# LXP Industrial Trust (LXP) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LXP Industrial Trust's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/910108/000144483823000006/lxp-20221231.htm
Accession: 0001444838-23-000006
Filing date: 2023-02-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LXP/
All MD&A years: /company/LXP/mda/
Previous year: /company/LXP/mda/fy2021/ (FY 2021)
Next year: /company/LXP/mda/fy2023/ (FY 2023)

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

In this discussion, we have included statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements may relate to our future plans and objectives, among other things. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed above in “Risk Factors” in Part I, Item 1A of this Annual Report and “Cautionary Statements Concerning Forward-Looking Statements” in the beginning of this Annual Report.

Introduction

The following is a discussion and analysis of the consolidated financial condition and results of operations of LXP Industrial Trust for the years ended December 31, 2022 and 2021, and significant factors that could affect its prospective financial condition and results of operations. This discussion should be read together with our accompanying consolidated financial statements included herein and notes thereto.

Investment Trends

General. Over the last several years, we have focused our investment activity primarily on income producing single-tenant warehouse and distribution assets and speculative development of warehouse and distribution assets.

In 2022, we acquired or completed and placed into service $195.2 million of warehouse and distribution assets, which is a decrease of $690.4 million compared to 2021 investment activity of $885.6 million. The decrease was primarily due to the substantial completion of our portfolio transformation efforts and related capital recycling and the disruptions in the capital markets.

We expected to recycle our remaining other assets into warehouse and distribution facilities by the end of 2022, but, due to current market conditions, we currently expect the remaining other assets to take longer to be sold. In addition, we expect to recycle out of certain warehouse and distribution facilities located outside of our target markets and use the proceeds to satisfy indebtedness and invest in our target markets. While our capital recycling strategy has had and may continue to have a near-term dilutive impact on earnings due to the sales of revenue-producing properties, we believe this strategy will benefit shareholder value in the long term.

The industrial real estate market remains one of the most resilient real estate markets in the current economic environment. One of the main drivers of growth in the industrial real estate market has been e-commerce. We believe that growth is also being driven by companies increasing their inventories in the United States to keep up with demand and to protect against future disruptions in the supply chain.

While we believe the industrial market will continue to grow, there continues to be competition for the acquisition of industrial properties, specifically warehouse/distribution properties. In addition, recessionary fears may cause tenants to reevaluate expansion and growth plans. We continue to prioritize development and acquiring vacancy over acquisitions of leased properties due to the increased yield that development generally provides.

Lease Term. We primarily acquire assets subject to intermediate and long-term leases with escalating rents, which we believe strengthen our future cash flows and provide a partial hedge against rising interest rates. We intend to maintain a weighted-average lease term longer than many comparable industrial companies and balance our lease expiration schedule.

Our industrial investment underwriting focuses less on tenant credit than our historical office investment underwriting as we focus on real estate characteristics such as location and related demographic and local economic trends. This has allowed us to acquire certain short-term leased warehouse/distribution assets, which may be acquired with greater total return potential than long-term leased warehouse/distribution assets and allow for a value-add strategy through the lease renewal or a multi-tenanting process.

Development. As a result of the competition for income producing single-tenant warehouse/distribution assets, in 2017, we began selectively investing in development projects. We believe we can achieve higher yields from development projects than we can by purchasing existing leased properties.

Our development activities have been focused on speculative development and purchasing newly-developed properties with vacancy. Our target markets are experiencing low vacancy rates. Despite an increase in construction in recent years, we believe there is sufficient tenant demand for our development projects.

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Leasing

General. Re-leasing properties that are currently vacant or become vacant as leases expire at favorable effective rates is a primary area of focus for our asset management. Renewals of industrial leases, particularly for warehouse/distribution facilities, are generally dependent on location and occupancy alternatives for our tenants.

If a property cannot be re-let to a single user and the property can be adapted to multi-tenant use, we determine whether the costs of adapting the property to multi-tenant use outweigh the benefit of funding operating costs while searching for a single-tenant and whether selling a vacant property, which limits operating costs and allows us to redeploy capital, is in the best interest of our shareholders.

During 2022, we entered into 18 new leases and lease extensions encompassing approximately 4.1 million square feet. The average base rent on these extended leases was approximately $5.36 per square foot compared to the average base rent on these leases before extension of $4.26 per square foot. The weighted-average cost of tenant improvements and lease commissions during 2022 was approximately $7.82 per square foot for new leases and $0.91 per square foot for extended leases. In addition, we ground leased approximately 100 acres in the Phoenix, Arizona market for 20 years (with three, 10-year extension options). The initial rent is $5.2 million per annum and escalate by 4% annually.

As of December 31, 2022, we had two single-tenant leases in our industrial portfolio where the lease term is scheduled to expire in 2023, covering approximately 0.9 million square feet. As of December 31, 2022, approximately 52.6% of our industrial ABR was from leases scheduled to expire during 2023 through 2028. We expect an aggregate increase in rental revenue as these leases are reset to market rates.

Inherent Growth. Many leases have scheduled fixed rent increases and a couple with rent increases based upon the consumer price index. As of December 31, 2022, 95.7% of our single-tenant industrial leases had scheduled rent increases. The average escalation rate of these leases based on the next rent step was 2.5% as of December 31, 2022. A majority of our leases require tenants to pay operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses. However, certain of our leases provide for some level of landlord responsibility for capital repairs and replacements, the cost of which is generally factored into the rental rate. Our motivation to release vacant space requires us to meet market demands with respect to rental rates, tenant concessions and landlord responsibilities. Developers are similarly motivated when signing leases with tenants due to the significant competition in the industrial space. As a result, the obligations of our property owner subsidiaries on new leases and newly renewed or extended leases may increase to include, among other items, some form of responsibility for operating expenses and/or capital repairs and replacements.

Tenant Credit. We continue to monitor the credit of tenants of properties in which we have an interest by (1) subscribing to rating agency information, so that we can monitor changes in the ratings of our rated tenants, (2) reviewing financial statements that are publicly available or that are required to be delivered to us under the applicable lease, (3) monitoring news reports regarding our tenants and their respective businesses, (4) monitoring the timeliness of rent collections and (5) meeting with our tenants.

Other properties

We continue to recycle our other real estate investments into warehouse/distribution assets. As of December 31, 2022, we owned seven consolidated other real estate assets consisting of office properties, a land ground lease and a heavy manufacturing facility. We have historically marketed non-industrial assets for sale when we believe we have obtained the highest possible valuation through various means, including lease renewals.

Non-Recourse Mortgage Loan Resolutions

Since we have a limited number of consolidated properties subject to non-recourse mortgages, we do not expect many foreclosure sales of consolidated properties in the future.

Impairment charges

During 2022 and 2021, we incurred impairment charges, of $3.0 million and $5.5 million, respectively, on certain of our assets due to each asset's carrying value being below its estimated fair value. Most of the impairment charges in 2022 and 2021 were incurred on non-core assets due to anticipated shortened holding periods. We cannot estimate if we will incur, or the amount of, future impairment charges on our assets. See Part I, Item 1A “Risk Factors”, of this Annual Report.

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Critical Accounting Estimates

In preparing the consolidated financial statements we have made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Accounting estimates are deemed critical if they involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Below is a summary of the critical accounting estimates used in the preparation of our consolidated financial statements. A summary of our significant accounting policies which are important to the portrayal of our financial condition and results of operations is set forth in Note 2 to the Consolidated Financial Statements, which are included in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report.

Acquisition of Real Estate. Primarily all of our acquisitions of real estate assets and liabilities are accounted for as asset acquisitions. As such, the purchase prices of acquired tangible and intangible assets and liabilities are recorded and allocated at fair value on a relative basis. The recorded allocations of tangible assets are based on the “as-if-vacant” value using estimated cash flow projections of the properties acquired which incorporates discount, capitalization and interest rates as well as available comparable market information. Allocations of intangible assets includes management’s estimates of current market rents and leasing costs.

We use considerable judgement in our estimates of cash flow projections, discount, capitalization and interest rates, fair market lease rates, carrying costs during hypothetical expected lease-up periods and costs to execute similar leases. While our methodology for purchase price allocation did not change during the year ended December 31, 2022, the real estate market is fluid and our assumptions are based on information currently available in the market at the time of acquisition. Significant increases or decreases in these key estimates, particularly with regards to cash flow projections and discount and capitalization rates, would result in a significantly lower or higher fair value measurement of the real estate assets being acquired.

Revenue Recognition. We enter into agreements with tenants that convey the right to control the use of identified space at our properties in exchange for rental revenue. These agreements meet the criteria for recognition as leases under Accounting Standards Codification (“ASC”) 842, Leases. Lease classification tests require significant estimates and judgments by management in its application. Upon lease commencement or lease modification, we assess the lease classification to determine whether the lease should be classified as a direct financing, sales-type or operating lease. The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates, including the estimation of both the value assigned to the property components on the lease commencement date or upon acquisition and the estimation of the unguaranteed residual value of such components at the end of the lease term. The determination of the lease term also requires judgement because the probability of purchase options and renewals have to be analyzed to conclude if they are reasonably certain of being exercised. If the lease component is determined to be a direct financing or sales-type lease, revenue is recognized over the life of the lease using the rate implicit in the lease.

Most of our leases are operating leases. We recognize operating lease revenue on a straight-line basis over the term of the lease unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. We commence revenue recognition when possession or control of the space is turned over to the tenant.

Impairment of Real Estate. We record impairments of our real estate assets classified as held for use when triggering events dictate that an asset may be impaired. An impairment is recorded when the carrying amount of the asset exceeds the sum of its undiscounted future operating and residual cash flows. The impairment is the difference between estimated fair value of the asset and the carrying amount. We record impairments of our real estate assets classified as held for sale at the lower of the carrying amount or estimated fair value using the estimated or contracted sales price less costs to sell. Any real estate assets recorded at fair value on a non-recurring basis as a result of our impairment analysis are valued using unobservable local and national industry market data such as comparable sales, appraisals, brokers’ opinions of value and/or terms of definitive sales contracts. Additionally, the analysis includes considerable judgement in our estimates of hold periods, projected cash flows and discount and capitalization rates. Significant increases or decreases in any of these inputs, particularly with regards to cash flow projections and discount and capitalization rates, would result in a significantly lower or higher fair value measurement of the real estate assets being assessed.

We will record an impairment charge related to our investments, including investments in non-consolidated entities, if we determine the fair value of the investments are less than their carrying value and such impairment is other-than-temporary. We evaluate whether events or changes in circumstances indicate that the carrying amount of our investments may not be recoverable. Our evaluation of changes in economic or operating conditions and whether an impairment is other-than-temporary may include developing estimates of fair value, forecasted cash flows or operating income before depreciation and amortization. We estimate undiscounted cash flows and fair value using observable and unobservable data such as operating income, hold periods, estimated

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capitalization and discount rates, or relevant market multiples, leasing prospects and local market information and whether certain impairments are other-than-temporary.

Allowance for Credit Losses. “ASC 326, Financial Instruments-Credit Losses” (“ASC 326”) requires that we measure and record current expected credit losses for our sales-type lease. We have elected to use a discounted cash flow model to estimate the allowance for credit losses. This model requires us to develop cash flows which project estimated credit losses over the life of the lease and discount these cash flows at the asset’s effective interest rate. We then record an allowance equal to the difference between the amortized cost basis of the asset and the present value of the expected credit loss cash flows.

Expected losses within our cash flows are determined by estimating the probability of default of our tenant and their parent guarantors over the term of the lease. We evaluate the collectability of our investment in a sales-type lease based various probability weighted default scenarios that include, but are not limited to, current payment status, the financial strength of our tenant and its parent guarantors, current economic conditions and 20 years of historical information on corporate defaults for entities with similar credit. Estimates in the discounted cash flow model are highly subjective. We have engaged a nationally recognized data analytics firm to assist us with estimating the probability default of our tenant and their parent guarantor.

We regularly evaluate the extent and impact of any credit deterioration that could affect performance and the value of our investment in a sales-type leases, as well as the financial and operating capability of the tenant. We also evaluate the tenant’s competency in managing and operating the secured property and consider the overall economic environment, real estate sector and geographic sub-market in which the secured property is located. If a tenant's credit deteriorates and it defaults under the terms of the sales-type lease, we put the lease in non-accrual status until it is determined that all payments under the lease are probable of being collected. The criteria evaluated to determine when a lease is in non-accrual status is subjective.

New Accounting Pronouncements

For a discussion of new accounting pronouncements, see Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this report.

Cybersecurity

While we have yet to experience a cyber attack that disrupted our operations in any material respect, all companies, including ours, are increasing the resources allocated to address and protect against cybersecurity threats. Due to the small size of our organization, we rely on third-parties to provide advice and services with respect to cybersecurity, which is not currently, but could become, a material cost.

Environmental, Social and Governance

ESG matters are becoming a central focus for our shareholders, employees, tenants, suppliers, creditors, and communities. During 2022, we allocated an increased amount of resources to ESG matters. We expect to continue to increase our ESG efforts and the resources allocated to ESG matters in the near future.

Liquidity

General. Our principal sources of liquidity have been (1) undistributed cash flows generated from our investments, (2) proceeds from the sales of our investments, (3) the public and private equity and debt markets, (4) corporate level borrowings, (5) property specific debt, and (6) commitments from co-investment partners. We believe our ratio of dividends to Adjusted Company Funds From Operations is conservative, and allows us to retain cash flow for internal growth.

Our ability to incur additional debt to fund acquisitions is dependent upon our existing leverage, the value of the assets we are attempting to leverage, our revenues and general economic and credit market conditions, which may be outside of management's control or influence.

Cash Flows. We believe that cash flows from operations will continue to provide adequate capital to fund our operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with applicable REIT requirements in both the short-term and long-term. However, our cash flow from operations may be negatively affected in the near term if we experience tenant defaults. In addition, we anticipate that cash on hand, borrowings under our unsecured revolving credit facility, capital recycling proceeds, issuances of equity, mortgage proceeds and other debt, as well as other available alternatives, will provide the necessary capital required by our business.

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Cash flows from operations as reported in the consolidated statements of cash flows totaled $194.3 million for 2022 and $220.3 million for 2021. The decrease was primarily related to property sales and a decrease in termination fee income, partially offset by cash flow generated from acquiring properties. The underlying drivers that impact our working capital, and therefore cash flows from operations, are the timing of collection of rents, including reimbursements from tenants, payment of interest on mortgage debt and payment of operating and general and administrative costs. We believe the net-lease structure of the leases encumbering a majority of the properties in which we have an interest mitigates the risks of the timing of cash flows from operations since the payment and timing of operating costs related to the properties are generally borne directly by the tenant. The collection and timing of tenant rents are closely monitored by management as part of our cash management program.

Net cash used in investing activities totaled $236.9 million in 2022 and $337.8 million in 2021. Cash used in investing activities related primarily to acquisitions of real estate, investments in real estate under construction, land held for development, capital expenditures, lease costs, investments in non-consolidated entities, investment in a note receivable and changes in real estate deposits, net. Cash provided by investing activities primarily related to net proceeds received from the disposition of real estate and distributions from non-consolidated entities.

Net cash (used in) provided by financing activities totaled ($93.9) million in 2022 and $129.1 million in 2021. Cash used in financing activities in 2022 was primarily related to the repurchase of common shares, the purchase of a noncontrolling interest and dividend and debt service payments, offset by common share issuances and contributions from noncontrolling interests . Cash provided by financing activities in 2021 was primarily related to the issuance of the 2031 Senior Notes, revolving credit facility borrowings, mortgage proceeds, issuances of common shares and cash contributions from noncontrolling interests, offset by the redemption of the 2023 Senior Notes, dividend and debt service payments.

Public and Private Equity and Debt Markets. We access the public and private equity and debt markets on an opportunistic basis when we (1) believe conditions are favorable and (2) have a compelling use of proceeds.

We expect to continue to access debt and equity markets in the future to implement our business strategy and to fund future growth when market conditions are favorable. However, the volatility in the capital markets primarily resulting from the effects of rising interest rate volatility and rising inflation may negatively affect our ability to access these capital markets.

Equity:

At-The-Market Offering Program. We maintain an At-The-Market offering program, or ATM program, under which we can issue common shares, including through forward contracts.

During 2022, we issued 3.6 million common shares previously sold on a forward basis in the first quarter of 2021 on the maturity date of the contracts and received $38.5 million of net proceeds. During 2021, we settled 5.0 million common shares previously sold on a forward basis on the maturity date of the contract and received $53.6 million of net proceeds.

During 2021, we sold 1.1 million shares under the ATM program for net proceeds of $13.5 million. We did not sell shares under the ATM program during 2022.

During 2021, we amended the terms of our ATM offering program, under which we may, from time to time, sell up to $350.0 million common shares over the term of the program. As of December 31, 2022, common shares with an aggregate value of $295.0 million remain available for issuance under the ATM program.

Underwritten equity offerings. During 2021, we entered into forward sales contracts for the sale of 16.0 million common shares at a public offering price of $12.11 per common share in an underwritten equity offering. In December 2022, we issued 16.0 million common shares and we received $183.4 million of net proceeds.

The volatility in the capital markets primarily resulting from the effects of interest rate volatility and rising inflation may negatively affect our ability to access the capital markets through our ATM program and other offerings.

Direct Share Purchase Plan. We maintain a direct share purchase plan, which has two components, (i) a dividend reinvestment component and (ii) a direct share purchase component. Under the dividend reinvestment component, common shareholders and holders of OP units may elect to automatically reinvest their dividends and distributions to purchase our common shares. Under the direct share purchase component, our current investors and new investors can make optional cash purchases of our common shares. The administrator of the plan, Computershare Trust Company, N.A., purchases common shares for the accounts of the participants under the plan, at our discretion, either directly from us, on the open market or through a combination of those two options. No shares were purchased from us under the plan in 2022 and 2021.

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Share Repurchase Program. In August 2022, our Board of Trustees authorized the repurchase of up to an additional 10.0 million common shares under our share repurchase program, which does not have an expiration date. During 2022, 12.1 million common shares were repurchased and retired for an average price of $10.78 per share. During 2021, there were no share repurchases. As of December 31, 2022, 6.9 million common shares remain available for repurchase under this authorization.

Operating Partnership Units. In recent years there has not been a great demand for OP units as consideration and, as a result, we expect the percentage of common shares that will be outstanding in the future relative to OP units will increase, and income attributable to noncontrolling interests should be expected to decrease, as such OP units are redeemed for our common shares. Furthermore, our credit agreement requires us to own at least 95.5% of a subsidiary for the assets of such subsidiary to be included in the calculation of our credit agreement covenants, which incents us to maintain our percentage ownership in LCIF and not issue additional OP units.

During 2021, LCIF redeemed and canceled 1,598,906 OP units in connection with the disposition of three properties. As of December 31, 2022, there were 0.7 million OP units outstanding not owned by us which were convertible on a one OP unit for approximately 1.13 common shares basis into an aggregate of 0.8 million common shares assuming we satisfied redemptions entirely with common shares. All outstanding OP units are entitled to a distribution equal to the dividend on our common shares or a stated distribution that may adjust based on our common share dividend amount. We expect to merge LCIF with and into us by the end of 2023.

Debt:

Corporate Borrowings. In 2021, we issued $400.0 million aggregate principal amount of our 2031 Senior Notes. We used a portion of the net proceeds from the offering of the 2031 Senior Notes to redeem the $188.8 million aggregate principal balance of our outstanding 2023 Senior Notes.

The following Senior Notes were outstanding as of December 31, 2022:

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[[/GREPCENT_TABLE]]

The Senior Notes are unsecured and pay interest semi-annually in arrears. We may redeem the Senior Notes at our option at any time prior to maturity in whole or in part by paying the principal amount of the Senior Notes being redeemed plus a make-whole premium.

A summary of the maturity dates and interest rates under our unsecured credit agreement, as of December 31, 2022, are as follows:

[[GREPCENT_TABLE]]
[["","","Maturity Date","","Interest Rate"],["$600.0 Million Revolving Credit Facility(1)","","07/2026","","SOFR + 0.85%"],["$300.0 Million Term Loan(2)","","01/2025","","Term SOFR + 1.00%"]]
[[/GREPCENT_TABLE]]

(1)     Maturity date of the revolving credit facility can be extended to July 2027 at our option. The interest rate ranges from SOFR plus 0.725% to 1.40%. At December 31, 2022, we had no borrowings outstanding and availability of $600.0 million, subject to covenant compliance.

(2)    The Term SOFR portion of the interest rate was swapped to obtain a current fixed rate of 2.722% per annum.

As of December 31, 2022, we were in compliance with the financial covenants contained in our corporate level debt agreements.

During 2007, we issued $200.0 million in Trust Preferred Securities, which bore interest at a fixed rate of 6.804% through April 2017 and, thereafter, bears interest at a variable rate of three month LIBOR plus 170 basis points. These securities are (1) classified as debt, (2) due in 2037 and (3) currently redeemable by us. As of December 31, 2022, there were $129.1 million of these securities outstanding. During 2023, we expect to transition from LIBOR to a new benchmark rate.

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Property Specific Debt. As of December 31, 2022, we have a limited number of consolidated properties subject to mortgages. Our property owner subsidiaries do not have mortgage maturities with balloon payments due until 2031. With respect to mortgages encumbering properties where the expected lease rental revenues are sufficient to provide an estimated property value in excess of the mortgage balance, we believe our property owner subsidiaries have sufficient sources of liquidity to meet these obligations through future cash flows from operations, the credit markets and, if determined appropriate by us, a capital contribution from us from either cash on hand ($54.4 million at December 31, 2022), property sale proceeds or borrowing capacity on our primary credit facility ($600.0 million as of December 31, 2022, subject to covenant compliance).

Our secured debt decreased to approximately $73.2 million at December 31, 2022 compared to $84.4 million at December 31, 2021. We expect to continue to use property specific, non-recourse mortgages in certain situations as we believe that by properly matching a debt obligation, including the balloon maturity risk, with the terms of a lease, our cash-on-cash returns increase and the exposure to residual valuation risk is reduced. In addition, we may procure credit tenant lease financing in certain situations where we are able to monetize all or a significant portion of the rental revenues of a property at an attractive rate.

Institutional Fund Management. We have entered into co-investment programs and joint ventures with institutional investors to mitigate our risk in certain assets and increase our return on equity to the extent we earn management or other fees. However, investments in certain co-investment programs and joint ventures limit our ability to make investment decisions unilaterally relating to the assets and limit our ability to deploy capital.

During 2021, we recapitalized a portfolio of 22 special purpose industrial properties, primarily manufacturing assets, through the formation of an institutional joint venture. This enabled us to capitalize on the compression of capitalization rates for these industrial assets, while mitigating risks of staying fully invested in these assets. We own 20% of this institutional joint venture and we and our partner are committed to fund an additional $50.0 million and $200.0 million, respectively, of future capital to grow this joint venture by acquiring special purpose industrial properties that do not conflict with our warehouse and distribution investment strategy. No additional acquisitions have been made by this joint venture and it is unlikely that this joint venture will make acquisitions until interest rates stabilize and financing is more accessible.

The real estate investments owned by our institutional joint ventures are generally financed with non-recourse debt. Non-recourse debt is generally defined as debt whereby the lenders' sole recourse with respect to borrower defaults is limited to the value of the assets collateralized by the debt. The lender generally does not have recourse against any other assets owned by the borrower or any of the members or partners of the borrower, except for certain specified exceptions listed in the particular loan documents. These exceptions generally relate to “bad boy” acts, including fraud, prohibited transfers and breaches of material representations, and environmental matters. We have guaranteed such obligations for certain of our non-consolidated entities with respect to $552.8 million of such non-recourse debt. We believe the likelihood of making any payments under such guaranties is remote and we generally have an agreement from each partner to reimburse us for its proportionate share of any liability related to a guarantee trigger unless such trigger is caused solely by us.

Capital Recycling. Part of our strategy to effectively manage our balance sheet involves pursuing and executing well on property dispositions and recycling of capital. During 2022, we disposed of our interests in 10 properties and one land parcel for an aggregate gross price of $197.0 million. Additionally, the NNN Office JV disposed of six properties for an aggregate $354.9 million of gross proceeds and distributed $28.1 million to us after repayment of an aggregate of $229.5 million of non-recourse debt. The proceeds were primarily used to (1) fund the development pipeline and (2) make investments in real property.

As we near the completion of the capital recycling of our non-industrial assets, we have recycled, and we expect to continue our recycling efforts with respect to our older industrial assets and/or those outside our target markets. We believe capital recycling (1) provides cost effective and timely capital to deleverage and to support for our investment activities and (2) allows us to maintain line capacity and cash in advance of our development commitments.

Liquidity Needs. Our principal liquidity needs are the contractual obligations set forth under the heading “Contractual Obligations,” below, and the payment of dividends to our shareholders and distributions to the holders of OP units. As we grow our development pipeline, we expect that development activities will become a greater part of our liquidity needs.

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As of December 31, 2022, we had approximately $1.5 billion of indebtedness, consisting of mortgages and notes payable outstanding, a term loan, 2.375%, 2.70%, and 4.40% Senior Notes and Trust Preferred Securities, with a weighted-average interest rate of approximately 3.2%. The ability of a property owner subsidiary to make debt service payments depends upon the rental revenues of its property and its ability to refinance the mortgage related thereto, sell the related property, or access capital from us or other sources. A property owner subsidiary's ability to accomplish such goals will be affected by numerous economic factors affecting the real estate industry, including the risks described under “Risk Factors” in Part I, Item 1A of this Annual Report.

If we are unable to satisfy our contractual obligations and other operating costs with our cash flow from operations, we intend to use borrowings and proceeds from issuances of equity or debt securities. If a property owner subsidiary is unable to satisfy its contractual obligations and other operating costs, it may default on its obligations and lose its assets in foreclosure or through bankruptcy proceedings.

In connection with our intention to continue to qualify as a REIT for federal income tax purposes, we expect to continue paying regular dividends to our shareholders. These dividends are expected to be paid from operating cash flows and/or from other sources. Since cash used to pay dividends reduces amounts available for capital investments, we generally intend to maintain a conservative dividend payout ratio, reserving such amounts as we consider necessary for the maintenance or expansion of properties in our portfolio, debt reduction, the acquisition of interests in new properties as suitable opportunities arise, and such other factors as our Board of Trustees considers appropriate.

We paid approximately $142.5 million in cash dividends to our common and preferred shareholders in 2022. Although our property owner subsidiaries receive the majority of our base rental payments on a monthly basis, we intend to continue paying dividends quarterly. Amounts accumulated in advance of each quarterly distribution are invested by us in short-term money market or other suitable instruments.

Contractual Obligations

As of December 31, 2022, we had six ongoing consolidated development projects and expect to incur approximately $107.0 million of costs in 2023, excluding noncontrolling interests' share, to substantially complete the construction of such projects. As of December 31, 2022, we had three consolidated and two non-consolidated subsidiaries that owned land parcels held for industrial development. We are unable to estimate the timing of any required fundings for potential development projects on these parcels.

Capital Resources

General. Due to the net-lease structure of a majority of our investments, our property owner subsidiaries historically have not incurred significant expenditures in the ordinary course of business to maintain the properties in which we have an interest. As leases expire, we expect our property owner subsidiaries to incur costs in extending the existing tenant leases, re-tenanting the properties with a single-tenant, or converting the property to multi-tenant use. The amounts of these expenditures can vary significantly depending on tenant negotiations, market conditions, rental rates and property type.

Single-Tenant Properties. We do not anticipate significant capital expenditures at the single-tenant properties in which we have an interest that are subject to net or similar leases since the tenants at these properties generally bear all or substantially all of the cost of property operations, maintenance and repairs. However, at certain properties subject to net leases, our property owner subsidiaries are responsible for replacement and/or repair of certain capital items, which may or may not be reimbursed. In addition, at certain single-tenant properties that are not subject to a net lease, our property owner subsidiaries have a level of property operating expense responsibility, which may or may not be reimbursed.

Multi-Tenant Properties. Primarily as a result of non-renewals at single-tenant net-lease properties, we have interests in multi-tenant properties in our consolidated portfolio. While tenants of these properties are generally responsible for increases over base year expenses, our property owner subsidiaries are generally responsible for the base-year expenses and capital expenditures, and are responsible for all expenses related to vacant space, at these properties.

Vacant Properties. To the extent there is a vacancy in a property, our property owner subsidiary would be obligated for all operating expenses, including capital expenditures, real estate taxes and insurance. When a property is vacant, our property owner subsidiary may incur substantial capital expenditure and releasing costs to re-tenant the property. However, we believe that, over the long term, our focus on industrial assets will result in significant savings compared to investing in office assets due to the lower operating and retenanting costs of industrial assets compared to office assets.

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Property Expansions. Under certain leases, tenants have the right to expand the facility located on a property in which we have an interest. We expect our property owner subsidiaries may fund these property expansions with either additional secured borrowings, the repayment of which will be funded out of rental increases under the leases covering the expanded properties, or capital contributions from us.

Ground Leases. The tenants of properties in which we have an interest generally pay the rental obligations on ground leases either directly to the fee holder or to our property owner subsidiary as increased rent. However, our property owner subsidiaries are responsible for these payments (1) under certain leases without reimbursement and (2) at vacant properties.

Environmental Matters. Based upon management's ongoing review of the properties in which we have an interest, management is not aware of any environmental condition with respect to any of these properties that would be reasonably likely to have a material adverse effect on us. There can be no assurance, however, that (1) the discovery of environmental conditions, which were previously unknown, (2) changes in law, (3) the conduct of tenants or (4) activities relating to properties in the vicinity of the properties in which we have an interest, will not expose us to material liability in the future. Changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of the tenants of properties in which we have an interest.

Results of Operations

Year ended December 31, 2022 compared with December 31, 2021. The decrease in net income attributable to common shareholders of $268.5 million was primarily due to the items discussed below.

The decrease in total gross revenues of $22.8 million was primarily a result of a decrease of $15.1 million of termination income. In addition, property sales, including the recapitalization in December 2021 of our special purpose industrial portfolio now owned by MFG Cold JV, contributed to the decrease, which was partially offset by revenue from recently acquired properties and an increase in advisory fees during 2022.

The increase in depreciation and amortization expense of $3.9 million was primarily due to acquisition activity.

The increase in property operating expense of $7.6 million was primarily due to an increase in operating expense responsibilities at certain properties.

The increase in general and administrative expense of $3.3 million was primarily due to an increase of $1.4 million in costs incurred related to the Board of Trustees' strategic alternatives review and costs related to shareholder activism. The remaining $1.9 million increase is primarily due to an increase in severance expense, payroll expense, trustee fees, legal and other consulting costs.

The increase in transaction costs of $3.7 million is primarily related to recognizing the direct costs of entering into a sales-type lease as an expense in accordance with the applicable GAAP accounting guidance, with no similar transaction in the prior year.

The decrease in interest and amortization expense of $1.3 million related primarily to the satisfaction of secured debt in 2021 and a $4.3 million increase in capitalized interest mostly related to increased development. The decrease was partially offset by an increase in interest expense related to increased interest rates on our variable-rate unsecured debt and increased amounts of unsecured debt during 2022 compared to 2021.

The decrease in debt satisfaction losses, net, of $13.8 million was primarily related to the redemption of the 2023 Senior Notes during 2021.

The decrease in impairment charges of $2.5 million was primarily due to the timing of impairment charges taken on certain properties. The impairments were primarily due to shortened hold periods, rising interest rates, vacancy and lack of leasing prospects.

The decrease in gains on sales of properties of $308.2 million was primarily related to the sale of 22 properties to a newly-formed joint venture in 2021 and the timing of property dispositions.

The increase in selling profit from sales-type leases of $47.1 million was due to three leases qualifying as sales-type leases in 2022 with no comparable transactions in 2021.

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The increase in equity in earnings (losses) of non-consolidated entities of $16.2 million was primarily due to recognizing our share of gains on sale of five properties from NNN Office JV L.P. in 2022 in the amount of $24.5 million with no property sales at our non-consolidated entities in 2021. The increase was primarily offset by recognizing our share of impairment charges and losses on debt satisfaction related to NNN Office JV L.P. in 2022 in the amount of $5.1 million and $1.5 million, respectively.

The increase in net income or decrease in net loss in future periods will be closely tied to the level of acquisitions made by us. Without acquisitions, the sources of growth in net income are limited to fixed rent adjustments and index adjustments (such as the consumer price index), reduced interest expense on amortizing mortgages and variable rate indebtedness and by controlling other variable overhead costs. However, there are many factors beyond management's control that could offset these items including, without limitation, changes in economic conditions such as the recent economic uncertainty primarily caused by the COVID-19 pandemic, increased interest rates and tenant monetary defaults and the other risks described in this Annual Report.

The analysis of the results of operations for the year ended December 31, 2021 compared with December 31, 2020 is included in our 2021 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, on February 24, 2022.

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Same-Store Results

Same-store net operating income, or NOI, which is a non-GAAP measure, represents the NOI for consolidated properties that were owned and included in our portfolio for two comparable reporting periods. We define NOI as operating revenues (rental income (less GAAP rent adjustments, non-cash income related to sales-type leases and lease termination income, net), and other property income) less property operating expenses. As same-store NOI excludes the change in NOI from acquired and disposed of properties, it highlights operating trends such as occupancy levels, rental rates and operating costs on properties. Other REITs may use different methodologies for calculating same-store NOI, and accordingly same-store NOI may not be comparable to other REITs. Management believes that same-store NOI is a useful supplemental measure of our operating performance. However, same-store NOI should not be viewed as an alternative measure of our financial performance since it does not reflect the operations of our entire portfolio, nor does it reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other nonproperty income and losses, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact our results from operations. We believe that net income is the most directly comparable GAAP measure to same-store NOI.

The following presents our consolidated same-store NOI, for the years ended December 31, 2022 and 2021 ($000):

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2022","","2021"],["Total cash base rent","","","","","$","207,087","","","$","197,684"],["Tenant reimbursements","","","","","35,221","","","33,186"],["Property operating expenses","","","","","(39,049)","","","(36,910)"],["Same-store NOI","","","","","$","203,259","","","$","193,960"]]
[[/GREPCENT_TABLE]]

Our reported same-store NOI increased from 2021 to 2022 by 4.8% primarily due to an increase in occupancy and cash base rents. As of December 31, 2022 and 2021, our historical same-store square footage leased was 99.8% and 99.7%, respectively.

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Below is a reconciliation of net income to same-store NOI for periods presented:

[[GREPCENT_TABLE]]
[["","","","Year ended December 31,"],["","","","","","2022","","2021"],["Net income","","","","","$","116,243","","","$","385,091"],["Interest and amortization expense","","","","","45,417","","","46,708"],["Provision for income taxes","","","","","1,102","","","1,293"],["Depreciation and amortization","","","","","180,567","","","176,714"],["General and administrative","","","","","38,714","","","35,458"],["Transaction costs","","","","","4,177","","","432"],["Non-operating/advisory fee income","","","","","(6,550)","","","(4,402)"],["Gains on sales of properties","","","","","(59,094)","","","(367,274)"],["Impairment charges","","","","","3,037","","","5,541"],["Selling profit from sales-type leases","","","","","(47,059)","","","\u2014"],["Debt satisfaction losses, net","","","","","119","","","13,894"],["Equity in (earnings) losses of non-consolidated entities","","","","","(16,006)","","","190"],["Lease termination income, net","","","","","(238)","","","(14,972)"],["Straight-line adjustments","","","","","(11,412)","","","(12,324)"],["Lease incentives","","","","","518","","","780"],["Amortization of above/below market leases","","","","","(1,865)","","","(1,551)"],["Sales-type lease adjustments","","","","","(249)","","","\u2014"],["NOI","","","","","247,421","","","265,578"],["Less NOI:"],["Acquisitions and dispositions","","","","","(44,162)","","","(71,618)"],["Same-Store NOI","","","","","$","203,259","","","$","193,960"]]
[[/GREPCENT_TABLE]]

Funds From Operations

We believe that Funds from Operations, or FFO, which is a non-GAAP measure, is a widely recognized and appropriate measure of the performance of an equity REIT. We believe FFO is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. As a result, FFO provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not necessarily be apparent from net income.

The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as “net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sales of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. The reconciling items include amounts to adjust earnings from consolidated partially-owned entities and equity in earnings of unconsolidated affiliates to FFO.” FFO does not represent cash generated from operating activities in accordance with GAAP and is not indicative of cash available to fund cash needs.

We present FFO available to common shareholders and unitholders - basic and also present FFO available to all equityholders and unitholders - diluted on a company-wide basis as if all securities that are convertible, at the holder's option, into our common shares, are converted at the beginning of the period. We also present Adjusted Company FFO available to all equityholders and unitholders - diluted, which adjusts FFO available to all equityholders and unitholders - diluted for certain items which we believe are not indicative of the operating results of our real estate portfolio. We believe this is an appropriate presentation as it is frequently requested by securities analysts, investors and other interested parties. Since others do not calculate these measures in a similar fashion, these measures may not be comparable to similarly titled measures as reported by others. These measures should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity.

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The following presents a reconciliation of net income attributable to common shareholders to FFO available to common shareholders and unitholders and Adjusted Company FFO available to all equityholders and unitholders for 2022 and 2021 (dollars in thousands, except share and per share amounts):

[[GREPCENT_TABLE]]
[["","","","","","Year Ended December31,"],["","","","","","","2022","","2021"],["FUNDS FROM OPERATIONS:"],["Basic and Diluted:"],["Net income attributable to common shareholders","","","","","$","107,307","","","$","375,848"],["Adjustments:"],["","Depreciation and amortization","","","","","177,725","","","173,833"],["","Impairment charges - real estate, including our share of non-consolidated entities","","","","","8,137","","","5,541"],["","Noncontrolling interests - OP units","","","","","156","","","1,672"],["","Amortization of leasing commissions","","","","","2,842","","","2,881"],["","Joint venture and noncontrolling interest adjustment","","","","","11,112","","","8,370"],["","Gains on sales of properties, including our share of non-consolidated entities","","","","","(83,562)","","","(367,274)"],["FFO available to common shareholders and unitholders - basic","","","","","223,717","","","200,871"],["","Preferred dividends","","","","","6,290","","","6,290"],["","Amount allocated to participating securities","","","","","186","","","510"],["FFO available to all equityholders and unitholders - diluted","","","","","230,193","","","207,671"],["","Selling profit from sales-type leases (1)","","","","","(47,059)","","","\u2014"],["","Allowance for credit losses","","","","","","93","","","\u2014"],["","Transaction costs(2)","","","","","","4,177","","","432"],["","Debt satisfaction losses, net, including our share of non-consolidated entities","","","","","1,615","","","13,894"],["","Other non-recurring costs(3)","","","","","","2,573","","","1,199"],["","Noncontrolling interest adjustments","","","","","","1,469","","","\u2014"],["Adjusted Company FFO available to all equityholders and unitholders - diluted","","","","","$","193,061","","","$","223,196"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Per Common Share and Unit Amounts"],["Basic:"],["FFO","","","","","","","$","0.80","","","$","0.72"],["Diluted:"],["FFO","","","","","","","$","0.80","","","$","0.72"],["Adjusted Company FFO","","","","","","","$","0.67","","","$","0.78"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Weighted-Average Common Shares:"],["Basic:"],["Weighted-average common shares outstanding - basic EPS","","","","","","","279,887,760","","277,640,835"],["Operating partnership units(4)","","","","","","","853,259","","1,918,845"],["Weighted-average common shares outstanding - basic FFO","","","","","","","280,741,019","","279,559,680"],["Diluted:"],["Weighted-average common shares outstanding - diluted EPS","","","","","","","282,473,458","","287,369,742"],["Unvested share-based payment awards","","","","","","","17,381","","44,261"],["Preferred shares - Series C","","","","","","","4,710,570","","\u2014"],["Weighted-average common shares outstanding - diluted FFO","","","","","","","287,201,409","","287,414,003"]]
[[/GREPCENT_TABLE]]

(1)    Aggregate gains recognized upon entering into a sales-type lease and exercises of tenant's purchase options in leases.

(2)    Includes initial direct costs incurred in connection with entering into investments classified as sales-type leases and other acquisition related costs.

(3)    Includes strategic alternatives and costs related to shareholder activism.

(4)    Includes OP units other than OP units held by us.

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