The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in Part IV, Item 5 of this Annual Report on Form 10-K. OVERVIEW (dollars in thousands, except per square foot data) We are a REIT organized underMaryland law. As ofDecember 31, 2021 , our portfolio was comprised of 288 wholly owned properties containing approximately 34.0 million rentable square feet, including 226 buildings, leasable land parcels and easements containing approximately 16.7 million rentable square feet located on the island ofOahu, HI , and 62 properties containing approximately 17.3 million rentable square feet located in 30 other states. As ofDecember 31, 2021 , we also owned a 22% equity interest in an unconsolidated joint venture, which owns 18 properties located in 12 states in the mainlandUnited States containing approximately 11.7 million rentable square feet that were 100% leased with an average (by annualized rental revenues) remaining lease term of 6.6 years. InNovember 2021 , we entered into the Merger Agreement related to the Monmouth Transaction, which will add 126 new, Class A, single tenant, net leased, e-commerce focused industrial properties containing over 26 million rentable square feet with a weighted average remaining lease term of approximately eight years to our portfolio. The Monmouth Transaction is subject to the satisfaction of conditions, including the receipt of requisite approval by Monmouth's stockholders, and is expected to close 43 -------------------------------------------------------------------------------- Table of Contents in the first quarter of 2022. For more information regarding the Monmouth Transaction and the associated risks, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements", Part I, Item I, "Business," and Part I, Item 1A, "Risk Factors." As ofDecember 31, 2021 , our properties were approximately 99.2% leased (based on rentable square feet) to 259 different tenants with a weighted average remaining lease term (based on annualized rental revenues) of approximately 9.4 years. Our business is focused on industrial and logistics properties. The industrial and logistics sector has fared better than some other industries thus far during the COVID-19 pandemic, including other real estate sectors, due, in part, to the demand for e-commerce. Although, to date, the COVID-19 pandemic has not had a significant adverse impact on our business, certain of our tenants requested relief from their obligations to pay rent due to us in response to the economic conditions resulting from the COVID-19 pandemic. As ofDecember 31, 2021 , we recognized$1,297 in our accounts receivable related to the remaining deferred amounts. In most cases, these tenants were obligated to pay the deferred rents in 12 equal monthly installments beginning inSeptember 2020 . These deferred amounts did not negatively impact our operating results for the year endedDecember 31, 2021 and will continue to be reflected in our financial results in the applicable future reporting periods, assuming these tenants continue to pay the deferred rents due to us. As ofFebruary 11, 2022 , we collected approximately 99% of our granted rent deferrals. There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic. As a result, we are unable to determine what the ultimate impact will be on our, our tenants' and other stakeholders' businesses, operations, financial results and financial position. For more information and risks relating to the COVID-19 pandemic on us and our business, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements," and Part I, Item 1A, "Risk Factors." Property Operations Occupancy data for our properties as ofDecember 31, 2021 and 2020 is as follows (square feet in thousands): All Properties Comparable Properties (1) As of December 31, As of December 31, 2021 2020 2021 2020 Total properties 288 289 285 285 Total rentable square feet (2) 33,991 34,870 32,988 33,012 Percent leased (3) 99.2 % 98.5 % 99.2 % 98.4 % (1)Consists of properties that we owned continuously sinceJanuary 1, 2020 and excludes 18 properties owned by an unconsolidated joint venture in which we own a 22% equity interest. (2)Subject to modest adjustments when space is remeasured or reconfigured for new tenants and when land leases are converted to building leases. (3)Percent leased includes (i) space being fitted out for occupancy pursuant to existing leases as ofDecember 31, 2021 , if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.
The average effective rental rates per square foot, as defined below, for our
properties for the years ended
Year Ended
2021 2020
Average effective rental rates per square foot leased: (1)
All properties $ 6.58 $ 6.06
Comparable properties (2) $ 6.35 $ 6.20
(1)Average effective rental rates per square foot leased represents total rental
income during the period specified divided by the average rentable square feet
leased during the period specified.
(2)Consists of properties that we owned continuously since January 1, 2020 and
excludes 18 properties owned by an unconsolidated joint venture in which we own
a 22% equity interest.
44
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During the year ended December 31, 2021 , we entered into new and renewal leases
as summarized in the following tables:
Year
Ended
New Leases Renewals Totals
Square feet leased during the period (in thousands) 556 2,548 3,103
Weighted average rental rate change (by rentable square
feet)
16.0 % 13.6 % 14.1 % Weighted average lease term by square feet (years) 11.0 9.3 9.6
Total leasing costs and concession commitments (1)
Total leasing costs and concession commitments per square
foot (1)
$ 6.69
Total leasing costs and concession commitments per square
foot per year (1)
$ 0.61
(1)Includes commitments made for leasing expenditures and concessions, such as
leasing commissions, tenant improvements or other tenant inducements.
During the year endedDecember 31, 2021 , we completed rent resets for approximately 462,000 square feet of land at ourHawaii Properties at rental rates that were approximately 33.2% higher than the prior rental rates. As shown in the table below, approximately 5.0% of our total leased square feet and approximately 5.8% of our total annualized rental revenues as ofDecember 31, 2021 are included in leases scheduled to expire byDecember 31, 2022 . As ofDecember 31, 2021 , our lease expirations by year are as follows (dollars and square feet in thousands): % of Cumulative % of Total Cumulative % Annualized % of Leased Leased of Total Annualized Rental Annualized Number of Square Feet Square Feet Square Feet Rental Revenues Revenues Rental Revenues Period / Year Tenants Expiring (1) Expiring (1) Expiring (1) Expiring Expiring Expiring 2022 46 1,685 5.0 % 5.0 %$ 12,156 5.8 % 5.8 % 2023 30 2,377 7.1 % 12.1 % 15,592 7.4 % 13.2 % 2024 37 5,775 17.1 % 29.2 % 25,072 11.9 % 25.1 % 2025 15 1,733 5.1 % 34.3 % 9,161 4.4 % 29.5 % 2026 9 1,071 3.2 % 37.5 % 7,689 3.7 % 33.2 % 2027 15 4,730 14.0 % 51.5 % 26,033 12.4 % 45.6 % 2028 21 2,817 8.4 % 59.9 % 19,737 9.4 % 55.0 % 2029 9 1,853 5.5 % 65.4 % 6,657 3.2 % 58.2 % 2030 9 1,232 3.7 % 69.1 % 9,519 4.5 % 62.7 % 2031 9 1,424 4.2 % 73.3 % 8,401 4.0 % 66.7 % Thereafter 92 9,016 26.7 % 100.0 % 70,215 33.3 % 100.0 % Total 292 33,713 100.0 %$ 210,232 100.0 % Weighted average remaining lease term (in years) 8.2 9.4 (1)Leased square feet is pursuant to existing leases as ofDecember 31, 2021 and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any. 45
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We generally receive rents from our tenants monthly in advance. As of
rental revenues were as follows (square feet in thousands):
% of Total % of Total
No. of Leased Leased
Annualized Rental
States Properties Sq. Ft. (1) Sq. Ft. (1)
Revenues
Amazon.com Services, Inc. / 1 Amazon.com Services LLC SC, TN, VA 3 3,048 9.0 % 7.7 % 2 Federal Express Corporation/ AR, CO, HI, IA, 17 952 2.8 % 4.8 % FedEx Ground Package System, ID, IL, MN, MO, Inc. NC, ND, NV, OH, OK, UT 3 Restoration Hardware, Inc. MD 1 1,195 3.5 % 3.0 % CO, LA, NE, NY, 4 American Tire Distributors, Inc. OH 5 722 2.1 % 2.6 % 5 Servco Pacific, Inc. HI 6 590 1.8 % 2.5 % 6 Par Hawaii Refining, LLC HI 3 3,148 9.3 % 2.4 % 7 UPS Supply Chain Solutions, Inc. NH 1 614 1.8 % 2.3 % 8 EF Transit, Inc. IN 1 535 1.6 % 1.9 % 9 BJ's Wholesale Club, Inc. NJ 1 634 1.9 % 1.7 %Coca-Cola Bottling of Hawaii , 10 LLC HI 4 351 1.0 % 1.6 % 11 Safeway Inc. HI 2 146 0.4 % 1.6 % 12 ELC Distribution Center LLC KS 1 645 1.9 % 1.6 % 13 Manheim Remarketing, Inc. KS 1 338 1.0 % 1.5 % 14 Exel Inc. SC 1 945 2.8 % 1.4 % 15 Avnet, Inc. OH 1 581 1.7 % 1.4 % 16 Shurtape Technologies, LLC OH 1 645 1.9 % 1.4 % 17 Warehouse Rentals Inc. HI 5 278 0.8 % 1.3 % 18 YNAP Corporation NJ 1 167 0.5 % 1.2 % 19 ODW Logistics, Inc. OH 3 760 2.3 % 1.1 % 20 Refresco Beverages US Inc. MO, SC 2 421 1.2 % 1.1 % 21 Honolulu Warehouse Co., Ltd. HI 1 298 0.9 % 1.1 % Hellmann Worldwide Logistics, 22 Inc. FL 1 240 0.7 % 1.1 % 23General Mills Operations , LLC MI 1 158 0.5 % 1.0 % 24 AES Hawaii, LLC HI 2 1,242 3.7 % 1.0 % Total 65 18,653 55.1 % 48.3 % (1)Leased square feet is pursuant to existing leases as ofDecember 31, 2021 and includes (i) space being fitted out for occupancy, if any, and (ii) space which is leased but is not occupied or is being offered for sublease by tenants, if any.Mainland Properties . As ofDecember 31, 2021 , ourMainland Properties represented approximately 47.1% of our annualized rental revenues. We generally will seek to renew or extend the terms of leases at ourMainland Properties as their expirations approach. Due to the capital many of the tenants in ourMainland Properties have invested in these properties and because many of these properties appear to be of strategic importance to the tenants' businesses, we believe that it is likely that these tenants will renew or extend their leases prior to their expirations. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties and the terms of any leases we may enter may be less favorable to us than the terms of our existing leases for those properties.Hawaii Properties . As ofDecember 31, 2021 , ourHawaii Properties represented approximately 52.9% of our annualized rental revenues. As ofDecember 31, 2021 , certain of ourHawaii Properties are lands leased for rents that periodically reset based on fair market values, generally every ten years. Revenues from ourHawaii Properties have generally increased under our or our predecessors' ownership as rents under the leases for those properties have been reset or renewed. Lease renewals, lease extensions, new leases and rental rates for ourHawaii Properties in the future will depend on prevailing market conditions when these lease renewals, lease extensions, new leases and rental rates are set. As rent reset dates or lease expirations approach at ourHawaii Properties , we generally negotiate with existing or new tenants for new lease terms. If we are unable to reach an agreement with a tenant on a rent reset, ourHawaii Properties' leases typically provide that rent is reset based on an appraisal process. Despite our and our predecessors' prior experience with rent resets, lease extensions and new leases inHawaii , our ability to increase rents when rents reset, leases are extended, or leases expire depends upon market conditions which are beyond our control. Accordingly, we cannot be sure that the historical increases achieved at ourHawaii Properties will continue in the future. 46 -------------------------------------------------------------------------------- Table of Contents The following chart shows the annualized rental revenues as ofDecember 31, 2021 scheduled to reset at ourHawaii Properties : Scheduled Rent Resets at Hawaii Properties (dollars in thousands) Annualized Rental Revenues as of December 31, 2021 Scheduled to Reset 2022 $ 1,575 2023 2,085 2024 1,266 2025 3,103 2026 1,296 2027 and thereafter 17,099 Total $ 26,424 As ofDecember 31, 2021 ,$12,156 , or 5.8%, of our annualized rental revenues are included in leases scheduled to expire byDecember 31, 2022 and 0.8% of our rentable square feet are currently vacant. Rental rates for which available space may be leased in the future will depend on prevailing market conditions when lease extensions, lease renewals or new leases are negotiated. Whenever we extend, renew or enter new leases for our properties, we intend to seek rents that are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. Since the time, in some cases 40 to 50 years ago, certain of ourHawaii Properties' leases were originally entered into, the characteristics of the neighborhoods in the vicinity of some of those properties have changed. In such circumstances, we and our predecessors have sometimes engaged in redevelopment activities to change the character of certain properties in order to increase rents. Because ourHawaii Properties are currently experiencing strong demand for their current uses, we do not currently expect redevelopment efforts inHawaii to become a major activity of ours in the near term; however, we may undertake such activities on a selective basis. Tenant Review Process. Our manager,RMR LLC , employs a tenant review process on our behalf.RMR LLC assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances,RMR LLC evaluates the creditworthiness of a tenant based on information that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. Investing and Financing Activities (dollars in thousands) During the year endedDecember 31, 2021 , we acquired four properties and one parcel of developable land containing 1,644,508 rentable square feet for an aggregate purchase price of$134,730 , including acquisition related costs of$1,030 . As a result of an eminent domain taking during the year endedDecember 2021 , we sold a portion of a land parcel located inRock Hill, South Carolina for$1,400 , excluding closing costs, resulting in a net gain on sale of real estate of$940 . 47 -------------------------------------------------------------------------------- Table of Contents InNovember 2021 , we entered into the Merger Agreement related to the Monmouth Transaction, which will add 126 new, Class A, single tenant, net leased, e-commerce focused industrial properties containing over 26 million square feet with a weighted average remaining lease term of approximately eight years to our portfolio. We intend to finance the Monmouth Transaction by entering into a joint venture with one or more institutional investors for equity investments and with proceeds from new mortgage debt and the assumption of existing Monmouth mortgage debt. Depending on the ultimate amount of the joint venture equity investments, we may also use proceeds from the sale of some of Monmouth's properties to finance the Monmouth Transaction. In addition, in connection with the financing of the Monmouth Transaction, we have obtained commitments from lenders to make a bridge loan of up to$4,000,000 available to us. The Monmouth Transaction is subject to the satisfaction of conditions, including the receipt of requisite approval by Monmouth's stockholders and is expected to close in the first quarter of 2022. For more information regarding the Monmouth Transaction and the associated risks, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements," Part I, Item I, "Business," and Part I, Item 1A, "Risk Factors." In the first quarter of 2020, we entered into agreements related to our joint venture for 12 of our properties in the mainlandUnited States , or our joint venture, with an unrelated third party institutional investor and contributed those 12 properties to our joint venture. We received an aggregate amount of$108,676 which included certain costs associated with the formation of our joint venture from that investor for a 39% equity interest in our joint venture and we retained the remaining 61% equity interest in our joint venture. InNovember 2020 , we sold an additional 39% equity interest from our then remaining 61% equity interest to a second unrelated third party institutional investor for$108,812 , which included certain costs related with the formation of our joint venture, and we retained a 22% equity interest in our joint venture following this sale. Effective as of the date of the sale inNovember 2020 , we deconsolidated our joint venture and, since that time, we account for our joint venture using the equity method of accounting under the fair value option. We recognized a 39% noncontrolling interest in our consolidated financial statements for the year endedDecember 31, 2020 . The portion of our joint venture's net loss not attributable to us, or$866 for the year endedDecember 31, 2020 , is reported as noncontrolling interest in our consolidated statements of comprehensive income. During the year endedDecember 31, 2020 , our joint venture made aggregate cash distributions of$14,049 , including$5,479 to the first joint venture investor. InDecember 2021 , we sold six recently acquired properties to our existing joint venture for an aggregate price of approximately$205,789 . We received proceeds from the investors, who own an aggregate of 78% equity interest in the joint venture, for an aggregate amount of$160,516 and recognized a net gain on sale of$11,114 on this transaction, which is included in gain on sale of real estate in our consolidated statements of comprehensive income. The sale resulted in an increase in our investment in the joint venture, in which we own a 22% equity interest, of$45,273 . We used the net proceeds from this transaction to reduce outstanding borrowings under our revolving credit facility. During the year endedDecember 31, 2021 , we recorded an increase in the fair value of our investment in our joint venture of$40,918 as equity in earnings of investees in our consolidated statements of comprehensive income. In addition, during the year endedDecember 31, 2021 , our joint venture made aggregate cash distributions of$2,640 to us. For more information regarding our joint venture and the use of the equity method for our joint venture, see Notes 3 and 6 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. InMay 2020 , we prepaid at par plus accrued interest a mortgage note secured by one of our properties with an outstanding principal balance of approximately$48,750 , an annual interest rate of 3.48% and a maturity date inNovember 2020 . As a result of the prepayment of this mortgage note, we recorded a gain on early extinguishment of debt of$120 for the year endedDecember 31, 2020 to write off unamortized premiums. For more information regarding our investing and financing activities, see elsewhere in this Annual Report on Form 10-K, including "Business-Our Company", "Business-Our Investment Policies" and "Business-Our Disposition Policies" in Part 1, Item 1 of this Annual Report on Form 10-K, "Liquidity and Capital Resources-Our Investing and Financing Liquidity and Resources" below and Notes 3 and 5 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. 48 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Year EndedDecember 31, 2021 , Compared to Year EndedDecember 31, 2020 (dollars and share amounts in thousands, except per share data) Comparable Properties Results (1) Non-Comparable Properties Results (2)
Consolidated Results
Year Ended December 31 , Year Ended December 31 , Year Ended December 31 ,
$ % $ $ %
2021 2020 Change Change 2021 2020 Change 2021 2020 Change Change
Rental income $ 206,802 $ 201,051 $ 5,751 2.9 % $ 13,072 $ 53,524 $ (40,452) $ 219,874 $ 254,575 $ (34,701) (13.6) %
Operating expenses:
Real estate taxes 28,845 28,162 683 2.4 % 1,289 7,023 (5,734) 30,134 35,185 (5,051) (14.4) %
Other operating expenses 17,353 15,752 1,601 10.2 % 1,325 4,997 (3,672) 18,678 20,749 (2,071) (10.0) %
Total operating expenses 46,198 43,914 2,284 5.2 % 2,614 12,020 (9,406) 48,812 55,934 (7,122) (12.7) %
Net operating income (3) $ 160,604 $ 157,137 $ 3,467 2.2 % $ 10,458 $ 41,504 $ (31,046) 171,062 198,641 (27,579) (13.9) %
Other expenses:
Depreciation and amortization 50,598 70,518 (19,920) (28.2) %
Acquisition and certain other transaction related costs 1,132 200 932 N/M
General and administrative 16,724 19,580 (2,856) (14.6) %
Total other expenses 68,454 90,298 (21,844) (24.2) %
Gain on sale of real estate 12,054 23,996 (11,942) (49.8) %
Interest income - 113 (113) (100.0) %
Interest expense (35,625) (51,619) 15,994 (31.0) %
Gain on early extinguishment of debt - 120 (120) N/M
Income before income tax expense and equity in earnings of investees
79,037 80,953 (1,916) (2.4) % Income tax expense (273) (277) 4 (1.4) % Equity in earnings of investees 40,918 529 40,389 N/M Net income 119,682 81,205 38,477 47.4 % Net loss attributable to noncontrolling interest - 866 (866) N/M Net income attributable to common shareholders$ 119,682 $ 82,071 $ 37,611 45.8 % Weighted average common shares outstanding - basic 65,169 65,104 65 0.1 % Weighted average common shares outstanding - diluted 65,211 65,114 97 0.1 % Per common share data (basic and diluted): Net income attributable to common shareholders$ 1.83 $ 1.26 $ 0.57 45.2 % N/M - not meaningful (1)Consists of properties that we owned continuously sinceJanuary 1, 2020 and excludes 18 properties owned by an unconsolidated joint venture in which we own a 22% equity interest. (2)Consists of seven properties that we acquired during the period fromJanuary 1, 2020 toDecember 31, 2021 , one property we sold inDecember 2020 and 12 and six properties we contributed and sold in the first quarter of 2020 and inDecember 2021 , respectively, to our joint venture in which we currently own a 22% equity interest. UntilNovember 2020 , we consolidated the properties we then owned which were subsequently contributed to our joint venture. (3)See our definition of NOI and our reconciliation of net income to NOI below under the heading "Non-GAAP Financial Measures." References to changes in the income and expense categories below relate to the comparison of results for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . For a comparison of consolidated results for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , see Part II, Item 7, "Management's Discussion and 49 -------------------------------------------------------------------------------- Table of Contents Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Rental income. The decrease in rental income is primarily a result of our acquisition and disposition activities, which includes the contribution of 12 properties to our joint venture that was deconsolidated inNovember 2020 and the sale of six properties to our joint venture inDecember 2021 , partially offset by increases from the acquisition of two properties during the 2020 period, the acquisition of five properties during the 2021 period and leasing activity and rent resets at certain of our comparable properties. Rental income includes non-cash straight line rent adjustments totaling approximately$7,263 and$9,041 for the 2021 and 2020 periods, respectively, and net amortization of acquired real estate leases and assumed real estate lease obligations totaling approximately$781 and$791 for the 2021 and 2020 periods, respectively. Real estate taxes. The decrease in real estate taxes primarily reflects our acquisition and disposition activities, partially offset by higher tax assessments at certain of our comparable properties. Other operating expenses. Other operating expenses primarily include repairs and maintenance, utilities, insurance, snow removal and property management fees. The decrease in other operating expenses is primarily due to our acquisition and disposition activities. The increase in other operating expenses at our comparable properties is primarily due to an increase in snow removal, repairs and maintenance costs and insurance expense in the 2021 period. Depreciation and amortization. The decrease in depreciation and amortization primarily reflects our acquisition and disposition activities and certain leasing related assets becoming fully amortized in the 2021 period, partially offset by an increase in depreciation and amortization of improvements made to certain of our properties afterJanuary 1, 2021 . Acquisition and certain other transaction related costs. Acquisition and certain other transaction related costs consist of costs related to potential acquisitions that were not completed or other transactions. General and administrative. General and administrative expenses primarily include fees paid under our business management agreement withRMR LLC , legal fees, audit fees, Trustee fees and expenses and equity compensation expense. The decrease in general and administrative expenses is primarily due to a decrease in business management fees as a result of our net disposition of properties sinceJanuary 1, 2020 . Gain on sale of real estate. Gain on sale of real estate represents the net gain of$11,114 from the sale of six properties to our joint venture and a$940 gain from the sale of a portion of a land parcel as a result of an eminent domain taking in the 2021 period. During the 2020 period, we recorded a$23,966 aggregate gain on sale of real estate, resulting from the deconsolidation of and sale of equity interests in our joint venture and the sale of one other property. Interest income. Interest income represents interest earned on our cash balances. The decrease in interest income is primarily due to lower returns on invested cash during the 2021 period as compared to the 2020 period. Interest expense. The decrease in interest expense in the 2021 period is primarily due to lower average outstanding indebtedness in the 2021 period as compared to the 2020 period. Gain on early extinguishment of debt. We recorded a gain on early extinguishment of debt in connection with our prepayment of a mortgage note during the 2020 period. Income tax expense. Income tax expense primarily reflects state income taxes payable in certain jurisdictions. Equity in earnings of investees. Equity in earnings of investees is the change in the fair value of our investment in our joint venture. Net income. The increase in net income for the 2021 period compared to the 2020 period reflects the changes noted above. Net loss attributable to noncontrolling interest. Net loss attributable to noncontrolling interest represents the net loss attributable to the 39% equity interest in our joint venture that we did not own during the 2020 period when we owned a 61% equity interest in the venture. Net income attributable to common shareholders. The increase in net income attributable to common shareholders for the 2021 period compared to the 2020 period reflects the changes noted above. Weighted average common shares outstanding - basic and diluted. The increase in weighted average common shares outstanding primarily reflects common shares awarded under our equity compensation plan sinceJanuary 1, 2020 . 50 -------------------------------------------------------------------------------- Table of Contents Net income attributable to common shareholders per common share - basic and diluted. The increase in net income attributable to common shareholders per common share reflects the changes to net income attributable to common shareholders and weighted average common shares noted above. Non-GAAP Financial Measures We present certain "non-GAAP financial measures" within the meaning of the applicableSEC rules, including NOI, FFO attributable to common shareholders and Normalized FFO attributable to common shareholders. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income or net income attributable to common shareholders as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income or net income attributable to common shareholders as presented in our consolidated statements of comprehensive income. We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income and net income attributable to common shareholders. We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties. Net Operating Income We calculate NOI as shown below. We define NOI as income from our rental of real estate less our property operating expenses. The calculation of NOI excludes certain components of net income in order to provide results that are more closely related to our property level results of operations. NOI excludes amortization of capitalized tenant improvement costs and leasing commissions that we record as depreciation and amortization expense. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do. The following table presents the reconciliation of net income to NOI for the years endedDecember 31, 2021 and 2020 (dollars in thousands): Year Ended December 31, 2021 2020 Reconciliation of Net Income to NOI: Net income$ 119,682 $ 81,205 Equity in earnings of investees (40,918) (529) Income tax expense 273 277
Income before income tax expense and equity in earnings of investees
79,037 80,953 Gain on early extinguishment of debt - (120) Interest expense 35,625 51,619 Interest income - (113) Gain on sale of real estate (12,054)
(23,996)
General and administrative 16,724 19,580 Acquisition and certain other transaction related costs 1,132 200 Depreciation and amortization 50,598 70,518 NOI$ 171,062 $ 198,641 NOI: Hawaii Properties$ 82,436 $ 79,028 Mainland Properties 88,626 119,613 NOI$ 171,062 $ 198,641 Funds From Operations Attributable to Common Shareholders and Normalized Funds From Operations Attributable to Common Shareholders We calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders as shown below. FFO attributable to common shareholders is calculated on the basis defined byThe National Association of Real 51 -------------------------------------------------------------------------------- Table of Contents Estate Investment Trusts, which is net income attributable to common shareholders, calculated in accordance with GAAP, excluding any gain or loss on sale of real estate and equity in earnings of an unconsolidated joint venture, plus real estate depreciation and amortization of consolidated properties and our proportionate share of FFO of unconsolidated joint venture properties and minus FFO adjustments attributable to noncontrolling interest, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO attributable to common shareholders, we adjust for the items shown below including similar adjustments for our unconsolidated joint venture, if any, and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO attributable to common shareholders and Normalized FFO attributable to common shareholders are among the factors considered by ourBoard of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our dividend yield and our dividend yield compared to the dividend yields of other industrial REITs, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders differently than we do. The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net income attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the years endedDecember 31, 2021 and 2020 (dollars in thousands, except per share data): Year EndedDecember 31, 2021 2020
Reconciliation of Net Income attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders:
Net income attributable to common shareholders
$ 119,682 $ 82,071 Depreciation and amortization 50,598 70,518 Equity in earnings of unconsolidated joint venture (40,918) (529) Share of FFO from unconsolidated joint venture 4,823 556 Gain on sale of real estate (12,054) (23,996) FFO adjustments attributable to noncontrolling interest - (7,656) FFO attributable to common shareholders 122,131 120,964 Acquisition and certain other transaction related costs 1,132 200 Gain on early extinguishment of debt - (120) Normalized FFO attributable to common shareholders
Weighted average common shares outstanding - basic 65,169 65,104 Weighted average common shares outstanding - diluted 65,211 65,114 Per common share data (basic and diluted) FFO attributable to common shareholders$ 1.87 $ 1.86 Normalized FFO attributable to common shareholders$ 1.89 $ 1.86 52
-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Our Operating Liquidity and Resources (dollars in thousands) Our principal sources of funds to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders are rents from tenants at our properties and borrowings under our revolving credit facility. With$568,000 of availability under our revolving credit facility as ofFebruary 11, 2022 , 71.9% of our annualized rental revenues derived from investment grade rated tenants, subsidiaries of investment grade rated parent entities or ourHawaii land leases and only 5.8% of our annualized rental revenues as ofDecember 31, 2021 from expiring leases over the next 12 months, we believe that these sources of funds will be sufficient to meet our current operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and the foreseeable future thereafter. The pending Monmouth Transaction and our financing of such acquisition may adversely affect our operating liquidity and resources as further described in "Risk Factors-Risks Related to the Monmouth Transaction-If we do not enter into a joint venture with one or more institutional investors for equity investments in the amounts we currently expect, or if our committed debt financing is not available, we may be required to obtain alternative financing for the Monmouth Transaction on terms which are materially less favorable to us." in this Annual Report on Form 10-K. Our future cash flows from operating activities will depend primarily upon our ability to: •collect rents from our tenants when due; •maintain the occupancy of, and maintain or increase the rental rates at, our properties; •control our operating cost increases; •purchase additional properties that produce cash flows in excess of our costs of acquisition capital and property operating expenses; and •develop properties to produce cash flows in excess of our cost of capital. The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our consolidated statements of cash flows (dollars in thousands): Year EndedDecember 31, 2021 2020
Cash and cash equivalents and restricted cash at beginning
of period
$ 22,834 $ 34,550 Net cash provided by (used in): Operating activities 110,650 114,564 Investing activities 22,875 (4,522) Financing activities (126,962) (121,758)
Cash and cash equivalents and restricted cash at end of
period
$
29,397
The decrease in net cash provided by operating activities for the year endedDecember 31, 2021 compared to the prior year is primarily due to changes in our working capital. The change in net cash provided by investing activities in the 2021 period to net cash used by investing activities in the 2020 period is primarily due to the sale of six properties to our joint venture, partially offset by our acquisition of five properties in the 2021 period compared to the acquisition of two properties in the 2020 period. The increase in net cash used in financing activities in the 2021 period compared to the 2020 period was primarily due to the proceeds we received from our joint venture transactions in the 2020 period, partially offset by a prepayment of a mortgage note and higher net borrowings under our revolving credit facility in the 2020 period. Our Investing and Financing Liquidity and Resources (dollars in thousands, except per share and per square foot data) Except as described below with respect to the Monmouth Transaction, our future acquisition or development activity cannot be accurately projected because such activity depends upon available opportunities to, and our ability to successfully, acquire, develop and operate properties, financing available to us, our cost of capital, other commitments we have made and alternative uses for the amounts that would be required for the acquisition or development, the extent of our leverage, and the expected impact of the acquisition or development on our debt covenants and certain other financial metrics. We generally do not intend to purchase ''turn around'' properties, or properties that do not generate positive cash flows, but we may undertake construction or redevelopment activities on our properties. During the year endedDecember 31, 2021 , we acquired a 53 -------------------------------------------------------------------------------- Table of Contents developable land parcel for$2,319 , including acquisition costs of$119 . We expect to spend approximately$14,000 to construct a building for lease on this land. As ofDecember 31, 2021 , we had cash and cash equivalents of$29,397 . To maintain our qualification for taxation as a REIT under the IRC, we generally are required to distribute at least 90% of our REIT taxable income annually, subject to specified adjustments and excluding any net capital gain. This distribution requirement limits our ability to retain earnings and thereby provide capital for our operations or acquisitions. In order to fund cash needs that may result from timing differences between our receipt of rents and our desire or need to make distributions, to pay operating or capital expenses or to fund any future property acquisitions, development or redevelopment efforts, we maintain a$750,000 unsecured revolving credit facility with a group of lenders. The maturity date of our revolving credit facility wasDecember 29, 2021 . InNovember 2021 , we exercised our option to extend the maturity date of our revolving credit facility by six months toJune 29, 2022 . We have an additional option to extend the maturity date of our revolving credit facility for one six month period, subject to the payment of an extension fee and meeting other conditions. We pay interest on borrowings under our revolving credit facility at the rate of LIBOR plus a premium that varies based on our leverage ratio. We are required to pay a commitment fee on the unused portion of our revolving credit facility. AtDecember 31, 2021 , the interest rate premium on our revolving credit facility was 130 basis points and our commitment fee was 25 basis points. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. As ofDecember 31, 2021 , the annual interest rate payable on borrowings under our revolving credit facility was 1.41%. As ofDecember 31, 2021 andFebruary 11, 2022 , we had$182,000 outstanding under our revolving credit facility, and$568,000 available to borrow under our revolving credit facility. Our credit agreement includes a feature under which the maximum borrowing availability under the facility may be increased to up to$1,500,000 in certain circumstances. As ofDecember 31, 2021 , our debt maturities (other than revolving credit facility), consisted of mortgage notes with an aggregate principal amount of$650,000 , which is secured by 186 of our properties (178 land parcels and eight buildings) containing approximately 9.6 million square feet located on the island ofOahu, HI . This non-amortizing loan matures onFebruary 7, 2029 and requires monthly payments of interest only at a fixed rate of 4.31% per annum. During the year endedDecember 31, 2021 , we acquired four industrial properties and one parcel of developable land containing 1,644,508 rentable square feet for an aggregate purchase price of$134,730 , including acquisition related costs of$1,030 . InNovember 2021 , we entered into the Merger Agreement related to the Monmouth Transaction, which will add 126 new, Class A, single tenant, net leased, e-commerce focused industrial properties containing over 26 million square feet with a weighted average remaining lease term of approximately eight years to our portfolio. We intend to finance the Monmouth Transaction by entering into a joint venture with one or more institutional investors for equity investments and with proceeds from new mortgage debt and the assumption of existing Monmouth mortgage debt. Depending on the ultimate amount of the joint venture equity investments, we may also use proceeds from the sale of some of Monmouth's properties to finance the Monmouth Transaction. In addition, in connection with the financing of the Monmouth Transaction, we have obtained commitments from lenders to make a bridge loan of up to$4,000,000 available to us. The Monmouth Transaction is subject to the satisfaction of conditions, including the receipt of requisite approval by Monmouth's stockholders and is expected to close in the first quarter of 2022. For more information regarding the Monmouth Transaction and the associated risks, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements", Part I, Item I, "Business," and Part I, Item 1A, "Risk Factors." 54 -------------------------------------------------------------------------------- Table of Contents In the first quarter of 2020, we entered into agreements related to our joint venture for 12 of our properties in the mainlandUnited States with an unrelated third party institutional investor and contributed those 12 properties to our joint venture. We received an aggregate amount of$108,676 , which included certain costs associated with the formation of our joint venture from that investor for a 39% equity interest in our joint venture and we retained the remaining 61% equity interest in our joint venture. InNovember 2020 , we sold an additional 39% equity interest from our then remaining 61% equity interest to a second unrelated third party institutional investor for an additional$108,812 , which included certain costs associated with the formation of our joint venture, and we retained a 22% equity interest in our joint venture following the sale. Effective as of the sale inNovember 2020 , we deconsolidated our joint venture and, since that time, we account for our joint venture using the equity method of accounting under the fair value option. We recognized a 39% noncontrolling interest in our consolidated financial statements for the year endedDecember 31, 2020 . The portion of our joint venture's net loss not attributable to us, or$866 for the year endedDecember 31, 2020 , is reported as noncontrolling interest in our consolidated statements of comprehensive income. During the year endedDecember 31, 2020 , our joint venture made aggregate cash distributions of$14,049 , including$5,479 to the first joint venture investor. InDecember 2021 , we sold six recently acquired properties to our joint venture for an aggregate price of approximately$205,789 . We received proceeds from the investors, who own an aggregate of 78% equity interest in the joint venture, for an aggregate amount of$160,516 and recognized a net gain on sale of$11,114 on this transaction, which is included in gain on sale of real estate in our consolidated statements of comprehensive income. We used the net proceeds from this transaction to reduce outstanding borrowings under our revolving credit facility. During the year endedDecember 31, 2021 , we recorded an increase in the fair value of our investment in our joint venture of$45,273 , as equity in earnings of investees in our consolidated statements of comprehensive income. In addition, during the year endedDecember 31, 2021 our joint venture made aggregate cash distributions of$2,640 to us. For more information regarding our investing and financing activities, our joint venture, the use of the equity method for our joint venture, see Notes 2, 3 and 6 to the Notes to Consolidated Financial Statements included in Part IV, of this Annual Report on Form 10-K. We expect to use borrowings under our revolving credit facility, proceeds we may receive from sales of properties to or equity investments in our joint venture or any future joint ventures we may enter into and net proceeds from offerings of equity or debt securities to fund any future property acquisitions, development or redevelopment efforts. We may also assume mortgage notes in connection with future acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturities of our revolving credit facility or our other debt approach, we intend to explore refinancing alternatives. Such alternatives may include incurring term debt, obtaining financing secured by mortgages on properties we own, issuing new equity or debt securities, extending the maturity date of our revolving credit facility, participating in joint ventures or selling properties. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but we cannot be sure that there will be purchasers for such securities. Further, any issuances of our equity securities may be dilutive to our existing shareholders. Although we cannot be sure that we will be successful in completing any particular type of financing, we believe that we will have access to financing, such as debt or equity offerings, to fund capital expenditures, future acquisitions, development, redevelopment and other activities and to pay our obligations. The completion and the costs of any future financings will depend primarily upon our success in operating our business and upon market conditions. In particular, the feasibility and cost of any future debt financings will depend primarily on our then current credit qualities and on market conditions. We have no control over market conditions. Potential lenders in future debt transactions will evaluate our ability to fund required debt service and repay principal balances when they become due by reviewing our financial condition, results of operations, business practices and plans and our ability to maintain our earnings, to stagger our debt maturities and to balance our use of debt and equity capital so that our financial performance and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. We intend to conduct our business activities in a manner which will afford us reasonable access to capital for investing and financing activities. However, there remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic and its impact on the economy and public health as well as our business. A protracted and extensive economic downturn resulting from the COVID-19 pandemic or otherwise may have various negative consequences, including a decline in financing availability and increased costs for financing. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources. During the year endedDecember 31, 2021 , we paid quarterly cash distributions to our shareholders totaling$86,236 using existing cash balances and borrowings under our revolving credit facility. For more information regarding the distributions we paid during 2020, see Note 7 to the Notes to Consolidated Financial Statements included in Part IV, of this Annual Report on Form 10-K. 55 -------------------------------------------------------------------------------- Table of Contents OnJanuary 13, 2022 , we declared a regular quarterly distribution of$0.33 per common share, or approximately$21,600 , to shareholders of record onJanuary 24, 2022 . We expect to pay this distribution to our shareholders on or aboutFebruary 17, 2022 using existing cash balances and borrowings under our revolving credit facility. During the years endedDecember 31, 2021 and 2020, amounts capitalized for tenant improvements, leasing costs, building improvements and development and redevelopment activities were as follows: Year Ended
2021
2020
Tenant improvements and leasing costs (1)$ 5,819 $ 2,880 Building improvements (2) 3,732
4,141
Development, redevelopment and other activities (3) 660 26
$ 10,211 $ 7,047
(1)Tenant improvements and leasing costs include capital expenditures used to
improve tenants' space or amounts paid directly to tenants to improve their
space and leasing related costs, such as brokerage commissions and tenant
inducements.
(2)Building improvements generally include expenditures to replace obsolete
building components and expenditures that extend the useful life of existing
assets.
(3)Development, redevelopment and other activities generally include capital
expenditure projects that reposition a property or result in new sources of
revenues.
As of December 31, 2021 , we had estimated unspent leasing related obligations of
$2,224 , of which $1,671 is expected to be spent during the next 12 months.
Debt Covenants (dollars in thousands)
Our principal debt obligations at December 31, 2021 were borrowings outstanding
under our revolving credit facility and a $650,000 non-recourse, mortgage loan
that is secured by 186 of our properties. The mortgage loan agreement contains
certain exceptions to the general non-recourse provisions that obligate us to
indemnify the lenders for certain potential environmental losses relating to
hazardous materials and violations of environmental law.
Our credit agreement provides for acceleration of payment of all amounts
outstanding upon the occurrence and continuation of certain events of default,
such as a change of control of us, which includes RMR LLC ceasing to act as our
business and property manager. Our credit agreement contains covenants,
including those that restrict our ability to incur debts, including debts
secured by mortgages on our properties, in excess of calculated amounts,
restrict our ability to make distributions to our shareholders in certain
circumstances and generally require us to maintain certain financial ratios. As
of December 31, 2021 , we believe we were in compliance with all the covenants
and other terms under our credit agreement.
Our credit agreement does not contain provisions for acceleration which could be
triggered by our leverage ratio. However, under our credit agreement, our
leverage ratio is used to determine the interest rates for calculating the
amount of interest payable on outstanding borrowings and the fees we pay.
Accordingly, if our leverage ratio increases above the applicable thresholds,
our interest expense and related costs under our credit agreement would
increase.
Our revolving credit facility has cross default provisions to other indebtedness
that is recourse of $25,000 or more and indebtedness that is non-recourse of
$50,000 or more.
The loan agreement and related documents governing our $650,000 mortgage loan
contain customary covenants, provide for acceleration of payment of all amounts
due thereunder upon the occurrence and continuation of certain events of default
and require us to maintain a minimum consolidated net worth of at least $250,000
and liquidity of at least $15,000 . As of December 31, 2021 , we believe we were
in compliance with all the covenants and other terms under this loan agreement.
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Related Person Transactions
We have relationships and historical and continuing transactions with RMR LLC ,
RMR Inc. and others related to them. For more information about these and other
such relationships and related person transactions, see Notes 9 and 10 to the
Notes to Consolidated Financial Statements included in Part IV, Item 15 of this
Annual Report on Form 10-K, our other filings with the SEC , including our
definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, or our
definitive Proxy Statement, to be filed with the SEC within 120 days after the
fiscal year ended December 31, 2021 . For more information about the risks that
may arise as a result of these and other related person transactions and
relationships, see elsewhere in this Annual Report on Form 10-K, including
"Warning Concerning Forward Looking Statements," Part I, Item 1, "Business" and
Part I, Item 1A, "Risk Factors." We may engage in additional transactions with
related persons, including businesses to which RMR LLC or its subsidiaries
provide management services.
Critical Accounting Estimates
Our critical accounting policies are those that will have the most impact on the
reporting of our financial condition and results of operations and those
requiring significant judgments and estimates. We believe that our judgments and
estimates have been and will be consistently applied and produce financial
information that fairly presents our results of operations. Our most critical
accounting policies involve our investments in real property. These policies
affect our:
•allocation of purchase prices between various asset categories, including
allocations to above and below market leases and the related impact on the
recognition of rental income and depreciation and amortization expenses; and
•assessment of the carrying values and impairments of long lived assets.
We allocate the cost of each property investment to various property components
such as land, buildings and improvements and intangibles based on their fair
values, and each component generally has a different useful life. For acquired
real estate, we record building, land and improvements, and, if applicable, the
value of in-place leases, the fair market value of above or below market leases
and tenant relationships at their relative fair value. We base purchase price
allocations and the determination of useful lives on our estimates and, under
some circumstances, studies from independent real estate appraisers to provide
market information and evaluations that are relevant to our purchase price
allocations and determinations of useful lives; however, our management is
ultimately responsible for the purchase price allocations and determination of
useful lives.
We compute depreciation expense using the straight line method over estimated
useful lives of up to 40 years for buildings and improvements, and up to
seven years for personal property. We do not depreciate the allocated cost of
land. We amortize capitalized above market lease values as a reduction to rental
income over the terms of the respective leases. We amortize capitalized below
market lease values as an increase to rental income over the terms of the
respective leases. We amortize the value of acquired in place leases exclusive
of the value of above market and below market acquired in place leases to
depreciation and amortization over the periods of the respective leases. If a
lease is terminated prior to its stated expiration, all unamortized amounts
relating to that lease are written off. Purchase price allocations require us to
make certain assumptions and estimates. Incorrect assumptions and estimates may
result in inaccurate charges to rental income and depreciation and amortization
over future periods.
We periodically evaluate our properties for impairment. Impairment indicators
may include declining tenant occupancy, our concerns about a tenant's financial
condition (which may be affected by a rent default or other information which
comes to our attention) or our decision to dispose of an asset before the end of
its estimated useful life and legislative, as well as market or industry changes
that could permanently reduce the value of a property. If indicators of
impairment are present, we evaluate the carrying value of the related property
by comparing it to the expected future undiscounted cash flows to be generated
from that property. If the sum of these expected future cash flows is less than
the carrying value, we reduce the net carrying value of the property to its fair
value. This analysis requires us to judge whether indicators of impairment exist
and to estimate likely future cash flows. The future net undiscounted cash flows
are subjective and are based in part on assumptions regarding hold periods,
market rents and terminal capitalization rates. If we misjudge or estimate
incorrectly or if future tenant operations, market or industry factors differ
from our expectations, we may record an impairment charge that is inappropriate
or fail to record a charge when we should have done so, or the amount of any
such charges may be inaccurate.
These accounting policies involve significant judgments made based upon our
experience and the experience of our management and our Board of Trustees ,
including judgments about current valuations, ultimate realizable value,
estimated useful lives, salvage or residual value, the ability and willingness
of our tenants to perform their obligations to us, current and future economic
conditions and competitive factors in the markets in which our properties are
located. Competition, economic conditions and other factors may cause occupancy
declines in the future. In the future, we may need to revise our carrying value
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assessments to incorporate information which is not now known, and such
revisions could increase or decrease our depreciation expense related to
properties we own or decrease the carrying values of our assets.
Impact of Climate Change
Concerns about climate change have resulted in various treaties, laws and
regulations that are intended to limit carbon emissions and address other
environmental concerns. These and other laws may cause energy or other costs at
our properties to increase. We do not expect the direct impact of these
increases to be material to our results of operations, because the increased
costs either would be the responsibility of our tenants directly or in the
longer term, passed through and paid by tenants of our properties. Although we
do not believe it is likely in the foreseeable future, laws enacted to mitigate
climate change may make some of our properties obsolete or cause us to make
material investments in our properties, which could materially and adversely
affect our financial condition or the financial condition of our tenants and
their ability to pay rent to us.
In an effort to reduce the effects of any increased energy costs in the future,
we continuously study ways to improve the energy efficiency at all of our
properties. Our property manager, RMR LLC , is a member of the ENERGY STAR
program, a joint program of the U.S. Environmental Protection Agency and the
U.S. Department of Energy that is focused on promoting energy efficiency at
commercial properties through its "ENERGY STAR" partner program, and a member of
the U.S. Green Building Council , a nonprofit organization focused on promoting
energy efficiency at commercial properties through its leadership in energy and
environmental design, or LEED®, green building program. RMR LLC's annual
Sustainability Report summarizes the ESG initiatives of RMR LLC and its client
companies, including ILPT. RMR LLC's Sustainability Report may be accessed on
RMR Inc.'s website at www.rmrgroup.com/corporate-sustainability/default.aspx.
The information on or accessible through RMR Inc.'s website is not incorporated
into this Annual Report on Form 10-K.
Some observers believe severe weather in different parts of the world over the
last few years is evidence of global climate change. Severe weather may have an
adverse effect on certain properties we own. Rising sea levels could cause
flooding at some of our properties, including some of our Hawaii Properties ,
which may have an adverse effect on individual properties we own. We mitigate
these risks by procuring, or requiring our tenants to procure, insurance
coverage we believe adequate to protect us from material damages and losses
resulting from the consequences of losses caused by climate change. However, we
cannot be sure that our mitigation efforts will be sufficient or that future
storms, rising sea levels or other changes that may occur due to future climate
change could not have a material adverse effect on our financial results.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk (dollars in
thousands, except per share data)
We are exposed to risks associated with market changes in interest rates. We
manage our exposure to this market risk by monitoring available financing
alternatives. Other than as described below, we do not currently expect any
significant changes in our exposure to fluctuations in interest rates or in how
we manage this exposure in the near future.
Fixed Rate Debt
As of December 31, 2021 , our outstanding fixed rate debt consisted of the
following mortgage notes:
Annual Annual Interest
Principal Interest Interest Payments
Debt Balance (1) Rate (1) Expense (1) Maturity Due
Mortgage notes (186 properties in
Hawaii) $ 650,000 4.31 % $ 28,015 2029 Monthly
$ 650,000 $ 28,015
(1)The principal balance, annual interest rate and annual interest expense are
the amounts stated in the applicable contract. In accordance with GAAP, our
carrying values and recorded interest expense may differ from these amounts
because of market conditions at the time we assumed or issued this debt.
These mortgage notes require interest only payments until maturity. Because our mortgage notes require interest to be paid at a fixed rate, changes in market interest rates during the terms of these mortgage notes will not affect our interest obligations. If these mortgage notes are refinanced at an interest rate which is one percentage point higher or lower than shown above, our annual interest cost would increase or decrease by approximately$6,500 . Changes in market interest rates would affect the fair value of our fixed rate debt obligations. Increases in market interest rates decrease the fair value of our fixed rate debt, while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balance outstanding atDecember 31, 2021 and discounted cash flow analyses through the maturity date, and assuming no other changes in factors that may affect the fair value of our fixed rate debt obligation, a 58 -------------------------------------------------------------------------------- Table of Contents hypothetical immediate one percentage point change in the interest rates would change the fair value of this obligation by approximately$42,600 . Floating Rate Debt AtDecember 31, 2021 , our floating rate debt consisted of$182,000 outstanding under our revolving credit facility. The maturity date of our revolving credit facility isJune 29, 2022 , We have an option to extend the maturity date of our revolving credit facility for one six month period, subject to the payment of extension fees and satisfaction of other conditions. No principal repayments are required under our revolving credit facility prior to maturity, and prepayments may be made at any time without penalty. Borrowings under our revolving credit facility are inU.S. dollars and require interest to be paid at LIBOR plus a premium that varies based on our leverage ratio. Accordingly, we are vulnerable to changes in theU.S. dollar based short term rates, specifically LIBOR. In addition, upon renewal or refinancing of this obligation, we are vulnerable to increases in interest rate premiums due to market conditions or our perceived credit risk. Generally, a change in interest rates would not affect the value of our floating rate debt but would affect our operating results. The following table presents the approximate impact a one percentage point increase in interest rates would have on our annual floating rate interest expense atDecember 31, 2021 : Impact
of an Increase in Interest Rates
Total Interest Annual
Interest Rate Outstanding Expense Earnings Per
Per Year Debt Per Year Share Impact (1)
At December 31, 2021 1.41 % $ 182,000 $ 2,566 $ (0.04)
One percentage point
increase 2.41 % $ 182,000 $ 4,386 $ (0.07)
(1) Based on the diluted weighted average common shares outstanding for the
year ended
The following table presents the approximate impact a one percentage point increase in interest rates would have on our annual floating rate interest expense atDecember 31, 2021 if we were fully drawn on our revolving credit facility: Impact of an Increase in Interest Rates Total Interest Annual Interest Rate Outstanding Expense Earnings Per Per Year Debt Per Year Share Impact (1) At December 31, 2021 1.41 %$ 750,000 $ 10,575 $ (0.16) One percentage point increase 2.41 %$ 750,000 $ 18,075 $ (0.28)
(1)Based on the diluted weighted average common shares outstanding for the year
ended
The foregoing table shows the impact of an immediate one percentage point change in floating interest rates. If interest rates were to change gradually over time, the impact would be spread over time. Our exposure to fluctuations in floating interest rates will increase or decrease in the future with increases or decreases in the outstanding amounts of our revolving credit facility and any other floating rate debt. LIBOR Phase Out As ofDecember 31, 2021 , LIBOR has been phased out for new contracts and is expected to be phased out for pre-existing contracts byJune 30, 2023 . We are required to pay interest on borrowings under our revolving credit facility at floating rates based on LIBOR and interest we may pay on any future debt that we may incur may also require that we pay interest based upon LIBOR. We currently expect that the determination of interest under our revolving credit facility will be revised as provided under our credit agreement or amended as necessary to provide for an interest rate that approximates the existing interest rate as calculated in accordance with LIBOR. Despite our current expectations, we cannot be sure that any changes to the determination of interest under our agreements would approximate the current calculation in accordance with LIBOR. We cannot be certain of what standard, if any, will replace LIBOR. Item 8. Financial Statements and Supplementary Data The information required by this item is included in Item 15 of this Annual Report on Form 10-K. 59
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