Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 to STAG 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 December 31, 2021, as updated elsewhere is this report, including those set forth under the headings “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
•the risk of global or national recessions and international, national, regional, and local economic conditions;
•the ongoing adverse effects of the public health crisis of the novel coronavirus disease (“COVID-19”) pandemic, or any future pandemic, epidemic or outbreak of infectious disease, on the financial condition, results of operations, cash flows and performance of the Company and its tenants, the real estate market and the global economy and financial markets;
•our ability to raise equity capital on attractive terms;
•the competitive environment in which we operate;
•real estate risks, including fluctuations in real estate values, the general economic climate in local markets and competition for tenants in such markets, and the repurposing or redevelopment of retail properties into industrial properties (in part or whole);
•decreased rental rates or increased vacancy rates;
•potential defaults (including bankruptcies or insolvency) on or non-renewal of leases by tenants;
•acquisition risks, including our ability to identify and complete accretive acquisitions and/or failure of such acquisitions to perform in accordance with projections;
•the timing of acquisitions and dispositions;
•technological developments, particularly those affecting supply chains and logistics;
•potential natural disasters, epidemics, pandemics, and other potentially catastrophic events such as acts of war and/or terrorism (including the conflict between Russia and Ukraine and the related impact on macroeconomic conditions as a result of such conflict);
•the general level of interest rates and currencies;
•potential changes in the law or governmental regulations and interpretations of those laws and regulations, including changes in real estate and zoning laws or real estate investment trust (“REIT”) or corporate income tax laws, and potential increases in real property tax rates;
•financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;
•credit risk in the event of non-performance by the counterparties to the interest rate swaps and revolving and unfunded debt;
•how and when pending forward equity sales may settle;
•lack of or insufficient amounts of insurance;
•our ability to maintain our qualification as a REIT;
•our ability to retain key personnel;
•litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and
•possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us.
Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Certain Definitions
In this report:
“GAAP” means generally accepted accounting principles in the United States.
“Total annualized base rental revenue” means the contractual monthly base rent as of September 30, 2022 (which differs from rent calculated in accordance with GAAP) multiplied by 12. If a tenant is in a free rent period as of September 30, 2022, the total annualized base rental revenue is calculated based on the first contractual monthly base rent amount multiplied by 12.
“Occupancy rate” means the percentage of total leasable square footage for which either revenue recognition has commenced in accordance with GAAP or the lease term has commenced as of the close of the reporting period, whichever occurs earlier.
“Value Add Portfolio” means our properties that meet any of the following criteria: (i) less than 75% occupied as of the acquisition date (ii) will be less than 75% occupied due to known move-outs within two years of the acquisition date; (iii) out of service with significant physical renovation of the asset; or (iv) development.
“Stabilization” for properties under development or being redeveloped means, the earlier of achieving 90% occupancy or 12 months after completion. With respect to properties acquired and immediately added to the Value Add Portfolio, (i) if acquired with less than 75% occupancy as of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy or 12 months from the acquisition date; or (ii) if acquired and will be less than 75% occupied due to known move-outs within
two years of the acquisition date, Stabilization will occur upon the earlier of achieving 90% occupancy after the known move-outs have occurred or 12 months after the known move-outs have occurred.
“Operating Portfolio” means all warehouse and light manufacturing assets that were acquired stabilized or have achieved Stabilization. The Operating Portfolio excludes non-core flex/office assets, assets contained in the Value Add Portfolio, and assets classified as held for sale.
“Comparable Lease” means a lease in the same space with a similar lease structure as compared to the previous in-place lease, excluding new leases for space that was not occupied under our ownership.
“SL Rent Change” means the percentage change in the average monthly base rent over the term of the lease that commenced during the period compared to the Comparable Lease for assets included in the Operating Portfolio. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses, and this calculation excludes the impact of any holdover rent.
“Cash Rent Change” means the percentage change in the base rent of the lease commenced during the period compared to the base rent of the Comparable Lease for assets included in the Operating Portfolio. The calculation compares the first base rent payment due after the lease commencement date compared to the base rent of the last monthly payment due prior to the termination of the lease, excluding holdover rent. Rent under gross or similar type leases are converted to a net rent based on an estimate of the applicable recoverable expenses.
“New Lease” means a lease that is signed for an initial term equal to or greater than 12 months for any vacant space, including a lease signed by a new tenant or an existing tenant that is expanding into new (additional) space.
“Renewal Lease” means a lease signed by an existing tenant to extend the term for 12 months or more, including (i) a renewal of the same space as the current lease at lease expiration, (ii) a renewal of only a portion of the current space at lease expiration, or (iii) an early renewal or workout, which ultimately does extend the original term for 12 months or more.
Overview
We are a real estate operating company focused on the acquisition, ownership, and operation of industrial properties throughout the United States. We are a Maryland corporation and our common stock is publicly traded on the New York Stock Exchange under the symbol “STAG.”
We are organized and conduct our operations to maintain our qualification as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and generally are not subject to federal income tax to the extent we currently distribute our income to our stockholders and maintain our qualification as a REIT. We remain subject to state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed income.
Pursuant to our previously announced management succession plan, 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 ten 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 next annual meeting of stockholders to be held in 2023. As Chief Executive Officer, Mr. Crooker leads and manages our business, executes the strategies developed by management and the board and serves as the chief spokesperson to our employees, stockholders and business counterparties. In addition, pursuant to our previously announced management succession plan and in connection with Mr. Crooker’s promotion, our board of directors appointed Benjamin S. Butcher as Executive Chair of our board of directors. 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.
Factors That May Influence Future Results of Operations
Our ability to increase revenues or cash flow will depend in part on our (i) external growth, specifically our acquisition activity, and (ii) internal growth, specifically our portfolio occupancy and rental rates. A variety of other factors, including those noted below, also may affect our future results of operations.
COVID-19 Pandemic
Since March 2020, the COVID-19 pandemic has severely harmed global economic activity, caused significant volatility and negative pressure in financial markets, and negatively impacted almost every industry, including the real estate industry and the industries of our tenants, directly or indirectly.
We did not incur significant disruptions or enter into any rent deferral agreements from the COVID-19 pandemic during the three and nine months ended September 30, 2022.
The COVID-19 pandemic or a future pandemic, epidemic or outbreak of infectious disease affecting states or regions in which we or our tenants operate could have material and adverse effects on our business, financial condition, results of operations and cash flows due to, among other factors: health or other government authorities requiring the closure of offices or other businesses or instituting quarantines of personnel as the result of, or in order to avoid, exposure to a contagious disease; disruption in supply and delivery chains; a general decline in business activity and demand for real estate; reduced economic activity, general economic decline or recession, which may impact our tenants’ businesses, financial condition and liquidity and may cause one or more of our tenants to be unable to make rent payments to us timely, or at all, or to otherwise seek modifications of lease obligations; difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis; and the potential negative impact on the health of our personnel, particularly if a significant number of our employees are impacted, which would result in a deterioration in our ability to ensure business continuity during a disruption.
The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including among others, the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows.
Outlook
Our business is affected by the uncertainty regarding the current high inflationary, rising interest rate environment, COVID-19 pandemic, and geopolitical tensions in Europe. These factors are key drivers of recent financial market volatility, continued supply chain bottlenecks, and growing concerns of a global recession. In the first two quarters of 2022, U.S. GDP declined 1.6% and 0.6%, respectively, while labor conditions remained strong at 3.7% unemployment as of August. As of the third quarter, general consensus among economists is higher recession risk over the near term.
Over the course of the COVID-19 pandemic, the U.S. federal and state governments, as well as the Federal 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, the Federal Reserve shifted away from an expansionary monetary policy. In September, the Federal Reserve raised interest rates 75 basis points to a range between 3.0% to 3.25%. Since March 2022 the Federal Reserve indicates monetary policy will continue to tighten with higher interest rates and a shrinking of Federal Reserve balance sheet until inflation approaches the Federal Reserve’s target.
We believe that the current economic environment, while volatile, will provide us with an opportunity to demonstrate the diversification of our portfolio. Specifically, we believe our existing portfolio should benefit from competitive rental rates and strong occupancy. In addition to our diversified portfolio, we believe that certain characteristics of our business and capital structure should position us well in an uncertain environment, including the fact that we have minimal floating rate debt exposure (taking into account our hedging activities) and strong liquidity and access to capital.
Due to the COVID-19 pandemic, geopolitical uncertainty, and recent U.S. infrastructure bill, we expect acceleration in a number of industrial specific trends to support stronger long-term demand, including:
•the continuing rise of e-commerce and the concomitant demand by e-commerce industry participants for well-located, functional distribution space;
•the increasing attractiveness of the United States as a manufacturing and distribution location because of the size of the U.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 in the United States.
Our portfolio continues to benefit from historically low availability throughout the national industrial market. The COVID-19 pandemic has caused both positive and negative impacts at varying levels across different industries and geographies. Ultimately, the acceleration in e-commerce enhanced by the COVID-19 pandemic and the growing desire for greater supply chain resilience have helped industrial space demand remain strong. The worsening global and U.S. economic trends could be a notable headwind and may result in relatively less demand for space and higher vacancy. We believe that the diversification of our portfolio by market, tenant industry, and tenant credit will prove to be strengths in this environment.
Conditions in Our Markets
The buildings in our portfolio are located in markets throughout the United States. Positive or negative changes in economic or other conditions, new supply, adverse weather conditions, natural disasters, epidemics, and other factors in these markets may affect our overall performance. We previously reported that our buildings located in Florida, Georgia, North Carolina and South Carolina did not suffer any material damage from Hurricane Ian (which made landfall in Florida in September 2022) and were able to continue to support normal tenant operations. As of September 30, 2022, our asset exposure in Florida and, together, North Carolina and South Carolina was 2.8% and 12.8% of total annualized base rental revenue, respectively.
Rental Income
We receive income primarily in the form of rental income from the tenants who occupy our buildings. The amount of rental income generated by the buildings in our portfolio depends principally on occupancy and rental rates.
Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, including those brought on by the COVID-19 pandemic, could adversely affect our ability to maintain or increase rental rates at our buildings. Our ability to lease our properties and the attendant rental rate is dependent upon, among other things, (i) the overall economy, (ii) the supply/demand dynamic in our markets, (iii) the quality of our properties, including age, clear height, and configuration, and (iv) our tenants’ ability to meet their contractual obligations to us.
The following table summarizes the Operating Portfolio leases that commenced during the three and nine months ended September 30, 2022. Any rental concessions in such leases are accounted for on a straight-line basis over the term of the lease.
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Operating Portfolio | | Square Feet | | Cash Basis Rent Per Square Foot | | SL Rent Per Square Foot | | Total Costs Per Square Foot(1) | | Cash Rent Change | | SL Rent Change | | Weighted Average Lease Term(2) (years) | | Rental Concessions per Square Foot(3) |
| | | | | | | |
Three months ended September 30, 2022 | | | | | | | | | | | | | | | | |
New Leases | | 1,135,784 | | | $ | 5.38 | | | $ | 5.69 | | | $ | 2.67 | | | 19.4 | % | | 29.9 | % | | 4.8 | | | $ | 0.25 | |
Renewal Leases | | 1,685,721 | | | $ | 4.52 | | | $ | 4.81 | | | $ | 1.74 | | | 9.5 | % | | 21.6 | % | | 5.0 | | | $ | 0.17 | |
Total/weighted average | | 2,821,505 | | | $ | 4.87 | | | $ | 5.16 | | | $ | 2.11 | | | 13.6 | % | | 25.1 | % | | 4.9 | | | $ | 0.21 | |
Nine months ended September 30, 2022 | | | | | | | | | | | | | | | | |
New Leases | | 3,627,110 | | | $ | 5.28 | | | $ | 5.56 | | | $ | 2.60 | | | 19.9 | % | | 29.7 | % | | 5.4 | | | $ | 0.53 | |
Renewal Leases | | 5,561,539 | | | $ | 4.82 | | | $ | 5.11 | | | $ | 1.14 | | | 10.7 | % | | 20.3 | % | | 5.0 | | | $ | 0.16 | |
Total/weighted average | | 9,188,649 | | | $ | 5.00 | | | $ | 5.29 | | | $ | 1.72 | | | 14.3 | % | | 24.0 | % | | 5.2 | | | $ | 0.31 | |
(1)"Total Costs" means the costs for improvements of vacant and renewal spaces, as well as the contingent-based legal fees and commissions for leasing transactions. Total Costs per square foot represent the total costs expected to be incurred on the leases that commenced during the period and do not reflect actual expenditures for the period.
(2)"Weighted average lease term" means the contractual lease term in years, assuming that tenants do not exercise any renewal options, purchase options, or early termination rights, weighted by square footage.
(3)Represents the total rental concessions for the entire lease term.
Additionally, for the three and nine months ended September 30, 2022, leases related to the Value Add Portfolio and first generation leasing, with a total of 60,875 and 809,234 square feet, are excluded from the Operating Portfolio statistics above.
Property Operating Expenses
Our property operating expenses generally consist of utilities, real estate taxes, management fees, insurance, and site repair and maintenance costs. For the majority of our tenants, our property operating expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance, and maintenance costs, but typically excluding roof and building structure. However, we also have modified gross leases and gross leases in our building portfolio, which may require us to absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for certain building related expenses during the lease term, but most of the expenses are passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all expenses related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through property operating expenses to our tenants.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases impacts our results of operations and will be affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately 7.2% of our annualized base rental revenue will expire during the period from October 1, 2022 to September 30, 2023, excluding month-to-month leases. We assume, based upon internal renewal probability estimates that some of our tenants will renew and others will vacate and the associated space will be re-let subject to downtime assumptions. Using the aforementioned assumptions, we expect that the rental rates on the respective new leases will be greater than the rates under existing leases expiring during the period October 1, 2022 to September 30, 2023, thereby resulting in an increase in revenue from the same space.
The following table summarizes lease expirations for leases in place as of September 30, 2022, plus available space, for each of the ten calendar years beginning with 2022 and thereafter in our portfolio. The information in the table assumes that tenants do not exercise renewal options or early termination rights.
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Lease Expiration Year | | Number of Leases Expiring | | Total Rentable Square Feet | | % of Total Occupied Square Feet | | Total Annualized Base Rental Revenue (in thousands) | | % of Total Annualized Base Rental Revenue | | |
Available | | — | | | 1,993,759 | | | — | | | — | | | — | | | |
| | | | | | | | | | | | |
Remainder of 2022 | | 6 | | | 663,066 | | | 0.6 | % | | $ | 3,508 | | | 0.7 | % | | |
2023 | | 80 | | | 9,911,545 | | | 9.0 | % | | 45,591 | | | 8.6 | % | | |
2024 | | 102 | | | 13,987,479 | | | 12.8 | % | | 65,917 | | | 12.4 | % | | |
2025 | | 102 | | | 14,689,924 | | | 13.4 | % | | 66,362 | | | 12.5 | % | | |
2026 | | 114 | | | 17,174,618 | | | 15.7 | % | | 83,223 | | | 15.6 | % | | |
2027 | | 92 | | | 13,997,482 | | | 12.8 | % | | 67,915 | | | 12.8 | % | | |
2028 | | 55 | | | 8,376,220 | | | 7.6 | % | | 38,989 | | | 7.3 | % | | |
2029 | | 44 | | | 7,516,081 | | | 6.9 | % | | 37,162 | | | 7.0 | % | | |
2030 | | 29 | | | 4,110,740 | | | 3.7 | % | | 22,978 | | | 4.3 | % | | |
2031 | | 41 | | | 7,312,872 | | | 6.7 | % | | 34,750 | | | 6.5 | % | | |
Thereafter | | 52 | | | 11,839,791 | | | 10.8 | % | | 65,488 | | | 12.3 | % | | |
Total | | 717 | | | 111,573,577 | | | 100.0 | % | | $ | 531,883 | | | 100.0 | % | | |
Portfolio Acquisitions
The following table summarizes our acquisitions during the three and nine months ended September 30, 2022.
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|
Market(1) | | Date Acquired | | Square Feet | | Number of Buildings | | Purchase Price (in thousands) |
Kansas City, MO | | January 6, 2022 | | 702,000 | | | 1 | | | $ | 60,428 | |
Chicago, IL | | January 31, 2022 | | 72,499 | | | 1 | | | 8,128 | |
Columbus, OH | | February 8, 2022 | | 138,213 | | | 1 | | | 11,492 | |
Cleveland, OH | | February 8, 2022 | | 136,800 | | | 1 | | | 13,001 | |
Nashville, TN | | March 10, 2022 | | 109,807 | | | 1 | | | 12,810 | |
Greenville/Spartanburg, SC | | March 10, 2022 | | 289,103 | | | 1 | | | 28,274 | |
Memphis, TN | | March 18, 2022 | | 195,622 | | | 1 | | | 15,828 | |
Greenville/Spartanburg, SC | | March 18, 2022 | | 155,717 | | | 1 | | | 16,390 | |
Three months ended March 31, 2022 | | | | 1,799,761 | | | 8 | | | 166,351 | |
Atlanta, GA | | April 1, 2022 | | 210,858 | | | 1 | | | 21,119 | |
Minneapolis/St. Paul, MN | | April 4, 2022 | | 160,000 | | | 1 | | | 13,472 | |
West Michigan, MI | | April 14, 2022 | | 211,125 | | | 2 | | | 12,274 | |
Pittsburgh, PA | | April 19, 2022 | | 400,000 | | | 1 | | | 50,178 | |
Greenville/Spartanburg, SC(2) | | April 22, 2022 | | — | | | — | | | 5,559 | |
Birmingham, AL | | May 5, 2022 | | 67,168 | | | 1 | | | 7,871 | |
South Bay/San Jose, CA | | June 7, 2022 | | 175,325 | | | 1 | | | 29,630 | |
Washington, DC | | June 29, 2022 | | 140,555 | | | 1 | | | 20,257 | |
Hampton Roads, VA | | June 29, 2022 | | 102,512 | | | 1 | | | 10,561 | |
Three months ended June 30, 2022 | | | | 1,467,543 | | | 9 | | | 170,921 | |
Atlanta, GA | | July 15, 2022 | | 159,048 | | | 1 | | | 10,062 | |
Fresno, CA | | July 25, 2022 | | 232,072 | | | 1 | | | 30,121 | |
El Paso, TX | | July 26, 2022 | | 326,166 | | | 4 | | | 37,792 | |
Portland, OR | | September 12, 2022 | | 78,000 | | | 1 | | | 11,281 | |
Louisville, KY | | September 21, 2022 | | 563,032 | | | 1 | | | 38,064 | |
Three months ended September 30, 2022 | | | | 1,358,318 | | | 8 | | | 127,320 | |
Nine months ended September 30, 2022 | | | | 4,625,622 | | | 25 | | | $ | 464,592 | |
(1) As defined by CoStar Realty Information Inc (“CoStar”). If the building is located outside of a CoStar defined market, the city and state is reflected.
(2) We acquired vacant land parcels.
Portfolio Dispositions
During the nine months ended September 30, 2022, we sold six buildings and one land parcel comprised of approximately 1.6 million rentable square feet with a net book value of approximately $73.4 million to third parties. Net proceeds from the sales of rental property were approximately $130.9 million and we recognized the full gain on the sales of rental property, net, of approximately $57.5 million for the nine months ended September 30, 2022.
Top Markets
The following table summarizes information about the 20 largest markets in our portfolio based on total annualized base rental revenue as of September 30, 2022.
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Top 20 Markets(1) | | | | | | % of Total Annualized Base Rental Revenue |
Chicago, IL | | | | | | 7.6 | % |
Philadelphia, PA | | | | | | 7.3 | % |
Greenville/Spartanburg, SC | | | | | | 5.5 | % |
Milwaukee/Madison, WI | | | | | | 4.4 | % |
Detroit, MI | | | | | | 4.3 | % |
Pittsburgh, PA | | | | | | 4.2 | % |
Columbus, OH | | | | | | 4.1 | % |
Minneapolis/St Paul, MN | | | | | | 3.7 | % |
Houston, TX | | | | | | 2.9 | % |
West Michigan, MI | | | | | | 2.5 | % |
Charlotte, NC | | | | | | 2.5 | % |
El Paso, TX | | | | | | 2.5 | % |
Cleveland, OH | | | | | | 1.9 | % |
Boston, MA | | | | | | 1.8 | % |
Indianapolis, IN | | | | | | 1.8 | % |
Kansas City, MO | | | | | | 1.8 | % |
Washington, DC | | | | | | 1.7 | % |
Columbia, SC | | | | | | 1.6 | % |
Westchester/So Connecticut, CT/NY | | | | | | 1.5 | % |
Cincinnati/Dayton, OH | | | | | | 1.5 | % |
Total | | | | | | 65.1 | % |
(1) As defined by CoStar.
Top Industries
The following table summarizes information about the 20 largest tenant industries in our portfolio based on total annualized base rental revenue as of September 30, 2022.
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Top 20 Tenant Industries(1) | | | | | | % of Total Annualized Base Rental Revenue |
Air Freight & Logistics | | | | | | 10.9 | % |
Containers & Packaging | | | | | | 8.2 | % |
Auto Components | | | | | | 7.4 | % |
Commercial Services & Supplies | | | | | | 5.3 | % |
Machinery | | | | | | 5.2 | % |
Trading Companies & Distribution (Industrial Goods) | | | | | | 5.1 | % |
Internet & Direct Market Retail | | | | | | 4.8 | % |
Household Durables | | | | | | 4.4 | % |
Distributors (Consumer Goods) | | | | | | 4.3 | % |
Food & Staples Retailing | | | | | | 3.5 | % |
Media | | | | | | 3.2 | % |
Building Products | | | | | | 3.1 | % |
Specialty Retail | | | | | | 2.8 | % |
Food Products | | | | | | 2.3 | % |
Chemicals | | | | | | 2.2 | % |
Electronic Equip, Instruments | | | | | | 2.2 | % |
Road & Rail | | | | | | 2.1 | % |
Beverages | | | | | | 2.0 | % |
Textiles, Apparel, Luxury Goods | | | | | | 2.0 | % |
Health Care Equipment & Supplies | | | | | | 1.8 | % |
Total | | | | | | 82.8 | % |
(1) Industry classification based on Global Industry Classification Standard methodology.
Top Tenants
The following table summarizes information about the 20 largest tenants in our portfolio based on total annualized base rental revenue as of September 30, 2022.
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Top 20 Tenants(1) | | Number of Leases | | | | | | % of Total Annualized Base Rental Revenue |
Amazon | | 7 | | | | | | 3.0 | % |
Eastern Metal Supply, Inc. | | 5 | | | | | | 0.9 | % |
American Tire Distributors, Inc. | | 7 | | | | | | 0.9 | % |
Tempur Sealy International, Inc. | | 2 | | | | | | 0.8 | % |
Lippert Component Manufacturing | | 5 | | | | | | 0.8 | % |
Kenco Logistic Services, LLC | | 3 | | | | | | 0.8 | % |
Penguin Random House, LLC | | 1 | | | | | | 0.8 | % |
FedEx Corporation | | 3 | | | | | | 0.8 | % |
WestRock Company | | 7 | | | | | | 0.7 | % |
DS Smith North America | | 2 | | | | | | 0.7 | % |
GXO Logistics, Inc. | | 2 | | | | | | 0.7 | % |
Yanfeng US Automotive Interior | | 2 | | | | | | 0.7 | % |
DHL Supply Chain | | 4 | | | | | | 0.7 | % |
Carolina Beverage Group | | 3 | | | | | | 0.7 | % |
LKQ Corporation | | 4 | | | | | | 0.7 | % |
Berlin Packaging L.L.C. | | 4 | | | | | | 0.7 | % |
Ford Motor Company | | 1 | | | | | | 0.6 | % |
Iron Mountain Information Management | | 5 | | | | | | 0.6 | % |
Hachette Book Group, Inc. | | 1 | | | | | | 0.6 | % |
Schneider Electric USA, Inc. | | 3 | | | | | | 0.6 | % |
Total | | 71 | | | | | | 16.8 | % |
(1) Includes tenants, guarantors, and/or non-guarantor parents.
Critical Accounting Policies
See “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our critical accounting policies and estimates.
Results of Operations
The following discussion of the results of our same store (as defined below) net operating income (“NOI”) should be read in conjunction with our consolidated financial statements included in this report. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below. Same store results are considered to be useful to investors in evaluating our performance because they provide information relating to changes in building-level operating performance without taking into account the effects of acquisitions or dispositions. We encourage the reader to not only look at our same store results, but also our total portfolio results, due to historic and future growth.
We define same store properties as properties that were in the Operating Portfolio for the entirety of the comparative periods presented. The results for same store properties exclude termination fees, solar income, and other income adjustments. Same store properties exclude Operating Portfolio properties with expansions placed into service after December 31, 2020. On September 30, 2022, we owned 458 industrial buildings consisting of approximately 93.2 million square feet and representing approximately 83.5% of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy increased approximately 1.5% to 98.9% as of September 30, 2022 compared to 97.4% as of September 30, 2021.
Comparison of the three months ended September 30, 2022 to the three months ended September 30, 2021
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the three months ended September 30, 2022 and 2021 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the three months ended September 30, 2022 and 2021 with respect to the buildings acquired and sold after December 31, 2020, Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2020, and our flex/office buildings, Value Add Portfolio, and buildings classified as held for sale.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Same Store Portfolio | | Acquisitions/Dispositions | | Other | | Total Portfolio |
| Three months ended September 30, | | Change | | Three months ended September 30, | | Three months ended September 30, | | Three months ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | $ | | % |
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
Operating revenue | | | | | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 133,528 | | | $ | 128,058 | | | $ | 5,470 | | | 4.3 | % | | $ | 26,318 | | | $ | 10,286 | | | $ | 4,837 | | | $ | 1,933 | | | $ | 164,683 | | | $ | 140,277 | | | $ | 24,406 | | | 17.4 | % |
Other income | 61 | | | 147 | | | (86) | | | (58.5) | % | | 106 | | | — | | | 1,455 | | | 1,690 | | | 1,622 | | | 1,837 | | | (215) | | | (11.7) | % |
Total operating revenue | 133,589 | | | 128,205 | | | 5,384 | | | 4.2 | % | | 26,424 | | | 10,286 | | | 6,292 | | | 3,623 | | | 166,305 | | | 142,114 | | | 24,191 | | | 17.0 | % |
Expenses | | | | | | | | | | | | | | | | | | | | | | | |
Property | 24,327 | | | 24,542 | | | (215) | | | (0.9) | % | | 4,656 | | | 1,846 | | | 1,104 | | | 354 | | | 30,087 | | | 26,742 | | | 3,345 | | | 12.5 | % |
Net operating income(1) | $ | 109,262 | | | $ | 103,663 | | | $ | 5,599 | | | 5.4 | % | | $ | 21,768 | | | $ | 8,440 | | | $ | 5,188 | | | $ | 3,269 | | | 136,218 | | | 115,372 | | | 20,846 | | | 18.1 | % |
Other expenses | | | | | | | | | | | | | | | | | | | | | | | |
General and administrative | | | | | | | | | | | | | | | | 10,884 | | | 12,668 | | | (1,784) | | | (14.1) | % |
| | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | | | | | 69,456 | | | 59,246 | | | 10,210 | | | 17.2 | % |
Loss on impairment | | | | | | | | | | | | | | | | 1,783 | | | — | | | 1,783 | | | 100.0 | % |
Other expenses | | | | | | | | | | | | | | | | 578 | | | 821 | | | (243) | | | (29.6) | % |
Total other expenses | | | | | | | | | | | | | | | | 82,701 | | | 72,735 | | | 9,966 | | | 13.7 | % |
Total expenses | | | | | | | | | | | | | | | | 112,788 | | | 99,477 | | | 13,311 | | | 13.4 | % |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | |
Interest and other income | | | | | | | | | | | | | | | | 26 | | | 30 | | | (4) | | | (13.3) | % |
Interest expense | | | | | | | | | | | | | | | | (21,155) | | | (15,746) | | | (5,409) | | | 34.4 | % |
Debt extinguishment and modification expenses | | | | | | | | | | | | | | (838) | | | — | | | (838) | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Gain on the sales of rental property, net | | | | | | | | | | | | | | | | 33,168 | | | 22,662 | | | 10,506 | | | 46.4 | % |
Total other income (expense) | | | | | | | | | | | | | | | | 11,201 | | | 6,946 | | | 4,255 | | | 61.3 | % |
Net income | | | | | | | | | | | | | | | | $ | 64,718 | | | $ | 49,583 | | | $ | 15,135 | | | 30.5 | % |
(1)For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.
Net Income
Net income for our total portfolio increased by approximately $15.1 million, or 30.5%, to approximately $64.7 million for the three months ended September 30, 2022, compared to approximately $49.6 million for the three months ended September 30, 2021.
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of rental income from (i) fixed lease payments, variable lease payments, straight-line rental income, and above and below market lease amortization from our properties (“lease income”), and (ii) other tenant billings for insurance, real estate taxes and certain other expenses (“other billings”).
For a detailed reconciliation of our same store total operating revenue to net income, see the table above.
Same store rental income, which includes lease income and other billings as discussed below, increased by approximately $5.5 million, or 4.3%, to approximately $133.5 million for the three months ended September 30, 2022 compared to approximately $128.1 million for the three months ended September 30, 2021.
Same store lease income increased by approximately $4.2 million, or 4.0%, to approximately $110.3 million for the three months ended September 30, 2022 compared to approximately $106.1 million for the three months ended September 30, 2021. The increase was primarily due to an increase in rental income of approximately $5.5 million from the execution of new leases and lease renewals with existing tenants. This increase was partially offset by the reduction of base rent of approximately $1.3 million due to tenant vacancies.
Same store other billings increased by approximately $1.2 million, or 5.6%, to approximately $23.2 million for the three months ended September 30, 2022 compared to approximately $22.0 million for the three months ended September 30, 2021. The increase was attributable to an increase of approximately $0.8 million in other expense reimbursements from an increase in corresponding expenses, as well as an increase of approximately $0.4 million of real estate tax reimbursements due to an increase in real estate taxes levied by the taxing authority for certain tenants in which we pay the real estate taxes on behalf of those tenants.
Same Store Operating Expenses
Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance.
For a detailed reconciliation of our same store operating expenses to net income, see the table above.
Total same store property operating expenses decreased by approximately $0.2 million, or 0.9%, to approximately $24.3 million for the three months ended September 30, 2022 compared to approximately $24.5 million for the three months ended September 30, 2021. This decrease was primarily related to a decrease in utility expense of approximately $0.3 million and repairs and maintenance expense of approximately $0.2 million. These decreases were partially offset by an increase in insurance and other expenses of approximately $0.1 million and $0.2 million, respectively.
Acquisitions and Dispositions Net Operating Income
For a detailed reconciliation of our acquisitions and dispositions NOI to net income, see the table above.
Subsequent to December 31, 2020, we acquired 89 buildings consisting of approximately 15.3 million square feet (excluding ten buildings that were included in the Value Add Portfolio at September 30, 2022 or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2020), and sold 28 buildings consisting of approximately 4.3 million square feet and one land parcel. For the three months ended September 30, 2022 and 2021, the buildings acquired after December 31, 2020 contributed approximately $21.6 million and $5.1 million to NOI, respectively. For the three months ended September 30, 2022 and 2021, the buildings sold after December 31, 2020 contributed approximately $0.2 million and $3.3 million to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold.
Other Net Operating Income
Other assets include our flex/office buildings, Value Add Portfolio, buildings classified as held for sale, and Operating Portfolio buildings with expansions placed in service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2020. Other NOI also includes termination, solar, and other income adjustments from buildings in our same store portfolio.
For a detailed reconciliation of our other NOI to net income, see the table above.
These buildings contributed approximately $3.3 million and $1.4 million to NOI for the three months ended September 30, 2022 and 2021, respectively. Additionally, there was approximately $1.9 million and $1.9 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the three months ended September 30, 2022 and 2021, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, loss on impairment, and other expenses.
Total other expenses increased approximately $10.0 million, or 13.7%, for the three months ended September 30, 2022 to approximately $82.7 million compared to approximately $72.7 million for the three months ended September 30, 2021. The increase was primarily a result of an increase in depreciation and amortization of approximately $10.2 million due to an increase in the depreciable asset base from net acquisitions. Additionally, a loss on impairment of approximately $1.8 million was recognized for the three months ended September 30, 2022, as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the three months ended September 30, 2021. The increase was partially offset by a decrease in general and administrative expenses of approximately $1.8 million which was primarily due to the severance costs of a former executive officer of approximately $2.1 million during the three months ended September 30, 2021 that did not recur during the three months ended September 30, 2022.
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, and gain on the sales of rental property, net. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs, and amortization of fair market value adjustments associated with the assumption of debt.
Total other income increased approximately $4.3 million, or 61.3%, for the three months ended September 30, 2022 to approximately $11.2 million compared approximately $6.9 million for the three months ended September 30, 2021. This increase was primarily a result of an increase in the gain on the sales of rental property, net of approximately $10.5 million. This increase was partially offset by an increase in interest expense of approximately $5.4 million which is primarily attributable to the issuance of $325.0 million and $400.0 million of unsecured notes on September 28, 2021 and June 28, 2022, respectively. Additionally, debt extinguishment and modification expenses of approximately $0.8 million were recognized for the three months ended September 30, 2022, as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the three months ended September 30, 2021.
Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021
The following table summarizes selected operating information for our same store portfolio and our total portfolio for the nine months ended September 30, 2022 and 2021 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the nine months ended September 30, 2022 and 2021 with respect to the buildings acquired and disposed of and Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2020 and our flex/office buildings, Value Add Portfolio and buildings classified as held for sale.
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| Same Store Portfolio | | Acquisitions/Dispositions | | Other | | Total Portfolio |
| Nine months ended September 30, | | Change | | Nine months ended September 30, | | Nine months ended September 30, | | Nine months ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | $ | | % |
Revenue | | | | | | | | | | | | | | | | | | | | | | | |
Operating revenue | | | | | | | | | | | | | | | | | | | | | | | |
Rental income | $ | 396,401 | | | $ | 384,651 | | | $ | 11,750 | | | 3.1 | % | | $ | 73,572 | | | $ | 22,026 | | | $ | 14,368 | | | $ | 5,230 | | | $ | 484,341 | | | $ | 411,907 | | | $ | 72,434 | | | 17.6 | % |
Other income | 286 | | | 421 | | | (135) | | | (32.1) | % | | 212 | | | 68 | | | 2,175 | | | 2,140 | | | 2,673 | | | 2,629 | | | 44 | | | 1.7 | % |
Total operating revenue | 396,687 | | | 385,072 | | | 11,615 | | | 3.0 | % | | 73,784 | | | 22,094 | | | 16,543 | | | 7,370 | | | 487,014 | | | 414,536 | | | 72,478 | | | 17.5 | % |
Expenses | | | | | | | | | | | | | | | | | | | | | | | |
Property | 74,094 | | | 72,849 | | | 1,245 | | | 1.7 | % | | 13,241 | | | 5,081 | | | 3,401 | | | 1,170 | | | 90,736 | | | 79,100 | | | 11,636 | | | 14.7 | % |
Net operating income(1) | $ | 322,593 | | | $ | 312,223 | | | $ | 10,370 | | | 3.3 | % | | $ | 60,543 | | | $ | 17,013 | | | $ | 13,142 | | | $ | 6,200 | | | 396,278 | | | 335,436 | | | 60,842 | | | 18.1 | % |
Other expenses | | | | | | | | | | | | | | | | | | | | | | | |
General and administrative | | | | | | | | | | | | | | | | 35,431 | | | 38,036 | | | (2,605) | | | (6.8) | % |
| | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | | | | | 206,101 | | | 174,985 | | | 31,116 | | | 17.8 | % |
Loss on impairment | | | | | | | | | | | | | | | | 1,783 | | | — | | | 1,783 | | | 100.0 | % |
Other expenses | | | | | | | | | | | | | | | | 1,607 | | | 2,184 | | | (577) | | | (26.4) | % |
Total other expenses | | | | | | | | | | | | | | | | 244,922 | | | 215,205 | | | 29,717 | | | 13.8 | % |
Total expenses | | | | | | | | | | | | | | | | 335,658 | | | 294,305 | | | 41,353 | | | 14.1 | % |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | |
Interest and other income | | | | | | | | | | | | | | | | 83 | | | 92 | | | (9) | | | (9.8) | % |
Interest expense | | | | | | | | | | | | | | | | (56,310) | | | (46,377) | | | (9,933) | | | 21.4 | % |
Debt extinguishment and modification expenses | | | | | | | | | | | | | | (838) | | | (679) | | | (159) | | | 23.4 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Gain on the sales of rental property, net | | | | | | | | | | | | | | | | 57,499 | | | 35,047 | | | 22,452 | | | 64.1 | % |
Total other income (expense) | | | | | | | | | | | | | | | | 434 | | | (11,917) | | | 12,351 | | | 103.6 | % |
Net income | | | | | | | | | | | | | | | | $ | 151,790 | | | $ | 108,314 | | | $ | 43,476 | | | 40.1 | % |
(1)For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.
Net Income
Net income for our total portfolio increased by $43.5 million, or 40.1%, to $151.8 million for the nine months ended September 30, 2022 compared to $108.3 million for the nine months ended September 30, 2021.
Same Store Total Operating Revenue
Same store total operating revenue consists primarily of rental income consisting of (i) fixed lease payments, variable lease payments, straight-line rental income, and above and below market lease amortization from our properties (“lease income”), and (ii) other tenant billings for insurance, real estate taxes and certain other expenses (“other billings”).
For a detailed reconciliation of our same store total operating revenue to net income, see the table above.
Same store rental income, which is comprised of lease income and other billings as discussed below, increased by approximately $11.8 million, or 3.1%, to approximately $396.4 million for the nine months ended September 30, 2022 compared to approximately $384.7 million for the nine months ended September 30, 2021.
Same store lease income increased by approximately $9.1 million, or 2.9%, to approximately $328.1 million for the nine months ended September 30, 2022 compared to approximately $319.0 million for the nine months ended September 30, 2021. Approximately $13.4 million of the increase was attributable to rental increases due to the execution of new leases and lease renewals with existing tenants and a net decrease in the amortization of net above market leases of approximately $0.4 million. The increase was also attributable to an increase in rental income of approximately $1.2 million at one property in which, during the nine months ended September 30, 2021, we determined that the future collectability of rental payments was not reasonably assured, and accordingly, we converted to the cash basis of accounting and reversed any accounts receivable and accrued rent balances into rental income and did not recognize revenue for payments that were not received from the tenant. The lease was subsequently terminated and replaced with a new tenant in September 2021, and during the nine months ended September 30, 2022, the former tenant repaid the rental amounts past due, both of which contributed to the increase in rental income during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. These increases were partially offset by the reduction of base rent of approximately $5.9 million due to tenant vacancy.
Same store other billings increased by approximately $2.6 million, or 4.0%, to approximately $68.3 million for the nine months ended September 30, 2022 compared to approximately $65.7 million for the nine months ended September 30, 2021. The increase was attributable to an increase of approximately $2.8 million related to other expense reimbursements which was primarily due to an increase in corresponding expenses. This increase was partially offset by a decrease in real estate taxes levied by the taxing authority as well as instances where the tenant began paying the real estate taxes directly to the taxing authority, whereas previously we paid those real estate taxes on behalf of tenants of approximately $0.2 million.
Same Store Operating Expenses
Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance.
For a detailed reconciliation of our same store operating expenses to net income, see the table above.
Total same store operating expenses increased by approximately $1.2 million or 1.7% to approximately $74.1 million for the nine months ended September 30, 2022 compared to approximately $72.8 million for the nine months ended September 30, 2021. This increase was due to increases in utility expense of approximately $0.4 million, insurance expense of approximately $0.4 million, snow removal expense of approximately $0.2 million, and other expenses of approximately $0.2 million.
Acquisitions and Dispositions Net Operating Income
For a detailed reconciliation of our acquisitions and dispositions NOI to net income, see the table above.
Subsequent to December 31, 2020, 89 buildings consisting of approximately 15.3 million square feet (excluding ten buildings that were included in the Value Add Portfolio at September 30, 2022 or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2020), and sold 28 buildings consisting of approximately 4.3 million square feet and one land parcel. For the nine months ended September 30, 2022 and September 30, 2021, the buildings acquired after December 31, 2020 contributed approximately $58.1 million and $7.9 million to NOI, respectively. For the nine months ended September 30, 2022 and September 30, 2021, the buildings sold after December 31, 2020 contributed approximately $2.4
million and $9.1 million to NOI, respectively. Refer to Note 3 in the accompanying Notes to Consolidated Financial Statements for additional discussion regarding buildings acquired or sold.
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 after December 31, 2020. Other NOI also includes termination, solar, and other income adjustments from buildings in our same store portfolio.
For a detailed reconciliation of our other NOI to net income, see the table above.
These buildings contributed approximately $8.5 million and $3.2 million to NOI for the nine months ended September 30, 2022 and September 30, 2021, respectively. Additionally, there was approximately $4.6 million and $3.0 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the nine months ended September 30, 2022 and September 30, 2021, respectively.
Total Other Expenses
Total other expenses consist of general and administrative expenses, depreciation and amortization, loss on impairment, and other expenses.
Total other expenses increased approximately $29.7 million, or 13.8%, to approximately $244.9 million for the nine months ended September 30, 2022 compared to approximately $215.2 million for the nine months ended September 30, 2021. This is primarily a result of an increase in depreciation and amortization of approximately $31.1 million as a result of net acquisitions that increased the depreciable asset base. Additionally, a loss on impairment of approximately $1.8 million was recognized for the nine months ended September 30, 2022, as discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements, that did not occur during the nine months ended September 30, 2021. This increase was partially offset by a decrease in general and administrative expenses of approximately $2.6 million which was primarily due to the severance costs of a former executive officer of approximately $2.1 million during the nine months ended September 30, 2021 that did not recur during the nine months ended September 30, 2022, as well as due to the adoption of our retirement vesting program on January 7, 2021 and related acceleration of equity-based compensation expense for certain eligible employees that did not recur during the nine months ended September 30, 2022. Additionally, other expenses decreased approximately $0.6 million that was primarily due to the settlement of litigation related to a terminated acquisition contract during the COVID-19 pandemic that did not recur during the nine months ended September 30, 2022.
Total Other Income (Expense)
Total other income (expense) consists of interest and other income, interest expense, debt extinguishment and modification expenses, and gain on the sales of rental property, net. Interest expense includes interest incurred during the period as well as adjustments related to amortization of financing fees and debt issuance costs, and amortization of fair market value adjustments associated with the assumption of debt.
Total other income (expense) increased approximately $12.4 million, or 103.6%, for the nine months ended September 30, 2022 to a total net other income of approximately $0.4 million compared to approximately $11.9 million net other expense for the nine months ended September 30, 2021. This increase is primarily a result of an increase in the gain on the sales of rental property, net of approximately $22.5 million. This was partially offset by an increase in interest expense of approximately $9.9 million which is primarily attributable to the issuance of $325.0 million and $400.0 million of unsecured notes on September 28, 2021 and June 28, 2022, respectively.
Non-GAAP Financial Measures
In this report, we disclose funds from operations (“FFO”) and NOI, which meet the definition of “non-GAAP financial measures” as set forth in Item 10(e) of Regulation S-K promulgated by the Securities and Exchange Commission (“SEC”). As a result, we are required to include in this report a statement of why management believes that presentation of these measures provides useful information to investors.
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) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income | | $ | 64,718 | | | $ | 49,583 | | | $ | 151,790 | | | $ | 108,314 | |
Rental property depreciation and amortization | | 69,400 | | | 59,195 | | | 205,938 | | | 174,825 | |
Loss on impairment | | 1,783 | | | — | | | 1,783 | | | — | |
Gain on the sales of rental property, net | | (33,168) | | | (22,662) | | | (57,499) | | | (35,047) | |
FFO | | 102,733 | | | 86,116 | | | 302,012 | | | 248,092 | |
Preferred stock dividends | | — | | | — | | | — | | | (1,289) | |
Redemption of preferred stock | | — | | | — | | | — | | | (2,582) | |
Amount allocated to restricted shares of common stock and unvested units | | (134) | | | (206) | | | (436) | | | (667) | |
FFO attributable to common stockholders and unit holders | | $ | 102,599 | | | $ | 85,910 | | | $ | 301,576 | | | $ | 243,554 | |
Net Operating Income
We consider NOI to be an appropriate supplemental performance measure to net income (loss) because we believe it helps investors and management understand the core operations of our buildings. NOI is defined as rental income, which includes billings for common area maintenance, real estate taxes and insurance, less property expenses and real estate taxes and insurance. NOI should not be viewed as an alternative measure of our financial performance since it excludes expenses which could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI.
The following table sets forth a reconciliation of our NOI for the periods presented to net income, the nearest GAAP equivalent.
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| | Three months ended September 30, | | Nine months ended September 30, |
Reconciliation of Net Income to NOI (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income | | $ | 64,718 | | | $ | 49,583 | | | $ | 151,790 | | | $ | 108,314 | |
General and administrative | | 10,884 | | | 12,668 | | | 35,431 | | | 38,036 | |
| | | | | | | | |
Depreciation and amortization | | 69,456 | | | 59,246 | | | 206,101 | | | 174,985 | |
Interest and other income | | (26) | | | (30) | | | (83) | | | (92) | |
Interest expense | | 21,155 | | | 15,746 | | | 56,310 | | | 46,377 | |
Loss on impairment | | 1,783 | | | — | | | 1,783 | | | — | |
| | | | | | | | |
Debt extinguishment and modification expenses | | 838 | | | — | | | 838 | | | 679 | |
Other expenses | | 578 | | | 821 | | | 1,607 | | | 2,184 | |
| | | | | | | | |
Gain on the sales of rental property, net | | (33,168) | | | (22,662) | | | (57,499) | | | (35,047) | |
Net operating income | | $ | 136,218 | | | $ | 115,372 | | | $ | 396,278 | | | $ | 335,436 | |
Cash Flows
Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021
The following table summarizes our cash flows for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | Change |
Cash Flows (dollars in thousands) | | 2022 | | 2021 | | $ | | % |
Net cash provided by operating activities | | $ | 297,869 | | | $ | 254,613 | | | $ | 43,256 | | | 17.0 | % |
Net cash used in investing activities | | $ | 397,321 | | | $ | 602,983 | | | $ | (205,662) | | | (34.1) | % |
Net cash provided by financing activities | | $ | 90,707 | | | $ | 374,204 | | | $ | (283,497) | | | (75.8) | % |
Net cash provided by operating activities increased approximately $43.3 million to approximately $297.9 million for the nine months ended September 30, 2022 compared to approximately $254.6 million for the nine months ended September 30, 2021. The increase was primarily attributable to incremental operating cash flows from property acquisitions completed after September 30, 2021, and operating performance at existing properties. These increases were partially offset by the loss of cash flows from property dispositions completed after September 30, 2021 and fluctuations in working capital due to the timing of payments and rental receipts.
Net cash used in investing activities decreased approximately $205.7 million to approximately $397.3 million for the nine months ended September 30, 2022 compared to approximately $603.0 million for the nine months ended September 30, 2021. The decrease was primarily attributable to the acquisition of 25 buildings and land parcels for a total cash consideration of approximately $464.6 million for the nine months ended September 30, 2022 compared to the acquisition of 39 buildings for a total cash consideration of approximately $648.6 million for the nine months ended September 30, 2021. Additionally, the decrease was also attributable to an increase in proceeds from sales of rental property, net of approximately $53.0 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Net cash provided by financing activities decreased approximately $283.5 million to approximately $90.7 million for the nine months ended September 30, 2022 compared to approximately $374.2 million for the nine months ended September 30, 2021. This decrease was primarily attributable to decrease in net proceeds received from the sale of common stock of approximately $317.1 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease was also attributable to a net cash outflow of approximately $102.0 million from our unsecured credit facility and an increase of approximately $18.2 million in dividends paid during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Additionally, we paid in full a mortgage note in the amount of approximately $46.6 million during the nine months ended September 30, 2022 that did not occur during the nine months ended September 30, 2021, as discussed in Note 4 of the accompanying Notes to Consolidated Financial Statements. These decreases were partially offset by increases in the funding of unsecured term loans and unsecured notes in the amount of $50.0 million and $75.0 million, respectively, during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Additionally, the decrease was also partially offset by the redemption of preferred stock with an aggregate liquidation value of $75.0 million during the nine months ended September 30, 2021 that did not recur during the nine months ended September 30, 2022.
Liquidity and Capital Resources
We believe that our liquidity needs will be satisfied through cash flows generated by operations, disposition proceeds, and financing activities. Operating cash flow from rental income, expense recoveries from tenants, and other income from operations is our principal source of funds to pay operating expenses, debt service, recurring capital expenditures, and the distributions required to maintain our REIT qualification. We primarily rely on the capital markets (common and preferred equity and debt securities) to fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality building standards that promote high occupancy rates and permit increases in rental rates, while reducing tenant turnover and controlling operating expenses. We believe that our revenue, together with proceeds from building sales and equity and debt financings, will continue to provide funds for our short-term and medium-term liquidity needs.
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our buildings, including interest expense, interest rate swap payments, scheduled principal payments on outstanding indebtedness, property acquisitions under contract, general and administrative expenses, and capital expenditures including tenant improvements and leasing commissions.
Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for property acquisitions and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through cash flow from operations, the issuance of equity or debt securities, other borrowings, property dispositions, or, in connection with acquisitions of certain additional buildings, the issuance of common units in the Operating Partnership.
As of September 30, 2022, we had total immediate liquidity of approximately $873.8 million, comprised of $13.4 million of cash and cash equivalents and $860.4 million of immediate availability on our unsecured credit facility.
In addition, we require funds to pay dividends to holders of our common stock and common units in the Operating Partnership. Any future dividends on our common stock are voluntary and declared in the sole discretion of our board of directors, subject to the distribution requirements to maintain our REIT status for federal income tax purposes, and may be reduced or stopped for any reason, including to use funds for other liquidity requirements. The following table summarizes the dividends declared on our outstanding common stock during the nine months ended September 30, 2022.
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Month Ended 2022 | | Declaration Date | | Record Date | | Per Share | | Payment Date |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
September 30 | | July 12, 2022 | | September 30, 2022 | | $ | 0.121667 | | | October 17, 2022 |
August 31 | | July 12, 2022 | | August 31, 2022 | | 0.121667 | | | September 15, 2022 |
July 31 | | July 12, 2022 | | July 29, 2022 | | 0.121667 | | | August 15, 2022 |
June 30 | | April 14, 2022 | | June 30, 2022 | | 0.121667 | | | July 15, 2022 |
May 31 | | April 14, 2022 | | May 31, 2022 | | 0.121667 | | | June 15, 2022 |
April 30 | | April 14, 2022 | | April 29, 2022 | | 0.121667 | | | May 16, 2022 |
March 31 | | January 10, 2022 | | March 31, 2022 | | 0.121667 | | | April 18, 2022 |
February 28 | | January 10, 2022 | | February 28, 2022 | | 0.121667 | | | March 15, 2022 |
January 31 | | January 10, 2022 | | January 31, 2022 | | 0.121667 | | | February 15, 2022 |
Total | | | | | | $ | 1.095003 | | | |
On October 12, 2022, our board of directors declared dividends on our common stock for the months ending October 31, 2022, November 30, 2022, and December 31, 2022 at a monthly rate of $0.121667 per share.
Indebtedness Outstanding
The following table summarizes certain information with respect to our indebtedness outstanding as of September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan | | Principal Outstanding as of September 30, 2022 (in thousands) | | Interest Rate(1)(2) | | Maturity Date | | Prepayment Terms(3) |
Unsecured credit facility: | | | | | | | | |
Unsecured Credit Facility(4) | | $ | 136,000 | | | Term SOFR + 0.775% | | October 23, 2026 | | i |
Total unsecured credit facility | | 136,000 | | | | | | | |
| | | | | | | | |
Unsecured term loans: | | | | | | | | |
Unsecured Term Loan F | | 200,000 | | | 2.96 | % | | January 12, 2025 | | i |
Unsecured Term Loan G | | 300,000 | | | 1.11 | % | | February 5, 2026 | | i |
Unsecured Term Loan A | | 150,000 | | | 2.16 | % | | March 15, 2027 | | i |
Unsecured Term Loan H | | 187,500 | | | 3.75 | % | | January 25, 2028 | | i |
Unsecured Term Loan I | | 187,500 | | | 2.89 | % | | January 25, 2028 | | i |
Total unsecured term loans | | 1,025,000 | | | | | | | |
Total unamortized deferred financing fees and debt issuance costs | | (4,896) | | | | | | | |
Total carrying value unsecured term loans, net | | 1,020,104 | | | | | | | |
| | | | | | | | |
Unsecured notes: | | | | | | | | |
Series F Unsecured Notes | | 100,000 | | | 3.98 | % |
| January 5, 2023 | | ii |
Series A Unsecured Notes | | 50,000 | | | 4.98 | % | | October 1, 2024 | | ii |
Series D Unsecured Notes | | 100,000 | | | 4.32 | % | | February 20, 2025 | | ii |
Series G Unsecured Notes | | 75,000 | | | 4.10 | % | | June 13, 2025 | | ii |
Series B Unsecured Notes | | 50,000 | | | 4.98 | % | | July 1, 2026 | | ii |
Series C Unsecured Notes | | 80,000 | | | 4.42 | % | | December 30, 2026 | | ii |
Series E Unsecured Notes | | 20,000 | | | 4.42 | % | | February 20, 2027 | | ii |
Series H Unsecured Notes | | 100,000 | | | 4.27 | % | | June 13, 2028 | | ii |
Series I Unsecured Notes | | 275,000 | | | 2.80 | % | | September 29, 2031 | | ii |
Series K Unsecured Notes | | 400,000 | | | 4.12 | % | | June 28, 2032 | | ii |
Series J Unsecured Notes | | 50,000 | | | 2.95 | % | | September 28, 2033 | | ii |
Total unsecured notes | | 1,300,000 | | | |
| | | |
Total unamortized deferred financing fees and debt issuance costs | | (4,747) | | | |
| | | |
Total carrying value unsecured notes, net | | 1,295,253 | | | |
| | | |
| | | | |
| | | |
Mortgage notes (secured debt): | | | | |
| | | |
Thrivent Financial for Lutherans | | 3,330 | | | 4.78 | % | | December 15, 2023 | | iii |
United of Omaha Life Insurance Company | | 4,794 | | | 3.71 | % | | October 1, 2039 | | ii |
Total mortgage notes | | 8,124 | | | | | | | |
Net unamortized fair market value discount | | (137) | | | | | | | |
Total unamortized deferred financing fees and debt issuance costs | | (6) | | | | | | | |
Total carrying value mortgage notes, net | | 7,981 | | | | | | | |
Total / weighted average interest rate(5) | | $ | 2,459,338 | | | 3.29 | % | | | | |
(1)Interest rate as of September 30, 2022. At September 30, 2022, the one-month Term Secured Overnight Financing Rate (“Term SOFR”) was 3.04205%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on the our debt rating and leverage ratio, as defined in the respective loan agreements.
(2)Our unsecured credit facility has a stated rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.775%. Our unsecured term loans have a stated interest rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.85%. As of September 30, 2022, one-month Term SOFR for the Unsecured Term Loans A, F, G, H, and I was swapped to a fixed rate of 1.31%, 2.11%, 0.26%, 2.90%, and 2.04%,, respectively (which includes the 0.10% adjustment). One-month Term SOFR for the Unsecured Term Loan G will be swapped to a fixed rate of 0.95% effective April 18, 2023. One-month Term SOFR for the Unsecured Term Loan I will be swapped to a fixed rate of 2.66% effective January 4, 2023. One-month Term SOFR for the Unsecured Term Loan H will be swapped to a fixed rate of 2.50% effective January 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 is October 24, 2025, or such later date which may be extended pursuant to two six-month extension options exercisable by us in our discretion upon advance written notice. Exercise of each six-month option is subject to the following conditions: (i) absence of a default immediately before the extension and immediately after giving effect to the extension, (ii) accuracy of representations and warranties as of the extension date (both immediately before and after the extension), as if made on the extension date, and (iii) payment of a fee. Neither extension option is subject to lender consent, assuming proper notice and satisfaction of the conditions.
(5)The weighted average interest rate was calculated using the fixed interest rate swapped on the notional amount of $1,025.0 million of debt, and is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums or discounts.
The aggregate undrawn nominal commitments on our unsecured credit facility and unsecured term loans as of September 30, 2022 was approximately $860.4 million, including issued letters of credit. Our actual borrowing capacity at any given point in time may be less and is restricted to a maximum amount based on our debt covenant compliance.
Our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes are subject to ongoing compliance with a number of financial and other covenants. As of September 30, 2022, we were in compliance with the applicable financial covenants.
On September 1, 2022, we repaid in full the mortgage note associated with the Wells Fargo Bank, National Association CMBS Loan.
On September 1, 2022, we entered into separate amended and restated term loan agreements for the Unsecured Term Loan A, the Unsecured Term Loan F, and the Unsecured Term Loan G (“Amended and Restated Unsecured Term Loans”), to provide that borrowings under the Amended and Restated Unsecured Term Loans bear a current annual interest rate of one-month Term SOFR, plus an adjustment of 0.10% and a spread of 0.85%, based on the our debt rating and leverage ratio (as defined in the applicable loan agreement). Other than the interest rate provisions described above, the material terms of the Amended and Restated Unsecured Term Loans, including the maturity dates, remain unchanged.
On July 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. The July 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.
On July 26, 2022, we entered into (i) a term loan agreement with Wells 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 with Bank of America, N.A. and the other lenders party thereto, providing for a new senior unsecured term loan in the original principal amount of $187.5 million (“Unsecured Term Loan I”). Each of the Unsecured Term Loan H and the Unsecured Term Loan I bears a current annual interest rate of one-month Term SOFR, plus a 0.10% adjustment and a spread of 0.85% based on our debt rating and leverage ratio (as defined in the applicable loan agreement), and matures on January 25, 2028. In connection with the new unsecured term loans, the $150.0 million Unsecured Term Loan D and the $175.0 million Unsecured Term Loan E were repaid in full.
On April 28, 2022, we entered into a note purchase agreement (the “April 2022 NPA”) for the private placement by our Operating Partnership of $400.0 million senior unsecured notes (the “Series K Unsecured Notes”) maturing June 28, 2032, with a fixed annual interest rate of 4.12%. The April 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. Our Operating Partnership issued the Series K Unsecured Notes on June 28, 2022. The Company and certain wholly owned subsidiaries of our Operating Partnership are guarantors of the Series K Unsecured Notes.
The following table summarizes our debt capital structure as of September 30, 2022.
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Debt Capital Structure | | September 30, 2022 |
Total principal outstanding (in thousands) | | $ | 2,469,124 | |
Weighted average duration (years) | | 5.4 | |
| | |
% Secured debt | | 0.3 | % |
% Debt maturing next 12 months | | 4.1 | % |
Net Debt to Real Estate Cost Basis(1) | | 35.6 | % |
(1)“Net Debt” means amounts outstanding under our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes, less cash and cash equivalents. “Real Estate Cost Basis” means the book value of rental property and deferred leasing intangibles, exclusive of the related accumulated depreciation and amortization.
We regularly pursue new financing opportunities to ensure an appropriate balance sheet position. As a result of these dedicated efforts, we are confident in our ability to meet future debt maturities and fund acquisitions. We believe that our current balance sheet is in an adequate position at the date of this filing, despite possible volatility in the credit markets.
Our interest rate exposure on our floating rate debt is managed through the use of interest rate swaps, which fix the rate of our long term floating rate debt. For a detailed discussion on our use of interest rate swaps, see “Interest Rate Risk” below.
Equity
Preferred Stock
We are authorized to issue up to 20,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2022 and December 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 $0.01 per share.
The following table summarizes our at-the-market (“ATM”) common stock offering program as of September 30, 2022. Pursuant to the equity distribution agreements for our ATM common stock offering program, we may from time to time sell common stock through sales agents and their affiliates, including shares sold on a forward basis under forward sale agreements. There was no activity under the ATM common stock offering program during the three months ended September 30, 2022.
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ATM Common Stock Offering Program | | Date | | Maximum Aggregate Offering Price (in thousands) | | Aggregate Available as of September 30, 2022 (in thousands) |
2022 $750 million ATM | | February 17, 2022 | | $ | 750,000 | | | $ | 750,000 | |
In connection with our underwritten public offering that closed in November 2021, on December 3, 2021, we executed a forward sale agreement for the sale of an additional 1,200,000 shares of common stock on a forward basis at a price of $41.87 per share. We did not initially receive any proceeds from the sale of shares on a forward basis. On March 29, 2022, we physically settled in full the forward sales agreement by issuing 1,200,000 shares of common stock for net proceeds of approximately $49.7 million, or $41.39 per share.
Noncontrolling Interest
We own our interests in all of our properties and conduct substantially all of our business through the Operating Partnership. We are the sole member of the sole general partner of the Operating Partnership. As of September 30, 2022, we owned approximately 97.9% of the common units in the Operating Partnership, and our current and former executive officers, directors, senior employees and their affiliates, and third parties that contributed properties to us in exchange for common units in the Operating Partnership owned the remaining 2.1%.
Interest Rate Risk
We use interest rate swaps to fix the rate of our variable rate debt. As of September 30, 2022, all of our outstanding variable rate debt, with the exception of our unsecured credit facility, was fixed with interest rate swaps through maturity.
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 from Moody’s Investor Services, Standard & Poor’s, or Fitch Ratings or other nationally recognized rating agencies.
The following table details our outstanding interest rate swaps as of September 30, 2022.
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Interest Rate Derivative Counterparty | | Trade Date | | Effective Date | | Notional Amount (in thousands) | | Fair Value (in thousands) | | Pay Fixed Interest Rate | | Receive Variable Interest Rate | | Maturity Date |
The Toronto-Dominion Bank | | Jul-20-2017 | | Jul-28-2022 | | $ | 25,000 | | | $ | 116 | | | 1.8830 | % | | One-month Term SOFR | | Jan-04-2023 |
Royal Bank of Canada | | Jul-20-2017 | | Jul-28-2022 | | $ | 25,000 | | | $ | 115 | | | 1.8980 | % | | One-month Term SOFR | | Jan-04-2023 |
Wells Fargo Bank, N.A. | | Jul-20-2017 | | Jul-28-2022 | | $ | 25,000 | | | $ | 116 | | | 1.8750 | % | | One-month Term SOFR | | Jan-04-2023 |
PNC Bank, N.A. | | Jul-20-2017 | | Jul-28-2022 | | $ | 25,000 | | | $ | 115 | | | 1.8860 | % | | One-month Term SOFR | | Jan-04-2023 |
PNC Bank, N.A. | | Jul-20-2017 | | Jul-28-2022 | | $ | 50,000 | | | $ | 231 | | | 1.8850 | % | | One-month Term SOFR | | Jan-04-2023 |
The Toronto-Dominion Bank | | Apr-20-2020 | | Aug-10-2022 | | $ | 75,000 | | | $ | 1,556 | | | 0.2660 | % | | One-month Term SOFR | | Apr-18-2023 |
Wells Fargo Bank, N.A. | | Apr-20-2020 | | Aug-10-2022 | | $ | 75,000 | | | $ | 1,559 | | | 0.2520 | % | | One-month Term SOFR | | Apr-18-2023 |
The Toronto-Dominion Bank | | Apr-20-2020 | | Aug-10-2022 | | $ | 75,000 | | | $ | 1,556 | | | 0.2660 | % | | One-month Term SOFR | | Apr-18-2023 |
Wells Fargo Bank, N.A. | | Apr-20-2020 | | Aug-10-2022 | | $ | 75,000 | | | $ | 1,559 | | | 0.2520 | % | | One-month Term SOFR | | Apr-18-2023 |
The Toronto-Dominion Bank | | Jul-24-2018 | | Jul-26-2022 | | $ | 50,000 | | | $ | 874 | | | 2.9080 | % | | One-month Term SOFR | | Jan-12-2024 |
PNC Bank, N.A. | | Jul-24-2018 | | Jul-26-2022 | | $ | 50,000 | | | $ | 866 | | | 2.9190 | % | | One-month Term SOFR | | Jan-12-2024 |
Bank of Montreal | | Jul-24-2018 | | Jul-26-2022 | | $ | 50,000 | | | $ | 868 | | | 2.9160 | % | | One-month Term SOFR | | Jan-12-2024 |
U.S. Bank, N.A. | | Jul-24-2018 | | Jul-26-2022 | | $ | 25,000 | | | $ | 435 | | | 2.9120 | % | | One-month Term SOFR | | Jan-12-2024 |
Wells Fargo Bank, N.A. | | May-02-2019 | | Aug-15-2022 | | $ | 50,000 | | | $ | 2,151 | | | 2.2360 | % | | One-month Term SOFR | | Jan-15-2025 |
U.S. Bank, N.A. | | May-02-2019 | | Aug-15-2022 | | $ | 50,000 | | | $ | 2,158 | | | 2.2380 | % | | One-month Term SOFR | | Jan-15-2025 |
Regions Bank | | May-02-2019 | | Aug-15-2022 | | $ | 50,000 | | | $ | 2,152 | | | 2.2389 | % | | One-month Term SOFR | | Jan-15-2025 |
Bank of Montreal | | Jul-16-2019 | | Aug-15-2022 | | $ | 50,000 | | | $ | 2,740 | | | 1.7100 | % | | One-month Term SOFR | | Jan-15-2025 |
U.S. Bank, N.A. | | Feb-17-2021 | | Apr-18-2023 | | $ | 150,000 | | | $ | 12,074 | | | 0.9520 | % | | One-month Term SOFR | | Feb-5-2026 |
Wells Fargo Bank, N.A. | | Feb-17-2021 | | Apr-18-2023 | | $ | 75,000 | | | $ | 6,007 | | | 0.9460 | % | | One-month Term SOFR | | Feb-5-2026 |
The Toronto-Dominion Bank | | Feb-17-2021 | | Apr-18-2023 | | $ | 75,000 | | | $ | 6,082 | | | 0.9355 | % | | One-month Term SOFR | | Feb-5-2026 |
Regions Bank | | Oct-26-2021 | | Aug-01-2022 | | $ | 50,000 | | | $ | 5,302 | | | 1.3090 | % | | One-month Term SOFR | | Mar-15-2027 |
Bank of Montreal | | Oct-26-2021 | | Aug-01-2022 | | $ | 50,000 | | | $ | 5,333 | | | 1.3090 | % | | One-month Term SOFR | | Mar-15-2027 |
PNC Bank, N.A. | | Oct-26-2021 | | Aug-01-2022 | | $ | 50,000 | | | $ | 5,311 | | | 1.3150 | % | | One-month Term SOFR | | Mar-15-2027 |
PNC Bank, N.A. | | Jul-27-2022 | | Jan-04-2023 | | $ | 50,000 | | | $ | 2,730 | | | 2.6420 | % | | One-month Term SOFR | | Jan-25-2028 |
The Toronto-Dominion Bank | | Jul-27-2022 | | Jan-04-2023 | | $ | 50,000 | | | $ | 2,726 | | | 2.6530 | % | | One-month Term SOFR | | Jan-25-2028 |
Regions Bank | | Jul-27-2022 | | Jan-04-2023 | | $ | 50,000 | | | $ | 2,681 | | | 2.6550 | % | | One-month Term SOFR | | Jan-25-2028 |
U.S. Bank, N.A. | | Jul-27-2022 | | Jan-12-2024 | | $ | 75,000 | | | $ | 3,151 | | | 2.4865 | % | | One-month Term SOFR | | Jan-25-2028 |
The Toronto-Dominion Bank | | Jul-27-2022 | | Jan-12-2024 | | $ | 50,000 | | | $ | 2,108 | | | 2.4910 | % | | One-month Term SOFR | | Jan-25-2028 |
Wells Fargo Bank, N.A. | | Jul-27-2022 | | Jan-12-2024 | | $ | 50,000 | | | $ | 2,062 | | | 2.4930 | % | | One-month Term SOFR | | Jan-25-2028 |
PNC Bank, N.A. | | Jul-27-2022 | | Jul-27-2022 | | $ | 50,000 | | | $ | 2,774 | | | 2.6790 | % | | One-month Term SOFR | | Jan-25-2028 |
In connection with the Amended and Restated Unsecured Term Loans that we entered into on September 1, 2022, as discussed in Note 4 in the accompanying Notes to Consolidated Financial Statements, we transitioned all of our outstanding interest rate swaps to one-month Term SOFR.
The swaps outlined in the above table were all designated as cash flow hedges of interest rate risk, and all are valued as Level 2 financial instruments. Level 2 financial instruments are defined as significant other observable inputs. As of September 30, 2022, the fair value of all 30 of our interest rate swaps were in an asset position of approximately $77.5 million, including any adjustment for nonperformance risk related to these agreements.
As of September 30, 2022, we had approximately $1,161.0 million of variable rate debt. As of September 30, 2022, all of our outstanding variable rate debt, with the exception of our unsecured credit facility, was fixed with interest rate swaps through maturity. To the extent interest rates increase, interest costs on our floating rate debt not fixed with interest rate swaps will increase, which could adversely affect our cash flow and our ability to pay principal and interest on our debt and our ability to make distributions to our security holders. From time to time, we may enter into interest rate swap agreements and other interest rate hedging contracts, including swaps, caps and floors. In addition, an increase in interest rates could decrease the amounts third parties are willing to pay for our assets, thereby limiting our ability to change our portfolio promptly in response to changes in economic or other conditions.
Off-balance Sheet Arrangements
As of September 30, 2022, we had letters of credit related to development projects and certain other agreements of approximately $3.6 million. As of September 30, 2022, we had no other material off-balance sheet arrangements.