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 potential adverse effect of the ongoing 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;
•potential natural disasters, epidemics, pandemics, and other potentially catastrophic events such as acts of war and/or terrorism;
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•international, national, regional and local economic conditions;
•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:
We define "GAAP" as generally accepted accounting principles in
We define "total annualized base rental revenue" as the contractual monthly base rent as ofSeptember 30, 2020 (which differs from rent calculated in accordance with GAAP) multiplied by 12. If a tenant is in a free rent period as ofSeptember 30, 2020 , the total annualized base rental revenue is calculated based on the first contractual monthly base rent amount multiplied by 12. We define "occupancy rate" as 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. We define the "Value Add Portfolio" as 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. We define "Stabilization" for properties under development or being redeveloped as 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 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. 27
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We define the "Operating Portfolio" as 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. We define a "Comparable Lease" as 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. We define "SL Rent Change" as 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. We define "Cash Rent Change" as 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. We define "New Lease" as any 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. We define "Renewal Lease" as 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 REIT focused on the acquisition, ownership, and operation of
single-tenant, industrial properties throughout
We are organized and conduct our operations to qualify 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.
Factors That May Influence Future Results of Operations
Our ability to increase revenues or cash flow will depend in part on our (i) external growth, specifically acquisition activity, and (ii) internal growth, specifically occupancy and rental rates on our portfolio. A variety of other factors, including those noted below, also affect our future results of operations.
COVID-19 Pandemic
SinceMarch 2020 , the COVID-19 pandemic has severely harmed global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the pandemic continues to evolve and many countries, includingthe United States , continue to react by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19 pandemic is negatively impacting almost every industry, including the real estate industry and the industries of our tenants, directly or indirectly. The rapid development and fluidity of the COVID-19 pandemic precludes any prediction as to the ultimate adverse impact the pandemic may have on our business, financial condition, results of operations and cash flows. While we did not incur significant disruptions from the COVID-19 pandemic during the nine months endedSeptember 30, 2020 , a number of our tenants requested rent deferral or rent abatement as a result of the pandemic. We entered into a limited number of rent deferral agreements during the three and nine months endedSeptember 30, 2020 , which resulted in approximately$0.4 million and$1.9 million of rent deferrals during the three and nine months endedSeptember 30, 2020 , respectively. We evaluate tenant rent relief requests on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modified agreements, nor are we foregoing our contractual rights under our lease agreements. 28
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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 the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows.
Outlook
Our business is affected by the uncertainty regarding the COVID-19 pandemic, the effectiveness of policies introduced to neutralize the disease, and the impact of those policies on economic activity. In June, theNational Bureau of Economic Research announcedthe United States entered into a recession inFebruary 2020 . In the third quarter, economic measurements suggest that theU.S. economy may be starting to recover. The ultimate shape of the recovery will depend on many factors, including the length and severity of the COVID-19 pandemic. While there has been a negative impact to our tenants, we believe we will benefit from having a well-diversified portfolio across industry, market, and lease term. Additionally, we strongly believe the current economic environment is likely to curb new industrial supply in the near term and to accelerate a number of trends that positively impact industrial demand. TheU.S. federal and state governments, as well as theFederal Reserve , responded to the profoundly uncertain economic outlook with a series of policies to ease the economic burden of COVID-19 closures on businesses and individuals. The majorU.S. congressional policy action known as the Coronavirus, Aid, Relief and Economic Security Act, or the CARES Act, allocated$2 trillion in federal aid to specific industries, small businesses and individuals. TheFederal Reserve also took major actions including the completion of two emergency federal funds rate cuts inMarch 2020 to a range between 0% to 0.25%, adding liquidity to the bond market, establishing new lending facilities, and expanding its bond buying program to include mortgage backed securities, investment grade corporate debt, and high yield corporate ETFs. While we expect supportive fiscal and monetary policy to continue, the timing and the magnitude of further fiscal support will be likely driven by the outcome of the 2020 elections. The current economic circumstances, while challenging, will provide an opportunity to demonstrate the diversification of our portfolio. Specifically, our existing portfolio should benefit from competitive rental rates and strong occupancy. Furthermore, we believe certain characteristics of our business should position us well in an uncertain environment, including the fact that we have a highly diversified portfolio, minimal floating rate debt exposure (taking into account our hedging activities), strong liquidity, strong access to capital, and that many of our competitors for the assets we purchase tend to be smaller local and regional investors who are likely to be more heavily impacted by interest rates and availability of capital.
Due to the COVID-19 pandemic, we expect acceleration in a number of industrial specific trends to support stronger long-term demand, including:
•the rise of e-commerce (as compared to the traditional retail store distribution model) and the concomitant demand by e-commerce industry participants for well-located, functional distribution space; •the increasing attractiveness ofthe United States as a manufacturing and distribution location because of the size of theU.S. consumer market, an increase in overseas labor costs, a desire for greater supply chain resilience and redundancy and the overall cost of supplying and shipping goods (i.e. the shortening and fattening of the supply chain); and •the overall quality of the transportation infrastructure inthe United States . Our portfolio continues to benefit from historically low availability throughout the national industrial market. We expect a near-term reduction in national industrial demand, in the aggregate, brought on by the pandemic. Certain industries and geographies are expected to be more heavily impacted. However, the acceleration in e-commerce brought on by the COVID-19 pandemic 29 -------------------------------------------------------------------------------- Table of Contents and the policy response to the pandemic has helped industrial space demand remain strong as the national availability rate remains stable. We believe the diversification of our portfolio by market, tenant industry, and tenant credit will prove to be a strength in this environment. Industrial development continues to be concentrated in the larger primary markets, but it is likely to decelerate in the near-term. We have limited exposure to many of the most active development markets. We will continue to monitor the supply and demand fundamentals for industrial real estate and assess its impact on our business.
Conditions in Our Markets
The buildings in our portfolio are located in markets throughout
Rental Income
We receive income primarily in the form of rental income from the tenants who occupy our buildings. The amount of rental income generated by the buildings in our portfolio depends principally on occupancy and rental rates. As ofSeptember 30, 2020 , our Operating Portfolio was approximately 96.9% leased and our SL Rent Change on New Leases and Renewal Leases in our Operating Portfolio together grew approximately 4.7% and 7.4% during the three and nine months endedSeptember 30, 2020 , respectively. Our Cash Rent Change on New Leases and Renewal Leases in our Operating Portfolio together grew approximately 1.3% and 1.7% during the three and nine months endedSeptember 30, 2020 . 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. 30 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our Operating Portfolio leases that commenced during the three and nine months endedSeptember 30, 2020 . Certain leases contain rental concessions; any such rental concessions are accounted for on a straight-line basis over the term of the lease. Cash Total Costs Basis Rent Per Weighted Average Lease Per SLRent Per Square Cash SL Rent Term(2) Rental Concessions Operating Portfolio Square Feet Square Foot Square Foot Foot(1) Rent Change Change (years) per Square Foot(3) Three months ended September 30, 2020 New Leases 1,576,265$ 4.00 $ 3.97 $ 1.24 (4.7) % (5.2) % 4.4 $ 1.10 Renewal Leases 4,006,340$ 3.86 $ 4.01 $ 0.60 3.1 % 7.9 % 6.2 $ 0.40 Total/weighted average 5,582,605$ 3.90 $ 4.00 $ 0.79 1.3 % 4.7 % 5.7 $ 0.60 Nine months ended September 30, 2020 New Leases 2,448,688$ 3.99 $ 4.09 $ 1.94 (4.9) % (1.2) % 5.8 $ 0.89 Renewal Leases 7,629,286$ 4.13 $ 4.31 $ 0.76 3.6 % 9.8 % 5.7 $ 0.38 Total/weighted average 10,077,974$ 4.10 $ 4.26 $ 1.04 1.7 % 7.4 % 5.7 $ 0.50 (1)We define Total Costs as the costs for improvements of vacant and renewal spaces, as well as the contingent-based legal fees and commissions for leasing transactions. Total Costs per square foot represent the total costs expected to be incurred on the leases that commenced during the period and do not reflect actual expenditures for the period. (2)We define weighted average lease term as the contractual lease term in years, assuming that tenants exercise no renewal options, purchase options, or early termination rights, weighted by square footage. (3)Represents the total rental concessions for the entire lease term. Additionally, for the three and nine months endedSeptember 30, 2020 , leases commenced totaling 82,420 and 564,358 square feet, respectively, related to the Value Add Portfolio and 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. The terms of those leases vary and on some occasions we may absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for some building related expenses during the lease term, but the cost of most of the expenses is passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all costs related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through property operating expenses to our tenants.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately 9.3% of our annualized base rental revenue will expire during the period fromOctober 1, 2020 toSeptember 30, 2021 , excluding month-to-month leases. We assume, based upon internal renewal probability estimates that some of our tenants will renew and others will vacate and the associated space will be re-let subject to downtime assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases will generally be the same as the rates under existing leases expiring during the periodOctober 1, 2020 toSeptember 30, 2021 , thereby resulting in approximately the same revenue from the same space. 31 -------------------------------------------------------------------------------- Table of Contents The following table summarizes lease expirations for leases in place as ofSeptember 30, 2020 , plus available space, for each of the ten calendar years beginning with 2020 and thereafter in our portfolio. The information in the table assumes that tenants exercise no renewal options and no 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 - 3,369,218 - - - Month-to-month leases 6 586,591 0.7 %$ 2,725 0.7 % Remainder of 2020 5 1,464,980 1.6 % 8,861 2.2 % 2021 59 9,299,999 10.5 % 41,847 10.4 % 2022 78 9,434,716 10.6 % 41,881 10.4 % 2023 82 12,195,437 13.7 % 49,848 12.4 % 2024 64 10,206,756 11.5 % 46,104 11.5 % 2025 57 9,293,133 10.4 % 41,176 10.3 % 2026 52 9,230,178 10.4 % 41,727 10.4 % 2027 25 3,427,788 3.9 % 17,347 4.3 % 2028 25 4,631,094 5.2 % 20,436 5.1 % 2029 23 5,190,476 5.8 % 23,347 5.8 % Thereafter 55 13,971,702 15.7 % 66,083 16.5 % Total 531 92,302,068 100.0 %$ 401,382 100.0 % Portfolio Summary
The following table summarizes information relating to diversification by
building type in our portfolio as of
Square Footage Annualized Base Rental Revenue
Amount
Building Type Number of Buildings Amount % Occupancy Rate (in thousands) %
Warehouse/Distribution 382 83,645,946 90.6 % 96.8 % $ 359,659 89.6 %
Light Manufacturing 70 7,902,777 8.6 % 97.5 % 38,498 9.6 %
Total Operating Portfolio/weighted
average 452 91,548,723 99.2 % 96.9 % $ 398,157 99.2 %
Value Add/Other 2 321,030 0.3 % 14.0 % 345 0.1 %
Flex/Office 8 432,315 0.5 % 48.9 % 2,880 0.7 %
Total portfolio/weighted average 462 92,302,068 100.0 % 96.3 % $ 401,382 100.0 %
32-------------------------------------------------------------------------------- Table of Contents Portfolio Acquisitions The following table summarizes our acquisitions during the three and nine months endedSeptember 30, 2020 . Purchase Price Market (1) Date Acquired Square Feet Number of Buildings (in thousands) Detroit, MI January 10, 2020 491,049 1$ 29,543 Rochester, NY January 10, 2020 124,850 1 8,565 Minneapolis/St Paul, MN February 6, 2020 139,875 1 10,460 Sacramento, CA February 6, 2020 160,534 1 18,468 Richmond, VA February 6, 2020 78,128 1 5,481 Milwaukee/Madison, WI February 7, 2020 81,230 1 7,219 Detroit, MI February 11, 2020 311,123 1 23,141 Philadelphia, PA March 9, 2020 78,000 1 6,571 Tulsa, OK March 9, 2020 134,600 1 9,895 Three months ended March 31, 2020 1,599,389 9 119,343 Sacramento, CA June 11, 2020 54,463 1 5,730 Chicago, IL June 29, 2020 67,817 1 6,184 Three months ended June 30, 2020 122,280 2$ 11,914 Philadelphia, PA August 31, 2020 112,294 1 8,427 Pittsburgh, PA September 3, 2020 125,000 1 15,580 Pittsburgh, PA September 24, 2020 66,387 1 6,685 Charlotte, NC September 28, 2020 50,000 1 5,729 Cleveland, OH September 29, 2020 276,000 1 28,261 Three months ended September 30, 2020 629,681 5 64,682 Nine months ended September 30, 2020 2,351,350 16$ 195,939
(1) As defined by
Portfolio Dispositions
During the nine months endedSeptember 30, 2020 , we sold five buildings comprised of approximately 1.7 million rentable square feet with a net book value of approximately$64.4 million to third parties. Net proceeds from the sales of rental property were approximately$121.3 million and we recognized the full gain on the sales of rental property, net, of approximately$56.9 million for the nine months endedSeptember 30, 2020 . 33 -------------------------------------------------------------------------------- Table of Contents Geographic Diversification The following table summarizes information about the 20 largest markets in our portfolio based on total annualized base rental revenue as ofSeptember 30, 2020 . Top 20 Markets (1) % of Total
Annualized Base Rental Revenue
Philadelphia, PA 9.3 %Chicago, IL 6.8 %Greenville /Spartanburg, SC 5.8 %Pittsburgh, PA 4.7 %Detroit, MI 4.5 %Milwaukee /Madison, WI 4.3 %Minneapolis/St Paul, MN 4.0 %Houston, TX 3.5 %Charlotte, NC 2.8 %Indianapolis, IN 2.5 %Cincinnati /Dayton, OH 2.5 %Boston, MA 2.5 %West Michigan , MI 2.4 %Columbus, OH 2.3 %El Paso, TX 2.2 %Columbia, SC 1.8 %Westchester /So Connecticut, CT/NY 1.7 %Cleveland, OH 1.7 %Raleigh/Durham, NC 1.6 %Kansas City, MO 1.5 % Total 68.4 % (1) As defined by CoStar. Industry Diversification The following table summarizes information about the 20 largest tenant industries in our portfolio based on total annualized base rental revenue as ofSeptember 30, 2020 . Top 20Tenant Industries (1) % of Total Annualized Base Rental Revenue Auto Components 11.9 % Air Freight & Logistics 7.9 % Commercial Services & Supplies 7.2 %Containers & Packaging 7.2 % Household Durables 5.0 % Machinery 5.0 % Building Products 4.6 % Food Products 4.5 % Internet & Direct Mkt Retail 4.3 % Media 3.9 % Food & Staples Retailing 3.6 % Electrical Equipment 3.1 % Beverages 2.8 % Specialty Retail 2.4 % Electronic Equip, Instruments 2.2 % Chemicals 2.0 % Textiles, Apparel, Luxury Good 1.9 % Household Products 1.8 % Metals & Mining 1.7 % Oil,Gas & Consumable Fuels 1.4 % Total 84.4 %
(1) Industry classification based on Global Industry Classification Standard methodology.
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Tenant Diversification
The following table summarizes information about the 20 largest tenants in our
portfolio based on total annualized base rental revenue as of September 30,
2020 .
% of Total Annualized
Top 20 Tenants (1) Number of Leases Base Rental Revenue
Amazon 5 2.9 %
General Service Administration 1 1.8 %
XPO Logistics, Inc. 5 1.3 %
TriMas Corporation 4 1.0 %
Penguin Random House LLC 1 0.9 %
DS Smith North America 2 0.9 %
American Tire Distributors Inc 5 0.9 %
Ford Motor Company 1 0.8 %
Carolina Beverage Group 2 0.8 %
Hachette Book Group, Inc. 1 0.8 %
Yanfeng US Automotive Interior 2 0.8 %
Packaging Corp of America 5 0.8 %
FedEx Corporation 3 0.8 %
Schneider Electric USA, Inc. 3 0.8 %
Kenco Logistic Services, LLC 2 0.7 %
Perrigo Company 2 0.7 %
Generation Brands 1 0.7 %
DHL Supply Chain 4 0.7 %
R.R. Donnelley & Sons Company 5 0.7 %
WestRock Company 5 0.7 %
Total 59 19.5 %
(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, 2019 , for a discussion of our critical accounting policies and estimates.
Results of Operations
The following discussion of our results of our same store (as defined below) net
operating income ("NOI") should be read in conjunction with our consolidated
financial statements. For a detailed discussion of NOI, including the reasons
management believes NOI is useful to investors, see "Non-GAAP Financial
Measures" below. Same store results are considered to be useful to investors in
evaluating our performance because they provide information relating to changes
in building-level operating performance without taking into account the effects
of acquisitions or dispositions. We encourage the reader to not only look at our
same store results, but also our total portfolio results, due to historic and
future growth.
We define same store properties as properties that were in the Operating
Portfolio for the entirety of the comparative periods presented. The results for
same store properties exclude termination fees, solar income, and revenue
associated with one-time tenant reimbursements of capital expenditures. Same
store properties exclude Operating Portfolio properties with expansions placed
into service after December 31, 2018 . On September 30, 2020 , we owned 367
industrial buildings consisting of approximately 73.0 million square feet, which
represents approximately 79.1% of our total portfolio, that are considered our
same store portfolio in the analysis below. Same store occupancy decreased
approximately 0.1% to 96.2% as of September 30, 2020 compared to 96.3% as of
September 30, 2019 .
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, 2020 and 2019 (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, 2020 and 2019 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, 2018 and our flex/office buildings and Value Add Portfolio. 35
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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
2020 2019 $ % 2020 2019 2020 2019 2020 2019 $ %
Revenue
Operating revenue
Rental income $ 90,004 $ 89,678 $ 326 0.4 % $ 25,192 $ 10,958 $ 2,051$ 1,658 $ 117,247 $ 102,294 $ 14,953 14.6 % Other income 33 64 (31) (48.4) % 15 63 - - 48 127 (79) (62.2) % Total operating revenue 90,037 89,742 295 0.3 % 25,207 11,021 2,051 1,658 117,295 102,421 14,874 14.5 % Expenses Property 15,772 15,376 396 2.6 % 3,979 1,973 1,066 808 20,817 18,157 2,660 14.6 % Net operating income (1)$ 74,265 $ 74,366 $ (101) (0.1) %$ 21,228 $ 9,048 $ 985 $ 850 96,478 84,264 12,214 14.5 % Other expenses General and administrative 9,537 8,924 613 6.9 % Depreciation and amortization 53,921 46,908 7,013 15.0 % Loss on impairments 3,172 4,413 (1,241) (28.1) % Other expenses 436 458 (22) (4.8) % Total other expenses 67,066 60,703 6,363 10.5 % Total expenses 87,883 78,860 9,023 11.4 % Other income (expense) Interest and other income 165 12 153 1,275.0 % Interest expense (15,928) (14,053) (1,875) 13.3 % Gain on involuntary conversion 1,500 - 1,500 100.0 % Gain on the sales of rental property, net 9,060 1,670 7,390 442.5 % Total other income (expense) (5,203) (12,371) 7,168 (57.9) % Net income$ 24,209 $ 11,190 $ 13,019 116.3 %
(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 $13.0 million , or 116.3%, to
$24.2 million for the three months ended September 30, 2020 , compared to $11.2
million for the three months ended September 30, 2019 .
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$0.3 million , or 0.4%, to$90.0 million for the three months endedSeptember 30, 2020 compared to$89.7 million for the three months endedSeptember 30, 2019 . Same store lease income decreased by$1.0 million , or 1.2%, to$75.6 million for the three months endedSeptember 30, 2020 compared to$76.6 million for the three months endedSeptember 30, 2019 . The decrease is partially attributable to the reduction of rental income of approximately$1.7 million for certain leases in which we determined that the future collectability was not reasonably assured, and accordingly, we converted to the cash basis of accounting and reversed any accounts receivable and accrued rent balances into rental income and did not recognize revenue for payments that were not received from the tenants. The decrease was also attributable to the reduction of base rent of approximately$1.5 million from tenant vacancies and downsizing, as well as a net increase in the amortization of net above market leases of approximately$0.4 million . These decreases were partially offset by an increase in rental income of approximately$2.6 million due to the execution of new leases and lease renewals with existing tenants. Same store other billings increased by$0.8 million , or 5.9%, to$13.9 million for the three months endedSeptember 30, 2020 compared to$13.1 million for the three months endedSeptember 30, 2019 . The increase was attributable to an increase of approximately$0.5 million related to other expense reimbursements due to new leases and an increase in real estate taxes levied by the taxing authority of approximately$0.3 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 property operating expenses increased by$0.4 million , or 2.6%, to$15.8 million for the three months endedSeptember 30, 2020 compared to$15.4 million for the three months endedSeptember 30, 2019 . This increase was primarily related to an increase in real estate taxes levied by the taxing authority of approximately$0.9 million , as well as an increase of$0.1 million related to insurance expense. These increases were partially offset by an decrease in repairs and maintenance expense and utilities expense of approximately$0.6 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, 2018 , we acquired 80 buildings consisting of approximately 17.2 million square feet (excluding five buildings that were included in the Value Add Portfolio atSeptember 30, 2020 or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2018 ), and sold 14 buildings and two land parcels consisting of approximately 3.3 million square feet. For the three months endedSeptember 30, 2020 and 2019, the buildings acquired afterDecember 31, 2018 contributed approximately$21.2 million and$8.5 million to NOI, respectively. For the three months endedSeptember 30, 2020 and 2019, the buildings sold afterDecember 31, 2018 contributed approximately$20,000 and$0.5 million to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold. 37 -------------------------------------------------------------------------------- Table of Contents Other Net Operating Income Our other assets include our flex/office buildings, Value Add Portfolio, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2018 . 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.
AtSeptember 30, 2020 , we owned eight flex/office buildings consisting of approximately 0.4 million square feet, two buildings in our Value Add Portfolio consisting of approximately 0.3 million square feet, and five buildings consisting of approximately 1.4 million square feet that were Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2018 . These buildings contributed approximately$1.4 million and$0.9 million to NOI for the three months endedSeptember 30, 2020 and 2019, respectively. Additionally, there was approximately$(0.4) million and$15,000 of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the three months endedSeptember 30, 2020 and 2019, 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$6.4 million , or 10.5%, for the three months endedSeptember 30, 2020 to$67.1 million compared to$60.7 million for the three months endedSeptember 30, 2019 . The increase is primarily a result of an increase in depreciation and amortization of approximately$7.0 million due to an increase in the depreciable asset base as a result of net acquisitions. Additionally, general and administrative expenses increased by approximately$0.6 million primarily due to increases in compensation and other payroll costs. These increases were partially offset by a decrease in loss on impairments of approximately$1.2 million as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements.
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, gain on involuntary conversion, and gain on the sales of rental property, net. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs, and amortization of fair market value adjustments associated with the assumption of debt. Total net other expense decreased$7.2 million , or 57.9%, for the three months endedSeptember 30, 2020 to$5.2 million compared$12.4 million for the three months endedSeptember 30, 2019 . This decrease was primarily a result of an increase in the gain on the sales of rental property, net of approximately$7.4 million and a gain on involuntary conversion of approximately$1.5 million related to an eminent domain taking of a portion of a parcel of land that occurred during the three months endedSeptember 30, 2020 . Additionally, there was an increase of approximately$0.2 million in interest and other income due to an increased cash and cash equivalents balance during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . These increases in other income were partially offset by an increase in interest expense of approximately$1.9 million which was primarily attributable to the funding of unsecured term loans onMarch 25, 2020 andDecember 18, 2019 .
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, 2020 and 2019 (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, 2020 and 2019 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, 2018 and our flex/office buildings and Value Add Portfolio. 38
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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
2020 2019 $ % 2020 2019 2020 2019 2020 2019 $ %
Revenue
Operating revenue
Rental income $ 270,324 $ 268,675 $ 1,649 0.6 % $ 74,683 $ 20,621 $ 8,050 $ 4,975 $ 353,057 $ 294,271 $ 58,786 20.0 %
Other income 304 396 (92) (23.2) % 60 102 39 - 403 498 (95) (19.1) %
Total operating revenue 270,628 269,071 1,557 0.6 % 74,743 20,723 8,089 4,975 353,460 294,769 58,691 19.9 %
Expenses
Property 47,976 47,803 173 0.4 % 11,688 4,234 3,492 2,586 63,156 54,623 8,533 15.6 %
Net operating income (1)
0.6 %$ 63,055 $ 16,489 $ 4,597 $ 2,389 290,304 240,146 50,158 20.9 % Other expenses General and administrative 29,316 26,723 2,593 9.7 % Depreciation and amortization 160,215 133,844 26,371 19.7 % Loss on impairments 3,172 9,757 (6,585) (67.5) % Other expenses 1,500 1,284 216 16.8 % Total other expenses 194,203 171,608 22,595 13.2 % Total expenses 257,359 226,231 31,128 13.8 % Other income (expense) Interest and other income 400 30 370 1,233.3 % Interest expense (46,125) (39,080) (7,045) 18.0 % Loss on extinguishment of debt (834) - (834) 100.0 % Gain on involuntary conversion 2,157 - 2,157 100.0 % Gain on the sales of rental property, net 56,864 3,261 53,603 1,643.8 % Total other income (expense) 12,462 (35,789) 48,251 (134.8) % Net income$ 108,563 $ 32,749 $ 75,814 231.5 %
(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 $75.8 million , or 231.5%, to
$108.6 million for the nine months ended September 30, 2020 compared to $32.7
million for the nine months ended September 30, 2019 .
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$1.6 million , or 0.6%, to$270.3 million for the nine months endedSeptember 30, 2020 compared to$268.7 million for the nine months endedSeptember 30, 2019 . Same store lease income increased by$0.5 million , or 0.2%, to$228.6 million for the nine months endedSeptember 30, 2020 compared to$228.1 million for the nine months endedSeptember 30, 2019 . Approximately$7.2 million of the increase was attributable to rental increases due to the execution of new leases and lease renewals with existing tenants. This increase was partially offset by a reduction of rental income of approximately$3.4 million for certain leases in which we determined that the future collectability was not reasonably assured, and accordingly, we converted to the cash basis of accounting and reversed any accounts receivable and accrued rent balances into rental income and did not recognize revenue for payments that were not received from the tenants. Rental income also decreased due to the reduction of base rent of approximately$2.9 million from tenant vacancies and downsizing, as well as a net decrease in the amortization of net above market leases of approximately$0.4 million . Same store other billings increased by$0.6 million , or 1.6%, to$41.2 million for the nine months endedSeptember 30, 2020 compared to$40.6 million for the nine months endedSeptember 30, 2019 . The increase was primarily attributable to an increase in operating expense and insurance expense reimbursements of approximately$0.6 million due to new leases.
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$0.2 million or 0.4% to$48.0 million for the nine months endedSeptember 30, 2020 compared to$47.8 million for the nine months endedSeptember 30, 2019 . This increase was primarily related to an increase in real estate taxes levied by the taxing authority of approximately$1.1 million , as well as an increase in repairs and maintenance expense and insurance expense of approximately$0.3 million and$0.1 million , respectively. These increases were partially offset by a decrease in snow removal expense and utilities expense of approximately$1.0 million and$0.3 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, 2018 , we acquired 80 buildings consisting of approximately 17.2 million square feet (excluding five buildings that were included in the Value Add Portfolio atSeptember 30, 2020 or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2018 ), and sold 14 buildings and two land parcels consisting of approximately 3.3 million square feet. For the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , the buildings acquired afterDecember 31, 2018 contributed approximately$62.7 million and$13.4 million to NOI, respectively. For the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , the buildings sold afterDecember 31, 2018 contributed approximately$0.4 million and$3.1 million to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold. 40 -------------------------------------------------------------------------------- Table of Contents Other Net Operating Income Our other assets include our flex/office buildings, Value Add Portfolio, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2018 . 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.
AtSeptember 30, 2020 , we owned eight flex/office buildings consisting of approximately 0.4 million square feet, two buildings in our Value Add Portfolio consisting of approximately 0.3 million square feet, and five buildings consisting of approximately 1.4 million square feet that were Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio afterDecember 31, 2018 . These buildings contributed approximately$4.2 million and$2.3 million to NOI for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively. Additionally, there was$0.4 million and$0.1 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , 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$22.6 million , or 13.2%, to$194.2 million for the nine months endedSeptember 30, 2020 compared to$171.6 million for the nine months endedSeptember 30, 2019 . This is primarily a result of an increase in depreciation and amortization of approximately$26.4 million as a result of net acquisitions that increased the depreciable asset base, as well as an increase of approximately$2.6 million in general and administrative expense primarily due to increases in compensation and other payroll costs. These increases were partially offset by a reduction in loss on impairments of approximately$6.6 million as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements.
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, loss on extinguishment of debt, gain on involuntary conversion, and gain on the sales of rental property, net. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs, and amortization of fair market value adjustments associated with the assumption of debt. Total other income (expense) increased$48.3 million , or 134.8%, to a total net other income of$12.5 million for the nine months endedSeptember 30, 2020 compared to$35.8 million total net other expense for the nine months endedSeptember 30, 2019 . This increase is primarily the result of an increase in gain on the sales of rental property, net of approximately$53.6 million and a gain on involuntary conversion of approximately$2.2 million related to an eminent domain taking of a portion of a parcel of land that occurred during the nine months endedSeptember 30, 2020 . Additionally, there was an increase of approximately$0.4 million in interest and other income due to an increased cash and cash equivalents balance during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . These increases were partially offset by an increase in interest expense of approximately$7.0 million which was primarily attributable to the funding of unsecured term loans onMarch 25, 2020 ,December 18, 2019 , andJuly 25, 2019 . Additionally, we recognized a loss on extinguishment of debt of approximately$0.8 million during the nine months endedSeptember 30, 2020 that was primarily related to the refinance of the Unsecured Term Loan B and the Unsecured Term Loan C onApril 17, 2020 , as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements.
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 September
30, Nine months ended September 30,
Reconciliation of Net Income to FFO (in
thousands) 2020 2019 2020 2019
Net income $ 24,209 $ 11,190 $ 108,563 $ 32,749
Rental property depreciation and amortization 53,853 46,834 160,007 133,622
Loss on impairments 3,172 4,413 3,172 9,757
Gain on the sales of rental property, net (9,060) (1,670) (56,864) (3,261)
FFO 72,174 60,767 214,878 172,867
Preferred stock dividends (1,289) (1,289) (3,867) (3,867)
Amount allocated to restricted shares of
common stock and unvested units (184) (218) (590) (697)
FFO attributable to common stockholders and
unit holders $ 70,701 $ 59,260 $ 210,421 $ 168,303
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) 2020 2019 2020 2019
Net income $ 24,209 $ 11,190 $ 108,563 $ 32,749
General and administrative 9,537 8,924 29,316 26,723
Transaction costs 23 94 82 247
Depreciation and amortization 53,921 46,908 160,215 133,844
Interest and other income (165) (12) (400) (30)
Interest expense 15,928 14,053 46,125 39,080
Loss on impairments 3,172 4,413 3,172 9,757
Gain on involuntary conversion (1,500) - (2,157) -
Loss on extinguishment of debt - - 834 -
Other expenses 413 364 1,418 1,037
Gain on the sales of rental property, net (9,060) (1,670) (56,864) (3,261)
Net operating income $ 96,478 $ 84,264 $ 290,304 $ 240,146
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) 2020 2019 $ %
Net cash provided by operating activities $ 224,131 $ 174,930 $ 49,201 28.1 %
Net cash used in investing activities $ 114,041 $ 765,675 $ (651,634) (85.1) %
Net cash provided by (used in) financing
activities $ (47,194) $ 577,476 $ (624,670) (108.2) %
Net cash provided by operating activities increased $49.2 million to $224.1
million for the nine months ended September 30, 2020 compared to $174.9 million
for the nine months ended September 30, 2019 . The increase was primarily
attributable to incremental operating cash flows from property acquisitions
completed after September 30, 2019 , and operating performance at existing
properties. These increases were partially offset by the loss of cash flows from
property dispositions completed after September 30, 2019 and fluctuations in
working capital due to timing of payments and rental receipts.
Net cash used in investing activities decreased $651.6 million to $114.0 million
for the nine months ended September 30, 2020 compared to $765.7 million for the
nine months ended September 30, 2019 . The decrease was primarily attributable to
an increase in proceeds from sales of rental property, net related to the
disposition of five buildings during the nine months ended September 30, 2020
for net proceeds of approximately $121.3 million , compared to the nine months
ended September 30, 2019 where we sold six buildings and two land parcels for
net proceeds of approximately $23.7 million . The decrease was also attributable
to the acquisition of 16 buildings for a total cash consideration of
approximately $195.4 million for the nine months ended September 30, 2020
compared to the acquisition of 46 buildings for a total cash consideration of
approximately $748.0 million for the nine months ended September 30, 2019 .
Net cash provided by (used in) financing activities decreased $624.7 million to
$(47.2) million for the nine months ended September 30, 2020 compared to $577.5
million for the nine months ended September 30, 2019 . The decrease in net cash
provided (used in) by financing activities is primarily attributable to a
decrease of net proceeds from the sales of common stock of approximately $395.8
million , an increase of net cash outflow on our unsecured credit facility of
approximately $123.5 million and our unsecured term loans of $75.0 million , and
an increase of approximately $29.0 million in dividends paid during the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019 .
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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 is primarily rental income, expense recoveries from tenants, and other income from operations and is our principal source of funds that we use to pay operating expenses, debt service, recurring capital expenditures and the distributions required to maintain our REIT qualification. We look to the capital markets (common equity, preferred equity, and debt) to primarily fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality standards for our buildings that promote high occupancy rates and permit increases in rental rates while reducing tenant turnover and controlling operating expenses. We believe that our revenue, together with proceeds from building sales and debt and equity financings, will continue to provide funds for our short-term and medium-term liquidity needs. Our short-term liquidity requirements consist primarily of funds to pay for operating expenses and other expenditures directly associated with our buildings, including interest expense, interest rate swap payments, scheduled principal payments on outstanding indebtedness, funding of property acquisitions under contract, general and administrative expenses, and capital expenditures for tenant improvements and leasing commissions. Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for acquisitions, non-recurring capital expenditures, and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through cash flow from operations, the issuance of equity or debt securities, other borrowings, property dispositions, or, in connection with acquisitions of certain additional buildings, the issuance of common units in theOperating Partnership . In response to the COVID-19 pandemic, we have worked to ensure that we maintain adequate liquidity. OnApril 17, 2020 we refinanced the Unsecured Term Loan B and the Unsecured Term Loan C, as discussed in "Indebtedness Outstanding" below. As ofSeptember 30, 2020 , we had total immediate liquidity of approximately$567.1 million , comprised of$70.1 million of cash and cash equivalents and$497.0 million of immediate availability on our unsecured credit facility. When incorporating the remaining undrawn balance available on our unsecured credit facility and the approximately$132.5 million of forward equity proceeds available to us at our option throughJanuary 13, 2021 , our total liquidity as ofSeptember 30, 2020 was approximately$699.6 million , with a material amount of that liquidity comprised of cash and cash equivalents. In addition, we require funds for future dividends to be paid to our common and preferred stockholders and unit holders in theOperating Partnership . These distributions on our common stock are voluntary (at the discretion of our board of directors), to the extent we have satisfied distribution requirements in order to maintain our REIT status for federal income tax purposes, and may be reduced or stopped if needed to fund other liquidity requirements or for other reasons. The following table summarizes the dividends attributable to our outstanding common stock that had a record date during the nine months endedSeptember 30, 2020 . Month Ended 2020 Declaration Date Record Date Per Share Payment Date September 30 July 9, 2020 September 30, 2020$ 0.12 October 15, 2020 August 31 July 9, 2020 August 31, 2020 0.12 September 15, 2020 July 31 July 9, 2020 July 31, 2020 0.12 August 17, 2020 June 30 April 9, 2020 June 30, 2020 0.12 July 15, 2020 May 31 April 9, 2020 May 29, 2020 0.12 June 15, 2020 April 30 April 9, 2020 April 30, 2020 0.12 May 15, 2020 March 31 January 8, 2020 March 31, 2020 0.12 April 15, 2020 February 29 January 8, 2020 February 28, 2020 0.12 March 16, 2020 January 31 January 8, 2020 January 31, 2020 0.12 February 18, 2020 Total$ 1.08 OnOctober 9, 2020 , our board of directors declared the common stock dividends for the months endingOctober 31, 2020 ,November 30, 2020 , andDecember 31, 2020 at a monthly rate of$0.12 per share of common stock. 44 -------------------------------------------------------------------------------- Table of Contents During the nine months endedSeptember 30, 2020 , we declared quarterly cumulative dividends on the 6.875% Series C Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") at a rate equivalent to the fixed annual rate of$1.71875 per share. The following table summarizes the dividends on the Series C Preferred Stock during the nine months endedSeptember 30, 2020 . Series C Preferred Stock Quarter Ended 2020 Declaration Date Per Share Payment Date September 30 July 9, 2020$ 0.4296875 September 30, 2020 June 30 April 9, 2020$ 0.4296875 June 30, 2020 March 31 January 8, 2020 0.4296875 March 31, 2020 Total$ 1.2890625
On
Indebtedness Outstanding
The following table summarizes certain information with respect to our
indebtedness outstanding as of
Principal
Outstanding as of
September 30, 2020 Interest
Loan (in thousands) Rate(1)(2) Maturity Date Prepayment Terms(3)
Unsecured credit facility:
Unsecured Credit Facility(4) $ -
L + 0.90% January 12, 2024 i
Total unsecured credit facility -
Unsecured term loans:
Unsecured Term Loan A 150,000 3.38 % March 31, 2022 i
Unsecured Term Loan D 150,000 2.85 % January 4, 2023 i
Unsecured Term Loan G(5) 300,000 2.77 % April 18, 2023 i
Unsecured Term Loan E 175,000 3.92 % January 15, 2024 i
Unsecured Term Loan F 200,000 3.11 % January 12, 2025 i
Total unsecured term loans 975,000
Less: Total unamortized deferred financing
fees and debt issuance costs (4,304)
Total carrying value unsecured term loans, 970,696
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
Total unsecured notes 575,000
Less: Total unamortized deferred financing
fees and debt issuance costs (1,819)
Total carrying value unsecured notes, net 573,181
Mortgage notes (secured debt):
Wells Fargo Bank , National Association CMBS 49,013 4.31 % December 1, 2022 iii
Loan
Thrivent Financial for Lutherans 3,587 4.78 % December 15, 2023 iv Total mortgage notes 52,600 Add: Total unamortized fair market value 31
premiums
Less: Total unamortized deferred financing fees and debt issuance costs (266) Total carrying value mortgage notes, net 52,365 Total / weighted average interest rate(6)$ 1,596,242 3.62 % (1)Interest rate as ofSeptember 30, 2020 . AtSeptember 30, 2020 , the one-month LIBOR ("L") was 0.14825%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on the our debt rating, as defined in the respective loan agreements. (2)The unsecured term loans have a stated interest rate of one-month LIBOR plus a spread of 1.0%, with the exception of the Unsecured Term Loan G which has a spread of 1.5% and is subject to a minimum rate for LIBOR of 0.25%. As ofSeptember 30, 2020 , one-month LIBOR for the Unsecured Term Loans 45 -------------------------------------------------------------------------------- Table of Contents A, D, E, F, and G was swapped to a fixed rate of 2.38%, 1.85%, 2.92%, 2.11%, and 1.17%, respectively. One-month LIBOR for the Unsecured Term Loan G will be swapped to a fixed rate of 0.28% effectiveMarch 19, 2021 . (3)Prepayment terms consist of (i) pre-payable with no penalty; (ii) pre-payable with penalty; (iii) pre-payable without penalty three months prior to the maturity date, however can be defeased; and (iv) pre-payable without penalty three months prior to the maturity date. (4)The capacity of the unsecured credit facility is$500.0 million . The initial maturity date isJanuary 15, 2023 , which may be extended pursuant to two six-month extension options exercisable at our discretion upon advance written notice. Exercise of each six-month option is subject to the following conditions: (i) absence of a default immediately before the extension and immediately after giving effect to the extension, (ii) accuracy of representations and warranties as of the extension date (both immediately before and after the extension), as if made on the extension date, and (iii) payment of a fee. Neither extension option is subject to lender consent, assuming proper notice and satisfaction of the conditions. (5)The initial maturity date isApril 16, 2021 , which may be extended pursuant to two one-year extension options exercisable at our discretion upon advance written notice. Exercise of each one-year 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. (6)The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of$975.0 million of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The aggregate undrawn nominal commitments on the unsecured credit facility and unsecured term loans as ofSeptember 30, 2020 was approximately$497.0 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
OnApril 17, 2020 , we entered into the$300.0 million Unsecured Term Loan G with Wells Fargo, National Association, as administrative agent on behalf of the various lenders under the agreement. In connection with execution of the Unsecured Term Loan G, the Unsecured Term Loan B and Unsecured Term Loan C were paid in full. As ofSeptember 30, 2020 , the Unsecured Term Loan G bore an interest rate of LIBOR plus a spread of 1.5% based on our debt rating, as defined in the loan agreement, and subject to a minimum rate for LIBOR of 0.25%. The Unsecured Term Loan G matures onApril 16, 2021 , subject to two one-year extension options at our discretion, and subject to certain conditions (other than lender discretion) such as the absence of default and the payment of an extension fee. We intend to exercise both extension options. To exercise the extension options we are required pay a fee equal to (i) 0.15% of the outstanding amount on the effective day of the first extension period and (ii) 0.20% of the outstanding amount on the effective day of the second extension period. The Unsecured Term Loan G has an accordion feature that allows us to increase its borrowing capacity to$600.0 million , subject to the satisfaction of certain conditions and lender consents. The Company and certain wholly owned subsidiaries of theOperating Partnership are guarantors of the Unsecured Term Loan G. The agreement also contains financial and other covenants substantially similar to the covenants in our unsecured credit facility. The following table summarizes our debt capital structure as ofSeptember 30, 2020 . Debt Capital Structure September 30, 2020 Total principal outstanding (in thousands)$ 1,602,600 Weighted average duration (years) 3.6 % Secured debt 3.3 % % Debt maturing next 12 months - % Net Debt to Real Estate Cost Basis(1) 32.3 %
(1)We define Net Debt as our amounts outstanding under our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes, less cash and cash equivalents. We define Real Estate Cost Basis as the book value of rental property and deferred leasing intangibles, exclusive of the related accumulated depreciation and amortization.
We regularly pursue new financing opportunities to ensure an appropriate balance
sheet position. As a result of these dedicated efforts, we are confident in our
ability to meet future debt maturities and building acquisition funding needs.
We believe that our current balance sheet is in an adequate position at the date
of this filing, despite possible volatility in the credit markets.
Our interest rate exposure as it relates to interest expense payments on our
floating rate debt is managed through our use of interest rate swaps, which fix
the rate of our long term floating rate debt. For a detailed discussion on our
use of interest rate swaps, see "Interest Rate Risk" below.
46
--------------------------------------------------------------------------------Table of Contents Equity Preferred Stock The following table summarizes our outstanding preferred stock issuances as ofSeptember 30, 2020 . Liquidation Value Preferred Stock Issuances Issuance Date Number of Shares Per Share Interest Rate Series C Preferred Stock March 17, 2016 3,000,000$ 25.00 6.875 % Common Stock The following table summarizes our at-the-market ("ATM") common stock offering program as ofSeptember 30, 2020 . We may from time to time sell common stock through sales agents under the program. There was no activity under the ATM common stock offering program during the three months endedSeptember 30, 2020 . Aggregate Common Stock Available as of ATM Common Stock Offering Maximum Aggregate Offering September 30, 2020 Program Date Price (in thousands) (in thousands) 2019$600 million ATM February 14, 2019 $ 600,000 $ 318,248 OnJanuary 13, 2020 , we completed an underwritten public offering of an aggregate 10,062,500 shares of common stock at a price to the underwriters of$30.9022 per share, consisting of (i) 5,600,000 shares offered directly by us and (ii) 4,462,500 shares offered by the forward dealer in connection with certain forward sale agreements (including 1,312,500 shares offered pursuant to the underwriters' option to purchase additional shares, which option was exercised in full). The offering closed onJanuary 16, 2020 and we received net proceeds from the sale of shares offered directly by us of approximately$173.1 million . Subject to our right to elect cash or net share settlement, we have the ability to settle the forward sales agreements at any time through scheduled maturity date of the forward sale agreements ofJanuary 13, 2021 .
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, 2020 , we owned approximately 97.8% of theOperating Partnership , and our current and former executive officers, directors, senior employees and their affiliates, and third parties who contributed properties to us in exchange for common units in ourOperating Partnership , owned the remaining 2.2%.
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. 47
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Table of Contents The following table details our outstanding interest rate swaps as ofSeptember 30, 2020 . Notional Amount Interest Rate (in Fair Value Pay Fixed Receive Variable Derivative Counterparty Trade Date Effective Date thousands) (in thousands) Interest Rate Interest Rate Maturity Date Royal Bank of Canada Jan-08-2015 Mar-20-2015$ 25,000 $ (182) 1.7090 % One-month L Mar-21-2021 The Toronto-Dominion Bank Jan-08-2015 Mar-20-2015$ 25,000 $ (182) 1.7105 % One-month L Mar-21-2021 The Toronto-Dominion Bank Jan-08-2015 Sep-10-2017$ 100,000 $ (970) 2.2255 % One-month L Mar-21-2021Wells Fargo, N.A. Jan-08-2015 Mar-20-2015$ 25,000 $ (639) 1.8280 % One-month L Mar-31-2022 The Toronto-Dominion Bank Jan-08-2015 Feb-14-2020$ 25,000 $ (874) 2.4535 % One-month L Mar-31-2022 Regions Bank Jan-08-2015 Feb-14-2020$ 50,000 $ (1,766) 2.4750 % One-month L Mar-31-2022 Capital One, N.A. Jan-08-2015 Feb-14-2020$ 50,000 $ (1,808) 2.5300 % One-month L Mar-31-2022 The Toronto-Dominion Bank Jul-20-2017 Oct-30-2017$ 25,000 $ (979) 1.8485 % One-month L Jan-04-2023 Royal Bank of Canada Jul-20-2017 Oct-30-2017$ 25,000 $ (980) 1.8505 % One-month L Jan-04-2023Wells Fargo, N.A. Jul-20-2017 Oct-30-2017$ 25,000 $ (980) 1.8505 % One-month L Jan-04-2023 PNC Bank, N.A. Jul-20-2017 Oct-30-2017$ 25,000 $ (978) 1.8485 % One-month L Jan-04-2023 PNC Bank, N.A. Jul-20-2017 Oct-30-2017$ 50,000 $ (1,956) 1.8475 % One-month L Jan-04-2023 The Toronto-Dominion Bank Apr-20-2020 Sep-29-2020$ 75,000 $ (272) 0.2750 % One-month L Apr-18-2023Wells Fargo, N.A. Apr-20-2020 Sep-29-2020$ 75,000 $ (279) 0.2790 % One-month L Apr-18-2023 The Toronto-Dominion Bank Apr-20-2020 Mar-19-2021$ 75,000 $ (230) 0.2750 % One-month L Apr-18-2023Wells Fargo, N.A. Apr-20-2020 Mar-19-2021$ 75,000 $ (239) 0.2800 % One-month L Apr-18-2023 The Toronto-Dominion Bank Jul-24-2018 Jul-26-2019$ 50,000 $ (4,568) 2.9180 % One-month L Jan-12-2024 PNC Bank, N.A. Jul-24-2018 Jul-26-2019$ 50,000 $ (4,568) 2.9190 % One-month L Jan-12-2024 Bank of Montreal Jul-24-2018 Jul-26-2019$ 50,000 $ (4,568) 2.9190 % One-month L Jan-12-2024 U.S. Bank, N.A. Jul-24-2018 Jul-26-2019$ 25,000 $ (2,284) 2.9190 % One-month L Jan-12-2024Wells Fargo, N.A. May-02-2019 Jul-15-2020$ 50,000 $ (4,412) 2.2460 % One-month L Jan-15-2025 U.S. Bank, N.A. May-02-2019 Jul-15-2020$ 50,000 $ (4,411) 2.2459 % One-month L Jan-15-2025 Regions Bank May-02-2019 Jul-15-2020$ 50,000 $ (4,411) 2.2459 % One-month L Jan-15-2025 Bank of Montreal Jul-16-2019 Jul-15-2020$ 50,000 $ (3,276) 1.7165 % One-month L Jan-15-2025 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, 2020 , the fair value of all of our 24 interest rate swaps were in a liability position of approximately$45.8 million , including any adjustment for nonperformance risk related to these agreements. As ofSeptember 30, 2020 , we had$975.0 million of variable rate debt. As ofSeptember 30, 2020 , 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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