Industrial Logistics Properties Trust (ILPT)

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

The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10-K.

OVERVIEW (dollars in thousands, except per square foot data)

We are a REIT organized under Maryland law. As of December 31, 2024, our portfolio was comprised of 411 properties containing approximately 59,890,000 rentable square feet located in 39 states with 94.4% occupancy leased to over 300 different tenants. As of December 31, 2024, we also owned a 22% equity interest in the unconsolidated joint venture.

We believe customer service expectations, growth in the number of households and demand for supply chain resiliency will keep demand for industrial properties strong for the foreseeable future. However, uncertainties surrounding interest rates and inflation in the United States and globally, and global geopolitical hostilities and tensions, have given rise to economic uncertainty and have caused disruptions in the financial markets. These conditions have increased our cost of capital and negatively impacted our ability to reduce leverage, and if continued, could adversely affect our financial condition and that of our tenants, could adversely impact the ability or willingness of our tenants to renew our leases or pay rent to us, may restrict our access to and would likely increase our cost of capital, may impact our ability to sell properties and may cause the values of our properties and of our common shares or other securities to decline.

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Our portfolio as of December 31, 2024 is summarized below (square feet in thousands):

(1)Based on annualized rental revenues as of December 31, 2024.

Property Operations

Occupancy and rental rate data for our portfolio as of December 31, 2024 and 2023 were as follows (square feet in thousands):

(1)Subject to modest adjustments when space is remeasured or reconfigured for new tenants and when land leases are converted to building leases.

(2)Leased square feet is pursuant to existing leases as of December 31, 2024, and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied, if any.

(3)Represents total rental income divided by the average rentable square feet leased during the periods specified for our properties.

Mainland Properties. We generally will seek to renew or extend the terms of leases for our Mainland Properties as their expirations approach. A majority of the leases for our Mainland Properties include periodic set dollar amount or percentage increases that increase the cash rent payable to us. Due to the capital that many of the tenants in our Mainland Properties have invested in these properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to their expirations. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties and the terms of any new leases we enter into may be less favorable to us than the terms of our existing leases for those properties.

Hawaii Properties. Certain of our Hawaii Properties are lands leased for rents that periodically reset based on fair market values, generally every 10 years. Revenues from our Hawaii Properties have generally increased as rents under the leases for those properties have been reset or renewed. Lease renewals, lease extensions, new leases and rental rates for our Hawaii Properties in the future will depend on prevailing market conditions when these lease renewals, lease extensions, new leases and rental rates are set. As rent reset dates or lease expirations approach at our Hawaii Properties, we generally negotiate with existing or new tenants for new lease terms. If we are unable to reach an agreement with a tenant on a rent reset, our Hawaii Properties’ leases typically provide that rent is reset based on an appraisal process. Due to the limited availability of land suitable for industrial uses that might compete with our Hawaii Properties, we believe that our Hawaii Properties offer the potential for future rent growth as a result of periodic rent resets, lease extensions and new leasing.

During the year ended December 31, 2024, we entered into new and renewal leases as summarized in the following table, excluding the impact of rent resets (square feet in thousands):

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(1)Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements.

During the year ended December 31, 2024, we completed rent resets for approximately 106,000 square feet of land at our Hawaii Properties at rental rates that were 27.5% higher than prior rental rates.

The following table provides the annualized rental revenues scheduled to reset at our Hawaii Properties as of December 31, 2024:

As of December 31, 2024, our lease expirations by year were as follows (square feet in thousands):

(1)Leased square feet is pursuant to existing leases as of December 31, 2024 and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied, if any.

As of December 31, 2024, subsidiaries of FedEx and Amazon leased 22.6% and 8.0% of our total leased square feet, respectively, and represented 29.1% and 6.8% of our total annualized rental revenues, respectively.

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As of December 31, 2024, $15,005, or 3.4%, of our annualized rental revenues are included in leases scheduled to expire by December 31, 2025 and 5.6% of our rentable square feet are currently vacant. Rental rates for which available space may be leased in the future will depend on prevailing market conditions when lease extensions, lease renewals or new leases are negotiated. Whenever we extend, renew or enter new leases for our properties, we intend to seek rents that are equal to or higher than our historical rents for the same properties. Despite our prior experience with rent resets, lease extensions and new leases in Hawaii, our ability to increase rents when rents reset, leases are extended or leases expire depends upon market conditions, which are beyond our control. Accordingly, we cannot be sure that the historical increases achieved at our Hawaii Properties will continue in the future.

Tenant Review Process. Our manager, RMR, conducts a tenant review process for us. RMR assesses tenants on an individual basis based on various applicable credit criteria. Depending on facts and circumstances, RMR evaluates the creditworthiness of a tenant based on information that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. RMR also may use a third party service to monitor the credit ratings of debt securities of our existing tenants whose debt securities are rated by a nationally recognized credit rating agency.

Disposition Activities

In 2023, we received gross proceeds of $25,460, excluding closing costs, and recognized a net gain on sale of real estate of $1,710 as a result of the sale of two properties and a portion of a land parcel.

For further information regarding our disposition activities, see elsewhere in this Annual Report on Form 10-K, including “Business—Our Company”, “Business—Our Investment Policies” and “Business—Our Disposition Policies” included in Part I, Item 1 of this Annual Report on Form 10-K, “Liquidity and Capital Resources—Our Investing and Financing Liquidity and Resources” below and Note 3 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 (dollars and share amounts in thousands, except per share data)

n/m - not meaningful

(1)Consists of properties that we owned continuously since January 1, 2023.

(2)Consists of two properties we disposed since January 1, 2023.

(3)See our definition of net operating income, or NOI, and our reconciliation of net loss to NOI below under the heading "Non-GAAP Financial Measures".

References to changes in the income and expense categories below relate to the comparison of results for the year ended December 31, 2024 to the year ended December 31, 2023. For a comparison of consolidated results for the year ended December 31, 2023 to the year ended December 31, 2022, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

Rental income. Rental income increased primarily due to our leasing activity and an increase in tenant reimbursement income driven by higher real estate taxes at certain of our properties in 2024.

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Real estate taxes. Real estate taxes increased primarily due to higher assessed values at certain of our properties and the expiration of a payment in lieu of taxes program at one of our Mainland Properties, partially offset by an abatement at one of our Mainland Properties in 2023.

Other operating expenses. Other operating expenses increased primarily due to increases in insurance and utility costs at certain of our properties, partially offset by decreased expense reimbursements to RMR as compared to 2023.

Depreciation and amortization. The decrease in depreciation and amortization reflects the impact of certain acquired real estate leases fully amortizing in 2024, partially offset by increased depreciation and amortization related to improvements and lease renewals at certain of our properties as compared to 2023.

General and administrative. The decrease in general and administrative expenses is primarily due to refunds of franchise and transfer taxes and professional fees, partially offset by increases in our trustee share awards and in our business management fees during 2024.

Acquisition and other transaction related costs. During 2023, our consolidated joint venture incurred costs related to a committed MNR property acquisition which was later terminated. We also incurred costs related to a property that was classified as held for sale and subsequently reclassified to held and used during 2023.

Loss on impairment of real estate. During 2023, we recognized a loss on impairment of real estate on one property that was classified as held for sale.

Interest income. The increase in interest income is primarily due to higher average cash balances during 2024, as compared to 2023.

Interest expense. The increase in interest expense is primarily due to increased amortization related to the cost of the interest rate cap purchased by our consolidated joint venture in 2024 and refinancing activities by our consolidated joint venture in 2023, partially offset by decreased interest costs and amortization of debt issuance costs related to our and our consolidated joint venture’s floating rate loans.

Gain on sale of real estate. During 2023, we recognized a gain on sale of real estate of $2,684 as a result of the sale of two properties in Asheville, NC and Mesquite, TX, partially offset by a loss on sale of real estate of $974 as a result of the sale of a portion of a land parcel in Everett, WA.

Loss on early extinguishment of debt. Loss on early extinguishment of debt relates to prepayment penalties incurred by our consolidated joint venture related to refinancing activities in 2023.

Income tax expense. Income tax expense reflects state income taxes payable in certain jurisdictions.

Equity in earnings of unconsolidated joint venture. Equity in earnings of unconsolidated joint venture represents the change in the fair value of our investment in the unconsolidated joint venture.

Non-GAAP Financial Measures (dollars in thousands, except per share data)

We present certain “non-GAAP financial measures” within the meaning of the applicable SEC rules including, NOI, FFO attributable to common shareholders and Normalized FFO attributable to common shareholders. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net loss or net loss attributable to common shareholders, as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net loss and net loss attributable to common shareholders as presented in our consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net loss and net loss attributable to common shareholders. We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties.

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Net Operating Income

We calculate NOI as shown below. We define NOI as income from our rental of real estate less our property operating expenses. The calculation of NOI excludes certain components of net loss in order to provide results that are more closely related to our property level results of operations. NOI excludes depreciation and amortization. We use NOI to evaluate individual and company-wide property level performance. Other real estate companies and REITs may calculate NOI differently than we do.

The following table presents the reconciliation of net loss to NOI for the years ended December 31, 2024 and 2023:

Funds From Operations Attributable to Common Shareholders and Normalized Funds From Operations Attributable to Common Shareholders

We calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders as shown below. FFO attributable to common shareholders is calculated on the basis defined by The National Association of Real Estate Investment Trusts, which is: (1) net loss attributable to common shareholders calculated in accordance with GAAP, excluding (i) any recovery or loss on impairment of real estate, (ii) any gain or loss on sale of real estate and (iii) equity in earnings of unconsolidated joint venture; (2) plus (i) real estate depreciation and amortization and (ii) our proportionate share of FFO from unconsolidated joint venture properties; (3) minus FFO adjustments attributable to noncontrolling interest; and (4) certain other adjustments currently not applicable to us. In calculating Normalized FFO attributable to common shareholders, we adjust for certain nonrecurring items shown below, including adjustments for such items related to the unconsolidated joint venture, if any.

FFO attributable to common shareholders and Normalized FFO attributable to common shareholders are among the factors considered by our Board of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, the then current and expected needs for and availability of cash to pay our obligations and fund our investments, limitations in the agreements governing our debt, the availability to us of debt and equity capital, our dividend yield and our dividend yield compared to the dividend yields of other REITs and our expectation of future capital requirements and operating performance. Other real estate companies and REITs may calculate FFO attributable to common shareholders and Normalized FFO attributable to common shareholders differently than we do.

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The following table presents our calculation of FFO attributable to common shareholders and Normalized FFO attributable to common shareholders and reconciliations of net loss attributable to common shareholders to FFO attributable to common shareholders and Normalized FFO attributable to common shareholders for the years ended December 31, 2024 and 2023.

LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share and per square foot data)

Our principal sources of funds to meet our operating and capital obligations, pay our debt service obligations and make distributions to our shareholders are rents from tenants at our properties. As of December 31, 2024, investment grade rated tenants, subsidiaries of investment grade rated parent entities or our Hawaii land leases represented 76.7% of our annualized rental revenues and only 3.4% of our annualized rental revenues were from leases expiring over the next 12 months. We believe that these sources of funds will be sufficient to meet our operating and capital obligations, pay our debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter.

The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our consolidated statements of cash flows included in Part IV, Item 15 of this Annual Report on Form 10-K:

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The decrease in net cash provided by operating activities for the year ended December 31, 2024 compared to 2023 is primarily due to the timing of payables in 2024, partially offset by higher cash flows from our properties. The decrease in net cash provided by investing activities for the year ended December 31, 2024 compared to 2023 is primarily due to costs associated with the purchase of interest rate caps for an aggregate of $43,150 in 2024 and proceeds from sales of real estate and distributions from the unconsolidated joint venture in 2023, partially offset by a reduction in real estate improvements and increased proceeds from the settlement of our interest rate caps in 2024. The change in net cash used in financing activities for the year ended December 31, 2024 compared to net cash provided by financing activities for 2023 was primarily due to our consolidated joint venture’s refinancing activities related to certain of its mortgage notes payable in 2023.

Our Operating Liquidity and Resources

Our future cash flows from operating activities will depend primarily upon our ability to:

•collect rents from our tenants when due;

•maintain the occupancy of, and maintain or increase the rental rates at, our properties; and

•control our operating cost increases, including interest and other financing costs.

Our Investing and Financing Liquidity and Resources

As of December 31, 2024, we had cash and cash equivalents, excluding restricted cash and cash equivalents, of $131,706. To maintain our qualification for taxation as a REIT under the IRC, we generally are required to distribute at least 90% of our REIT taxable income annually, subject to specified adjustments and excluding any net capital gain. This distribution requirement limits our ability to retain earnings and thereby provide capital for our operations or acquisitions. We may use our cash and cash equivalents on hand, the cash flow from our operations, net proceeds from any sales of assets and net proceeds of offerings of equity or debt securities to fund our distributions to our shareholders.

When our debt approaches maturity or we desire to reduce our leverage or refinance debt, we intend to explore refinancing alternatives, property sales or sales of equity interests in joint ventures. Such alternatives may include incurring term debt, obtaining financing secured by mortgages on properties we own, issuing new equity or debt securities, obtaining a revolving credit facility, participating or selling equity interests in joint ventures or selling properties. Further, any issuances of our equity securities may be dilutive to our existing shareholders. We may also assume mortgage loans or incur debt in connection with future acquisitions, developments and redevelopments. Although we cannot be sure that we will be successful in completing any particular type of financing, we believe that we will have access to financing, such as debt or equity offerings, to fund capital expenditures, future acquisitions, development, redevelopment and other activities and to pay our obligations. We expect to fund any future property acquisitions, developments and redevelopments with proceeds we may receive in connection with any additional properties we may sell to our joint ventures, equity contributions from any third party investors in our joint ventures or any future joint ventures, net proceeds from offerings of equity or debt securities and cash on hand.

Real Estate Activities

In 2023, we received gross proceeds of $25,460, excluding closing costs of $1,160, and recognized a net gain on sale of real estate of $1,710 as a result of the sale of two properties and a portion of a land parcel.

During the years ended December 31, 2024 and 2023, amounts capitalized at our properties for tenant improvements, leasing costs, building improvements and development, redevelopment and other activities were as follows:

(1)Includes capital expenditures used to improve tenants’ space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and tenant inducements.

(2)Includes expenditures to replace obsolete building components and expenditures that extend the useful life of existing assets.

(3)Includes capital expenditure projects that reposition a property or result in new sources of revenues.

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As of December 31, 2024, committed, but unspent, tenant related obligations based on existing leases were $3,910, all of which are expected to be spent during the next 12 months.

For further information regarding real estate activities, see Note 3 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Joint Ventures

We own a 61% equity interest in our consolidated joint venture. We control this consolidated joint venture and therefore account for the properties owned by this joint venture on a consolidated basis in our consolidated financial statements. We also own a 22% equity interest in the unconsolidated joint venture. We account for the unconsolidated joint venture using the equity method of accounting under the fair value option. The unconsolidated joint venture made aggregate cash distributions to us of $3,960 and $9,900 for the years ended December 31, 2024 and 2023, respectively.

For further information regarding these joint ventures, see Note 3 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Indebtedness

As of December 31, 2024, we had an aggregate principal amount of $4,307,829 of indebtedness, including (1) our $1,235,000 loan, or the ILPT Floating Rate Loan, (2) our consolidated joint venture’s $1,400,000 loan, or the Mountain Floating Rate Loan, (3) our $700,000 mortgage loan and (4) our $650,000 mortgage loan, with maturity dates after giving effect to potential exercises of all extension options between 2027 and 2038.

The ILPT Floating Rate Loan is secured by 104 of our properties, matures in October 2025, subject to two remaining one year extension options, and requires that interest be paid at an annual rate of secured overnight financing rate, or SOFR, plus a weighted average premium of 3.93%. In October 2024, we exercised the first of our three, one year extension options for the maturity date of this loan. In connection with the exercise of the extension, we purchased a one year interest rate cap for $16,975 with a SOFR strike rate equal to 2.78%, which replaced the previous interest rate cap with a SOFR strike rate equal to 2.25%. Subject to the satisfaction of certain conditions, we have the option to prepay the ILPT Floating Rate Loan in full or in part at any time at par with no premium.

The Mountain Floating Rate Loan is secured by 82 properties, matures in March 2025, subject to two remaining one year extension options, and requires that interest be paid at an annual rate of SOFR plus a premium of 2.77%. In March 2024, our consolidated joint venture exercised the first of its three, one year extension options for the maturity date of this loan. In connection with the exercise of the extension, our consolidated joint venture purchased a one year interest rate cap for $26,175 with a SOFR strike rate equal to 3.04%, which replaced the previous interest rate cap with a SOFR strike rate equal to 3.40%. Subject to the satisfaction of certain conditions, we have the option to prepay the Mountain Floating Rate Loan in full or in part at any time at par with no premium. In February 2025, our consolidated joint venture provided notice to exercise the second extension option for the maturity of the Mountain Floating Rate Loan and in connection therewith purchased a one year interest rate cap for $15,010 with a SOFR strike rate equal to 3.10%.

The weighted average interest rates under our floating rate loans for the years ended December 31, 2024 and 2023 were as follow:

(1)Reflects the impact of interest rate caps with a current SOFR strike rate equal to 2.78%, which replaced the previous strike rate equal to 2.25% in October 2024.

(2)Reflects the impact of interest rate caps with a current SOFR strike rate equal to 3.04%, which replaced the previous strike rate equal to 3.40% in March 2024.

In May 2023, our consolidated joint venture obtained a $91,000 fixed rate, interest only mortgage loan secured by four properties owned by our consolidated joint venture. This mortgage loan matures in June 2030 and requires that interest be paid at an annual rate of 6.25%. A portion of the net proceeds from this mortgage loan was used to repay four then outstanding mortgage loans of our consolidated joint venture with an aggregate outstanding principal balance of $35,910 and a weighted average interest rate of 3.70%. We recognized a loss on early extinguishment of debt of $359 in conjunction with the repayment of these mortgage loans.

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The agreements and related documents governing the ILPT Floating Rate Loan, the Mountain Floating Rate Loan, our $700,000 mortgage loan and our $650,000 mortgage loan contain customary covenants, provide for acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default and, in the case of the $650,000 mortgage loan, also require us to maintain a minimum consolidated net worth of at least $250,000 and liquidity of at least $15,000. As of December 31, 2024, we believe that we were in compliance with all of the covenants and other terms under the agreements governing these loans.

For further information regarding our indebtedness and interest rate caps, see Notes 5 and 11 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Distributions

During the year ended December 31, 2024, we paid quarterly cash distributions to our shareholders totaling $2,638 using cash on hand.

On January 16, 2025, we declared a regular quarterly distribution to common shareholders of record on January 27, 2025 of $0.01 per share, or approximately $661, and we expect to pay this distribution on or about February 20, 2025 using cash on hand.

Related Person Transactions

We have relationships and historical and continuing transactions with RMR, RMR Inc. and others related to them. For further information about these and other such relationships and related person transactions, see Notes 9 and 10 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K, our other filings with the SEC, including our definitive Proxy Statement for our 2025 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with the SEC within 120 days after the fiscal year ended December 31, 2024. For further information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements”, Part I, Item 1, “Business” and Part I, Item 1A, “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR or its subsidiaries provide management services.

Critical Accounting Estimates

Our critical accounting estimates are those that will have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates have been and will be consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting estimates involve our investments in real property. These estimates affect our:

•allocation of purchase prices for property acquisitions between various asset categories, including allocations to above and below market leases and the related impact on the recognition of rental income and depreciation and amortization expenses; and

•assessment of the carrying values and impairments of our properties.

We allocate the cost of each property acquired to various property components and each component generally has a different useful life. We record building, land and improvements, and, if applicable, the value of in-place leases, the fair market value of above or below market leases and tenant relationships at their relative fair value. We base purchase price allocations and the determination of useful lives on our estimates and, under some circumstances, studies from independent real estate appraisers to provide market information and evaluations that are relevant to our purchase price allocations and determinations of useful lives; however, our management is ultimately responsible for the purchase price allocations and determination of useful lives.

We compute depreciation expense using the straight line method over estimated useful lives of up to 40 years for buildings and improvements, and up to seven years for personal property. We do not depreciate the allocated cost of land. We amortize above market lease values as a reduction to rental income over the terms of the respective leases. We amortize below market lease values as an increase to rental income over the terms of the respective leases. We amortize the value of acquired in-place leases, exclusive of the value of above market and below market acquired in-place leases, to depreciation and amortization over the periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are amortized in full at that time. Purchase price allocations require us to make certain assumptions and estimates. Incorrect assumptions and estimates may result in inaccurate rental income and depreciation and amortization over future periods.

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We periodically evaluate our properties for impairment. Impairment indicators may include declining tenant occupancy, our concerns about a tenant's financial condition (which may be affected by a rent default or other information which comes to our attention) or our decision to dispose of an asset before the end of its estimated useful life and legislative, as well as market or industry changes that could permanently reduce the value of a property. If indicators of impairment are present, we evaluate the carrying value of the related property by comparing it to the expected future undiscounted cash flows to be generated from that property. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to its fair value. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods, market rents and terminal capitalization rates. If we misjudge or estimate incorrectly or if future tenant operations, market or industry factors differ from our expectations, we may record an impairment that is inappropriate or fail to record an impairment when we should have done so, or the amount of any such impairment may be inaccurate.

These accounting estimates involve significant judgments made based upon our experience and the experience of our management and our Board of Trustees, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability and willingness of our tenants to perform their obligations to us, current and future economic conditions and competitive factors in the markets in which our properties are located. Competition, economic conditions and other factors may cause occupancy declines in the future. In the future, we may need to revise our carrying value assessments to incorporate information which is not now known, and such revisions could increase or decrease our depreciation expense related to properties we own or decrease the carrying values of our assets.

Impact of Climate Change

Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our properties to increase. We do not expect the direct impact of these increases to be material to our results of operations because the increased costs either would be the responsibility of our tenants directly or in the longer term, passed through and paid by tenants of our properties. Although we do not believe it is likely in the foreseeable future, laws enacted to mitigate climate change may make some of our properties obsolete or cause us to make material investments in our properties, which could materially and adversely affect our financial condition or the financial condition of our tenants and their ability to pay rent to us.

In an effort to reduce the effects of any increased energy costs in the future, we continuously study ways to improve the energy efficiency at all of our properties. Our property manager, RMR, is a member of the ENERGY STAR program, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy that is focused on promoting energy efficiency at commercial properties through its “ENERGY STAR” partner program, and a member of the U.S. Green Building Council, a nonprofit organization focused on promoting energy efficiency at commercial properties through its leadership in energy and environmental design, or LEED®, green building program. RMR’s annual Sustainability Report summarizes the ESG initiatives of RMR and its client companies, including us. RMR's Sustainability Report may be accessed on RMR Inc.'s website at www.rmrgroup.com/corporate-sustainability/default.aspx. The information on or accessible through RMR Inc.'s website is not incorporated into this Annual Report on Form 10-K.

Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather may have an adverse effect on certain properties we own. Rising sea levels could cause flooding at some of our properties, including some of our Hawaii Properties, which may have an adverse effect on individual properties we own. We mitigate these risks by procuring, or requiring our tenants to procure, insurance coverage we believe adequate to protect us from material damages and losses resulting from the consequences of losses caused by climate change. However, we cannot be sure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on our financial results.

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

The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10-K.

OVERVIEW (dollars in thousands, except per square foot data)

We are a REIT organized under Maryland law. As of December 31, 2023, our portfolio was comprised of 411 properties containing approximately 59,951,000 rentable square feet located in 39 states, including 226 buildings, leasable land parcels and easements containing approximately 16,729,000 rentable square feet located on the island of Oahu, Hawaii, and 185 properties containing approximately 43,222,000 rentable square feet located in 38 other states. As of December 31, 2023, our properties were approximately 98.8% leased to 303 tenants with a weighted average remaining lease term (by annualized rental revenues) of approximately 8.1 years. As of December 31, 2023, our properties included 94 properties in which we owned a 61% equity interest located in 27 states containing approximately 20,981,000 rentable square feet that were 99.2% leased with an average remaining lease term (based on annualized rental revenues) of approximately 7.1 years. As of December 31, 2023, we also owned a 22% equity interest in the unconsolidated joint venture.

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During 2023, our rental income and net operating income, or NOI, increased as compared to the prior year as a result of the Merger completed in February 2022 and from leasing activity and rent resets at our properties. Long-term e-commerce trends and supply chain resiliency have resulted in high occupancy and increases in rents. We believe customer service expectations, growth in the number of households and demand for supply chain resiliency will keep demand for industrial properties strong for the foreseeable future. However, inflationary pressures and high interest rates in the United States and globally, and global geopolitical hostilities and tensions, have given rise to economic uncertainty and have caused disruptions in the financial markets. These conditions have increased our cost of capital and negatively impacted our ability to reduce our leverage. An economic recession, or continued or intensified disruptions in the financial markets, could adversely affect our financial condition and that of our tenants, could adversely impact the ability or willingness of our tenants to renew our leases or pay rent to us, may restrict our access to and would likely increase our cost of capital, may impact our ability to sell properties and may cause the values of our properties and of our common shares or other securities to decline.

Property Operations

Occupancy data for our properties as of December 31, 2023 and 2022 were as follows:

(1)Consists of properties that we owned continuously since January 1, 2022.

(2)Subject to modest adjustments when space is remeasured or reconfigured for new tenants and when land leases are converted to building leases.

(3)Leased square feet is pursuant to existing leases as of December 31, 2023, and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied.

The average effective rental rates per square foot represents total rental income divided by the average rentable square feet leased during the periods specified for our properties. For the years ended December 31, 2023 and 2022, the average effective rental rates per square foot of our properties were as follows:

(1)Consists of properties that we owned continuously since January 1, 2022.

During the year ended December 31, 2023, we entered into new and renewal leases as summarized in the following table:

(1)Includes commitments made for leasing expenditures and concessions, such as leasing commissions, tenant improvements or other tenant inducements.

During the year ended December 31, 2023, we completed rent resets for approximately 420,000 square feet of land at our Hawaii Properties at rental rates that were 29.6% higher than prior rental rates.

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As of December 31, 2023, our lease expirations by year were as follows (square feet in thousands):

(1)Leased square feet is pursuant to existing leases as of December 31, 2023 and includes space being fitted out for occupancy, if any, and space which is leased but is not occupied.

(2)Annualized rental revenues are as of December 31, 2023.

As of December 31, 2023, FedEx and Amazon leased 21.7% and 7.7% of our total leased square feet, respectively, and represented 29.7% and 6.7% of our total annualized rental revenues, respectively.

Mainland Properties. As of December 31, 2023, occupancy at our Mainland Properties was 98.9% and represented 72.1% of our annualized rental revenues. We generally will seek to renew or extend the terms of leases at our Mainland Properties as their expirations approach. A majority of the leases at our Mainland Properties include periodic set dollar amount or percentage increases that raise the cash rent payable to us. Due to the capital that many of the tenants in our Mainland Properties have invested in these properties and because many of these properties appear to be of strategic importance to the tenants’ businesses, we believe that it is likely that these tenants will renew or extend their leases prior to their expirations. If we are unable to extend or renew our leases, it may be time consuming and expensive to relet some of these properties and the terms of any leases we may enter may be less favorable to us than the terms of our existing leases for those properties.

Hawaii Properties. As of December 31, 2023, occupancy at our Hawaii Properties was 98.6% and represented 27.9% of our annualized rental revenues. As of December 31, 2023, certain of our Hawaii Properties are lands leased for rents that periodically reset based on fair market values, generally every 10 years. Revenues from our Hawaii Properties have generally increased under our or our predecessors’ ownership as rents under the leases for those properties have been reset or renewed. Lease renewals, lease extensions, new leases and rental rates for our Hawaii Properties in the future will depend on prevailing market conditions when these lease renewals, lease extensions, new leases and rental rates are set. As rent reset dates or lease expirations approach at our Hawaii Properties, we generally negotiate with existing or new tenants for new lease terms. If we are unable to reach an agreement with a tenant on a rent reset, our Hawaii Properties’ leases typically provide that rent is reset based on an appraisal process. Due to the limited availability of land suitable for industrial uses that might compete with our Hawaii Properties, we believe that our Hawaii Properties offer the potential for future rent growth as a result of periodic rent resets, lease extensions and new leasing.

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The following table provides the annualized rental revenues scheduled to reset by year at our Hawaii Properties as of December 31, 2023:

As of December 31, 2023, $24,239, or 5.6%, of our annualized rental revenues are included in leases scheduled to expire by December 31, 2024 and 1.2% of our rentable square feet are currently vacant. Rental rates for which available space may be leased in the future will depend on prevailing market conditions when lease extensions, lease renewals or new leases are negotiated. Whenever we extend, renew or enter new leases for our properties, we intend to seek rents that are equal to or higher than our historical rents for the same properties. Despite our and our predecessors’ prior experience with rent resets, lease extensions and new leases in Hawaii, our ability to increase rents when rents reset, leases are extended or leases expire depends upon market conditions, which are beyond our control. Accordingly, we cannot be sure that the historical increases achieved at our Hawaii Properties will continue in the future.

Tenant Review Process. Our manager, RMR, employs a tenant review process for us. RMR assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances, RMR evaluates the creditworthiness of a tenant based on information that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. RMR also may use a third party service to monitor the credit ratings of debt securities of our existing tenants whose debt securities are rated by a nationally recognized credit rating agency.

Disposition Activities

In 2023, we received gross proceeds of $25,460, excluding closing costs, and recognized a net gain on sale of real estate of $1,710 as a result of the sale of two properties and a portion of a land parcel.

For further information regarding our disposition activities, see elsewhere in this Annual Report on Form 10-K, including “Business—Our Company”, “Business—Our Investment Policies” and “Business—Our Disposition Policies” included in Part I, Item 1 of this Annual Report on Form 10-K, “Liquidity and Capital Resources—Our Investing and Financing Liquidity and Resources” below and Note 3 to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 (dollars and share amounts in thousands, except per share data)