EDGAR 10-K Filing

Company CIK: 1476150
Filing Year: 2022
Filename: 1476150_10-K_2022_0001476150-22-000006.json

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ITEM 1. BUSINESS
Item 1. Business.
Overview
Terreno Realty Corporation (“Terreno”, and together with its subsidiaries, “we”, “us”, “our”, “our Company” or “the Company”) acquires, owns and operates industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. We invest in several types of industrial real estate, including warehouse/distribution (approximately 79.5% of our total annualized base rent as of December 31, 2021), flex (including light industrial and research and development, or R&D) (approximately 4.8%), transshipment (approximately 6.4%) and improved land (approximately 9.3%). We target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. Infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings. As of December 31, 2021, we owned a total of 253 buildings aggregating approximately 15.1 million square feet, 36 improved land parcels consisting of approximately 127.1 acres and four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres. As of December 31, 2021, the buildings and improved land parcels were approximately 95.5% and 94.8% leased (including 0.4 million square feet of vacancy acquired during the fourth quarter of 2021), respectively, to 554 customers, the largest of which accounted for approximately 4.9% of our total annualized base rent.
We are an internally managed Maryland corporation and elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Code, commencing with our taxable year ended December 31, 2010.
Our Investment Strategy
We acquire, own and operate industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C.
As described in more detail below, we invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and R&D), transshipment and improved land. We target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate.
Industrial Facility General Characteristics
Warehouse / distribution (approximately 79.5% of our total annualized base rent as of December 31, 2021)
•Single and multiple tenant facilities that typically serve tenants greater than 10,000 square feet of space
•Generally less than 20% office space
•Typical clear height from 18 feet to 36 feet
•May include production/manufacturing areas
•Interior access via dock-high and/or grade-level doors
•Truck court for large and small truck distribution options, possibly including staging for a high volume of truck activity and/or trailer storage
Flex (including light industrial and R&D, approximately 4.8% of our total annualized base rent as of
December 31, 2021)
•Single and multiple tenant facilities that typically serve tenants less than 10,000 square feet of space
•Facilities generally accommodate both office and warehouse/manufacturing activities
•Typically has a larger amount of office space and shallower bay depths than warehouse/distribution facilities
•Parking consistent with increased office use
•Interior access via grade-level and/or dock-high doors
•Staging for moderate truck activity
•May include a showroom, service center, or assembly/light manufacturing component
•Enhanced landscaping
Transshipment (approximately 6.4% of our total annualized base rent as of December 31, 2021)
•Includes truck terminals and other transshipment facilities, which serve both single and multiple tenants
•Typically has a high number of dock-high doors, shallow bay depth and lower clear height
•Staging for a high volume of truck activity and trailer storage
Improved land (approximately 9.3% of our total annualized base rent as of December 31, 2021)
•Used for industrial outdoor storage, including truck, trailer and car parking
•May be redeveloped in the future
We selected our target markets by drawing upon the experience of our executive management investing and operating in over 50 global industrial markets located in North America, Europe and Asia, the fundamentals of supply and demand, and in anticipation of trends in logistics patterns resulting from population changes, regulatory and physical constraints, changes in technology, e-commerce, the economic and environmental benefits of reducing vehicle miles traveled and other factors. We believe that our target markets have attractive long-term investment attributes. We target assets with characteristics that include, but are not limited to, the following:
•Located in high population coastal markets;
•Close proximity to transportation infrastructure (such as sea ports, airports, highways and railways);
•Situated in supply-constrained submarkets with barriers to new industrial development, as a result of physical and/or regulatory constraints;
•Functional and flexible layout that can be modified to accommodate single and multiple tenants;
•Acquisition price at a discount to the replacement cost of the property;
•Potential for enhanced return through re-tenanting or operational or physical improvements; and
•Opportunity for higher and better use of the property over time.
In general, we prefer to utilize local third-party property managers for day-to-day property management. We believe outsourcing property management is cost effective, provides us with operational flexibility and is a source of acquisition opportunities. We have directly managed certain of our properties in the past and may do so in the future if we determine such direct property management is in our best interest.
We have no current intention to acquire undeveloped or unimproved industrial land or to pursue greenfield ground-up development. Nevertheless, we pursue redevelopment, renovation and expansion opportunities of properties that we own, acquire properties and improved land parcels with the intent to redevelop in the near-term, and acquire adjacent land to expand our existing facilities.
We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties. We may acquire industrial properties through the acquisition of other corporations or entities that own industrial real estate. We will opportunistically make investments in debt secured by industrial real estate that would otherwise meet our investment criteria with the intention of ultimately acquiring the underlying real estate. We currently do not intend to target specific percentages of holdings of particular types of industrial properties. This expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions.
The properties we acquire may be stabilized (fully leased) or unstabilized (have near term lease expirations or be partially or fully vacant). During the period from February 16, 2010 to December 31, 2021, we have stabilized 91 properties.
We sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value or the market value of the property is significantly greater than its estimated replacement cost. Capital from such sales is reinvested into properties that are expected to provide better prospective returns or returned to shareholders. We have disposed of 25 properties since inception in 2010 for an aggregate sales price of approximately $407.7 million and a total gain of approximately $136.5 million.
Competitive Strengths
We believe we distinguish ourselves from our competitors through the following competitive advantages:
•Focused Investment Strategy. We invest exclusively in six major coastal U.S. markets and focus on infill locations. We selected our six target markets based upon the experience of our executive management investing and operating in over 50 global industrial markets located in North America, Europe and Asia, the fundamentals of supply and demand, and in anticipation of trends in logistics patterns resulting from population changes, regulatory and physical constraints, changes in technology, e-commerce, the economic and environmental benefits of reducing vehicle miles traveled and other factors. We have no current intention to acquire undeveloped or unimproved land or pursue greenfield ground-up development, but we pursue redevelopment, renovation and expansion activities.
•Highly Aligned Compensation Structure. We believe that executive compensation should be closely aligned with long-term stockholder value creation. As a result, the long-term performance-based equity incentive compensation of our executive officers is based exclusively on our total shareholder return exceeding the total shareholder return of the MSCI U.S. REIT Index (RMS) or the FTSE National Association of Real Estate Investment Trusts (“Nareit”) Equity Industrial Index.
•Commitment to Strong Corporate Governance. We are committed to strong corporate governance, as demonstrated by the following:
-all members of our board of directors serve annual terms;
-we have adopted a majority voting standard in non-contested director elections;
-we have opted out of three Maryland anti-takeover provisions and, in the future, we may not opt back in to these provisions without stockholder approval;
-we designed our ownership limits solely to protect our status as a REIT and not for the purpose of serving as an anti-takeover device; and
-we have no stockholder rights plan. In the future, we will not adopt a stockholder rights plan unless our stockholders approve in advance the adoption of such a plan or, if adopted by our board of directors, we will submit the stockholder rights plan to our stockholders for a ratification vote within 12 months of adoption or the plan will terminate.
Our Financing Strategy
The primary objective of our financing strategy is to maintain financial flexibility with a conservative capital structure using retained cash flows, proceeds from dispositions of properties, long-term debt and the issuance of common and perpetual preferred stock to finance our growth. Over the long term, we intend to:
•limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 35% of our total enterprise value;
•maintain a fixed charge coverage ratio in excess of 2.0x;
•maintain a debt-to-adjusted EBITDA ratio below 6.0x;
•limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness; and
•have staggered debt maturities that are aligned to our expected average lease term (5-7 years), positioning us to re-price parts of our capital structure as our rental rates change with market conditions.
We intend to preserve a flexible capital structure with a long-term goal to maintain our investment grade rating and be in a position to issue additional unsecured debt and perpetual preferred stock. Fitch Ratings assigned us an issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. There can be no assurance that we will be able to maintain our current credit rating. Our credit rating can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. In the event our current credit rating is downgraded, it may become difficult or expensive to obtain additional financing or refinance existing obligations and commitments. We intend to primarily utilize senior unsecured notes, term loans, credit facilities, dispositions of properties, and proceeds from the issuance of common stock and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value ratio.
Our Corporate Structure
We are a Maryland corporation formed on November 6, 2009 and have been publicly held and subject to U.S. Securities and Exchange Commission (“SEC”) reporting obligations since 2010. We are not structured as an Umbrella Partnership Real Estate Investment Trust, or UPREIT, although we could put in place a similar structure to facilitate an acquisition if needed. We
currently own our properties indirectly through subsidiaries and may utilize one or more taxable REIT subsidiaries as appropriate.
Our Tax Status
We elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with our taxable year ended December 31, 2010. We believe that our organization and method of operation has enabled and will continue to enable us to meet the requirements for qualification and taxation as a REIT for federal income tax purposes. To maintain REIT status we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our net taxable income to our stockholders, excluding net capital gains. As a REIT, we generally will not be subject to federal income tax on REIT taxable income we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property and the income of our taxable REIT subsidiaries, if any, will be subject to taxation at regular corporate rates. We do not currently own any taxable REIT subsidiaries but may in the future.
Competition
We believe the current market for industrial real estate acquisitions to be highly competitive. We compete for real property investments with pension funds and their advisors, bank and insurance company investment accounts, other public and private real estate investment companies, including other REITs, real estate limited partnerships, owner-users, individuals and other entities engaged in real estate investment activities, some of which have greater financial resources than we do. We believe the leasing of real estate to be competitive. We experience competition for customers from owners and managers of competing properties. As a result, we may have to provide free rental periods, incur charges for tenant improvements or offer other inducements, all of which may have an adverse impact on our results of operations.
Governmental Regulations
Compliance with various governmental regulations has an impact on our business, including our capital expenditures, earnings and competitive position, which can be material. We incur costs to monitor and take actions to comply with governmental regulations that are applicable to our business, which include, among others, federal securities laws and regulations, applicable stock exchange requirements, REIT and other tax laws and regulations, environmental and health and safety laws and regulations, local zoning, usage and other regulations relating to real property and the Americans with Disabilities Act of 1990.
In addition to the discussion below, see “Item 1A - Risk Factors” for a discussion of material risks to us, including, to the extent material, to our competitive position, relating to governmental regulations, and see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” together with our audited consolidated financial statements and the related notes thereto for a discussion of material information relevant to an assessment of our financial condition and results of operations, including, to the extent material, the effects that compliance with governmental regulations may have upon our capital expenditures and earnings.
Environmental Matters
The industrial properties that we own and will acquire are subject to various federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated, and therefore it is possible we could incur these costs even after we sell some of our properties. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow using the property as collateral or to sell the property. Under applicable environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos at one of our properties may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. An example would be laws that require a business using chemicals to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for any of the costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. We generally obtain “Phase I environmental site assessments”, or ESAs, on each property prior to acquiring it. However, these ESAs may not reveal all environmental costs that might have a material adverse effect on our business, assets, results of operations or liquidity and may not identify all potential environmental liabilities.
In general, we utilize local third-party property managers for day-to-day property management and will rely on these third parties to operate our industrial properties in compliance with applicable federal, state and local environmental laws in their daily operation of the respective properties and to promptly notify us of any environmental contaminations or similar issues. As a result, we may become subject to material environmental liabilities of which we are unaware. We can make no assurances that (1) future laws or regulations will not impose material environmental liabilities on us, or (2) the environmental condition of our industrial properties will not be affected by the condition of the properties in the vicinity of our industrial properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us. We were not aware of any significant or material exposures as of December 31, 2021 and 2020.
General Uninsured Losses
We carry property and rental loss, liability and terrorism insurance. We believe that the policy terms, conditions, limits and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current industry practice. In addition, our properties are located, or may in the future be located, in areas that are subject to earthquake and flood activity. As a result, we have obtained, as applicable, limited earthquake and flood insurance on those properties. There are, however, certain types of extraordinary losses, such as those due to acts of war that may be either uninsurable or not economically insurable. Although we have obtained coverage for certain acts of terrorism, with policy specifications and insured limits that we believe are commercially reasonable, there can be no assurance that we will be able to collect under such policies. Should an uninsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, a property. We were not aware of any significant or material exposures as of December 31, 2021 or 2020.
Employees and Human Capital
As of February 8, 2022, we had 34 employees. None of our employees is a member of any union or is subject to a collective bargaining agreement.
We recognize that our success is linked to the talent and expertise of our people. We invest in our employees and are committed to growing individual skills and leadership qualities across our business. Our human capital objectives include, as applicable, identifying, recruiting, retaining, developing, incentivizing and integrating our existing and prospective employees. We also emphasize external community engagement by encouraging volunteer work, providing paid time off to participate in charitable activities and matching a portion of employee donations to qualifying nonprofit organizations.
As an equal opportunity employer, we promote a consistent message of diversity and inclusion and reward our employees based on merit and their contributions. We have also increased our board diversity in terms of gender, race and work experience. We have designed an executive compensation program intended to (i) align the interest of our executives and stockholders, (ii) motivate our executives to manage our business to meet our near, medium and long-term objectives, (iii) assist in attracting and retaining talented and well-qualified executives, (iv) be competitive with other industrial real estate investment trusts and (v) encourage and provide the opportunity for our executives to obtain meaningful ownership levels of our stock.
The health and safety of our employees, third-party property managers, tenants and communities where our properties are located are of primary concern. Our employees are encouraged to make healthy lifestyle decisions that can ultimately benefit the company by reducing insurance claims and boosting productivity. We also provide our employees with highly competitive health and wellness benefits, including medical, dental, vision, life and short-term disability insurance, and also offer a wellness reimbursement program, a program to pay commuting and office parking costs with pre-tax income and a competitive vacation policy, including paid holidays and personal time off.
Available Information
We maintain an internet website at the following address: http://terreno.com. The information on our website is neither part of nor incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge, on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the
Exchange Act. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and exhibits and amendments to these reports, and Section 16 filings. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. You may also obtain our reports by accessing the EDGAR database at the SEC’s website at http://www.sec.gov.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Set forth below are the risks that we believe are material to our investors and they should be carefully considered. If any of the following risks occur, our business, financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock could be adversely affected. These risks are not all of the risks we face and other factors not presently known to us or that we currently believe are immaterial may also affect our business if they occur. Investors should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 2 and should also refer to our quarterly reports on Form 10-Q and current reports on Form 8-K for any material updates to these risk factors.
Risks Related to Our Business and Our Properties
Our long-term growth will depend, in part, upon future acquisitions of properties, and we may acquire properties that pose integration and other risks that could harm our business.
We intend to continue to acquire industrial properties in our six target markets. The acquisition of properties entails various risks, including the risks that our investments may not perform as well as we had expected, that we may be unable to quickly and efficiently integrate our new acquisitions into our existing operations and that our cost estimates for bringing an acquired property up to market standards may prove inaccurate. We may also own or acquire properties that are subject to contingent or pre-existing undisclosed liabilities including, but not limited to, liabilities for adverse environmental conditions, accrued but unpaid liabilities incurred in the ordinary course of business or tax liabilities. We may have no recourse, or only limited recourse, with respect to such unknown liabilities or may be unable to secure insurance coverage on the property in a sufficient amount of cover the liability, or at all. As a result, if a liability were asserted against us based upon ownership of any of these entities or properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flows. There is no assurance we would successfully overcome these risks or any other problems encountered with these acquisitions.
In addition, we cannot assure you of the availability of investment opportunities in our targeted markets at attractive pricing levels, or at all. As a result of competition in our targeted markets, we may be unable to acquire properties as we desire or the purchase price may be significantly elevated. In the event that such opportunities are not available in our targeted markets as we expect, our ability to execute our business plan and realize our projections for growth may be materially adversely affected.
The availability and timing of cash distributions is uncertain and is limited by the requirements of Maryland law.
We have made regular quarterly cash distributions (which we also refer to as dividends) to our stockholders, and we intend to continue to pay regular quarterly cash distributions. Our corporate strategy is to fund the payment of quarterly distributions entirely from distributable cash flows. However, our board of directors has the sole discretion to determine the timing, form and amount of any cash distributions and may fund our quarterly distributions from a combination of available cash flows, net of recurring capital expenditures and/or proceeds from borrowings and property dispositions or may retain any portion of our distributable cash flows for working capital. We cannot assure our stockholders that sufficient funds will be available to pay distributions or that the level of any distributions we do make will increase or even be maintained over time, any of which could materially and adversely affect the market price of our shares of common stock.
Our ability to pay distributions on our stock is also limited by applicable Maryland law, under which we generally may not make a distribution on our stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences senior to those of our outstanding stock.
Our investments are concentrated in the industrial real estate sector, and our business would be adversely affected by an economic downturn in that sector.
Our investments in real estate assets are concentrated in the industrial real estate sector. This concentration may expose us to the risk of economic downturns in this sector to a greater extent than if our business activities included a more significant portion of other sectors of the real estate industry.
COVID-19 or any future pandemic, epidemic or outbreak of any other highly infectious disease could have an adverse effect on our business, financial condition, results of operations and cash flows and the business, financial condition, results of operations and cash flows of our tenants.
The global COVID-19 pandemic, including the emergence of various variants, has caused, and could continue to cause, significant disruptions to the U.S. and global economies and has contributed, and may continue to contribute, to significant volatility and negative pressure in financial markets. The extent to which COVID-19, or any future pandemic, epidemic or outbreak of any other highly infectious disease, impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted accurately, including the scope, severity and duration of such pandemic, the emergence and characteristics of new variants, the actions taken to contain the pandemic or mitigate its impact, including the adoption, administration and effectiveness of available COVID-19 vaccines, and the direct and indirect economic effects of the pandemic and containment measures, among others. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of COVID-19 on our business and businesses of our tenants. Nevertheless, COVID-19, or any future pandemic, epidemic or outbreak of any other highly infectious disease, may materially and adversely affect our businesses, financial condition, results of operations and cash flows and may also have the effect of heightening many of the risks described below and within this “Risk Factors” section, including:
•the complete or partial closure of, or other operational restrictions or other issues at, one or more of our properties resulting from government or tenant action has had, and could continue to have, a material adverse impact on our operations and those of our tenants and third-party property managers;
•reduced economic activity impacting the businesses, financial condition and liquidity of our tenants, has caused, and could continue to cause, one or more of our tenants, including certain significant tenants, or one or more of our third-party managers, to be unable to meet their rent payment or other obligations to us in full, or at all, to otherwise seek modifications of such obligations, including rent payment deferrals, or to file for bankruptcy protection;
•our inability to renew leases, lease vacant space, including vacant space from tenant defaults, or re-lease space as leases expire on favorable terms, or at all, including in the current slowing leasing environment, which could result in lower rental revenues or cause interruptions or delays in the receipt, or non-receipt, of rental payments;
•severe disruption and instability in the U.S. and global financial markets or deteriorations in credit and financing conditions could make it difficult for us to access debt and equity capital on attractive terms, or at all, and impact our ability to fund business activities and repay debt on a timely basis; and
•disruptions in the supply of materials or products or the inability of contractors to perform on a timely basis, or at all, including as a result of restrictions on construction activity, could cause delays in completing ongoing or future construction or re-development projects.
Events or occurrences that affect areas in which our properties are located may materially adversely impact our financial results.
In addition to general regional, national and international economic conditions that may materially adversely affect our business and financial results, our operating performance will be materially adversely impacted by adverse economic conditions in the specific markets in which we operate and particularly in the markets in which we have significant concentrations of properties. For example, as of December 31, 2021, approximately 22.9% of our rentable square feet and approximately 42.6% of our improved land parcels were located in Northern New Jersey/New York City, representing a combined percentage of approximately 27.3% of our total annualized base rent. See “Item 2 - Properties” in this Annual Report on Form 10-K for additional information regarding our ownership of properties in our markets. Any downturn in the economy in the real estate market or any of our markets and any failure to accurately predict the timing of any economic improvement in these markets could cause our operations and our revenue and cash available for distribution to our stockholders to be materially adversely affected.
We may be unable to renew leases, lease vacant space, including vacant space resulting from tenant defaults, or re-lease space as leases expire.
We cannot assure you that leases at our properties will be renewed or that such properties will be re-leased at net effective rental rates equal to or above the then current average net effective rental rates, or at all. In addition, we may be required to grant concessions or fund improvements. If the rental rates for our properties decrease, our tenants do not renew their leases or
we do not re-lease a significant portion of our available space, including vacant space resulting from tenant defaults, and space for which leases are scheduled to expire, our financial condition, results of operations, cash flows, cash available for distribution to stockholders, per share trading price of our common stock and our ability to satisfy our debt service obligations could be materially adversely affected. In addition, if we are unable to renew leases or re-lease a property, the resale value of that property could be diminished because the market value of a particular property will depend in part upon the value of the leases of such property.
We may be required to fund future tenant improvements, and we may not have funding for those improvements.
When a tenant at one of our properties does not renew its lease or otherwise vacates its space in one of our buildings in the future, it is likely that, in order to attract one or more new tenants, we will be required to expend funds to construct new tenant improvements in the vacated space. We may also be required to fund tenant improvements to retain tenants. Although we intend to manage our cash position or financing availability to pay for any improvements required for re-leasing, we cannot assure our stockholders that we will have adequate sources of funding available to us for such purposes in the future.
We face potential adverse effects from the bankruptcies or insolvencies of tenants or from tenant defaults generally.
We are dependent on tenants for our revenues, including certain significant tenants and single tenants that occupy entire properties. As a result, the bankruptcy or insolvency of our tenants, or tenant defaults generally, may adversely affect the income produced by our properties. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs, including litigation and related expenses, in protecting our investment and re-leasing our property.
Our tenants, particularly those that are highly leveraged, could file for bankruptcy protection or become insolvent in the future. Under bankruptcy law, a tenant cannot be evicted solely because of its bankruptcy but the bankrupt tenant may be authorized to reject and terminate its lease with us. In such case, our claim against the bankrupt tenant for unpaid and future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease, and, even so, our claim for unpaid rent would likely not be paid in full. This shortfall could force us to find an alternative source of revenues to pay any mortgage loan or operating expenses on the property, adversely affect our cash flows and results of operations and could cause us to reduce the amount of distributions to stockholders.
Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.
We review the carrying value of our properties when circumstances, such as adverse market conditions, indicate potential impairment may exist. We base our review on an estimate of the future cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our evaluation indicates that we may be unable to recover the carrying value of a real estate investment, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses would have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition, results of operations, cash available for distribution, including cash available for us to pay distributions to our stockholders and per share trading price of our common stock.
We utilize local third-party managers for day-to-day property management for substantially all of our properties.
In general, we prefer to utilize local third-party managers for day-to-day property management, although we may directly manage other properties in the future. To the extent we utilize third-party managers, our cash flows from our industrial properties may be adversely affected if our managers fail to provide quality services. In addition, our managers or their affiliates may manage, and in some cases may own, invest in or provide credit support or operating guarantees to industrial properties that compete with our industrial properties, which may result in conflicts of interest and decisions regarding the operation of our industrial properties that are not in our best interests.
Our redevelopment, renovation or expansion strategies may not be successful.
We may pursue redevelopment opportunities or construct expansions or improvements of industrial properties that we own. These activities are subject to risks, including, but not limited to, the risks that: we will expend money and time on
projects that do not perform as expected; the actual construction or operating costs, including labor and material costs, will be higher than originally estimated; we may fail to obtain, or experience delays in obtaining, any necessary permits and authorizations; permits and authorizations may be subject to stringent conditions that could impede or delay our progress; we are unable to complete construction on the timeframe we expect, or at all; occupancy and rental rates may not meet expectations; and we may be unable to obtain financing on favorable terms, or at all, for such projects.
We may not acquire the industrial properties that we have entered into agreements or non-binding letters of intent to acquire.
We have entered, and may in the future enter, into agreements and non-binding letters of intent with third-party sellers to acquire properties as more fully described under the heading “Material Cash Commitments” in this Annual Report on Form 10-K. There is no assurance that we will acquire the properties under contract and non-binding letters of intent because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions, and in the case of properties under non-binding letters of intent, our entry into purchase and sale agreements with respect to the properties. There is no assurance that such proposed acquisitions, if completed, will be completed on the timeframe or terms we expect. If we do not complete the acquisition of the properties under contract or non-binding letters of intent, we will have incurred expenses without our stockholders realizing any benefit from the acquisition of such properties.
We depend on key personnel.
Our success depends to a significant degree upon the contributions of our senior management team whose continued service is not guaranteed. The loss of services from our senior management team or our inability to find suitable replacements, could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets.
We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems.
Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations and, in some cases, may be critical to the operations of certain of our tenants. We face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, people with access or who gain access to our systems and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Although we make efforts to maintain the security and integrity of our IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, including but not limited to password protection, ongoing training modules throughout the year, frequent backups and a redundant data system, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving our IT networks and related systems could significantly disrupt the proper functioning of our networks and systems and, as a result, disrupt our operations, which could have a material adverse effect on our cash flow, financial condition and results of operations.
We may from time to time be subject to litigation that may negatively impact our cash flow, financial condition, results of operations and market price of our common stock.
We may from time to time be a defendant in lawsuits and regulatory proceedings relating to our business. Due to the inherent uncertainties of litigation and regulatory proceedings, we cannot accurately predict the ultimate outcome of any such litigation or proceedings. An unfavorable outcome could negatively impact our cash flow, financial condition, results of operations and trading price of our common stock.
Risks Related to Financing and Capital
If we cannot obtain additional financing, our growth will be limited.
If adverse conditions in the credit markets, in particular with respect to real estate, materially deteriorate, our business could be materially and adversely affected. Our long-term ability to grow through investments in industrial properties, including our ability to realize our projections for growth, will be limited if we cannot obtain additional financing on favorable terms, or at all. In the future, we will rely on equity and debt financing, including issuances of common and perpetual preferred stock,
borrowings under our revolving credit facility, term loans, issuances of unsecured debt securities and debt secured by individual properties or pools of properties, to finance our acquisition, redevelopment, renovation and expansion activities and for working capital. If we are unable to obtain equity or debt financing from these or other sources, or to refinance existing indebtedness upon maturity, our financial condition and results of operations would likely be adversely affected. Market conditions may make it difficult to obtain additional financing, and we cannot assure you that we will be able to obtain additional debt or equity financing or that we will be able to obtain it on favorable terms.
In addition, to qualify as a REIT, we are required to distribute at least 90% of our taxable income (determined before the deduction for dividends paid and excluding any net capital gains) each year to our stockholders, and we generally expect to make distributions in excess of such amount. As a result, our ability to retain earnings to fund acquisitions, redevelopment, renovation and expansion, if any, or other capital expenditures will be limited.
Debt service obligations could adversely affect our overall operating results, may require us to sell industrial properties and could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock.
Our business strategy contemplates the use of both non-recourse secured debt and unsecured debt to finance long-term growth. As of December 31, 2021, we had total debt, net of deferred financing costs, of approximately $720.7 million, which consisted of revolving credit facility borrowings, term loan borrowings, senior unsecured note borrowings and mortgage loans payable (if any). While over the long term we intend to limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding shares of preferred stock to less than 35% of our total enterprise value, our governing documents contain no limitations on the amount of debt that we may incur, and our board of directors may change our financing policy at any time without stockholder approval. We also intend to maintain a fixed charge coverage ratio in excess of 2.0x and a debt-to-adjusted EBITDA ratio below 6.0x and limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness but our board of directors may modify or eliminate these limitations at any time without the approval of our stockholders. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Our existing debt, and the incurrence of additional debt, could subject us to many risks, including the risks that:
•our cash flows from operations will be insufficient to make required payments of principal and interest;
•our debt may increase our vulnerability to adverse economic and industry conditions;
•we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes;
•the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and
•the use of leverage could adversely affect our ability to make distributions to our stockholders and the market price of our shares of common stock.
If we do not have sufficient funds to repay existing or future debt, including debt under our credit facility and senior unsecured notes, it may be necessary to refinance the debt through additional debt or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, the increase in interest expense would adversely affect our cash flows, and, consequently, cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of industrial properties on disadvantageous terms, potentially resulting in losses. We may also place mortgages on our properties that we own to secure a revolving credit facility or other debt. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our industrial properties that may be pledged to secure our obligations to foreclosure.
Higher interest rates could increase debt service requirements on any floating rate debt that we incur and could reduce the amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future business opportunities, or other purposes. In addition, an increase in interest rates could decrease the amount 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. Adverse economic conditions could cause the terms on which we borrow to be unfavorable. We could be required to liquidate one or more of our industrial properties in order to meet our debt service obligations at times which may not permit us to receive an attractive return on our investments.
The agreements relating to our existing debt contain, and we expect that agreements relating to our future indebtedness will contain, covenants that could limit our operations and our ability to make distributions to our stockholders.
We have a credit facility, which consists of a $100.0 million term loan that matures in January 2027 and a revolving credit facility with $250.0 million in borrowing capacity that matures in August 2025. We also have $625.0 million of senior unsecured notes outstanding. We have agreed to guarantee the obligations of the borrower (a wholly-owned subsidiary) under our revolving credit facility, our term loan and our senior unsecured notes. Our revolving credit facility, our term loan and our senior unsecured notes and certain of our existing mortgage loans payable contain, and we expect that our future indebtedness will contain, financial and operating covenants, such as fixed charge coverage and debt ratios and other limitations that will limit or restrict our ability to make distributions or other payments to our stockholders and may restrict our investment activities. For example, our credit facility restricts distributions if we are in default. These covenants may limit our operating and financial flexibility and our ability to respond to changes in our business or competitive activities in the future and may also restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders or obtain necessary funds.
Failure to meet our financial covenants could result from, among other things, changes in our results of operations, the incurrence of additional debt or changes in general economic conditions. If we violate covenants or if there is an event of default under our credit facility, our senior unsecured notes, our existing mortgage loans payable or in our future agreements, we could be required to repay all or a portion of our indebtedness before maturity and might be unable to arrange financing for such repayment on attractive terms, if at all. In addition, the note purchase agreements with respect to our existing senior unsecured notes contain, and any unsecured debt agreements we enter into in the future may contain, specific cross-default provisions with respect to specified other indebtedness, giving the unsecured lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could materially and adversely affect our cash flows, financial condition and results of operations.
We may acquire outstanding debt or provide a loan, in each case secured by an industrial property, which will expose us to risks.
We may acquire outstanding debt secured by an industrial property from lenders and investors or provide a loan secured by industrial property if we believe we can acquire ownership of the underlying property through foreclosure, deed-in-lieu of foreclosure or other means. If we acquire such debt or provide such a loan, borrowers may seek to assert various defenses to our foreclosure or other actions, and we may not be successful in acquiring the underlying property on a timely basis, or at all, in which event we could incur significant costs and experience significant delays in acquiring such properties, all of which could adversely affect our financial performance and reduce our expected returns from such investments. In addition, we may not earn a current return on such investments particularly if the loan that we acquire or provide is in, or goes into, default.
If we provide debtor-in-possession financing or provide a loan, a default by the borrower could adversely affect our cash flows.
We may on a limited basis provide debtor-in-possession financing to a property owner that has filed for bankruptcy or make a loan secured by real estate that we might otherwise purchase directly. We expect that any such loans would be secured by one or more properties that we intend to acquire and that we would have the option to acquire such property in lieu of the repayment of such loan. Any default by the borrower under any such loan could negatively impact our cash flows and our ability to make cash distributions to our stockholders and result in litigation and related expenses. Although we would expect to acquire the secured property upon a borrower’s default, there is no assurance that we will successfully foreclose on a property, and any such foreclosure could result in significant expenses.
Adverse changes in our credit rating could negatively affect our financing activity.
Fitch Ratings assigned us an issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Our credit rating can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. There can be no assurance that we will be able to maintain our current credit rating, and in the event our credit rating is downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our credit rating may trigger additional payments or other negative consequences under our existing and future credit facilities and debt instruments. For example, if our credit rating is downgraded to below investment grade levels, we may not be able to obtain or maintain extensions on certain of our existing debt. Adverse changes in our credit rating could negatively impact our refinancing activities, our ability to manage our debt maturities, our future growth, our financial condition, the market price of our stock and our acquisition activities.
Failure to hedge effectively against interest rate changes may adversely affect results of operations.
We may seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as cap contracts and swap agreements. We do not currently have any hedging arrangements in place but have previously used interest rate caps to hedge the variable cash flows associated with our term loans. Any future hedging arrangements we enter into may not be effective in reducing our exposure to interest rate changes and a court could rule that such arrangements are not legally enforceable. Hedging may reduce overall returns on our investments and the failure to hedge effectively against interest rate changes may materially adversely affect our results of operations.
The discontinuation of LIBOR and the replacement of LIBOR with an alternative reference rate may adversely affect our borrowing costs and could impact our business and results of operations.
The LIBOR benchmark has been the subject of national, international and other regulatory guidance and proposals for reform and replacement, with most LIBOR settings not expected to be published after June 30, 2023. In the U.S., the Alternative Reference Rates Committee (“ARRC”), which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (“SOFR”) plus a recommended spread adjustment as its preferred alternative to LIBOR in derivatives and other financial contracts. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.
We expect that all LIBOR settings relevant to us will cease to be published or will no longer be representative after June 30, 2023. As a result, any of our LIBOR-based borrowings that extend beyond such date will need to be converted to a replacement rate. Certain risks may arise in connection with transitioning contracts to SOFR or any other alternative variable rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted. Our credit facility, which we entered into in August 2021, provides for the replacement of LIBOR if it becomes unavailable during the term of the facility. However, for some instruments, the method of transitioning to an alternative rate may be challenging, as they may require substantial negotiation with each respective counterparty. If a contract is not transitioned to an alternative variable rate and LIBOR is discontinued, the impact is likely to vary by contract.
The discontinuation of LIBOR will not affect our ability to borrow or maintain already outstanding borrowings or swaps, but if our contracts indexed to LIBOR, including certain contracts governing our variable rate debt, are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available. Additionally, although SOFR is the ARRC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in ways that would result in higher interest costs for us. It is not yet possible to predict the magnitude of LIBOR’s end on our borrowing costs given the remaining uncertainty about which rates will replace LIBOR.
Our existing stockholders may experience dilution if we issue additional common stock.
Sales of substantial amounts of shares of our common stock in the public market, including the issuance of our common stock in connection with property, portfolio or business acquisitions, the issuance and vesting of any restricted stock granted to employees under our 2019 Equity Incentive Plan and the issuance of our common stock upon the vesting of awards under our Amended and Restated Long-Term Incentive Plan, may be dilutive to existing stockholders and could have an adverse effect on the market price of our common stock.
We may issue preferred stock or debt securities and may also incur other future indebtedness which would rank senior to our common stock upon liquidation and may adversely affect the market price of our common stock.
Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Upon liquidation, holders of our debt securities and any shares of preferred stock, and lenders with respect to other borrowings, including our existing credit facility and mortgage loans payable, will receive distributions of our available assets prior to the holders of our common stock. In addition, future offerings of debt securities or the incurrence of additional indebtedness may reduce the market price of our common stock. Shares of our preferred stock, if issued in the future, could have a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay a dividend or make another distribution to the holders of our common stock and, as a result, may reduce the market price of our common stock.
Volatility in the capital and credit markets could materially and adversely impact us.
The capital and credit markets have experienced, and may continue to experience, extreme volatility and disruption from time to time, which may make it more difficult for us to raise equity capital, hinder our ability to borrow money, obtain new debt financing or refinance our maturing debt on favorable terms, or at all. Market turmoil and tightening of credit, which have occurred in the past, can also lead to an increased lack of consumer confidence and widespread reduction of business activity
generally, which also could materially and adversely impact us, including our ability to acquire and dispose of assets on favorable terms or at all. Volatility in capital and credit markets may also have a material adverse effect on the market price of our common stock.
Risks Related to the Real Estate Industry
Investments in real estate properties are subject to risks that could adversely affect our business.
Investments in real estate properties are subject to varying degrees of risk and our performance and value are subject to general economic conditions and risks associated with our properties. While we seek to minimize these risks through geographic diversification of our portfolio, market research and our asset management capabilities, these risks cannot be eliminated. Factors that may affect real estate values and cash flows include:
•downturns in national, regional and local economic conditions (particularly increases in unemployment);
•the attractiveness of our properties to potential tenants and competition from other industrial properties;
•changes in supply of, or demand for, similar or competing properties in an area;
•bankruptcies, financial difficulties or lease defaults by the tenants of our properties;
•adverse capital and credit market conditions, which may restrict our operating activities;
•changes in interest rates, availability and terms of debt financing, including periods of high or rising interest rates;
•changes in operating costs and expenses and our ability to control rents;
•changes in, or increased costs of compliance with, governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder;
•increasing costs of maintaining, insuring, renovating and making improvements to our properties;
•unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;
•tenant turnover;
•re-leasing that may require concessions or reduced rental rates under the new leases due to reduced demand;
•our ability to renovate and reposition our properties due to changes in the business and logistical needs of our tenants;
•technological changes, such as reconfiguration of supply chains, autonomous vehicles, robotics, 3D printing or other technologies;
•disruptions in the global supply chain caused by political, regulatory or other factors, including terrorism and domestic terrorist attacks;
•disruptions to political, governmental or regulatory systems, including shutdowns of the government and its agencies; and,
•the effects of deflation, including credit market dislocation, weakened consumer demand and a decline in general price levels.
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or public perception that any of these events may occur, would result in a general decrease in rents or an increased occurrence of defaults under existing leases, which would materially adversely affect our financial condition and results of operations. Future terrorist attacks may also result in declining economic activity, which could reduce the demand for, and the value of, our properties and adversely impact our tenants, including their ability to meet obligations under their leases. For these and other reasons, we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our properties.
Actions by our competitors may decrease or prevent increases in the occupancy and rental rates of our properties.
We compete with other developers, owners and operators of real estate, some of which own properties similar to our properties in the same markets in which the properties we own are located. If our competitors offer space at rental rates below current market rates or below the rental rates we will charge the tenants of our properties, we may lose existing or potential tenants, and we may be pressured to reduce our rental rates or offer tenant concessions or favorable lease terms in order to retain tenants when such tenants’ leases expire or attract new tenants. As a result of these actions by our competitors, our financial condition, cash flows, cash available for distribution, trading price of our common stock and ability to satisfy our debt service obligations could be materially adversely affected.
Real estate investments are not as liquid as other types of assets, which may reduce economic returns to investors.
Real estate investments are not as liquid as other types of investments and significant expenditures associated with real estate investments, such as mortgage payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investments. In addition, we intend to comply with the safe harbor rules relating to the number of properties that can be disposed of in a year, the tax bases and the costs of improvements made to these properties, and meet other tests which enable a REIT to avoid punitive taxation on the sale of assets. Thus, our ability at any time to sell assets may be restricted. This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic, financial, investment or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the market price of, our common stock.
Uninsured or underinsured losses relating to real property may adversely affect our returns.
We will attempt to ensure that all of our properties are adequately insured to cover casualty losses. However, there are certain losses, including losses from floods, hurricanes, fires, earthquakes and other natural disasters, acts of war, acts of terrorism or riots, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so. In addition, changes in the cost or availability of insurance could expose us to uninsured casualty losses. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property and we may not have access to an alternative source of funding to repair or reconstruct the damaged property. In the event that any of our properties incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a property after it has been damaged or destroyed. Any such losses could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.
We own properties in Los Angeles, the San Francisco Bay Area and Seattle, which are located in areas that are known to be subject to earthquake activity. Although we carry replacement-cost earthquake insurance on all of our properties located in areas historically subject to seismic activity, subject to coverage limitations and deductibles that we believe are commercially reasonable, we may not be able to obtain coverage to cover all losses with respect to such properties on economically favorable terms, which could expose us to uninsured casualty losses. We intend to evaluate our earthquake insurance coverage annually in light of current industry practice.
Environmentally hazardous conditions may adversely affect our operating results.
Under various federal, state and local environmental laws, a current or previous owner or operator of real property may be liable for the cost of investigating, removing or remediating hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Even if more than one person may have been responsible for the contamination, each person covered by applicable environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages based on personal injury, natural resource or property damage or other costs, including investigation and clean-up costs, resulting from the environmental contamination. The presence of hazardous or toxic substances on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to sell or lease the property or borrow using the property as collateral. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated. A property owner who violates environmental laws may be subject to sanctions which may be enforced by governmental agencies or, in certain circumstances, private parties. In connection with the acquisition and ownership of our properties, we may be exposed to such costs. The cost of defending against environmental claims, of compliance with environmental regulatory requirements or of remediating any contaminated property could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.
Environmental laws in the U.S. also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties may contain asbestos-containing building materials.
We invest in properties historically used for industrial, manufacturing and commercial purposes. Some of these properties contain, or may have contained, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances. Some of our properties may be adjacent to or near other properties that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. In addition, certain of our properties may be on or are adjacent to or near other properties upon which others, including former owners or tenants of such properties, have engaged, or may in the future engage, in activities that may release petroleum products or other hazardous or toxic substances. As needed, we may obtain environmental insurance policies on commercially reasonable terms that provide coverage for potential environmental liabilities, subject to the policy’s coverage conditions and limitations. From time to time, we may acquire properties, or interests in properties, with known adverse environmental conditions where we believe that the environmental liabilities associated with these conditions are quantifiable and that the acquisition will yield a superior risk- adjusted return. In such an instance, we underwrite the costs of environmental investigation, clean-up and monitoring into the cost. Further, in connection with property dispositions, we may agree to remain responsible for, and to bear the cost of, remediating or monitoring certain environmental conditions on the properties.
We generally obtain Phase I environmental site assessments on each property prior to acquiring it and we generally anticipate that the properties that we may acquire in the future may be subject to a Phase I or similar environmental assessment by independent environmental consultants at the time of acquisition. Phase I assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. Phase I assessments generally include a historical review, a public records review, an investigation of the surveyed site and surrounding properties, and preparation and issuance of a written report, but do not include soil sampling or subsurface investigations and typically do not include an asbestos survey. Even if none of our environmental assessments of our properties reveal an environmental liability that we believe would have a material adverse effect on our business, financial condition or results of operations taken as a whole, we cannot give any assurance that such conditions do not exist or may not arise in the future. Material environmental conditions, liabilities or compliance concerns may go undetected by the environmental assessment or arise after the environmental assessment has been completed. Moreover, there can be no assurance that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the environmental condition of our properties will not be affected by tenants, by the condition of land or operations in the vicinity of such properties (such as releases from underground storage tanks), or by third parties unrelated to us.
Costs of complying with governmental laws and regulations with respect to our properties may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to various federal, state and local laws and regulations. Tenants’ ability to operate and to generate income to pay their lease obligations may be affected by permitting and compliance obligations arising under such laws and regulations. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Leasing our properties to tenants that engage in industrial, manufacturing and commercial activities will cause us to be subject to the risk of liabilities under environmental laws and regulations.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and which may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines or damages we must pay will reduce our ability to make distributions and may reduce the value of our common stock. In addition, changes in these laws and governmental regulations, or their interpretation by agencies or the courts, could occur.
Furthermore, while leases with our tenants generally include provisions to obligate the tenants to comply with all laws and operate within a defined use, there is no guaranty that the tenants will comply with the terms of their leases. Moreover, our tenants may disregard the use restrictions contained in their leases and conduct operations not contemplated by the lease, including highly hazardous uses, despite our efforts to prohibit certain uses. We may also incur costs to bring a property into legal compliance even though the tenant may have been contractually required to comply and pay for the cost of compliance.
We are exposed to the potential impacts of future climate change and climate-change related risks, which may result in unanticipated losses that could affect our business and financial condition.
Government authorities and various interest groups are promoting laws and regulations relating to climate change, including regulations aimed at limiting greenhouse gas emissions and the implementation of “green” building codes, due to
concerns over contributions to climate change. These laws and regulations may require us to make improvements to our existing properties or result in increased operating costs that we may not be able to effectively pass on to our tenants. In addition, such laws and regulations could impose substantial costs on our tenants, including, for example, an increase in the cost of the fuel and other energy purchased by our tenants. Any such increased costs could impact the financial condition of our tenants and their ability to meet their lease obligations and also affect our ability to lease or re-lease our properties.
We may be exposed to physical risks from possible future changes in climate. Our properties may be exposed to rare catastrophic weather events, such as severe storms or floods. If the frequency of extreme weather events increases, our exposure to these events could increase. Some of our properties may be subject to risks from rising sea levels. In addition, many state and local governments are adopting or considering adopting regulations requiring that property owners and developers include in their development or redevelopment plans resiliency measures to address climate-change related risks. If such regulations apply to any of our properties, we may be required to incur substantial costs to address such regulations.
Compliance or failure to comply with regulatory requirements could result in substantial costs.
We are required to comply with many regulations made by various regulatory entities, including (but not limited to) the Americans with Disabilities Act, The Fair Housing Amendment of 1988, various California energy efficiency standards such as The Energy Efficiency Standards for Residential and Nonresidential Buildings, Title 24, and/or other similar regulations. Noncompliance could result in the imposition of fines or the award of damages to private litigants. If we are required to incur additional costs and make unanticipated expenditures or substantial modifications to our properties to comply with such regulatory requirements, our financial condition, cash flows, results of operations, the market price of our shares of common stock and our ability to make distributions to our stockholders could be adversely affected.
We may be unable to sell a property if or when we decide to do so, including as a result of uncertain market conditions, which could adversely affect the return on an investment in our common stock.
We expect to hold the various real properties in which we invest until such time as we decide that a sale or other disposition is appropriate given our investment objectives. Our ability to dispose of properties on advantageous terms or at all depends on factors beyond our control, including competition from other sellers that are divesting similar assets in the same markets and/or at valuations below our valuations for comparable assets and the availability of attractive financing for potential buyers of our properties. Due to the uncertainty of market conditions which may affect the future disposition of our properties, we cannot assure our stockholders that we will be able to sell such properties at a profit, or at all, in the future.
Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold and may not have the funds available to correct such defects or to make such improvements. In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
Risks Related to Our Organizational Structure
Our board of directors may change significant corporate policies without stockholder approval.
Our investment, financing, borrowing and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations, are determined by our board of directors. These policies may be amended or revised at any time and from time to time at the discretion of the board of directors without notice to, or a vote of, our stockholders. In addition, the board of directors may change our governance policies, including our conflict of interest policies, provided that such changes are consistent with applicable legal and regulatory requirements, including the listing standards of the New York Stock Exchange. A change in these policies could have an adverse effect on our financial condition, results of operations, cash flows, per share trading price of our common stock and ability to satisfy our debt service obligations and to pay distributions to our stockholders.
We could increase the number of authorized shares of stock and issue stock without stockholder approval.
Subject to applicable legal and regulatory requirements, our charter authorizes our board of directors, without stockholder approval, to increase the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of such classified or unclassified shares. Our board of directors could establish a series of preferred stock that could, depending on the terms of such
series, delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting or deterring a third-party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
•“Business Combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (as defined under the MGCL) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter may impose special stockholder voting requirements unless certain minimum price conditions are satisfied; and
•“Control Share” provisions that provide that “control shares” of our company acquired in a “control share acquisition” (each as defined under the MGCL) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have opted out of the business combination and control share provisions of the MGCL by resolution of our board of directors and pursuant to a provision in our bylaws, respectively. However, in the future, only upon the approval of our stockholders, our board of directors may by resolution elect to opt-in to the business combination provisions of the MGCL and we may, only upon the approval of our stockholders, by amendment to our bylaws, opt-in to the control share provisions of the MGCL. Our board of directors has also adopted a resolution prohibiting us from electing to be subject to the provisions of Title 3, Subtitle 8 of the MGCL, without the approval of our stockholders, that would permit our board of directors to classify the board without stockholder approval. Such provisions of Title 3, Subtitle 8 of the MGCL could have an anti-takeover effect.
In addition, the provisions of our charter on removal of directors and the advance notice provisions of our bylaws could delay, defer or prevent a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interest. Likewise, if our board of directors, with stockholder approval, as applicable, were to opt- in to the business combination or control share provisions of the MGCL or the provisions of Title 3, Subtitle 8 of the MGCL, these provisions of the MGCL could have similar anti-takeover effects.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Maryland law provides that a director or officer has no liability in that capacity if he or she satisfies his or her duties to us and our stockholders. Our charter limits the liability of our directors and officers to us and our stockholders for monetary damages, except for liability resulting from:
•actual receipt of an improper benefit or profit in money, property or services; or
•a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.
In addition, our charter authorizes us, and our bylaws require us, to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Accordingly, in the event that actions taken in good faith by any of our directors or officers impede the performance of our company, your ability to recover damages from such director or officer will be limited. In addition, we may be obligated to advance the defense costs incurred by our directors and executive officers, and may, in the discretion of our board of directors, advance the defense costs incurred by our employees and other agents in connection with legal proceedings.
Risks Related to Our Status as a REIT
Failure to qualify as a REIT would cause us to be taxed as a regular C corporation, which would substantially reduce funds available for distributions to stockholders.
We believe that our organization and method of operation have enabled and will continue to enable us to meet the requirements for qualification and taxation as a REIT. However, we cannot assure you that we will qualify as such. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations and involves the determination of facts and circumstances not
entirely within our control. Future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.
If we fail to qualify as a REIT in any taxable year, and are unable to obtain relief under certain statutory provisions, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
•we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal and state income tax at regular corporate rates; and
•we could not elect to qualify as a REIT for four taxable years following the year during which we were disqualified.
In addition, we would no longer be required to pay distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it could adversely affect the value of our common stock.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Our tax liabilities may increase as a result of changes in state and local tax laws or regulations, or, in the case of property taxes, as our properties are assessed or reassessed by taxing authorities. Any of these taxes would decrease cash available for distributions to stockholders.
We may be subject to a 100% penalty tax on any prohibited transactions that we enter into, or may be required to forego certain otherwise beneficial opportunities in order to avoid the penalty tax on prohibited transactions.
If we have acquired or held property primarily for sale to customers in the ordinary course of business, we may be subject to a 100% prohibited transactions tax under U.S. federal tax laws on the gain from disposition of the property unless the disposition qualifies for one or more safe harbor exceptions for properties that have been held by us for at least two years and satisfies certain additional requirements.
The potential application of the prohibited transactions tax could cause us to forego potential dispositions of property or to forego other opportunities that might otherwise be attractive to us, or to hold investments or undertake such dispositions or other opportunities through a taxable REIT subsidiary (“TRS”), which would generally result in corporate income taxes being incurred by such TRS.
REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.
In order to maintain our REIT status and to meet the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our net taxable income each year, excluding capital gains. In addition, we will be subject to corporate income tax to the extent we distribute less than 100% of our net taxable income including any net capital gain. We intend to make distributions to our stockholders to comply with the requirements of the Code for REITs and to minimize or eliminate our corporate income tax obligation to the extent consistent with our business objectives. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
Dividends payable by REITs generally do not qualify for reduced tax rates.
Currently, the maximum tax rate for qualified dividends payable to individual U.S. stockholders is 20%. Dividends payable by REITs, however, are generally not eligible for such reduced rates. However, for taxable years beginning before
January 1, 2026, a deduction of up to 20% (subject to certain limitations) is available on most ordinary REIT dividends and certain trade or business income of non-corporate taxpayers. Additionally, to the extent such dividends are attributable to certain dividends that we receive from a TRS, such dividends generally will be eligible for the reduced rates that apply to qualified dividend income. While we currently do not own an interest in a TRS, we may own such an interest in the future. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
We may choose to pay dividends in our stock instead of cash, in which case stockholders may be required to pay income taxes in excess of any cash dividends they receive.
We may distribute taxable dividends that are payable in stock. Taxable stockholders receiving taxable stock dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of any cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends. In addition, if a significant number of our stockholders sell common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or to liquidate otherwise attractive investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the total voting power of the outstanding securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 20% of the value of our total assets can be represented by the securities of one or more TRSs and no more than 25% of the value of our total assets can be represented by unsecured debt of publicly offered REITs, in each case, at the close of each calendar quarter. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Our relationship with any TRS will be limited, and a failure to comply with the limits would jeopardize our REIT qualification and may result in the imposition of certain taxes.
While we currently do not own an interest in a TRS, we may own such an interest in the future. As a REIT, we are subject to a variety of limitations on our ownership of TRSs and operations with respect to any TRSs that we own, and failure to comply with these limitations may subject us to additional taxes, the amount of which could be substantial, or, potentially, loss of REIT status. While we anticipate that we will comply with these limitations in the event we acquire an interest in a TRS, we can provide no assurances in this regard.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to be qualified as a REIT. If we cease to be a REIT, we would become subject to federal and state corporate income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders and on the market price of our common stock.
We may face risks in connection with Section 1031 Exchanges.
We may engage in one or more real estate transactions intended to qualify for federal income tax deferral as a “like-kind exchange” under Section 1031 of the Code. If a transaction that is intended to qualify for deferral under Section 1031 is later determined to have been taxable, we may face adverse consequences. Additionally, if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.
At any time, the federal income tax laws governing REITs (or otherwise affecting our business or affecting our stockholders) or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
General Risks
Our business could be adversely impacted if we have deficiencies in our disclosure controls and procedures or internal controls over financial reporting.
The design and effectiveness of our disclosure controls and procedures and internal controls over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal controls over financial reporting, there can be no guarantee that our internal controls over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal controls over financial reporting which may occur in the future could result in misstatements or restatements of our financial statements or a decline in our stock price.
The market price and trading volume of our common stock may be volatile and may trade at prices that are higher or lower than our net asset value per share.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations. If the market price of our common stock declines, you may be unable to resell your shares at or above the price you paid for such shares. We cannot assure you that the market price of our common stock will not fluctuate or decline in the future.
Additionally, the market value of the equity securities of a REIT is based upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and upon the real estate market value of the underlying assets. Our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flows for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include: our financial condition, performance, liquidity and prospects; actual or anticipated variations in our quarterly operating results or distributions; changes in our funds from operations, or FFO, or earnings; publication of research reports about us or the real estate industry; changes in earnings estimates by analysts and our ability to meet analysts’ earnings estimates; increases in market interest rates that lead purchasers of our shares to demand a higher yield; the market for similar securities issued by REITs; the attractiveness of REIT securities in comparison to the securities of other companies, taking into account, among other things, the higher tax rates imposed on dividends paid by REITs; government legislation, action or regulation; our issuance of debt or preferred equity securities; the realization of any of the other risk factors presented in this Annual Report on Form 10-K; and general market, including capital market and real estate market, and economic conditions.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
As of December 31, 2021, we owned a total of 253 buildings aggregating approximately 15.1 million square feet, 36 improved land parcels consisting of approximately 127.1 acres and four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres. As of December 31, 2021, the buildings and improved land parcels were approximately 95.5% and 94.8% leased (including 0.4 million square feet of vacancy acquired during the fourth quarter of 2021), respectively, to 554 customers, the largest of which accounted for approximately 4.9% of our total annualized base rent. The properties are located in Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. We invest in several types of industrial real estate, including warehouse/distribution buildings, flex buildings (including light industrial and research and development, or R&D), transshipment buildings and improved land parcels. See “Item 1 - Our Investment Strategy - Industrial Facility General Characteristics” in this Annual Report on Form 10-K for a general description of these types of industrial real estate. We target functional buildings in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. Infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings. See our “Consolidated Financial Statements, Schedule III-Real Estate Investments and Accumulated Depreciation” in this Annual Report on Form 10-K for a detailed listing of our properties.
The following table summarizes by type our investments in real estate as of December 31, 2021:
Type Number of Buildings or Improved Land Parcels Annualized Base Rent (in thousands) 1
% of Total
Warehouse/distribution 223 $ 146,272 79.5 %
Flex 12 8,816 4.8 %
Transshipment 18 11,683 6.4 %
Improved land 36 17,094 9.3 %
Total 289 $ 183,865 100.0 %
1Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2021, multiplied by 12.
The following table summarizes by market our investments in real estate as of December 31, 2021:
Los Angeles Northern New Jersey/New York City San Francisco Bay Area Seattle Miami Washington, D.C. Total/Weighted Average
Investments in Real Estate
Number of Buildings 51 62 46 41 31 22 253
Rentable Square Feet 2,695,418 3,447,704 2,196,384 2,750,349 2,210,497 1,761,704 15,062,056
% of Total 17.8 % 22.9 % 14.6 % 18.3 % 14.7 % 11.7 % 100.0 %
Occupancy % as of December 31, 2021 4
99.0 % 98.5 % 97.7 % 96.8 % 83.7 % 93.9 % 95.5 %
Annualized Base Rent (in thousands) 1
$ 28,043 $ 43,228 $ 29,861 $ 29,076 $ 16,527 $ 20,036 $ 166,771
% of Total 16.8 % 25.9 % 17.9 % 17.5 % 9.9 % 12.0 % 100.0 %
Annualized Base Rent 1 Per Occupied Square Foot
$ 10.51 $ 12.72 $ 13.91 $ 10.92 $ 8.94 $ 12.11 $ 11.60
Weighted Average Remaining Lease Term (Years) 2
2.6 4.7 3.4 3.8 4.5 3.1 4.4
Investments in Improved Land
Number of Land Parcels 10 10 3 8 2 3 36
Acres 20.7 54.2 7.1 21.2 3.2 20.7 127.1
% of Total 16.3 % 42.6 % 5.6 % 16.7 % 2.5 % 16.3 % 100.0 %
Occupancy % as of December 31, 2021
90.5 % 100.0 % 100.0 % 78.1 % 100.0 % 100.0 % 94.8 %
Annualized Base Rent
(in thousands) 1
$ 4,341 $ 7,043 $ 1,418 $ 2,163 $ 422 $ 1,707 $ 17,094
% of Total 25.4 % 41.2 % 8.3 % 12.6 % 2.5 % 10.0 % 100.0 %
Annualized Base Rent 1 Per Occupied Square Foot
$ 5.32 $ 3.07 $ 4.60 $ 3.15 $ 3.07 $ 1.95 $ 3.32
Weighted Average Remaining Lease Term (Years) 2
3.3 5.9 3.4 3.8 2.6 6.0 5.0
Total Investments in Real Estate and Improved Land
Annualized Base Rent (in thousands) 1
$ 32,384 $ 50,271 $ 31,279 $ 31,239 $ 16,949 $ 21,743 $ 183,865
% of Total Annualized Base Rent 1
17.6 % 27.3 % 17.0 % 17.0 % 9.2 % 11.9 % 100.0 %
Gross Book Value (in thousands) 3
$ 537,072 $ 750,302 $ 453,233 $ 551,547 $ 341,946 $ 312,726 $ 2,946,826
% of Total Gross Book Value 18.2 % 25.5 % 15.4 % 18.7 % 11.6 % 10.6 % 100.0 %
1Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2021, multiplied by 12.
2Weighted average remaining lease term is calculated by summing the remaining lease term of each lease as of December 31, 2021, weighted by the respective square footage.
3Includes four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres.
4Includes 0.4 million square feet of vacancy acquired in Miami.
As of December 31, 2021, we owned four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres with a total expected investment of approximately $75.8 million, including redevelopment costs, capitalized interest and other costs.
The following table summarizes our capital expenditures incurred during the three months and years ended December 31, 2021 and 2020 (dollars in thousands):
For the Three Months Ended December 31, For the Year Ended December 31,
2021 2020 2021 2020
Building improvements $ 8,600 $ 3,210 $ 29,614 $ 15,311
Tenant improvements 1,060 1,163 8,018 2,868
Leasing commissions 3,265 3,698 15,487 13,408
Redevelopment, renovation and expansion 4,776 265 14,711 7,026
Total capital expenditures 1
$ 17,701 $ 8,336 $ 67,830 $ 38,613
1Includes approximately $11.0 million and $2.0 million for the three months ended December 31, 2021 and 2020, respectively, and approximately $39.0 million and $17.4 million for the years ended December 31, 2021 and 2020, respectively, related to leasing acquired vacancy, redevelopment construction in progress and renovation and expansion projects (stabilization capital) at 22 and 10 properties for the three months ended December 31, 2021 and 2020, respectively, and at 24 and 15 properties for the years ended December 31, 2021 and 2020, respectively.
Our industrial properties are typically subject to leases on a “triple net basis,” in which tenants pay their proportionate share of real estate taxes, insurance and operating costs, or are subject to leases on a “modified gross basis,” in which tenants pay expenses over certain threshold levels. In addition, approximately 94.2% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years. We monitor the liquidity and creditworthiness of our tenants on an ongoing basis by reviewing outstanding accounts receivable balances, and as provided under the respective lease agreements, review the tenant’s financial condition periodically as appropriate. As needed, we hold discussions with the tenant’s management about their business and we conduct site visits of the tenant’s operations.
Our top 20 customers based on annualized base rent as of December 31, 2021 are as follows:
Customer Leases Rentable
Square Feet % of Total
Rentable
Square Feet Annualized
Base Rent
(in thousands) 1
% of Total
Annualized
Base Rent
1 Amazon.com 2
6 471,880 3.1 % $ 9,059 4.9 %
2 FedEx Corporation 3
6 246,779 1.6 % 4,814 2.6 %
3 Danaher 3 171,707 1.1 % 3,844 2.1 %
4 United States Government 8 300,732 2.0 % 3,757 2.0 %
5 District of Columbia 7 234,071 1.6 % 3,362 1.8 %
6 O'Neill Logistics 2 237,692 1.6 % 2,069 1.1 %
7 DirectBuy Home Improvement 1 230,891 1.5 % 2,011 1.1 %
8 Costco-Innovel Solutions LLC 1 219,910 1.5 % 1,870 1.0 %
9 Port Kearny Security, Inc. 4
1 - - % 1,800 1.0 %
10 XPO Logistics 2 180,717 1.2 % 1,764 1.0 %
11 L3 Harris Technologies, Inc. 1 147,898 1.0 % 1,700 0.9 %
12 Exquisite Apparel Corporation 1 114,061 0.8 % 1,574 0.9 %
13 Bar Logistics 1 203,263 1.3 % 1,546 0.9 %
14 Topaz Lighting Corp. 1 190,000 1.3 % 1,507 0.9 %
15 Envogue International 1 192,000 1.3 % 1,454 0.8 %
16 YRC 2 61,252 0.4 % 1,441 0.8 %
17 United States Postal Service 2 53,000 0.4 % 1,438 0.8 %
18 Lilac Solutions Inc. 1 92,884 0.6 % 1,378 0.7 %
19 Saia Motor Freight Line LLC 1 52,086 0.3 % 1,315 0.7 %
20 Northrop Grumman Systems Corporation 1 103,200 0.7 % 1,300 0.7 %
Total 49 3,504,023 23.3 % $ 49,003 26.7 %
1Annualized base rent is calculated as contractual monthly base rent per the leases, excluding any partial or full rent abatements, as of December 31, 2021, multiplied by 12.
2Includes two improved land parcels consisting of approximately 6.2 acres.
3Includes two improved land parcels consisting of approximately 7.7 acres.
4Includes an improved land parcel consisting of approximately 16.9 acres.
The following table summarizes the anticipated lease expirations for leases in place as of December 31, 2021, without giving effect to the exercise of unexercised renewal options or termination rights, if any, at or prior to the scheduled expirations:
Year Rentable Square Feet % of Total Rentable
Square Feet Annualized Base Rent
(in thousands) 2, 3
% of Total Annualized
Base Rent
2022 1
2,073,677 13.8 % $ 22,246 10.6 %
2023 2,076,228 13.8 % 27,592 13.2 %
2024 1,868,669 12.4 % 25,385 12.1 %
2025 1,721,728 11.4 % 27,689 13.2 %
2026 2,307,961 15.3 % 35,988 17.2 %
Thereafter 4,328,863 28.8 % 70,831 33.7 %
Total 14,377,126 95.5 % $ 209,731 100.0 %
1Includes leases that expire on or after December 31, 2021 and month-to-month leases totaling approximately 44,655 square feet.
2Annualized base rent is calculated as contractual monthly base rent per the leases at expiration, excluding any partial or full rent abatements, as of December 31, 2021, multiplied by 12.
3Includes annualized base rent related to 36 improved land parcels totaling approximately 127.1 acres.
Our ability to re-lease or renew expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. As of December 31, 2021, leases representing approximately 10.6% of the total annualized base rent of our portfolio are scheduled to expire during the year ending December 31, 2022. We currently expect that, on average, the rental rates we are likely to achieve on new (re-leased) or renewed leases for our 2022 expirations will be above the rates currently being paid for the same space. Rent changes on new and renewed leases totaling approximately 0.6 million square feet commencing during the three months ended December 31, 2021 were approximately 34.4% higher as compared to the previous rental rates for that same space, and rent changes on new and renewed leases totaling approximately 2.6 million square feet commencing during the year ended December 31, 2021 were approximately 28.4% higher as compared to the previous rental rates for that same space. We had a tenant retention ratio of 57.5% and 65.7%, respectively, for the three months and year ended December 31, 2021. We define tenant retention ratio as the square footage of all leases commenced during the period that are rented by existing tenants divided by the square footage of all expiring leases during the reporting period. The square footage of tenants that default or buy-out prior to expiration of their lease and short-term leases of less than one year are not included in the calculation.
Our past performance may not be indicative of future results, and we cannot assure you that leases will be renewed or that our properties will be re-leased at all or at rental rates equal to or above the current average rental rates. Further, re-leased/renewed rental rates in a particular market may not be consistent with rental rates across our portfolio as a whole and re-leased/renewed rental rates for particular properties within a market may not be consistent with rental rates across our portfolio within a particular market, in each case due to a number of factors, including local real estate conditions, local supply and demand for industrial space, the condition of the property, the impact of leasing incentives, including free rent and tenant improvements, and whether the property, or space within the property, has been redeveloped.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “TRNO”. As of January 27, 2022, there were approximately 43,069 holders of record of shares of our common stock. This number does not include stockholders for which shares are held in “nominee” or “street” name.
Distribution Policy
We intend to pay regular quarterly distributions when, as and if authorized by our board of directors and declared by us. Our ability to make distributions to our stockholders also will depend on our levels of retained cash flows, which we intend to use as a source of investment capital. In order to qualify for taxation as a REIT, we must distribute to our stockholders an amount at least equal to:
(i)90% of our REIT taxable income (determined before the deduction for dividends paid and excluding any net capital gain); plus
(ii)90% of the excess of our after-tax net income, if any, from foreclosure property over the tax imposed on such income by the Code; less
(iii)the sum of certain items of non-cash income.
Generally, we expect to distribute 100% of our REIT taxable income so as to avoid the income and excise tax on undistributed REIT taxable income. However, we cannot assure you as to our ability to sustain those distributions.
The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including:
•actual results of operations;
•our level of retained cash flows;
•any debt service requirements;
•capital expenditure requirements for our properties;
•our property dispositions;
•our taxable income;
•the annual distribution requirement under the REIT provisions of the Code;
•our operating expenses;
•restrictions on the availability of funds under Maryland law; and
•other factors that our board of directors may deem relevant.
To the extent that, in respect of any calendar year, cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable share distribution or distribution of debt securities. Income as computed for purposes of the tax rules described above will not necessarily correspond to our income as determined for financial reporting purposes.
Distributions to our stockholders generally are taxable to our stockholders as ordinary income; however, because a significant portion of our investments are equity ownership interests in industrial properties, which generate depreciation and other non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital, although our current intention is to limit the level of such return of capital.
Performance Graph
The following graph compares the change in the cumulative total stockholder return on our common stock during the period from December 31, 2016 to December 31, 2021 with the cumulative total return of the Standard and Poor’s 500 Stock Index, the MSCI U.S. REIT Index (RMS) and the FTSE Nareit Equity Industrial Index. The return shown on the graph is not necessarily indicative of future performance. The comparison assumes that $100 was invested on December 31, 2016 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.
The performance graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing, except to the extent that the company specifically incorporates it by reference into such filing.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved.
Not applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion in conjunction with the sections of this Annual Report on Form 10-K entitled “Risk Factors”, “Forward-Looking Statements”, “Business” and our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
We acquire, own and operate industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. We invest in several types of industrial real estate, including warehouse/distribution (approximately 79.5% of our total annualized base rent as of December 31, 2021), flex (including light industrial and research and development, or R&D) (approximately 4.8%), transshipment (approximately 6.4%) and improved land (approximately 9.3%). We target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate. Infill locations are geographic locations surrounded by high concentrations of already developed land and existing buildings. As of December 31, 2021, we owned a total of 253 buildings aggregating approximately 15.1 million square feet, 36 improved land parcels consisting of approximately 127.1 acres and four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres. As of December 31, 2021, our buildings and improved land parcels were approximately 95.5% and 94.8% leased (including 0.4 million square feet of vacancy acquired during the fourth quarter of 2021), respectively, to 554 customers, the largest of which accounted for approximately 4.9% of our total annualized base rent.
We are an internally managed Maryland corporation and elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 2010.
Our Investment Strategy
We acquire, own and operate industrial real estate in six major coastal U.S. markets: Los Angeles, Northern New Jersey/New York City, San Francisco Bay Area, Seattle, Miami, and Washington, D.C. We invest in several types of industrial real estate, including warehouse/distribution, flex (including light industrial and R&D), transshipment and improved land. We target functional properties in infill locations that may be shared by multiple tenants and that cater to customer demand within the various submarkets in which we operate.
We selected our target markets by drawing upon the experience of our executive management investing and operating in over 50 global industrial markets located in North America, Europe and Asia, the fundamentals of supply and demand, and in anticipation of trends in logistics patterns resulting from population changes, regulatory and physical constraints, changes in technology, e-commerce, the economic and environmental benefits of reducing vehicle miles traveled and other factors. We believe that our target markets have attractive long term investment attributes. We target assets with characteristics that include, but are not limited to, the following:
•Located in high population coastal markets;
•Close proximity to transportation infrastructure (such as sea ports, airports, highways and railways);
•Situated in supply-constrained submarkets with barriers to new industrial development, as a result of physical and/or regulatory constraints;
•Functional and flexible layout that can be modified to accommodate single and multiple tenants;
•Acquisition price at a discount to the replacement cost of the property;
•Potential for enhanced return through re-tenanting or operational and physical improvements; and
•Opportunity for higher and better use of the property over time.
In general, we prefer to utilize local third-party property managers for day-to-day property management and as a source of acquisition opportunities. We believe outsourcing property management is cost effective and provides us with operational flexibility. We may directly manage properties in the future if we determine such direct property management is in our best interest.
We have no current intention to acquire undeveloped or unimproved industrial land or to pursue greenfield ground up development. Nevertheless, we pursue redevelopment, renovation and expansion opportunities of properties that we own, acquire properties and improved land parcels with the intent to redevelop in the near-term, and acquire adjacent land to expand our existing facilities.
We expect that we will continue to acquire the significant majority of our investments as equity interests in individual properties or portfolios of properties. We may acquire industrial properties through the acquisition of other corporations or entities that own industrial real estate. We will opportunistically make investments in debt secured by industrial real estate that would otherwise meet our investment criteria with the intention of ultimately acquiring the underlying real estate. We currently do not intend to target specific percentages of holdings of particular types of industrial properties. This expectation is based upon prevailing market conditions and may change over time in response to different prevailing market conditions.
The properties we acquire may be stabilized (fully leased) or unstabilized (have near term lease expirations, be partially or fully vacant and may require physical repositioning).
We sell properties from time to time when we believe the prospective total return from a property is particularly low relative to its market value and/or the market value of the property is significantly greater than its estimated replacement cost. Capital from such sales is reinvested into properties that are expected to provide better prospective returns or returned to shareholders. We have disposed of 25 properties since inception in 2010 for an aggregate sales price of approximately $407.7 million and a total gain of approximately $136.5 million.
2021 Developments
COVID-19
The COVID-19 pandemic, including the emergence of various variants, has caused significant disruption to the U.S. and global economies and has contributed to significant volatility and negative pressure in financial markets. Our operations, including our occupancy, rent collections and acquisition volume, largely returned to pre-COVID levels during the year ended December 31, 2021. However, there can be no assurance that our business, and that of our tenants, will not be materially and adversely impacted by COVID-19 in the future. See "Item 1A - Risk Factors" in this Annual Report on Form 10-K for additional discussion regarding the risks to which we are and may be subject to as a result of the COVID-19 pandemic.
Acquisition Activity
During 2021, we acquired 34 industrial properties for a total purchase price of approximately $657.3 million. The properties were acquired from unrelated third parties using existing cash on hand, net proceeds from dispositions, net proceeds from the issuance of common stock and debt. The following table sets forth the industrial properties we acquired during 2021:
Property Name Location Acquisition Date Number of
Buildings Square
Feet Purchase Price
(in thousands) 1
Stabilized
Cap Rate 2
Acreage
256 Paterson Plank Carlstadt, NJ January 13, 2021 1 16,159 $ 10,625 5.2 % -
117th Place NE Kirkland, WA February 25, 2021 1 126,721 33,750 2.9 % -
Countyline #24 & #25 Hialeah, FL March 17, 2021 2 273,577 48,114 3.7 % -
Edison San Leandro, CA March 31, 2021 3 112,392 17,600 5.6 % -
73rd Street Miami, FL April 6, 2021 - - 5,800 5.1 % 5.8
68th Kent Kent, WA April 13, 2021 2 67,120 10,000 5.5 % -
East Gish San Jose, CA April 22, 2021 - - 8,004 4.8 % 2.2
Gramercy Place Torrance, CA May 12, 2021 1 17,407 6,290 4.7 % -
Occidental Avenue Seattle, WA May 12, 2021 3 51,853 16,450 4.6 % -
SW 16th Street Renton, WA June 14, 2021 - - 7,615 1.5 % 2.9
Countyline #26 Hialeah, FL July 14, 2021 1 220,942 39,409 3.7 % -
13020 & 13030 Cerise Hawthorne, CA July 14, 2021 2 21,846 8,075 5.4 % -
1150 & 1250 W. Trenton Ave Orange, CA July 30, 2021 2 34,224 9,335 3.6 % -
MLK 9801 Seattle, WA August 11, 2021 - - 11,900 2.4 % 3.1
MLK 9845 Seattle, WA August 11, 2021 - - 15,750 3.4 % 3.4
MLK 9600 Seattle, WA August 11, 2021 - - 22,350 4.9 % 5.2
Foley Street Hayward, CA August 26, 2021 2 40,504 8,250 4.9 % -
Paterson Plank III Carlstadt, NJ August 27, 2021 - - 17,850 4.5 % 4.9
97 Third Street Kearny, NJ September 27, 2021 - - 26,250 3.1 % 5.4
13025 Cerise Hawthorne, CA September 30, 2021 1 21,000 7,875 2.9 % -
Woodinville Woodinville, WA October 1, 2021 1 84,238 23,600 3.1 % -
190 Morgan Brooklyn, NY October 12, 2021 1 11,881 4,450 4.9 % -
San Pedro Gardena, CA October 15, 2021 - - 8,800 7.0 % 2.0
228 North Avenue Elizabeth, NJ October 20, 2021 1 30,978 44,000 4.8 % -
Pickett Alexandria, VA October 29, 2021 1 27,683 9,000 4.5 % -
Berryessa San Jose, CA October 29, 2021 - - 23,000 5.2 % 7.2
768 772 Ceres Los Angeles, CA November 18, 2021 2 16,887 7,661 3.4 % -
Tuxedo Hyattsville, MD November 23, 2021 - - 8,000 5.6 % 2.9
Maple II Rancho Dominguez, CA November 30, 2021 - - 13,800 4.9 % 2.3
Eisenhower Alexandria, VA December 10, 2021 3 199,396 60,750 3.0 % -
4501 46th Street Bladensburg, MD December 13, 2021 - - 11,850 3.8 % 4.4
Countyline #27 & #28 Hialeah, FL December 15, 2021 2 401,906 74,142 3.8 % -
Woodinville II Woodinville, WA December 23, 2021 2 118,310 33,500 3.7 % -
Willows Redmond, WA December 27, 2021 - - 3,500 4.9 % 0.8
Total/Weighted Average 34 1,895,024 $ 657,345 4.0 % 52.5
1Excludes intangible liabilities and mortgage premiums, if any. The total aggregate initial investment was approximately $682.0 million, including $12.6 million in capitalized closing costs and acquisition costs and $34.2 million in assumed intangible liabilities and $22.1 million in other credits related to near term capital expenditures at the Countyline #24 & #25, Countyline #26 and Countyline #27 & #28 properties.
2Stabilized capitalization rates, referred to herein as stabilized cap rates, are calculated, at the time of acquisition, as annualized cash basis net operating income for the property stabilized to market occupancy (generally 95%) divided by the total acquisition cost for the property. Total acquisition cost basis for the property includes the initial purchase price, the effects of marking assumed debt to market, buyer’s due diligence and closing costs, estimated near-term capital expenditures and leasing costs necessary to achieve stabilization. We define cash basis net operating income for the property as net operating income excluding straight-line rents and amortization of lease intangibles. These stabilized cap rates are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in this Annual Report on Form 10-K.
Redevelopment Activity
As of December 31, 2021, we had four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres with a total expected investment of approximately $75.8 million, including redevelopment costs, capitalized interest and other costs as follows:
Property Name Total Expected
Investment (in
thousands) 1
Amount Spent to Date (in thousands) Estimated
Amount
Remaining to
Spend (in thousands) Estimated
Stabilized Cap
Rate 2
Estimated Post-Development Square Feet Estimated
Completion
Quarter % Pre-leased December 31, 2021
Americas Gateway $ 7,429 $ 6,392 $ 1,037 5.5 % 51,800 Q4 2022 50.9 %
Paterson Plank III 3
23,643 19,080 4,563 4.5 % N/A Q4 2022 - %
73rd Street 20,136 16,254 3,882 5.1 % 128,844 Q4 2022 - %
Berryessa 4
24,563 23,431 1,132 5.1 % N/A Q1 2023 - %
Total/Weighted Average $ 75,771 $ 65,157 $ 10,614 5.0 % 180,644 14.6 %
1Total expected investment for the properties include the initial purchase price, buyer’s due diligence and closing costs, estimated near-term redevelopment expenditures, capitalized interest and leasing costs necessary to achieve stabilization.
2Estimated stabilized cap rates are calculated as estimated annualized cash basis net operating income for the properties stabilized to market occupancy (generally 95%) divided by the total acquisition cost for the property. We define cash basis net operating income for the property as net operating income excluding straight-line rents and amortization of lease intangibles. These estimated stabilized cap rates are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control, including risks related to our ability to meet our estimated forecasts related to stabilized cap rates and those risk factors contained in this Annual Report on Form 10-K.
3Improved land parcel of approximately 4.9 acres.
4Improved land parcel of approximately 7.2 acres.
During the fourth quarter of 2021, we completed redevelopment of our Sodo Row - North & South property in Seattle, Washington, an approximately 0.2 million square foot redevelopment property. The total investment was approximately $62.8 million. We capitalized interest associated with redevelopment and expansion activities of approximately $0.7 million, $1.6 million and $3.2 million during the years ended December 31, 2021, 2020 and 2019, respectively.
Disposition Activity
During the year ended December 31, 2021, we sold one property located in the Seattle, Washington market for a sales price of approximately $10.3 million, resulting in a gain of approximately $3.2 million, and one property located in the New York/New Jersey market for a sales price of approximately $32.7 million, resulting in a gain of approximately $13.4 million.
The following summarizes the condensed results of operations of the properties sold during the year ended December 31, 2021 for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands):
For the Year Ended December 31,
2021 2020 2019
Rental revenues $ 1,611 $ 1,690 $ 2,028
Tenant expense reimbursements 466 585 558
Property operating expenses (581) (724) (658)
Depreciation and amortization (606) (936) (875)
Income from operations $ 890 $ 615 $ 1,053
Public Offering
On November 8, 2021, we completed a public offering of 3,500,000 shares of our common stock at a price per share of $74.50. On November 10, 2021, we sold an additional 525,000 shares upon the exercise by the underwriters of their option to purchase additional shares. The net proceeds of the offering were approximately $296.5 million after deducting the underwriting discount and offering costs of approximately $3.3 million. We intend to use the net proceeds for general corporate purposes, which may include, without limitation, working capital, repayment of indebtedness, future acquisitions and redevelopments.
ATM Program
We have an at-the-market equity offering program (the “$300 Million ATM Program”) pursuant to which we may issue and sell shares of our common stock having an aggregate offering price of up to $300.0 million ($221.4 million remaining as of December 31, 2021) in amounts and at times as we determine from time to time. Prior to the implementation of the $300 Million ATM Program, we had a previous at-the-market equity program (the “Previous $300.0 million ATM Program”), which was substantially utilized as of June 10, 2021 and which is no longer active. We intend to use the net proceeds from the offering of the shares under the $300 Million ATM Program, if any, for general corporate purposes, which may include future acquisitions, redevelopments and repayment of indebtedness, including borrowings under our revolving credit facility. During 2021, we issued an aggregate of 2,569,771 shares of common stock at a weighted average offering price of $63.23 per share under the Previous $300 Million ATM and the $300 Million ATM Program, resulting in net proceeds of approximately $160.1 million and paying total compensation to the applicable sales agents of approximately $2.4 million.
Share Repurchase Program
We have a share repurchase program authorizing us to repurchase up to 3,000,000 shares of our outstanding common stock from time to time through December 31, 2022. Purchases made pursuant to this program, if any, will be made in either the open market or in privately negotiated transactions as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. As of December 31, 2021, we had not repurchased any shares of our common stock pursuant to our share repurchase program.
Senior Unsecured Notes
On July 15, 2021, we issued (i) $100.0 million of senior guaranteed green notes (the “Series A Notes”) and (ii) $50.0 million of senior guaranteed notes (the “Series B Notes”) in a private placement. The Series A Notes bear interest at a fixed annual interest rate of 2.41% and mature in July 2028, and the Series B Notes bear interest at a fixed annual interest rate of 2.84% and mature in July 2031. On October 28, 2021, we issued $125.0 million of senior guaranteed notes (the “2.38% Notes”) in a private placement. The 2.38% Notes bear interest at a fixed rate of 2.38% and mature in August 2030. The 2.38% Notes and, together with the Series A Notes and the Series B Notes, the “Notes”, are guaranteed by us and by substantially all of the current and to-be-formed subsidiaries of the borrower that own an unencumbered property. The Notes are not secured by our properties or by interests in the subsidiaries that hold such properties. The Notes include a series of financial and other covenants with which we must comply.
Dividend and Distribution Activity
On February 8, 2022, our board of directors declared a cash dividend in the amount of $0.34 per share of our common stock payable on April 8, 2022 to the stockholders of record as of the close of business on March 25, 2022.
The following table sets forth the cash dividends paid or payable per share during the year ended December 31, 2021:
For the Three Months Ended Security Dividend per
Share Declaration Date Record Date Date Paid
March 31, 2021 Common stock $ 0.29 February 9, 2021 March 26, 2021 April 9, 2021
June 30, 2021 Common stock $ 0.29 May 4, 2021 June 30, 2021 July 14, 2021
September 30, 2021 Common stock $ 0.34 August 3, 2021 October 1, 2021 October 15, 2021
December 31, 2021 Common stock $ 0.34 November 2, 2021 December 15, 2021 January 5, 2022
Contractual Commitments
As of February 8, 2022, we have outstanding contracts with third-party sellers to acquire five industrial properties for a total aggregate purchase price of $125.8 million, as described under the heading “Material Cash Commitments” in this Annual Report on Form 10-K. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions.
Outlook
Current operating conditions in our six markets for our business are excellent. We believe that on average, the rental rates we are likely to achieve on new or renewed leases for our 2022 expirations will be above the rates currently paid for the same space. However, new speculative development continues. This new development will slow potential rent growth from what it would be without such new development.
We see attractive acquisition opportunities. Nevertheless, our acquisition volume will be dependent on both the quality and pricing of the opportunity set and the price of our stock relative to net asset value (“NAV”). Those conditions, not knowable in advance, will determine our results. We will continue to sell assets and redeploy the capital to enhance NAV per share or return the capital to shareholders. We entered 2022 with our balance sheet exceedingly well positioned for growth as we have no balance outstanding on our $250.0 million revolving credit facility and a cash balance of approximately $204.4 million.
Within our six markets we have increasingly focused on urban infill locations. While our net growth will remain limited to a size where we can make directly informed operational decisions, we feel more strongly today than we did twelve years ago about the long-term investment merits of our strategy and the growth opportunities ahead. We are mindful, always, that it is per share rather than aggregate results that matter.
We believe in the long-term operating prospects of our functional, extremely infill coastal assets. We believe in sound balance sheet management. We believe in the benefits of our market-leading corporate governance and exceptionally aligned executive management compensation. As a result, we are enthusiastic about the future and our ability to produce superior results for our shareholders over time.
Our outlook is subject to the risks set forth in this Annual Report on Form 10-K, including the risks set form in “Item 1A - Risk Factors”.
Inflation
The U.S. economy has experienced an increase in inflation rates recently. A wide variety of industries and sectors are affected by increasing commodity prices. Inflation has increased construction costs, including tenant improvements and capital projects, and operating costs, recently. Most of our leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. In addition, leases with respect to approximately 66.7% of our total rentable square feet expire within five years which enables us to seek to replace existing leases with new leases at the then-existing market rate.
Financial Condition and Results of Operations
We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include fixed base rents and recoveries of certain property operating expenses that we have incurred and that we pass through to the individual tenants. Approximately 94.2% of our leased space includes fixed rental increases or Consumer Price Index-based rental increases. Lease terms typically range from three to ten years.
Our primary cash expenses consist of our property operating expenses, which include: real estate taxes, repairs and maintenance, management expenses, insurance, utilities, general and administrative expenses, which include compensation costs, office expenses, professional fees and other administrative expenses, acquisition costs, which include third-party costs paid to brokers and consultants, and interest expense, primarily on our revolving credit facility, term loans and senior unsecured notes.
Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions at various times during the course of such periods. The results of operations of any acquired property are included in our financial statements as of the date of its acquisition.
The analysis of our results below for the years ended December 31, 2021 and 2020 includes the changes attributable to same store properties. The same store pool for the comparison of the years ended December 31, 2021 and 2020 includes all properties that were owned and in operation as of December 31, 2021 and since January 1, 2020 and excludes properties that were either disposed of prior to, held for sale to a third party or in redevelopment as of December 31, 2021. As of December 31, 2021, the same store pool consisted of 210 buildings aggregating approximately 12.5 million square feet representing approximately 83.0% of our total square feet owned and 19 improved land parcels consisting of approximately 79.6 acres. As of December 31, 2021, the non-same store properties, which we acquired, redeveloped, or sold during 2020 and 2021 or were held for sale (if any) or in redevelopment as of December 31, 2021, consisted of 43 buildings aggregating approximately 2.6 million square feet, 17 improved land parcels consisting of approximately 47.5 acres and four properties under redevelopment that, upon completion, will consist of two properties aggregating approximately 0.2 million square feet and two improved land parcels aggregating approximately 12.1 acres. As of December 31, 2021 and 2020, our consolidated same store pool occupancy was approximately 98.2% and 98.0%, respectively.
Our future financial condition and results of operations, including rental revenues, straight-line rents and amortization of lease intangibles, may be impacted by the acquisitions of additional properties, and expenses may vary materially from historical results.
Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020:
For the Year Ended December 31,
2021 2020 $ Change % Change
(Dollars in thousands)
Rental revenues 1
Same store $ 153,569 $ 138,761 $ 14,808 10.7 %
Non-same store operating properties 2
22,530 8,340 14,190 170.1 %
Total rental revenues 176,099 147,101 28,998 19.7 %
Tenant expense reimbursements 1
Same store 41,260 37,954 3,306 8.7 %
Non-same store operating properties 2
4,571 1,829 2,742 149.9 %
Total tenant expense reimbursements 45,831 39,783 6,048 15.2 %
Total revenues 221,930 186,884 35,046 18.8 %
Property operating expenses
Same store 48,703 46,131 2,572 5.6 %
Non-same store operating properties 2
7,545 2,965 4,580 154.5 %
Total property operating expenses 56,248 49,096 7,152 14.6 %
Net operating income 3
Same store 146,126 130,584 15,542 11.9 %
Non-same store operating properties 2
19,556 7,204 12,352 171.5 %
Total net operating income $ 165,682 $ 137,788 $ 27,894 20.2 %
Other costs and expenses
Depreciation and amortization 50,687 45,875 4,812 10.5 %
General and administrative 26,964 23,489 3,475 14.8 %
Acquisition costs 172 271 (99) (36.5) %
Total other costs and expenses 77,823 69,635 8,188 11.8 %
Other income (expense)
Interest and other income 822 873 (51) (5.8) %
Interest expense, including amortization (18,054) (15,997) (2,057) 12.9 %
Gain on sales of real estate investments 16,627 26,766 (10,139) (37.9) %
Total other income (expense) (605) 11,642 (12,247) n/a
Net income $ 87,254 $ 79,795 $ 7,459 9.3 %
1Accounting Standards Update (“ASU”) No. 2018-11, Leases (Topic 842), Targeted Improvements, allows us to elect not to separate lease and non-lease rental income. All rental income earned pursuant to tenant leases is reflected as one line, “Rental revenues and tenant expense reimbursements” on our accompanying consolidated statements of operations. We believe that the above presentation of rental revenues and tenant expense reimbursements is not, and is not intended to be, a presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We believe this information is frequently used by management, investors, and other interested parties to evaluate our performance. See “Note 2 - Significant Accounting Policies” in our notes to consolidated financial statements for more information regarding our adoption of this standard.
2Includes 2020 and 2021 acquisitions and dispositions, seventeen improved land parcels and four properties under redevelopment as of December 31, 2021.
3Includes straight-line rents and amortization of lease intangibles. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of net operating income and same store net operating income from net income and a discussion of why we believe net operating income and same store net operating income are useful supplemental measures of our operating performance.
Revenues. Total revenues increased approximately $35.0 million for the year ended December 31, 2021 compared to the prior year due primarily to increased revenue on new and renewed leases, property acquisitions during 2021 and 2020. Cash rents on new and renewed leases totaling approximately 2.6 million square feet commencing during the year ended December 31, 2021 increased approximately 28.4% compared to the same period from the prior year. For the years ended December 31, 2021 and 2020, approximately $5.3 million and $4.3 million, respectively, was recorded in straight-line rental revenues related to contractual rent abatements given to certain tenants and approximately $0.3 million and $3.7 million, respectively, was recorded in lease termination revenue.
Property operating expenses. Total property operating expenses increased approximately $7.2 million during the year ended December 31, 2021 compared to the prior year. The increase in total property operating expenses was primarily due to an increase of approximately $4.6 million attributable to property acquisitions during 2021 and 2020 as well as increases in real estate taxes related to annual rate increases at certain of our properties.
Depreciation and amortization. Depreciation and amortization increased approximately $4.8 million during the year ended December 31, 2021 compared to the prior year primarily due to property acquisitions during 2020 and 2021.
General and administrative expenses. General and administrative expenses increased approximately $3.5 million for the year ended December 31, 2021 primarily due to increased restricted stock amortization and other compensation expenses, including an increase in bonus expense of approximately $1.8 million and an increase in the number of employees compared to the prior year.
Interest and other income. Interest and other income decreased approximately $0.1 million for the year ended December 31, 2021 compared to the prior year primarily due to the pay down of our outstanding senior secured loan balance.
Interest expense, including amortization. Interest expense increased approximately $2.1 million for the year ended December 31, 2021 compared to the prior year. This increase was primarily due to the issuance of approximately $275 million of senior unsecured notes during 2021, partially offset by the repayment of a $32.7 million mortgage loan in 2020 and an $11.3 million mortgage loan in 2021.
Gain on sales of real estate investments. Gain on sales of real estate investments decreased approximately $10.1 million for the year ended December 31, 2021 compared to the prior year. The aggregate sales price for property sales for the year ended December 31, 2021 was approximately $43.0 million as compared to approximately $73.5 million for the prior year.
Comparison of the Year Ended December 31, 2020 to the Year Ended December 31, 2019:
Discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019 was included in our Annual Report on Form 10-K for the year ended December 31, 2020 on page 34 under Part II, Item 7, “Management's Discussion and Analysis of Financial Position and Results of Operations”, which was filed with the Securities and Exchange Commission on February 10, 2021.
Liquidity and Capital Resources
The primary objective of our financing strategy is to maintain financial flexibility with a conservative capital structure using retained cash flows, proceeds from dispositions of properties, long-term debt and the issuance of common and perpetual preferred stock to finance our growth. Over the long-term, we intend to:
•limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding perpetual preferred stock to less than 35% of our total enterprise value;
•maintain a fixed charge coverage ratio in excess of 2.0x;
•maintain a debt-to-adjusted EBITDA ratio below 6.0x;
•limit the principal amount of our outstanding floating rate debt to less than 20% of our total consolidated indebtedness; and
•have staggered debt maturities that are aligned to our expected average lease term (5-7 years), positioning us to re-price parts of our capital structure as our rental rates change with market conditions.
We intend to preserve a flexible capital structure with a long-term goal to maintain our investment grade rating and be in a position to issue additional unsecured debt and perpetual preferred stock. Fitch Ratings assigned us an issuer rating of BBB with a stable outlook. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. There can be no assurance that we will be able to maintain our current credit rating. Our credit rating can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. In the event our current credit rating is downgraded, it may become difficult or expensive to obtain additional financing or refinance existing obligations and commitments. We intend to primarily utilize senior unsecured notes, term loans, credit facilities, dispositions of properties, and proceeds from the issuance of common stock and perpetual preferred stock. We may also assume debt in connection with property acquisitions which may have a higher loan-to-value ratio.
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our revolving credit facility. We believe that our net cash provided by operations will be adequate to fund operating requirements, pay interest on any borrowings and fund distributions in accordance with the REIT requirements of the federal income tax laws. In the near-term, we intend to fund future investments in properties with cash on hand, term loans, senior unsecured notes, mortgages, borrowings under our revolving credit facility, perpetual preferred and common stock issuances and, from time to time, property dispositions. We expect to meet our long-term liquidity requirements, including with respect to other investments in industrial properties, property acquisitions, property redevelopments, renovations and expansions and scheduled debt maturities, through borrowings under our revolving credit facility, periodic issuances of common stock, perpetual preferred stock, and long-term unsecured and secured debt, and, from time to time, with proceeds from the disposition of properties. The success of our acquisition strategy may depend, in part, on our ability to obtain and borrow under our revolving credit facility and to access additional capital through issuances of equity and debt securities.
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Equity Sources of Liquidity
On November 8, 2021, we completed a public offering of 3,500,000 shares of our common stock at a price per share of $74.50. On November 10, 2021, we sold an additional 525,000 shares upon the exercise by the underwriters of their option to purchase additional shares. The net proceeds of the offering were approximately $296.5 million after deducting the underwriting discount and offering costs of approximately $3.3 million. We intend to use the net proceeds for general corporate purposes, which may include, without limitation, working capital, repayment of indebtedness, future acquisitions and redevelopments.
The following sets forth certain information regarding our current at-the-market common stock offering program as of December 31, 2021:
ATM Stock Offering Program Date Implemented Maximum Aggregate Offering Price (in thousands) Aggregate Common Stock Available (in thousands)
$300 Million ATM Program June 11, 2021 $ 300,000 $ 221,434
The table below sets forth the activity under our at-the-market common stock offering programs during the years ended December 31, 2021 and 2020, respectively (in thousands, except share and price per share data):
For the Year Ended December 31,
Shares Sold Weighted Average
Price Per Share Net Proceeds (in thousands) Sales Commissions
(in thousands)
December 31, 2021 2,569,771 $ 63.23 $ 160,127 $ 2,356
December 31, 2020 1,197,597 $ 54.08 $ 63,828 $ 939
Debt Sources of Liquidity
On July 15, 2021, we issued (i) $100.0 million of senior guaranteed green notes (the “Series A Notes”) and (ii) $50.0 million of senior guaranteed notes (the “Series B Notes”) in a private placement. The Series A Notes bear interest at a fixed annual interest rate of 2.41% and mature in July 2028, and the Series B Notes bear interest at a fixed annual interest rate of 2.84% and mature in July 2031. On October 28, 2021, we issued $125.0 million of senior guaranteed notes (the “2.38% Notes”) in a private placement. The 2.38% Notes bear interest at a fixed rate of 2.38% and mature in August 2030. The 2.38% Notes and, together with the Series A Notes and the Series B Notes, the “Notes”, are guaranteed by us and by substantially all of the current and to-be-formed subsidiaries of the borrower that own an unencumbered property. The Notes are not secured by our properties or by interests in the subsidiaries that hold such properties. The Notes include a series of financial and other covenants with which we must comply.
As of December 31, 2021, we had $50.0 million of senior unsecured notes that mature in September 2022, $100.0 million of senior unsecured notes that mature in July 2024, $50.0 million of senior unsecured notes that mature in July 2026, $50.0 million of senior unsecured notes that mature in October 2027, $100.0 million of Series A Notes, $100.0 million of senior unsecured notes that mature in December 2029, $125.0 million of 2.38% Notes, and $50.0 million of Series B Notes (collectively, the “Senior Unsecured Notes”).
On August 20, 2021, our subsidiary entered into a Sixth Amended and Restated Senior Credit Agreement (the “Amended Facility”) which consists of a $250.0 million revolving credit facility that matures in August 2025 and a $100.0 million term loan that matures in January 2027. Among other things, the Amended Facility extended the maturity date of the revolving credit facility and the $100.0 million term loan. As of both December 31, 2021 and 2020, there were no borrowings outstanding on our revolving credit facility and $100.0 million of borrowings outstanding on our term loan.
The aggregate amount of the Amended Facility may be increased to a total of up to $650.0 million, subject to the approval of the administrative agent and the identification of lenders willing to make available additional amounts. Outstanding borrowings under the Amended Facility are limited to the lesser of (i) the sum of the $100.0 million term loan and the $250.0 million revolving credit facility, or (ii) 60.0% of the value of the unencumbered properties. Interest on the Amended Facility, including the term loan is generally to be paid based upon, at our option, either (i) LIBOR plus the applicable LIBOR margin or (ii) the applicable base rate which is the greatest of the administrative agent’s prime rate, 0.50% above the federal funds effective rate, or thirty-day LIBOR plus the applicable LIBOR margin for LIBOR rate loans under the Amended Facility plus 1.25%. The applicable LIBOR margin will range from 1.00% to 1.45% (1.00% as of December 31, 2021) for the revolving credit facility and 1.15% to 1.65% (1.15% as of December 31, 2021) for the $100.0 million term loan, depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value. The Amended Facility requires quarterly payments of an annual facility fee in an amount ranging from 0.15% to 0.30%, depending on the ratio of our outstanding consolidated indebtedness to the value of our consolidated gross asset value.
The Amended Facility and the Senior Unsecured Notes are guaranteed by us and by substantially all of the current and to-be-formed subsidiaries of the borrower that own an unencumbered property. The Amended Facility and the Senior Unsecured Notes are not secured by our properties or by interests in the subsidiaries that hold such properties. The Amended Facility and the Senior Unsecured Notes include a series of financial and other covenants with which we must comply. We were in compliance with the covenants under the Amended Facility and the Senior Unsecured Notes as of December 31, 2021 and 2020.
As of December 31, 2021 and 2020, we had an outstanding mortgage loan payable, net of deferred financing costs, of approximately $0 and $11.3 million, respectively, and held cash and cash equivalents totaling approximately $204.4 million and $107.2 million, respectively. The mortgage loan payable was fully repaid in January 2021.
The following tables summarize our debt maturities and principal payments as of and for the year ended December 31, 2021, and market capitalization, capitalization ratios, Adjusted EBITDA, interest coverage, fixed charge coverage and debt ratios as of and for the years ended December 31, 2021 and 2020 (dollars in thousands, except per share data):
Credit
Facility Term Loan Senior
Unsecured
Notes Total Debt
2022 $ - $ - $ 50,000 $ 50,000
2023 - - - -
2024 - - 100,000 100,000
2025 - - - -
2026 - - 50,000 50,000
Thereafter - 100,000 425,000 525,000
Total Debt - 100,000 625,000 725,000
Deferred financing costs, net - (505) (3,825) (4,330)
Total Debt, net $ - $ 99,495 $ 621,175 $ 720,670
Weighted average interest rate n/a 1.2% 3.2% 2.9%
As of December 31, 2021 As of December 31, 2020
Total Debt, net $ 720,670 $ 459,118
Equity
Common Stock
Shares Outstanding 1
75,344,302 68,515,588
Market Price 2
$ 85.29 $ 58.51
Total Equity 6,426,116 4,008,847
Total Market Capitalization $ 7,146,786 $ 4,467,965
Total Debt-to-Total Investments in Properties 3
24.5% 20.6%
Total Debt-to-Total Market Capitalization 4
10.1% 10.3%
Floating Rate Debt as a % of Total Debt 5
13.8% 21.7%
Unhedged Floating Rate Debt as a % of Total Debt 6
13.8% 10.9%
Mortgage Loans Payable as a % of Total Debt 7
-% 2.5%
Mortgage Loans Payable as a % of Total Investments in Properties 8
-% 0.5%
Adjusted EBITDA 9
$ 149,094 $ 124,998
Interest Coverage 10
8.3 x 7.8 x
Fixed Charge Coverage 11
8.0 x 7.1 x
Total Debt-to-Adjusted EBITDA 12
4.5 x 3.6 x
Weighted Average Maturity of Total Debt (years) 5.9 4.5
1Includes 289,186 and 203,729 shares of unvested restricted stock outstanding as of December 31, 2021 and 2020, respectively. Also includes 275,727 and 139,224 shares held in the Deferred Compensation Plan as of December 31, 2021 and 2020, respectively.
2Closing price of our shares of common stock on the New York Stock Exchange on December 31, 2021 and 2020, respectively, in dollars per share.
3Total debt-to-total investments in properties is calculated as total debt, including premiums and net of deferred financing costs, divided by total investments in properties.
4Total debt-to-total market capitalization is calculated as total debt, including premiums and net of deferred financing costs, divided by total market capitalization.
5Floating rate debt as a percentage of total debt is calculated as floating rate debt, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing costs. Floating rate debt includes our $100.0 million variable-rate term loan borrowings, of which $50.0 million was subject to an interest rate cap of 4.0% plus 1.20% to 1.70%, depending on leverage, as of December 31, 2020. The interest rate cap expired on May 4, 2021. See “Note 8 - Derivative Financial Instruments” in our notes to consolidated financial statements for more information regarding our prior interest rate cap.
6Unhedged floating rate debt as a percentage of total debt is calculated as unhedged floating rate debt, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing
costs. Hedged debt includes our $100.0 million variable-rate term loan borrowings, of which $50.0 million was subject to an interest rate cap of 4.0% plus 1.20% to 1.70%, depending on leverage, as of December 31, 2020. The interest rate cap expired on May 4, 2021. See “Note 8 - Derivative Financial Instruments” in our notes to consolidated financial statements for more information regarding our prior interest rate cap.
7Mortgage loans payable as a percentage of total debt is calculated as mortgage loans payable, including premiums and net of deferred financing costs, divided by total debt, including premiums and net of deferred financing costs.
8Mortgage loans payable as a percentage of total investments in properties is calculated as mortgage loans payable, including premiums and net of deferred financing costs, divided by total investments in properties.
9Earnings before interest, taxes, gains (losses) from sales of property, depreciation and amortization, acquisition costs and stock-based compensation (“Adjusted EBITDA”) for the years ended December 31, 2021 and 2020, respectively. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
10Interest coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
11Fixed charge coverage is calculated as Adjusted EBITDA divided by interest expense, including amortization plus capitalized interest. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
12Total debt-to-Adjusted EBITDA is calculated as total debt, including premiums and net of deferred financing costs, divided by annualized Adjusted EBITDA. See “Non-GAAP Financial Measures” in this Annual Report on Form 10-K for a definition and reconciliation of Adjusted EBITDA from net income and a discussion of why we believe Adjusted EBITDA is a useful supplemental measure of our operating performance.
The following table sets forth the cash dividends paid or payable per share during the years ended December 31, 2021 and 2020:
For the Three Months Ended Security Dividend per
Share Declaration Date Record Date Date Paid
March 31, 2021 Common stock $ 0.29 February 9, 2021 March 26, 2021 April 9, 2021
June 30, 2021 Common stock $ 0.29 May 4, 2021 June 30, 2021 July 14, 2021
September 30, 2021 Common stock $ 0.34 August 3, 2021 October 1, 2021 October 15, 2021
December 31, 2021 Common stock $ 0.34 November 2, 2021 December 15, 2021 January 5, 2022
For the Three
Months Ended Security Dividend
per Share Declaration Date Record Date Date Paid
March 31, 2020 Common stock $ 0.27 February 5, 2020 March 27, 2020 April 10, 2020
June 30, 2020 Common stock $ 0.27 May 5, 2020 June 30, 2020 July 14, 2020
September 30, 2020 Common stock $ 0.29 August 4, 2020 October 2, 2020 October 16, 2020
December 31, 2020 Common stock $ 0.29 November 3, 2020 December 15, 2020 January 5, 2021
Sources and Uses of Cash
Our principal sources of cash are cash from operations, borrowings under loans payable, draws on our Amended Facility, common and preferred stock issuances, proceeds from property dispositions and issuances of unsecured notes. Our principal uses of cash are asset acquisitions, debt service, capital expenditures, operating costs, corporate overhead costs and common stock dividends.
Cash From Operating Activities. Net cash provided by operating activities totaled approximately $132.2 million for the year ended December 31, 2021 compared to approximately $101.1 million for the year ended December 31, 2020. This increase in cash provided by operating activities is primarily attributable to additional cash flows generated from the properties acquired during 2021 and 2020, as we acquired 34 properties during year ended December 31, 2021 compared to 11 properties acquired in the prior year, and increased rents on new and renewed leases at our same store properties.
Cash From Investing Activities. Net cash used in investing activities was approximately $666.4 million and $52.1 million for the years ended December 31, 2021 and 2020, respectively, which consisted primarily of cash paid for property acquisitions of approximately $645.0 million and $98.1 million, respectively, additions to capital improvements of approximately $62.6
million and $40.6 million, respectively, partially offset by net cash received for the senior secured loan of $0 and $15.9 million, respectively, and net proceeds from sales of real estate investments of approximately $41.1 million and $70.7 million, respectively, in each case for the years ended December 31, 2021 and 2020.
Cash From Financing Activities. Net cash provided by financing activities was approximately $631.2 million for the year ended December 31, 2021, which consisted primarily of approximately $456.7 million in net common stock issuance proceeds and borrowings of $275.0 million in connection with our issuance of senior unsecured notes partially offset by approximately $84.6 million in equity dividend payments and approximately $11.3 million in mortgage loan payments. Net cash used in financing activities was approximately $53.9 million for the year ended December 31, 2020, which consisted primarily of approximately $63.8 million in net common stock issuance proceeds, partially offset by approximately $74.8 million in equity dividend payments and approximately $33.0 million in mortgage loan payments.
Critical Accounting Policies
Below is a discussion of the accounting policies that we believe are critical. We consider these policies critical because they require estimates about matters that are inherently uncertain, involve various assumptions and require significant management judgment, and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our 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. Applying different estimates or assumptions may result in materially different amounts reported in our financial statements.
Capitalization of Costs. We capitalize costs directly related to the redevelopment, renovation and expansion of our investment in real estate. Costs associated with such projects are capitalized as incurred. If the project is abandoned, these costs are expensed during the period in which the redevelopment or expansion project is abandoned. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes and insurance, if appropriate. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress. In the event that the activities to ready the asset for its intended use are suspended, the capitalization period will cease until such activities are resumed. Costs incurred for maintaining and repairing properties, which do not extend their useful lives, are expensed as incurred.
Interest is capitalized based on actual capital expenditures from the period when redevelopment, renovation or expansion commences until the asset is ready for its intended use, at the weighted average borrowing rate during the period.
Property Acquisitions. Business Combinations (Topic 805): Clarifying the Definition of a Business requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the integrated set of assets and activities is not considered a business. To be a business, the set of acquired activities and assets must include inputs and one or more substantive processes that together contribute to the ability to create outputs. We have determined that our real estate property acquisitions will generally be accounted for as asset acquisitions under the clarified definition. Upon acquisition of a property we estimate the fair value of acquired tangible assets (consisting generally of land, buildings and improvements) and intangible assets and liabilities (consisting generally of the above and below-market leases and the origination value of all in-place leases). We determine fair values using Level 3 inputs such as replacement cost, estimated cash flow projections and other valuation techniques and applying appropriate discount and capitalization rates based on available market information. Mortgage loans assumed in connection with acquisitions are recorded at their fair value using current market interest rates for similar debt at the date of acquisition. Acquisition-related costs associated with asset acquisitions are capitalized to individual tangible and intangible assets and liabilities assumed on a relative fair value basis and acquisition-related costs associated with business combinations are expensed as incurred.
The fair value of the tangible assets is determined by valuing the property as if it were vacant. Land values are derived from current comparative sales values, when available, or management’s estimates of the fair value based on market conditions and the experience of our management team. Building and improvement values are calculated as replacement cost less depreciation, or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods. The fair value of the above and below-market leases is based on the present value of the difference between the contractual amounts to be received pursuant to the acquired leases (using a discount rate that reflects the risks associated with the acquired leases) and our estimate of the market lease rates measured over a period equal to the remaining term of the leases plus the term of any below-market fixed rate renewal options. The above and below-market lease values are amortized to rental revenues over the remaining initial term plus the term of any below-market fixed rate renewal options that are considered bargain renewal options of the respective leases. The origination value of in-place leases is based on costs to execute similar leases, including commissions and other related costs. The origination value of in-place leases also includes real estate taxes,
insurance and an estimate of lost rental revenue at market rates during the estimated time required to lease up the property from vacant to the occupancy level at the date of acquisition.
Impairment. Carrying values for financial reporting purposes are reviewed for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of a property may not be fully recoverable. Examples of such events or changes in circumstances may include classifying an asset to be held for sale, changing the intended hold period or when an asset remains vacant significantly longer than expected. The intended use of an asset either held for sale or held for use can significantly impact how impairment is measured. If an asset is intended to be held for the long-term, the recoverability is based on the undiscounted future cash flows. If the asset carrying value is not supported on an undiscounted future cash flow basis, then the asset carrying value is measured against the lower of cost or the present value of expected cash flows over the expected hold period. An impairment charge to earnings is recognized for the excess of the asset’s carrying value over the lower of cost or the present values of expected cash flows over the expected hold period. If an asset is intended to be sold, impairment is determined using the estimated fair value less costs to sell. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions, among other things, regarding current and future economic and market conditions and the availability of capital. We determine the estimated fair values based on its assumptions regarding rental rates, lease-up and holding periods, as well as sales prices. When available, current market information is used to determine capitalization and rental growth rates. If available, current comparative sales values may also be used to establish fair value. When market information is not readily available, the inputs are based on our understanding of market conditions and the experience of our management team. Actual results could differ significantly from our estimates. The discount rates used in the fair value estimates represent a rate commensurate with the indicated holding period with a premium layered on for risk.
Revenue Recognition. We record rental revenue from operating leases on a straight-line basis over the term of the leases and maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. If tenants fail to make contractual lease payments that are greater than our allowance for doubtful accounts, security deposits and letters of credit, then we may have to recognize additional doubtful account charges in future periods. We monitor the liquidity and creditworthiness of our tenants on an on-going basis by reviewing their financial condition periodically as appropriate. Each period we review our outstanding accounts receivable, including straight-line rents, for doubtful accounts and provide allowances as needed. We also record lease termination fees when a tenant has executed a definitive termination agreement with us and the payment of the termination fee is not subject to any conditions that must be met or waived before the fee is due to us. If a tenant remains in the leased space following the execution of a definitive termination agreement, the applicable termination will be deferred and recognized over the term of such tenant’s occupancy.
Tenant expense reimbursement income includes payments and amounts due from tenants pursuant to their leases for real estate taxes, insurance and other recoverable property operating expenses and is recognized as revenues during the same period the related expenses are incurred.
Income Taxes. We elected to be taxed as a REIT under the Code and operate as such beginning with our taxable year ended December 31, 2010. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT.
Stock-Based Compensation and Other Long-Term Incentive Compensation. We follow the provisions of ASC 718, Compensation-Stock Compensation, to account for our stock-based compensation plan, which requires that the compensation cost relating to stock-based payment transactions be recognized in the financial statements and that the cost be measured on the fair value of the equity or liability instruments issued. Our 2019 Equity Incentive Plan (the “2019 Plan”) provides for the grant of restricted stock awards, performance share awards, unrestricted shares or any combination of the foregoing. Stock-based compensation is recognized as a general and administrative expense in the financial statements and measured at the fair value of the award on the date of grant. We estimate the forfeiture rate based on historical experience as well as expected behavior. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the stock-based award.
In addition, we have awarded long-term incentive target awards (the “Performance Share awards”) under the Amended and Restated Long-Term Incentive Plan (as amended and restated, the “Amended LTIP”), which we amended and restated on January 8, 2019, to our executives that are payable in shares of our common stock after the conclusion of each pre-established performance measurement period, which is generally three years. The amount that may be earned is variable depending on the relative total shareholder return of our stock as compared to the total shareholder return of the MSCI U.S. REIT Index (RMS) and the FTSE Nareit Equity Industrial Index over the pre-established performance measurement period. Under the Amended LTIP, each participant’s Performance Share award granted on or after January 1, 2019 will be expressed as a number of shares of common stock and settled in shares of common stock. Target awards were previously expressed as a dollar amount and settled in shares of common stock. Commencing with Performance Share awards granted on or after January 1, 2019, the grant date fair value of the Performance Share awards will be determined under current accounting treatment using a Monte Carlo simulation model on the date of grant and recognized on a straight-line basis over the performance period. For Performance Share awards granted prior to January 1, 2019, we estimate the fair value of the Performance Share awards using a Monte Carlo simulation model on the date of grant and at each reporting period. The Performance Share awards granted prior to January 1, 2019 are recognized as compensation expense over the requisite performance period based on the fair value of the Performance Share awards at the balance sheet date, which varies quarter to quarter based on our relative share price performance, and are included as a component of Performance Share awards payable in the accompanying consolidated balance sheets.
Material Cash Commitments
As of February 8, 2022, we have five outstanding contracts with third-party sellers to acquire five industrial properties for a total aggregate purchase price of $125.8 million. There is no assurance that we will acquire the properties under contract because the proposed acquisitions are subject to the completion of satisfactory due diligence and various closing conditions.
The following table summarizes our material cash commitments due by period as of December 31, 2021 (dollars in thousands):
Material Cash Commitments Less than 1
Year 1-3 Years 3-5 Years More than 5
Years Total
Debt $ 50,000 $ 100,000 $ 50,000 $ 525,000 $ 725,000
Debt interest payments 20,130 36,030 28,530 34,078 118,768
Operating lease commitments 442 916 883 1,302 3,542
Purchase obligations 1
125,775 - - - 125,775
Total $ 196,347 $ 136,946 $ 79,413 $ 560,380 $ 973,085
1As of February 8, 2022
As of February 8, 2022, we executed four non-binding letters of intent with third-party sellers to acquire four industrial properties for a total anticipated purchase price of approximately $94.9 million. In the normal course of its business, we enter into non-binding letters of intent to purchase properties from third parties that may obligate us to make payments or perform other obligations upon the occurrence of certain events, including the execution of a purchase and sale agreement and satisfactory completion of various due diligence matters. There can be no assurance that we will enter into purchase and sale agreements with respect to these properties or otherwise complete any such prospective purchases on the terms described or at all.
Non-GAAP Financial Measures
We use the following non-GAAP financial measures that we believe are useful to investors as key supplemental measures of our operating performance: funds from operations, or FFO, Adjusted EBITDA, net operating income, or NOI, same store NOI and cash-basis same store NOI. FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. Further, our computation of FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI may not be comparable to FFO, Adjusted EBITDA, NOI, same store NOI and cash-basis same store NOI reported by other companies.
We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“Nareit”), which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property and impairment write-downs of depreciable real estate, plus depreciation and amortization on real estate assets and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We
believe that presenting FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets.
We believe that FFO is a meaningful supplemental measure of our operating performance because historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, we believe that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of our operating performance.
The following table reflects the calculation of FFO reconciled from net income for the three months and years ended December 31, 2021, 2020 and 2019 (dollars in thousands except per share data):
For the Three Months Ended December 31, For the Three Months Ended December 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Net income
$ 32,259 $ 13,513 $ 18,746 138.7 % $ 13,513 $ 14,821 $ (1,308) (8.8) %
Gain on sales of real estate investments (13,442) - (13,442) n/a - (3,144) 3,144 n/a
Depreciation and amortization 13,707 11,192 2,515 22.5 % 11,192 11,847 (655) (5.5) %
Non-real estate depreciation (22) (11) (11) n/a (11) (26) 15 (57.7) %
Allocation to participating securities 1
(126) (73) (53) 72.6 % (73) (150) 77 (51.3) %
Funds from operations attributable to common stockholders 2
$ 32,376 $ 24,621 $ 7,755 31.5 % $ 24,621 $ 23,348 $ 1,273 5.5 %
Basic FFO per common share
$ 0.44 $ 0.36 $ 0.08 22.2 % $ 0.36 $ 0.35 $ 0.01 2.9 %
Diluted FFO per common share
$ 0.44 $ 0.36 $ 0.08 22.2 % $ 0.36 $ 0.35 $ 0.01 2.9 %
Weighted average basic common shares
73,380,519 68,245,315 68,245,315 66,706,245
Weighted average diluted common shares
73,735,244 68,652,454 68,652,454 67,000,815
For the Year Ended December 31, For the Year Ended December 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Net income
$ 87,254 $ 79,795 $ 7,459 9.3 % $ 79,795 $ 55,516 $ 24,279 43.7 %
Gain on sales of real estate investments (16,627) (26,766) 10,139 (37.9) % (26,766) (9,391) (17,375) 185.0 %
Depreciation and amortization 50,687 45,875 4,812 10.5 % 45,875 44,015 1,860 4.2 %
Non-real estate depreciation (74) (70) (4) 5.7 % (70) (108) 38 (35.2) %
Allocation to participating securities 1
(428) (496) 68 (13.7) % (496) (565) 69 (12.2) %
Funds from operations attributable to common stockholders 2
$ 120,812 $ 98,338 $ 22,474 22.9 % $ 98,338 $ 89,467 $ 8,871 9.9 %
Basic FFO per common share
1.71 $ 1.45 $ 0.26 17.9 % 1.45 $ 1.39 $ 0.06 4.3 %
Diluted FFO per common share
1.71 $ 1.44 $ 0.27 18.8 % 1.44 $ 1.38 $ 0.06 4.3 %
Weighted average basic common shares
70,534,202 67,762,927 67,762,927 64,428,406
Weighted average diluted common shares
70,793,670 68,170,066 68,170,066 64,722,976
1To be consistent with our policies of determining whether instruments granted in share-based payment transactions are participating securities and accounting for earnings per share, the FFO per common share is adjusted for FFO distributed through declared dividends (if any) and allocated to all participating securities (weighted average common shares outstanding and unvested restricted shares outstanding) under the two-class method. Under this method, allocations were made to 288,976, 203,729 and 426,985 of weighted average unvested restricted shares outstanding for the three months ended December 31, 2021, 2020 and 2019, respectively, and 245,075, 341,673 and 402,380 of weighted average unvested restricted shares outstanding for the years ended December 31, 2021, 2020 and 2019, respectively.
2Includes performance share award expense of approximately $1.3 million, $2.9 million and $1.8 million for the three months ended December 31, 2021, 2020 and 2019, respectively, and approximately $5.3 million, $6.6 million and
$8.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. See “Note 10 - Stockholders’ Equity” in our notes to consolidated financial statements for more information regarding our performance share awards.
FFO increased by approximately $7.8 million and $22.5 million for the three months and years ended December 31, 2021, respectively, compared to the same periods from the prior year due primarily to same store NOI growth of approximately $4.2 million and $15.5 million for the three months and years ended December 31, 2021, respectively, compared to the same periods from the prior year, as well as property acquisitions during 2021. The FFO increase was partially offset by increased weighted average common shares outstanding and increased general and administrative expenses due to additional headcount, for the three months and year ended December 31, 2021 compared to the same periods from the prior year.
We compute Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, gain on sales of real estate investments, acquisition costs and stock-based compensation. We believe that presenting Adjusted EBITDA provides useful information to investors regarding our operating performance because it is a measure of our operations on an unleveraged basis before the effects of tax, gain (loss) on sales of real estate investments, non-cash depreciation and amortization expense, acquisition costs and stock-based compensation. By excluding interest expense, Adjusted EBITDA allows investors to measure our operating performance independent of our capital structure and indebtedness and, therefore, allows for more meaningful comparison of our operating performance between quarters and other interim periods as well as annual periods and for the comparison of our operating performance to that of other companies, both in the real estate industry and in other industries. As we are currently in a growth phase, acquisition costs are excluded from Adjusted EBITDA to allow for the comparison of our operating performance to that of stabilized companies.
The following table reflects the calculation of Adjusted EBITDA reconciled from net income for the three months and years ended December 31, 2021, 2020 and 2019 (dollars in thousands):
For the Three Months Ended December 31, For the Three Months Ended December 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Net income $ 32,259 $ 13,513 $ 18,746 138.7 % $ 13,513 $ 14,821 $ (1,308) (8.8) %
Gain on sales of real estate investments (13,442) - (13,442) n/a - (3,144) 3,144 n/a
Depreciation and amortization 13,707 11,192 2,515 22.5 % 11,192 11,847 (655) (5.5) %
Interest expense, including amortization 5,207 4,195 1,012 24.1 % 4,195 4,069 126 3.1 %
Loss on extinguishment of debt - - - n/a - 189 (189) n/a
Stock-based compensation 2,547 3,472 (925) (26.6) % 3,472 2,492 980 39.3 %
Acquisition costs - 85 (85) n/a 85 (3) 88 n/a
Adjusted EBITDA $ 40,278 $ 32,457 $ 7,821 24.1 % $ 32,457 $ 30,271 $ 2,186 7.2 %
For the Year Ended December 31, For the Year Ended December 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Net income $ 87,254 $ 79,795 $ 7,459 9.3 % $ 79,795 $ 55,516 $ 24,279 43.7 %
Gain on sales of real estate investments (16,627) (26,766) 10,139 (37.9) % (26,766) (9,391) (17,375) 185.0 %
Depreciation and amortization 50,687 45,875 4,812 10.5 % 45,875 44,015 1,860 4.2 %
Interest expense, including amortization 18,054 15,997 2,057 12.9 % 15,997 16,338 (341) (2.1) %
Loss on extinguishment of debt - - - n/a - 189 (189) n/a
Stock-based compensation 9,554 9,826 (272) (2.8) % 9,826 10,644 (818) (7.7) %
Acquisition costs 172 271 (99) (36.5) % 271 45 226 502.2 %
Adjusted EBITDA $ 149,094 $ 124,998 $ 24,096 19.3 % $ 124,998 $ 117,356 $ 7,642 6.5 %
We compute NOI as rental revenues, including tenant expense reimbursements, less property operating expenses. We compute same store NOI as rental revenues, including tenant expense reimbursements, less property operating expenses on a
same store basis. NOI excludes depreciation, amortization, general and administrative expenses, acquisition costs and interest expense, including amortization. We compute cash-basis same store NOI as same store NOI excluding straight-line rents and amortization of lease intangibles. The same store pool for the comparison of the three months and years ended December 31, 2021 and 2020 includes all properties that were owned and in operation as of December 31, 2021 and since January 1, 2020 and excludes properties that were either disposed of prior to, held for sale to a third party or in redevelopment as of December 31, 2021. As of December 31, 2021, the same store pool consisted of 210 buildings aggregating approximately 12.5 million square feet representing approximately 83.0% of our total square feet owned and 19 improved land parcels containing approximately 79.6 acres. The same store pool for the comparison of the three months and years ended December 31, 2020 and 2019 includes all properties that were owned as of December 31, 2020 and since January 1, 2019 and excludes properties that were either disposed of prior to, held for sale to a third-party or in redevelopment as of December 31, 2020. As of December 31, 2020, the same store pool consisted of 198 buildings aggregating approximately 12.0 million square feet representing approximately 91.1% of our total square feet owned and 14 improved land parcels containing approximately 54.2 acres. We believe that presenting NOI, same store NOI and cash-basis same store NOI provides useful information to investors regarding the operating performance of our properties because NOI excludes certain items that are not considered to be controllable in connection with the management of the properties, such as depreciation, amortization, general and administrative expenses, acquisition costs and interest expense. By presenting same store NOI and cash-basis same store NOI, the operating results on a same store basis are directly comparable from period to period.
The following table reflects the calculation of NOI, same store NOI and cash-basis same store NOI reconciled from net income for the three months and years ended December 31, 2021, 2020 and 2019 (dollars in thousands):
For the Three Months Ended December 31, For the Three Months Ended December 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Net income 1
$ 32,259 $ 13,513 $ 18,746 138.7 % $ 13,513 $ 14,821 $ (1,308) (8.8) %
Depreciation and amortization 13,707 11,192 2,515 22.5 % 11,192 11,847 (655) (5.5) %
General and administrative 7,716 6,936 780 11.2 % 6,936 6,072 864 14.2 %
Acquisition costs - 85 (85) n/a 85 (3) 88 n/a
Total other income and expenses (8,372) 4,127 (12,499) n/a 4,127 470 3,657 778.1
Net operating income 45,310 35,853 9,457 26.4 % 35,853 33,207 2,646 8.0 %
Less non-same store NOI
(7,094) 2
(1,859) 2
(5,235) 281.6 % (5,091) 3
(4,125) 3
(966) 23.4 %
Same store NOI 4
$ 38,216 $ 33,994 $ 4,222 12.4 % $ 30,762 $ 29,082 $ 1,680 5.8 %
Less straight-line rents and amortization of lease intangibles 5
(2,388) (2,117) (271) 12.8 % (1,257) (921) (336) 36.5 %
Cash-basis same store NOI
$ 35,828 $ 31,877 $ 3,951 12.4 % $ 29,505 $ 28,161 $ 1,344 4.8 %
Less termination fee income (148) (75) (73) 97.3 % (75) (143) 68 (47.6) %
Cash-basis same store NOI excluding termination fees $ 35,680 $ 31,802 $ 3,878 12.2 % $ 29,430 $ 28,018 $ 1,412 5.0 %
1Includes approximately $0.1 million of lease termination income for the three months ended December 31, 2021, 2020 and 2019.
2Includes 2020 and 2021 acquisitions and dispositions, seventeen improved land parcels consisting of approximately 47.5 acres, four properties under redevelopment and one completed redevelopment property with an aggregate book value of approximately $66.6 million as of December 31, 2021.
3Includes 2019 and 2020 acquisitions and dispositions, eleven improved land parcels consisting of approximately 37.3 acres, one property under redevelopment and two completed redevelopment properties with an aggregate gross book value of approximately $49.3 million as of December 31, 2020.
4Includes $0.1 million of lease termination income for the three months ended December 31, 2021, 2020 and 2019.
5Includes straight-line rents and amortization of lease intangibles for the same store pool only.
For the Year Ended December 31, For the Year Ended December 31,
2021 2020 $ Change % Change 2020 2019 $ Change % Change
Net income 1
$ 87,254 $ 79,795 $ 7,459 9.3 % $ 79,795 $ 55,516 $ 24,279 43.7 %
Depreciation and amortization 50,687 45,875 4,812 10.5 % 45,875 44,015 1,860 4.2 %
General and administrative 26,964 23,489 3,475 14.8 % 23,489 23,924 (435) (1.8) %
Acquisition costs 172 271 (99) (36.5) % 271 45 226 502.2 %
Total other income and expenses 605 (11,642) 12,247 n/a (11,642) 3,321 (14,963) n/a
Net operating income 165,682 137,788 27,894 20.2 % 137,788 126,821 10,967 8.6 %
Less non-same store NOI
(19,556) 2
(7,204) 2
(12,352) 171.5 % (19,070) 3
(11,360) 3
(7,710) 67.9 %
Same store NOI 4
$ 146,126 $ 130,584 $ 15,542 11.9 % $ 118,718 $ 115,461 $ 3,257 2.8 %
Less straight-line rents and amortization of lease intangibles 5
(10,021) (4,284) (5,737) 133.9 % (447) (5,693) 5,246 (92.1) %
Cash-basis same store NOI
$ 136,105 $ 126,300 $ 9,805 7.8 % $ 118,271 $ 109,768 $ 8,503 7.7 %
Less termination fee income (309) (3,717) 3,408 (91.7) % (3,696) (346) (3,350) 968.2 %
Cash-basis same store NOI excluding termination fees $ 135,796 $ 122,583 $ 13,213 10.8 % $ 114,575 $ 109,422 $ 5,153 4.7 %
1Includes approximately $1.0 million, $3.8 million and $0.3 million of lease termination income for the year ended December 31, 2021, 2020 and 2019, respectively.
2Includes 2020 and 2021 acquisitions and dispositions, seventeen improved land parcels consisting of approximately 47.5 acres, four properties under redevelopment and one completed redevelopment property with an aggregate book value of approximately $66.6 million as of December 31, 2021.
3Includes 2019 and 2020 acquisitions and dispositions, eleven improved land parcels consisting of approximately 37.3 acres, one property under redevelopment and two completed redevelopment properties with an aggregate gross book value of approximately $49.3 million as of December 31, 2020.
4Includes approximately $0.3 million, $3.7 million and $0.3 million of lease termination income for the years ended December 31, 2021, 2020 and 2019, respectively.
5Includes straight-line rents and amortization of lease intangibles for the same store pool only.
Cash-basis same store NOI increased by approximately $4.0 million for the three months ended December 31, 2021 compared to the same period from the prior year due to increased rental revenue on new and renewed leases and contractual rent increases. For the three months ended December 31, 2021 and 2020, total contractual rent abatements of approximately $0.5 million and $0.8 million, respectively, were given to certain tenants in the same-store pool and approximately $0.1 million and $0.1 million, respectively, in lease termination income was received from certain tenants in the same store pool. In addition, approximately $0.2 million of the increase in cash-basis same store NOI for the three months ended December 31, 2021 related to properties that were acquired vacant or with near term expirations in 2019.
Cash-basis same store NOI increased by approximately $9.8 million for the year ended December 31, 2021 compared to the same period from the prior year primarily due to increased rental revenue on new and renewed leases and increased occupancy. For the year ended December 31, 2021 and 2020, total contractual rent abatements of approximately $2.7 million and $3.2 million, respectively, were given to certain tenants in the same-store pool and approximately $0.3 million and $3.7 million, respectively, in lease termination income was received from certain tenants in the same store pool. In addition, approximately $2.3 million of the increase in cash-basis same store NOI for the year ended December 31, 2021 related to properties that were acquired vacant or with near term expirations in 2019.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative And Qualitative Disclosures About Market Risk.
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk which we are exposed to is interest rate risk. We are exposed to interest rate changes primarily as a result of debt used to maintain liquidity, fund capital expenditures and expand our investment portfolio and operations. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. As described below, some of our outstanding debt bears interest at variable rates, and we expect that some of our future outstanding debt will have variable interest rates. We may use interest rate caps and/or swap agreements to manage our interest rate risks relating to our variable rate debt. We expect to replace variable rate debt on a regular basis with fixed rate, long-term debt to finance our assets and operations.
As of December 31, 2021, we had $100.0 million of borrowings outstanding under our Amended Facility, none of which were subject to interest rate caps. See “Note 8 - Derivative Financial Instruments” in our notes to consolidated financial statements for more information regarding our prior interest rate cap. Amounts borrowed under our Amended Facility bear interest at a variable rate based on LIBOR plus an applicable LIBOR margin. The weighted average interest rate on borrowings outstanding under our Amended Facility was 1.2% as of December 31, 2021. If the LIBOR rate were to fluctuate by 0.25%, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows by approximately $0.3 million annually on the total of the outstanding balances on our Amended Facility as of December 31, 2021.
In July 2017, the Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In March 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced its intention to cease publication of certain LIBOR settings after 2021, while continuing to publish overnight and one-, three-, six-, and twelve-month U.S. dollar LIBOR rates through June 30, 2023. While this announcement extended the transition period to June 2023, the United States Federal Reserve Board and other regulatory bodies concurrently issued guidance encouraging banks and other financial market participants to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate as soon as practicable and in any event no later than December 31, 2021. In the U.S., the Alternative Reference Rates Committee (“ARRC”), which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended that the Secured Overnight Financing Rate (“SOFR”) plus a recommended spread adjustment as its preferred alternative to USD-LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.
We expect that all LIBOR settings relevant to us will cease to be published or will no longer be representative after June 30, 2023. As a result, any of our LIBOR-based borrowings that extend beyond such date will need to be converted to a replacement rate. Certain risks may arise in connection with transitioning contracts to SOFR or any other alternative variable rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted. The Amended Facility, which we entered into in August 2021, provides for the replacement of LIBOR if it becomes unavailable during the term of the facility. However, for some instruments, the method of transitioning to an alternative rate may be challenging, as they may require substantial negotiation with each respective counterparty. If a contract is not transitioned to an alternative variable rate and LIBOR is discontinued, the impact is likely to vary by contract.
The discontinuation of LIBOR will not affect our ability to borrow or maintain already outstanding borrowings or swaps, but if our contracts indexed to LIBOR, including certain contracts governing our variable rate debt and our interest rate swaps, are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available. Additionally, although SOFR is the ARRC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in ways that would result in higher interest costs for us. It is not yet possible to predict the magnitude of LIBOR’s end on our borrowing costs given the remaining uncertainty about which rates will replace LIBOR.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements And Supplementary Data.
See Part IV, Item 15 - “Exhibits and Financial Statement Schedules” beginning on page of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls And Procedures.
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer, President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), and has concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to give reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer, President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting
Terreno Realty Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting. This internal control system was designed to provide reasonable assurance to the company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Terreno Realty Corporation’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2021. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on its assessment, management of Terreno Realty Corporation believes that, as of December 31, 2021, the company’s internal control over financial reporting is effective based on those criteria. Terreno Realty Corporation’s independent auditors have issued an audit report on the effectiveness of the company’s internal control over financial reporting, as stated in their report included in this Annual Report on Form 10-K (which expresses an unqualified opinion on the effectiveness of the company’s internal control over financial reporting as of December 31, 2021).
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Terreno Realty Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Terreno Realty Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Terreno Realty Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15 of the Company and our report dated February 9, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Francisco, California
February 9, 2022
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
On February 8, 2022, Gabriela F. Parcella informed us that she would not stand for re-election at our 2022 Annual Meeting of Stockholders (the “Annual Meeting”) in order to focus on other commitments. Ms. Parcella will continue to serve on our board of directors and maintain her committee memberships, including her position as chair of the nominating and corporate governance committee through the Annual Meeting. Ms. Parcella’s decision not to stand for re-election was not the result of any disagreement with us on any matter relating to our operations, policies or practices.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2021 and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The information required by Item 11 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2021 and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2021 and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2021 and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
The information required by Item 14 will be contained in a definitive proxy statement for our Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year ended December 31, 2021 and is incorporated herein by reference.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
(a)
1. and 2. Financial Statements and Schedules
The following consolidated financial information is included as a separate section of this Annual Report on Form 10-K beginning on page as follows:
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Equity for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
Schedule III - Real Estate Investments and Accumulated Depreciation
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted, or the required information is included in the consolidated financial statements and notes thereto.
3. Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index at the end of this Annual Report on Form 10-K immediately preceding the signature page, which is incorporated by reference herein.