STAG INDUSTRIAL, INC. You should read the following discussion with the financial statements and related notes included elsewhere in Item 1 of this report and the audited financial statements and related notes thereto included in our most recent Annual Report on Form 10-K.
As used herein, except where the context otherwise requires, "Company," "we," "our" and "us," refer toSTAG Industrial, Inc. and our consolidated subsidiaries and partnerships, including our operating partnership,STAG Industrial Operating Partnership, L.P. (the "Operating Partnership").
Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). You can identify forward-looking statements by the use of words such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "seeks," "should," "will," and variations of such words or similar expressions. Forward-looking statements in this report include, among others, statements about our future financial condition, results of operations, capitalization rates on future acquisitions, our business strategy and objectives, including our acquisition strategy, occupancy and leasing rates and trends, and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:
•the factors included in our Annual Report on Form 10-K for the year ended
•the risk of global or national recessions and international, national, regional, and local economic conditions;
•the ongoing adverse effects of the public health crisis of the novel
coronavirus disease ("COVID-19") pandemic, or any future pandemic, epidemic or
outbreak of infectious disease, on the financial condition, results of
operations, cash flows and performance of the Company and its tenants, the real
estate market and the global economy and financial markets;
•our ability to raise equity capital on attractive terms;
•the competitive environment in which we operate;
•real estate risks, including fluctuations in real estate values, the general economic climate in local markets and competition for tenants in such markets, and the repurposing or redevelopment of retail properties into industrial properties (in part or whole);
•decreased rental rates or increased vacancy rates;
•potential defaults (including bankruptcies or insolvency) on or non-renewal of leases by tenants;
•acquisition risks, including our ability to identify and complete accretive acquisitions and/or failure of such acquisitions to perform in accordance with projections;
•the timing of acquisitions and dispositions;
•technological developments, particularly those affecting supply chains and logistics;
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•potential natural disasters, epidemics, pandemics, and other potentially catastrophic events such as acts of war and/or terrorism (including the conflict betweenRussia andUkraine and the related impact on macroeconomic conditions as a result of such conflict);
•the general level of interest rates and currencies;
•potential changes in the law or governmental regulations and interpretations of
those laws and regulations, including changes in real estate and zoning laws or
real estate investment trust ("REIT") or corporate income tax laws, and
potential increases in real property tax rates;
•financing risks, including the risks that our cash flows from operations may be
insufficient to meet required payments of principal and interest and we may be
unable to refinance our existing debt upon maturity or obtain new financing on
attractive terms or at all;
•credit risk in the event of non-performance by the counterparties to the interest rate swaps and revolving and unfunded debt;
•how and when pending forward equity sales may settle;
•lack of or insufficient amounts of insurance;
•our ability to maintain our qualification as a REIT;
•our ability to retain key personnel;
•litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and
•possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us.
Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Certain Definitions In this report:
"GAAP" means generally accepted accounting principles in
"Total annualized base rental revenue" means the contractual monthly base rent as ofSeptember 30, 2022 (which differs from rent calculated in accordance with GAAP) multiplied by 12. If a tenant is in a free rent period as ofSeptember 30, 2022 , the total annualized base rental revenue is calculated based on the first contractual monthly base rent amount multiplied by 12. "Occupancy rate" means the percentage of total leasable square footage for which either revenue recognition has commenced in accordance with GAAP or the lease term has commenced as of the close of the reporting period, whichever occurs earlier. "Value Add Portfolio" means our properties that meet any of the following criteria: (i) less than 75% occupied as of the acquisition date (ii) will be less than 75% occupied due to known move-outs within two years of the acquisition date; (iii) out of service with significant physical renovation of the asset; or (iv) development. "Stabilization" for properties under development or being redeveloped means, the earlier of achieving 90% occupancy or 12 months after completion. With respect to properties acquired and immediately added to the Value Add Portfolio, (i) if acquired with less than 75% occupancy as of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy or 12 months from the acquisition date; or (ii) if acquired and will be less than 75% occupied due to known move-outs within 25 -------------------------------------------------------------------------------- Table of Contents two years of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy after the known move-outs have occurred or 12 months after the known move-outs have occurred. "Operating Portfolio" means all warehouse and light manufacturing assets that were acquired stabilized or have achieved Stabilization. The Operating Portfolio excludes non-core flex/office assets, assets contained in the Value Add Portfolio, and assets classified as held for sale.
"Comparable Lease" means a lease in the same space with a similar lease structure as compared to the previous in-place lease, excluding new leases for space that was not occupied under our ownership.
"SL Rent Change" means the percentage change in the average monthly base rent over the term of the lease that commenced during the period compared to the Comparable Lease for assets included in the Operating Portfolio. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses, and this calculation excludes the impact of any holdover rent. "Cash Rent Change" means the percentage change in the base rent of the lease commenced during the period compared to the base rent of the Comparable Lease for assets included in the Operating Portfolio. The calculation compares the first base rent payment due after the lease commencement date compared to the base rent of the last monthly payment due prior to the termination of the lease, excluding holdover rent. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses. "New Lease" means a lease that is signed for an initial term equal to or greater than 12 months for any vacant space, including a lease signed by a new tenant or an existing tenant that is expanding into new (additional) space. "Renewal Lease" means a lease signed by an existing tenant to extend the term for 12 months or more, including (i) a renewal of the same space as the current lease at lease expiration, (ii) a renewal of only a portion of the current space at lease expiration, or (iii) an early renewal or workout, which ultimately does extend the original term for 12 months or more.
Overview
We are a real estate operating company focused on the acquisition, ownership, and operation of industrial properties throughoutthe United States . We are aMaryland corporation and our common stock is publicly traded on theNew York Stock Exchange under the symbol "STAG." We are organized and conduct our operations to maintain our qualification as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, 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 toU.S. federal income and excise taxes on our undistributed income. Pursuant to our previously announced management succession plan, onJuly 1, 2022 , our board of directors appointedWilliam R. Crooker to the role of Chief Executive Officer of the Company, in addition to his role as President, effectiveJuly 1, 2022 . In addition, onJune 29, 2022 , our board of directors increased the size of the board from nine to ten members and appointedMr. Crooker to the board and the investment committee of the board, effective as ofJuly 1, 2022 , subject to re-election at the next annual meeting of stockholders to be held in 2023. As Chief Executive Officer,Mr. Crooker leads and manages our business, executes the strategies developed by management and the board and serves as the chief spokesperson to our employees, stockholders and business counterparties. In addition, pursuant to our previously announced management succession plan and in connection withMr. Crooker's promotion, our board of directors appointedBenjamin S. Butcher as Executive Chair of our board of directors. As Executive Chair,Mr. Butcher manages the business of the board, regularly consults withMr. Crooker on key corporate matters and serves as a liaison between the board and the management team.
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 our acquisition activity, and (ii) internal
growth, specifically our portfolio occupancy and rental rates. A variety of
other factors, including those noted below, also may affect our future results
of operations.
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COVID-19 Pandemic
Since
We did not incur significant disruptions or enter into any rent deferral
agreements from the COVID-19 pandemic during the three and nine months ended
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 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 among others, 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. 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 high inflationary, rising interest rate environment, COVID-19 pandemic, and geopolitical tensions inEurope . These factors are key drivers of recent financial market volatility, continued supply chain bottlenecks, and growing concerns of a global recession. In the first two quarters of 2022,U.S. GDP declined 1.6% and 0.6%, respectively, while labor conditions remained strong at 3.7% unemployment as of August. As of the third quarter, general consensus among economists is higher recession risk over the near term. 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 fiscal and monetary policies to ease the economic burden of COVID-19 closures on businesses and individuals. In 2022, given the historically high inflation levels and strong employment reports, theFederal Reserve shifted away from an expansionary monetary policy. In September, theFederal Reserve raised interest rates 75 basis points to a range between 3.0% to 3.25%. SinceMarch 2022 theFederal Reserve indicates monetary policy will continue to tighten with higher interest rates and a shrinking ofFederal Reserve balance sheet until inflation approaches theFederal Reserve's target. 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.
Due to the COVID-19 pandemic, geopolitical uncertainty, and recent
•the continuing rise of e-commerce 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 27 -------------------------------------------------------------------------------- Table of Contents which is driving higher inventory to sales ratios and greater domestic warehouse demand over the long-term (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 enhanced by the COVID-19 pandemic and the growing desire for greater supply chain resilience have helped industrial space demand remain strong. The worsening global andU.S. economic trends could be a notable headwind and may result in relatively less demand for space and higher vacancy. We believe that the diversification of our portfolio by market, tenant industry, and tenant credit will prove to be strengths in this environment. Conditions in Our Markets The buildings in our portfolio are located in markets throughoutthe United States . Positive or negative changes in economic or other conditions, new supply, adverse weather conditions, natural disasters, epidemics, and other factors in these markets may affect our overall performance. We previously reported that our buildings located inFlorida ,Georgia ,North Carolina andSouth Carolina did not suffer any material damage from Hurricane Ian (which made landfall inFlorida inSeptember 2022 ) and were able to continue to support normal tenant operations. As ofSeptember 30, 2022 , our asset exposure inFlorida and, together,North Carolina andSouth Carolina was 2.8% and 12.8% of total annualized base rental revenue, respectively.
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 the Operating Portfolio leases that commenced during the three and nine months endedSeptember 30, 2022 . Any rental concessions in such leases 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) Three months ended September 30, 2022 New Leases 1,135,784$ 5.38 $ 5.69 $ 2.67 19.4 % 29.9 % 4.8 $ 0.25 Renewal Leases 1,685,721$ 4.52 $ 4.81 $ 1.74 9.5 % 21.6 % 5.0 $ 0.17 Total/weighted average 2,821,505$ 4.87 $ 5.16 $ 2.11 13.6 % 25.1 % 4.9 $ 0.21 Nine months ended September 30, 2022 New Leases 3,627,110$ 5.28 $ 5.56 $ 2.60 19.9 % 29.7 % 5.4 $ 0.53 Renewal Leases 5,561,539$ 4.82 $ 5.11 $ 1.14 10.7 % 20.3 % 5.0 $ 0.16 Total/weighted average 9,188,649$ 5.00 $ 5.29 $ 1.72 14.3 % 24.0 % 5.2 $ 0.31 (1)"Total Costs" means 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)"Weighted average lease term" means the contractual lease term in years, assuming that tenants do not exercise any 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 three and nine months endedSeptember 30, 2022 , leases related to the Value Add Portfolio and first generation leasing, with a total of 60,875 and 809,234 square feet, are excluded from the Operating Portfolio statistics above. 28
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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, which may require us to absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for certain building related expenses during the lease term, but most of the expenses are passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all expenses 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 impacts our results of operations and will be affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately 7.2% of our annualized base rental revenue will expire during the period fromOctober 1, 2022 toSeptember 30, 2023 , 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 be greater than the rates under existing leases expiring during the periodOctober 1, 2022 toSeptember 30, 2023 , thereby resulting in an increase in revenue from the same space. The following table summarizes lease expirations for leases in place as ofSeptember 30, 2022 , plus available space, for each of the ten calendar years beginning with 2022 and thereafter in our portfolio. The information in the table assumes that tenants do not exercise renewal options or early termination rights. Total Annualized Number % of Base Rental % of Total of Total Revenue Annualized Leases Total Rentable Occupied (in Base Rental Lease Expiration Year Expiring Square Feet Square Feet thousands) Revenue Available - 1,993,759 - - - Remainder of 2022 6 663,066 0.6 %$ 3,508 0.7 % 2023 80 9,911,545 9.0 % 45,591 8.6 % 2024 102 13,987,479 12.8 % 65,917 12.4 % 2025 102 14,689,924 13.4 % 66,362 12.5 % 2026 114 17,174,618 15.7 % 83,223 15.6 % 2027 92 13,997,482 12.8 % 67,915 12.8 % 2028 55 8,376,220 7.6 % 38,989 7.3 % 2029 44 7,516,081 6.9 % 37,162 7.0 % 2030 29 4,110,740 3.7 % 22,978 4.3 % 2031 41 7,312,872 6.7 % 34,750 6.5 % Thereafter 52 11,839,791 10.8 % 65,488 12.3 % Total 717 111,573,577 100.0 %$ 531,883 100.0 % 29
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Portfolio Acquisitions
The following table summarizes our acquisitions during the three and nine months endedSeptember 30, 2022 . Purchase Price Market(1) Date Acquired Square Feet Number of Buildings (in thousands) Kansas City, MO January 6, 2022 702,000 1$ 60,428 Chicago, IL January 31, 2022 72,499 1 8,128 Columbus, OH February 8, 2022 138,213 1 11,492 Cleveland, OH February 8, 2022 136,800 1 13,001 Nashville, TN March 10, 2022 109,807 1 12,810 Greenville/Spartanburg, SC March 10, 2022 289,103 1 28,274 Memphis, TN March 18, 2022 195,622 1 15,828 Greenville/Spartanburg, SC March 18, 2022 155,717 1
16,390
Three months ended March 31, 2022 1,799,761 8 166,351 Atlanta, GA April 1, 2022 210,858 1 21,119 Minneapolis/St. Paul, MN April 4, 2022 160,000 1 13,472 West Michigan, MI April 14, 2022 211,125 2 12,274 Pittsburgh, PA April 19, 2022 400,000 1 50,178 Greenville/Spartanburg, SC(2) April 22, 2022 - - 5,559 Birmingham, AL May 5, 2022 67,168 1 7,871 South Bay/San Jose, CA June 7, 2022 175,325 1 29,630 Washington, DC June 29, 2022 140,555 1 20,257 Hampton Roads, VA June 29, 2022 102,512 1
10,561
Three months ended June 30, 2022 1,467,543 9 170,921 Atlanta, GA July 15, 2022 159,048 1 10,062 Fresno, CA July 25, 2022 232,072 1 30,121 El Paso, TX July 26, 2022 326,166 4 37,792 Portland, OR September 12, 2022 78,000 1 11,281 Louisville, KY September 21, 2022 563,032 1 38,064 Three months ended September 30, 2022 1,358,318 8
127,320
Nine months ended September 30, 2022 4,625,622 25 $
464,592
(1) As defined byCoStar Realty Information Inc ("CoStar"). If the building is located outside of a CoStar defined market, the city and state is reflected. (2) We acquired vacant land parcels.
Portfolio Dispositions
During the nine months endedSeptember 30, 2022 , we sold six buildings and one land parcel comprised of approximately 1.6 million rentable square feet with a net book value of approximately$73.4 million to third parties. Net proceeds from the sales of rental property were approximately$130.9 million and we recognized the full gain on the sales of rental property, net, of approximately$57.5 million for the nine months endedSeptember 30, 2022 . 30 -------------------------------------------------------------------------------- Table of Contents Top Markets The following table summarizes information about the 20 largest markets in our portfolio based on total annualized base rental revenue as ofSeptember 30, 2022 . Top 20 Markets(1) % of Total Annualized Base Rental RevenueChicago, IL 7.6 %Philadelphia, PA 7.3 %Greenville /Spartanburg, SC 5.5 %Milwaukee /Madison, WI 4.4 %Detroit, MI 4.3 %Pittsburgh, PA 4.2 %Columbus, OH 4.1 %Minneapolis/St Paul, MN 3.7 %Houston, TX 2.9 %West Michigan , MI 2.5 %Charlotte, NC 2.5 %El Paso, TX 2.5 %Cleveland, OH 1.9 %Boston, MA 1.8 %Indianapolis, IN 1.8 %Kansas City, MO 1.8 %Washington, DC 1.7 %Columbia, SC 1.6 %Westchester /So Connecticut, CT/NY 1.5 %Cincinnati /Dayton, OH 1.5 % Total 65.1 % (1) As defined by CoStar.Top Industries
The following table summarizes information about the 20 largest tenant
industries in our portfolio based on total annualized base rental revenue as of
% of Total Annualized
Top 20 Tenant Industries (1) Base Rental Revenue
Air Freight & Logistics 10.9 %
Containers & Packaging 8.2 %
Auto Components 7.4 %
Commercial Services & Supplies 5.3 %
Machinery 5.2 %
Trading Companies & Distribution (Industrial Goods) 5.1 %
Internet & Direct Market Retail 4.8 %
Household Durables 4.4 %
Distributors (Consumer Goods) 4.3 %
Food & Staples Retailing 3.5 %
Media 3.2 %
Building Products 3.1 %
Specialty Retail 2.8 %
Food Products 2.3 %
Chemicals 2.2 %
Electronic Equip, Instruments 2.2 %
Road & Rail 2.1 %
Beverages 2.0 %
Textiles, Apparel, Luxury Goods 2.0 %
Health Care Equipment & Supplies 1.8 %
Total 82.8 %
(1) Industry classification based on Global Industry Classification Standard methodology.
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Top Tenants
The following table summarizes information about the 20 largest tenants in our
portfolio based on total annualized base rental revenue as of September 30,
2022 .
% of Total Annualized
Top 20 Tenants(1) Number of Leases Base Rental Revenue
Amazon 7 3.0 %
Eastern Metal Supply, Inc. 5 0.9 %
American Tire Distributors, Inc. 7 0.9 %
Tempur Sealy International, Inc. 2 0.8 %
Lippert Component Manufacturing 5 0.8 %
Kenco Logistic Services, LLC 3 0.8 %
Penguin Random House, LLC 1 0.8 %
FedEx Corporation 3 0.8 %
WestRock Company 7 0.7 %
DS Smith North America 2 0.7 %
GXO Logistics, Inc. 2 0.7 %
Yanfeng US Automotive Interior 2 0.7 %
DHL Supply Chain 4 0.7 %
Carolina Beverage Group 3 0.7 %
LKQ Corporation 4 0.7 %
Berlin Packaging L.L.C. 4 0.7 %
Ford Motor Company 1 0.6 %
Iron Mountain Information Management 5 0.6 %
Hachette Book Group, Inc. 1 0.6 %
Schneider Electric USA, Inc. 3 0.6 %
Total 71 16.8 %
(1) Includes tenants, guarantors, and/or non-guarantor parents.
Critical Accounting Policies
See "Critical Accounting Policies" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a discussion of our critical accounting policies and estimates. Results of Operations The following discussion of the results of our same store (as defined below) net operating income ("NOI") should be read in conjunction with our consolidated financial statements included in this report. 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. 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 other income adjustments. Same store properties exclude Operating Portfolio properties with expansions placed into service afterDecember 31, 2020 . OnSeptember 30, 2022 , we owned 458 industrial buildings consisting of approximately 93.2 million square feet and representing approximately 83.5% of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy increased approximately 1.5% to 98.9% as ofSeptember 30, 2022 compared to 97.4% as ofSeptember 30, 2021 .
Comparison of the three months ended
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the three months endedSeptember 30, 2022 and 2021 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the three months endedSeptember 30, 2022 and 2021 with respect to the buildings acquired and sold afterDecember 31, 2020 , Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2020 , and our flex/office buildings, Value Add Portfolio, and buildings classified as held for sale. 32
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Same Store Portfolio Acquisitions/Dispositions Other Total Portfolio
Three months ended September
Three months ended September 30 , Change Three months ended September 30 , 30, Three months ended September 30 , Change
2022 2021 $ % 2022 2021 2022 2021 2022 2021 $ %
Revenue
Operating revenue
Rental income $ 133,528 $ 128,058 $ 5,470 4.3 % $ 26,318 $ 10,286 $ 4,837 $ 1,933 $ 164,683 $ 140,277 $ 24,406 17.4 %
Other income 61 147 (86) (58.5) % 106 - 1,455 1,690 1,622 1,837 (215) (11.7) %
Total operating revenue 133,589 128,205 5,384 4.2 % 26,424 10,286 6,292 3,623 166,305 142,114 24,191 17.0 %
Expenses
Property 24,327 24,542 (215) (0.9) % 4,656 1,846 1,104 354 30,087 26,742 3,345 12.5 %
Net operating income(1) $ 109,262 $ 103,663 $ 5,599 5.4 % $ 21,768 $ 8,440 $ 5,188 $ 3,269 136,218 115,372 20,846 18.1 %
Other expenses
General and administrative 10,884 12,668 (1,784) (14.1) %
Depreciation and amortization 69,456 59,246 10,210 17.2 %
Loss on impairment 1,783 - 1,783 100.0 %
Other expenses 578 821 (243) (29.6) %
Total other expenses 82,701 72,735 9,966 13.7 %
Total expenses 112,788 99,477 13,311 13.4 %
Other income (expense)
Interest and other income 26 30 (4) (13.3) %
Interest expense (21,155) (15,746) (5,409) 34.4 %
Debt extinguishment and modification expenses (838) - (838) 100.0 %
Gain on the sales of rental property, net 33,168 22,662 10,506 46.4 % Total other income (expense) 11,201 6,946 4,255 61.3 % Net income$ 64,718 $ 49,583 $ 15,135 30.5 %
(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 increased by approximately $15.1 million , or
30.5%, to approximately $64.7 million for the three months ended September 30,
2022 , compared to approximately $49.6 million for the three months ended
September 30, 2021 .
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of rental income from (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 includes lease income and other billings as
discussed below, increased by approximately
Same store lease income increased by approximately$4.2 million , or 4.0%, to approximately$110.3 million for the three months endedSeptember 30, 2022 compared to approximately$106.1 million for the three months endedSeptember 30, 2021 . The increase was primarily due to an increase in rental income of approximately$5.5 million from the execution of new leases and lease renewals with existing tenants. This increase was partially offset by the reduction of base rent of approximately$1.3 million due to tenant vacancies. Same store other billings increased by approximately$1.2 million , or 5.6%, to approximately$23.2 million for the three months endedSeptember 30, 2022 compared to approximately$22.0 million for the three months endedSeptember 30, 2021 . The increase was attributable to an increase of approximately$0.8 million in other expense reimbursements from an increase in corresponding expenses, as well as an increase of approximately$0.4 million of real estate tax reimbursements due to an increase in real estate taxes levied by the taxing authority for certain tenants in which we pay the real estate taxes on behalf of those tenants.
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 operating expenses to net income, see the table above.
Total same store property operating expenses decreased by approximately$0.2 million , or 0.9%, to approximately$24.3 million for the three months endedSeptember 30, 2022 compared to approximately$24.5 million for the three months endedSeptember 30, 2021 . This decrease was primarily related to a decrease in utility expense of approximately$0.3 million and repairs and maintenance expense of approximately$0.2 million . These decreases were partially offset by an increase in insurance and other expenses of approximately$0.1 million and$0.2 million , respectively.
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, 2020 , we acquired 89 buildings consisting of approximately 15.3 million square feet (excluding ten buildings that were included in the Value Add Portfolio atSeptember 30, 2022 or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2020 ), and sold 28 buildings consisting of approximately 4.3 million square feet and one land parcel. For the three months endedSeptember 30, 2022 and 2021, the buildings acquired afterDecember 31, 2020 contributed approximately$21.6 million and$5.1 million to NOI, respectively. For the three months endedSeptember 30, 2022 and 2021, the buildings sold afterDecember 31, 2020 contributed approximately$0.2 million and$3.3 million to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold. 34 -------------------------------------------------------------------------------- Table of Contents Other Net Operating Income 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, 2020 . 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.
These buildings contributed approximately$3.3 million and$1.4 million to NOI for the three months endedSeptember 30, 2022 and 2021, respectively. Additionally, there was approximately$1.9 million and$1.9 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the three months endedSeptember 30, 2022 and 2021, respectively. Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, loss on impairment, and other expenses.
Total other expenses increased approximately$10.0 million , or 13.7%, for the three months endedSeptember 30, 2022 to approximately$82.7 million compared to approximately$72.7 million for the three months endedSeptember 30, 2021 . The increase was primarily a result of an increase in depreciation and amortization of approximately$10.2 million due to an increase in the depreciable asset base from net acquisitions. Additionally, a loss on impairment of approximately$1.8 million was recognized for the three months endedSeptember 30, 2022 , as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the three months endedSeptember 30, 2021 . The increase was partially offset by a decrease in general and administrative expenses of approximately$1.8 million which was primarily due to the severance costs of a former executive officer of approximately$2.1 million during the three months endedSeptember 30, 2021 that did not recur during the three months endedSeptember 30, 2022 . Total Other Income (Expense) Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, 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 other income increased approximately$4.3 million , or 61.3%, for the three months endedSeptember 30, 2022 to approximately$11.2 million compared approximately$6.9 million for the three months endedSeptember 30, 2021 . This increase was primarily a result of an increase in the gain on the sales of rental property, net of approximately$10.5 million . This increase was partially offset by an increase in interest expense of approximately$5.4 million which is primarily attributable to the issuance of$325.0 million and$400.0 million of unsecured notes onSeptember 28, 2021 andJune 28, 2022 , respectively. Additionally, debt extinguishment and modification expenses of approximately$0.8 million were recognized for the three months endedSeptember 30, 2022 , as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the three months endedSeptember 30, 2021 .
Comparison of the nine months ended
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the nine months endedSeptember 30, 2022 and 2021 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the nine months endedSeptember 30, 2022 and 2021 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, 2020 and our flex/office buildings, Value Add Portfolio and buildings classified as held for sale. 35
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Same Store Portfolio Acquisitions/Dispositions Other Total Portfolio
Nine months ended September
Nine months ended September 30 , Change Nine months ended September 30 , 30, Nine months ended September 30 , Change
2022 2021 $ % 2022 2021 2022 2021 2022 2021 $ %
Revenue
Operating revenue
Rental income $ 396,401 $ 384,651 $ 11,750 3.1 % $ 73,572 $ 22,026
17.6 %
Other income 286 421 (135) (32.1) % 212 68 2,175 2,140 2,673 2,629 44 1.7 %
Total operating revenue 396,687 385,072 11,615 3.0 % 73,784 22,094 16,543 7,370 487,014 414,536 72,478 17.5 %
Expenses
Property 74,094 72,849 1,245 1.7 % 13,241 5,081 3,401 1,170 90,736 79,100 11,636 14.7 %
Net operating income(1)
3.3 %$ 60,543 $ 17,013 $ 13,142 $ 6,200 396,278 335,436 60,842 18.1 % Other expenses General and administrative 35,431 38,036 (2,605) (6.8) % Depreciation and amortization 206,101 174,985 31,116 17.8 % Loss on impairment 1,783 - 1,783 100.0 % Other expenses 1,607 2,184 (577) (26.4) % Total other expenses 244,922 215,205 29,717 13.8 % Total expenses 335,658 294,305 41,353 14.1 % Other income (expense) Interest and other income 83 92 (9) (9.8) % Interest expense (56,310) (46,377) (9,933) 21.4 % Debt extinguishment and modification expenses (838) (679) (159) 23.4 % Gain on the sales of rental property, net 57,499 35,047 22,452 64.1 % Total other income (expense) 434 (11,917) 12,351 103.6 % Net income$ 151,790 $ 108,314 $ 43,476 40.1 %
(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 increased by
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 approximately$11.8 million , or 3.1%, to approximately$396.4 million for the nine months endedSeptember 30, 2022 compared to approximately$384.7 million for the nine months endedSeptember 30, 2021 . Same store lease income increased by approximately$9.1 million , or 2.9%, to approximately$328.1 million for the nine months endedSeptember 30, 2022 compared to approximately$319.0 million for the nine months endedSeptember 30, 2021 . Approximately$13.4 million of the increase was attributable to rental increases due to the execution of new leases and lease renewals with existing tenants and a net decrease in the amortization of net above market leases of approximately$0.4 million . The increase was also attributable to an increase in rental income of approximately$1.2 million at one property in which, during the nine months endedSeptember 30, 2021 , we determined that the future collectability of rental payments 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 tenant. The lease was subsequently terminated and replaced with a new tenant inSeptember 2021 , and during the nine months endedSeptember 30, 2022 , the former tenant repaid the rental amounts past due, both of which contributed to the increase in rental income during the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . These increases were partially offset by the reduction of base rent of approximately$5.9 million due to tenant vacancy. Same store other billings increased by approximately$2.6 million , or 4.0%, to approximately$68.3 million for the nine months endedSeptember 30, 2022 compared to approximately$65.7 million for the nine months endedSeptember 30, 2021 . The increase was attributable to an increase of approximately$2.8 million related to other expense reimbursements which was primarily due to an increase in corresponding expenses. This increase was partially offset by a decrease in real estate taxes levied by the taxing authority as well as instances where the tenant began paying the real estate taxes directly to the taxing authority, whereas previously we paid those real estate taxes on behalf of tenants of approximately$0.2 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 operating expenses to net income, see the table above.
Total same store operating expenses increased by approximately$1.2 million or 1.7% to approximately$74.1 million for the nine months endedSeptember 30, 2022 compared to approximately$72.8 million for the nine months endedSeptember 30, 2021 . This increase was due to increases in utility expense of approximately$0.4 million , insurance expense of approximately$0.4 million , snow removal expense of approximately$0.2 million , and other expenses of approximately$0.2 million .
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, 2020 , 89 buildings consisting of approximately 15.3 million square feet (excluding ten buildings that were included in the Value Add Portfolio atSeptember 30, 2022 or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2020 ), and sold 28 buildings consisting of approximately 4.3 million square feet and one land parcel. For the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , the buildings acquired afterDecember 31, 2020 contributed approximately$58.1 million and$7.9 million to NOI, respectively. For the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , the buildings sold afterDecember 31, 2020 contributed approximately$2.4 37
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million and
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, 2020 . 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.
These buildings contributed approximately$8.5 million and$3.2 million to NOI for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. Additionally, there was approximately$4.6 million and$3.0 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, loss on impairment, and other expenses.
Total other expenses increased approximately$29.7 million , or 13.8%, to approximately$244.9 million for the nine months endedSeptember 30, 2022 compared to approximately$215.2 million for the nine months endedSeptember 30, 2021 . This is primarily a result of an increase in depreciation and amortization of approximately$31.1 million as a result of net acquisitions that increased the depreciable asset base. Additionally, a loss on impairment of approximately$1.8 million was recognized for the nine months endedSeptember 30, 2022 , as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the nine months endedSeptember 30, 2021 . This increase was partially offset by a decrease in general and administrative expenses of approximately$2.6 million which was primarily due to the severance costs of a former executive officer of approximately$2.1 million during the nine months endedSeptember 30, 2021 that did not recur during the nine months endedSeptember 30, 2022 , as well as due to the adoption of our retirement vesting program onJanuary 7, 2021 and related acceleration of equity-based compensation expense for certain eligible employees that did not recur during the nine months endedSeptember 30, 2022 . Additionally, other expenses decreased approximately$0.6 million that was primarily due to the settlement of litigation related to a terminated acquisition contract during the COVID-19 pandemic that did not recur during the nine months endedSeptember 30, 2022 .
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, 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 other income (expense) increased approximately$12.4 million , or 103.6%, for the nine months endedSeptember 30, 2022 to a total net other income of approximately$0.4 million compared to approximately$11.9 million net other expense for the nine months endedSeptember 30, 2021 . This increase is primarily a result of an increase in the gain on the sales of rental property, net of approximately$22.5 million . This was partially offset by an increase in interest expense of approximately$9.9 million which is primarily attributable to the issuance of$325.0 million and$400.0 million of unsecured notes onSeptember 28, 2021 andJune 28, 2022 , respectively.
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 the Securities and Exchange Commission ("SEC"). 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.
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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 the National
Association of Real Estate Investment Trusts ("Nareit"). FFO represents GAAP net
income (loss), excluding gains (or losses) from sales of depreciable operating
buildings, land sales, 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 sets forth a reconciliation of our FFO attributable to common stockholders and unit holders for the periods presented to net income, the nearest GAAP equivalent.
Three months ended
2022 2021 2022 2021
Net income $ 64,718 $ 49,583 $ 151,790 $ 108,314
Rental property depreciation and
amortization 69,400 59,195 205,938 174,825
Loss on impairment 1,783 - 1,783 -
Gain on the sales of rental property, net (33,168) (22,662) (57,499) (35,047)
FFO 102,733 86,116 302,012 248,092
Preferred stock dividends - - - (1,289)
Redemption of preferred stock - - - (2,582)
Amount allocated to restricted shares of
common stock and unvested units (134) (206) (436) (667)
FFO attributable to common stockholders and
unit holders $ 102,599 $ 85,910 $ 301,576 $ 243,554
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 and real estate taxes and insurance. 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.
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The following table sets forth a reconciliation of our NOI for the periods presented to net income, the nearest GAAP equivalent.
Three months ended September 30, Nine months ended September 30,
Reconciliation of Net Income to NOI (in
thousands) 2022 2021 2022 2021
Net income $ 64,718 $ 49,583 $ 151,790 $ 108,314
General and administrative 10,884 12,668 35,431 38,036
Depreciation and amortization 69,456 59,246 206,101 174,985
Interest and other income (26) (30) (83) (92)
Interest expense 21,155 15,746 56,310 46,377
Loss on impairment 1,783 - 1,783 -
Debt extinguishment and modification expenses 838 - 838 679
Other expenses 578 821 1,607 2,184
Gain on the sales of rental property, net (33,168) (22,662) (57,499) (35,047)
Net operating income $ 136,218 $ 115,372 $ 396,278 $ 335,436
Cash Flows
Comparison of the nine months ended
The following table summarizes our cash flows for the nine months ended
Nine months ended September 30, Change
Cash Flows (dollars in thousands) 2022 2021 $ %
Net cash provided by operating activities $ 297,869 $ 254,613 $ 43,256 17.0 %
Net cash used in investing activities $ 397,321 $ 602,983 $ (205,662) (34.1) %
Net cash provided by financing activities $ 90,707 $ 374,204 $ (283,497) (75.8) %
Net cash provided by operating activities increased approximately $43.3 million
to approximately $297.9 million for the nine months ended September 30, 2022
compared to approximately $254.6 million for the nine months ended September 30,
2021 . The increase was primarily attributable to incremental operating cash
flows from property acquisitions completed after September 30, 2021 , and
operating performance at existing properties. These increases were partially
offset by the loss of cash flows from property dispositions completed after
September 30, 2021 and fluctuations in working capital due to the timing of
payments and rental receipts.
Net cash used in investing activities decreased approximately $205.7 million to
approximately $397.3 million for the nine months ended September 30, 2022
compared to approximately $603.0 million for the nine months ended September 30,
2021 . The decrease was primarily attributable to the acquisition of 25 buildings
and land parcels for a total cash consideration of approximately $464.6 million
for the nine months ended September 30, 2022 compared to the acquisition of 39
buildings for a total cash consideration of approximately $648.6 million for the
nine months ended September 30, 2021 . Additionally, the decrease was also
attributable to an increase in proceeds from sales of rental property, net of
approximately $53.0 million during the nine months ended September 30, 2022
compared to the nine months ended September 30, 2021 .
Net cash provided by financing activities decreased approximately $283.5 million
to approximately $90.7 million for the nine months ended September 30, 2022
compared to approximately $374.2 million for the nine months ended September 30,
2021 . This decrease was primarily attributable to decrease in net proceeds
received from the sale of common stock of approximately $317.1 million during
the nine months ended September 30, 2022 compared to the nine months ended
September 30, 2021 . The decrease was also attributable to a net cash outflow of
approximately $102.0 million from our unsecured credit facility and an increase
of approximately $18.2 million in dividends paid during the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 .
Additionally, we paid in full a mortgage note in the amount of approximately
$46.6 million during the nine months ended September 30, 2022 that did not occur
during the nine months ended September 30, 2021 , as discussed in Note 4 of the
accompanying Notes to Consolidated Financial Statements. These decreases were
partially offset by increases in the funding of unsecured term loans and
unsecured notes in the amount of $50.0 million and $75.0 million , respectively,
during the nine months ended September 30, 2022 compared to the nine months
ended September 30, 2021 . Additionally, the decrease was also partially offset
by the redemption of preferred stock with an aggregate liquidation value of
$75.0 million during the nine months ended September 30, 2021 that did not recur
during the nine months ended September 30, 2022 .
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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 from rental income, expense recoveries from tenants, and other income from operations is our principal source of funds to pay operating expenses, debt service, recurring capital expenditures, and the distributions required to maintain our REIT qualification. We primarily rely on the capital markets (common and preferred equity and debt securities) to fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality building standards 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 equity and debt financings, will continue to provide funds for our short-term and medium-term liquidity needs. Our short-term liquidity requirements consist primarily of funds necessary 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, property acquisitions under contract, general and administrative expenses, and capital expenditures including 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 property acquisitions 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 theOperating Partnership .
As of
In addition, we require funds to pay dividends to holders of our common stock and common units in theOperating Partnership . Any future dividends on our common stock are voluntary and declared in the sole discretion of our board of directors, subject to the distribution requirements to maintain our REIT status for federal income tax purposes, and may be reduced or stopped for any reason, including to use funds for other liquidity requirements. The following table summarizes the dividends declared on our outstanding common stock during the nine months endedSeptember 30, 2022 . Month Ended 2022 Declaration Date Record Date Per Share Payment Date September 30 July 12, 2022 September 30, 2022$ 0.121667 October 17, 2022 August 31 July 12, 2022 August 31, 2022 0.121667 September 15, 2022 July 31 July 12, 2022 July 29, 2022 0.121667 August 15, 2022 June 30 April 14, 2022 June 30, 2022 0.121667 July 15, 2022 May 31 April 14, 2022 May 31, 2022 0.121667 June 15, 2022 April 30 April 14, 2022 April 29, 2022 0.121667 May 16, 2022 March 31 January 10, 2022 March 31, 2022 0.121667 April 18, 2022 February 28 January 10, 2022 February 28, 2022 0.121667 March 15, 2022 January 31 January 10, 2022 January 31, 2022 0.121667 February 15, 2022 Total$ 1.095003
On
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Indebtedness Outstanding
The following table summarizes certain information with respect to our
indebtedness outstanding as of
Principal
Outstanding as of
September 30, 2022
Loan (in thousands) Interest Rate(1)(2) Maturity Date Prepayment Terms(3)
Unsecured credit facility:
Unsecured Credit Facility(4) $ 136,000 Term SOFR + 0.775% October 23, 2026 i
Total unsecured credit facility 136,000 Unsecured term loans: Unsecured Term Loan F 200,000 2.96 % January 12, 2025 i Unsecured Term Loan G 300,000 1.11 % February 5, 2026 i Unsecured Term Loan A 150,000 2.16 % March 15, 2027 i Unsecured Term Loan H 187,500 3.75 % January 25, 2028 i Unsecured Term Loan I 187,500 2.89 % January 25, 2028 i Total unsecured term loans 1,025,000 Total unamortized deferred financing fees and debt issuance costs (4,896) Total carrying value unsecured term loans, 1,020,104 net 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 K Unsecured Notes 400,000 4.12 % June 28, 2032 ii Series J Unsecured Notes 50,000 2.95 % September 28, 2033 ii Total unsecured notes 1,300,000 Total unamortized deferred financing fees and debt issuance costs (4,747) Total carrying value unsecured notes, net 1,295,253 Mortgage notes (secured debt): Thrivent Financial for Lutherans 3,330 4.78 % December 15, 2023
iii
United of Omaha Life Insurance Company 4,794 3.71 % October 1, 2039
ii
Total mortgage notes 8,124 Net unamortized fair market value discount (137) Total unamortized deferred financing fees and debt issuance costs (6) Total carrying value mortgage notes, net 7,981
Total / weighted average interest rate(5)
3.29 % (1)Interest rate as ofSeptember 30, 2022 . AtSeptember 30, 2022 , the one-month Term Secured Overnight Financing Rate ("Term SOFR") was 3.04205%. 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 and leverage ratio, as defined in the respective loan agreements. (2)Our unsecured credit facility has a stated rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.775%. Our unsecured term loans have a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.85%. As ofSeptember 30, 2022 , one-month Term SOFR for the Unsecured Term Loans A, F, G, H, and I was swapped to a fixed rate of 1.31%, 2.11%, 0.26%, 2.90%, and 2.04%,, respectively (which includes the 0.10% adjustment). One-month Term SOFR for the Unsecured Term Loan G will be swapped to a fixed rate of 0.95% effectiveApril 18, 2023 . One-month Term SOFR for the Unsecured Term Loan I will be swapped to a fixed rate of 2.66% effectiveJanuary 4, 2023 . One-month Term SOFR for the Unsecured Term Loan H will be swapped to a fixed rate of 2.50% effectiveJanuary 12, 2024 . (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. (4)The capacity of our unsecured credit facility is$1.0 billion . 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. 42 -------------------------------------------------------------------------------- Table of Contents (5)The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of$1,025.0 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 our unsecured credit facility and unsecured term loans as ofSeptember 30, 2022 was approximately$860.4 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.
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
On
OnSeptember 1, 2022 , we entered into separate amended and restated term loan agreements for the Unsecured Term Loan A, the Unsecured Term Loan F, and the Unsecured Term Loan G ("Amended and Restated Unsecured Term Loans"), to provide that borrowings under the Amended and Restated Unsecured Term Loans bear a current annual interest rate of one-month Term SOFR, plus an adjustment of 0.10% and a spread of 0.85%, based on the our debt rating and leverage ratio (as defined in the applicable loan agreement). Other than the interest rate provisions described above, the material terms of the Amended and Restated Unsecured Term Loans, including the maturity dates, remain unchanged. OnJuly 26, 2022 , we entered into an amended and restated credit agreement for our unsecured credit facility (the "July 2022 Credit Agreement"), which provided for an increase in the aggregate commitments available for borrowing under our unsecured credit facility from$750.0 million to up to$1.0 billion . TheJuly 2022 Credit Agreement also provided for the replacement of one-month LIBOR for one-month Term SOFR, plus a 0.10% adjustment. Other than the increase in the borrowing commitments and the interest rate provisions described above, the material terms of our unsecured credit facility remain unchanged. OnJuly 26, 2022 , we entered into (i) a term loan agreement withWells Fargo Bank, National Association and the other lenders party thereto, providing for a new senior unsecured term loan in the original principal amount of$187.5 million ("Unsecured Term Loan H"), and (ii) a term loan agreement withBank of America, N.A . and the other lenders party thereto, providing for a new senior unsecured term loan in the original principal amount of$187.5 million ("Unsecured Term Loan I"). Each of the Unsecured Term Loan H and the Unsecured Term Loan I bears a current annual interest rate of one-month Term SOFR, plus a 0.10% adjustment and a spread of 0.85% based on our debt rating and leverage ratio (as defined in the applicable loan agreement), and matures onJanuary 25, 2028 . In connection with the new unsecured term loans, the$150.0 million Unsecured Term Loan D and the$175.0 million Unsecured Term Loan E were repaid in full. OnApril 28, 2022 , we entered into a note purchase agreement (the "April 2022 NPA") for the private placement by ourOperating Partnership of$400.0 million senior unsecured notes (the "Series K Unsecured Notes") maturingJune 28, 2032 , with a fixed annual interest rate of 4.12%. TheApril 2022 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 K Unsecured Notes onJune 28, 2022 . The Company and certain wholly owned subsidiaries of ourOperating Partnership are guarantors of the Series K Unsecured Notes.
The following table summarizes our debt capital structure as of
Debt Capital StructureSeptember 30, 2022
Total principal outstanding (in thousands)
5.4
% Secured debt 0.3 %
% Debt maturing next 12 months 4.1 %
Net Debt to Real Estate Cost Basis(1) 35.6 %
(1)"Net Debt" means amounts outstanding under our unsecured credit facility,
unsecured term loans, unsecured notes, and mortgage notes, less cash and cash
equivalents. "Real Estate Cost Basis" means the book value of rental property
and deferred leasing intangibles, exclusive of the related accumulated
depreciation and amortization.
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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 fund acquisitions. 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 on our floating rate debt is managed through the 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. Equity Preferred Stock We are authorized to issue up to 20,000,000 shares of preferred stock, par value$0.01 per share. As ofSeptember 30, 2022 andDecember 31, 2021 , there were no shares of preferred stock issued or outstanding.
Common Stock
We are authorized to issue up to 300,000,000 shares of common stock, par value
The following table summarizes our at-the-market ("ATM") common stock offering
program as of September 30, 2022 . Pursuant to the equity distribution agreements
for our ATM common stock offering program, we may from time to time sell common
stock through sales agents and their affiliates, including shares sold on a
forward basis under forward sale agreements. There was no activity under the ATM
common stock offering program during the three months ended September 30, 2022 .
Aggregate Available as
Maximum Aggregate Offering of September 30, 2022
ATM Common Stock Offering Program Date Price (in thousands) (in thousands)
2022 $750 million ATM February 17, 2022 $ 750,000 $ 750,000
In connection with our underwritten public offering that closed in November
2021 , on December 3, 2021 , we executed a forward sale agreement for the sale of
an additional 1,200,000 shares of common stock on a forward basis at a price of
$41.87 per share. We did not initially receive any proceeds from the sale of
shares on a forward basis. On March 29, 2022 , we physically settled in full the
forward sales agreement by issuing 1,200,000 shares of common stock for net
proceeds of approximately $49.7 million , or $41.39 per share.
Noncontrolling Interest
We own our interests in all of our properties and conduct substantially all of our business through theOperating Partnership . We are the sole member of the sole general partner of theOperating Partnership . As ofSeptember 30, 2022 , we owned approximately 97.9% of the common units in theOperating Partnership , and our current and former executive officers, directors, senior employees and their affiliates, and third parties that contributed properties to us in exchange for common units in theOperating Partnership owned the remaining 2.1%.
Interest Rate Risk
We use interest rate swaps to fix the rate of our variable rate debt. As of
We recognize all derivatives on the balance sheet at fair value. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income (loss), which is a component of equity. Derivatives that are not designated as hedges must be adjusted to fair value and the changes in fair value must be reflected as income or expense. We have established criteria for suitable counterparties in relation to various specific types of risk. We only use counterparties that have a credit rating of no lower than investment grade at swap inception fromMoody's Investor Services ,Standard & Poor's , or Fitch Ratings or other nationally recognized rating agencies. 44
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Table of Contents The following table details our outstanding interest rate swaps as ofSeptember 30, 2022 . Notional Amount (in Fair Value Pay Fixed Interest Interest Rate Derivative Counterparty Trade Date Effective Date thousands) (in thousands) Rate Receive Variable Interest Rate Maturity
Date
The Toronto-Dominion Bank Jul-20-2017 Jul-28-2022$ 25,000 $ 116 1.8830 % One-month Term SOFR Jan-04-2023 Royal Bank of Canada Jul-20-2017 Jul-28-2022$ 25,000 $ 115 1.8980 % One-month Term SOFR Jan-04-2023Wells Fargo Bank, N.A. Jul-20-2017 Jul-28-2022$ 25,000 $ 116 1.8750 % One-month Term SOFR Jan-04-2023PNC Bank, N.A. Jul-20-2017 Jul-28-2022$ 25,000 $ 115 1.8860 % One-month Term SOFR Jan-04-2023PNC Bank, N.A. Jul-20-2017 Jul-28-2022$ 50,000 $ 231 1.8850 % One-month Term SOFR Jan-04-2023 The Toronto-Dominion Bank Apr-20-2020 Aug-10-2022$ 75,000 $ 1,556 0.2660 % One-month Term SOFR Apr-18-2023Wells Fargo Bank, N.A. Apr-20-2020 Aug-10-2022$ 75,000 $ 1,559 0.2520 % One-month Term SOFR Apr-18-2023 The Toronto-Dominion Bank Apr-20-2020 Aug-10-2022$ 75,000 $ 1,556 0.2660 % One-month Term SOFR Apr-18-2023Wells Fargo Bank, N.A. Apr-20-2020 Aug-10-2022$ 75,000 $ 1,559 0.2520 % One-month Term SOFR Apr-18-2023 The Toronto-Dominion Bank Jul-24-2018 Jul-26-2022$ 50,000 $ 874 2.9080 % One-month Term SOFR Jan-12-2024PNC Bank, N.A. Jul-24-2018 Jul-26-2022$ 50,000 $ 866 2.9190 % One-month Term SOFR Jan-12-2024 Bank of Montreal Jul-24-2018 Jul-26-2022$ 50,000 $ 868 2.9160 % One-month Term SOFR Jan-12-2024U.S. Bank, N.A. Jul-24-2018 Jul-26-2022$ 25,000 $ 435 2.9120 % One-month Term SOFR Jan-12-2024Wells Fargo Bank, N.A. May-02-2019 Aug-15-2022$ 50,000 $ 2,151 2.2360 % One-month Term SOFR Jan-15-2025U.S. Bank, N.A. May-02-2019 Aug-15-2022$ 50,000 $ 2,158 2.2380 % One-month Term SOFR Jan-15-2025Regions Bank May-02-2019 Aug-15-2022$ 50,000 $ 2,152 2.2389 % One-month Term SOFR Jan-15-2025 Bank of Montreal Jul-16-2019 Aug-15-2022$ 50,000 $ 2,740 1.7100 % One-month Term SOFR Jan-15-2025U.S. Bank, N.A. Feb-17-2021 Apr-18-2023$ 150,000 $ 12,074 0.9520 % One-month Term SOFR Feb-5-2026Wells Fargo Bank, N.A. Feb-17-2021 Apr-18-2023$ 75,000 $ 6,007 0.9460 % One-month Term SOFR Feb-5-2026 The Toronto-Dominion Bank Feb-17-2021 Apr-18-2023$ 75,000 $ 6,082 0.9355 % One-month Term SOFR Feb-5-2026Regions Bank Oct-26-2021 Aug-01-2022$ 50,000 $ 5,302 1.3090 % One-month Term SOFR Mar-15-2027 Bank of Montreal Oct-26-2021 Aug-01-2022$ 50,000 $ 5,333 1.3090 % One-month Term SOFR Mar-15-2027PNC Bank, N.A. Oct-26-2021 Aug-01-2022$ 50,000 $ 5,311 1.3150 % One-month Term SOFR Mar-15-2027PNC Bank, N.A. Jul-27-2022 Jan-04-2023$ 50,000 $ 2,730 2.6420 % One-month Term SOFR Jan-25-2028 The Toronto-Dominion Bank Jul-27-2022 Jan-04-2023$ 50,000 $ 2,726 2.6530 % One-month Term SOFR Jan-25-2028Regions Bank Jul-27-2022 Jan-04-2023$ 50,000 $ 2,681 2.6550 % One-month Term SOFR Jan-25-2028U.S. Bank, N.A. Jul-27-2022 Jan-12-2024$ 75,000 $ 3,151 2.4865 % One-month Term SOFR Jan-25-2028 The Toronto-Dominion Bank Jul-27-2022 Jan-12-2024$ 50,000 $ 2,108 2.4910 % One-month Term SOFR Jan-25-2028Wells Fargo Bank, N.A. Jul-27-2022 Jan-12-2024$ 50,000 $ 2,062 2.4930 % One-month Term SOFR Jan-25-2028PNC Bank, N.A. Jul-27-2022 Jul-27-2022$ 50,000 $ 2,774 2.6790 % One-month Term SOFR Jan-25-2028 In connection with the Amended and Restated Unsecured Term Loans that we entered into onSeptember 1, 2022 , as discussed in Note 4 in the accompanying Notes to Consolidated Financial Statements, we transitioned all of our outstanding interest rate swaps to one-month Term SOFR. 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 ofSeptember 30, 2022 , the fair value of all 30 of our interest rate swaps were in an asset position of approximately$77.5 million , including any adjustment for nonperformance risk related to these agreements. As ofSeptember 30, 2022 , we had approximately$1,161.0 million of variable rate debt. As ofSeptember 30, 2022 , all of our outstanding variable rate debt, with the 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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