Lease Expirations
The table below reflects our consolidated in-service portfolio lease expiration schedule at June 30, 2022 (in thousands, except percentage data and number of leases):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Consolidated Portfolio | | Industrial | | Non-Reportable |
Year of Expiration | Square Feet | | Annual Rental Revenue* | | Number of Leases | | Square Feet | | Annual Rental Revenue* | | Square Feet | | Annual Rental Revenue* |
Remainder of 2022 | 2,436 | | $ | 12,167 | | | 36 | | 2,431 | | $ | 12,103 | | | 5 | | $ | 64 | |
2023 | 12,403 | | 64,308 | | | 134 | | 12,380 | | 63,985 | | | 23 | | 323 | |
2024 | 14,201 | | 76,568 | | | 152 | | 14,194 | | 76,486 | | | 7 | | 82 | |
2025 | 16,435 | | 92,422 | | | 155 | | 16,430 | | 92,368 | | | 5 | | 54 | |
2026 | 15,766 | | 83,430 | | | 140 | | 15,754 | | 83,281 | | | 12 | | 149 | |
2027 | 20,583 | | 115,028 | | | 113 | | 20,571 | | 114,885 | | | 12 | | 143 | |
2028 | 12,697 | | 94,421 | | | 65 | | 12,578 | | 90,934 | | | 119 | | 3,487 | |
2029 | 10,845 | | 63,245 | | | 45 | | 10,845 | | 63,245 | | | — | | — | |
2030 | 7,677 | | 49,525 | | | 35 | | 7,677 | | 49,525 | | | — | | — | |
2031 | 6,320 | | 48,386 | | | 25 | | 6,305 | | 48,209 | | | 15 | | 177 | |
2032 and Thereafter | 19,892 | | 149,638 | | | 61 | | 19,892 | | 149,638 | | | — | | — | |
Total Leased | 139,255 | | $ | 849,138 | | | 961 | | 139,057 | | $ | 844,659 | | | 198 | | $ | 4,479 | |
| | | | | | | | | | | | | |
Total Portfolio Square Feet | 139,745 | | | | | | 139,534 | | | | 211 | | |
Percent Leased | 99.6 | % | | | | | | 99.7 | % | | | | 93.8 | % | | |
* Annualized rental revenue represents average annual base rental payments, on a straight-line basis for the term of each lease, from space leased to tenants at the end of the most recent reporting period. Annualized rental revenue excludes additional amounts paid by tenants as reimbursement for operating expenses. |
Property Acquisitions
Our decision process in determining whether or not to acquire a property or portfolio of properties involves several factors, including expected rent growth, multiple yield metrics, property locations and expected demographic growth in each location, current occupancy of the properties, tenant profile and remaining terms of the in-place leases in the properties. It is difficult to predict which markets may present acquisition opportunities that align with our strategy. Because of the numerous factors considered in our acquisition decisions, we do not establish specific target yields for future acquisitions.
We acquired two in-service buildings during the six months ended June 30, 2022 and ten buildings during the year ended December 31, 2021. The following table summarizes the acquisition price, percent leased at time of acquisition and in-place yields of property acquisitions (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2022 Acquisitions | | Full Year 2021 Acquisitions |
Type | Fair Value of Acquired Assets* | | In-Place Yield (Mark to Market)** | | Percent Leased at Acquisition Date*** | | Fair Value of Acquired Assets* | | In-Place Yield (Mark to Market)** | | Percent Leased at Acquisition Date*** |
Industrial | $ | 90,472 | | | 2.9 | % | | 75.4 | % | | $ | 609,241 | | | 4.4 | % | | 100.0 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
* Includes fair value of real estate assets and acquired in-place lease intangible assets. |
** In-place yields of completed acquisitions are calculated as the current annualized net rental payments from space leased to tenants at the date of acquisition, including the amortization of above or below market leases, less current annualized operating expenses not recovered through tenant reimbursements, divided by the fair value of the acquired real estate assets. |
*** Represents percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced, at the date of acquisition, including lease-backs with sellers executed in connection with the acquisition(s). |
Building Dispositions
We dispose of properties on a basis that is generally consistent with our strategic plans. Our ability to dispose of properties, from time to time, on favorable terms is a key performance indicator from the perspective of management, as a source of capital to fund future investment. We believe that evaluating our disposition activity is also useful to investors.
We sold five consolidated properties during the six months ended June 30, 2022 and 30 consolidated properties including two trailer storage lots during the year ended December 31, 2021. The following table summarizes the sales prices, in-place yields and percent leased of industrial property dispositions (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year-to-Date 2022 Dispositions | | Full Year 2021 Dispositions |
Type | Sales Price | | In-Place Yield* | | Percent Leased** | | Sales Price | | In-Place Yield* | | Percent Leased** |
Industrial | $ | 358,107 | | | 3.7 | % | | 100.0 | % | | $ | 1,069,120 | | | 4.6 | % | | 100.0 | % |
| | | | | | | | | | | |
* In-place yields of completed dispositions are calculated as annualized net operating income from space leased to tenants at the date of sale on a lease-up basis, including full rent from all executed leases, even if currently in a free rent period, divided by the sales price. Annualized net operating income is comprised of base rental payments, excluding reimbursement of operating expenses, less current annualized operating expenses not recovered through tenant reimbursements. |
** Represents percentage of total square feet leased based on executed leases and without regard to whether the leases have commenced, at the date of sale. |
Development
We expect to generate future earnings from Rental Operations as development properties are placed in service and leased. Development activities, and our ability to lease those developments, are viewed by management as key indicators of future earnings growth and provide useful information to investors for the same reasons.
At June 30, 2022, we had 12.6 million square feet of properties under development with total estimated costs upon completion of $1.95 billion compared to 11.1 million square feet with total estimated costs upon completion of $1.45 billion at June 30, 2021. The square footage includes both consolidated properties and unconsolidated joint venture development activity at 100% while estimated costs include consolidated properties and unconsolidated joint venture development activity at our 50% ownership share.
The following table summarizes our properties under development at June 30, 2022 (in thousands, except percentage data and number of buildings):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ownership Type | Number of Buildings | | Square Feet | | Percent Leased | | Total Estimated Project Costs | | Total Incurred to Date | | Amount Remaining to be Spent |
Consolidated properties | 36 | | 10,902 | | 42.8 | % | | $ | 1,886,609 | | | $ | 907,459 | | | $ | 979,150 | |
Unconsolidated joint venture properties | 3 | | 1,676 | | 69.0 | % | | 65,552 | | | 39,526 | | | 26,026 | |
Total | 39 | | 12,578 | | 46.3 | % | | $ | 1,952,161 | | | $ | 946,985 | | | $ | 1,005,176 | |
Results of Operations
A summary of our operating results and property statistics is as follows (in thousands, except number of properties):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Rental and related revenue | $ | 280,145 | | | $ | 253,971 | | | $ | 555,359 | | | $ | 512,150 | |
| | | | | | | |
Operating income | 121,976 | | | 201,443 | | | 420,905 | | | 308,945 | |
General Partner | | | | | | | |
Net income attributable to common shareholders | $ | 102,470 | | | $ | 175,817 | | | $ | 351,391 | | | $ | 255,179 | |
| | | | | | | |
| | | | | | | |
Partnership | | | | | | | |
Net income attributable to common unitholders | $ | 103,598 | | | $ | 177,555 | | | $ | 354,982 | | | $ | 257,678 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Number of in-service consolidated properties at end of period | 479 | | 481 | | 479 | | 481 |
In-service consolidated square footage at end of period | 139,745 | | 142,046 | | 139,745 | | 142,046 |
Number of in-service unconsolidated joint venture properties at end of period | 43 | | 36 | | 43 | | 36 |
In-service unconsolidated joint venture square footage at end of period | 15,154 | | 10,315 | | 15,154 | | 10,315 |
Supplemental Performance Measures
In addition to net income computed in accordance with GAAP, we assess and measure the overall operating results of the General Partner and the Partnership using certain non-GAAP supplemental performance measures, which include (i) Funds From Operations ("FFO"), (ii) PNOI and (iii) Same-Property Net Operating Income - Cash Basis ("SPNOI").
These non-GAAP metrics are commonly used by industry analysts and investors as supplemental operating performance measures of REITs and are viewed by management to be useful indicators of operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Management believes that the use of FFO, PNOI and SPNOI, combined with net income (which remains the primary GAAP measure of performance), improves the understanding of operating results of REITs among the investing public and makes comparisons of REIT operating results more meaningful.
The most comparable GAAP measure to FFO is net income (loss) attributable to common shareholders or common unitholders, while the most comparable GAAP measure to PNOI and SPNOI is income (loss) before income taxes.
FFO, PNOI and SPNOI each exclude expenses that materially impact our overall results of operations and, therefore, should not be considered as a substitute for net income (loss) attributable to common shareholders or common unitholders, income (loss) before income taxes, or any other measures derived in accordance with GAAP. Furthermore, these metrics may not be comparable to other similarly titled measures of other companies.
Funds From Operations
The National Association of Real Estate Investment Trusts ("Nareit") created FFO as a non-GAAP supplemental measure of REIT operating performance. FFO, as defined by Nareit, represents GAAP net income (loss), excluding gains or losses from sales of real estate assets (including real estate assets incidental to our business) and related taxes, gains and losses from change in control, impairment charges related to real estate assets (including real estate assets incidental to our business) plus certain non-cash items such as real estate asset depreciation and amortization, and after similar adjustments for unconsolidated partnerships and joint ventures. We calculate FFO in accordance with the definition that was adopted by the Board of Governors of Nareit.
Management believes that the use of FFO as a performance measure enables investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT's activity and assists them in comparing these operating results between periods or between different companies that use the Nareit definition of FFO.
The following table shows a reconciliation of net income attributable to common shareholders or common unitholders to the calculation of FFO attributable to common shareholders or common unitholders (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net income attributable to common shareholders of the General Partner | $ | 102,470 | | | $ | 175,817 | | | $ | 351,391 | | | $ | 255,179 | |
Add back: Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership | 1,128 | | | 1,738 | | | 3,591 | | | 2,499 | |
Net income attributable to common unitholders of the Partnership | 103,598 | | | 177,555 | | | 354,982 | | | 257,678 | |
Adjustments: | | | | | | | |
Depreciation and amortization | 93,944 | | | 91,729 | | | 187,945 | | | 185,302 | |
Company share of unconsolidated joint venture depreciation, amortization and other adjustments | 2,999 | | | 2,012 | | | 6,297 | | | 4,269 | |
Gain on sale of properties | (24,832) | | | (95,183) | | | (235,579) | | | (116,543) | |
Gain on land sales | (2,025) | | | (9,900) | | | (3,117) | | | (11,138) | |
Impairment charges | 1,563 | | | — | | | 1,563 | | | — | |
Income tax expense not allocable to FFO | 493 | | | 3,672 | | | 6,823 | | | 8,856 | |
Gains on sales of real estate assets - share of unconsolidated joint ventures | (1,497) | | | (7,360) | | | (1,497) | | | (20,108) | |
FFO attributable to common unitholders of the Partnership | $ | 174,243 | | | $ | 162,525 | | | $ | 317,417 | | | $ | 308,316 | |
Additional General Partner Adjustments: | | | | | | | |
Net income attributable to noncontrolling interests - common limited partnership interests in the Partnership | (1,128) | | | (1,738) | | | (3,591) | | | (2,499) | |
Noncontrolling interest share of adjustments | (731) | | | 149 | | | 379 | | | (492) | |
FFO attributable to common shareholders of the General Partner | $ | 172,384 | | | $ | 160,936 | | | $ | 314,205 | | | $ | 305,325 | |
Property-Level Net Operating Income - Cash Basis
PNOI is comprised of rental revenues less rental expenses and real estate taxes, along with certain other adjusting items. As a performance metric that consists of only the cash-based revenues and expenses directly related to ongoing real estate rental operations, PNOI is narrower in scope than Nareit FFO.
PNOI, as we calculate it, may not be directly comparable to similarly titled, but differently calculated, measures for other REITs. We believe that PNOI is another useful supplemental performance measure, as it is an input in many REIT valuation models and it provides a means by which to evaluate the performance of the properties within our Rental Operations segments. The operations of our industrial properties, as well as our non-reportable Rental Operations (our residual non-industrial properties that have not yet been sold, referred to throughout as "non-reportable"), are collectively referred to as "Rental Operations."
The major factors influencing PNOI are occupancy levels, acquisitions and sales, development properties that achieve stabilized operations, rental rate increases or decreases, and the recoverability of operating expenses.
Note 10 to the consolidated financial statements included in Part I, Item 1 of this Report shows a calculation of our PNOI for the three and six months ended June 30, 2022 and 2021 and provides a reconciliation of PNOI for our Rental Operations segments to income before income taxes.
Same-Property Net Operating Income - Cash Basis
We also evaluate the performance of our properties, including our share of properties we jointly control, on a "same-property" basis, using a metric referred to as SPNOI. We view SPNOI as a useful supplemental performance measure because it improves comparability between periods by eliminating the effects of changes in the composition of our portfolio.
On an individual property basis, SPNOI is generally computed in a consistent manner as PNOI.
We define our "same-property" population once a year at the beginning of the current calendar year and include buildings that were stabilized (the term "stabilized" means properties that have reached 90% leased or that have been in-service for at least one year since development completion or acquisition) as of January 1 of the prior calendar year. The "same-property" pool is also adjusted to remove properties that were sold subsequent to the beginning of the current calendar year. As such, the "same-property" population for the period ended June 30, 2022 includes all properties that we owned or jointly controlled at January 1, 2022, which had both been owned or jointly controlled and had reached stabilization by January 1, 2021, and have not been sold.
A reconciliation of income before income taxes to SPNOI is presented as follows (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | Percent | | Six Months Ended June 30, | Percent |
| | 2022 | | 2021 | Change | | 2022 | | 2021 | Change |
Income before income taxes | | $ | 104,181 | | | $ | 181,328 | | | | $ | 361,988 | | | $ | 266,716 | | |
Share of SPNOI from unconsolidated joint ventures | | 6,754 | | | 6,599 | | | | 13,354 | | | 13,145 | | |
PNOI excluded from the "same-property" population | | (24,930) | | | (7,343) | | | | (46,236) | | | (12,124) | | |
Earnings from Service Operations | | (1,413) | | | (3,655) | | | | (2,893) | | | (5,305) | | |
Rental Operations revenues and expenses excluded from PNOI | | (15,063) | | | (21,361) | | | | (28,553) | | | (46,208) | | |
Non-Segment Items | | 112,491 | | | 16,294 | | | | 61,956 | | | 121,309 | | |
SPNOI | | $ | 182,020 | | | $ | 171,862 | | 5.9 | % | | $ | 359,616 | | | $ | 337,533 | | 6.5 | % |
| | | | | |
The composition of the line items titled "Rental Operations revenues and expenses excluded from PNOI" and "Non-Segment Items" from the table above are shown in greater detail in Note 10 to the consolidated financial statements included in Part I, Item 1 of this Report.
We believe that the factors that impact SPNOI are generally the same as those that impact PNOI. The following table details the number of properties, square feet, average commencement occupancy and average cash rental rate for the properties included in SPNOI for the respective periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Number of properties | 486 | | 486 | | 486 | | 486 |
Square feet (in thousands) (1) | 133,244 | | 133,244 | | 133,244 | | 133,244 |
Average commencement occupancy percentage (2) | 99.4% | | 97.9% | | 98.9% | | 97.9% |
Average rental rate - cash basis (3) | $5.39 | | $5.18 | | $5.35 | | $5.15 |
| | | | | | | |
(1) Includes the total square feet of the consolidated properties that are in the "same-property" population as well as 6.1 million square feet of space for unconsolidated joint ventures, which represents our ratable share of the 15.2 million total square feet of space for buildings owned by unconsolidated joint ventures that are in the "same-property" population. |
(2) Commencement occupancy represents the percentage of total square feet where the leases have commenced. |
(3) Represents the average annualized contractual rent per square foot for tenants in occupancy in properties in the "same-property" population. Cash rent does not include the tenant's obligation to pay property operating expenses and real estate taxes. If a tenant was within a free rent period, its rent would equal zero for purposes of this metric. |
Comparison of Three Months Ended June 30, 2022 to Three Months Ended June 30, 2021
Rental and Related Revenue
The following table sets forth rental and related revenue (in thousands):
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
Rental and related revenue: | | | |
Industrial | $ | 278,628 | | | $ | 252,511 | |
Non-reportable Rental Operations and non-segment revenues | 1,517 | | | 1,460 | |
Total rental and related revenue | $ | 280,145 | | | $ | 253,971 | |
| | | |
| | | |
The primary reasons for the increase in rental and related revenue were:
•We acquired 12 properties and placed 24 developments in service from January 1, 2021 to June 30, 2022, which provided incremental revenues of $24.8 million during the three months ended June 30, 2022, as compared to the same period in 2021.
•Rental and related revenue from our "same-property" portfolio increased by $13.0 million during the three months ended June 30, 2022, as compared to the same period in 2021. These increased revenues were primarily driven by rental rate growth and occupancy within our "same-property" portfolio.
•The continued acquisition of other real estate investments drove an increase of $3.5 million in rental and related revenue during the three months ended June 30, 2022, as compared to the same period in 2021.
•The sale of 35 in-service properties since January 1, 2021 resulted in a decrease of $18.5 million to rental and related revenue during the three months ended June 30, 2022, as compared to the same period in 2021, which partially offset the aforementioned increases to rental and related revenue.
Rental Expenses and Real Estate Taxes
The following table sets forth rental expenses and real estate taxes (in thousands):
| | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 |
Rental expenses: | | | |
Industrial | $ | 21,060 | | | $ | 18,411 | |
Non-reportable Rental Operations and non-segment expenses | 180 | | | 104 | |
Total rental expenses | $ | 21,240 | | | $ | 18,515 | |
| | | |
| | | |
Real estate taxes: | | | |
Industrial | $ | 43,377 | | | $ | 41,106 | |
Non-reportable Rental Operations and non-segment expenses | 351 | | | 262 | |
Total real estate tax expense | $ | 43,728 | | | $ | 41,368 | |
| | | |
| | | |
Overall, real estate tax expense increased by $2.4 million during the three months ended June 30, 2022, compared to the same period in 2021. The increase in real estate tax expense was mainly due to higher real estate tax assessments in certain of our markets and the result of acquisitions and developments placed in service from January 1, 2021 to June 30, 2022, which have generally been concentrated in markets with higher tax rates and/or assessed values. These increases were partially offset by the impact of property sales.
Depreciation and Amortization
Depreciation and amortization expense was $93.9 million and $91.7 million for the three months ended June 30, 2022 and 2021, respectively. The impact of acquired properties and developments placed in service was partially offset by property dispositions.
Equity in Earnings of Unconsolidated Joint Ventures
Equity in earnings of unconsolidated joint ventures represents our ownership share of net income from investments in unconsolidated joint ventures that generally own and operate rental properties. Equity in earnings from unconsolidated joint ventures was $5.6 million and $10.6 million for the three months ended June 30, 2022 and 2021, respectively. During the three months ended June 30, 2022, we recognized $1.6 million of equity in earnings related to our share of gain on a property sale to unrelated parties by an unconsolidated joint venture. During the three months ended June 30, 2021, we recognized $7.7 million of equity in earnings related to our share of gains on property sales to unrelated parties by unconsolidated joint ventures.
Gain on Sale of Properties
The $24.8 million recognized as gain on sale of properties for the three months ended June 30, 2022 was primarily the result of the sale of one consolidated property.
The $95.2 million recognized as gain on sale of properties for the three months ended June 30, 2021 was primarily the result of the sale of three consolidated properties.
General and Administrative Expenses
General and administrative expenses consist of two components. The first component includes general corporate expenses, and the second component represents the indirect operating costs not allocated to, or absorbed by, either the development, leasing and operation of our consolidated properties or our Service Operations. Such indirect operating costs are primarily comprised of employee compensation, including related costs such as benefits and wage-related taxes, but also include other ancillary costs such as travel and information technology support. Total indirect operating costs, prior to any allocation or absorption, and general corporate expenses are collectively referred to as our overall pool of overhead costs.
Those indirect costs not allocated to or absorbed by these operations are charged to general and administrative expenses. We regularly review our total overhead cost structure relative to our leasing, development and construction volume and adjust the level of total overhead, generally through changes in our level of staffing in various functional departments, as necessary, in order to control overall general and administrative expenses.
General and administrative expenses were $27.5 million and $15.9 million for the three months ended June 30, 2022 and 2021, respectively. The following table sets forth the factors that led to the increased general and administrative expenses (in millions):
| | | | | |
General and administrative expenses - three months ended June 30, 2021 | $ | 15.9 | |
Decrease to overall pool of overhead costs | (1.4) | |
Merger costs (1) | 10.0 | |
Impact of decreased allocation of costs to leasing and development activities (2) | 2.1 | |
Decreased allocation of costs to Service Operations and Rental Operations | 0.9 | |
General and administrative expenses - three months ended June 30, 2022 | $ | 27.5 | |
(1) Costs incurred for the opinion of a financial advisor related to our proposed merger with Prologis.
(2) We capitalized $2.5 million and $6.1 million of our total overhead costs to leasing and development, respectively, for consolidated properties during the three months ended June 30, 2022, compared to capitalizing $1.3 million and $9.1 million of such costs, respectively, during the three months ended June 30, 2021. Combined overhead costs capitalized to leasing and development totaled 24.7% and 28.3% of our overall pool of overhead costs for the three months ended June 30, 2022 and 2021, respectively. Additionally, $3.5 million of our total overhead costs, which were not capitalizable, were recorded as expenses and presented separately in the line item "Non-Incremental Costs Related to Successful Leases" on the Consolidated Statements of Operations for the three months ended June 30, 2022, compared to $4.0 million of such expenses for the three months ended June 30, 2021.
Interest Expense
Interest expense was $18.7 million and $21.1 million for the three months ended June 30, 2022 and 2021, respectively. The decrease in interest expense for the three months ended June 30, 2022 was primarily due to lower average interest rates resulting from refinancing unsecured notes and higher capitalized interest expense, partially offset by increased overall borrowings.
We capitalized $10.4 million and $9.7 million of interest costs for the three months ended June 30, 2022 and 2021, respectively.
Debt Extinguishment
We did not repurchase any unsecured notes during the three months ended June 30, 2022.
During the three months ended June 30, 2021, the Partnership redeemed $83.7 million of its unsecured notes due October 2022, which had a stated interest rate of 3.88%. We recognized a loss of $3.9 million in connection with the redemption of these notes including the prepayment premium and write-off of the unamortized deferred financing costs.
Comparison of Six Months Ended June 30, 2022 to Six Months Ended June 30, 2021
Rental and Related Revenue
The following table sets forth rental and related revenue (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Rental and related revenue: | | | |
Industrial | $ | 552,298 | | | $ | 509,181 | |
Non-reportable Rental Operations and non-segment revenues | 3,061 | | | 2,969 | |
Total rental and related revenue | $ | 555,359 | | | $ | 512,150 | |
| | | |
| | | |
The following factors contributed to the increase in rental and related revenue:
•We acquired 12 properties and placed 24 developments in service from January 1, 2021 to June 30, 2022, which provided incremental revenues of $50.2 million during the six months ended June 30, 2022, as compared to the same period in 2021.
•Rental and related revenue from our "same-property" portfolio increased by $21.8 million during the six months ended June 30, 2022, as compared to the same period in 2021. These increased revenues were primarily driven by rental rate growth and occupancy within our "same-property" portfolio.
•The continued acquisition of other real estate investments drove an increase of $4.8 million in rental and related revenue during the six months ended June 30, 2022, as compared to the same period in 2021.
•The sale of 35 in-service properties since January 1, 2021 resulted in a decrease of $39.3 million to rental and related revenue during the six months ended June 30, 2022, as compared to the same period in 2021, which partially offset the aforementioned increases to rental and related revenue.
Rental Expenses and Real Estate Taxes
The following table sets forth rental expenses and real estate taxes (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Rental expenses: | | | |
Industrial | $ | 46,210 | | | $ | 46,235 | |
Non-reportable Rental Operations and non-segment expenses | 316 | | | 410 | |
Total rental expenses | $ | 46,526 | | | $ | 46,645 | |
| | | |
| | | |
Real estate taxes: | | | |
Industrial | $ | 87,171 | | | $ | 82,270 | |
Non-reportable Rental Operations and non-segment expenses | 485 | | | 268 | |
Total real estate tax expense | $ | 87,656 | | | $ | 82,538 | |
| | | |
| | | |
Overall, real estate tax expense increased by $5.1 million during the six months ended June 30, 2022, compared to the same period in 2021. The increase in real estate tax expense was mainly due to higher real estate tax assessments in certain of our markets and the result of acquisitions and developments placed in service from January 1, 2021 to June 30, 2022, which have generally been concentrated in markets with higher tax rates and/or assessed values. These increases were partially offset by the impact of property sales.
Depreciation and Amortization
Depreciation and amortization expense was $187.9 million and $185.3 million for the six months ended June 30, 2022 and 2021, respectively. The increase in depreciation and amortization expense for the six months ended June 30, 2022 was mainly the result of continued growth in our portfolio through development and acquisition, and partially offset by the impact of property dispositions.
Equity in Earnings of Unconsolidated Joint Ventures
Equity in earnings from unconsolidated joint ventures was $9.4 million and $26.9 million for the six months ended June 30, 2022 and 2021, respectively.
During the six months ended June 30, 2022, we recognized $1.6 million of equity in earnings related to our share of gain on a property sale to unrelated parties by an unconsolidated joint venture. During the six months ended June 30, 2021, we recognized $10.6 million of equity in earnings of unconsolidated joint ventures related to gains on the distribution of joint venture assets to our partner in two unconsolidated joint ventures made in connection with a plan of dissolution. We also recognized $10.0 million of equity in earnings related to our share of gains on the sale of properties to unrelated parties by unconsolidated joint ventures during the six months ended June 30, 2021.
Gain on Sale of Properties
The $235.6 million recognized as gain on sale of properties for the six months ended June 30, 2022 was primarily the result of the sale of five consolidated properties.
The $116.5 million recognized as gain on sale of properties for the six months ended June 30, 2021 related to the gain from the sale of five consolidated properties.
General and Administrative Expenses
General and administrative expenses increased from $40.1 million for the six months ended June 30, 2021 to $51.4 million for the same period in 2022. The following table sets forth the factors that impacted general and administrative expenses (in millions):
| | | | | |
General and administrative expenses - six months ended June 30, 2021 | $ | 40.1 | |
Increase to overall pool of overhead costs | 2.9 | |
Merger costs (1) | 10.0 | |
Impact of decreased allocation of costs to leasing and development activities (2) | 0.2 | |
Increased allocation of costs to Service Operations and Rental Operations | (1.8) | |
General and administrative expenses - six months ended June 30, 2022 | $ | 51.4 | |
(1) Costs incurred for the opinion of a financial advisor related to our proposed merger with Prologis.
(2) We capitalized $4.5 million and $12.4 million of our total overhead costs to leasing and development, respectively, for consolidated properties during the six months ended June 30, 2022, compared to capitalizing $3.4 million and $15.7 million of such costs, respectively, during the six months ended June 30, 2021. Combined overhead costs capitalized to leasing and development totaled 20.6% and 24.2% of our overall pool of overhead costs for the six months ended June 30, 2022 and 2021, respectively. Additionally, $9.0 million of our total overhead costs, which were not capitalizable, were recorded as expenses and presented separately in the line item "Non-Incremental Costs Related to Successful Leases" on the Consolidated Statements of Operations for the six months ended June 30, 2022, compared to $7.0 million of such expenses for the six months ended June 30, 2021.
Interest Expense
Interest expense was $38.7 million and $43.6 million for the six months ended June 30, 2022 and 2021, respectively. The decrease in interest expense for the six months ended June 30, 2022 was primarily due to lower average interest rates resulting from refinancing unsecured notes and higher capitalized interest expense, partially offset by increased overall borrowings.
We capitalized $19.5 million and $17.7 million of interest costs during the six months ended June 30, 2022 and 2021, respectively.
Debt Extinguishment
In February 2022, the Partnership redeemed $300.0 million of its unsecured notes due December 2024, which had a stated interest rate of 3.75%. A loss of $21.9 million was recognized in connection with the redemption of these notes, which included the prepayment premium and write-off of the unamortized deferred financing costs.
In January 2021, the Partnership assumed and immediately repaid $40.2 million of unsecured debt related to the assets received as part of the dissolution of unconsolidated joint ventures.
In June 2021, the Partnership redeemed $83.7 million of its remaining 3.88% unsecured notes due October 2022. A loss of $3.9 million was recognized in connection with the redemption of these notes including the prepayment premium and write-off of the unamortized deferred financing costs.
Liquidity and Capital Resources
Overview
We expect to meet our short-term liquidity requirements over the next 12 months, which include payments of dividends and distributions, completion of development projects that are currently under construction and capital expenditures needed to maintain our current real estate assets, through working capital, net cash provided by operating activities and short term borrowings on the Partnership's unsecured line of credit. We had $44.2 million of cash on hand and no outstanding borrowings on the Partnership's $1.20 billion unsecured line of credit at June 30, 2022.
In addition to our existing sources of liquidity, we expect to meet long-term liquidity requirements, such as scheduled mortgage and unsecured debt maturities, financing of development activities, acquisitions and other capital improvements, through multiple sources of capital including operating cash flow, proceeds from property dispositions and accessing the public debt and equity markets.
Sources of Liquidity
Rental Operations
Cash flows from Rental Operations is our primary source of liquidity and provides a stable source of cash flow to fund operational expenses. We believe that this cash-based revenue stream is substantially aligned with revenue recognition (except for items such as periodic straight-line rental income accruals and amortization of above or below market rents) as cash receipts from the leasing of rental properties are generally received in advance of, or a short time following, the actual revenue recognition.
We are subject to a number of risks related to general economic conditions, including reduced occupancy, tenant defaults and bankruptcies and potential reduction in rental rates upon renewal or re-letting of properties, any of which would result in reduced cash flow from operations.
Debt and Equity Securities
We use the Partnership's unsecured line of credit (which is guaranteed by the General Partner) as a temporary source of capital to fund development activities, acquire additional rental properties and provide working capital. In June 2022, the Partnership amended and restated its existing revolving credit agreement ("Amendment") to issue and draw down on a term loan with an aggregate commitment of $500.0 million. The term loan matures March 31, 2025 and bears interest at a variable rate of one-month SOFR plus 0.850% (equal to 2.46% as of June 30, 2022).
In 2017, the Alternative Reference Rates Committee proposed that the SOFR replace LIBOR. In March 2021, the administrator of LIBOR announced that the publication of LIBOR will cease for one-week and two-month USD LIBOR settings immediately after December 31, 2021, and the remaining USD LIBOR settings immediately after June 30, 2023. As a result of entering into the Amendment in June 2022, the automatic transition of the benchmark rate on the unsecured line of credit from one-month LIBOR to SOFR was triggered. Such transition has not had a material impact on our consolidated financial statements.
Debt securities issued by the Partnership are governed pursuant to certain indentures and related supplemental indentures, which also require us to comply with financial ratios and other covenants regarding our operations. We were in compliance with all such covenants, as well as applicable covenants under our unsecured line of credit, at June 30, 2022.
At June 30, 2022, we had on file with the SEC an automatic shelf registration statement on Form S-3 relating to the offer and sale, from time to time, of an indeterminate amount of debt and equity securities (including guarantees of the Partnership's debt securities by the General Partner). Equity securities are offered and sold by the General Partner, and the net proceeds of such offerings are contributed to the Partnership in exchange for additional General Partner Units or Preferred Units. From time to time, we expect to issue additional securities under this automatic shelf registration statement to fund the repayment of debt, development and future acquisitions and for other general corporate purposes.
In February 2022, the General Partner terminated its previous equity distribution agreement for the ATM equity program and entered into a new equity distribution agreement pursuant to which the General Partner may sell, from time to time, up to an aggregate offering price of $600.0 million of its common stock through sales agents or forward sellers. During the three months ended June 30, 2022, the General Partner issued a total of 1.3 million common shares pursuant to its ATM equity program, resulting in net proceeds of $74.9 million after paying total compensation of $757,000. During the six months ended June 30, 2022, the General Partner issued a total of 2.0 million common shares pursuant to its ATM equity program, resulting in net proceeds of $114.3 million after paying total compensation of $1.2 million to the applicable sales agents, in addition to other fees paid totaling $326,000. As of June 30, 2022, the ATM equity program had $484.2 million worth of common shares available to issue.
Sale of Real Estate Assets
We dispose of certain properties in a manner consistent with our strategic plans. Our ability to dispose of such properties on favorable terms is dependent upon a number of factors including the availability of credit to potential buyers to purchase properties at prices that we consider acceptable. Although we believe that we have demonstrated our ability to generate significant liquidity through property dispositions, potential future adverse changes to market and economic conditions could negatively impact our further ability to dispose of properties that no longer meet our long-term objectives.
Sales of land and properties provided $334.7 million and $266.0 million in net proceeds during the six months ended June 30, 2022 and 2021, respectively.
Transactions with Unconsolidated Joint Ventures
Transactions with unconsolidated joint ventures also provide a source of liquidity. From time to time we will sell properties to unconsolidated joint ventures, while retaining a continuing interest in that entity, and receive proceeds commensurate to those interests that we do not own. Additionally, unconsolidated joint ventures will from time to time obtain debt financing or sell properties and will then distribute to us, and our joint venture partners, all or a portion of the proceeds from such transactions. During the six months ended June 30, 2022, our share of capital distributions from unconsolidated joint ventures totaled $33.6 million related to our share of the distribution of proceeds from third party mortgage loans originated in connection with the contribution of three of our properties to a 20%-owned unconsolidated joint venture (see Note 6 to the consolidated financial statements included in Part I, Item 1 of this Report).
Uses of Liquidity
Our principal uses of liquidity include the following:
•property investment;
•leasing/capital costs;
•dividends and distributions to shareholders and unitholders;
•debt service and maturities;
•opportunistic repurchases of outstanding debt; and
•other contractual obligations.
Property Investment
Our overall strategy is to continue to increase our investment in quality industrial properties, primarily through development, on both a speculative and build-to-suit basis, supplemented with acquisitions in Coastal Tier 1 markets. Pursuant to this strategy, we evaluate development and acquisition opportunities based upon our market outlook, including general economic conditions, supply and long-term growth potential. Our ability to make future property investments is dependent upon identifying suitable acquisition and development opportunities, and our continued access to our longer-term sources of liquidity, including issuances of debt or equity securities as well as generating cash flow by disposing of selected properties.
Leasing/Capital Costs
Tenant improvements and lease-related costs pertaining to our initial leasing of newly completed space, or vacant space in acquired properties, are referred to as first generation expenditures. Such first generation expenditures for tenant improvements are included within "development of real estate investments" in our Consolidated Statements of Cash Flows, while such expenditures for capitalizable lease-related costs are included within "other deferred leasing costs."
Cash expenditures related to the construction of a building's shell, as well as the associated site improvements, are also included within "development of real estate investments" in our Consolidated Statements of Cash Flows.
Tenant improvements and leasing costs to renew or re-let rental space that we previously leased to tenants for second generation leases are referred to as second generation expenditures. Building improvements that are not specific to any tenant but serve to improve integral components of our real estate properties are also second generation expenditures. One of the principal uses of our liquidity is to fund the second generation leasing/capital expenditures of our real estate investments.
The following table summarizes our second generation capital expenditures by type of expenditure, as well as capital expenditures for the development of real estate investments and for other deferred leasing costs (in thousands):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Second generation tenant improvements | $ | 10,400 | | | $ | 11,732 | |
Second generation leasing costs | 18,707 | | | 18,645 | |
Building improvements | 4,350 | | | 3,370 | |
Total second generation capital expenditures | $ | 33,457 | | | $ | 33,747 | |
Development of real estate investments | $ | 353,492 | | | $ | 332,091 | |
Other deferred leasing costs | $ | 20,678 | | | $ | 16,448 | |
The capital expenditures in the table above include the capitalization of internal overhead costs. We capitalized $4.5 million and $3.4 million of overhead costs that are incremental to executing leases, including both first and second generation leases, during the six months ended June 30, 2022 and 2021, respectively. We capitalized $12.4 million and $15.7 million of overhead costs related to development activities, including both development and tenant improvement projects on first and second generation space, during the six months ended June 30, 2022 and 2021, respectively. Combined overhead costs capitalized to leasing and development totaled 20.6% and 24.2% of our overall pool of overhead costs for the six months ended June 30, 2022 and 2021, respectively.
Further discussion of the capitalization of overhead costs can be found herein, in the quarter-to-quarter and year-to-year comparisons of general and administrative expenses of this Item 2.
In addition to the capitalization of overhead costs, the totals for development of real estate assets in the table above include the capitalization of $19.5 million and $17.7 million of interest costs during the six months ended June 30, 2022 and 2021, respectively.
Both our first and second generation expenditures vary significantly between leases on a per square foot basis, dependent upon several factors including the nature of a tenant's operations, the specific physical characteristics of each individual property and the market in which the property is located.
Dividend and Distribution Requirements
The General Partner is required to meet the distribution requirements of the Code in order to maintain its REIT status. We paid regular dividends or distributions of $0.28 per common share or Common Unit in the first and second quarters of 2022.
We expect to continue to distribute at least an amount equal to our taxable earnings, to meet the requirements to maintain the General Partner's REIT status, and additional amounts as determined by the General Partner's board of directors. Distributions are declared at the discretion of the General Partner's board of directors and are subject to actual cash available for distribution, our financial condition, capital requirements and such other factors as the General Partner's board of directors deems relevant.
Debt Service and Maturities
Debt outstanding at June 30, 2022 had a face value totaling $3.93 billion with a weighted average interest rate of 2.88% and maturities at various dates through 2050. Of this total amount, we had $3.88 billion of unsecured debt, $54.0 million of secured debt and no outstanding borrowings on our unsecured line of credit at June 30, 2022. Scheduled principal amortization and repayment of unsecured debt totaled $302.1 million for the six months ended June 30, 2022.
The following table is a summary of the scheduled future amortization and maturities of our indebtedness at June 30, 2022 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Future Repayments | | |
Year | Scheduled Amortization | | Maturities | | Total | | Weighted Average Interest Rate of Future Repayments |
Remainder of 2022 | $ | 2,503 | | | $ | — | | | $ | 2,503 | | | 4.96 | % |
2023 | 4,893 | | | — | | | 4,893 | | | 5.25 | % |
2024 | 5,155 | | | — | | | 5,155 | | | 5.28 | % |
2025 | 5,102 | | | 500,000 | | | 505,102 | | | 2.48 | % |
2026 | 3,238 | | | 375,000 | | | 378,238 | | | 3.38 | % |
2027 | 1,615 | | | 475,000 | | | 476,615 | | | 3.18 | % |
2028 | 1,307 | | | 500,000 | | | 501,307 | | | 4.45 | % |
2029 | 1,359 | | | 400,000 | | | 401,359 | | | 2.88 | % |
2030 | 1,413 | | | 350,000 | | | 351,413 | | | 1.86 | % |
2031 | 1,469 | | | 450,000 | | | 451,469 | | | 1.84 | % |
2032 | 1,233 | | | 515,332 | | | 516,565 | | | 2.45 | % |
Thereafter | 2,028 | | | 332,402 | | | 334,430 | | | 3.19 | % |
| $ | 31,315 | | | $ | 3,897,734 | | | $ | 3,929,049 | | | 2.88 | % |
We anticipate generating capital to fund our debt maturities by using undistributed cash generated from our Rental Operations and property dispositions and by raising additional capital from future debt or equity transactions.
Repayments of Outstanding Debt
To the extent that it supports our overall capital strategy, we may purchase or redeem some of our outstanding unsecured notes prior to their stated maturities.
In February 2022, we redeemed $300.0 million of unsecured notes that were scheduled to mature in December 2024.
Contractual Obligations
Aside from repayment of long-term debt described above, there have been no other material changes in our outstanding commitments since December 31, 2021, as previously discussed in our 2021 Annual Report.
Historical Cash Flows
Cash, cash equivalents and restricted cash were $61.9 million and $53.2 million at June 30, 2022 and 2021, respectively. The following table highlights significant changes in net cash associated with our operating, investing and financing activities (in millions):
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | |
Net cash provided by operating activities | $ | 328.1 | | | $ | 312.0 | |
Net cash used for investing activities | $ | (461.0) | | | $ | (595.6) | |
Net cash provided by financing activities | $ | 91.6 | | | $ | 269.6 | |
| | | |
Operating Activities
Cash flows from operating activities provide the cash necessary to meet our operational requirements and the receipt of rental income from Rental Operations continues to be our primary source of operating cash flows. The increase in net cash provided by operating activities compared to the six months ended June 30, 2021 was primarily due to increasing our asset base through developing and leasing up new properties as well as increasing occupancy and rental rates within our existing portfolio. These increases in net cash provided by operating activities were partially offset by increased payroll and related costs during the six months ended June 30, 2022.
Investing Activities
Highlights of significant cash sources and uses are as follows (in millions):
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
| | | | | |
Development of real estate investments | $ | (353.5) | | | $ | (332.1) | | | |
Acquisition of buildings, land and other real estate assets | (397.7) | | | (442.1) | | | |
Proceeds from sale of land and properties, net | 334.7 | | | 266.0 | | | |
Second generation tenant improvements, leasing costs and building improvements | (33.5) | | | (33.7) | | | |
| | | | | |
Purchase deposit for assets to be contributed to an unconsolidated joint venture | — | | | 28.4 | | | |
Issuance of secured loan | (5.0) | | | (81.7) | | | |
Capital distributions from unconsolidated joint ventures | 33.6 | | | 20.5 | | | |
Capital contributions and advances to unconsolidated joint ventures | (12.5) | | | (9.0) | | | |
Financing Activities
Highlights of cash inflows and outflows from equity transactions are as follows (in millions):
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
Proceeds from issuances of common shares under ATM equity programs | $ | 114.3 | | | $ | 185.8 | | | |
Distributions to common shareholders | (214.8) | | | (191.1) | | | |
Distributions to limited partners | (2.2) | | | (1.9) | | | |
Highlights of cash inflows and outflows from debt transactions are as follows (in millions):
| | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
Proceeds from the issuance of debt | | | | | |
| | | | | |
Unsecured debt | $ | 500.0 | | | $ | 446.6 | | | |
| | | | | |
| | | | | |
Repurchase of and repayments on debt (including extinguishment costs) | | | | | |
| | | | | |
Senior unsecured debt | $ | (320.1) | | | $ | (127.8) | | | |
| | | | | |
| | | | | |
Repayments on line of credit, net | | | | | |
Unsecured line of credit | $ | — | | | $ | (30.0) | | | |