EDGAR 10-K Filing

Company CIK: 1600626
Filing Year: 2024
Filename: 1600626_10-K_2024_0001600626-24-000023.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
The use herein of the words “PKST,” “the Company,” “we,” “us,” and “our” refer to Peakstone Realty Trust, a Maryland real estate investment trust, and its subsidiaries, including PKST OP L.P., our operating partnership (our “Operating Partnership”), except where the context otherwise requires.
Overview
Peakstone Realty Trust is an internally managed, publicly traded real estate investment trust (“REIT”) that owns and operates a high-quality, newer-vintage portfolio of predominantly single-tenant industrial and office properties located in diverse, strategic growth markets. These assets are generally leased to creditworthy tenants under long-term net lease agreements with contractual rent escalations.
PKST OP, L.P., our operating partnership (the “Operating Partnership”), owns, directly and indirectly all of the Company’s assets. As of December 31, 2023, the Company owned approximately 91.8% of the outstanding common units of limited partnership interest in the Operating Partnership (“OP Units”).
As of December 31, 2023, the Company’s wholly-owned portfolio (i) consisted of 71 properties located in 24 states, (ii) was 96.4% leased with a weighted average remaining lease term (“WALT”) of approximately 6.5 years, and (iii) generated approximately $196.7 million Annualized Base Rent (“ABR”).
The Company reports the results of its wholly-owned portfolio in three segments which had the following characteristics as of December 31, 2023:
•Industrial: This segment (i) comprised 19 industrial properties and (ii) was 100% leased with a WALT of approximately 6.7 years.
•Office: This segment (i) comprised 35 office properties and (ii) was 98.8% leased with a WALT of approximately 7.6 years.
•Other: This segment (i) comprised 17 properties and (ii) was 82.4% leased with a WALT of approximately 2.6 years.
Our Business Strategy
The Company’s long-term objective is to maximize shareholder value through the ownership and operation of industrial and select office assets located in strategic growth markets. We are focused on maintaining a strong balance sheet that enables us to execute multi-channel investments across the risk and capital spectrum as they arise. It is our intention to continue to maximize our balance sheet flexibility through free cash flow generation and the execution of our strategic disposition plan. We seek to generate internal and external growth by increasing the cash flow from our properties and expanding our portfolio by making industrial-focused investments. To accomplish our objectives, we will leverage our experienced, operationally-minded and cycle-tested management team.
Competition
The commercial real estate markets in which we operate are highly competitive. We compete against owners and managers of competing properties in leasing space to prospective tenants and in re-leasing space to existing tenants. There are numerous public and private real estate investors, developers, and financial institutions, some of which have greater financial or other resources than we do, that compete with us for acquisition, disposition, and investment opportunities.
Regulatory Matters
Overview
Our business is subject to many laws and governmental regulations. Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently. We and any of our operating subsidiaries that we may form may be subject to state and local tax in states and localities in which they or we do business or own property. The tax treatment of us, our Operating Partnership, any of our operating subsidiaries we may form and the holders of our shares in local jurisdictions may differ from our U.S. federal income tax treatment.
Tax
We have elected to be taxed as a REIT under the Internal Revenue Code (the “Code”), commencing with our tax year ended December 31, 2015. To qualify as a REIT, the Company must meet certain organizational and operational requirements. The Company intends to adhere to these requirements and maintain its REIT status for the current year and subsequent years. As a REIT, the Company generally will not be subject to federal income taxes on taxable income that is distributed to shareholders. However, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income, if any. If the Company fails to qualify as a REIT in any taxable year, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service (“IRS”) grants the Company relief under certain statutory provisions. Such an event could materially adversely affect net income and net cash available for the payment of dividends to shareholders. As of December 31, 2023, the Company satisfied the REIT requirements and distributed all of its taxable income. Pursuant to the Code, the Company has elected to treat its corporate subsidiary as a taxable REIT subsidiary (“TRS”). In general, the TRS may perform non-customary services for the Company’s tenants and may engage in any real estate or non-real estate-related business. The TRS will be subject to corporate federal and state income tax.
Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we perform diligence compliance with laws, including the ADA, when we acquire properties, we may incur additional costs to comply with the ADA or other regulations related to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to pay expected dividends could be adversely affected.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our ability to lease or sell the property or to borrow using the property as collateral and may expose us to liability resulting from any release of or exposure to these substances. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. We maintain liability insurance (including pollution coverage) for all of our properties to insure against the potential liability of remediation and exposure risk. Also, numerous states and municipalities have adopted laws and policies on climate change and emission reduction targets. For example, in October 2023, California passed two bills that require certain companies that do business in California to disclose their green house emissions and climate-related financial risks starting in 2026. If we are unable to meet the required emissions reductions or provide the required disclosure, we may be subject to material fines that will continue to be assessed each year we fail to comply.
Other Regulations
The properties we own and operate generally are subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. Through our due diligence process and protections in our leases, we aim to own and operate properties that are in material compliance with all such regulatory requirements. However, we cannot assure our shareholders that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
We conduct our operations so that we and our subsidiaries are not required to register as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and monitor the structure and nature of our assets so that we do not come within the definition of an “investment company” under the 1940 Act. If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we may be required to, among other things, substantially change the manner in which we conduct our operations to avoid being required to register as an investment company under the 1940 Act or register as an investment company under the 1940 Act.
Human Capital Management
We are internally managed by an experienced team that specializes in industrial and office properties. As of December 31, 2023, we employed 35 people. We believe our employees are our greatest asset. Because of this perspective, we have implemented several programs to foster their professional growth and their growth as global citizens.
We offer all our full time employees a comprehensive benefits and wellness package, which includes paid time off and parental leave, high-quality medical, dental and vision insurance, disability and life insurance, wellness allowance, 401(k) and long-term incentive plans. We also encourage internal mobility in our organization and provide career enhancement and education opportunities, as well as professional development grants.
We believe that a wide range of opinions and experiences are key to our continued success, and we therefore value racial, gender, and generational diversity throughout our organization. As of December 31, 2023, approximately 56% of our employees were people of color/minorities and approximately 47% were women. In addition, as of December 31, 2023, the majority of our five-member Board of Trustees (the “Board”) was composed of women and/or minorities.
Our cultural values extend beyond the individuals within our organization and encourages our employees to have a positive impact on the community around us. Throughout our organization, we have a shared passion and dedication to giving back to the communities in which we live and work.
Available Information
We make available on the “SEC Filings” subpage of the investor section of our website (www.pkst.com) free of charge our annual reports on Form 10-K, including this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, ownership reports on Forms 3, 4 and 5 and any amendments to those reports as soon as practicable after we electronically file such reports with the SEC. Our electronically filed reports can also be obtained on the SEC’s internet site at http://www.sec.gov. Further, copies of our Code of Business Conduct and Ethics and the charters for the Audit, Compensation, and Nominating and Corporate Governance Committees of our Board are also available on the “Governance - Governance Documents” subpage of the “Investors” section of our website. We use our website (www.pkst.com) as a routine channel of distribution of company information, including press releases, presentations, and supplemental information, and as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website in addition to following press releases, SEC filings, and public conference calls and webcasts. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Shareholders should carefully consider the following risks in evaluating our company and our common shares. If any of the following risks were to occur, our business, prospects, financial condition, liquidity, results of operations, cash flow, ability to satisfy our debt obligations, returns to our shareholders, the value of our shareholders’ investment in us and/or our ability to pay dividends to our shareholders could be materially and adversely affected, which we refer herein collectively as a “material adverse effect on us.” Some statements in this Annual Report on Form 10-K, including statements in the following risk factors, constitute forward-looking statements. Refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information regarding these forward-looking statements.
Risks Related to Our Business
Most of our properties are occupied by a single tenant; therefore, for each such property income generated by that property is dependent on the financial stability of a single tenant or the lease guarantor or parent-guarantor of such tenant, as applicable. Many events affecting our tenants could have a material adverse effect on us including, the bankruptcy, insolvency, or a general downturn in the business of, or a lease termination or election by a tenant not to renew, or other events affecting our tenants, could have a material adverse effect on us.
Our properties are primarily leased to single tenants or will derive a majority of their rental income from single tenants and, therefore, the income generated by these properties is materially dependent on the financial stability of the companies to which we have leased, such companies’ parents and/or the companies who have guaranteed such leases, including parent-guarantors. Our revenues depend on the financial condition of our tenants, their parents or lease guarantors, as applicable. Any event of bankruptcy, insolvency, or a general downturn in the business of any of these tenants or the relevant parent-guarantor, a default by a tenant, the failure of a guarantor to fulfill its obligations, a premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have a material adverse effect on us. Additionally, in certain instances, we may enter into leases that do not include a credit party guaranty. Moreover, we can provide no assurance that our strategy of owning and operating industrial and office properties that are primarily leased to single tenants will be successful or that we will attain our investment and portfolio management objectives. Furthermore, although we have no current intention to do so, we may also invest in single-tenant, leased industrial and office properties outside of the United States and we can provide no assurance that we will have success in any such investments. The occurrence of any of the foregoing could have a material adverse effect on us.
Additionally, we may not be able to verify the credit quality of our tenant prior to leasing our properties to such tenants. As a result, we may be exposed to a greater risk of default for tenants for whom we are not able to verify their credit quality prior to entering into leasing our properties.
We may own or invest in special use single tenant properties, and, as such, it may be difficult to re-lease or sell these properties, which could have a material adverse effect on us.
We focus our investments on industrial and office properties, a number of which may have special uses. Special use properties may be relatively illiquid compared to other types of real estate and financial assets. Upon expiration or early termination of a lease, this illiquidity could limit our ability to quickly pivot in response to changes in economic, market or other conditions to an even greater extent than the typically illiquid nature of real estate assets. With these properties, we may be required to renovate or demolish a vacant property in order to try to re-lease or sell it, grant rent or other concessions and/or make significant capital expenditures to improve these properties in order to retain existing tenants or attract new tenants following a lease expiration. In addition, in the event we determine it is best to sell the property, we may have difficulty selling it to a party other than the company that has leased the property, such company’s parent and/or the company that has guaranteed the lease of the property due to the special purpose for which the property may have been designed. These and other limitations could have a material adverse effect on us and may affect our ability to re-lease or sell these properties upon expiration or early termination of a lease, which could have a material adverse effect on us.
Tenant defaults may have a material adverse effect on our business, financial condition and results of operations.
The majority of our revenues and income comes from rental income from real property. As such, our business, financial condition and results of operations could be adversely affected if our tenants default on their rental payments or other lease obligations. Rental payment defaults, including those caused by the current economic climate or tenant liquidity limitations resulting from adverse developments affecting the financial services industry, could cause us to reduce the amount of dividends we pay, force us to find an alternative source of revenue to meet a debt payment and prevent a foreclosure if the property secures a loan, and/or and have a material adverse effect on our business, financial condition and results of operations.
Our ability to manage our assets is also subject to federal bankruptcy laws and state laws that limit creditors’ rights and remedies available to real property owners to collect delinquent rents. If a tenant becomes insolvent or bankrupt, we cannot be sure that we could recover the premises from the tenant promptly or from a trustee or debtor-in-possession in any bankruptcy proceeding relating to that tenant. We also cannot be sure that we would receive any rent in the proceeding sufficient to cover our expenses and future income expectations with respect to the premises. If a tenant becomes bankrupt, the federal bankruptcy code will apply and, in some instances, may restrict the amount and recoverability of our claims against the tenant. A tenant’s default on its lease obligations may have a material adverse effect on our business, financial condition and results of operations.
We currently rely on five tenants for approximately a quarter of our revenue and adverse effects to their business, including a tenant’s bankruptcy or insolvency, a general downturn in a tenant’s business, a lease termination or election by a tenant not to renew, or other events affecting our tenants, could have a material adverse effect on us.
Our five largest tenants, based on Annualized Base Rent as of December 31, 2023, were Keurig Dr. Pepper, located in Massachusetts (approximately 5.9%), Southern Company Services located in Alabama (approximately 4.7%), LPL Holdings located in South Carolina (approximately 4.4%), Amazon located in Ohio and Illinois (approximately 4.4%) and Freeport-McMoRan, located in Arizona (approximately 4.0%). The revenues generated by the properties leased and/or guaranteed by these companies are substantially reliant upon the financial condition of such companies, either because they are the tenant at
such properties or the parent-guarantor, and, accordingly, any event of bankruptcy, insolvency, or a general downturn in the business of any of these tenants or the relevant parent-guarantor, a default by a tenant, the failure of a guarantor to fulfill its obligations, a premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, which could have a material adverse effect on us.
Approximately a quarter of the leases in our portfolio are scheduled to expire in the next four years. An inability to sell or re-lease such properties could result in a material adverse effect on us. Also, vacancies increase our exposure to downturns in the real estate market during the time that we are trying to sell or re-lease such space, and could increase our capital expenditure requirements during the liquidation or re-leasing period, as applicable, any of which could have a material adverse effect on us.
Our lease expirations by year based on Annualized Base Rent as of December 31, 2023 are as follows (dollars in thousands):
Year of Lease Expiration (1)
Annualized Base Rent
(unaudited)
Number of Leases Approx. Square Feet Percentage of Annualized Base Rent
2024 $ 17,045 9 1,398,500 8.7 %
2025 8,090 7 788,700 4.1
2026 13,308 4 1,449,100 6.8
2027 14,349 7 570,700 7.3
2028 18,726 11 2,027,200 9.5
2029 38,756 10 2,394,100 19.7
> 2029 86,457 31 8,595,800 43.9
Leased Amenity Space - - 2,000 -
Vacant - - 642,800 -
Total $ 196,731 79 17,868,900 100.0 %
(1) Expirations that occur on the last day of the month are shown as expiring in the subsequent month.
We may experience concentrations of lease expiration dates in the future. As the expiration date of a lease for a building solely or primarily leased to a single tenant approaches, the value of the property generally declines because of the risk that the building may not be re-leased upon expiration of the existing lease or may not be re-leased on terms as favorable as those of the current lease(s). Therefore, if we were to sell any of these assets prior to the favorable re-leasing of the space or without electing to redevelop a space, we may suffer a loss on our investment. Our shareholders may also suffer a loss (including a reduction in dividends) after the expiration of the applicable lease term if we are not able to, or elect not to, sell or re-lease such space. These expiring leases, therefore, increase our risk to real estate downturns during and approaching these periods of concentrated lease expirations. An inability to sell or re-lease a space on favorable terms could adversely impact the value of our properties and have an adverse effect on our business, financial condition, results of operations and the market price of our common shares. The occurrence of any of the foregoing risks could have a material adverse effect on us.
Our portfolio has geographic market concentrations that make us especially susceptible to adverse developments in those geographic markets.
In addition to general, regional, national and international economic conditions, our business, financial condition, and results of operations are impacted by the economic conditions of the specific geographic markets in which we have concentrations of properties. We have significant property concentrations based on Annualized Base Rent as of December 31, 2023 in Arizona (11.9%), New Jersey (9.9%), Colorado (8.4%), Ohio (6.7%), and Massachusetts (6.3%). In the future, we may experience additional geographic concentrations, which could adversely affect our business, financial condition, and result of operations if conditions become less favorable in any of the states or markets within such states in which we have a concentration of properties. We cannot assure you that any of our markets will grow, not experience adverse developments or that such markets will not become less desirable to investors. Our business, financial condition and results of operations may also be affected if competing properties are built, redeveloped or become more desirable than our properties in such markets. A downturn in the economy in the states or regions in which we have a concentration of properties, or markets within such states or regions, could adversely affect our tenants operating businesses in those states, impair their ability to pay rent to us and materially and adversely affect us.
We may be unable to fully benefit from increases in market rental rates because certain of our leases contain fixed renewal rates or limitations on market rental rate resets upon renewal.
Based on Annualized Base Rent, as of December 31, 2023, our weighted average lease term was approximately 6.5 years and approximately 98.2% of our leases contain fixed rental rate increases. By entering into longer term leases, we are subject to the risk during the initial term that we would not be able to increase our rental rates to market rental rates if market rental rates have increased. In addition, during periods of high inflation, fixed rental rate increases subject us to the risk of receiving lower rental revenue than we otherwise would have been entitled to receive if the rental rate increases were based on an increase in the consumer price index over a specified period. In addition, our leases may contain provisions (including caps, collars, fixed increases, etc.) that may limit our ability to reset rental rates to market rental rates upon expiration of the periods of fixed rental rate increases. Any inability to take advantage of increases in market rental rates could adversely impact the value of our properties and the market price of our common shares and could have a material adverse effect on us.
Our ability to fully control the maintenance of our net-leased properties may be limited.
Certain of our leases provide that tenants of our net-leased properties are responsible for some or all of the maintenance and other day-to-day management of the relevant properties or their premises. If a property is not adequately maintained in accordance with the terms of the applicable lease, we may incur expenses for deferred maintenance or other liabilities, including upon expiration or earlier termination of a lease. We generally visit our properties on an annual basis, but these visits are not comprehensive inspections and deferred maintenance items may go unnoticed. In addition, a tenant may refuse or be unable to pay for any required maintenance for a property or its premises, which may result in the Company needing to cover such costs. While our leases generally provide for protection in these instances, a tenant may defer maintenance and it may be difficult to enforce remedies against such a tenant.
To the extent we are unable to pass along our property operating expenses to our tenants, our business, financial condition and results of operations, may be negatively impacted.
Operating expenses associated with owning a property typically include real estate taxes, insurance, maintenance, repair and renovation costs, the cost of compliance with governmental regulation (including zoning) and the potential for liability under applicable laws. We generally lease our properties to tenants pursuant to triple-net leases that require the tenant to pay their proportionate share of substantially all such property operating expenses. However, on a limited basis we lease our properties to tenants pursuant to leases that do not pass along all such property operating expenses. We have mostly entered into leases pursuant to which we retain responsibility for the costs of structural repairs and maintenance. If there is an increase in property operating expenses that we are unable to pass along to our tenants, then our business, financial condition and results of operations could be negatively impacted. Similarly, vacancy in our portfolio would negatively impact our business, financial condition and results of operations, as we would be responsible for all property operating expenses that we have formerly passed on to our tenants.
We face significant competition for tenants, which may decrease or prevent increases of the occupancy and rental rates of our properties. Furthermore, at the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties. The occurrence of any of the foregoing could have a material adverse effect on us.
The commercial real estate markets in which we operate are highly competitive. The leasing of real estate is also often highly competitive, and we may experience competition for tenants from owners and managers of competing properties. An oversupply of properties in the industries and geographies in which we concentrate could further increase competition. As a result, we may have to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentive payments or we might not be able to timely lease the space. If our competitors offer space at rental rates below current market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates or to offer more substantial rent abatements, tenant improvements, early termination rights, below-market renewal options or other lease incentives in order to retain tenants when our leases expire. Competition for companies that may lease or guarantee our properties could decrease or prevent increases of the occupancy and rental rates of our properties. Furthermore, at the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties. The occurrence of any of the foregoing could have a material adverse effect on us.
We may suffer adverse effects from acquisitions of and/or other investments in properties if such properties fail to perform as expected or market conditions deteriorate, particularly with respect to investments in new markets and new business lines.
We may pursue acquisitions of and/or other investments in properties as part of our business plan. Acquisitions of and/or other investments in properties entail risks, such as the risk that such properties fail to perform as expected.
We may pursue acquisitions of and/or other investments in properties in regions where we have not previously owned properties. This could create risks in addition to those we face in more familiar regions, such as our not sufficiently anticipating conditions or trends in a new market and, therefore a property not operating profitably.
We may acquire properties and/or invest in properties that are subject to liabilities in situations where we have no recourse, or only limited recourse, against the prior owners, co-investors or other third parties with respect to unknown liabilities. The seller of real property will typically seek to sell such real property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements typically contain limited warranties, representations and indemnifications that will only survive for a limited period after the closing and subject to a floor and cap. As a result, if a liability were asserted against us based upon ownership of or interest in those properties, we might have to pay substantial sums to settle or contest it if we have no recourse, or only limited recourse, against the prior owners.
We may pursue acquisitions of and/or other investments in properties for which we are unable to secure traditional financing on terms and conditional acceptable to us. Accordingly, we may be required to seek alternative sources of financing. Such non-traditional financing may not be available on terms and conditions that are as favorable as traditional lending sources.
Additionally, we may not be able to successfully implement appropriate operational, financial and management systems and controls to achieve the benefits expected to result from the acquisitions of and/or other investments in properties. If acquisitions of and/or other investments in properties do not perform as expected or market conditions deteriorate, there may be a material adverse effect on our business, financial condition or results of operations.
We may enter into a new business line or market or acquire or invest in real estate assets that have characteristics that differ from our current portfolio.
As a result of an acquisition or other investment, we may enter into a new business line or market or own real estate assets that have characteristics that differ from our current portfolio. For example, we may target new property types, which differ from the real estate assets we are currently invested in and that we have not previously targeted. Any such new business line new market or property type may present new challenges for us, and we may not be able to overcome such challenges. If our entry into, or acquisition of or investment in, as applicable, a new business line, market or property type does not perform as expected, there may be a material adverse effect on our business, financial condition or results of operations.
Properties we acquire or invest in may require development or redevelopment in order for the property to be leased to a new tenant.
Properties we acquire or invest in may require development or redevelopment in order for the property to be leased by a new tenant. The development or redevelopment of such properties is subject to various risks, including the following, among others:
•we may be unable to obtain zoning, occupancy or other governmental approvals;
•rents may not meet our projections and the project may not be accretive;
•we may need the consent of third parties such as mortgage lenders and joint venture partners, and those consents may be withheld; and
•development, redevelopment or expansions may fail to appeal to the demographics of the market in which they are located.
If a development or redevelopment of a newly acquired property is unsuccessful, either because we do not receive the rents we expected or are unable to lease the property, then we could experience a material adverse effect on our business, financial condition or results of operation.
Additionally, the development or redevelopment of a property may be time consuming and experience delays. A property may need to remain vacant during the period of development or redevelopment and we may not receive any rental income during such period. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or result of operations.
We may not be able to control the extent of warranties and indemnities we may be required to provide when disposing of properties.
As we seek to dispose of certain properties, in some circumstances market conditions may impact the terms on which we are able to sell properties, which may require us to provide warranties, representations and covenants, and agree to indemnification obligations or to retain certain liabilities, in order to complete such dispositions. As we complete property dispositions, the overall size of our post-closing indemnification and retained liability obligations to purchasers may increase, and no assurance can be given that the extent of such indemnification obligations and retained liabilities will not, individually or in the aggregate, be material to our business, financial condition or results of operations.
We have limited control with respect to properties that are partially owned or managed by third parties, which may adversely affect our ability to manage such properties and related business.
As of December 31, 2023, we owned interests in 46 income-producing properties with other parties. Investments in these properties and future similar investments, could involve risks that would not be present were a third party not involved, including the possibility that partners or other owners might become bankrupt or suffer a deterioration in their creditworthiness, or fail to fund their share of required capital contributions. If one of our partners or other owners in these investments were to become bankrupt, we may be precluded from taking certain actions regarding our investments without prior court approval, which at a minimum may delay the actions we would or may desire to take. Additionally, partners or other owners could have economic or other business interests or goals that are inconsistent with our own business interests or goals, and could be in a position to take actions contrary to our policies or objectives.
These investments, and other future similar investments, also have the potential risk of creating impasses on decisions, such as a sale, financing or development, because neither we nor our partner or other owner has full control over the partnership or joint venture. Disputes between us and partners or other owners might result in litigation or arbitration that could increase our expenses and divert the attention of management. Consequently, actions by, or disputes with, partners or other owners might result in subjecting properties owned pursuant to a joint venture to additional risk. In addition, we risk the possibility of being liable for the actions of our partners or other owners.
A substantial portion of our portfolio is comprised of office assets, which have generally experienced a decrease in demand and value. Office assets may experience a further decrease in demand and value and such decrease in demand could have a material adverse effect on us. Further, our ability to sell any of our office assets may be limited in the current economic climate.
A substantial portion of our portfolio (approximately 56.3% based on Annualized Base Rent as of December 31, 2023) is comprised of office assets, which have generally experienced a decrease in demand and value. Current economic conditions could lead our office tenants electing not to renew their leases, or to renew their leases for less space than they currently occupy, which could increase vacancy rates and decrease rental income. Remote and hybrid work practices are likely to continue in a post-pandemic environment. As a result of the increased bargaining power of tenants, we may be required to spend increased amounts for property improvements. Additionally, if substantial office space reconfiguration is required, it may be more attractive for our tenants to pursue relocating to other office space than renewing their leases and renovating their existing space, which could have a material adverse effect on us.
Further, our current business plan contemplates the sale of a number of our office assets. Our ability to sell our office assets at attractive prices may be limited in the current economic climate, and there is no assurance that we will be able to effect such sales on attractive terms, or at all.
Additionally, in the event of a default, a termination of, or failure to renew a lease, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property or experience a decrease in value of a property if the Company determines to sell such property while it is vacant. In addition, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss due to its being vacant.
We depend on current key personnel for our future success, and the loss of such personnel or inability to attract and retain personnel could harm our business and the loss of services of one or more members of our executive management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business, diminish our investment opportunities and weaken our business relationships with lenders, business partners, companies that may lease or guarantee our properties and other industry participants, any of which could have a material adverse effect on us.
Our future success will depend in large part on our ability to attract and retain a sufficient number of qualified personnel. Competition for such personnel is intense, and we cannot assure shareholders that we will be successful in attracting and retaining such skilled personnel. Our future success also depends upon the service of our executive management team, who we believe have extensive market knowledge and business relationships and will exercise substantial influence over the Company’s operating, financing, acquisition, disposition and investment activity. Among the reasons that they are important to our success is that we believe that each has a national or regional industry reputation that is expected to attract business and investment opportunities and assist us in negotiations with lenders, companies that may lease or guarantee our properties and other industry personnel. We believe that many of our other key personnel also have extensive experience and strong reputations in the industry. The loss of services of one or more members of our executive management team, or our inability to attract and retain highly qualified personnel, could adversely affect our business and weaken our business relationships with lenders, business partners, companies that may lease or guarantee our properties and other industry participants, any of which could have a material adverse effect on us.
If global market and economic conditions deteriorate, including as a result of geopolitical conflicts, U.S. elections, bank failures and negative depositor confidence in depositary institutions, it could have a material adverse effect on us.
Our business may be adversely affected by market and economic volatility experienced by the U.S. and global economies, the real estate industry as a whole and/or the local economies in the markets in which our properties are located. Such adverse economic and geopolitical conditions may be due to, among other issues, rising inflation and interest rates, volatility in the public equity and debt markets, and international economic and other conditions, including pandemics, geopolitical instability, geopolitical conflicts, U.S. elections, sanctions, bank failure and negative depositor confidence in depositary institutions and other conditions beyond our control. These current conditions, or similar conditions existing in the future, may adversely affect our business, financial condition, results of operations and ability to pay dividends to our shareholders as a result of one or more of the following, among other potential consequences:
•significant job losses may occur, which may decrease demand for our office and industrial space, causing market rental rates and property values to be negatively impacted, and create increased challenges in disposing of properties in accordance with our business plan;
•reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of secured or unsecured loans;
•inflation may adversely affect tenant leases with stated rent increases tied to the consumer price index, which could be lower than the increase in inflation at any given time;
•the financial condition of our tenants may be adversely affected, which may result in tenant defaults under leases due to inflationary pressure, bankruptcy, lack of liquidity, the stability of tenants’ banking institutions, lack of funding, operational failures or for other reasons;
•our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to refinance existing debt and increase our future interest expense;
•the value and liquidity of our short-term investments and cash deposits could be reduced as a result of a deterioration of the financial condition of the institutions that hold our cash deposits or the institutions or assets in which we have made short-term investments, a dislocation of the markets for our short-term investments, increased volatility in market rates for such investments or other factors; and
•to the extent we enter into derivative financial instruments, one or more counterparties to our derivative financial instruments could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments.
The outbreak of a highly infectious or contagious disease or declaration of a pandemic, epidemic or other health crises could have a material adverse effect on us.
A future outbreak of a highly infectious or contagious disease or declaration of a pandemic, epidemic or other health crises could result in a general decline in rents, an increased incidence of defaults under existing leases and negatively impact our ability to achieve new leases as existing leases expire. Additionally, our tenants may determine to lease less space as a result of the aftereffects of the outbreak of a highly infectious or contagious disease, or a declaration of a pandemic, epidemic or other health crises, resulting more vacancies at our properties, which could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, we cannot predict the impact that an epidemic, pandemic or other health crises could on our tenants and other business partners; however, any material effect on these parties could have a material adverse effect on us.
If we fail to maintain effective internal controls over financial reporting, we could severely inhibit our ability to accurately and timely report our financial condition, results of operations or cash flows.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports, effectively prevent fraud and operate successfully. Any failure to provide reliable financial reports or prevent fraud could harm operating results, cause us to fail to meet our reporting obligations or cause reputational harm. As a public company, we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows.
As a result of material weaknesses or significant deficiencies that may be identified in our internal control over financial reporting in the future, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we or our independent registered public accounting firm discover any such material weaknesses or significant deficiencies, we will make efforts to further improve our internal control over financial reporting controls, but there is no assurance that we will be successful. Any failure to maintain effective controls or timely effect any necessary improvement of our internal control over financial reporting controls could harm our results of operation, cause us to fail to meet our reporting obligations or cause reputational harm. Ineffective internal control over financial reporting and disclosure controls could also cause investors to lose confidence in our reported financial information, the market price of our common shares could decline, and we could be subject to investigations by the NYSE, the SEC or other regulatory authorities. Failure to remedy any material weakness or significant deficiency in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
Our operating results will be affected by economic and regulatory changes, such as inflation and rising interest rates, that have an adverse impact on the real estate market in general, and we cannot provide any assurance that we will be profitable or that we will realize growth in the value of the real estate we own and/or are invested in.
We own and operate real estate and face risks related to investments in real estate. As of December 31, 2023, our real estate portfolio included 71 properties in 24 states and 67 lessees. Our operating results will be subject to risks generally incident to the ownership of real estate. These include risks described elsewhere in this “Risk Factors” section and other risks, including the following:
•the value of real estate fluctuates depending on conditions in the general economy and the real estate business. Additionally, adverse changes in these conditions may result in a decline in rental revenues, sales proceeds and occupancy levels at our properties and could have a material adverse effect on us. If rental revenues, sales proceeds and/or occupancy levels decline, we generally would expect to have less cash available to pay indebtedness, to pay dividends to shareholders or otherwise run our business;
•it may be difficult to sell real estate quickly, or potential buyers of our properties may experience difficulty in obtaining financing, which may limit our ability to dispose of properties promptly in response to changes in economic or other conditions. Additionally, we may be unable to identify, negotiate, finance or consummate dispositions of our properties, on favorable terms, or at all;
•our properties may be subject to impairment losses;
•changes in tax, real estate, environmental or zoning laws and regulations;
•changes in property tax assessments and insurance costs;
•changes in interest rates and rising inflation;
•the cost and availability of credit may be adversely affected by illiquid credit markets and wider credit spreads, and/or more stringent underwriting standards, which could affect our inability or the inability of our tenants to timely refinance maturing liabilities to meet liquidity needs; and
•we may from time to time be subject to litigation, which may significantly divert the attention and resources of the Company’s management and result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance.
These and other risks could have a material adverse effect on us and may prevent us from realizing growth in the value of the real estate we own and/or are invested in.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, it could have a material adverse effect on us.
We may suffer losses that are not covered by insurance or that are in excess of insurance. There are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, fires, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. In addition, we may decide not to obtain, even though available, any or adequate earthquake or similar catastrophic insurance coverage because the premiums are too high. Generally, our leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. Separately, we obtain, to the extent available, liability insurance (includes pollution coverage) and property insurance (includes earthquake coverage, wind coverage, flood coverage and rent loss coverage for at least one year of rental loss) for all of our properties. However, the coverage and amounts of our environmental, flood and earthquake insurance policies may not be sufficient to cover our entire risk. We cannot assure shareholders that we will have adequate coverage for losses. If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, it could have a material adverse effect on us.
Costs of complying with governmental laws and regulations, including those relating to environmental matters and the ADA, may have a material adverse effect on us.
Our operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and zoning and state and local fire and life safety requirements.
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and we may not have the adequate insurance in place to cover such costs. The presence of these substances may adversely affect our ability to lease or sell the property or to borrow using the property as collateral and may expose us to
liability resulting from any release of or exposure to these substances, any of which could result in expenditures and could have a material adverse effect on us. In addition, we may incur costs and liabilities associated with the disposal or treatment of hazardous or toxic substances, claims by third parties based on damages and costs resulting from environmental contamination emanating from own of our properties, or liability in connection with the handling or exposure to asbestos-containing materials. We maintain pollution liability insurance for all of our properties to insure against the potential liability of remediation and exposure risk. 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. Failure to comply with these regulations could result in the imposition of fine by governmental authorities or an award of damages to private litigants.
Under the ADA all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. The ADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We aim to own and operate properties that comply with the ADA or may place the burden on a third party to ensure compliance with the ADA. However, we cannot assure our shareholders that we will be able to allocate responsibilities in this manner. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we diligence compliance with laws, including the ADA, when we acquire properties, we may incur additional costs to comply with the ADA or other regulations related to access by disabled persons. If required changes involve a greater amount of expenditures than we currently anticipate, it could have a material adverse effect on us.
Furthermore, our properties may be subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or an award of damages to private litigants. Through our due diligence process and protections in our leases, we aim to own and operate properties that are in material compliance with all such regulatory requirements. However, we cannot assure our shareholders that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have a material adverse effect on us.
Furthermore, changes in federal and state legislation and regulations on climate change, including the increasing number of state and municipality laws and policies on climate change, emission reduction targets and required disclosures, could result in increased utility expenses and/or increased capital expenditures to improve the energy efficiency and reduce carbon emissions of our properties in order to comply with such regulations or result in fines for non-compliance. For example, in October 2023, California passed two bills that require certain companies that do business in California to disclose their GHG emissions and climate-related financial risks starting in 2026. The occurrence of any of the foregoing could have a material adverse effect on us.
We may seek to use artificial intelligence and automated decision making technology in order to realize operating efficiencies in our business. In recent years use of these methods has come under increased regulatory scrutiny. New laws, guidance and/or decisions in this area may limit our ability to use our artificial intelligence models, or require us to make changes to our operations that may decrease our operational efficiency, result in an increase to operating costs and/or hinder our ability to improve our services if we begin to use these methods. For example, in October 2023, the President of the United States issued an executive order on the Safe, Secure and Trustworthy Development and Use of AI, emphasizing the need for transparency, accountability and fairness in the development and use of AI. Any actual or perceived failure to comply with evolving regulatory frameworks around the development and use of AI, machine learning and automated decision making could adversely affect our business, results of operations, and financial condition.
If we sell properties by providing financing to purchasers, defaults by the purchasers could have a material adverse effect on us.
If we provide seller-financing to purchasers (also known as purchase money financing), we will bear the risk that the purchaser may default, which could have a material adverse effect on us. Even in the absence of a purchaser default, there may be a material adverse effect on us. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years, which at times may not include interest payments to us. If any purchaser defaults under a financing arrangement with us, it could have a material adverse effect on us. In certain jurisdictions, the remedies available to us, in the context of seller-financing, may also limit our ability to recover any deficiencies after a buyer defaults and we foreclosure on the asset.
If we are unable to increase the number of shares authorized for issuance under our long-term incentive plan, we may need to settle awards to our trustees and employees in cash.
As of December 31, 2023, there are 167,185 shares of our common stock reserved for issuance under our long-term incentive plan. If we continue to grant awards of restricted stock units (“RSUs”) to our trustees and employees as has been our historical practice, and our shareholders do not approve an increase in the number of common shares authorized for issuance under our long-term incentive plan, we may need to settle future awards in cash. The use of cash to settle awards under our long-term incentive plan would result in the Company having less cash available to pay indebtedness, to pay dividends to shareholders and otherwise run our business.
Risks Related to Debt Financing
If we are unable to refinance our existing debt or obtain new debt to replace such maturing debt on favorable terms or at all, we would have to use cash on hand to repay such debt at maturity, and we may not have sufficient cash available to repay such debt at maturity. In that event, we could default under the associated loan agreement, including our unsecured corporate credit agreement, which could have a material adverse effect on us.
Under the terms of our existing secured and unsecured debt instruments, we have $29.1 million of debt scheduled to mature in 2024. The credit markets have experienced dislocation in recent months and owners of office assets have experienced particular challenges in refinancing existing debt and in obtaining new debt. Our business depends on the availability of credit, and credit terms that support our underwriting of assets. If we are unable to refinance our existing debt or obtain new debt to replace such maturing debt on favorable terms or at all, we would have to use cash on hand to repay such debt as it matures, and we may not have sufficient cash available to repay such debt at maturity. In that event, we could default under the associated loan agreement which could lead to a cross-default under our unsecured corporate credit agreement, which could have a material adverse effect on us. A continued failure to repay our debt as it matures could lead to an inability for the Company to continue as a going concern.
If we were to default under our unsecured credit agreement, the facility lenders would have the ability to immediately declare the loans due and payable in whole or in part. In such event, we may not have sufficient available cash to repay such debt at the time it becomes due, or be able to refinance such debt on acceptable terms or at all. Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended, the “Second Amended and Restated Credit Agreement”), with KeyBank, National Association (“KeyBank”), as administrative agent, and a syndicate of lenders, our Operating Partnership, as the borrower, has a $1.3 billion credit facility consisting of a (i) $750.0 million unsecured revolving credit facility (the “Revolving Credit Facility”), under which the Company has drawn $400 million (the “Revolving Loan”), currently maturing in March 2024 (with a series of extension options to January 31, 2026, subject to the satisfaction of certain customary conditions), (ii) a $400.0 million senior unsecured term loan maturing in December 2025 (the “$400M 2025 5-Year Term Loan”), and (iii) a $150.0 million senior unsecured term loan maturing in April 2026 (the “$150M 2026 7-Year Term Loan” and together with the Revolving Credit Facility and the $400M 2025 5-Year Term Loan, the “KeyBank Loans”). The Second Amended and Restated Credit Agreement also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, increase the existing term loans and/or incur new term loans by up to an additional $1.0 billion in the aggregate. In addition to customary representations, warranties, covenants, and indemnities, the Second Amended and Restated Credit Agreement contains a number of financial covenants as described in Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K.
On February 12, 2024, the Company exercised an option to extend the Revolving Loan Maturity Date (as defined in the Second Amended and Restated Credit Agreement) which upon satisfaction or waiver of certain customary conditions, will extend to June 30, 2024.
Any of the foregoing could have a material adverse effect on us.
We may finance properties with prepayment lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. We may finance properties with lock-out provisions, which could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for the payment of dividends to our shareholders and may prohibit us from reducing the outstanding indebtedness with respect to any such properties by repaying or refinancing such indebtedness. Any
mortgage debt that we place on our properties may also impose prepayment penalties. If a lender invokes these penalties, the cost to the Company to sell, repay or refinance the property could increase substantially. Lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in our shareholders’ best interests. The occurrence of any of the foregoing could have a material adverse effect on us.
We have broad authority to incur debt, and our indebtedness could have a material adverse effect on us.
We have broad authority to incur debt, subject to the approval of our Board. High debt levels would cause us to incur higher interest charges, which would result in higher debt service payments. Our indebtedness could have a material adverse effect on us, as well as:
•increase our vulnerability to general adverse economic and industry conditions;
•decrease the market price of our common shares as a result of market aversion to higher debt levels;
•limit our ability to obtain additional financing to fund future working capital, acquisitions, investments, capital expenditures and other general corporate requirements;
•require the use of an increased portion of our cash flow from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund working capital, acquisitions, investments, capital expenditures and general corporate requirements;
•limit our flexibility in planning for, or reacting to, changes in our business and our industry and accomplishing our business plan;
•put us at a disadvantage compared to our competitors with less indebtedness; and
•limit our ability to access capital markets.
We have placed, and may continue to place, permanent financing on our properties or increase our credit facility or other similar financing arrangement in order to acquire and/or invest in properties. We may also decide to later further leverage our properties or to rely on securitization vehicles. We may borrow funds for any purposes related to our business. A shortfall between the cash flow from our properties and the cash flow needed to service debt could have a material adverse effect on us.
In addition, our indebtedness could be accompanied by more restrictive covenants than those in our existing credit facility or other secured debt obligations. The assumptions in our corporate credit agreement and mortgage debt regarding values, cash flow and debt service coverage, and individual asset underwriting of key performance metrics such as loan-to-value ratios, debt service coverage ratios and debt yields that support our current borrowings may be subject to change, as market conditions change and/or lending standards become more stringent. Lenders have imposed and could impose restrictions on us that affect our dividend and operating policies and our ability to incur additional debt, including customary restrictive covenants, that, among other things, restrict our ability to engage in material asset sales, mergers, consolidations, acquisitions or investments, to make capital expenditures, to pay special dividends, and more generally on how and when we can spend operating funds and capital event proceeds. We may also be required to have and maintain certain specified financial ratios and to reserve or otherwise set aside funds for specific expenses, such as anticipated leasing and capital expenditures. These or other limitations may adversely affect our flexibility and limit our ability to pay dividends to shareholders at our current level. Any of the foregoing could have a material adverse effect on us.
We expect to need additional funding to fund future investments.
We expect to need additional funding to finance our investments, including debt financing; however, we can provide no assurance that debt financing will be available on terms that we deem attractive or at all. If we are unable to consummate our anticipated financing plans, we will need to secure alternative sources of funding. These sources may include the net proceeds from equity issuances, joint ventures or the sale of assets. No assurance can be given that any of these sources of capital will be available on terms that are as favorable as those that we currently expect to obtain, or available at all. If we finance any funding shortfall with common equity issuances, there may be a dilutive effect on our earnings per share after giving effect to the issuance of such common shares and the application of the proceeds thereof. The incurrence of additional debt could increase our leverage ratios and would increase our exposure to the risks associated with debt financing, all of which would be negatively perceived by the market. In addition, an inability to obtain sufficient capital to meet our funding obligations could
lead to contractual defaults that could materially and adversely affect us. If debt financings or alternative sources of financing are unavailable when strategic opportunities arise, we may not be able to acquire properties or make a relevant investment.
We have incurred, and intend to continue to incur, indebtedness secured by our properties. If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt, which could have a material adverse effect on us.
Some of our assets are and will be secured by mortgages on our properties, and we may in the future rely on securitization vehicles. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan or vehicle, which could have a material adverse effect on us. To the extent lenders require us to cross-collateralize our properties, or provisions in our loan documents contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure. Foreclosures of one or more of our properties could have a material adverse effect on us.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay dividends to shareholders at our current level or otherwise have a material adverse effect on us.
We expect that we will incur indebtedness in the future. Increases in the interest we pay on our indebtedness could adversely affect our ability to pay dividends to shareholders at our current level, among other consequences. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs, could reduce our cash flows and our ability to pay dividends to shareholders at our current level or otherwise have a material adverse effect on us. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to sell one or more of our investments in properties at times that may not permit realization of the maximum return on such investments. Any of the foregoing risks could have a material adverse effect on us.
Failure to hedge effectively against interest rate changes may adversely affect our business, financial condition, results of operations and ability to pay dividends to our shareholders.
The REIT provisions of the Code impose certain restrictions on our ability to utilize hedges, swaps and other types of derivatives to hedge our liabilities. At the same time, our corporate credit agreement requires us to maintain certain covenants with respect to maximum, unhedged interest rate risk. Subject to these restrictions and requirements, we have entered, and may continue to enter into, hedging transactions to protect ourselves from the effects of interest rate fluctuations on floating rate debt. Our hedging transactions include entering into interest rate swap agreements. These agreements involve risks, such as the risk that such arrangements would not be effective in reducing our exposure to interest rate changes or that a court could rule that such an agreement is not legally enforceable. In addition, interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates and a failure to hedge effectively against interest rate changes could materially adversely affect our business, financial condition, results of operations and ability to pay dividends to our shareholders. In addition, while such agreements would be intended to lessen the impact of rising interest rates on us, they could also expose us to the risk that the other parties to the agreements would not perform, and that the hedging arrangements may not be effective in reducing our exposure to interest rate changes. Should we desire to terminate a hedging agreement, there could be significant costs and cash requirements involved to fulfill our obligation under the hedging agreement.
U.S. Federal Income Tax Risks
Failure to continue to qualify as a REIT would adversely affect our operations and our ability to pay dividends because we would incur additional tax liabilities, which could have a material adverse effect on us.
We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Code. Qualification as a REIT involves highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, dividends and satisfaction of specific shareholder ownership rules, and various other requirements imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings available for investment or paying dividends to shareholders because of the additional tax liability. If this occurs, we might be required to borrow funds or sell some investments in order to pay the applicable tax. In addition, dividends paid to our shareholders would no longer qualify for the dividends paid deduction, and we would no longer be required to pay dividends. Qualification as a REIT is subject to the
satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations, or court decisions could change the tax laws with respect to qualification as a REIT or the U.S. federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT could have a material adverse effect on us. In addition, our REIT status depends on the ongoing qualification of subsidiary entities qualifying as REITs or taxable REIT subsidiaries, as applicable, as a result of our substantial ownership interest in those entities.
To qualify as a REIT, and to avoid the payment of U.S. federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities, or sell assets to pay dividends, which may result in our distributing amounts that may otherwise be used for our operations, which could have a material adverse effect on us.
To qualify as a REIT, we will be required each year to distribute to our shareholders at least 90% of our REIT taxable income, generally determined without regard to the deduction for dividends paid and by excluding net capital gains. We will be subject to U.S. federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which dividends we pay with respect to any taxable year are less than the sum of (i) 85% of our ordinary income, (ii) 95% of our capital gain net income, and (iii) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on the acquisition of, investment in, and/or maintenance or development of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities, or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of U.S. federal income and excise taxes. We may be required to pay dividends to our shareholders at times it would be more advantageous to reinvest cash in our business or when we do not have cash readily available for distribution, and we may be forced to sell assets on terms and at times unfavorable to us, which could have a material adverse effect on us. These methods of obtaining funding could affect future dividends by increasing operating costs and decreasing available cash. In addition, such dividends may constitute a return of capital.
If certain of our subsidiaries, including our Operating Partnership, fail to maintain their respective status as a partnership or disregarded entity, as applicable, for U.S. federal income tax purposes, we could cease to qualify as a REIT and suffer other adverse consequences.
One or more of our subsidiaries may be treated as a partnership or disregarded entity for federal income tax purposes and, therefore, will not be subject to federal income tax on its income. Instead, each of its partners or its member, as applicable, which may include us, will be allocated, and may be required to pay tax with respect to, such partner’s or member’s share of its income. We intend to maintain the status of our Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were to successfully challenge the status of our Operating Partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnership could make. This would also result in our losing REIT status and becoming subject to a corporate level tax on our income. This would substantially reduce our cash available to pay dividends and the return on our shareholders’ investment, which could have a material adverse effect on us. In addition, if any of the entities through which our Operating Partnership owns its properties, in whole or in part, loses its characterization as an entity disregarded from its parent, a REIT or a partnership for federal income tax purposes, the underlying entity could become subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership and jeopardizing our ability to maintain REIT status.
In certain circumstances, even if we qualify as a REIT, we and our subsidiaries may be subject to certain federal, state, and other income taxes, which would reduce our cash available to pay dividends to our shareholders and could have a material adverse effect on us.
Even if we qualify and maintain our status as a REIT, we may be subject to certain U.S. federal, state and local income taxes on our income and assets, including taxes and undistributed income, built in gain tax on the taxable sale of assets, tax on income from some activities conducted as a result of a foreclosure, and non-U.S., state or local income, property and transfer taxes. Moreover, if we have net income from “prohibited transactions”, that income will be subject to a 100% tax. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our shareholders would be treated as if they earned that income and paid the tax on it directly. However, our shareholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of our Operating Partnership or at the level of the other companies through which we indirectly own our assets. In particular, we will be subject to U.S. federal and state income tax (and any applicable non-U.S. taxes) on the income earned by our taxable REIT
subsidiaries. Any U.S. or federal, state or other taxes we pay will reduce our cash available for paying dividends to our shareholders and could have a material adverse effect on us.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions that would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of business, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.
We may be required to pay some taxes due to actions of our taxable REIT subsidiaries, which would reduce our cash available to pay dividends to our shareholders and could have a material adverse effect on us.
Any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for U.S. federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to U.S. federal and possibly state corporate income tax. We have elected to treat Griffin Capital Essential Asset TRS, Inc. as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of U.S. federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT’s customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. To the extent that we and our affiliates are required to pay U.S. federal, state and local taxes, we will have less cash available to pay dividends to our shareholders.
Complying with the REIT requirements may cause us to forgo otherwise attractive opportunities, which could have a material adverse effect on us.
To qualify as a REIT for U.S. 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 shareholders and the ownership of our common shares. We may be required to pay dividends to our shareholders at times it would be more advantageous to reinvest cash in our business or when we do not have cash readily available to pay dividends, and we may be forced to sell assets on terms and at times unfavorable to us, which could have a material adverse effect on us.. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
To the extent our dividends represent a return of capital for tax purposes, a shareholder could recognize an increased capital gain upon a subsequent sale of the shareholder’s common shares.
Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a shareholder to the extent those distributions do not exceed the shareholder’s adjusted tax basis in his or her common shares, but instead will constitute a return of capital and will reduce such adjusted basis. (Such distributions to non-U.S. shareholders may be subject to withholding, which may be refundable.) If distributions exceed such adjusted basis, then such adjusted basis will be reduced to zero and the excess will be capital gain to the shareholder (assuming such shares are held as a capital asset for U.S. federal income tax purposes). If distributions result in a reduction of a shareholder’s adjusted basis in his or her common shares, then subsequent sales of such shareholder’s common shares potentially will result in recognition of an increased capital gain.
Legislation that modifies the rules applicable to partnership tax audits may affect us.
Under the Bipartisan Budget Act of 2015, liability is imposed on the partnership (rather than its partners) for adjustments to reported partnership taxable income resulting from audits or other tax proceedings. The liability can include an imputed underpayment of tax, calculated by using the highest marginal U.S. federal income tax rate, as well as interest and penalties on such imputed underpayment of tax. It is possible that the Bipartisan Budget Act of 2015 rules could result in partnerships in which we directly or indirectly invest (including our Operating Partnership) being required to pay additional taxes, interest and penalties as a result of an audit adjustment, and we, as a direct or indirect partner of these partnerships, could be required to bear the economic burden of those taxes, interest, and penalties even though we may have not been a partner in the partnership during the year to which the audit relates and we, as a REIT, may not otherwise have been required to pay additional corporate-
level taxes as a result of the related audit adjustment. Using certain rules, partnerships may be able to transfer these liabilities to their partners. In the event any adjustments are imposed by the IRS on the taxable income reported by any subsidiary partnerships, we intend to utilize certain rules to the extent possible to allow us to transfer any liability with respect to such adjustments to the partners of the subsidiary partnerships who should properly bear such liability. However, there is no assurance that we will qualify under those rules or that we will have the authority to use those rules under the operating agreements for certain of our subsidiary partnerships.
Legislative or regulatory tax changes related to REITs could materially and adversely affect our business.
The U.S. federal income tax laws and regulations governing REITs and their shareholders, as well as the administrative interpretations of those laws and regulations, are constantly under review and may be changed at any time, possibly with retroactive effect. No assurance can be given as to whether, when, or in what form, the U.S. federal income tax laws applicable to us and our shareholders may be enacted. Changes to the U.S. federal income tax laws and interpretations of U.S. federal tax laws could adversely affect an investment in our common shares.
Risks Related to Our Common Shares
The price of our common shares may experience volatility. In addition, limited trading volume may depress the market price of our common shares and make it difficult for investors to sell their shares and less attractive to new investors to purchase our common shares.
The U.S. stock markets, including the NYSE, on which our common shares are listed, historically have experienced significant price and volume fluctuations, and recently, this has especially impacted REITs with significant office assets. As a result, the market price of our common shares has similarly been volatile, and investors in our common shares may experience a decrease in the market price of their shares, including decreases unrelated to our business, financial conditions or results of operations. We cannot assure you that the market price of our common shares will not fluctuate or decline significantly in the future or that holders of our common shares will be able to sell their shares when desired on favorable terms, or at all. The market price of our common shares could be subject to wide fluctuations in response to:
•our financial performance, cash flows, financial condition, results of operations and prospects,
•actual or anticipated differences in our quarterly or annual operating results from those expected;
•our dependence on key personnel whose continued services are not guaranteed;
•whether we will be successful in renewing leases as they expire;
•failure to qualify as a REIT;
•failure to comply with the rules of the NYSE, the requirements of the Sarbanes-Oxley Act or other applicable laws;
•the annual yield from dividends on our common shares as compared to yields on other financial instruments;
•actual or anticipated changes in our and our tenants’ business or prospects;
•the current state of the credit and capital markets, and our ability and the ability of our tenants to obtain financing on favorable terms;
•whether work-from-home trends or other factors will impact the attractiveness of industrial and/or office assets;
•changes in market valuations of similar companies;
•strategic decisions by us or our competitors, such as acquisitions or investments, divestments, spin offs, joint ventures, strategic investments or changes in business strategy;
•further increases in (or prolonged periods of high) market interest rates, which could result in increased interest expense on our debt;
•equity issuances by us (including the issuance of OP Units or other securities convertible into, or exchangeable for, our common shares) or the conversion of a large number of OP Units into common shares as opposed to cash;
•future sales of substantial amounts of our common shares by our existing or future shareholders, or the perception that such issuances or future sales may occur;
•adverse market reaction to any indebtedness we incur in the future, inability to refinance our existing indebtedness, the inclusion of restrictive covenants in our future indebtedness, or our failure to establish debt levels that investors believe are appropriate;
•changes in expectations of future financial performance or changes in estimates of securities analysts;
•publication of research reports about us or our industry by securities analysts;
•government regulatory action or inaction and legislative changes that could adversely affect our industry;
•changes in tax laws;
•adverse speculation in the press or investment community;
•changes in the underlying value of real estate;
•climate change and natural disasters, such as earthquakes, wildfires, rising sea levels, flooding, and extreme weather;
•impacts of the outbreak of a highly infectious or contagious disease or declaration of a pandemic, epidemic or other health crises;
•terrorist acts, natural or man-made disasters or threatened or actual armed conflicts; and
•general market conditions.
We may change our dividend policy.
Future dividends will be declared and paid at the sole discretion of our Board, and the amount and timing of dividends will depend upon our actual and projected financial condition, results of operations, cash flows, liquidity and FFO, AFFO, maintenance of our REIT qualification and such other matters as our Board may deem relevant from time to time. Our Board may change our dividend policy at any time, and there can be no assurance as to the manner in which future dividends will be paid or that the current dividend level will be maintained in future periods. Shareholders have no contractual or other legal right to dividends that have not been authorized and declared by the Board. We may not be able to pay dividends in the future or may need to fund such payments from external sources, including debt or equity financings, as to which no assurances can be given. Our failure to meet the market’s expectations with regard to future cash dividends likely would adversely affect the market price of our common shares.
Our shareholders are subject to the risk that our business and operating plans may change.
Our Board may change our investment objectives, targeted investments, borrowing policies or other corporate policies without shareholder approval.
Increases in market interest rates may result in a decrease in the value of our common shares.
One of the factors that may influence the price of our common shares will be the dividend rate on our common shares (as a percentage of the price of our common shares) relative to market interest rates. If market interest rates rise, prospective purchasers of our common shares may expect a higher dividend rate. Higher interest rates would not, however, result in more funds being available to pay dividends and, in fact, would likely increase our borrowing costs and might decrease our funds available for dividends. We therefore may not be able, or we may not choose, to provide a higher dividend rate. As a result, prospective purchasers may decide to purchase other securities rather than our common shares, which would reduce the demand for, and result in a decline in the market price of, our common shares.
The future issuance of common shares or the resale of outstanding common shares could adversely affect the market price of our common shares.
Future primary issuances of our common shares or other securities convertible into, or exchangeable or exercisable for, our common shares could dilute shareholders and could have an adverse effect on the market price of our common shares. Holders of our common shares are not entitled to preemptive rights or other protections against dilution.
Additionally, in connection with the transaction that resulted in the internalization of our management in December 2018 (the “Self-Administration Transaction”), Griffin Capital, LLC, a Delaware limited liability company (“GC LLC”), which is an entity controlled by our former Executive Chairman, Kevin A. Shields, and is an affiliate of Griffin Capital Company, LLC, which was the sponsor of our predecessor, Griffin Capital Essential Asset REIT, Inc. (our “Predecessor”), received OP Units (approximately 2.7 million taking into effect the 9 to 1 reverse split) as a consideration in exchange for the sale to our Predecessor of the advisory, asset management and property management business of Griffin Capital Real Estate Company, LLC (now known as PKST Management Company, LLC). As further described below, of December 31, 2023, GC LLC owned 2,486,516 OP Units, which, upon a request for redemption by GC LLC, are exchangeable into common shares or cash, at the Company’s election. We are party to a registration rights agreement with GC LLC pursuant to which GC LLC has the right to request that we register for resale, under the Securities Act, our common shares issued or issuable to GC LLC and certain successor holders. Resales of a significant number of our common shares, or the perception that such resales could occur, may have an adverse effect on the market price of our common shares.
The vesting of any restricted shares or other equity awards granted to certain trustees, executive officers and other employees under our equity incentive plan, or the issuance of our common shares, or OP Units in connection with future acquisitions of and/or other investments in properties, could have an adverse effect on the market price of our common shares.
Risks Related to Our Conflicts of Interest
Conflicts of interest may exist or could arise in the future between the interests of our shareholders and the interests of holders of OP Units, which may impede business decisions that could otherwise have benefitted our shareholders.
Conflicts of interest exist or could arise in the future between the interests of our shareholders and the interests of holders of OP Units. Our trustees and officers have duties to the Company under applicable Maryland law in connection with their management of the Company. At the same time, we, as the general partner of our Operating Partnership have fiduciary duties, and obligations to our Operating Partnership and its partners in connection with the management of our Operating Partnership under Delaware law and the partnership agreement of our Operating Partnership. Our fiduciary duties and obligations as general partner to our Operating Partnership and its partners may come into conflict with the duties of our trustees and officers to the Company and our shareholders, which may result in management making business decisions that could benefit either the Operating Partnership and its partners or the Company and our shareholders and be adverse to the interests of the others.
Certain of our executive officers own an interest in an incentive compensation plan controlled by our former Executive Chairman and pursuant to which they may be entitled to receive substantial payments, which could create the appearance of a conflict of interest between the interest of the Company and the interests of these executive officers.
GC LLC assigned approximately 50% of the OP Units received in connection with the Self-Administration Transaction to then participants in GC LLC’s long-term incentive plan (the “GCC Incentive Plan”). Our former Executive Chairman, Kevin A. Shields, is the plan administrator of the GCC Incentive Plan.
As previously disclosed, certain of our current and former employees and executive officers, including Michael Escalante, our Chief Executive Officer, and Javier Bitar, our Chief Financial Officer and Treasurer, were employed by affiliates of GC LLC prior to the Self-Administration Transaction and are therefore participants in the GCC Incentive Plan which made grants to such participants in connection with services rendered prior to the Self-Administration Transaction. Participants in the GCC Incentive Plan, including Messrs. Escalante and Bitar, are entitled to receive distributions from the GCC Incentive Plan in the form of cash, common shares, or other property, or a combination thereof, as elected by the plan administrator.
As required by our listing on the NYSE, certain awards under the GCC Incentive Plan were settled during the fourth quarter 2023 and will be settled in four annual installments thereafter, unless waived or modified. In connection with the settlement of awards under the GCC Incentive Plan, the plan administrator may choose to distribute cash, common shares, or other property, or a combination thereof, as elected by the plan administrator.
On December 15, 2023, GC LLC elected to redeem 209,954 OP Units pursuant to the terms of our Operating Partnership’s operating agreement, and we satisfied such redemption request with our common shares. Following this redemption, GC LLC distributed such common shares to participants in the GCC Incentive Plan, including 56,266 common shares to Mr. Escalante and his designee and 2,000 common shares to Mr. Bitar. In connection with the aforesaid future installments, if GC LLC elects to redeem additional OP Units, we currently intend to satisfy such redemption request with our common shares. GCC Incentive Plan participants may receive additional payment, which payments could be substantial. Our executive officers’ interest in the GCC Incentive Plan may create the appearance of a conflict of interest between the interest of the Company and the interest of these executive officers.
Risks Related to Our Corporate Structure
Our charter contains certain ownership limits with respect to our shares.
Generally, to maintain our qualification as a REIT, no more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of our taxable year (except with respect to the first taxable year for which an election to be taxed as a REIT is made). The Code defines “individuals” for purposes of the requirement described in the preceding sentence to include some types of entities. Our charter authorizes our Board to take such actions as it determines are necessary or appropriate to preserve our qualification as a REIT. Our charter prohibits the ownership by any Person (as defined in our charter) of more than 9.8% (in value or in number, whichever is more restrictive, as determined in good faith by our Board) of the aggregate of our common shares or more than 9.8% of the value (as determined in good faith by our Board) of the aggregate of our outstanding Shares (as defined in our charter), unless waived by our Board. For these purposes, our charter includes a “group” as that term is used for purposes of Section 13(d)(3) of the Exchange Act in the definition of “Person.” Our Board may exempt a person, prospectively or retroactively, from these ownership limits if certain conditions are satisfied. This ownership limit and the other restrictions on ownership and transfer of our shares contained in our charter may:
•discourage a tender offer or other transactions or a change in management or of control that might involve a premium price for our shares or that our shareholders might otherwise believe to be in their best interest; or
•result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.
Certain provisions of Maryland law could inhibit changes in control, which may discourage third parties from conducting a tender offer or seeking other change of control transactions that might involve a premium price for our shares or that our shareholders might otherwise believe to be in their best interest.
Certain provisions of the MGCL may have the effect of inhibiting 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 common shares with the opportunity to realize a premium price for our common shares, including:
•“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then-outstanding voting shares at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter impose fair price and/or supermajority shareholder voting requirements on these combinations; and
•“control share” provisions that provide that a shareholder’s “control shares” of our Company (defined as shares (other than shares acquired directly from us) that, when aggregated with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights with respect to their control shares, except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
As permitted by the MGCL, we have elected to opt out of the business combination and control share provisions of the MGCL. However, we cannot assure you that our Board will not opt to be subject to such provisions of the MGCL in the future, including opting to be subject to such provisions retroactively.
Further, Maryland statutory law provides that an act of a trustee relating to or affecting an acquisition or investment or a potential acquisition of control of a real estate investment trust may not be subject to a higher duty or greater scrutiny than is applied to any other act of a trustee. Hence, trustees of a Maryland real estate investment trust by statute are not required to act in certain takeover situations under the same standards of care, and are not subject to the same standards of review, as apply in Delaware and other corporate jurisdictions.
Our rights and the rights of our shareholders to recover claims against our officers and trustees are limited, which could reduce our shareholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a trustee has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the real estate investment trust’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter requires us to indemnify our trustees and officers to the maximum extent permitted under Maryland law. Additionally, our charter limits the liability of our trustees and officers for monetary damages to the maximum extent permitted under Maryland law. Further, our charter permits the Company, with the approval of our Board, to provide such indemnification and advancement of expenses to any of our employees or agents. As a result, we and our shareholders may have more limited rights against our trustees, officers, employees and agents, than might otherwise exist under common law, which could reduce our shareholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our trustees, officers, employees and agents in some cases which would decrease the cash otherwise available to pay dividends to shareholders or otherwise operate our business.
We are uncertain of our sources of funding our future capital needs. If we cannot obtain funding on acceptable terms, it could affect our ability to make necessary capital improvements to our properties, pursue acquisitions of and/or other investments in properties as part of our business plan, pay our expenses, pay dividends, expand our business or otherwise have a material adverse effect on us.
To continue to qualify as a REIT, we generally must distribute to our shareholders at least 90% of our taxable income each year, excluding capital gains. Because of this dividend requirement, it is not likely that we will be able to fund a significant portion of our future capital needs from retained earnings. We have not identified all of our sources of funding, and such sources of funding may not be available to us on favorable terms or at all. If we do not have access to sufficient funding in the future, our ability to make necessary capital improvements to our properties, pursue acquisitions of and/or other investments in properties as part of our business plan, pay our expenses, pay dividends or expand our business may be impaired or delayed.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions and proceedings that may be initiated by our shareholders.
Our bylaws provide that, unless we consent in writing to the selection of a different forum, the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the U.S. District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach by any trustee, officer, other employee or agent of the Company of a duty owed to the Company or our shareholders or of any standard of conduct set forth in the Maryland General Corporation Law (“MGCL”), (iii) any action asserting a claim arising pursuant to any provision of the MGCL including, but not limited to, the meaning, interpretation, effect, validity, performance or enforcement of our charter or our bylaws, (iv) any action asserting a claim governed by the internal affairs doctrine, or (v) any Internal Corporate Claim (as defined the MGCL). This exclusive forum provision does not apply to claims under the Securities Act, the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring or holding any interest in our common shares will be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. Our Board, without shareholder approval, adopted this provision of our bylaws so that we may respond to such litigation more efficiently and reduce the costs associated with our responses to such litigation, particularly litigation that might otherwise be brought in multiple forums. This exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with the Company or our trustees, officers, agents or employees, if any, and may discourage lawsuits against us and our trustees, officers, agents or employees, if any. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings notwithstanding that the MGCL expressly provides that the charter or bylaws of a Maryland real estate investment trust may require that any internal corporate claim be brought only in courts sitting in one or more specified jurisdictions, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could have a material adverse effect on us.
General Risks
Cybersecurity risks and cyber incidents or the failure to comply with laws and regulations concerning data privacy and security may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, any of which could have a material adverse effect on us.
We rely on computer systems, hardware, software, technology infrastructure and online sites and networks for both internal and external operations that are critical to our business (collectively, “IT Systems”). We own and manage some of these IT Systems but also rely on the third parties that provide services to the Company (collectively, “Service Providers”) for a range of IT Systems and related products and services, including but not limited to cloud computing services. And we collect, maintain and process confidential, sensitive, and proprietary information about investors, tenants, partners, businesses, our employees, and others, including personally identifiable information, as well as confidential, sensitive, and proprietary information belonging to our business such as trade secrets (collectively, “Confidential Information”).
We face numerous and evolving cybersecurity risks that threaten the confidentiality, integrity and availability of our IT Systems and Confidential Information. The risk of a cyber incident has generally increased as the number, intensity and sophistication of attempted attacks have increased globally, especially given the use of more advanced hacking tools and techniques and the use of artificial intelligence, including by computer hackers, foreign governments, information service interruptions and cyber terrorists, opportunistic hackers and hacktivists, as well as through diverse attack vectors, such as social engineering/phishing, malware (including ransomware), malfeasance by insiders, human or technological error, and as a result of bugs, misconfigurations or exploited vulnerabilities in software or hardware. Techniques used in cyber incidents evolve frequently, may originate from less regulated and remote areas of the world and be difficult to detect and may not be recognized until launched against a target. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, making it impossible for us to entirely eliminate this risk. For example, unauthorized parties, whether within or outside the Company, may disrupt or gain access to our IT Systems, or those of third parties with whom we do business, through human error, misfeasance, fraud, trickery, or other forms of deceit, including break-ins, use of stolen credentials, social engineering, phishing, computer viruses or other malicious codes, and similar means of unauthorized and destructive tampering.
As our reliance on technology increases, so do the risks posed to our systems - both internal and external. Our primary risks that could directly result from the occurrence of a cyber incident are theft of assets; operational interruption; regulatory enforcement, lawsuits and other legal proceedings; damage to our relationships with our tenants; and exposure of Confidential Information. A significant or extended disruption could damage our business or reputation, cause a loss of revenue, have an adverse effect on tenant relations, cause an unintended or unauthorized public disclosure, or lead to the misappropriation of Confidential Information, any of which could result in us incurring significant expenses to resolve these kinds of issues. Even security measures that are appropriate, reasonable and/or in accordance with applicable legal requirements may not be sufficient to protect our IT Systems and the Confidential Information we maintain due to attackers using tools and techniques that are designed to circumvent controls, avoid detection and remove or obfuscate forensic evidence.
As have many companies, our Service Providers have been impacted by security incidents in the past and
will likely continue to experience security incidents of varying degrees. We have not identified risks from known
cybersecurity threats, including as a result of any prior cybersecurity incidents, that have had a material adverse effect on us, including an adverse effect on our business, financial condition and results of operations. While we do not believe these incidents have had a material impact to date, as our reliance on technology increases, so do the risks of a security incident. The Service Providers that provide cloud services and store our information are critical to our operations and could experience security incidents resulting in downtime, data breach or loss, or shutdown. The occurrence of any of the foregoing risks could have a material adverse effect on us including an adverse effect on our business, financial condition and results of operations.
In addition, our processing of Confidential Information, including personally identifiable information, subjects us to various federal, state and local laws, regulations and industry standards governing the collection, use, storage, sharing, transmission and other processing of personal information. The regulatory environment surrounding information security and privacy is increasingly demanding, with frequent imposition of new and changing requirements that are subject to differing interpretations. Any failure or perceived failure by us to comply with laws, regulations, policies or regulatory guidance relating to privacy or data security may result in governmental investigations and enforcement actions, litigation, fines and penalties or adverse publicity and could cause our investors to lose trust in us, which could have an adverse effect on our reputation as well as our business, financial condition and results of operations.
There can be no assurance that our cybersecurity risk management program and processes, including our policies, controls or procedures, will be fully implemented, complied with or effective in protecting our systems and information.
We are subject to risks from climate change and natural disasters such as earthquakes and severe weather conditions.
Our properties are located in areas that may be subject to climate change and natural disasters, such as earthquakes and wildfires, and severe weather conditions. Climate change and natural disasters, including rising sea levels, flooding, extreme weather, and changes in precipitation and temperature, may result in physical damage to, or a total loss of, our properties located in areas affected by these conditions, including those in low-lying areas close to sea level, and/or decreases in demand, rent from, or the value of those properties. In addition, we may incur material costs to protect these properties, including increases in our insurance premiums as a result of the threat of climate change, or the effects of climate change, and may not be covered by our insurance policies. Additionally, the occurrence of natural disasters could affect our ability to carry on business functions that are critical to our financial and operational viability.
The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have a geographic concentration of exposures, a single catastrophe (such as an earthquake) affecting an area in which we have a significant concentration of properties, such as in Texas, California, Ohio, Arizona, Georgia, Illinois or New Jersey, could have a material adverse effect on us. We also own at least one property near an earthquake fault line. As a result, our operating and financial results may vary significantly from one period to the next, and our financial results may be adversely affected by our exposure to losses arising from climate change, natural disasters or severe weather conditions.
Corporate responsibility, specifically related to environmental, social, and governance (“ESG”) factors, may impose additional costs and expose us to new risks.
Investors and other stakeholder have become more focused on understanding how companies address a variety of ESG factors. Certain organizations that provide corporate governance and other corporate risk information to investors and shareholders have developed scores and ratings to evaluate companies and investment funds based upon ESG or “sustainability” metrics. Many investment funds focus on positive ESG business practices and sustainability scores when making investments and may consider a company’s sustainability score as a reputational or other factor in making an investment decision. In addition, investors, particularly institutional investors, use these scores to benchmark companies against their peers, and if a company is perceived as lagging, these investors may engage with companies to require improved ESG disclosure or performance. We may face reputational damage in the event our corporate responsibility procedures or standards do not meet the standards set by various constituencies. A low sustainability score could result in a negative perception of the Company, or exclusion of our common shares from consideration by certain investors.
We may be subject to litigation relating to our business, which could have a material adverse effect on our business, financial condition and results of operations and could result in significant defense costs and potentially significant judgments against us.
We may be subject to litigation relating to our business including securities class action litigation following any period of volatility in the price of our common shares. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which we may not be insured against. While we generally intend to vigorously defend ourselves against such claims, we cannot be certain of the ultimate outcomes of claims that may be asserted against us. Unfavorable resolution of such litigation may result in our having to pay significant fines, judgments, or settlements, which, if uninsured-or if the fines, judgments and settlements exceed insured levels-would adversely impact our cash flows, thereby negatively impacting our ability to service debt and pay dividends to our shareholders, which may have a material adverse effect on our business, financial condition and results of operations. Certain litigation, or the resolution of certain litigation, may affect the availability or cost of some of our insurance coverage, expose us to increased risks that would be uninsured, or adversely impact our ability to attract officers and trustees, each of which may have a material adverse effect on our business, financial condition and results of operations, as well as divert the attention of management.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2023, we owned a fee simple interest in 66 and a ground leasehold interest in 5 properties, encompassing approximately 17.9 million rentable square feet. See Part IV, Item 15. “Exhibits, Financial Statement Schedules-Schedule III-Real Estate and Accumulated Depreciation and Amortization,” of this Annual Report on Form 10-K for a detailed listing of our properties. See Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K for more information about our indebtedness secured by our properties.
Revenue Concentration
By State:
The percentage of Annualized Base Rent as of December 31, 2023, by state, based on the respective in-place leases, is as follows (dollars in thousands):
State Annualized Base Rent
(unaudited)
Number of
Properties (2)
Percentage of Annualized Base Rent
Arizona $ 23,336 7 11.9 %
New Jersey 19,532 5 9.9
Colorado 16,471 4 8.4
Ohio 13,261 5 6.7
Massachusetts 12,449 3 6.3
California 12,271 2 6.2
Alabama 10,307 2 5.2
South Carolina 9,853 3 5.0
North Carolina 9,079 6 4.6
Illinois 8,865 3 4.5
Subtotal 135,424 40 68.7
All Others (1)
61,307 31 31.3
Total $ 196,731 71 100.0 %
(1)All others account for 3.9% or less of total Annualized Base Rent on an individual state basis.
(2)Includes properties held for sale and sold subsequent to year-end.
By Industry:
The percentage of Annualized Base Rent as of December 31, 2023, by industry, based on the respective in-place leases, is as follows (dollars in thousands):
Industry (1)(3)
Annualized Base Rent
(unaudited)
Number of
Lessees Percentage of Annualized Base Rent
Capital Goods $ 32,436 15 16.5 %
Consumer Services 21,597 5 11.0
Materials 19,980 5 10.2
Food, Beverage & Tobacco 16,677 3 8.5
Commercial & Professional Services 11,701 7 5.9
Utilities 11,297 2 5.7
Retailing 9,727 2 4.9
Technology Hardware & Equipment 9,179 3 4.7
Diversified Financials 9,127 3 4.6
Health Care Equipment & Services 9,032 3 4.6
Subtotal 150,753 48 76.6
All others (2)
45,978 19 23.4
Total $ 196,731 67 100.0 %
(1) Industry classification based on the Global Industry Classification Standard.
(2) No individual industry included within “all others” accounts for more than 4.4% of total Annualized Base Rent.
(3)Includes properties held for sale and sold subsequent to year-end.
Top Ten Tenants:
Pursuant to the respective in-place leases, no lessee or property generated more than 5.9% of our total Annualized Base Rent as of December 31, 2023. As of December 31, 2023, our top 10 tenants are as follows (dollars in thousands):
Tenant Annualized Base Rent
(unaudited)
Percentage of Annualized Base Rent
Keurig Dr. Pepper $ 11,532 5.9 %
Southern Company 9,224 4.7 %
LPL 8,701 4.4 %
Amazon 8,590 4.4 %
Freeport McMoRan 7,867 4.0 %
Maxar Technologies 7,723 3.9 %
RH 7,487 3.8 %
Wyndham Hotels & Resorts 7,392 3.8 %
McKesson 6,123 3.1 %
Travel & Leisure, Co. 5,826 3.0 %
Subtotal 80,465 41.0 %
All Others (1)
116,266 59.0 %
Total $ 196,731 100.0 %
(1) No individual tenant included within “All others” account for more than 2.8% of Annualized Base Rent.
Lease Expirations:
As of December 31, 2023, our lease expirations by year are as follows (dollars in thousands):
Year of Lease Expiration (1)(2)
Annualized Base Rent
(unaudited)
Number of
Leases Approx. Square Feet Percentage of Annualized Base Rent
2024 $ 17,045 9 1,398,500 8.7 %
2025 8,090 7 788,700 4.1
2026 13,308 4 1,449,100 6.8
2027 14,349 7 570,700 7.3
2028 18,726 11 2,027,200 9.5
2029 38,756 10 2,394,100 19.7
>2029 86,457 31 8,595,800 43.9
Leased Amenity Space - - 2,000 -
Vacant - - 642,800 -
Total $ 196,731 79 17,868,900 100.0 %
(1)Expirations that occur on the last day of the year are shown as expiring in the subsequent year.
(2)Includes properties held for sale and sold subsequent to year-end.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become subject to legal and regulatory proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to, nor is the Company aware of any material pending legal proceedings nor is any property of the Company subject to any material pending legal proceedings.

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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 NYSE under the ticker symbol “PKST”. As of February 20, 2024, there were 11,616 holders of record of our common stock. Certain shares of our Company are held in “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing numbers.
Dividends
We intend to pay dividends on a quarterly basis at the discretion of our Board, unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so.
Recent Sales of Unregistered Securities
During the year ended December 31, 2023, there were no sales of unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Prior to the listing of the Company’s shares on the New York Stock Exchange (the “Listing”), the Company had adopted the share redemption program (as amended and restated, the “SRP”) that enabled shareholders to sell their shares to the Company in limited circumstances. Pursuant to the terms of the SRP, during any calendar year, with respect to each share class, the Company was permitted to redeem no more than 5% of the weighted average number of shares of such class outstanding during the prior calendar year, and the Company would redeem shares as of the last business day of each quarter (with quarterly redemptions capped at $5 million) at a price equal to the most recently published net asset value (“NAV”) per share for the applicable class prior to quarter end. The SRP was suspended during certain periods prior to Listing and terminated in connection with the Listing. During the year ended December 31, 2023, the Company redeemed 941 shares.
Issuances Under Equity Compensation Plans
Our equity compensation plan information required by this item are incorporated by reference to the information in Part III, Item 12 of this Annual Report on Form 10-K.
Share Performance
The information below shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
The following performance graph is a comparison of the cumulative return of our common shares for the period from our Listing through December 31, 2023. The graph also shows the cumulative total returns of the Standard and Poor’s 500 Index (“S&P 500”), and industry peer groups during the same period. The historical information set forth on the following performance graph is not necessarily indicative of future performance.
Forfeitures
During the quarter ended December 31, 2023, the Company repurchased shares as follows:
For the Month Ended Total Number of Shares Repurchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet be Purchased Under the Plans or Programs
October 31, 2023 - $ - - -
November 30, 2023 - $ - - -
December 31, 2023 58,982 (1)
$ 19.92 - -
(1) Consists of shares withheld (i.e. forfeited) pursuant to provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

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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
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the Company’s consolidated financial statements and the notes thereto contained in this Annual Report on Form 10-K.
Overview
Peakstone Realty Trust is an internally managed, publicly traded real estate investment trust (“REIT”) that owns and operates a high-quality, newer-vintage portfolio of predominantly single-tenant industrial and office properties located in diverse, strategic growth markets. These assets are generally leased to creditworthy tenants under long-term net lease agreements with contractual rent escalations.
PKST OP, L.P., our operating partnership (the “Operating Partnership”), owns, directly and indirectly all of the Company’s assets. As of December 31, 2023, the Company owned approximately 91.8% of the outstanding common units of limited partnership interest in the Operating Partnership (“OP Units”).
As of December 31, 2023, the Company’s wholly-owned portfolio (i) consisted of 71 properties located in 24 states, (ii) was 96.4% leased with a weighted average remaining lease term (“WALT”) of approximately 6.5 years, and (iii) generated approximately $196.7 million Annualized Base Rent (“ABR”).
The Company reports the results of its wholly-owned portfolio in three segments which had the following characteristics as of December 31, 2023:
•Industrial: This segment (i) comprised 19 industrial properties and (ii) was 100% leased with a WALT of approximately 6.7 years.
•Office: This segment (i) comprised 35 office properties and (ii) was 98.8% leased with a WALT of approximately 7.6 years.
•Other: This segment (i) comprised 17 properties and (ii) was 82.4% leased with a WALT of approximately 2.6 years.
Results of Operations
The Company’s results of operations are primarily impacted by the Company’s ability to re-lease space, dispose of and acquire and/or invest in select properties, all of which impact period-to-period comparisons.
Due to current remote and hybrid work practices, demand for office space nationwide has declined and may continue to decline. While we have seen some positive trends recently, office utilization remains down materially relative to pre-pandemic levels. Brand new office buildings (urban and suburban), with high walk-scores, immediate access to retail amenities and transportation hubs continue to attract tenants and market rental rates. In addition, challenging economic conditions and volatility in the capital markets (including bank failures) throughout 2023 adversely impacted commercial real estate overall and, in particular, the office sector. These market conditions and the potential for increased capital costs and availability of debt financing, among other things, have driven many companies to be more reticent in making office or other real estate related investments. The potential for a reversal of interest rates by the Fed has brought some relief to investor sentiment, however, we are still seeing a negative investment psychology at this moment, especially for office product. All of these trends and uncertainties may adversely impact the Company’s business, financial condition, results of operations and cash flows.
The Company’s long-term objective is to maximize shareholder value through the ownership and operation of industrial and select office assets located in strategic growth markets. We are focused on maintaining a strong balance sheet that enables us to execute multi-channel investments across the risk and capital spectrum as they arise. It is our intention to continue to maximize our balance sheet flexibility through free cash flow generation and the execution of our strategic disposition plan. We seek to generate internal and external growth by increasing the cash flow from our properties and expanding our portfolio by making industrial-focused investments. To accomplish our objectives, we will leverage our experienced, operationally-minded and cycle-tested management team.
For a discussion of material trends and uncertainties that have impacted or may impact the Company’s financial condition, results of operations or cash flows, see (i) the discussion above, and (ii) the risks highlighted in the “Risk Factors” section in Part I.
Segment Information
The Company internally evaluates all of the properties and interests therein as three reportable segments: Industrial, Office and Other. The Company evaluates performance of each segment based on segment net operating income (“NOI”), which is defined as property revenue less property expenses. The Company excludes the following from segment NOI because they are addressed on a corporate level: (i) the Office Joint Venture, (ii) interest expense, and (iii) general administrative expenses. Segment NOI is not a measure of operating income or cash flows from operating activities, is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate segment profit measures in the same manner. The Company considers segment NOI to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations and valuations of our properties.
Highlights
The following provides a summary of the significant developments related to our business during and subsequent to 2023:
Listing:
•On April 13, 2023, we listed our common shares on the New York Stock Exchange (“NYSE”).
Transaction Activity:
•Prior to the Listing, we sold two Industrial segment properties, and one Office segment property for approximately $169.6 million in gross disposition proceeds and a net gain of approximately $30.6 million.
•Subsequent to the Listing, we sold four Office segment properties and four Other segment properties for approximately $166.3 million in gross disposition proceeds and recognized a net loss of approximately $1.4 million.
Leasing Activity:
•During the year ended December 31, 2023, we executed seven new and renewal leases within our Industrial and Office segments with a combined 1.2 million square feet.
Financing:
•In 2023, we paid off the outstanding principal balance for following loans: (i) the $19.1 million HealthSpring Mortgage Loan; (ii) the $400.0 million 2024 Term Loan; and (iii) the $17.1 million Samsonite Loan.
•On December 22, 2023, we entered into an agreement with AIG that is intended to facilitate the disposition of the mortgaged properties under the AIG Loans, without regard to the original release prices, and support the repayment of both AIG Loans.
•As of December 31, 2023, the Revolving Loan Maturity Date was March 30, 2024 (with two extension options to January 31, 2026, subject to the satisfaction of certain customary conditions, the first of which we exercised subsequent to year-end and described below).
Equity:
•On April 10, 2023, the Company redeemed all 5,000,000 Series A Preferred Shares for a redemption payment of $125.0 million and accumulated unpaid dividends of approximately $2.4 million.
•On August 2, 2023, we entered into a $200.0 million at-the-market equity offering program (“ATM”).
Subsequent Events:
•On January 31, 2024, the Company sold one held-for-sale property in the Office segment for a sales price of $30.0 million, including the issuance of a $15.0 million, one-year promissory note in connection with the sale.
•On February 12, 2024, we exercised an option to extend the Revolving Loan Maturity Date, which upon satisfaction or waiver of certain customary conditions, will extend to June 30, 2024.
Reconciliation of Net Loss to Same Store NOI
Total net loss for the years ended December 31, 2023 and December 31, 2022 was $605.1 million and $441.4 million, respectively. The following table reconciles net loss to Same Store NOI for the years ended December 31, 2023 and December 31, 2022, (dollars in thousands):
Year Ended December 31,
2023 2022
Reconciliation of Net Loss to Same Store NOI
Net loss $ (605,102) $ (441,382)
General and administrative expenses 42,962 38,995
Corporate operating expenses to related parties 1,154 1,349
Real estate impairment provision 409,512 127,577
Goodwill impairment provision 16,031 135,270
Depreciation and amortization 112,204 190,745
Interest expense 65,623 84,816
Debt breakage costs - 13,249
Other (income) expense, net (13,111) 943
Net loss from investment in unconsolidated entity 176,767 9,993
(Gain) loss from disposition of assets (29,164) 139,280
Transaction expenses 24,982 22,386
Total NOI $ 201,858 $ 323,221
Same Store Adjustments:
Recently acquired properties - -
Recently disposed properties (8,922) (123,899)
Total Same Store NOI $ 192,936 $ 199,322
Same Store Analysis
Comparison of the Years Ended December 31, 2023 and December 31, 2022
For the year ended December 31, 2023, our “Same Store” portfolio consisted of 71 properties, encompassing approximately 17.9 million square feet, with an acquisition value of $3.0 billion and Annualized Base Rent as of December 31, 2023 of $196.7 million. Our Same Store portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for the 71 properties for the years ended December 31, 2023 and 2022 (dollars in thousands):
Year Ended December 31,
2023 2022 Increase/
(Decrease) Percentage Change
Industrial Same Store NOI
Total Industrial revenues $ 56,951 $ 56,467 $ 484 1 %
Industrial operating expenses (7,622) (7,517) (105) 1 %
Industrial NOI 49,329 48,950 379 1 %
Office Same Store NOI
Total Office revenues 134,214 139,112 (4,898) (4) %
Office operating expenses (22,244) (20,861) (1,383) 7 %
Office NOI 111,970 118,251 (6,281) (5) %
Other Same Store NOI
Total Other revenues 48,733 46,245 2,488 5 %
Other operating expenses (17,096) (14,124) (2,972) 21 %
Other NOI 31,637 32,121 (484) (2) %
Total Same Store NOI $ 192,936 $ 199,322 $ (6,386) (3) %
NOI
Total Same Store NOI decreased by $6.4 million, or 3%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, consisting of:
An increase in Industrial segment Same Store NOI by $0.4 million, or 1%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to new leasing activity at one property.
A decrease in Office segment Same Store NOI by $6.3 million, or 5%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease is primarily due to a $7.4 million decrease in termination income compared to prior year offset by approximately $1.2 million related to net leasing activity in 2023.
A decrease in Other segment Same Store NOI by $0.5 million, or 2%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease is primarily due to an increase of non-recoverable operating expenses at one property.
Portfolio Analysis
Comparison of the Years Ended December 31, 2023 and 2022.
For the years ended December 31, 2023 and 2022, the Company recorded a net loss of $605.1 million and $441.4 million. The following table reconciles net loss to NOI for the year ended December 31, 2023 and 2022 (dollars in thousands):
Year Ended December 31,
2023 2022 Increase/(Decrease) Percentage Change
Reconciliation of Net (Loss) Income to NOI
Net (loss) income $ (605,102) $ (441,382) $ (163,720) 37 %
General and administrative expenses 42,962 38,995 3,967 10 %
Corporate operating expenses to related parties 1,154 1,349 (195) (14) %
Real estate impairment provision 409,512 127,577 281,935 221 %
Goodwill impairment provision 16,031 135,270 (119,239) (88) %
Depreciation and amortization 112,204 190,745 (78,541) (41) %
Interest expense 65,623 84,816 (19,193) (23) %
Debt breakage costs - 13,249 (13,249) (100) %
Other (income) expense, net (13,111) 943 (14,054) (1490) %
Net loss from investment in unconsolidated entity 176,767 9,993 166,774 1669 %
(Gain) loss from disposition of assets (29,164) 139,280 (168,444) (121) %
Transaction expenses 24,982 22,386 2,596 12 %
Total NOI $ 201,858 $ 323,221 $ (121,363) (38) %
The following table provides further detail regarding segment NOI for the years ended December 31, 2023 and 2022 (dollars in thousands):
Year Ended December 31,
2023 2022 Increase/Decrease Percentage Change
Industrial NOI
Total Industrial revenues $ 57,304 $ 61,347 $ (4,043) (7) %
Industrial operating expenses (7,655) (7,870) 215 (3) %
Industrial NOI 49,649 53,477 (3,828) (7) %
Office NOI
Total Office revenues 142,734 297,110 (154,376) (52) %
Office operating expenses (24,295) (66,143) 41,848 (63) %
Office NOI 118,439 230,967 (112,528) (49) %
Other NOI
Total Other revenues 54,246 58,029 (3,783) (7) %
Other operating expenses (20,476) (19,252) (1,224) 6 %
Other NOI 33,770 38,777 (5,007) (13) %
Total NOI $ 201,858 $ 323,221 $ (121,363) (38) %
NOI
Total NOI decreased by $121.4 million, or 38%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022, consisting of:
A decrease in Office segment NOI by $112.5 million, or 49%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease is primarily due to (i) the dispositions of 48 Office segment properties in 2022 and (ii) the disposition of five Office segment properties in 2023.
A decrease in Other segment NOI by $5.0 million, or 13% for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease is primarily due to the sale of four Other segment properties in 2023.
A decrease in Industrial segment NOI by $3.8 million, or 7%, for the year ended December 31, 2023 as compared to the year ended December 31, 2022 primarily due to the sale of two Industrial segment properties in 2023 prior to the Listing.
General and Administrative Expenses
General and administrative expenses increased approximately $4.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to increases in employee severance expenses (including legal fees).
Corporate Operating Expense to Related Parties
Corporate operating expenses to related parties decreased approximately $0.2 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 due to the amendments and subsequent termination of the Administrative Services Agreement in 2023, which reduced the total services provided.
Impairment Provision, Real Estate
Impairment provision, real estate increased approximately $281.9 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to the impairment of seventeen properties in 2023 compared to the impairment of eleven properties in 2022. The impairment of seventeen properties in 2023 was primarily related to changes to anticipated hold periods, estimated selling prices, and potential vacancies.
Impairment Provision, Goodwill
The Company recorded a $16.0 million goodwill impairment related to its Other reporting unit as of December 31, 2023, compared to a $135.3 million goodwill impairment related to its Office reporting unit in the year ended December 31, 2022. During the year ended December 31, 2023, the impairment resulted from a decline in fair value of the underlying properties within the Other reporting unit, particularly as we continue to execute on our strategic disposition plan under current market conditions.
Depreciation and Amortization
Depreciation and amortization decreased approximately $78.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to (i) the sale of 48 Office segment properties 2022 and the sale of eleven total properties across all segments in 2023; (ii) accelerated amortization due to amended, naturally expiring and early terminated leases; and (iii) real estate impairments, which lowered the depreciable book bases of the impaired assets.
Interest Expense
Interest expense decreased approximately $19.2 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The primary reasons for the decrease related to the following activity: (i) in 2022, the payoff of approximately $1.0 billion of debt, consisting of two mortgage loans, the 2023 Term Loan, and the pay down of the Revolving Credit Facility; and (ii) in 2023, the payoff of approximately $441.3 million of debt, consisting two mortgage loans and the 2024 Term Loan; offset by (iii) a partial increase in interest expense related to the $400.0 million Revolving Loan, which was used to pay the 2024 Term Loan, and higher interest rates on unhedged variable debt in 2023.
Debt Breakage Costs
Debt breakage costs decreased approximately $13.2 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, which is entirely attributable to the prior year breakage costs for the early payoff of the Midland Mortgage Loan of $0.9 million and the Bank of America Loan of $12.3 million made in connection with the Office Portfolio Sale in 2022.
Net Loss from Investment in Unconsolidated Entity
Net loss from investment in unconsolidated entity increased approximately $166.8 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022 due to the Company’s investment in the Office Joint Venture, which was formed in August 2022. In September 2023, the Company recorded an other-than-temporary impairment (“OTTI”) of approximately $129.3 million for its investment in the Office Joint Venture, which represents a complete write-off of the Company’s remaining investment balance. Subsequent to the OTTI, since the Company’s basis in the Office Joint Venture is zero, the Company no longer records any equity income or losses from the Office Joint Venture.
Net Gain (Loss) from Disposition of Assets
Gain from disposition of assets increased approximately $168.4 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase is primarily due to the net gain of $29.2 million on the disposition of two Industrial segment properties, five Office segment properties, and four Other segment properties in 2023 compared to the net loss of $139.3 million on the sale of the 48 Office segment properties during the year ended December 31, 2022.
Transaction Expenses
Transaction expenses for the year ended December 31, 2023 were $24.9 million, which is an increase of approximately $2.6 million compared to the year ended December 31, 2022 primarily due to fees and expenses relating to the Listing, including banking, advisory, and listing fees.
Comparison of the Years Ended December 31, 2022 and 2021.
Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations” in our Form 10-K for the year ended December 31, 2022, filed with the SEC on March 24, 2023, for a discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021.
Critical Accounting Estimates
We have established accounting estimates which conform to GAAP. The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies. For further discussion on our significant accounting policies and discussion of new accounting pronouncements, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our consolidated financial statements included in this Annual Report on Form 10-K.
As we continue to execute on our strategic disposition plan, we have recorded impairments on several assets in our Office and Other segments, as well as impaired the goodwill related to the Other segment in the year ended December 31, 2023. As we navigate changing market conditions, we will continue to evaluate for property specific impairments relating to these segments and the potential for future goodwill impairment in the Other segment. As such, the following critical accounting estimates discussion reflects what we believe are the most significant estimates, assumptions, and judgments that have had or are reasonably likely to have a material impact on our financial condition or our results of operations.
Impairment of Real Estate and Related Intangible Assets and Liabilities
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC 360, we assess the carrying values of real estate assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Recoverability of real estate assets requires estimates of future market and economic conditions impacting our strategic disposition plan, including assumptions related to estimated selling prices, anticipated hold periods, potential vacancies, capitalization rates, market rental income amounts subsequent to the expiration of current lease agreements, and property operating expenses. When real estate assets are not recoverable, we calculate an impairment charge as the amount the carrying value exceeds the estimated fair value of the real estate property as of the measurement date. Fair value is determined through certain valuation techniques involving (i) discounted cash flow models
applying significant assumptions related to market rent, terminal capitalization rates, and discount rates or (ii) estimated selling prices based on quoted market values and comparable property sales.
For the year ended December 31, 2023, we recorded an impairment provision related to seventeen properties, consisting of nine Office segment properties and eight Other segment properties. As part of our impairment analysis, we noted certain properties in both segments that had potential indicators of impairment, but the future undiscounted cash flows were sufficient to recover the carrying amount. Refer to Note 3, Real Estate, to our consolidated financial statements included in this Annual Report on Form 10-K for details.
Impairment of Goodwill
We recorded goodwill as a result of the transaction that resulted in the internalization of PKST management in December 2018 (“Self-Administration Transaction”). The Company’s goodwill is assigned to each of the Company’s three reporting units, which are aligned with its three operating segments: Industrial, Office, and Other. We test goodwill for impairment on an annual basis for each reporting unit as of October 1st of each period, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. We perform a qualitative analysis to determine whether a potential impairment of goodwill exists prior to quantitatively estimating the fair value of each reporting unit. If an impairment exists, we recognize an impairment of goodwill based on the excess of the reporting unit’s carrying value compared to its fair value, up to the amount of goodwill for that reporting unit. Under the quantitative assessment, we focus on the fair value of real estate assets and mortgage loans, as those comprise the significant components of fair value within each reporting unit. The analysis involves estimates around significant assumptions such as market rent, discount rates, terminal capitalization rates, and borrowing rates.
As a result of the qualitative and quantitative assessment as of October 1, 2023, the Company concluded that it was more likely than not that the fair value of the Other reporting unit was less than the carrying amount. The impairment resulted from a decline in fair value of certain underlying properties within the Other reporting unit, particularly as we continue to execute on our strategic disposition plan under current market conditions. Thus, the Company recorded a $16.0 million impairment of goodwill allocated to its Other reporting unit. Refer to Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our consolidated financial statements included in this Annual Report on Form 10-K for details.
As of December 31, 2023, the Company’s goodwill balance was $78.6 million, of which $68.4 million was allocated to the Industrial segment and $10.3 million was allocated to the Other segment. Refer to Note 14, Segment Reporting, for allocation of goodwill for each of the Company’s segments.
Funds from Operations and Adjusted Funds from Operations
Our reported results are presented in accordance with GAAP. We also disclose Funds from Operations (“FFO”) and Adjusted Funds from Operations (“AFFO”) both of which are non-GAAP financial measures. We believe these two non-GAAP financial measures are useful to investors because they are widely accepted industry measures used by analysts and investors to compare the operating performance of REITs.
We compute FFO in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable real estate assets, adding back impairment write-downs of depreciable real estate assets, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred dividends. Because FFO calculations exclude such items as depreciation and amortization of depreciable real estate assets and gains and losses from sales of depreciable real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than we do, making comparisons less meaningful.
Additionally, we use AFFO as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of share-based compensation net, deferred rent, amortization of in-place lease valuation, acquisition or investment-related costs, financed termination fee, net of payments received, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, write-off transaction costs and other one-time transactions. FFO and AFFO have been revised to include amounts available to both common shareholders and limited partners for all periods presented.
AFFO is a measure used among our peer group. We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.
Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current dividend level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay or sustain dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities.
For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to net income (loss) are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund the payment of dividends since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. The use of AFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. FFO and AFFO should not be viewed as a more prominent measure of performance than net income (loss) and each should be reviewed in connection with GAAP measurements.
Neither the SEC, NAREIT, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, NAREIT may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Our calculation of FFO and AFFO is presented in the following table for the years ended December 31, 2023, 2022 and 2021 (in thousands, except per share amounts):
Year Ended December 31,
2023 2022 2021
Net (loss) income $ (605,102) $ (441,382) $ 11,570
Adjustments:
Depreciation of building and improvements 72,273 113,191 125,388
Amortization of leasing costs and intangibles 40,318 77,926 84,598
Impairment provision, real estate 409,511 127,577 4,242
Equity interest of depreciation of building and improvements - unconsolidated entities 24,623 4,643 -
(Gain) Loss from disposition of assets, net (29,164) 139,280 326
Company's share of loss on sale of unconsolidated entity - 3,558 (8)
FFO $ (87,541) $ 24,793 $ 226,116
Dividends to redeemable preferred shareholders (2,375) (10,063) (9,698)
Preferred units redemption charge (4,970) - -
FFO attributable to common shareholders and partners $ (94,886) $ 14,730 $ 216,418
Reconciliation of FFO to AFFO:
FFO attributable to common shareholders and partners $ (94,886) $ 14,730 $ 216,418
Adjustments:
Revenues in excess of cash received, net (7,953) (15,407) (10,780)
Amortization of share-based compensation 10,063 9,573 7,470
Deferred rent - ground lease 1,724 1,951 2,064
Amortization of above/(below) market rent, net (1,240) (2,205) (1,323)
Amortization of debt premium/(discount), net 419 409 409
Amortization of below tax benefit amortization 1,494 1,494 1,252
Amortization of deferred financing costs 3,632 3,544 3,184
Amortization of lease inducements 150 537 278
Company's share of amortization of deferred financing costs- unconsolidated entity 31,061 3,740 -
Amortization of ground leasehold interests (389) (372) (350)
Loss on debt breakage costs - write-off of deferred financing costs - 1,771 -
Company's share of revenues in excess of cash received (straight-line rents) - unconsolidated entity (2,207) (257) -
Unrealized loss (gain) on investments 17 195 (15)
Company's share of amortization of above/(below) market rent - unconsolidated entity (532) (58) -
Employee separation expense 4,096 72 777
Write-off of reserve liability - - (1,166)
Write-off of transaction costs 115 28 65
Transaction expenses 24,982 22,386 966
Impairment provision, goodwill 16,031 135,270 -
Debt breakage costs - 13,249 -
Preferred unit redemption charge 4,970 - -
Other income - proration adjustments for dispositions (1,587) - -
Impairment provision, investment in unconsolidated entity 129,334 - -
Write off of Company’s proportionate share of other comprehensive income - unconsolidated entity (1,226) - -
AFFO available to common shareholders and partners $ 118,068 $ 190,650 $ 219,249
FFO per share, basic and diluted $ (2.40) $ 0.37 $ 5.71
AFFO per share, basic and diluted $ 2.99 $ 4.81 $ 5.79
Weighted-average common shares outstanding - basic and diluted EPS 35,988,231 36,057,825 34,361,208
Weighted-average OP Units 3,472,770 3,537,654 3,537,654
Weighted-average common shares and OP Units outstanding - basic and diluted FFO/AFFO 39,461,001 39,595,479 37,898,862
NOI and Cash NOI
Net operating income is a non-GAAP financial measure calculated as net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP, excluding equity in the earnings of our unconsolidated real estate joint ventures, general and administrative expenses, interest expense, depreciation and amortization, impairment of real estate, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, investment income or loss and termination income. Net operating income on a cash basis (“Cash NOI”) is net operating income adjusted to exclude the effect of straight-line rent and amortization of acquired above- and below-market lease intangibles adjustments required by GAAP. We believe that NOI and Cash NOI are helpful to investors as additional measures of operating performance because we believe they help both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and non-cash depreciation and amortization. NOI and Cash NOI are unlevered operating performance metrics of our properties and allow for a useful comparison of the operating performance of individual assets or groups of assets. These measures thereby provide an operating perspective not immediately apparent from GAAP income from operations or net income. In addition, NOI and Cash NOI are considered by many in the real estate industry to be useful starting points for determining the value of a real estate asset or group of assets.
Because NOI and Cash NOI exclude depreciation and amortization and capture neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations, the utility of NOI and Cash NOI as measures of our performance is limited. Therefore, NOI and Cash NOI should not be considered as alternatives to net (loss) income, as computed in accordance with GAAP. NOI and Cash NOI may not be comparable to similarly titled measures of other companies.
Our calculation of each of NOI and Cash NOI is presented in the following table for the year ended December 31, 2023, 2022 and 2021 (dollars in thousands):
Year Ended December 31,
2023 2022 2021
Reconciliation of Net (Loss) Income to Total NOI
Net (loss) income $ (605,102) $ (441,382) $ 11,570
General and administrative expenses 42,962 38,995 39,051
Corporate operating expenses to affiliates 1,154 1,349 2,520
Impairment provision, real estate 409,512 127,577 4,242
Impairment provision, goodwill 16,031 135,270 -
Depreciation and amortization 112,204 190,745 209,638
Interest expense 65,623 84,816 85,087
Debt breakage costs - 13,249 -
Other expense (income), net (13,111) 943 (93)
Loss (income) from investment in unconsolidated entities 176,767 9,993 (8)
Loss (gain) from disposition of assets (29,164) 139,280 326
Transaction expense 24,982 22,386 966
Total NOI $ 201,858 $ 323,221 $ 353,299
Year Ended December 31,
2023 2022 2021
Cash NOI Adjustments
Industrial:
Industrial NOI $ 49,649 $ 53,477 $ 52,125
Straight-line rents (344) (1,018) (1,700)
Amortization of acquired lease intangibles (384) (369) (345)
Deferred termination income (24) (39) -
Industrial Cash NOI 48,897 52,051 50,080
Office:
Office NOI 118,439 230,967 260,255
Straight-line rents (9,046) (12,207) (12,171)
Amortization of acquired lease intangibles (306) (1,346) (231)
Deferred ground lease 1,739 1,945 2,066
Other intangible amortization 1,494 1,495 1,252
Inducement amortization 150 537 278
Office Cash NOI 112,470 221,391 251,449
Other NOI 33,770 38,777 40,919
Straight-line rents 1,461 634 313
Amortization of acquired lease intangibles (549) (489) (749)
Deferred termination income - (2,779) 2,779
Deferred ground lease (15) 5 (3)
Other Cash NOI 34,667 36,148 43,259
Total Cash NOI $ 196,034 $ 309,590 $ 344,788
Liquidity and Capital Resources
Overview
Property rental income is our primary source of operating cash flow and is dependent on a number of factors including occupancy levels and rental rates, as well as the ability and willingness of our tenants’ to pay rent. Our assets provide a relatively consistent level of cash flow that enables us to pay operating expenses, dividends to shareholders, and for the payment of debt service on our outstanding indebtedness, including repayment of our KeyBank Loans (as defined below) and property-secured mortgage loans. Generally, we anticipate that cash needs will be met from cash on hand, funds from operations, our existing Credit Facility, or other financings. We anticipate these funds will be adequate to fund our business operations, debt amortization, capital expenditures, dividends and other requirements both in the short-term and long-term.
In August 2023, we entered into an at-the-market equity offering (the “ATM”) pursuant to which we may sell common shares up to an aggregate purchase price of $200.0 million. We may sell such shares in amounts and at times to be determined by us from time to time, but we have no obligation to sell any of the shares. Actual sales, if any, will depend on a variety of factors to be determined by us from time to time, including, among other things, market conditions, the trading price of our common shares, capital needs, and our determinations of the appropriate sources of funding. During the year ended December 31, 2023, we did not sell shares under the ATM program.
Financing Activities
AIG Debt Amendment
The Company’s subsidiaries previously entered into the AIG loans with AIG. All of the mortgaged properties under the AIG Loans constitute Other segment properties of the Company. On December 22, 2023, the Company and AIG entered into an agreement that is intended to facilitate the disposition of the mortgaged properties under the AIG Loans, without regard to the original release prices, and support the repayment of both AIG Loans. The agreement did not result in any changes to the loan amounts, interest rate or term.
Second Amended and Restated Credit Agreement
Pursuant to the Second Amended and Restated Credit Agreement dated as of April 30, 2019 (as amended by the First Amendment to the Second Amended and Restated Credit Agreement dated as of October 1, 2020 (the “First Amendment”), the Second Amendment to the Second Amended and Restated Credit Agreement dated as of December 18, 2020 (the “Second Amendment”), the Third Amendment to the Second Amended and Restated Credit Agreement dated as of July 14, 2021 (the “Third Amendment”), the Fourth Amendment to the Second Amended and Restated Credit Agreement dated as of April 28, 2022 (the “Fourth Amendment”), the Fifth Amendment to the Second Amended and Restated Credit Agreement dated as of September 28, 2022 (the “Fifth Amendment”), the Sixth Amendment to the Second Amended and Restated Credit Agreement dated as of November 30, 2022 (the “Sixth Amendment”), and the Seventh Amendment to the Amended and Restated Credit Agreement dated as of March 21, 2023 (the “Seventh Amendment”), and together with the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, and the Sixth Amendment, the “Second Amended and Restated Credit Agreement”)), with KeyBank National Association (“KeyBank”) as administrative agent, and a syndicate of lenders, the Operating Partnership, as the borrower, has been provided with a $1.3 billion credit facility consisting of (i) a $750.0 million senior unsecured revolving credit facility (the “Revolving Credit Facility”), under which the Company has drawn $400 million (the “Revolving Loan”), maturing on March 30, 2024 (with two extension options to January 31, 2026, subject to the satisfaction of certain customary conditions, the first of which the Company exercised subsequent to year-end as described below), (ii) a $400.0 million senior unsecured term loan maturing in December 2025 (the “$400M 2025 5-Year Term Loan”), and (iii) a $150.0 million senior unsecured term loan maturing in April 2026 (the “$150M 2026 7-Year Term Loan”) and, together with the Revolving Credit Facility and the $400M 2025 5-Year Term Loan, the “KeyBank Loans”). The Second Amended and Restated Credit Agreement also provides the option, subject to obtaining additional commitments from lenders and certain other customary conditions, to increase the commitments under the Revolving Credit Facility, to increase the existing term loans and/or incur new term loans by up to an additional $1.0 billion in the aggregate. As of December 31, 2023, the available undrawn capacity under the Revolving Credit Facility was $159.1 million.
The Second Amended and Restated Credit Agreement requires that the Operating Partnership maintain a pool of unencumbered real properties (each a “Pool Property” and collectively the “Pool Properties”) that meet certain requirements contained in the Second Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement sets forth certain covenants relating to the Pool Properties, including, without limitation:
•there must be no less than 15 Pool Properties at any time;
•no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;
•no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
•no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development or assets under renovation; and
•the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%.
Borrowing availability under the Revolving Credit Facility is limited to the lesser of the maximum amount of all loans outstanding that would result in (i) an unsecured leverage ratio of no greater than 60%, or (ii) an unsecured interest coverage ratio of no less than 2.00:1.00.
Guarantors of the KeyBank Loans include the Company, each special purpose entity that owns a Pool Property, and each of the Operating Partnership's other subsidiaries which owns a direct or indirect equity interest in a SPE that owns a Pool Property.
In addition to customary representations, warranties, covenants, and indemnities, the Second Amended and Restated Credit Agreement requires the Operating Partnership to comply with the following, which will be tested on a quarterly basis:
•a maximum consolidated leverage ratio of 60%, or, the ratio may increase, on two occasions, to 65% for up to four consecutive quarters after a material acquisition;
•a minimum consolidated tangible net worth of not less than the sum of (i) $1,000,000,000.00, plus (ii) (A) seventy-five percent (75%) of the net proceeds (gross proceeds less reasonable and customary costs of sale and issuance paid to persons not affiliates of any credit party) received by the Company or the Operating Partnership at any time from the issuance of shares (whether common, preferred or otherwise), after the effective date of the Seventh Amendment, plus (B) seventy-five percent (75%) of the amount of OP Units of the Operating Partnership issued after the effective date of the Seventh Amendment, minus (iii) seventy-five percent (75%) of the amount of any payments that are used to redeem shares (whether common, preferred or otherwise) of the Company or the Operating Partnership or to redeem OP Units after the effective date of the Seventh Amendment, minus (iv) any amounts paid for the redemption or retirement of, or any accrued return on, the preferred equity held by SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13 (H) (the “Preferred Holder”);
•a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00;
•a maximum total secured debt ratio of not greater than 40%, which ratio may increase, on two occasions, to 45% for four consecutive quarters after closing of a material acquisition that is financed with secured debt;
•a minimum unsecured interest coverage ratio of 2.00:1.00;
•a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value;
•aggregate maximum unhedged variable rate debt of not greater than 30% of the Company's total asset value; and
•a maximum unsecured leverage ratio of 60%, or, the ratio may increase, on two occasions, up to 65% for up to four consecutive quarters after a material acquisition.
Furthermore, the activities of the Operating Partnership, the Company, and the Company's subsidiaries must be focused principally on the ownership, development, operation and management of office, industrial, manufacturing, warehouse, distribution or educational properties (or mixed uses thereof) and businesses reasonably related or ancillary thereto.
As of December 31, 2023, the Revolving Loan Maturity Date was March 30, 2024. On February 12, 2024, the Company exercised an option to extend the Revolving Loan Maturity Date, which upon satisfaction or waiver of certain customary conditions, will extend to June 30, 2024.
Derivative Instruments
As discussed in Note 6, Interest Rate Contracts, to the consolidated financial statements, we entered into interest rate swap agreements (collectively, “Interest Rate Swaps”) to hedge the variable cash flows associated with variable-rate debt, including our Second Amended and Restated Credit Agreement. The effective portion of changes in the fair value of the Interest Rate Swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Interest Rate Swaps were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of debt. The ineffective portion of the change in the fair value of the Interest Rate Swaps is recognized directly in earnings.
The following table sets forth a summary of the Interest Rate Swaps at December 31, 2023 and December 31, 2022 (dollars in thousands):
Fair Value (1)
Current Notional Amount
December 31, December 31,
Derivative Instrument Effective Date Maturity Date Interest Strike Rate 2023 2022 2023 2022
Assets/(Liabilities)
Interest Rate Swap 3/10/2020 7/1/2025 0.83% $ 7,891 $ 12,391 $ 150,000 $ 150,000
Interest Rate Swap 3/10/2020 7/1/2025 0.84% 5,250 8,244 100,000 100,000
Interest Rate Swap 3/10/2020 7/1/2025 0.86% 3,915 6,145 75,000 75,000
Interest Rate Swap 7/1/2020 7/1/2025 2.82% 2,924 4,331 125,000 125,000
Interest Rate Swap 7/1/2020 7/1/2025 2.82% 2,331 3,444 100,000 100,000
Interest Rate Swap 7/1/2020 7/1/2025 2.83% 2,327 3,441 100,000 100,000
Interest Rate Swap 7/1/2020 7/1/2025 2.84% 2,304 3,408 100,000 100,000
Total $ 26,942 $ 41,404 $ 750,000 $ 750,000
(1) We record all derivative instruments on a gross basis in the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of December 31, 2023, derivatives that were in an asset or/liability position are included in the line item “Other assets or Interest rate swap liability,” respectively, in the consolidated balance sheets at fair value.
Common Equity
Distribution Reinvestment Plan
Prior to the Listing, the Company had adopted a distribution reinvestment plan (the “DRP”). On July 17, 2020, we filed a registration statement on Form S-3 (the “DRP Registration Statement”) for the registration of up to $100 million in common shares pursuant to the DRP. On October 1, 2021, we announced a suspension of our DRP, effective October 11, 2021. As of December 31, 2023, we had sold 3,946,642 common shares for approximately $341.1 million under our DRP Offering. On April 26, 2023, the Board approved a termination of the DRP, effective May 15, 2023. On May 22, 2023, we filed a post-effective amendment to the DRP Registration Statement to deregister all of the common shares registered for sale that were not sold pursuant to the DRP Registration Statement.
Share Redemption Program
Prior to the Listing, the Company had adopted a share redemption program (“SRP”) that enabled shareholders to sell their shares to the Company in limited circumstances. The SRP was suspended on October 1, 2021 but resumed on a limited basis (i.e., limited to redemptions in connection with a holder’s death, disability or incompetence) on August 5, 2022 with quarterly redemptions capped at $5.0 million. In addition, pursuant to the terms of the SRP, during any calendar year, with respect to each share class, the Company was permitted to redeem no more than 5% of the weighted average number of shares of such class outstanding during the prior calendar year. Under the SRP the Company would redeem shares as of the last business day of each quarter at a price equal to the most recently published NAV per share for the applicable class prior to quarter end. During the year ended December 31, 2023, the Company redeemed 941 shares. The SRP was suspended again on March 7, 2023 and terminated in connection with the Listing.
Perpetual Convertible Preferred Shares
Prior to the Listing, the Company redeemed the only preferred shares being the 5,000,000 shares of Series A Cumulative Perpetual Convertible Preferred Shares (the “Series A Preferred Shares”) held by SHBNPP Global Professional Investment Type Private Real Estate Trust No. 13(H) (the “Preferred Holder”) in exchange for a redemption payment of $125.0 million, plus accumulated and unpaid dividends of $2.4 million (the “Preferred Redemption”).
The Preferred Holder initially purchased the 5,000,000 Series A Preferred Shares at a price of $25.00 per share pursuant to that certain purchase agreement (the “Purchase Agreement”) that our Predecessor entered into on August 8, 2018 with the Preferred Holder (acting through Kookmin Bank as trustee) and Shinhan BNP Paribas Asset Management Corporation, as an asset manager of the Preferred Holder.
On April 10, 2023, the Company entered into a Redemption Agreement (the “Redemption Agreement”) with the Preferred Holder and Shinhan Asset Management Co., Ltd.
Pursuant to the Redemption Agreement, the Company effectuated the Preferred Redemption in accordance with the Articles Supplementary filed by the Company on April 30, 2019 (the “Articles Supplementary”). The Preferred Holder agreed to waive the Redemption Fee (as defined in the Articles Supplementary) in the amount of $1.9 million and any other payments in connection with the Series A Preferred Shares. The Redemption Agreement also terminated the Purchase Agreement, and provided that any rights and privileges afforded to the Preferred Holder under the Purchase Agreement were terminated and canceled and of no further force or effect, and no party to the Purchase Agreement has any further obligations thereunder.
Additionally, the Company had $5.0 million of capitalized offering costs related to the initial issuance of the Series A Preferred Shares, which were previously recorded to equity and were written off during the year as a non-cash expense to preferred units redemption charge on the statement of operations.
During the year ended December 31, 2023, the Company paid dividends in quarterly arrears at a rate of $2.4 million. As of December 31, 2023, no further dividends to the holders of the Series A Preferred Shares were due in light of the Preferred Redemption.
Other Potential Future Sources of Capital
Other potential future sources of capital include proceeds from potential private or public offerings of our shares or OP Units, proceeds from secured or unsecured financings from banks or other lenders, including debt assumed in a real estate transaction, proceeds from the sale of properties and undistributed funds from operations, and entering into joint venture arrangements to invest in assets. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon our current financing and income from operations.
Liquidity Requirements
Our principal liquidity needs for the next 12 months and in the longer term are to fund:
•normal operating expenses;
•payment of debt service on outstanding indebtedness; including any maturing debt that we may be unable to refinance on attractive terms or at all;
•capital expenditures, including tenant improvements and leasing costs;
•dividends to common shareholders, and distributions to holders of OP Units; and
•possible acquisition of, or investment in, assets.
We expect to meet our long-term liquidity requirements through various sources of capital as described above. The success of our business strategy will depend, to a significant degree, on our ability to access these various capital sources.
To qualify as a REIT, we must meet a number of organizational and operational requirements on a continuing basis, including the requirement that we annually distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gain, to our shareholders. As a result of this requirement, we cannot rely on retained earnings to fund our business needs to the same extent as other entities that are not REITs. If we do not have sufficient funds available to us from our operations to fund our business needs, we will need to find alternative ways to fund those needs. Such alternatives may include, among other things, divesting ourselves of properties (whether or not the sales price is optimal or otherwise meets our strategic long-term objectives), incurring additional indebtedness or issuing equity securities in public or private transactions, the availability and attractiveness of the terms of which cannot be assured.
Cash Requirements
The Company’s material cash requirements as of December 31, 2023 including the following contractual obligations are as follows (in thousands):
Payments Due During the Years Ending December 31,
2024 Thereafter Total
Outstanding debt obligations (1)
$ 34,181 $ 1,407,364 $ 1,441,545
Interest on outstanding debt obligations (2)
85,882 143,702 229,584
Ground lease obligations 2,294 260,822 263,116
Total(3)
$ 122,357 $ 1,811,888 $ 1,934,245
(1)Amounts only include principal payments. The payments on our mortgage debt do not include the premium/discount or debt financing costs.
(2)Projected interest payments are based on the outstanding principal amounts at December 31, 2023. Projected interest payments on the Credit Facility and Term Loan are based on the contractual interest rates in effect at December 31, 2023.
Capital Expenditures and Tenant Improvement Commitments
As of December 31, 2023, we had aggregate remaining contractual commitments for repositioning, capital expenditure projects, leasing commitments and tenant improvements of approximately $15.7 million.
Summary of Cash Flows
We expect to meet our short-term operating liquidity requirements with operating cash flows generated from our properties and draws from our Revolving Credit Facility.
Comparison of the cash flow activity for the year ended December 31, 2023 to December 31, 2022 is as follows (in thousands):
Year Ended December 31,
2023 2022 Change
Net cash provided by operating activities $ 89,152 $ 152,676 $ (63,524)
Net cash provided by investing activities $ 308,555 $ 1,098,343 $ (789,788)
Net cash used in financing activities $ (234,641) $ (1,199,215) $ 964,574
Cash and cash equivalents and restricted cash were $401.0 million and $237.9 million, respectively.
Operating Activities. Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions of and/or other investments in properties. During the year ended December 31, 2023, we generated $89.2 million in cash from operating activities compared to $152.7 million for the year ended December 31, 2022. The decrease in cash from operating activities for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to the reduction in operating cash flow from the disposition of 59 properties in 2022 and 2023.
Investing Activities. Cash provided by investing activities for the years ended December 31, 2023 and 2022 consisted of the following (in thousands):
Year Ended December 31,
2023 2022 Increase (decrease)
Net cash provided by investing activities:
Proceeds from disposition of properties $ 325,160 $ 1,120,803 $ (795,643)
Sale of investment in unconsolidated entities - 31,000 (31,000)
Total sources of cash provided by investing activities $ 325,160 $ 1,151,803 $ (826,643)
Uses of cash for investing activities:
Restricted reserves $ - $ (266) $ 266
Payments for construction in progress (16,323) (17,494) 1,171
Purchase of investment in unconsolidated entities - (34,558) 34,558
Purchase of investments (282) (1,142) 860
Total sources of cash (used in) provided by investing activities $ (16,605) $ (53,460) $ 36,855
Net cash (used in) provided by investing activities $ 308,555 $ 1,098,343 $ (789,788)
Financing Activities. Cash used in financing activities for the years ended December 31, 2023 and 2022 consisted of the following (in thousands):
Year Ended December 31,
2023 2022 Increase (decrease)
Sources of cash provided by financing activities:
Proceeds from borrowings - Revolving Loan $ 400,000 $ - $ 400,000
Total sources of cash provided by financing activities $ 400,000 $ - $ 400,000
Uses of cash (used in) provided by financing activities:
Principal payoff of secured indebtedness - Mortgage Debt $ (41,283) $ (469,777) $ 428,494
Principal pay down of indebtedness - Revolving Loan - (373,500) 373,500
Principal payoff of indebtedness - Term Loan (400,000) (200,000) (200,000)
Principal amortization payments on secured indebtedness (6,973) (8,736) 1,763
Repurchase of common shares to satisfy employee tax withholding requirements (2,625) (3,189) 564
Redemption of preferred units (125,000) - (125,000)
Repurchase of common shares (4,443) (5,617) 1,174
Dividends to common shareholders (40,807) (114,110) 73,303
Dividends paid on preferred units subject to redemption (4,891) (10,063) 5,172
Dividends to noncontrolling interests (3,974) (11,136) 7,162
Deferred financing costs (3,530) (2,724) (806)
Offering costs (796) (43) (753)
Financing lease payment (319) (320) 1
Total sources of cash (used in) provided by financing activities $ (634,641) $ (1,199,215) $ 564,574
Net cash (used in) provided by financing activities $ (234,641) $ (1,199,215) $ 964,574
Dividends
Dividends will be authorized at the discretion of our Board and be paid to our shareholders as of the record date selected by our Board. We expect to pay dividends on a quarterly basis unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. The funds we receive from operations that are available to pay dividends may be affected by a number of factors, including the following:
•our operating and interest expenses;
•our ability to sell properties;
•our ability to keep our properties occupied;
•our ability to maintain or increase rental rates;
•tenant improvements and capital expenditures;
•the issuance of additional shares; and
•financings, refinancings, debt repayment and limitations on dividends under our KeyBank Loans, property secured mortgages, or other debt.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk to which we believe we may be exposed is interest rate risk, including the risk of changes in the underlying rates on our variable rate debt, which may result from factors that are beyond our control. Our current indebtedness consists of the KeyBank loans and other loans and property secured mortgages as described in Note 5, Debt, to our consolidated financial statements included in this Annual Report on Form 10-K. These instruments were not entered into for trading purposes.
We may utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts. We will not enter into these financial instruments for speculative purposes. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.
As of December 31, 2023, our debt consisted of approximately $1.2 billion in fixed rate debt (including the effect of interest rate swaps) and approximately $200.0 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $5.6 million). As of December 31, 2022, our debt consisted of approximately $1.3 billion in fixed rate debt (including the effect of interest rate swaps) and approximately $200.0 million in variable rate debt (excluding unamortized deferred financing cost and discounts, net, of approximately $4.4 million). Changes in interest rates have different impacts on the fixed and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no effect on interest incurred or cash flows. A change in interest rates on variable rate debt could affect the interest incurred and cash flows and its fair value.
Our future earnings and fair values relating to variable rate financial instruments are primarily dependent upon prevalent market rates of interest, such as SOFR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. The effect of an increase of 100 basis points in interest rates, assuming a SOFR floor of 0%, on our variable-rate debt, including our KeyBank loans, after considering the effect of our interest rate swap agreements, would decrease our future earnings and cash flows by approximately $2.0 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data filed as part of this Annual Report on Form 10-K are set forth 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
As of the end of the period covered by this Annual Report on Form 10-K, management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our management, including our chief executive officer and chief financial officer, evaluated, as of December 31, 2023, the effectiveness of our internal control over financial reporting using the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2023.
The effectiveness of our internal control over financial reporting as of December 31, 2023 has been audited by Ernst & Young LLP, an independent accounting firm, as stated in its report, which is included herein.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
During the three months ended December 31, 2023, no trustee or officer of the Company adopted or terminated a “Rule 10b5-1 trading agreement” or “non-Rule 10b5-1 trading agreement,” each term as defined in Item 408(a) of Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to the 2024 Proxy Statement to be filed within 120 days after the end of the year ended December 31, 2023.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the 2024 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2023.

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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 this item is incorporated herein by reference to the 2024 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2023.

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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 this item is incorporated herein by reference to the 2024 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2023.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to the 2024 Proxy Statement to be filed with the SEC within 120 days after the end of the year ended December 31, 2023.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Documents Filed.
1. The list of the financial statements contained herein is set forth on page hereof.
2. Schedule III - Real Estate and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
3. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index below.
(b) See (a) 3 above.
(c) See (a) 2 above.
EXHIBIT INDEX
The following exhibits are included in this Annual Report on Form 10-K for the year ended December 31, 2023 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No. Description
2.1
Agreement and Plan of Merger, dated as of October 29, 2020, by and among Griffin Capital Essential Asset REIT, Inc., GRT (Cardinal REIT Merger Sub), LLC, Griffin Capital Essential Asset Operating Partnership, L.P., GRT OP (Cardinal New GP Sub), LLC, GRT OP (Cardinal LP Merger Sub), LLC, GRT OP (Cardinal OP Merger Sub), LLC, Cole Office & Industrial REIT (CCIT II), Inc., Cole Corporate Income Operating Partnership II, LP and CRI CCIT II LLC (incorporated by reference to Annex A to the Proxy Statement/Prospectus that is part of the Registration Statement on Form S-4, filed on November 25, 2020, SEC File No. 333-250962)
2.2
Agreement and Plan of Merger, dated as of December 14, 2018, by and among Griffin Capital Essential Asset REIT II, Inc., Griffin Capital Essential Asset Operating Partnership II, L.P., Globe Merger Sub, LLC, Griffin Capital Essential Asset REIT, Inc. and Griffin Capital Essential Asset Operating Partnership, L.P., incorporated by reference to Exhibit 2.1 to the Registrant's Current on Form 8-K, filed on December 20, 2018, SEC File No. 000-55605
3.1
Declaration of Trust, incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on January 20, 2023, SEC File No. 000-55605
3.2
Articles of Amendment to Declaration of Trust, incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on March 10, 2023, SEC File No. 000-55605
3.3
Articles of Amendment to Declaration of Trust, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on April 17, 2023, SEC File No. 001-41686
3.4
Second Amended and Restated Bylaws, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on March 20, 2023, SEC File No. 000-55605
4.1*
Description of Securities
10.1+*
Peakstone Realty Trust Second Amended and Restated Employee and Trustee Long-Term Incentive Plan
10.2
Eighth Amended and Restated Limited Partnership Agreement of PKST OP, L.P., dated April 13, 2023, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on April 13, 2023, SEC File No. 000-55605
10.3
Second Amended and Restated Credit Agreement dated April 30, 2019, incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K, filed on May 2019, SEC File No. 000-55605
10.4
First Amendment to Second Amended and Restated Credit Agreement dated October 1, 2020, by and among Griffin Capital Essential Asset Operating Partnership, L.P., the lending institutions party thereto as lenders and KeyBank, National Association, as administrative agent, incorporated by reference to Exhibit 10.1 the Registrant’s Quarterly Report on Form 10-Q, filed on November 9, 2020, SEC File No. 000-55605
10.5
Second Amendment to Second Amended and Restated Credit Agreement dated December 18, 2020, by and among Griffin Capital Essential Asset Operating Partnership, L.P., the lending institutions party thereto as lenders and KeyBank, National Association, as administrative agent, incorporated by reference to Exhibit the Registrant’s Current Report on Form 8-K, filed on December 23, 2020, SEC File No. 000-55605
10.6
Third Amendment to Second Amendment and Restated Credit Agreement dated July 14, 2021, by and among Griffin Realty Trust, GRT OP, L.P., and the subsidiary guarantors party thereto, the lending institutions party thereto as lenders and KeyBank National Association, as administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on July 16, 2021, SEC File No. 000-555605
10.7
Fourth Amendment to Second Amended and Restated Credit Agreement dated April 28, 2022, by and among Griffin Realty Trust, GRT OP, L.P., the subsidiary guarantors party thereto, the lending institutions party thereto as lenders and KeyBank National Association as administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 8, 2022, SEC File No. 000-555605
10.8
Fifth Amendment to Second Amended and Restated Credit Agreement dated September 28, 2022, by and among Griffin Realty Trust, GRT OP, L.P., the subsidiary guarantors party thereto, the lending institutions party thereto as lenders and KeyBank National Association, as administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 4, 2022, SEC File No. 000-55605
10.9
Sixth Amendment to Second Amended and Restated Credit Agreement dated November 30, 2022, by and among Griffin Realty Trust, GRT OP, L.P., the subsidiary guarantors party thereto, the lending institutions party thereto as lenders and KeyBank National Association, as administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on December 5, 2022, SEC File No. 000-55605
10.10
Seventh Amendment to Second Amended and Restated Credit Agreement dated November March 21, 2023, by and among Peakstone Realty Trust, PKST OP, L.P., the subsidiary guarantors party thereto, the lending institutions party thereto as lenders and KeyBank National Association, as administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on March 24, 2023, SEC File No. 000-55605
10.11
Guaranty Agreement with KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.12
2026 Term Note payable to KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.7 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.13
Second Amended and Restated Revolving Note payable to KeyBank dated April 30, 2019, incorporated by reference to Exhibit 10.8 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.14
Schedule of Omitted Documents for KeyBank Loan, incorporated by reference to Exhibit 10.10 to the Registrant's Current Report on Form 8-K, filed on May 1, 2019, SEC File No. 000-55605
10.15
2025 Term Note payable to KeyBank, National Association dated December 18, 2020, incorporated by reference to Exhibit 10.2 the Registrant’s Current Report on Form 8-K, filed on December 23, 2020, SEC File No. 000-55605
10.16
Schedule of Omitted Documents for New $400M 5-Year Term Loan, incorporated by reference to Exhibit 10.3 the Registrant’s Current Report on Form 8-K, filed on December 23, 2020, SEC File No. 000-55605
10.17
Amended and Restated Registration Rights Agreement dated August 2, 2023, by and among Peakstone Realty Trust, PKST OP, L.P., and Griffin Capital, LLC, incorporated by reference to Exhibit 10.14 to our Quarterly Report on Form 10-K, filed on November 9, 2023, SEC File No. 001-41686
10.18+
Amended and Restated Employment Agreement, dated March 23, 2023, by and between Peakstone Realty Trust and Michael J. Escalante, incorporated by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q, filed May 9, 2023, SEC File No. 001-41686
10.19+
Amended and Restated Employment Agreement, dated March 23, 2023, by and between Peakstone Realty Trust and Javier F. Bitar, incorporated by reference to Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q, filed May 9, 2023, SEC File No. 001-41686
10.20+
Amended and Restated Employment Agreement, dated March 23, 2023, by and between Peakstone Realty Trust and Nina Momtazee Sitzer, incorporated by reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q, filed May 9, 2023, SEC File No. 001-41686
10.21*
Amendment No. 1 to Amended and Restated Employment Agreement, dated November 14, 2023, by and between Peakstone Realty Trust and Michael J. Escalante
10.22+*
Amendment No. 1 to Amended and Restated Employment Agreement, dated November 14, 2023, by and between Peakstone Realty Trust and Javier F. Bitar
10.23+*
Amendment No. 1 to Amended and Restated Employment Agreement, dated November 14, 2023, by and between Peakstone Realty Trust and Nina Momtazee Sitzer
10.24+
Form of Employment Agreement for Other Officers dated December 14, 2018, incorporated by reference to Exhibit 10.7 to our Predecessor’s Current Report on Form 8-K, filed on December 20, 2018, SEC File No. 000-54377
10.25+
Form of One-Time Restricted Stock Unit (NEOs) dated March 25, 2021, incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 7, 2021, SEC File No. 000-55605
10.26+
Form of One-Time Restricted Stock Unit Agreement (Employees) dated March 25, 2021, incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 7, 2021, SEC File No. 000-55605
10.27+
Form of One-Time Restricted Stock Unit Agreement (Director) dated March 25, 2021, incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q, filed on May 7, 2021, SEC File No. 000-55605
10.28+*
Form of Time-Based Restricted Stock Unit Agreement (NEOs) dated August 5, 2022
10.29+*
Form of Time-Based Restricted Stock Unit Agreement (Employees) dated August 5, 2022
10.30+*
Form of Time-Based Restricted Share Unit Agreement (NEOs) dated March 23, 2023
10.31+*
Form of Time-Based Restricted Stock Unit Agreement (Employees) dated March 23, 2023
10.32+*
Form of Restricted Share Award Agreement (Non-Employee Trustees) dated June 20, 2023
10.33+*
Form of Time-Based Restricted Stock Unit Agreement (NEOs) for 2024
10.34+*
Form of Time-Based Restricted Stock Unit Agreement (Employees) for 2024
10.35+
Separation and Consulting Agreement, dated as of June 22, 2023, by and among Peakstone Realty Trust, PKST OP, L.P., Griffin Capital Real Estate Company, LLC and Scott Tausk, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on June 23, 2023, SEC File No. 001-41686
10.36+*
Separation Agreement, dated as of December 29, 2023, by and among Peakstone Realty Trust, PKST OP, L.P., PKST Management Company, LLC and Louis K. Sohn
10.37
Redemption Agreement dated April 10, 2023, by and among Peakstone Realty Trust, SH Global Private Real Estate Trust No. 13(H) and Shinhan Asset Management Co., Ltd., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on April 11, 2023, SEC File No. 000-55605
10.38
Sublease executed March 25, 2022, by and between Griffin Capital Company, LLC and Griffin Realty Trust, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 31, 2022, SEC File No. 000-55605
10.39
Purchase and Sale Agreement dated August 26, 2022, by and between the Office Buyers and the GRT Sellers, incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed on September 1, 2022, SEC File No. 000-55605
10.40
Joint Venture and Limited Liability Company Agreement of NVO Promote LLC, dated August 26, 2022, by and between GRT VAO OP, LLC and RVMC Capital LLC, incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K, filed on September 1, 2022, SEC File No. 000-55605
10.41*
Form of Indemnification Agreement
14.1*
Code of Business Conducts and Ethics
21.1*
Subsidiaries of Peakstone Realty Trust
23.1*
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
31.1*
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2**
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
97.1*
Policy for Recovery of Erroneously Awarded Compensation
101* The following Peakstone Realty Trust financial information for the period ended December 31, 2023 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
*
Filed herewith.
**
Furnished herewith.
+
Management contract, compensatory plan or arrangement filed in response to Item 15(a)(3) of Form 10-K.