debt assumed, we discount the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt based on a current market rate. The associated fair market value debt adjustment is amortized through interest expense over the life of the debt on a basis which approximates the effective interest method.
We evaluate the carrying value of all tangible and intangible rental property
assets and deferred leasing intangible liabilities (collectively, the
"property") held for use for possible impairment when an event or change in
circumstance has occurred that indicates their carrying value may not be
recoverable. The evaluation includes estimating and reviewing anticipated future
undiscounted cash flows to be derived from the property. If such cash flows are
less than the property's carrying value, an impairment charge is recognized to
the extent by which the property's carrying value exceeds the estimated fair
value. Estimating future cash flows is highly subjective and is based in part on
assumptions regarding anticipated hold period, future occupancy, rental rates,
capital requirements, and exit capitalization rates that could differ from
actual results. The discount rate used to present value the cash flows for
determining fair value is also subjective.
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Depreciation expense is computed using the straight-line method based on the following estimated useful lives.
Description Estimated Useful Life
Building 40 Years
Building and land improvements (maximum) 20 years
Shorter of useful life or terms
Tenant improvements of related lease
Leases
For leases in which we are the lessee, we recognize a right-of-use asset and
corresponding lease liability on the accompanying Consolidated Balance Sheets
equal to the present value of the fixed lease payments. In determining operating
right-of-use asset and lease liability for our operating leases, we estimate an
appropriate incremental borrowing rate on a fully-collateralized basis for the
terms of the leases. We utilize a market-based approach to estimate the
incremental borrowing rate for each individual lease. Since the terms under our
ground leases are significantly longer than the terms of borrowings available to
us on a fully-collateralized basis, the estimate of this rate required
significant judgment, and considered factors such as yields on outstanding
public debt and other market based pricing on longer duration financing
instruments.
The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Our goodwill of approximately$4.9 million represents amounts allocated to the assembled workforce from the acquired management company, and is presented in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets. Our goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis atDecember 31 , or more frequently if events or changes in circumstances indicate that the asset might be impaired. We take a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. We have recorded no impairments to goodwill as ofDecember 31, 2021 .
Use of Derivative Financial Instruments
We record all derivatives on the accompanying Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or we elect not to apply hedge accounting. In accordance with fair value measurement guidance, we made an accounting policy election to measure the credit risk of our derivative financial instruments that are subject to master netting arrangements on a net basis by counterparty portfolio. Credit risk is the risk of failure of the counterparty to perform under the terms of the contract. We minimize the credit risk in our derivative financial instruments by entering into transactions with various high-quality counterparties. Our exposure to credit risk at any point is generally limited to amounts recorded as assets on the accompanying Consolidated Balance Sheets.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, restricted cash, tenant
accounts receivable, interest rate swaps, accounts payable, accrued expenses,
unsecured credit facility, unsecured term loans, unsecured notes, and mortgage
notes. See Note 4 in the accompanying Notes to Consolidated Financial Statements
for the fair value of our indebtedness. See Note 5 in the accompanying Notes to
Consolidated Financial Statements for the fair value of our interest rate swaps.
We adopted fair value measurement provisions for our financial instruments
recorded at fair value. The guidance establishes a three-tier value hierarchy,
which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as
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observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
Incentive and Equity-Based Employee Compensation Plans
We grant equity-based compensation awards to our employees and directors in the form of restricted shares of common stock, LTIP units, and performance units. See Notes 6, 7 and 8 in the accompanying Notes to Consolidated Financial Statements for further discussion of restricted shares of common stock, LTIP units, and performance units, respectively. We measure equity-based compensation expense based on the fair value of the awards on the grant date and recognize the expense ratably over the vesting period, and forfeitures are recognized in the period in which they occur. OnJanuary 7, 2021 , we adopted theSTAG Industrial, Inc. Employee Retirement Vesting Program (the "Vesting Program") to provide supplemental retirement benefits for eligible employees. For those employees who are retirement eligible or will become retirement eligible during the applicable vesting period under the terms of the Vesting Program, we accelerate equity-based compensation through the employee's six-month retirement notification period or retirement eligibility date, respectively.
Revenue Recognition
All current leases are classified as operating leases and rental income is recognized on a straight-line basis over the term of the lease (and expected bargain renewal terms or assumed exercise of early termination options) when collectability is reasonably assured. Differences between rental income earned and amounts due under the lease are charged or credited, as applicable, to accrued rental income. We determined that for all leases where we are the lessor, that the timing and pattern of transfer of the non-lease components and associated lease components are the same, and that the lease components, if accounted for separately, would be classified as an operating lease. Accordingly, we have made an accounting policy election to recognize the combined component in accordance with Accounting Standards Codification Topic 842 as rental income on the accompanying Consolidated Statements of Operations. Rental income recognition commences when the tenant takes possession of or controls the physical use of the leased space and the leased space is substantially complete and ready for its intended use. In order to determine whether the leased space is substantially complete and ready for its intended use, we determine whether we or the tenant own the tenant improvements. When it is determined that we are the owner of the tenant improvements, rental income recognition begins when the tenant takes possession of or controls the physical use of the finished space, which is generally when our owned tenant improvements are completed. In instances when it is determined that the tenant is the owner of tenant improvements, rental income recognition begins when the tenant takes possession of or controls the physical use of the leased space. When we are the owner of tenant improvements or other capital items, the cost to construct the tenant improvements or other capital items, including costs paid for or reimbursed by the tenants, is recorded as capital assets. For these tenant improvements or other capital items, the amount funded by or reimbursed by the tenants are recorded as deferred revenue, which is amortized on a straight-line basis as income over the shorter of the useful life of the capital asset or the term of the related lease. Early lease termination fees are recorded in rental income on a straight-line basis from the notification date of such termination to the then remaining (not the original) lease term, if any, or upon collection if collection is not reasonably assured.
We evaluate cash basis versus accrual basis of rental income recognition based on the collectability of future lease payments.
Results of Operations
The following discussion of our results of our same store (as defined below) net
operating income ("NOI") should be read in conjunction with our Consolidated
Financial Statements. For a detailed discussion of NOI, including the reasons
management believes NOI is useful to investors, see "Non-GAAP Financial
Measures" below. Same store results are considered to be useful to investors in
evaluating our performance because they provide information relating to changes
in building-level operating performance without taking into account the effects
of acquisitions or dispositions. We encourage the reader to not only look at our
same store results, but also our total portfolio results, due to historic and
future growth.
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We define same store properties as properties that were in the Operating
Portfolio for the entirety of the comparative periods presented. The results for
same store properties exclude termination fees, solar income, and revenue
associated with one-time tenant reimbursements of capital expenditures. Same
store properties exclude Operating Portfolio properties with expansions placed
into service or transferred from the Value Add Portfolio to the Operating
Portfolio after December 31, 2019 . On December 31, 2021 , we owned 412 industrial
buildings consisting of approximately 83.9 million square feet, which represents
approximately 77.3% of our total portfolio, that are considered our same store
portfolio in the analysis below. Same store occupancy decreased approximately
0.6% to 97.1% as of December 31, 2021 compared to 97.7% as of December 31,
2020 .
Discussions of selected operating information for our same store portfolio and
our total portfolio for the comparison of the years ended December 31, 2020 and
2019 that are not included in this Form 10-K can be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2020 , which was filed with the SEC on February 10, 2021 .
Comparison of the year ended
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the years endedDecember 31, 2021 and 2020 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the years endedDecember 31, 2021 and 2020 with respect to the buildings acquired and disposed of and Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2019 and our flex/office buildings, Value Add Portfolio, and buildings classified as held for sale. 43
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Same Store Portfolio Acquisitions/Dispositions Other Total Portfolio
Year ended December 31 , Change Year ended December 31 , Year ended December 31 , Year ended December 31 , Change
2021 2020 $ % 2021 2020 2021 2020 2021 2020 $ %
Revenue
Operating revenue
Rental income $ 450,345 $ 433,874 $ 16,471 3.8 % $ 92,527 $ 39,408 $ 16,560 $ 9,543 $ 559,432 $ 482,825 $ 76,607 15.9 %
Other income 385 367 18 4.9 % 198 150 2,144 69 2,727 586 2,141 365.4 %
Total operating revenue 450,730 434,241 16,489 3.8 % 92,725 39,558 18,704 9,612 562,159 483,411 78,748 16.3 %
Expenses
Property 83,833 76,135 7,698 10.1 % 19,999 10,567 4,154 2,657 107,986 89,359 18,627 20.8 %
Net operating income(1) $ 366,897 $ 358,106 $ 8,791 2.5 % $ 72,726 $ 28,991 $ 14,550 $ 6,955 454,173 394,052 60,121 15.3 %
Other expenses
General and administrative 48,629 40,072 8,557 21.4 %
Depreciation and amortization 238,699 214,738 23,961 11.2 %
Loss on impairments - 5,577 (5,577) (100.0) %
Other expenses 2,878 2,029 849 41.8 %
Total other expenses 290,206 262,416 27,790 10.6 %
Total expenses 398,192 351,775 46,417 13.2 %
Other income (expense)
Interest and other income 121 446 (325) (72.9) %
Interest expense (63,484) (62,343) (1,141) 1.8 %
Debt extinguishment and modification expenses (2,152) (834) (1,318) 158.0 %
Gain on involuntary conversion - 2,157 (2,157) (100.0) %
Gain on the sales of rental property, net 97,980 135,733 (37,753) (27.8) %
Total other income (expense) 32,465 75,159 (42,694) (56.8) %
Net income $ 196,432 $ 206,795 $ (10,363) (5.0) %
(1)For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see "Non-GAAP Financial Measures" below.
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Net Income
Net income for our total portfolio decreased by $10.4 million or 5.0% to $196.4
million for the year ended December 31, 2021 compared to $206.8 million for the
year ended December 31, 2020 .
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of rental income
consisting of (i) fixed lease payments, variable lease payments, straight-line
rental income, and above and below market lease amortization from our properties
("lease income"), and (ii) other tenant billings for insurance, real estate
taxes and certain other expenses ("other billings").
For a detailed reconciliation of our same store total operating revenue to net income, see the table above.
Same store rental income, which is comprised of lease income and other billings as discussed below, increased by$16.5 million or 3.8% to$450.3 million for the year endedDecember 31, 2021 compared to$433.9 million for the year endedDecember 31, 2020 . Same store lease income increased by$10.6 million or 2.9% to$375.5 million for the year endedDecember 31, 2021 compared to$364.9 million for the year endedDecember 31, 2020 . Approximately$9.1 million of the increase was attributable to rental increases due to the execution of new leases and lease renewals with existing tenants, an increase of approximately$1.5 million due the to impact of inheriting the ownership of a solar panel array on one of our buildings, and a net decrease in the amortization of net above market leases of approximately$0.8 million . These increases were also attributable to an increase in rental income of approximately$3.3 million at properties in which, during the year endedDecember 31, 2020 , we determined that the future collectability was not reasonably assured, and accordingly, we converted to the cash basis of accounting and reversed any accounts receivable and accrued rent balances into rental income and did not recognize revenue for payments that were not received from the tenants. These reversals of accounts receivable and accrued rent balances decreased during the the year endedDecember 31, 2021 . These increases were partially offset by the reduction of base rent of approximately$4.1 million due to tenant vacancy. Same store other billings increased by$5.8 million or 8.5% to$74.8 million for the year endedDecember 31, 2021 compared to$69.0 million for the year endedDecember 31, 2020 . The increase was attributable to an increase of approximately$3.6 million related to other expense reimbursements due to an increase in corresponding expenses and changes to lease terms where we began paying the operating expenses on behalf of tenants that had previously paid its operating expenses directly to respective vendors. Additionally, there was an increase in real estate taxes levied by the taxing authority and changes to lease terms where we began paying the real estate taxes on behalf of tenants that had previously paid its taxes directly to the taxing authority of approximately$2.2 million .
Same Store Operating Expenses
Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance.
For a detailed reconciliation of our same store portfolio operating expenses to net income, see the table above.
Total same store operating expenses increased by$7.7 million or 10.1% to$83.8 million for the year endedDecember 31, 2021 compared to$76.1 million for the year endedDecember 31, 2020 . This increase was primarily related to an increase in real estate taxes of approximately$2.9 million levied by the taxing authority and changes to lease terms where we began paying the real estate taxes on behalf of tenants that had previously paid its taxes directly to the taxing authority. The increase was also attributable to an increase of$1.8 million in repairs and maintenance expense, an increase in utility expense of$1.1 million , and an increase of$1.9 million related to insurance, snow removal, and other expenses.
Acquisitions and Dispositions Net Operating Income
For a detailed reconciliation of our acquisitions and dispositions NOI to net income, see the table above.
Subsequent toDecember 31, 2019 , we acquired 111 buildings consisting of approximately 20.7 million square feet (excluding 11 buildings that were included in the Value Add Portfolio atDecember 31, 2021 or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2019 ), and sold 29 buildings consisting of approximately 6.1 million square feet. For the years endedDecember 31, 2021 and 2020, the buildings acquired afterDecember 31, 2019 contributed approximately 45 -------------------------------------------------------------------------------- Table of Contents$69.5 million and$13.6 million to NOI, respectively. For the years endedDecember 31, 2021 and 2020, the buildings sold afterDecember 31, 2019 contributed approximately$3.2 million and$15.4 million to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold.
Other Net Operating Income
Our other assets include our flex/office buildings, Value Add Portfolio, buildings classified as held for sale, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2019 . Other NOI also includes termination, solar, and other income adjustments from buildings in our same store portfolio.
For a detailed reconciliation of our other NOI to net income, see the table above.
AtDecember 31, 2021 we owned two flex/office buildings consisting of approximately 0.1 million square feet, nine buildings in our Value Add Portfolio consisting of approximately 1.8 million square feet, and 10 buildings consisting of approximately 2.1 million square feet that were Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2019 . These buildings contributed approximately$11.2 million and$6.0 million to NOI for the years endedDecember 31, 2021 and 2020, respectively. Additionally, there was$3.4 million and$1.0 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the years endedDecember 31, 2021 andDecember 31, 2020 , respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, loss on impairments, and other expenses.
Total other expenses increased$27.8 million or 10.6% for the year endedDecember 31, 2021 to$290.2 million compared to$262.4 million for the year endedDecember 31, 2020 . This is primarily a result of an increase in depreciation and amortization of approximately$24.0 million as a result of net acquisitions that increased the depreciable asset base. General and administrative expenses increased by approximately$8.6 million primarily due to the acceleration of equity-based compensation expense for certain eligible employees related to the adoption of the Vesting Program in the amount of approximately$2.3 million . Additionally, general and administrative expenses increased by approximately$2.1 million related to the severance costs of a former executive officer, as discussed in Note 7 in the accompanying Notes to Consolidated Financial Statements. General and administrative expenses also increased due to increases in compensation and other payroll costs. Other expenses also increased, and approximately$0.3 million of the increase was primarily due to the settlement of litigation related to a terminated acquisition contract during the COVID-19 pandemic. These increases were partially offset by a decrease in loss on impairments of approximately$5.6 million as there were no loss on impairments recognized during the year endedDecember 31, 2021 .
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, gain on involuntary conversion, and gain on the sales of rental property, net. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs, and amortization of fair market value adjustments associated with the assumption of debt. Total net other income decreased$42.7 million or 56.8% to$32.5 million total other income for the year endedDecember 31, 2021 compared to$75.2 million total other expense for the year endedDecember 31, 2020 . This decrease is primarily the result of an decrease in gain on the sales of rental property, net of approximately$37.8 million and a decrease in gain on involuntary conversion of approximately$2.2 million related to an eminent domain taking of a portion of a parcel of land that occurred during the year endedDecember 31, 2020 . There was also an increase in interest expense of approximately$1.1 million which was primarily attributable to the funding of unsecured term loans onSeptember 28, 2021 andMarch 25, 2020 . Debt extinguishment and modification expenses also increased approximately$1.3 million during the year endedDecember 31, 2021 that was primarily related to the refinance of the Unsecured Term Loans onOctober 26, 2021 , as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements. Additionally, there was a decrease of approximately$0.3 million in interest and other income due to a decreased cash and cash equivalents balance during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . 46 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures In this report, we disclose funds from operations ("FFO") and NOI, which meet the definition of "non-GAAP financial measures" as set forth in Item 10(e) of Regulation S-K promulgated by theSEC . As a result, we are required to include in this report a statement of why management believes that presentation of these measures provides useful information to investors.
Funds From Operations
FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, and we believe that to understand our performance further, FFO should be compared with our reported net income (loss) in accordance with GAAP, as presented in our consolidated financial statements included in this report. We calculate FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts ("NAREIT"). FFO represents GAAP net income (loss), excluding gains (or losses) from sales of depreciable operating buildings, impairment write-downs of depreciable real estate, real estate related depreciation and amortization (excluding amortization of deferred financing costs and fair market value of debt adjustment) and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental performance measure because it is a widely recognized measure of the performance of REITs. FFO may be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our buildings that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our buildings, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other REITs may not calculate FFO in accordance with the NAREIT definition, and, accordingly, our FFO may not be comparable to such other REITs' FFO. FFO should not be used as a measure of our liquidity, and is not indicative of funds available for our cash needs, including our ability to pay dividends.
The following table summarizes a reconciliation of our FFO attributable to common stockholders and unit holders for the periods presented to net income, the nearest GAAP equivalent.
Year ended December 31,
Reconciliation of Net Income to FFO (in thousands) 2021 2020 2019
Net income $ 196,432 $ 206,795 $ 50,665
Rental property depreciation and amortization 238,487 214,464 185,154
Loss on impairments - 5,577 9,757
Gain on the sales of rental property, net (97,980) (135,733) (7,392)
FFO $ 336,939 $ 291,103 $ 238,184
Preferred stock dividends (1,289) (5,156) (5,156)
Redemption of preferred stock (2,582) - -
Amount allocated to restricted shares of common stock and unvested units
(838) (756) (891)
FFO attributable to common stockholders and unit holders
$ 285,191 $ 232,137 Net Operating Income We consider NOI to be an appropriate supplemental performance measure to net income (loss) because we believe it helps investors and management understand the core operations of our buildings. NOI is defined as rental income, which includes billings for common area maintenance, real estate taxes and insurance, less property expenses. NOI should not be viewed as an alternative measure of our financial performance since it excludes expenses which could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI. 47
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The following table summarizes a reconciliation of our NOI for the periods presented to net income, the nearest GAAP equivalent.
Year
ended
Reconciliation of Net Income to NOI (in thousands) 2021 2020 2019 Net income$ 196,432 $ 206,795 $ 50,665 General and administrative 48,629 40,072 35,946 Transaction costs 347 159 346 Depreciation and amortization 238,699 214,738 185,450 Interest and other income (121) (446) (87) Interest expense 63,484 62,343 54,647 Loss on impairments - 5,577 9,757 Gain on involuntary conversion - (2,157) - Debt extinguishment and modification expenses 2,152 834 - Other expenses 2,531
1,870 1,439
Gain on the sales of rental property, net (97,980) (135,733) (7,392) Net operating income$ 454,173 $ 394,052 $ 330,771 Cash Flows
Comparison of the year ended
The following table summarizes our cash flows for the year ended
Year ended December 31, Change
Cash Flows (dollars in thousands) 2021 2020 $ %
Net cash provided by operating activities $ 336,154 $ 293,922 $ 42,232 14.4 %
Net cash used in investing activities $ 1,220,420 $ 554,623 $ 665,797 120.0 %
Net cash provided by financing activities $ 887,123 $ 269,176 $ 617,947 229.6 %
Net cash provided by operating activities increased
Net cash used in investing activities increased by$665.8 million to$1,220.4 million for the year endedDecember 31, 2021 , compared to$554.6 million for the year endedDecember 31, 2020 . The increase was primarily attributable to the acquisition of 74 buildings during the year endedDecember 31, 2021 of approximately$1,365.8 million , compared to the acquisition of 48 buildings during the year endedDecember 31, 2020 of approximately$773.3 million . The increase is also attributable to an decrease in net proceeds from the sale of 22 buildings during the year endedDecember 31, 2021 for net proceeds of approximately$188.0 million , compared to the year endedDecember 31, 2020 where we sold seven buildings for net proceeds of approximately$273.6 million . Net cash provided by financing activities increased$617.9 million to$887.1 million for the year endedDecember 31, 2021 , compared to$269.2 million for the year endedDecember 31, 2020 . The increase is primarily attributable to funding of the Series I Unsecured Notes and Series J Unsecured Notes (each as defined below) of$325.0 million , as well as a net cash inflow of approximately$228.0 million from our unsecured credit facility. The increase is also attributable to an increase of net proceeds from the sales of common stock of approximately$268.5 million . These increases were partially offset by the redemption of the Series C Preferred Stock (as defined below) of$75.0 million , and an increase of approximately$21.4 million in dividends paid during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Additionally, the funding of the Unsecured Term Loan F of$100.0 million did not recur during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . 48 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We believe that our liquidity needs will be satisfied through cash flows generated by operations, disposition proceeds, and financing activities. Operating cash flow is primarily rental income, expense recoveries from tenants, and other income from operations and is our principal source of funds that we use to pay operating expenses, debt service, recurring capital expenditures, and the distributions required to maintain our REIT qualification. We look to the capital markets (common equity, preferred equity, and debt) to primarily fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality standards for our buildings that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. We believe that our revenue, together with proceeds from building sales and debt and equity financings, will continue to provide funds for our short-term and medium-term liquidity needs. Our short-term liquidity requirements consist primarily of funds to pay for operating expenses and other expenditures directly associated with our buildings, including interest expense, interest rate swap payments, scheduled principal payments on outstanding indebtedness, funding of property acquisitions under contract, general and administrative expenses, and capital expenditures for tenant improvements and leasing commissions. Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through cash flow from operations, the issuance of equity or debt securities, other borrowings, property dispositions, or, in connection with acquisitions of certain additional buildings, the issuance of common units in ourOperating Partnership . Since the start of the COVID-19 pandemic in early-2020, we have worked to ensure that we maintain adequate liquidity. InFebruary 2021 andOctober 2021 , we refinanced our unsecured credit facility and several unsecured term loans and onSeptember 28, 2021 , we issued the Series I Unsecured Notes and Series J Unsecured Notes, as discussed in "Indebtedness Outstanding" below. As ofDecember 31, 2021 , we had total immediate liquidity of approximately$469.4 million , comprised of$19.0 million of cash and cash equivalents and$450.4 million of immediate availability on our unsecured credit facility. When incorporating the remaining undrawn balance available on our unsecured credit facility and the approximately$50.1 million of forward equity proceeds available to us at our option throughNovember 3, 2022 , our total liquidity as ofDecember 31, 2021 was approximately$519.5 million . In addition, we require funds for future dividends to be paid to our common stockholders and common unit holders in ourOperating Partnership . These distributions on our common stock are voluntary (at the discretion of our board of directors), to the extent in excess of distribution requirements in order to maintain our REIT status for federal income tax purposes, and the excess portion may be reduced or stopped if needed to fund other liquidity requirements or for other reasons. The following table summarizes the dividends attributable to our common stock that were declared or paid during the year endedDecember 31, 2021 . Month Ended 2021 Declaration Date Record Date Per Share Payment Date December 31 October 13, 2021 December 31, 2021$ 0.120833 January 18, 2022 November 30 October 13, 2021 November 30, 2021 0.120833 December 15, 2021 October 31 October 13, 2021 October 29, 2021 0.120833 November 15, 2021 September 30 July 13, 2021 September 30, 2021 0.120833 October 15, 2021 August 31 July 13, 2021 August 31, 2021 0.120833 September 15, 2021 July 31 July 13, 2021 July 30, 2021 0.120833 August 16, 2021 June 30 April 12, 2021 June 30, 2021 0.120833 July 15, 2021 May 31 April 12, 2021 May 28, 2021 0.120833 June 15, 2021 April 30 April 12, 2021 April 30, 2021 0.120833 May 17, 2021 March 31 January 11, 2021 March 31, 2021 0.120833 April 15, 2021 February 28 January 11, 2021 February 26, 2021 0.120833 March 15, 2021 January 31 January 11, 2021 January 29, 2021 0.120833 February 16, 2021 Total$ 1.449996 OnJanuary 10, 2022 , our board of directors declared the common stock dividends for the months endingJanuary 31, 2022 ,February 28, 2022 andMarch 31, 2022 at a monthly rate of$0.121667 per share of common stock. OnMarch 31, 2021 , we redeemed all 3,000,000 issued and outstanding shares of 6.875% Series C Cumulative Redeemable Preferred Stock, par value$0.01 per share ("Series C Preferred Stock"), at a cash redemption price of$25.00 per share, plus 49 -------------------------------------------------------------------------------- Table of Contents accrued and unpaid dividends to, but excluding, the redemption date. The following table summarizes the dividends paid on the Series C Preferred Stock during the year endedDecember 31, 2021 . Series C Quarter Ended 2021 Declaration Date Preferred Stock Per Share Payment Date March 31 January 11, 2021 $ 0.4296875 March 31, 2021 Total $ 0.4296875 Indebtedness Outstanding
The following table summarizes certain information with respect to the
indebtedness outstanding as of
Principal
Outstanding as of
December 31, 2021 Interest
Loan (in thousands) Rate(1)(2) Maturity Date Prepayment Terms(3)
Unsecured credit facility:
Unsecured Credit Facility(4) $ 296,000 L + 0.775% October 23, 2026 i
Total unsecured credit facility 296,000
Unsecured term loans:
Unsecured Term Loan D 150,000 2.85 % January 4, 2023 i
Unsecured Term Loan E 175,000 3.77 % January 15, 2024 i
Unsecured Term Loan F 200,000 2.96 % January 12, 2025 i
Unsecured Term Loan G 300,000 1.13 % February 5, 2026 i
Unsecured Term Loan A 150,000 3.23 % March 15, 2027 i
Total unsecured term loans 975,000
Total unamortized deferred financing fees
and debt issuance costs (4,423)
Total carrying value unsecured term loans,
net 970,577
Unsecured notes:
Series F Unsecured Notes 100,000 3.98 % January 5, 2023 ii
Series A Unsecured Notes 50,000 4.98 % October 1, 2024 ii
Series D Unsecured Notes 100,000 4.32 % February 20, 2025 ii
Series G Unsecured Notes 75,000 4.10 % June 13, 2025 ii
Series B Unsecured Notes 50,000 4.98 % July 1, 2026 ii
Series C Unsecured Notes 80,000 4.42 % December 30, 2026 ii
Series E Unsecured Notes 20,000 4.42 % February 20, 2027 ii
Series H Unsecured Notes 100,000 4.27 % June 13, 2028 ii
Series I Unsecured Notes 275,000 2.80 % September 29, 2031 ii
Series J Unsecured Notes 50,000 2.95 % September 28, 2033 ii
Total unsecured notes 900,000
Total unamortized deferred financing fees
and debt issuance costs (3,059)
Total carrying value unsecured notes, net 896,941
Mortgage notes (secured debt):
Wells Fargo Bank , National Association CMBS
Loan 46,610 4.31 % December 1, 2022 iii
Thrivent Financial for Lutherans 3,430 4.78 % December 15, 2023 iv
United of Omaha Life Insurance Company 4,943 3.71 % October 1, 2039 ii
Total mortgage notes 54,983
Net unamortized fair market value premium
(discount) (136)
Total unamortized deferred financing fees
and debt issuance costs (103)
Total carrying value mortgage notes, net 54,744
Total / weighted average interest rate(5)
2.88 % (1)Interest rate as ofDecember 31, 2021 . AtDecember 31, 2021 , the one-month LIBOR ("L") was 0.10125%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on the our debt rating, as defined in the respective loan agreements. (2)The unsecured term loans have a stated interest rate of one-month LIBOR plus a spread of 0.85%, with the exception of Unsecured Term Loan D which has a stated interest rate of one-month LIBOR plus a spread of 1.0%. As ofDecember 31, 2021 , one-month LIBOR for the Unsecured Term Loans A, D, E, F, and G was swapped to a fixed rate of 2.38%, 1.85%, 2.92%, 2.11%, and 0.28%, respectively. One-month LIBOR for the Unsecured Term Loan A will be swapped to a fixed rate of 1.30% effectiveApril 1, 2022 . One-month LIBOR for the Unsecured Term Loan G will be swapped to a fixed rate of 0.94% effectiveApril 18, 2023 . 50 -------------------------------------------------------------------------------- Table of Contents (3)Prepayment terms consist of (i) pre-payable with no penalty; (ii) pre-payable with penalty; (iii) pre-payable without penalty three months prior to the maturity date, however can be defeased; and (iv) pre-payable without penalty three months prior to the maturity date. (4)The capacity of the unsecured credit facility is$750.0 million . The initial maturity date isOctober 24, 2025 , or such later date which may be extended pursuant to two six-month extension options exercisable by us in our discretion upon advance written notice. Exercise of each six-month option is subject to the following conditions: (i) absence of a default immediately before the extension and immediately after giving effect to the extension, (ii) accuracy of representations and warranties as of the extension date (both immediately before and after the extension), as if made on the extension date, and (iii) payment of a fee. Neither extension option is subject to lender consent, assuming proper notice and satisfaction of the conditions. (5)The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of$975.0 million of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums or discounts. The aggregate undrawn nominal commitments on the unsecured credit facility and unsecured term loans as ofDecember 31, 2021 was approximately$450.4 million , including issued letters of credit. Our actual borrowing capacity at any given point in time may be less and is restricted to a maximum amount based on our debt covenant compliance. Unsecured Credit Facility OnOctober 26, 2021 , we entered into an amendment to the unsecured credit facility (the "October 2021 Credit Facility Amendment"). TheOctober 2021 Credit Facility Amendment provides for an extension of the maturity date toOctober 24, 2025 , with two six-month extension options, subject to certain conditions, and a reduced current interest rate of LIBOR plus a spread of 0.775% and facility fee of 0.15%, each based on our current debt rating (as defined in the credit agreement) and leverage level. As ofDecember 31, 2021 , the unsecured credit facility bore an interest rate of LIBOR plus a spread of 0.775% based on our debt rating, as defined in the loan agreement. In connection with theOctober 2021 Credit Facility Amendment, we incurred approximately$3.7 million in costs which are being deferred and amortized through the maturity date of the unsecured credit facility. We also incurred approximately$0.1 million of modification expenses which were recognized in debt extinguishment and modification expenses in the accompanying Consolidated Statements of Operations. Other than the maturity and interest rate provisions described above, the material terms of the unsecured credit facility remain unchanged. OnFebruary 5, 2021 , we entered into an amendment to the unsecured credit facility (the "February 2021 Credit Facility Amendment"). The Credit Facility Amendment provides for an increase in the aggregate commitments available for borrowing under the unsecured credit facility from$500 million to up to$750 million . In connection with theFebruary 2021 Credit Facility Amendment, we incurred approximately$1.2 million in costs, which are being deferred and amortized through the maturity date of our unsecured credit facility. Other than the increase in the borrowing commitments, the material terms of our unsecured credit facility were not changed by theFebruary 2021 Credit Facility Amendment.
Unsecured Term Loans
OnOctober 26 , 2021,we entered into an amendment to the Unsecured Term Loan A (the "Amendment to Unsecured Term Loan A"). The Amendment to Unsecured Term Loan A provides for an extension of the maturity date toMarch 15, 2027 and a reduced current interest rate of LIBOR plus a spread of 0.85% based on our current debt rating (as defined in the loan agreement) and leverage level. In connection with the Amendment to Unsecured Term Loan A, we incurred approximately$0.6 million in costs which are being deferred and amortized through the new maturity date ofMarch 15, 2027 . We also incurred approximately$0.2 million of modification expenses which were recognized in debt extinguishment and modification expenses in the accompanying Consolidated Statements of Operations. Other than the maturity and interest rate provisions described above, the material terms of the Unsecured Term Loan A remain unchanged. OnOctober 26, 2021 , we entered into amendments to the Unsecured Term Loan E, the Unsecured Term Loan F, and the Unsecured Term Loan G ("Term Loan Amendments") that provide for reduced current interest rates on each of the loans of LIBOR plus a spread of 0.85% based on our current debt rating (as defined in each loan agreement) and leverage level. In connection with the Term Loan Amendments, we incurred approximately$0.6 million in costs which are being deferred and amortized the respective maturity dates. We also incurred approximately$1.2 million of modification expenses which were recognized in debt extinguishment and modification expenses in the accompanying Consolidated Statements of Operations. Other than the interest rate provisions described above, the material terms of the Unsecured Term Loan E, the Unsecured Term Loan F, and the Unsecured Term Loan G remain unchanged. OnOctober 26, 2021 , we entered into an amendment to the Unsecured Term Loan D to conform certain provisions of such loan agreement to the unsecured credit facility. OnFebruary 5, 2021 , we entered into an amendment to the Unsecured Term Loan G (the "Amendment to Unsecured Term Loan G"). The Amendment to Unsecured Term Loan G provides for an extension of the maturity date toFebruary 5, 2026 and a reduced stated interest rate of one-month LIBOR plus a spread that ranges from 0.85% to 1.65% for LIBOR borrowings based on our debt ratings. The Amendment to Unsecured Term Loan G also amended the provision for a minimum interest rate, or floor, for LIBOR borrowings to 0.00% and for Base Rate borrowings to 1.00%. In connection with the Amendment to 51 -------------------------------------------------------------------------------- Table of Contents Unsecured Term Loan G, we incurred approximately$1.6 million in costs, which are being deferred and amortized through the new maturity date ofFebruary 5, 2026 . We also incurred approximately$0.7 million of modification expenses, which were recognized in debt extinguishment and modification expenses in the accompanying Consolidated Statements of Operations. Additionally, we reversed the previously accrued extension fees of approximately$1.1 million from an amendment to the Unsecured Term Loan G that was entered into onApril 17, 2020 , which resulted in a decrease to interest expense of approximately$0.3 million . Other than the maturity and interest rate provisions described above, the material terms of the Unsecured Term Loan G were not changed by the Amendment to Unsecured Term Loan G. Unsecured Notes OnJuly 8, 2021 , we entered into a note purchase agreement (the "July 2021 NPA") for the private placement by ourOperating Partnership of$275.0 million senior unsecured notes (the "Series I Unsecured Notes") maturingSeptember 29, 2031 , with a fixed annual interest rate of 2.80%, and$50.0 million senior unsecured notes (the "Series J Unsecured Notes") maturingSeptember 28, 2033 , with a fixed annual interest rate of 2.95%. TheJuly 2021 NPA contains a number of financial covenants substantially similar to the financial covenants contained in our unsecured credit facility and other unsecured notes, plus a financial covenant that requires us to maintain a minimum interest coverage ratio of not less than 1.50:1.00. OurOperating Partnership issued the Series I Unsecured Notes and the Series J Unsecured Notes onSeptember 28, 2021 . The Company and certain wholly owned subsidiaries of ourOperating Partnership are guarantors of the unsecured notes. Mortgage Notes OnFebruary 25, 2021 , we assumed a mortgage note withUnited of Omaha Life Insurance Company of approximately$5.1 million in connection with the acquisition of the property located inLong Island , NY, which serves as collateral for the debt. The debt matures onOctober 1, 2039 and bears interest at 3.71% per annum. The assumed debt was recorded at fair value and a fair value discount of approximately$0.2 million was recorded. The fair value of debt was determined by discounting the future cash flows using the current rate of approximately 4.10% at which loans would be made to borrowers with similar credit ratings for loans with similar remaining maturities, terms, and loan-to-value ratios. The fair value of the debt is based on Level 3 inputs and is a nonrecurring fair value measurement.
The
The following table summarizes our debt capital structure as ofDecember 31, 2021 . Debt Capital Structure December 31, 2021 Total principal outstanding (in thousands)$ 2,225,983 Weighted average duration (years) 4.6 % Secured debt 2.5 % % Debt maturing next 12 months 2.1 % Net Debt to Real Estate Cost Basis (1) 34.2 %
(1)We define Net Debt as our amounts outstanding under our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes, less cash and cash equivalents. We define Real Estate Cost Basis as the book value of rental property and deferred leasing intangibles, exclusive of the related accumulated depreciation and amortization.
We regularly pursue new financing opportunities to ensure an appropriate balance sheet position. As a result of these dedicated efforts, we are confident in our ability to meet future debt maturities and building acquisition funding needs. We believe that our current balance sheet is in an adequate position at the date of this filing, despite possible volatility in the credit markets. Our interest rate exposure as it relates to interest expense payments on our floating rate debt is managed through our use of interest rate swaps, which fix the rate of our long term floating rate debt. For a detailed discussion on our use of interest rate swaps, see "Interest Rate Risk" below.
Unsecured Credit Facility, Unsecured Term Loans, and Unsecured Notes
The unsecured credit facility provides for a facility fee payable by us to the lenders at a rate per annum of 0.1% to 0.3%, depending on our debt rating, as defined in the credit agreement, of the aggregate commitments (currently$750.0 million ). The facility fee is due and payable quarterly. Covenants: Our ability to borrow, maintain borrowings and avoid default under the unsecured credit facility, the unsecured term loans, and unsecured notes is subject to our ongoing compliance with a number of financial covenants, including: 52 -------------------------------------------------------------------------------- Table of Contents •a maximum consolidated leverage ratio of not greater than 0.60:1.00;
•a maximum secured leverage ratio of not greater than 0.40:1.00;
•a maximum unencumbered leverage ratio of not greater than 0.60:1.00;
•a minimum fixed charge ratio of not less than or equal to 1.50:1.00; and
•a minimum unsecured interest coverage ratio of not less than or equal to 1.75:1.00.
The respective note purchase agreements additionally contain a financial covenant that requires us to maintain a minimum interest coverage ratio of not less than 1.50:1.00.
Pursuant to the terms of our unsecured debt agreements, we may not pay distributions that exceed the minimum amount required for us to qualify and maintain our status as a REIT if a default or event of default occurs and is continuing.
Our unsecured credit facility, unsecured term loans, unsecured notes, and
mortgage notes are subject to ongoing compliance with a number of financial and
other covenants. As of
Events of Default: Our unsecured credit facility and unsecured term loans contain customary events of default, including but not limited to non-payment of principal, interest, fees or other amounts, defaults in the compliance with the covenants contained in the documents evidencing the unsecured credit facility and the unsecured term loans, cross-defaults to other material debt and bankruptcy or other insolvency events. Borrower and Guarantors: OurOperating Partnership is the borrower under the unsecured credit facility, the unsecured term loans and is the issuer of the unsecured notes. The Company and certain of its subsidiaries guarantee the obligations under our unsecured debt agreements.
Equity
Preferred Stock
OnMarch 31, 2021 , we redeemed all 3,000,000 issued and outstanding shares of the Series C Preferred Stock at a cash redemption price of$25.00 per share, plus accrued and unpaid dividends to, but excluding, the redemption date. We have no outstanding preferred stock issuances as ofDecember 31, 2021 .
Common Stock
The following table summarizes our ATM common stock offering program as of
Aggregate
Common Stock
Available as of
ATM Common Stock Offering Maximum Aggregate Offering December 31, 2021 (in
Program Date Price (in thousands) thousands)
2019 $600 million ATM February 14, 2019 $ 600,000 $ 76,482
Subsequent to
OnNovember 3, 2021 , we completed an underwritten public offering of an aggregate of 8,000,000 shares of common stock at a price to the underwriters of$41.99 per share, consisting of (i) 5,250,000 shares offered directly us and (ii) 2,750,000 shares offered by the forward dealer in connection with certain forward sale agreements. The offering closed onNovember 8, 2021 and we received net proceeds from the sale of shares offered directly by us of approximately$220.4 million . OnDecember 1, 2021 , the underwriters exercised their option to purchase an additional 1,200,000 shares for an offering price of$41.87 per share and the underwriters' option closed onDecember 3, 2021 . OnDecember 27, 2021 , we partially physically settled the forward sales agreements in full by issuing 2,750,000 shares of common stock and received net proceeds of approximately$115.0 million . Subject to the our right to elect cash or net share settlement, we have the ability to settle the remaining forward sales agreements at any time through scheduled maturity date of the forward sale agreements ofNovember 3, 2022 . 53 -------------------------------------------------------------------------------- Table of Contents OnApril 5, 2021 , we sold 1,446,760 shares on a forward basis under the ATM common stock offering program at a price of$34.56 per share, or$50.0 million , and $34.2144 per share net of sales agent fees. We did not initially receive any proceeds from the sale of shares on a forward basis. OnSeptember 29, 2021 , we physically settled in full the forward sales agreements under the ATM common stock offering program by issuing 1,446,760 shares of common stock and received net proceeds of approximately$48.4 million , or$33.4585 per share.
Noncontrolling Interests
We own our interests in all of our properties and conduct substantially all of our business through ourOperating Partnership . We are the sole member of the sole general partner of ourOperating Partnership . As ofDecember 31, 2021 , we owned approximately 98.1% of the common units in ourOperating Partnership , and our current and former executive officers, directors, senior employees and their affiliates, and other third parties owned the remaining 1.9% of the common units.
Interest Rate Risk
We use interest rate swaps to fix the rate of our variable rate debt. As ofDecember 31, 2021 , all of our outstanding variable rate debt, with the exception of our unsecured credit facility, was fixed with interest rate swaps through maturity. We recognize all derivatives on the balance sheet at fair value. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income (loss), which is a component of equity. Derivatives that are not designated as hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. We have established criteria for suitable counterparties in relation to various specific types of risk. We only use counterparties that have a credit rating of no lower than investment grade at swap inception fromMoody's Investor Services ,Standard & Poor's , Fitch Ratings, or other nationally recognized rating agencies. The following table summarizes our outstanding interest rate swaps as ofDecember 31, 2021 . Notional Amount (in Fair Value Pay Fixed Receive Variable Interest Rate Derivative Counterparty Trade Date Effective Date thousands) (in thousands) Interest Rate Interest Rate Maturity DateWells Fargo Bank, N.A. Jan-08-2015 Mar-20-2015$ 25,000 $ (105) 1.8280 % One-month L Mar-31-2022 The Toronto-Dominion Bank Jan-08-2015 Feb-14-2020$ 25,000 $ (143) 2.4535 % One-month L Mar-31-2022Regions Bank Jan-08-2015 Feb-14-2020$ 50,000 $ (289) 2.4750 % One-month L Mar-31-2022Capital One, N.A. Jan-08-2015 Feb-14-2020$ 50,000 $ (296) 2.5300 % One-month L Mar-31-2022 The Toronto-Dominion Bank Jul-20-2017 Oct-30-2017$ 25,000 $ (353) 1.8485 % One-month L Jan-04-2023 Royal Bank of Canada Jul-20-2017 Oct-30-2017$ 25,000 $ (354) 1.8505 % One-month L Jan-04-2023Wells Fargo Bank, N.A. Jul-20-2017 Oct-30-2017$ 25,000 $ (354) 1.8505 % One-month L Jan-04-2023PNC Bank, N.A. Jul-20-2017 Oct-30-2017$ 25,000 $ (353) 1.8485 % One-month L Jan-04-2023PNC Bank, N.A. Jul-20-2017 Oct-30-2017$ 50,000 $ (706) 1.8475 % One-month L Jan-04-2023 The Toronto-Dominion Bank Apr-20-2020 Sep-29-2020$ 75,000 $ 299 0.2750 % One-month L Apr-18-2023Wells Fargo Bank, N.A. Apr-20-2020 Sep-29-2020$ 75,000 $ 295 0.2790 % One-month L Apr-18-2023 The Toronto-Dominion Bank Apr-20-2020 Mar-19-2021$ 75,000 $ 299 0.2750 % One-month L Apr-18-2023Wells Fargo Bank, N.A. Apr-20-2020 Mar-19-2021$ 75,000 $ 294 0.2800 % One-month L Apr-18-2023 The Toronto-Dominion Bank Jul-24-2018 Jul-26-2019$ 50,000 $ (2,128) 2.9180 % One-month L Jan-12-2024PNC Bank, N.A. Jul-24-2018 Jul-26-2019$ 50,000 $ (2,128) 2.9190 % One-month L Jan-12-2024 Bank of Montreal Jul-24-2018 Jul-26-2019$ 50,000 $ (2,128) 2.9190 % One-month L Jan-12-2024U.S. Bank, N.A. Jul-24-2018 Jul-26-2019$ 25,000 $ (1,064) 2.9190 % One-month L Jan-12-2024Wells Fargo Bank, N.A. May-02-2019 Jul-15-2020$ 50,000 $ (1,827) 2.2460 % One-month L Jan-15-2025U.S. Bank, N.A. May-02-2019 Jul-15-2020$ 50,000 $ (1,826) 2.2459 % One-month L Jan-15-2025Regions Bank May-02-2019 Jul-15-2020$ 50,000 $ (1,825) 2.2459 % One-month L Jan-15-2025 Bank of Montreal Jul-16-2019 Jul-15-2020$ 50,000 $ (1,022) 1.7165 % One-month L Jan-15-2025U.S. Bank, N.A. Feb-17-2021 Apr-18-2023$ 150,000 $ 2,014 0.9385 % One-month L Feb-5-2026Wells Fargo Bank, N.A. Feb-17-2021 Apr-18-2023$ 75,000 $ 1,009 0.9365 % One-month L Feb-5-2026 The Toronto-Dominion Bank Feb-17-2021 Apr-18-2023$ 75,000 $ 1,010 0.9360 % One-month L Feb-5-2026Regions Bank Oct-26-2021 Apr-01-2022$ 50,000 $ (54) 1.3045 % One-month L Mar-15-2027 Bank of Montreal Oct-26-2021 Apr-01-2022$ 50,000 $ (45) 1.3045 % One-month L Mar-15-2027PNC Bank, N.A. Oct-26-2021 Apr-01-2022$ 50,000 $ (52) 1.3045 % One-month L Mar-15-2027 54
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Table of Contents
The swaps outlined in the above table were all designated as cash flow hedges of interest rate risk, and all are valued as Level 2 financial instruments. Level 2 financial instruments are defined as significant other observable inputs. As ofDecember 31, 2021 , the fair value of seven of our interest rate swaps were in a asset position of approximately$5.2 million , including any adjustment for nonperformance risk related to these agreements. The remaining 20 interest rate swaps were in a liability position of approximately$17.1 million , including any adjustment for nonperformance risk related to these agreements. As ofDecember 31, 2021 , we had$1,271.0 million of variable rate debt. As ofDecember 31, 2021 , all of our outstanding variable rate debt, with exception of our unsecured credit facility, was fixed with interest rate swaps through maturity. To the extent interest rates increase, interest costs on our floating rate debt not fixed with interest rate swaps will increase, which could adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our security holders. From time to time, we may enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. In addition, an increase in interest rates could decrease the amounts third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions.
Off-balance Sheet Arrangements
As of
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