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 report..
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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 maintain our qualification 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.
On July 1, 2022 , our board of directors appointed William R. Crooker to the role
of Chief Executive Officer of the Company, in addition to his role as President,
effective July 1, 2022 . In addition, on June 29, 2022 , our board of directors
increased the size of the board from nine to 10 members and appointed Mr.
Crooker to the board and the investment committee of the board, effective as of
July 1, 2022 , subject to re-election at the 2023 Annual Meeting of Stockholders.
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, in connection with Mr. Crooker's promotion, our board of directors
appointed Benjamin S. Butcher as Executive Chair of the Company. As Executive
Chair, Mr. Butcher manages the business of the board, regularly consults with
Mr. Crooker on key corporate matters and serves as a liaison between the board
and the management team.
As of December 31, 2022 , we owned 562 buildings in 41 states with approximately
111.7 million rentable square feet, consisting of 484 warehouse/distribution
buildings, 74 light manufacturing buildings, one flex/office building, and three
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, 2022 , our buildings were approximately 98.5% leased, with no
single tenant accounting for more than approximately 3.0% of our total
annualized base rental revenue and no single industry accounting for more than
approximately 10.9% of our total annualized base rental revenue.
We own all of our properties and conduct substantially all of our business
through our
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.
Outlook
Our business is affected by the uncertainty regarding the current high inflationary, rising interest rate environment, 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 before posting a gain of 3.5% in the third quarter of 2022. Labor conditions remained strong with a 3.7% unemployment rate as ofDecember 2022 . Going forward, the general consensus among economists is to expect an elevated risk of recession over the near term. While the macro-economic conditions continue to evolve and could result in weakening tenant cash flows and rising vacancy rates, we believe we will continue to benefit from having a well-diversified portfolio across 35 -------------------------------------------------------------------------------- Table of Contents various markets, tenant industries, and lease terms. Additionally, we believe that the COVID-19 pandemic and geopolitical tensions have accelerated a number of trends that positively impactU.S. 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 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. InFebruary 2023 , theFederal Reserve raised interest rates 25 basis points to a range between 4.5% to 4.75%. SinceMarch 2022 , theFederal Reserve has raised the Fed Funds Rate by 450 basis points and started shrinking its balance sheet. TheFederal Reserve indicates monetary policy will continue tightening with higher interest rates and a shrinking ofFederal Reserve balance sheet until inflation measures approach its long-term 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, we believe that certain characteristics of our business and capital structure should position us well in an uncertain environment, including our minimal floating rate debt exposure (taking into account our hedging activities), strong liquidity, and access to capital, and the fact that many of our competitors for acquisitions tend to be smaller local and regional investors who may be more heavily impacted by rising interest rates and lack of available of capital.
Due to the COVID-19 pandemic, geopolitical uncertainty, and recent legislative
bills supporting
•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 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, actions taken by federal and state governments and theFederal Reserve in response to the pandemic, and the growing desire for greater supply chain resilience has helped industrial space demand remain relatively strong going into 2023. The weakening 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 a strength in this environment. 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, 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.
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The following table summarizes our Operating Portfolio leases that commenced during the year endedDecember 31, 2022 . Any rental concessions in such leases are accounted for on a straight-line basis over the term of the lease. Cash Basis Total Costs WeightedRent Per SLRent Per Per Square Cash Rent SL Rent Average Lease Rental Concessions Operating Portfolio Square Feet Square Foot Square Foot Foot(1) Change Change Term (years) per Square Foot(2) Year endedDecember 31, 2022 New Leases 4,376,929$ 5.34 $ 5.67 $ 2.73 18.6 % 31.2 % 5.9 $ 0.58 Renewal Leases 7,795,545$ 4.84 $ 5.10 $ 1.09 11.8 % 20.5 % 4.7 $ 0.12 Total/weighted average 12,172,474$ 5.02 $ 5.30 $ 1.69 14.3 % 24.3 % 5.1 $ 0.28 (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)Represents the total rental concessions for the entire lease term. Additionally, for the year endedDecember 31, 2022 , leases related to the Value Add Portfolio and first generation leasing, with a total of 1,069,650 square feet, are excluded from the Operating Portfolio statistics above.
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 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 7.7% of our total annualized base rental revenue will expire during the period fromJanuary 1, 2023 toDecember 31, 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 periodJanuary 1, 2023 toDecember 31, 2023 , thereby resulting in an 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
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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 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.
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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.
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 requires
significant judgment, and consider factors such as yields on outstanding public
debt and other market based pricing on longer duration financing instruments.
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Goodwill
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 at December 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 of
December 31, 2022 .
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 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. 40 -------------------------------------------------------------------------------- Table of Contents 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 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 after December 31, 2020 . On December 31, 2022 , we
owned 455 industrial buildings consisting of approximately 91.9 million square
feet, which represents approximately 82.2% of our total portfolio, that are
considered our same store portfolio in the analysis below. Same store occupancy
increased approximately 1.3% to 99.1% as of December 31, 2022 compared to 97.8%
as of December 31, 2021 .
Discussions of selected operating information for our same store portfolio and
our total portfolio for the comparison of the years ended December 31, 2021 and
2020 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, 2021 , which was filed with the SEC on February 16, 2022 .
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, 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 years endedDecember 31, 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 41 -------------------------------------------------------------------------------- Table of Contents Add Portfolio to the Operating Portfolio afterDecember 31, 2020 and our flex/office buildings, Value Add Portfolio, and buildings classified as held for sale. 42
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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
2022 2021 $ % 2022 2021 2022 2021 2022 2021 $ %
Revenue
Operating revenue
Rental income $ 526,819 $ 508,810 $ 18,009 3.5 % $ 102,758 $ 38,162 $ 24,800 $ 12,460 $ 654,377 $ 559,432 $ 94,945 17.0 %
Other income 370 517 (147) (28.4) % 236 70 2,362 2,140 2,968 2,727 241 8.8 %
Total operating revenue 527,189 509,327 17,862 3.5 % 102,994 38,232 27,162 14,600 657,345 562,159 95,186 16.9 %
Expenses
Property 100,674 97,501 3,173 3.3 % 19,732 8,419 5,295 2,066 125,701 107,986 17,715 16.4 %
Net operating income(1) $ 426,515 $ 411,826 $ 14,689 3.6 % $ 83,262 $ 29,813 $ 21,867 $ 12,534 531,644 454,173 77,471 17.1 %
Other expenses
General and administrative 46,958 48,629 (1,671) (3.4) %
Depreciation and amortization 275,040 238,699 36,341 15.2 %
Loss on impairments 1,783 - 1,783 100.0 %
Other expenses 4,363 2,878 1,485 51.6 %
Total other expenses 328,144 290,206 37,938 13.1 %
Total expenses 453,845 398,192 55,653 14.0 %
Other income (expense)
Interest and other income 103 121 (18) (14.9) %
Interest expense (78,018) (63,484) (14,534) 22.9 %
Debt extinguishment and modification expenses (838) (2,152) 1,314 (61.1) %
Gain on the sales of rental property, net 57,487 97,980 (40,493) (41.3) %
Total other income (expense) (21,266) 32,465 (53,731) (165.5) %
Net income $ 182,234 $ 196,432 $ (14,198) (7.2) %
(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 approximately
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$18.0 million or 3.5% to approximately$526.8 million for the year endedDecember 31, 2022 compared to approximately$508.8 million for the year endedDecember 31, 2021 . Same store lease income increased approximately$13.8 million or 3.3% to approximately$434.8 million for the year endedDecember 31, 2022 compared to approximately$421.0 million for the year endedDecember 31, 2021 . Approximately$16.2 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$0.8 million at one property in which, during the year endedDecember 31, 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 year endedDecember 31, 2022 , the former tenant repaid the rental amounts past due, both of which contributed to the increase in rental income during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . These increases were partially offset by the reduction of base rent of approximately$3.6 million due to tenant vacancy. Same store other billings increased approximately$4.2 million or 4.8% to approximately$92.0 million for the year endedDecember 31, 2022 compared to approximately$87.8 million for the year endedDecember 31, 2021 . The increase was attributable to an increase of approximately$4.7 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 taxing authorities of approximately$0.5 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 approximately$3.2 million or 3.3% to approximately$100.7 million for the year endedDecember 31, 2022 compared to approximately$97.5 million for the year endedDecember 31, 2021 . This increase was due to increases in insurance, utility, repairs and maintenance, snow removal, and other expenses of approximately$0.6 million ,$1.0 million ,$0.8 million ,$0.7 million , and$0.7 million , respectively. These increases were partially offset by a decrease in real estate tax expense of approximately$0.6 million due to a decrease in real estate taxes levied by taxing authorities.
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 90 buildings consisting of approximately 15.4 million square feet (excluding ten buildings that were included in the Value Add Portfolio atDecember 31, 2022 or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2020 ), and sold 30 buildings consisting of approximately 4.4 million square feet and one land parcel. For the years endedDecember 31, 2022 andDecember 31, 2021 , the buildings acquired afterDecember 31, 2020 contributed approximately$80.9 million and$18.8 million to NOI, respectively. For the years ended 44 -------------------------------------------------------------------------------- Table of ContentsDecember 31, 2022 andDecember 31, 2021 , the buildings sold afterDecember 31, 2020 contributed approximately$2.4 million and$11.0 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, 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$16.2 million and$9.1 million to NOI for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively. Additionally, there was approximately$5.7 million and$3.4 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the years endedDecember 31, 2022 andDecember 31, 2021 , 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 approximately$37.9 million or 13.1% for the year endedDecember 31, 2022 to approximately$328.1 million compared to approximately$290.2 million for the year endedDecember 31, 2021 . This is primarily a result of an increase in depreciation and amortization of approximately$36.3 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 year endedDecember 31, 2022 , as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the year endedDecember 31, 2021 . Other expenses also increased approximately$1.5 million , which was primarily attributed to the relinquishment of an acquisition deposit of approximately$2.1 million related to a terminated acquisition contract during the year endedDecember 31, 2022 . These increases were partially offset by a decrease in general and administrative expenses of approximately$1.7 million which was primarily due to the severance costs of a former executive officer of approximately$2.1 million during the year endedDecember 31, 2021 that did not recur during the year endedDecember 31, 2022 , as well as due to the adoption of the Vesting Program onJanuary 7, 2021 and related acceleration of equity-based compensation expense for certain eligible employees that did not recur during the year endedDecember 31, 2022 . These decreases in general and administrative expenses were offset by an increase in payroll costs. 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 net other income decreased approximately$53.7 million or 165.5% to approximately$21.3 million total other expense for the year endedDecember 31, 2022 compared to approximately$32.5 million total other income for the year endedDecember 31, 2021 . This decrease is primarily the result of a decrease in gain on the sales of rental property, net of approximately$40.5 million . There was also an increase in interest expense of approximately$14.5 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. Debt extinguishment and modification expenses also decreased approximately$1.3 million during the year endedDecember 31, 2022 . The debt extinguishment and modification expenses during the year endedDecember 31, 2022 were related to the refinance of our unsecured term loans onJuly 26, 2022 , as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements. The debt extinguishment and modification expenses during the year endedDecember 31, 2021 were primarily related to the refinance of our unsecured term loans onOctober 26, 2021 , as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements. 45 -------------------------------------------------------------------------------- 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) 2022 2021 2020
Net income $ 182,234 $ 196,432 $ 206,795
Rental property depreciation and amortization 274,823 238,487 214,464
Loss on impairments 1,783 - 5,577
Gain on the sales of rental property, net (57,487) (97,980) (135,733)
FFO $ 401,353 $ 336,939 $ 291,103
Preferred stock dividends - (1,289) (5,156)
Redemption of preferred stock - (2,582) -
Amount allocated to restricted shares of common stock and unvested units
(558) (838) (756)
FFO attributable to common stockholders and unit holders
$ 332,230 $ 285,191 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, real estate tax expense and insurance expense. 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. 46
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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) 2022 2021 2020 Net income$ 182,234 $ 196,432 $ 206,795 General and administrative 46,958 48,629 40,072 Depreciation and amortization 275,040 238,699 214,738 Interest and other income (103) (121) (446) Interest expense 78,018 63,484 62,343 Loss on impairments 1,783 - 5,577 Gain on involuntary conversion -
- (2,157)
Debt extinguishment and modification expenses 838 2,152 834 Other expenses 4,363
2,878 2,029
Gain on the sales of rental property, net (57,487) (97,980) (135,733) Net operating income$ 531,644 $ 454,173 $ 394,052 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) 2022 2021 $ %
Net cash provided by operating activities $ 387,931 $ 336,154 $ 51,777 15.4 %
Net cash used in investing activities $ 447,524 $ 1,220,420 $ (772,896) (63.3) %
Net cash provided by financing activities $ 63,186 $ 887,123 $ (823,937) (92.9) %
Net cash provided by operating activities increased approximately $51.8 million
to approximately $387.9 million for the year ended December 31, 2022 , compared
to approximately $336.2 million for the year ended December 31, 2021 . The
increase was primarily attributable to incremental operating cash flows from
property acquisitions completed after December 31, 2021 , and operating
performance at existing properties. These increases were partially offset by the
loss of cash flows from property dispositions completed after December 31, 2021
and fluctuations in working capital due to timing of payments and rental
receipts.
Net cash used in investing activities decreased approximately $772.9 million to
approximately $447.5 million for the year ended December 31, 2022 , compared to
approximately $1,220.4 million for the year ended December 31, 2021 . The
decrease was primarily attributable to the acquisition of 26 buildings during
the year ended December 31, 2022 of approximately $472.6 million , compared to
the acquisition of 74 buildings during the year ended December 31, 2021 of
approximately $1,365.8 million . This decrease was also attributable to a
decrease in proceeds from sales of rental property, net of approximately $52.6
million during the year ended December 31, 2022 compared to the year ended
December 31, 2021 . This decrease in net cash used in investing activities was
partially offset by an increase in cash paid for additions of land and building
and improvements of approximately $72.2 million during the year ended
December 31, 2022 compared to the year ended December 31, 2021 .
Net cash provided by financing activities decreased approximately $823.9 million
to approximately $63.2 million for the year ended December 31, 2022 , compared to
approximately $887.1 million for the year ended December 31, 2021 . This decrease
was primarily attributable to decrease in net proceeds received from the sale of
common stock of approximately $652.2 million during the year ended December 31,
2022 compared to the year ended December 31, 2021 . The decrease was also
attributable to a net cash outflow of approximately $310.0 million from our
unsecured credit facility and an increase of approximately $21.1 million in
dividends paid during the year ended December 31, 2022 compared to the year
ended December 31, 2021 . Additionally, we paid in full a mortgage note in the
amount of approximately $46.6 million during the year ended December 31, 2022
that did not occur during the year ended December 31, 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 year ended December 31, 2022 compared to the year ended
December 31, 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 year ended December 31, 2021 that did not recur during the
year ended December 31, 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 development projects, 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 ourOperating Partnership .
As of
In addition, we require funds to pay dividends to holders of our common stock and common units in ourOperating Partnership . Any future dividends on our common stock are 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. 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 accrued and unpaid dividends to, but excluding, the redemption date. 48
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Indebtedness Outstanding
The following table summarizes certain information with respect to our
indebtedness outstanding as of
Principal
Outstanding as of
December 31, 2022 Interest
Loan (in thousands) Rate(1)(2) Maturity Date Prepayment Terms(3)
Unsecured credit facility:
Unsecured Credit Facility(4) $ 175,000 Term SOFR + 0.855% October 23, 2026 i
Total unsecured credit facility 175,000
Unsecured term loans:
Unsecured Term Loan F 200,000 2.94 % January 12, 2025 i
Unsecured Term Loan G 300,000 1.09 % February 5, 2026 i
Unsecured Term Loan A 150,000 2.14 % 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 (4,560)
Total carrying value unsecured term loans,
net 1,020,440
Unsecured notes:
Series F Unsecured Notes(5) 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 (4,558)
Total carrying value unsecured notes, net 1,295,442
Mortgage notes (secured debt):
Thrivent Financial for Lutherans 3,296 4.78 % December 15, 2023 iii
United of Omaha Life Insurance Company 4,744 3.71 % October 1, 2039
ii
Total mortgage notes 8,040 Net unamortized fair market value discount (137) Total unamortized deferred financing fees and debt issuance costs (5) Total carrying value mortgage notes, net 7,898
Total / weighted average interest rate(6)
3.39 % (1)Interest rate as ofDecember 31, 2022 . AtDecember 31, 2022 , the one-month Term Term SOFR was 4.35806%. 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 or discounts. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on 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%, less a sustainability-related interest rate adjustment of 0.02%. The unsecured term loans A, F, and G have a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.85%, less a sustainability-related interest rate adjustment of 0.02%. The unsecured term loans H and I have a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.85%. As ofDecember 31, 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. We are required to pay a 49 -------------------------------------------------------------------------------- Table of Contents facility fee on the aggregate commitment amount (currently$1.0 billion ) at a rate per annum of 0.1% to 0.3%, depending on our debt rating, as defined in the credit agreement. The facility fee is due and payable quarterly. (5)Subsequent toDecember 31, 2022 , onJanuary 5, 2023 , the Series F Unsecured Notes were repaid in full. See below for additional details. (6)The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of$1,025.0 million of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums or discounts. OnOctober 3, 2022 , we achieved a 2022 public disclosure assessment score of "A" from the Global Real Estate Sustainability Benchmark (GRESB). The improved score triggered a sustainability-related interest rate adjustment for our unsecured credit facility and the Unsecured Term Loan A, the Unsecured Term Loan F, and the Unsecured Term Loan G. The 0.02% interest rate reduction for each instrument became effective onOctober 17, 2022 and will end onJune 29, 2024 , in accordance with the respective loan agreements. The following table summarizes our debt capital structure as ofDecember 31, 2022 . Debt Capital Structure December 31, 2022 Total principal outstanding (in thousands)$ 2,508,040 Weighted average duration (years) 5.2 % Secured debt 0.3 % % Debt maturing next 12 months 4.1 % Net Debt to Real Estate Cost Basis(1) 36.0 % (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. 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. Unsecured Credit Facility 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. The aggregate undrawn nominal commitments on our unsecured credit facility as ofDecember 31, 2022 was approximately$821.4 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 Term Loans
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 (the "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 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 (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 50 -------------------------------------------------------------------------------- Table of Contents agreement), and matures onJanuary 25, 2028 . We used a portion of the borrowings under the new unsecured term loans to repay in full the$150.0 million Unsecured Term Loan D and the$175.0 million Unsecured Term Loan E.
Unsecured Notes
Subsequent to
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.
Mortgage Notes
On
Unsecured Indebtedness - Financial Covenants and Other Terms
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$1.0 billion ). The facility fee is due and payable quarterly. Financial Covenants: Our ability to borrow, maintain borrowings and avoid default under our unsecured credit facility, unsecured term loans, and unsecured notes is subject to our ongoing compliance with a number of financial covenants, including: •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; •a minimum unsecured interest coverage ratio of not less than or equal to 1.75:1.00; and •with respect to our unsecured notes, a minimum interest coverage ratio of not less than 1.50:1.00.
As of
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.
Pursuant to the terms of our unsecured loan agreements, if a default or event of default occurs and is continuing, we may not pay distributions that exceed the minimum amount required for us to qualify and maintain our status as a REIT. 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 financial and other covenants contained in the applicable loan agreement, cross-defaults to other material debt, and bankruptcy or other insolvency events.
Borrower and Guarantors: Our
Supplemental Guarantor Information
We have filed a registration statement with theSEC allowing us to offer, from time to time, an indefinite amount of equity and debt securities on an as-needed basis, including debt securities of ourOperating Partnership that are guaranteed by the 51 -------------------------------------------------------------------------------- Table of Contents Company. Any such guarantees issued by the Company will be full, irrevocable, unconditional, and absolute joint and several guarantees to the holders of each series of such outstanding guaranteed debt securities. Pursuant to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company's consolidated financial statements, the parent guarantee is "full and unconditional" and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information. Accordingly, we have not presented separate consolidated financial statements of ourOperating Partnership . Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have not presented summarized financial information for ourOperating Partnership because the assets, liabilities, and results of operations of ourOperating Partnership are not materially different than the corresponding amounts in the Company's consolidated financial statements, and we believe the inclusion of such summarized financial information would be repetitive and would not provide incremental value to investors.
Equity
Preferred Stock
We are authorized to issue up to 20,000,000 shares of preferred stock, par value$0.01 per share. As ofDecember 31, 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 ATM common stock offering program as ofDecember 31, 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 endedDecember 31, 2022 . Aggregate Common Stock Available as of ATM Common Stock Offering Maximum Aggregate Offering December 31, 2022 (in Program Date Price (in thousands) thousands) 2022$750 million ATM February 17, 2022 $ 750,000 $ 750,000 In connection with our underwritten public offering that closed inNovember 2021 , onDecember 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. OnMarch 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 Interests
We own 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, 2022 , we owned approximately 97.9% of the common units in ourOperating 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 owned the remaining 2.1%.
Interest Rate Risk
We use interest rate swaps to fix the rate of our variable rate debt. As ofDecember 31, 2022 , 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. 52 -------------------------------------------------------------------------------- Table of Contents 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, 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 $ 5 1.8830 % One-month Term SOFR Jan-04-2023 Royal Bank of Canada Jul-20-2017 Jul-28-2022$ 25,000 $ 5 1.8980 % One-month Term SOFR Jan-04-2023Wells Fargo Bank, N.A. Jul-20-2017 Jul-28-2022$ 25,000 $ 5 1.8750 % One-month Term SOFR Jan-04-2023PNC Bank, N.A. Jul-20-2017 Jul-28-2022$ 25,000 $ 5 1.8860 % One-month Term SOFR Jan-04-2023PNC Bank, N.A. Jul-20-2017 Jul-28-2022$ 50,000 $ 10 1.8850 % One-month Term SOFR Jan-04-2023 The Toronto-Dominion Bank Apr-20-2020 Aug-10-2022$ 75,000 $ 981 0.2660 % One-month Term SOFR Apr-18-2023Wells Fargo Bank, N.A. Apr-20-2020 Aug-10-2022$ 75,000 $ 984 0.2520 % One-month Term SOFR Apr-18-2023 The Toronto-Dominion Bank Apr-20-2020 Aug-10-2022$ 75,000 $ 981 0.2660 % One-month Term SOFR Apr-18-2023Wells Fargo Bank, N.A. Apr-20-2020 Aug-10-2022$ 75,000 $ 984 0.2520 % One-month Term SOFR Apr-18-2023 Bank of Montreal Jul-24-2018 Jul-26-2022$ 50,000 $ 999 2.9160 % One-month Term SOFR Jan-12-2024 The Toronto-Dominion Bank Jul-24-2018 Jul-26-2022$ 50,000 $ 1,003 2.9080 % One-month Term SOFR Jan-12-2024PNC Bank, N.A. Jul-24-2018 Jul-26-2022$ 50,000 $ 997 2.9190 % One-month Term SOFR Jan-12-2024U.S. Bank, N.A. Jul-24-2018 Jul-26-2022$ 25,000 $ 500 2.9120 % One-month Term SOFR Jan-12-2024Wells Fargo Bank, N.A. May-02-2019 Aug-15-2022$ 50,000 $ 2,179 2.2360 % One-month Term SOFR Jan-15-2025U.S. Bank, N.A. May-02-2019 Aug-15-2022$ 50,000 $ 2,182 2.2380 % One-month Term SOFR Jan-15-2025Regions Bank May-02-2019 Aug-15-2022$ 50,000 $ 2,177 2.2389 % One-month Term SOFR Jan-15-2025 Bank of Montreal Jul-16-2019 Aug-15-2022$ 50,000 $ 2,700 1.7100 % One-month Term SOFR Jan-15-2025U.S. Bank, N.A. Feb-17-2021 Apr-18-2023$ 150,000 $ 12,024 0.9520 % One-month Term SOFR Feb-5-2026Wells Fargo Bank, N.A. Feb-17-2021 Apr-18-2023$ 75,000 $ 6,003 0.9460 % One-month Term SOFR Feb-5-2026 The Toronto-Dominion Bank Feb-17-2021 Apr-18-2023$ 75,000 $ 6,050 0.9355 % One-month Term SOFR Feb-5-2026Regions Bank Oct-26-2021 Aug-01-2022$ 50,000 $ 4,953 1.3090 % One-month Term SOFR Mar-15-2027 Bank of Montreal Oct-26-2021 Aug-01-2022$ 50,000 $ 4,976 1.3090 % One-month Term SOFR Mar-15-2027PNC Bank, N.A. Oct-26-2021 Aug-01-2022$ 50,000 $ 4,952 1.3150 % One-month Term SOFR Mar-15-2027PNC Bank, N.A. Jul-27-2022 Jan-04-2023$ 50,000 $ 2,623 2.6420 % One-month Term SOFR Jan-25-2028 The Toronto-Dominion Bank Jul-27-2022 Jan-04-2023$ 50,000 $ 2,614 2.6530 % One-month Term SOFR Jan-25-2028Regions Bank Jul-27-2022 Jan-04-2023$ 50,000 $ 2,583 2.6550 % One-month Term SOFR Jan-25-2028U.S. Bank, N.A. Jul-27-2022 Jan-12-2024$ 75,000 $ 2,668 2.4865 % One-month Term SOFR Jan-25-2028 The Toronto-Dominion Bank Jul-27-2022 Jan-12-2024$ 50,000 $ 1,778 2.4910 % One-month Term SOFR Jan-25-2028Wells Fargo Bank, N.A. Jul-27-2022 Jan-12-2024$ 50,000 $ 1,756 2.4930 % One-month Term SOFR Jan-25-2028PNC Bank, N.A. Jul-27-2022 Jul-27-2022$ 50,000 $ 2,546 2.6790 % One-month Term SOFR Jan-25-2028 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, 2022 , the fair value of all 30 of our interest rate swaps were in an asset position of approximately$72.2 million , including any adjustment for nonperformance risk related to these agreements. As ofDecember 31, 2022 , we had$1.2 billion of variable rate debt. As ofDecember 31, 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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