# LXP Industrial Trust (LXP) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LXP Industrial Trust's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/910108/000144483824000053/lxp-20231231.htm
Accession: 0001444838-24-000053
Filing date: 2024-02-15
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/LXP/mda/fy2024/ (FY 2024)

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, 2023 and 2022, 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.

Summary of 2023 Transactions

The following summarizes certain of our transactions during 2023.

Leasing Activity.

•We entered into new leases and lease extensions encompassing 6.8 million square feet. The average fixed rent on the second generation new and extended leases was $5.40 per square foot compared to the average fixed rent on these leases before extension of $3.85 per square foot. The weighted-average cost of tenant improvements and lease commissions was $12.31 per square foot for new first generation leases and $1.82 per square foot for second generation new and extended leases.

Investments.

•Acquired one warehouse/distribution facility for a cost of $15.0 million.

•Acquired a 13.8-acre parcel of land and partially completed 250,000 square foot warehouse/distribution facility in Etna, Ohio from a non-consolidated joint venture for $15.9 million.

•Completed core and shell construction of seven warehouse/distribution facilities containing an aggregate of 4.2 million square feet in four target markets.

•Placed into service warehouse/distribution facilities containing an aggregate of 1.8 million square feet in four target markets.

•Invested an aggregate of $122.1 million in development activities, including $85.8 million in ongoing consolidated development projects.

Capital Recycling.

•Disposed of our interests in certain properties and one land parcel for an aggregate gross disposition price of $100.2 million.

•Received $8.1 million and satisfied our share of the proportionate debt from a non-consolidated joint venture, in which we had a 25% interest, upon the disposition of its specialty net-leased asset for $82.0 million and the satisfaction of an aggregate of $48.9 million of non-recourse debt.

•Satisfied our share of the proportionate debt from another non-consolidated joint venture, in which we have a 20% ownership interest, upon the disposition of one of its properties for a disposition price of $30.1 million and the satisfaction of $29.4 million of non-recourse variable rate debt.

Debt.

•Issued $300.0 million aggregate principal amount of 6.75% Senior Notes due 2028 (“2028 Senior Notes”), at an issuance price of 99.423% of the principal amount.

•Amended the agreement governing our $300.0 million term loan to extend the maturity from January 31, 2025 to January 31, 2027.

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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 2023, we acquired or completed and placed into service $146.4 million of warehouse and distribution assets, which is a decrease of $48.8 million compared to 2022 investment activity of $195.2 million. The decrease was primarily due to the substantial completion of our portfolio transformation efforts and related tax-free exchange capital recycling and the increase in our cost of capital driven by the increase in interest rates. Also there has been a disconnect between buyers and sellers in the real estate market over the last year, which has generally slowed acquisition and disposition activity in our target markets.

As of December 31, 2023, we had two non-industrial assets in our consolidated portfolio, which were held for sale. In addition, we expect to recycle out of certain warehouse and distribution facilities located outside of our target markets over time and use the proceeds to reduce 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. The main drivers of growth in the industrial real estate market have been e-commerce and near shoring, where companies increase 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, specifically build-to-suit projects, over acquisitions of leased properties due to the higher 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 more on real estate characteristics such as location and related demographic and local economic trends than it does on tenant credit. 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 generally 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. In 2024, we expect to focus our development activities on build-to-suit activities and limit the amount of speculative development to markets where there is sufficient tenant demand. In 2022 and 2023, construction starts in our target markets were generally down compared to construction starts in 2020 and 2021. We believe this will result in lower supply in the future and may provide opportunity for more build-to-suit investment.

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.

We expect rents in our target markets to remain above existing rents due to strong demand and low vacancy. As of December 31, 2023, we had 11 single-tenant leases in our industrial portfolio where the lease term is scheduled to expire in 2024, covering approximately 2.9 million square feet. As of December 31, 2023, approximately 58.0% of our industrial ABR was from leases scheduled to expire during 2024 through 2029. During the year ended December 31, 2023, we completed 6.8 million square feet of new leases and lease extensions, raising industrial Base and Cash Base Rents by 40.1% and 27.0%, respectively,

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and 52.3% and 37.3%, respectively excluding fixed-rate renewals. A considerable portion of our leases expire from 2024 to 2029 and we expect renewals and new lease terms to result in growth in future income.

Inherent Growth. As of December 31, 2023, 98.1% of our industrial leases had scheduled rent increases. The average escalation rate of these leases based on the next rent step was 2.6% as of December 31, 2023. 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, 2023, we owned three consolidated other real estate assets consisting of two office properties and a land ground lease. The remaining office assets are held for sale and we believe we have obtained the highest possible valuation by pursuing buyers that intend to redevelop the properties. The land ground lease is underlying a parking garage held in a joint venture where our joint venture partner is entitled to most of the cash flow.

Impairment charges

During 2023 and 2022, we incurred impairment charges, of $16.5 million and $3.0 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 2023 and 2022 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.

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 and Development 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, 2023, 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.

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For properties under development, costs associated with development (i.e., land, construction costs, interest expense, property taxes and other costs associated with development) are aggregated into the total capitalized costs of the property. Included in these costs are management’s estimates for the portions of internal costs (primarily personnel costs) deemed related to such development activities. The internal costs are allocated to specific development projects based on development activities.

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 when it is probable that the lease revenue is collectible over the remaining 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 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 lease, 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

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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.

Liquidity and Capital Resources

Overview:

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 dividend policy is conservative, and allows us to retain cash flow for internal growth.

Our ability to incur additional debt to fund acquisitions and the cost of any such debt 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.

Cash flows from operations as reported in the consolidated statements of cash flows totaled $209.4 million for 2023 and $194.3 million for 2022. The increase was primarily related to increased rental revenue related to lease extensions and placing development properties into service, partially offset by a decrease in cash flow due to property sales. 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 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 $183.5 million in 2023 and $236.9 million in 2022. Cash used in investing activities related primarily to acquisitions of real estate, investments in real estate under construction, capital expenditures, lease costs, investments in non-consolidated entities. Cash provided by investing activities primarily related to net proceeds received from the disposition of real estate and distributions from non-consolidated entities and the receipt of principal payments on a note receivable and changes in real estate deposits, net.

Net cash provided by (used in) financing activities totaled $119.0 million in 2023 and ($93.9) million in 2022. Cash provided by financing activities in 2023 was primarily related to the receipt of proceeds from the issuance of the 2028 Senior Notes and borrowings on the credit facility, offset by the repurchase of common shares to settle tax obligations, the purchase of a noncontrolling interest and dividend and debt service payments, 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.

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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 rates and rising inflation have 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 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, 2023, common shares with an aggregate value of $295.0 million remain available for issuance under the ATM program.

During 2022, we issued 3.6 million common shares previously sold on a forward basis under our ATM program in the first quarter of 2021 on the maturity date of the contracts and received $38.5 million of net proceeds. We did not issue common shares under the ATM program during 2023.

Underwritten equity offerings. In December 2022, we issued 16.0 million common shares and we received $183.4 million of net proceeds related to an underwritten equity offering in 2021, which was sold on a forward basis. There were no underwritten equity offerings in 2023.

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 2023 and 2022.

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. No shares were repurchased in 2023. As of December 31, 2023, 6.9 million common shares remain available for repurchase under this authorization.

Debt:

Corporate Borrowings. In 2023, we issued $300.0 million aggregate principal amount of our 2028 Senior Notes. We used the proceeds to pay down all amounts under our unsecured revolving credit facility and invested the remaining proceeds in cash and cash equivalents and short-term investments to fund general corporate purposes, including to repay other indebtedness at or in advance of maturity and to fund our development pipeline.

The following Senior Notes were outstanding as of December 31, 2023:

[[GREPCENT_TABLE]]
[["Issue Date","","Face Amount (millions)","","Interest Rate","","Maturity Date","","Issue Price"],["November 2023","","$","300.0","","","6.750","%","","November 2028","","99.423","%"],["August 2021","","400.0","","","2.375","%","","October 2031","","99.758","%"],["August 2020","","400.0","","","2.70","%","","September 2030","","99.233","%"],["May 2014","","198.9","","","4.40","%","","June 2024","","99.883","%"],["","","$","1,298.9"]]
[[/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.

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A summary of the maturity dates and interest rates under our unsecured credit agreement, as of December 31, 2023, 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)","","01/2027","","Term SOFR + 1.00%"]]
[[/GREPCENT_TABLE]]

(1)Maturity date of the revolving credit facility can be extended to July 2027, subject to certain conditions. The interest rate ranges from SOFR (plus a 0.10% index adjustment) plus 0.725% to 1.40%. At December 31, 2023, we had no borrowings outstanding and availability of $600.0 million, subject to covenant compliance.

(2)In November 2023, we amended the agreement governing our $300 million term loan. The amendment among other things extends the maturity of the term loan from January 31, 2025 to January 31, 2027. The Term SOFR portion of the interest rate remains swapped to obtain a current fixed rate of 2.722% per annum until January 31, 2025.

As of December 31, 2023, 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 SOFR plus a 26 basis point adjustment 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, 2023, there were $129.1 million of these securities outstanding.

Property Specific Debt. As of December 31, 2023, 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 and short-term investments ($199.2 million and $130.1 million, respectively, at December 31, 2023), property sale proceeds or borrowing capacity on our primary credit facility ($600.0 million as of December 31, 2023, subject to covenant compliance).

Our secured debt decreased to approximately $60.9 million at December 31, 2023 compared to $73.2 million at December 31, 2022. 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.

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 $458.6 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.

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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 2023, we disposed of our interests in one industrial property, three other properties and one land parcel for an aggregate gross price of $100.2 million. Additionally, the Office JV disposed of one property for $30.1 million of gross proceeds and repaid an aggregate of $29.4 million of non-recourse debt. Additionally, a non-consolidated joint venture, in which we held a 25% ownership interest, disposed of one property for $82.0 million of gross proceeds and we received a distribution of $8.1 million after repayment of $48.9 million of non-recourse debt. The proceeds of our capital recycling efforts 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 debt maturities, interest payment obligations, the payment of dividends to our shareholders and funding our development projects.

As of December 31, 2023, we had approximately $1.8 billion of indebtedness, consisting of mortgages and notes payable outstanding, a term loan, 6.75%, 2.375%, 2.70%, and 4.40% Senior Notes and Trust Preferred Securities, with a weighted-average interest rate of approximately 3.9%. 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.

We expect to be able to satisfy the maturity of our 4.40% Senior Notes from cash and cash equivalent and short-term investments. We expect to pay our non-maturity debt service obligations from cash flow from operations.

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 $151.9 million in cash dividends to our common and preferred shareholders in 2023. 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.

As of December 31, 2023, we expect to incur approximately $53.2 million of costs, excluding noncontrolling interests' share and potential developer fees or partner buyouts, to substantially fund our consolidated development project commitments. As of December 31, 2023, 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.

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Non-Development Capital Expenditures:

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 operating expenses in their spaces, but we are responsible for all expenses related to vacant space and certain non-reimbursable building expenses, 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 re-tenanting costs of industrial assets compared to office assets.

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, 2023 compared with December 31, 2022. The decrease in net income attributable to common shareholders of $83.4 million was primarily due to the items discussed below.

The increase in total gross revenues of $19.3 million was primarily due to an increase of $12.8 million in base rental revenue and a $7.4 million increase in tenant reimbursement income primarily due to acquisitions, properties placed in service and increases in market rental rates, partially offset by property sales.

The increase in depreciation and amortization expense of $3.0 million was primarily due to properties acquired and/or completed and placed in service subsequent to January 1, 2022.

The increase in property operating expense of $3.5 million was primarily due to an increase in operating expense responsibilities at certain properties.

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The decrease of $2.4 million in general and administrative expense was primarily related to a decrease of $2.6 million in costs incurred related to the Board of Trustees' strategic alternatives review and consulting costs related to shareholder activism in 2022. No consulting costs were incurred related to shareholder activism during the year ended December 31, 2023.

The decrease in transaction costs of $4.2 million was due to the recognition of direct costs of a sales-type lease in 2022 with no comparable transaction in 2023.

The increase in non-operating income of $2.0 million was primarily due to an increase in interest income earned from investing some of the proceeds received from the 2028 Senior Notes.

The increase in interest and amortization expense of $1.0 million is primarily due to a $4.4 million increase in variable interest expense related to the Trust Preferred Securities in 2023 compared to 2022. Additionally, the 2028 Senior Notes were issued in November 2023 resulting in a $2.7 million increase to interest expense. These increases were partially offset by an increase of $3.8 million in capitalized interest primarily related to our development projects and a decrease of $2.1 million of interest expense incurred due to a decrease in borrowings on the credit facility during 2023 compared to 2022.

The increase in impairment charges of $13.5 million was primarily related to the timing of impairment charges recognized on certain properties. The impairments in 2023 were taken on office assets primarily due to potential sales.

The decrease in gains on sales of properties of $26.1 million was related to the timing of property dispositions.

The decrease in selling profit from sales-type lease of $47.1 million was due to three leases qualifying as sales-type leases in 2022 with no comparable transaction in 2023.

The decrease in equity in earnings (losses) of non-consolidated entities of $14.6 million was primarily due to the timing of property sales within our non-consolidated entities.

The increase in net income attributable to noncontrolling interest holders of $3.1 million was primarily due to the timing of property dispositions resulting in an increase in noncontrolling interest income of $4.7 million in 2023 compared to 2022. The increase was offset by $1.5 million allocated to noncontrolling interest holders for their share of selling profit on a sales-type lease in 2022, with no comparable transactions in 2023.

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 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, 2022 compared with December 31, 2021 is included in our 2022 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, on February 16, 2023.

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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, stabilized 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. 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 because same-store NOI excludes the change in NOI from acquired and disposed of properties and it highlights operating trends such as occupancy levels, rental rates and operating costs on properties. 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, 2023 and 2022 ($000):

[[GREPCENT_TABLE]]
[["","","","Years Ended December 31,"],["","","","","","2023","","2022"],["Total cash base rent","","","","","$","227,323","","","$","218,772"],["Tenant reimbursements","","","","","43,928","","","37,148"],["Property operating expenses","","","","","(45,964)","","","(39,357)"],["Same-store NOI","","","","","$","225,287","","","$","216,563"]]
[[/GREPCENT_TABLE]]

Our reported same-store NOI increased from 2022 to 2023 by 4.0% primarily due to an increase in occupancy and cash base rents. As of December 31, 2023 and 2022, our historical same-store square footage leased was 100% and 99.8%, respectively.

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

[[GREPCENT_TABLE]]
[["","","","Years ended December 31,"],["","","","","","2023","","2022"],["Net income","","","","","$","35,923","","","$","116,243"],["Interest and amortization expense","","","","","46,389","","","45,417"],["Provision for income taxes","","","","","703","","","1,102"],["Depreciation and amortization","","","","","183,524","","","180,567"],["General and administrative","","","","","36,334","","","38,714"],["Transaction costs","","","","","4","","","4,177"],["Non-operating/advisory fee income","","","","","(7,319)","","","(6,550)"],["Gains on sales of properties","","","","","(33,010)","","","(59,094)"],["Impairment charges","","","","","16,490","","","3,037"],["Selling profit from sales-type leases","","","","","\u2014","","","(47,059)"],["Debt satisfaction losses, net","","","","","132","","","119"],["Equity in earnings losses of non-consolidated entities","","","","","(1,366)","","","(16,006)"],["Lease termination income, net","","","","","\u2014","","","(238)"],["Straight-line adjustments","","","","","(9,688)","","","(11,412)"],["Lease incentives","","","","","439","","","518"],["Amortization of above/below market leases","","","","","(1,796)","","","(1,865)"],["Sales-type lease adjustments","","","","","(2,231)","","","(249)"],["NOI","","","","","264,528","","","247,421"],["Less NOI:"],["Acquisitions, development and dispositions","","","","","(39,241)","","","(30,858)"],["Same-Store NOI","","","","","$","225,287","","","$","216,563"]]
[[/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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Adjusted Company FFO, NOI and the other non-GAAP financial measures are not equivalent to our net income or loss as determined in accordance with GAAP, and investors should consider GAAP measures to be more relevant to evaluating our operating performance. FFO, Adjusted Company FFO and NOI, and GAAP net income (loss) differ because FFO, Adjusted Company FFO and NOI exclude many items that are factored into GAAP net income or loss.

Because of the differences between FFO, Adjusted Company FFO, NOI and GAAP net income or loss, FFO, Adjusted Company FFO and NOI may not be accurate indicators of our operating performance, especially during periods in which we are acquiring and selling properties. In addition, FFO, Adjusted Company FFO and NOI are not necessarily indicative of cash flow available to fund cash needs and investors should not consider FFO, Adjusted Company FFO or NOI as alternatives to cash flows from operations, as an indication of our liquidity or as indicative of funds available to fund our cash needs, including our ability to make distributions to our shareholders.

Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO, Adjusted Company FFO and NOI. Also, because not all companies calculate FFO, Adjusted Company FFO and NOI the same way, comparisons with other companies’ measures with similar titles may not be meaningful.

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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 2023 and 2022 (dollars in thousands, except share and per share amounts):

[[GREPCENT_TABLE]]
[["","","","","","Years Ended December31,"],["","","","","","","2023","","2022"],["FUNDS FROM OPERATIONS:"],["Basic and Diluted:"],["Net income attributable to common shareholders","","","","","$","23,863","","","$","107,307"],["Adjustments:"],["","Depreciation and amortization related to real estate","","","","","179,554","","","177,725"],["","Impairment charges - real estate, including our share of non-consolidated entities","","","","","17,859","","","8,137"],["","Noncontrolling interests - OP units","","","","","(58)","","","156"],["","Amortization of leasing commissions","","","","","3,970","","","2,842"],["","Joint venture and noncontrolling interest adjustment","","","","","13,168","","","11,112"],["","Gains on sales of properties, including our share of non-consolidated entities","","","","","(38,796)","","","(83,562)"],["FFO available to common shareholders and unitholders - basic","","","","","199,560","","","223,717"],["","Preferred dividends","","","","","6,290","","","6,290"],["","Amount allocated to participating securities","","","","","230","","","186"],["FFO available to all equityholders and unitholders - diluted","","","","","206,080","","","230,193"],["","Selling profit from sales-type leases (1)","","","","","\u2014","","","(47,059)"],["","Allowance for credit losses","","","","","","(32)","","","93"],["","Transaction costs(2)","","","","","","4","","","4,177"],["","Debt satisfaction losses, net, including our share of non-consolidated entities","","","","","138","","","1,615"],["","Other non-recurring costs(3)","","","","","","\u2014","","","2,573"],["","Noncontrolling interest adjustments","","","","","","1","","","1,469"],["Adjusted Company FFO available to all equityholders and unitholders - diluted","","","","","$","206,191","","","$","193,061"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Per Common Share and Unit Amounts"],["Basic:"],["FFO","","","","","","","$","0.69","","","$","0.80"],["Diluted:"],["FFO","","","","","","","$","0.70","","","$","0.80"],["Adjusted Company FFO","","","","","","","$","0.70","","","$","0.67"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Weighted-Average Common Shares:"],["Basic:"],["Weighted-average common shares outstanding - basic EPS","","","","","","","290,245,877","","279,887,760"],["Operating partnership units(4)","","","","","","","820,386","","853,259"],["Weighted-average common shares outstanding - basic FFO","","","","","","","291,066,263","","280,741,019"],["Diluted:"],["Weighted-average common shares outstanding - diluted EPS","","","","","","","291,193,514","","282,473,458"],["Unvested share-based payment awards","","","","","","","\u2014","","17,381"],["Preferred shares - Series C","","","","","","","4,710,570","","4,710,570"],["Weighted-average common shares outstanding - diluted FFO","","","","","","","295,904,084","","287,201,409"]]
[[/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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