# STAG Industrial, Inc. (STAG) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from STAG Industrial, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1479094/000147909424000007/stag-20231231.htm
Accession: 0001479094-24-000007
Filing date: 2024-02-13
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/STAG/
All MD&A years: /company/STAG/mda/
Previous year: /company/STAG/mda/fy2022/ (FY 2022)
Next year: /company/STAG/mda/fy2024/ (FY 2024)

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. For the definitions of certain terms used in the following discussion, refer to Item 1, “Business - Certain Definitions” included elsewhere in this report.

Overview

We are a REIT focused on the acquisition, ownership, and operation of industrial properties throughout the United States. Our platform is designed to (i) identify properties for acquisition that offer relative value across CBRE-EA Tier 1 industrial property

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types and tenants through the principled application of our proprietary risk assessment model, (ii) provide growth through sophisticated industrial operation and an attractive opportunity set, and (iii) capitalize our business appropriately given the characteristics of our assets. We are a Maryland corporation and our common stock is publicly traded on the NYSE under the symbol “STAG.”

We are organized and conduct our operations to maintain our qualification as a REIT under Sections 856 through 860 of the Code, and generally are not subject to federal income tax to the extent we currently distribute our income to our stockholders and maintain our qualification as a REIT. We remain subject to state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed income.

Our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, qualification tests in the federal income tax laws. Those tests involve the percentage of income that we earn from specified sources, the percentage of our assets that falls within specified categories, the diversity of our capital stock ownership and the percentage of our earnings that we distribute.

As of December 31, 2023, we owned 569 buildings in 41 states with approximately 112.3 million rentable square feet, consisting of 493 warehouse/distribution buildings, 70 light manufacturing buildings, one flex/office building, and five Value Add Portfolio buildings. We own both single- and multi-tenant properties, although the majority of our portfolio is single-tenant.

As of December 31, 2023, our buildings were approximately 98.2% leased, with no single tenant accounting for more than approximately 2.9% of our total annualized base rental revenue and no single industry accounting for more than approximately 11.0% of our total annualized base rental revenue.

We own all of our properties and conduct substantially all of our business through our Operating Partnership, which we control and manage. As of December 31, 2023, we owned approximately 97.9% of the common units in our Operating Partnership, and our current and former executive officers, directors, senior employees and their affiliates, and other third parties owned the remaining 2.1%.

In connection with the successful completion of the previously announced management succession plan, (i) on June 30, 2023, the term of Benjamin S. Butcher as Executive Chairman ended, and he continues to serve on our board of directors as a non-management director, and (ii) on July 1, 2023, Larry T. Guillemette become the independent Chairman of the Board. In addition, on March 31, 2023, Steven T. Kimball joined our Company as Executive Vice President–Real Estate Operations.

Factors That May Influence Future Results of Operations

Our ability to increase revenues or cash flow will depend in part on our (i) external growth, specifically acquisition activity, and (ii) internal growth, specifically occupancy and rental rates on our portfolio.  A variety of other factors, including those noted below, also affect our future results of operations.

Outlook

The industrial real estate business is affected by the recent high inflationary, rising interest rate environment, disruption in the banking industry, and geopolitical tensions. These factors are key drivers of financial market volatility and raise concerns about a slowing global economy. While U.S. gross domestic product (“GDP”) declined during the first two quarters of 2022, GDP increased more than 2.0% during the year ended June 30, 2023 and surged in the third quarter of 2023 to a 4.9% annualized growth rate. Labor conditions held strong with a consistent 3.7% unemployment rate as of December 2023. Going forward, the general consensus among economists is to expect low growth in the United States with a continued historically elevated risk of recession. While the macro-economic conditions continue to evolve and could result in tighter credit conditions, weakening tenant cash flows, and rising vacancy rates, we believe we will continue to benefit from having a well-diversified portfolio across various markets, tenant industries, and lease terms. Additionally, we believe that recent moves toward more regional supply chains and geopolitical tensions have accelerated a number of trends that positively impact U.S. industrial demand. However, given the current uncertainty and events discussed above, our acquisition activity slowed in 2022 and 2023 relative to our historical acquisition pace.

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

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structure should position us well in an uncertain environment, including our minimal floating rate debt exposure (taking into account our hedging activities), strong banking relationships, strong liquidity, access to capital, and the fact that many of our competitors for the assets we purchase tend to be smaller local and regional investors who may have been more heavily impacted by rising interest rates and lack of available capital.

Due to demographic/consumer trends, geopolitical uncertainty and recent legislation supporting U.S. infrastructure, we expect acceleration in a number of industrial specific trends to support stronger long term demand, including:

•the continued growth of e-commerce (as compared to the traditional retail store distribution model) and the concomitant demand by e-commerce industry participants for well-located, functional distribution space;

•the increasing attractiveness 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. Demand moderated in 2023 relative to recent peaks, but remains solid across a broad array of our markets. Vacancy and availability rates, while rising, remain low by historical standards. The supply pipeline remains robust, albeit smaller and more notably concentrated in very large warehouses. Construction starts declined as a result of both moderating demand and volatile capital markets in 2023. The weakening 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 a strength 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.

Rental Income

We receive income primarily in the form of rental income from the tenants who occupy our buildings. The amount of rental income generated by the buildings in our portfolio depends principally on occupancy and rental rates.

Future economic downturns or regional downturns affecting our submarkets that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase rental rates at our buildings. Our ability to lease our properties and the attendant rental rate is dependent upon, among other things, (i) the overall economy, (ii) the supply/demand dynamic in our markets, (iii) the quality of our properties, including age, clear height, and configuration, and (iv) our tenants’ ability to meet their contractual obligations to us.

The following table summarizes our Operating Portfolio leases that commenced during the year ended December 31, 2023. Any rental concessions in such leases are accounted for on a straight-line basis over the term of the lease.

[[GREPCENT_TABLE]]
[["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 (years)","","Rental Concessions per Square Foot(2)"],["Year ended December 31, 2023"],["New Leases","","2,991,646","","","$","7.16","","","$","7.62","","","$","3.78","","","43.3","%","","54.3","%","","5.3","","","$","0.67"],["Renewal Leases","","10,322,350","","","$","5.59","","","$","5.89","","","$","1.13","","","26.9","%","","40.5","%","","4.3","","","$","0.07"],["Total/weighted average","","13,313,996","","","$","5.94","","","$","6.28","","","$","1.72","","","31.0","%","","44.0","%","","4.5","","","$","0.21"]]
[[/GREPCENT_TABLE]]

(1)“Total Costs” means the costs for improvements of vacant and renewal spaces, as well as the contingent-based legal fees and commissions for leasing transactions. Total Costs per square foot represent the total costs expected to be incurred on the leases that commenced during the period and do not reflect actual expenditures for the period.

(2)Represents the total rental concessions for the entire lease term.

Additionally, for the year ended December 31, 2023, leases related to the Value Add Portfolio and first generation leasing, with a total of 1,609,083 square feet, are excluded from the Operating Portfolio statistics above.

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Property Operating Expenses

Our property operating expenses generally consist of utilities, real estate taxes, management fees, insurance, and site repair and maintenance costs. For the majority of our tenants, our property operating expenses are controlled, in part, by the triple net provisions in tenant leases. In our triple net leases, the tenant is responsible for all aspects of and costs related to the building and its operation during the lease term, including utilities, taxes, insurance, and maintenance costs, but typically excluding roof and building structure. However, we also have modified gross leases and gross leases, as well as leases with expense caps, in our building portfolio, which may require us to absorb certain building related expenses of our tenants. In our modified gross leases, we are responsible for certain building related expenses during the lease term, but most of the expenses are passed through to the tenant for reimbursement to us. In our gross leases, we are responsible for all expenses related to the building and its operation during the lease term. Our overall performance will be affected by the extent to which we are able to pass-through property operating expenses to our tenants.

Scheduled Lease Expirations

Our ability to re-lease space subject to expiring leases will impact our results of operations and is affected by economic and competitive conditions in our markets and by the desirability of our individual buildings. Leases that comprise approximately 7.6% of our total annualized base rental revenue will expire during the period from January 1, 2024 to December 31, 2024, 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, overall, the rental rates on the respective new leases will be greater than the rates under existing leases expiring during the period January 1, 2024 to December 31, 2024, thereby resulting in an increase in revenue from the same space.

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Certain estimates, judgments and assumptions are inherently subjective and based on the existing business and market conditions, and are therefore continually evaluated based upon available information and experience. The following items require significant estimation or judgement.

Purchase Price Accounting

We have determined that judgments regarding the allocation of the purchase price of properties based upon the fair value of the assets acquired and liabilities assumed represents a critical accounting estimate that has the potential to be material in future periods and has been material in all periods presented in this Form 10-K. As discussed below in “Critical Accounting Policies,” we allocate the purchase price of properties based upon the fair value of the assets acquired and liabilities assumed, which generally consist of land, buildings, tenant improvements, mortgage debt assumed, and deferred leasing intangibles, which includes in-place leases, above market and below market leases, and tenant relationships, and therefore involves subjective analysis and uncertainty. The process for determining the allocation to these components requires estimates and assumptions, including rental rates, discount rates, exit capitalization rates, and land value per square foot. We do not believe that the conclusions we reached regarding the allocation of the purchase price of properties, in the current economic and operating environment, would result in a materially different conclusion within any reasonable range of assumptions that could have been applied. As discussed below, we continuously assess our portfolio for the impairment of tangible and intangible rental property and deferred leasing intangible liabilities.

Rental Property and Deferred Leasing Intangible Liabilities Impairment Assessment

We have determined that judgments regarding the impairment of tangible and intangible rental property and deferred leasing intangible liabilities represents a critical accounting estimate that has the potential to be material in future periods and has been material in certain periods presented in this Form 10-K. As discussed below in “Critical Accounting Policies,” we evaluate the carrying value of all tangible and intangible rental property assets and deferred leasing intangible liabilities (collectively, the “property”) held for use for possible impairment when an event or change in circumstance has occurred that indicates their carrying value may not be recoverable. The evaluation includes estimating and reviewing anticipated future undiscounted cash flows to be derived from the property. If such cash flows are less than the property’s carrying value, an impairment charge is

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recognized to the extent by which the asset’s carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective and is based in part on assumptions related to anticipated hold period, future occupancy, rental rates, capital requirements, and exit capitalization rates that could differ from actual results. The discount rate used to present value the cash flows for determining fair value is also subjective. We do not believe that the conclusions we reached regarding the assessment of our rental property assets for impairment, in the current economic and operating environment, would result in a materially different conclusion within any reasonable range of assumptions that could have been applied. Should economic conditions worsen, and the values of industrial assets decline in future periods, then the assumptions and estimates we may make in future impairment analyses, and potential future measurement of impairment charges, could be sensitive and could result in a material change in the range of potential outcomes.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. We base our estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied resulting in a different presentation of our financial statements. From time to time, we evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Rental Property and Deferred Leasing Intangibles

Rental property is carried at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized.

We capitalize costs directly and indirectly related to the development, pre-development, redevelopment, or improvement of rental property. Real estate taxes, compensation costs of development personnel, insurance, interest, and other directly related costs during construction periods are capitalized as incurred, with depreciation commencing with the date the property is substantially completed. Such costs begin to be capitalized to the development projects from the point we are undergoing the necessary activities to get the development project ready for its intended use and cease when the development projects are substantially completed and held available for occupancy. Interest is capitalized based on actual capital expenditures from the period when development or redevelopment commences until the asset is ready for its intended use, at the weighted average borrowing rate of our unsecured indebtedness during the period.

For properties classified as held for sale, we cease depreciating and amortizing the rental property and value the rental property at the lower of depreciated and amortized cost or fair value less costs to dispose. We present those properties classified as held for sale with any qualifying assets and liabilities associated with those properties as held for sale in the accompanying Consolidated Balance Sheets.

Using information available at the time of acquisition, we allocate the purchase price of properties acquired based upon the fair value of the assets acquired and liabilities assumed, which generally consist of land, buildings, tenant improvements, mortgage debt assumed, and deferred leasing intangibles, which includes in-place leases, above market and below market leases, and tenant relationships. The process for determining the allocation to these components requires estimates and assumptions, including rental rates, discount rates and exit capitalization rates, and land value per square foot, as well as available market information, and therefore involves subjective analysis and uncertainty. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. The portion of the purchase price that is allocated to above and below market leases is valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease term plus the term of any bargain renewal options. The purchase price is further allocated to in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and its overall relationship with the respective tenant.

The above and below market lease values are amortized into rental income over the remaining lease term. The value of in-place lease intangibles and tenant relationships are amortized over the remaining lease term (and expected renewal period of the respective lease for tenant relationships) as increases to depreciation and amortization expense. The remaining lease terms are adjusted for bargain renewal options or assumed exercises of early termination options, as applicable. If a tenant subsequently

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terminates its lease, any unamortized portion of above and below market leases is accelerated into rental income and the in-place lease value and tenant relationships are accelerated into depreciation and amortization expense over the shortened lease term.

The purchase price allocated to deferred leasing intangible assets are included in rental property, net on the accompanying Consolidated Balance Sheets, and the purchase price allocated to deferred leasing intangible liabilities are included in deferred leasing intangibles, net on the accompanying Consolidated Balance Sheets under the liabilities section.

In determining the fair value of the debt assumed, we discount the spread between the future contractual interest payments and hypothetical future interest payments on mortgage debt based on a current market rate. The associated fair market value debt adjustment is amortized through interest expense over the life of the debt on a basis which approximates the effective interest method.

We evaluate the carrying value of all tangible and intangible rental property assets and deferred leasing intangible liabilities (collectively, the “property”) held for use for possible impairment when an event or change in circumstance has occurred that indicates their carrying value may not be recoverable. The evaluation includes estimating and reviewing anticipated future undiscounted cash flows to be derived from the property. If such cash flows are less than the property’s carrying value, an impairment charge is recognized to the extent by which the property’s carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective and is based in part on assumptions regarding anticipated hold period, future occupancy, rental rates, capital requirements, and exit capitalization rates that could differ from actual results. The discount rate used to present value the cash flows for determining fair value is also subjective.

Depreciation expense is computed using the straight-line method based on the following estimated useful lives.

[[GREPCENT_TABLE]]
[["Description","","Estimated Useful Life"],["Building","","40 Years"],["Building and land improvements (maximum)","","20 years"],["Tenant improvements","","Shorter of useful life or terms of related lease"]]
[[/GREPCENT_TABLE]]

Leases

For leases in which we are the lessee, we recognize a right-of-use asset and corresponding lease liability on the accompanying Consolidated Balance Sheets equal to the present value of the fixed lease payments. In determining operating right-of-use asset and lease liability for our operating leases, we estimate an appropriate incremental borrowing rate on a fully-collateralized basis for the terms of the leases. We utilize a market-based approach to estimate the incremental borrowing rate for each individual lease. Since the terms under our ground leases are significantly longer than the terms of borrowings available to us on a fully-collateralized basis, the estimate of this rate requires significant judgment, and considers factors such as yields on outstanding public debt and other market based pricing on longer duration financing instruments.

Goodwill

The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Our goodwill of approximately $4.9 million represents amounts allocated to the assembled workforce from the acquired management company, and is presented in prepaid expenses and other assets on the accompanying Consolidated Balance Sheets. Our goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis at December 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We take a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. We have recorded no impairments to goodwill as of December 31, 2023.

Use of Derivative Financial Instruments

We record all derivatives on the accompanying Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of

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forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.

In accordance with fair value measurement guidance, we made an accounting policy election to measure the credit risk of our derivative financial instruments that are subject to master netting arrangements on a net basis by counterparty portfolio. Credit risk is the risk of failure of the counterparty to perform under the terms of the contract. We minimize the credit risk in our derivative financial instruments by entering into transactions with various high-quality counterparties. Our exposure to credit risk at any point is generally limited to amounts recorded as assets on the accompanying Consolidated Balance Sheets.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, restricted cash, tenant accounts receivable, interest rate swaps, accounts payable, accrued expenses, unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes. See Note 4 in the accompanying Notes to Consolidated Financial Statements for the fair value of our indebtedness. See Note 5 in the accompanying Notes to Consolidated Financial Statements for the fair value of our interest rate swaps.

We adopted fair value measurement provisions for our financial instruments recorded at fair value. The guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Incentive and Equity-Based Employee Compensation Plans

We grant equity-based compensation awards to our employees and directors in the form of restricted shares of common stock, LTIP units, and performance units. See Notes 6, 7 and 8 in the accompanying Notes to Consolidated Financial Statements for further discussion of restricted shares of common stock, LTIP units, and performance units, respectively. We measure equity-based compensation expense based on the fair value of the awards on the grant date and recognize the expense ratably over the vesting period, and forfeitures are recognized in the period in which they occur.

On January 7, 2021, we adopted the STAG Industrial, Inc. Employee Retirement Vesting Program (the “Vesting Program”) to provide supplemental retirement benefits for eligible employees. For those employees who are retirement eligible or will become retirement eligible during the applicable vesting period under the terms of the Vesting Program, we accelerate equity-based compensation through the employee’s six-month retirement notification period or retirement eligibility date, respectively.

Revenue Recognition

All current leases are classified as operating leases and rental income is recognized on a straight-line basis over the term of the lease (and expected bargain renewal terms or assumed exercise of early termination options) when collectability is reasonably assured. Differences between rental income earned and amounts due under the lease are charged or credited, as applicable, to accrued rental income.

We determined that for all leases where we are the lessor, that the timing and pattern of transfer of the non-lease components and associated lease components are the same, and that the lease components, if accounted for separately, would be classified as an operating lease. Accordingly, we have made an accounting policy election to recognize the combined component in accordance with Accounting Standards Codification Topic 842 as rental income on the accompanying Consolidated Statements of Operations.

Rental income recognition commences when the tenant takes possession of or controls the physical use of the leased space and the leased space is substantially complete and ready for its intended use. In order to determine whether the leased space is substantially complete and ready for its intended use, we determine whether we or the tenant own the tenant improvements. When it is determined that we are the owner of the tenant improvements, rental income recognition begins when the tenant takes possession of or controls the physical use of the finished space, which is generally when our owned tenant improvements are completed. In instances when it is determined that the tenant is the owner of tenant improvements, rental income recognition begins when the tenant takes possession of or controls the physical use of the leased space.

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When we are the owner of tenant improvements or other capital items, the cost to construct the tenant improvements or other capital items, including costs paid for or reimbursed by the tenants, is recorded as capital assets. For these tenant improvements or other capital items, the amount funded by or reimbursed by the tenants are recorded as deferred revenue, which is amortized on a straight-line basis as income over the shorter of the useful life of the capital asset or the term of the related lease.

Early lease termination fees are recorded in rental income on a straight-line basis from the notification date of such termination to the then remaining (not the original) lease term, if any, or upon collection if collection is not reasonably assured.

We evaluate cash basis versus accrual basis of rental income recognition based on the collectability of future lease payments.

Results of Operations

The following discussion of the results of our same store (as defined below) net operating income (“NOI”) should be read in conjunction with our consolidated financial statements included in this report. For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below. Same store results are considered to be useful to investors in evaluating our performance because they provide information relating to changes in building-level operating performance without taking into account the effects of acquisitions or dispositions. We encourage the reader to not only look at our same store results, but also our total portfolio results, due to historic and future growth.

We define same store properties as properties that were in the Operating Portfolio for the entirety of the comparative periods presented. The results for same store properties exclude termination fees, solar income, and other income adjustments. Same store properties exclude Operating Portfolio properties with expansions placed into service after December 31, 2021. On December 31, 2023, we owned 513 industrial buildings consisting of approximately 101.7 million square feet, which represents approximately 90.6% of our total portfolio, that are considered our same store portfolio in the analysis below. Same store occupancy decreased approximately 0.7% to 98.4% as of December 31, 2023 compared to 99.1% as of December 31, 2022. 

Discussions of selected operating information for our same store portfolio and our total portfolio for the comparison of the years ended December 31, 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 14, 2023.

Comparison of the year ended December 31, 2023 to the year ended December 31, 2022

The following table summarizes selected operating information for our same store portfolio and our total portfolio for the years ended December 31, 2023 and 2022 (dollars in thousands). This table includes a reconciliation from our same store portfolio to our total portfolio by also providing information for the years ended December 31, 2023 and 2022 with respect to the buildings acquired and sold after December 31, 2021, Operating Portfolio buildings with expansions placed into service or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2021, flex/office buildings, Value Add Portfolio buildings, and buildings classified as held for sale.

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[[GREPCENT_TABLE]]
[["","Same Store Portfolio","","Acquisitions/Dispositions","","Other","","Total Portfolio"],["","Year ended December 31,","","Change","","Year ended December 31,","","Year ended December 31,","","Year ended December 31,","","Change"],["","2023","","2022","","$","","%","","2023","","2022","","2023","","2022","","2023","","2022","","$","","%"],["Revenue"],["Operating revenue"],["Rental income","$","634,020","","","$","601,536","","","$","32,484","","","5.4","%","","$","39,208","","","$","30,970","","","$","31,932","","","$","21,871","","","$","705,160","","","$","654,377","","","$","50,783","","","7.8","%"],["Other income","211","","","369","","","(158)","","","(42.8)","%","","176","","","1,144","","","2,288","","","1,455","","","2,675","","","2,968","","","(293)","","","(9.9)","%"],["Total operating revenue","634,231","","","601,905","","","32,326","","","5.4","%","","39,384","","","32,114","","","34,220","","","23,326","","","707,835","","","657,345","","","50,490","","","7.7","%"],["Expenses"],["Property","124,540","","","115,807","","","8,733","","","7.5","%","","8,008","","","5,220","","","7,048","","","4,674","","","139,596","","","125,701","","","13,895","","","11.1","%"],["Net operating income(1)","$","509,691","","","$","486,098","","","$","23,593","","","4.9","%","","$","31,376","","","$","26,894","","","$","27,172","","","$","18,652","","","568,239","","","531,644","","","36,595","","","6.9","%"],["Other expenses"],["General and administrative","","","","","","","","","","","","","","","","47,491","","","46,958","","","533","","","1.1","%"],["Depreciation and amortization","","","","","","","","","","","","","","","","278,447","","","275,040","","","3,407","","","1.2","%"],["Loss on impairment","","","","","","","","","","","","","","","","\u2014","","","1,783","","","(1,783)","","","(100.0)","%"],["Other expenses","","","","","","","","","","","","","","","","4,693","","","4,363","","","330","","","7.6","%"],["Total other expenses","","","","","","","","","","","","","","","","330,631","","","328,144","","","2,487","","","0.8","%"],["Total expenses","","","","","","","","","","","","","","","","470,227","","","453,845","","","16,382","","","3.6","%"],["Other income (expense)"],["Interest and other income","","","","","","","","","","","","","","","","68","","","103","","","(35)","","","(34.0)","%"],["Interest expense","","","","","","","","","","","","","","","","(94,575)","","","(78,018)","","","(16,557)","","","21.2","%"],["Debt extinguishment and modification expenses","","","","","","","","","","","\u2014","","","(838)","","","838","","","(100.0)","%"],["Gain on the sales of rental property, net","","","","","","","","","","","","54,100","","","57,487","","","(3,387)","","","(5.9)","%"],["Total other income (expense)","","","","","","","","","","","","","","","","(40,407)","","","(21,266)","","","(19,141)","","","90.0","%"],["Net income","","","","","","","","","","","","","","","","$","197,201","","","$","182,234","","","$","14,967","","","8.2","%"]]
[[/GREPCENT_TABLE]]

(1)For a detailed discussion of NOI, including the reasons management believes NOI is useful to investors, see “Non-GAAP Financial Measures” below.

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Net Income

Net income for our total portfolio increased by approximately $15.0 million or 8.2% to approximately $197.2 million for the year ended December 31, 2023 compared to approximately $182.2 million for the year ended December 31, 2022.

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 $32.5 million or 5.4% to approximately $634.0 million for the year ended December 31, 2023 compared to approximately $601.5 million for the year ended December 31, 2022.

Same store lease income increased approximately $22.8 million or 4.6% to approximately $518.4 million for the year ended December 31, 2023 compared to approximately $495.6 million for the year ended December 31, 2022. The increase was primarily due to an increase in rental income of approximately $29.8 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 $5.5 million due to tenant vacancies and a net increase in the amortization of net above market leases of approximately $0.5 million. Additionally, there was a decrease in same store lease income of approximately $1.0 million which was primarily attributable to management’s evaluation of operating leases to determine the probability of collecting substantially all of the lessee’s remaining lease payments under the lease term. For those that are not probable of collection, we convert to the cash basis of accounting. Management determined two tenants should be converted from the cash basis of accounting back to the accrual basis of accounting, for which approximately $1.5 million of straight-line rental income was recognized. This was offset by certain other tenants converting from the accrual basis of accounting to the cash basis of accounting, for which approximately $2.5 million of straight-line rental income was either reversed or was not recognized.

Same store other billings increased approximately $9.7 million or 9.2% to approximately $115.6 million for the year ended December 31, 2023 compared to approximately $105.9 million for the year ended December 31, 2022. The increase was attributable to (i) an increase of approximately $5.7 million of real estate tax reimbursements due to an increase in real estate taxes levied by the taxing authority for certain tenants for which we pay the real estate taxes on their behalf, (ii) changes to lease terms where we began paying the real estate taxes on behalf of tenants that had previously paid the taxes directly to the taxing authorities, and (iii) occupancy of previously vacant buildings. The increase was also attributable to an increase of approximately $4.0 million in other expense reimbursements which was primarily due to an increase in corresponding expenses.

Same Store Operating Expenses

Same store operating expenses consist primarily of property operating expenses and real estate taxes and insurance.

For a detailed reconciliation of our same store portfolio operating expenses to net income, see the table above.

Total same store operating expenses increased approximately $8.7 million or 7.5% to approximately $124.5 million for the year ended December 31, 2023 compared to approximately $115.8 million for the year ended December 31, 2022. This increase was due to increases in real estate tax, insurance, repairs and maintenance, other expenses, and utilities expense of approximately $4.0 million, $2.5 million, $1.4 million, $1.4 million, and $0.2 million, respectively. These increases were partially offset by a reduction of snow removal expense of approximately $0.8 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, 2021, we acquired 35 buildings consisting of approximately 5.4 million square feet (excluding seven buildings that were included in the Value Add Portfolio at December 31, 2023 or transferred from the Value Add Portfolio to the Operating Portfolio after December 31, 2021), and sold 18 buildings consisting of approximately 3.8 million

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square feet. For the years ended December 31, 2023 and December 31, 2022, the buildings acquired after December 31, 2021 contributed approximately $28.2 million and $16.0 million to NOI, respectively. For the years ended December 31, 2023 and December 31, 2022, the buildings sold after December 31, 2021 contributed approximately $3.2 million and $10.9 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, 2021. 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 $23.1 million and $14.0 million to NOI for the years ended December 31, 2023 and December 31, 2022, respectively. Additionally, there was approximately $4.1 million and $4.7 million of termination, solar, and other income adjustments from certain buildings in our same store portfolio for the years ended December 31, 2023 and December 31, 2022, respectively.

Total Other Expenses

Total other expenses consist of general and administrative, depreciation and amortization, loss on impairment, and other expenses.

Total other expenses increased approximately $2.5 million or 0.8% for the year ended December 31, 2023 to approximately $330.6 million compared to approximately $328.1 million for the year ended December 31, 2022. This increase was primarily attributable to an increase in depreciation and amortization of approximately $3.4 million due to an increase in the depreciable asset base from net acquisitions after December 31, 2022, as well as an increase in general and administrative expenses of approximately $0.5 million primarily due to increases in compensation and other payroll costs and professional fees. Other expenses also increased approximately $0.3 million due to the relinquishment of an acquisition deposit of approximately $2.5 million related to the termination of an acquisition contract in January 2023, whereas the relinquishment of an acquisition deposit of approximately $2.1 million related to a terminated acquisition contract was recognized during the year ended December 31, 2022. These increases were partially offset by a decrease in loss on impairment of approximately $1.8 million, as there was no loss on impairment recognized during the year ended December 31, 2023, compared to a loss on impairment recognized at one building during the year ended December 31, 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 net other expense increased approximately $19.1 million or 90.0% to approximately $40.4 million for the year ended December 31, 2023 compared to approximately $21.3 million for the year ended December 31, 2022. This increase was primarily attributable to an increase in interest expense of approximately $16.6 million which was primarily attributable to the issuance of $400.0 million of unsecured notes on June 28, 2022, an additional $50.0 million (net) of unsecured term loans on July 26, 2022, and an increase in one-month Term SOFR. This increase was also attributable to a decrease in the gain on the sales of rental property, net of approximately $3.4 million. These increases were partially offset by a decrease in debt and modification expenses of approximately $0.8 million, as there were no debt and modification expenses during the year ended December 31, 2023.

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 SEC. As a result, we are required to include in this report a statement of why management believes that presentation of these measures provides useful information to investors.

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Funds From Operations

FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, and we believe that to understand our performance further, FFO should be compared with our reported net income (loss) in accordance with GAAP, as presented in our consolidated financial statements included in this report.

We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“Nareit”). FFO represents GAAP net income (loss), excluding gains (or losses) from sales of depreciable operating buildings, impairment write-downs of depreciable real estate, real estate related depreciation and amortization (excluding amortization of deferred financing costs and fair market value of debt adjustment) and after adjustments for unconsolidated partnerships and joint ventures.

Management uses FFO as a supplemental performance measure because it is a widely recognized measure of the performance of REITs. FFO may be used by investors as a basis to compare our operating performance with that of other REITs.

However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our buildings that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our buildings, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other REITs may not calculate FFO in accordance with the Nareit definition, and, accordingly, our FFO may not be comparable to such other REITs’ FFO. FFO should not be used as a measure of our liquidity, and is not indicative of funds available for our cash needs, including our ability to pay dividends.

The following table summarizes a reconciliation of our FFO attributable to common stockholders and unit holders for the periods presented to net income, the nearest GAAP equivalent.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["Reconciliation of Net Income to FFO (in thousands)","","2023","","2022","","2021"],["Net income","","$","197,201","","","$","182,234","","","$","196,432"],["Rental property depreciation and amortization","","278,216","","","274,823","","","238,487"],["Loss on impairment","","\u2014","","","1,783","","","\u2014"],["Gain on the sales of rental property, net","","(54,100)","","","(57,487)","","","(97,980)"],["FFO","","$","421,317","","","$","401,353","","","$","336,939"],["Preferred stock dividends","","\u2014","","","\u2014","","","(1,289)"],["Redemption of preferred stock","","\u2014","","","\u2014","","","(2,582)"],["Amount allocated to restricted shares of common stock and unvested units","","(546)","","","(558)","","","(838)"],["FFO attributable to common stockholders and unit holders","","$","420,771","","","$","400,795","","","$","332,230"]]
[[/GREPCENT_TABLE]]

Net Operating Income

We consider NOI to be an appropriate supplemental performance measure to net income (loss) because we believe it helps investors and management understand the core operations of our buildings. NOI is defined as rental income, which includes billings for common area maintenance, real estate taxes and insurance, less property expenses, real estate tax expense and insurance expense. NOI should not be viewed as an alternative measure of our financial performance since it excludes expenses which could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI.

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The following table summarizes a reconciliation of our NOI for the periods presented to net income, the nearest GAAP equivalent.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["Reconciliation of Net Income to NOI (in thousands)","","2023","","2022","","2021"],["Net income","","$","197,201","","","$","182,234","","","$","196,432"],["General and administrative","","47,491","","","46,958","","","$","48,629"],["Depreciation and amortization","","278,447","","","275,040","","","$","238,699"],["Interest and other income","","(68)","","","(103)","","","$","(121)"],["Interest expense","","94,575","","","78,018","","","$","63,484"],["Loss on impairment","","\u2014","","","1,783","","","$","\u2014"],["Debt extinguishment and modification expenses","","\u2014","","","838","","","$","2,152"],["Other expenses","","4,693","","","4,363","","","$","2,878"],["Gain on the sales of rental property, net","","(54,100)","","","(57,487)","","","$","(97,980)"],["Net operating income","","$","568,239","","","$","531,644","","","$","454,173"]]
[[/GREPCENT_TABLE]]

Cash Flows

Comparison of the year ended December 31, 2023 to the year ended December 31, 2022

The following table summarizes our cash flows for the year ended December 31, 2023 compared to the year ended December 31, 2022.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,","","Change"],["Cash Flows (dollars in thousands)","","2023","","2022","","$","","%"],["Net cash provided by operating activities","","$","391,092","","","$","387,931","","","$","3,161","","","0.8","%"],["Net cash used in investing activities","","$","320,346","","","$","447,524","","","$","(127,178)","","","(28.4)","%"],["Net cash provided by (used in) financing activities","","$","(75,667)","","","$","63,186","","","$","(138,853)","","","(219.8)","%"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities increased approximately $3.2 million to approximately $391.1 million for the year ended December 31, 2023, compared to approximately $387.9 million for the year ended December 31, 2022. The increase was primarily attributable to incremental operating cash flows from property acquisitions completed after December 31, 2022, and operating performance at existing properties. These increases were partially offset by the loss of cash flows from property dispositions completed after December 31, 2022 and fluctuations in working capital due to timing of payments and rental receipts.

Net cash used in investing activities decreased approximately $127.2 million to approximately $320.3 million for the year ended December 31, 2023, compared to approximately $447.5 million for the year ended December 31, 2022. The decrease was primarily attributable to the acquisition of 16 buildings during the year ended December 31, 2023 of approximately $321.9 million, compared to the acquisition of 26 buildings during the year ended December 31, 2022 of approximately $472.6 million. Additionally, there was a decrease in cash paid for additions of land and building and improvements of approximately $3.8 million during the year ended December 31, 2023 compared to the year ended December 31, 2022. These decreases in net cash used in investing activities were partially offset by decrease in proceeds from sales of rental property, net of approximately $29.7 million during the year ended December 31, 2023 compared to the year ended December 31, 2022.

Net cash provided by (used in) financing activities decreased approximately $138.9 million to approximately $75.7 million net cash used in financing activities for the year ended December 31, 2023, compared to approximately $63.2 million net cash provided by financing activities for the year ended December 31, 2022. This decrease was primarily attributable to the funding of the $400.0 million unsecured notes on June 28, 2022 and the $50.0 million (net) unsecured term loans on July 26, 2022, that did not occur during the year ended December 31, 2023, as well as the redemption of $100.0 million of unsecured notes on January 5, 2023 that did not occur during the year ended December 31, 2022. These decreases were partially offset by an increase in net borrowings of approximately $348.0 million under our unsecured credit facility and an increase in proceeds from sales of common stock, net of approximately $14.7 million during the year ended December 31, 2023 compared to the year ended December 31, 2022. Additionally, we paid in full a mortgage note of approximately $3.2 million during the year ended December 31, 2023, compared to the year ended December 31, 2022, in which we paid in full a mortgage note in the amount of approximately $46.6 million.

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Liquidity and Capital Resources

We believe that our liquidity needs will be satisfied through cash flows generated by operations, disposition proceeds, and financing activities. Operating cash flow from rental income, expense recoveries from tenants, and other income from operations is our principal source of funds to pay operating expenses, debt service, recurring capital expenditures, and the distributions required to maintain our REIT qualification. We primarily rely on the capital markets (equity and debt securities) to fund our acquisition activity. We seek to increase cash flows from our properties by maintaining quality building standards that promote high occupancy rates and permit increases in rental rates, while reducing tenant turnover and controlling operating expenses. We believe that our revenue, together with proceeds from building sales and equity and debt financings, will continue to provide funds for our short-term and medium-term liquidity needs.

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our buildings, including interest expense, interest rate swap payments, scheduled principal payments on outstanding indebtedness, property acquisitions under contract, general and administrative expenses, and capital expenditures including development projects, tenant improvements and leasing commissions.

Our long-term liquidity needs, in addition to recurring short-term liquidity needs as discussed above, consist primarily of funds necessary to pay for property acquisitions and scheduled debt maturities. We intend to satisfy our long-term liquidity needs through cash flow from operations, the issuance of equity or debt securities, other borrowings, property dispositions, or, in connection with acquisitions of certain additional buildings, the issuance of common units in our Operating Partnership.

As of December 31, 2023, we had total immediate liquidity of approximately $615.4 million, comprised of approximately $20.7 million of cash and cash equivalents and approximately $594.7 million of immediate availability on our unsecured credit facility. When incorporating our total immediate liquidity of $615.4 million and approximately $41.3 million of forward sale proceeds available to us under our ATM common stock offering program through December 14, 2024, our total liquidity was approximately $656.7 million as of December 31, 2023.

In addition, we require funds to pay dividends to holders of our common stock and common units in our Operating Partnership. Any future dividends on our common stock are declared in the sole discretion of our board of directors, subject to the distribution requirements to maintain our REIT status for federal income tax purposes, and may be reduced or stopped for any reason, including to use funds for other liquidity requirements.

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Indebtedness Outstanding

The following table summarizes certain information with respect to our indebtedness outstanding as of December 31, 2023.

[[GREPCENT_TABLE]]
[["Indebtedness (dollars in thousands)","","Principal Outstanding as of December 31, 2023 (in thousands)","","","","Interest Rate(1)(2)","","Maturity Date","","Prepayment Terms(3)"],["Unsecured credit facility:"],["Unsecured Credit Facility(4)","","$","402,000","","","","","Term SOFR + 0.855%","","October 23, 2026","","i"],["Total unsecured credit facility","","402,000"],["Unsecured term loans:"],["Unsecured Term Loan F","","200,000","","","","","2.94","%","","January 12, 2025","","i"],["Unsecured Term Loan G","","300,000","","","","","1.78","%","","February 5, 2026","","i"],["Unsecured Term Loan A","","150,000","","","","","2.14","%","","March 15, 2027","","i"],["Unsecured Term Loan H","","187,500","","","","","3.73","%","","January 25, 2028","","i"],["Unsecured Term Loan I","","187,500","","","","","3.49","%","","January 25, 2028","","i"],["Total unsecured term loans","","1,025,000"],["Total unamortized deferred financing fees and debt issuance costs","","(3,227)"],["Total carrying value unsecured term loans, net","","1,021,773"],["Unsecured notes:"],["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","","1,200,000"],["Total unamortized deferred financing fees and debt issuance costs","","(4,128)"],["Total carrying value unsecured notes, net","","1,195,872"],["Mortgage notes (secured debt):"],["United of Omaha Life Insurance Company","","4,537","","","","","3.71","%","","October 1, 2039","","ii"],["Total mortgage notes","","4,537"],["Net unamortized fair market value discount","","(136)"],["Total unamortized deferred financing fees and debt issuance costs","","\u2014"],["Total carrying value mortgage notes, net","","4,401"],["Total / weighted average interest rate(5)","","$","2,624,046","","","","","3.79","%"]]
[[/GREPCENT_TABLE]]

(1)Interest rate as of December 31, 2023. At December 31, 2023, the one-month Term SOFR was 5.35472%. The current interest rate is not adjusted to include the amortization of deferred financing fees or debt issuance costs incurred in obtaining debt or any unamortized fair market value premiums or discounts. The spread over the applicable rate for our unsecured credit facility and unsecured term loans is based on our debt rating and leverage ratio, as defined in the respective loan agreements.

(2)Our unsecured credit facility has a stated rate of one-month Term SOFR plus a 0.10% adjustment and a spread of 0.775%, less a sustainability-related interest rate adjustment of 0.02%. 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%, less a sustainability-related interest rate adjustment of 0.02%. As of December 31, 2023, 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%, 0.95%, 2.90%, and 2.66%, respectively (which includes the 0.10% adjustment). 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; and (ii) pre-payable with penalty.

(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. We are required to pay a facility fee on the aggregate commitment amount (currently $1.0 billion) at a rate per annum of 0.1% to 0.3%, depending on our debt rating, as defined in the credit agreement. The facility fee is due and payable quarterly.

(5)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.

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The aggregate undrawn nominal commitments on our unsecured credit facility as of December 31, 2023 was approximately $594.7 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.

On December 15, 2023, the mortgage note associated with Thrivent Financial for Lutherans in the amount of approximately $3.2 million was repaid in full.

On January 19, 2023, the sustainability-related interest rate adjustment for our Unsecured Term Loan H and Unsecured Term Loan I went into effect in connection with our 2022 public disclosure assessment score of “A” from the Global Real Estate Sustainability Benchmark (GRESB). The interest rate adjustment, a 0.02% interest rate reduction for each instrument, will end on June 29, 2024, in accordance with the respective loan agreements.

On January 5, 2023, we redeemed in full at maturity the $100.0 million in aggregate principal amount of the Series F Unsecured Notes with a fixed interest rate of 3.98%.

The following table summarizes our debt capital structure as of December 31, 2023.

[[GREPCENT_TABLE]]
[["Debt Capital Structure","","December 31, 2023"],["Total principal outstanding (in thousands)","","$","2,631,537"],["Weighted average duration (years)","","4.3"],["% Secured debt","","0.2","%"],["% Debt maturing next 12 months","","1.9","%"],["Net Debt to Real Estate Cost Basis(1)","","36.3","%"]]
[[/GREPCENT_TABLE]]

(1)“Net Debt” means amounts outstanding under our unsecured credit facility, unsecured term loans, unsecured notes, and mortgage notes, less cash and cash equivalents. “Real Estate Cost Basis” means the book value of rental property and deferred leasing intangibles, exclusive of the related accumulated depreciation and amortization.

We regularly pursue new financing opportunities to ensure an appropriate balance sheet position. As a result of these dedicated efforts, we are confident in our ability to meet future debt maturities and fund acquisitions. We believe that our current balance sheet is in an adequate position at the date of this filing, despite possible volatility in the credit markets.

Our interest rate exposure on our floating rate debt is managed through the use of interest rate swaps, which fix the rate of our long term floating rate debt. For a detailed discussion on our use of interest rate swaps, see “Interest Rate Risk” below.

Unsecured Indebtedness – Financial Covenants and Other Terms

The unsecured credit facility provides for a facility fee payable by us to the lenders at a rate per annum of 0.1% to 0.3%, depending on our debt rating, as defined in the credit agreement, of the aggregate commitments (currently $1.0 billion). The facility fee is due and payable quarterly.

Financial Covenants: Our ability to borrow, maintain borrowings and avoid default under our unsecured credit facility, unsecured term loans, and unsecured notes is subject to our ongoing compliance with a number of financial covenants, including:

•a maximum consolidated leverage ratio of not greater than 0.60:1.00;

•a maximum secured leverage ratio of not greater than 0.40:1.00;

•a maximum unencumbered leverage ratio of not greater than 0.60:1.00;

•a minimum fixed charge ratio of not less than or equal to 1.50:1.00;

•a minimum unsecured interest coverage ratio of not less than or equal to 1.75:1.00; and

•with respect to our unsecured notes, a minimum interest coverage ratio of not less than 1.50:1.00. 

As of December 31, 2023, we were in compliance with the applicable financial covenants.

Pursuant to the terms of our unsecured debt agreements, we may not pay distributions that exceed the minimum amount required for us to qualify and maintain our status as a REIT if a default or event of default occurs and is continuing.

Pursuant to the terms of our unsecured loan agreements, if a default or event of default occurs and is continuing, we may not pay distributions that exceed the minimum amount required for us to qualify and maintain our status as a REIT.

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Events of Default: Our unsecured credit facility and unsecured term loans contain customary events of default, including, but not limited to, non-payment of principal, interest, fees or other amounts, defaults in the compliance with the financial and other covenants contained in the applicable loan agreement, cross-defaults to other material debt, and bankruptcy or other insolvency events.

Borrower and Guarantors: Our Operating Partnership is the borrower under our unsecured credit facility and unsecured term loans and the issuer of the unsecured notes. The Company and certain of its subsidiaries guarantee the obligations under our unsecured loan agreements.

Supplemental Guarantor Information

We have filed a registration statement with the SEC allowing us to offer, from time to time, an indefinite amount of equity and debt securities on an as-needed basis, including debt securities of our Operating Partnership that are guaranteed by the Company. Any such guarantees issued by the Company will be full, irrevocable, unconditional, and absolute joint and several guarantees to the holders of each series of such outstanding guaranteed debt securities. Pursuant to Rule 3-10 of Regulation S-X, subsidiary issuers of obligations guaranteed by the parent are not required to provide separate financial statements, provided that the subsidiary obligor is consolidated into the parent company’s consolidated financial statements, the parent guarantee is “full and unconditional” and, subject to certain exceptions as set forth below, the alternative disclosure required by Rule 13-01 of Regulation S-X is provided, which includes narrative disclosure and summarized financial information. Accordingly, we have not presented separate consolidated financial statements of our Operating Partnership. Furthermore, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, we have not presented summarized financial information for our Operating Partnership because the assets, liabilities, and results of operations of our Operating Partnership are not materially different than the corresponding amounts in the Company’s consolidated financial statements, and we believe the inclusion of such summarized financial information would be repetitive and would not provide incremental value to investors.

Equity

Preferred Stock

We are authorized to issue up to 20,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 2023 and December 31, 2022, 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.

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. The following table summarizes our ATM common stock offering program as of December 31, 2023.

[[GREPCENT_TABLE]]
[["ATM Common Stock Offering Program","","Date","","Maximum Aggregate Offering Price (in thousands)","","Aggregate Common Stock Available as of December 31, 2023 (in thousands)"],["2022 $750 million ATM","","February 17, 2022","","$","750,000","","","$","637,663"]]
[[/GREPCENT_TABLE]]

There was no settled activity under the ATM common stock offering program during the three months ended December 31, 2023.

Subsequent to December 31, 2023, on January 9, 2024 we sold 567,112 shares on a forward basis under the ATM common stock offering program at a sale price of $38.8818 per share (an aggregate of approximately $22.1 million gross sale price), or $38.5058 per share net of commissions. We did not receive any proceeds from the sale of such shares on a forward basis. We expect to fully physically settle the applicable forward sale agreement on one or more dates prior to the scheduled maturity date of January 9, 2025, at which point we would receive the proceeds net of certain costs; provided, however, we may elect to cash settle or net share settle such forward sale agreement at any time through the scheduled maturity date.

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On December 14, 2023, we sold 1,100,000 shares on a forward basis under the ATM common stock offering program at a sale price of $38.00 per share (an aggregate of approximately $41.8 million gross sale price), or $37.62 per share net of commissions. We did not receive any proceeds from the sale of such shares on a forward basis. We expect to fully physically settle the applicable forward sale agreement on one or more dates prior to the scheduled maturity date of December 14, 2024, at which point we would receive the proceeds net of certain costs; provided, however, we may elect to cash settle or net share settle such forward sale agreement at any time through the scheduled maturity date.

On June 16, 2023, we sold 992,295 shares on a forward basis under the ATM common stock offering program at a weighted average sale price of $36.5319 per share (an aggregate of approximately $36.3 million in gross sale price), or $36.1820 per share net of commissions. We did not initially receive any proceeds from the sale of shares on a forward basis. On July 27, 2023, we physically settled in full the forward sales agreements by issuing 992,295 shares of common stock for net proceeds of approximately $35.9 million, or $36.2046 per share.

On May 5, 2023, we sold 725,698 shares on a forward basis under the ATM common stock offering program at a sale price of $35.0458 per share (an aggregate of approximately $25.4 million in gross sale price), or $34.6953 per share net of commissions. We did not initially receive any proceeds from the sale of shares on a forward basis. On July 27, 2023, we physically settled in full the forward sales agreements by issuing 725,698 shares of common stock for net proceeds of approximately $25.2 million, or $34.7714 per share.

Noncontrolling Interests

We own all of our properties and conduct substantially all of our business through our Operating Partnership. We are the sole member of the sole general partner of our Operating Partnership. As of December 31, 2023, we owned approximately 97.9% of the common units in our 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 our 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 December 31, 2023, 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, Fitch Ratings, or other nationally recognized rating agencies.

The swaps are 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 December 31, 2023, we had 21 interest rate swaps outstanding that were in an asset position of approximately $50.4 million, including any adjustment for nonperformance risk related to these agreements.

As of December 31, 2023, we had approximately $1.4 billion of variable rate debt. As of December 31, 2023, 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.

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Off-balance Sheet Arrangements

As of December 31, 2023, we had letters of credit related to development projects and certain other agreements of approximately $3.3 million. As of December 31, 2023, we had no other material off-balance sheet arrangements.