(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
We make statements in this Quarterly Report on Form 10-Q that are forward-looking statements, which are usually identified by the use of words such as "anticipates," "believes," "estimates," "expects," "intends," "may," "plans" "projects," "seeks," "should," "will," and variations of such words or similar expressions. Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Additionally, unforeseen factors emerge from time to time, and we cannot predict which factors will arise or their ultimate impact on our business or the extent to which any such factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. One of these factors is the outbreak of the novel coronavirus (COVID-19), the impact of which is difficult to fully assess at this time due to, among other factors, continued uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of efforts to contain the spread of the virus and its resulting direct and indirect impact on the U.S. economy and economic activity. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:
uncertainty surrounding the social and economic impacts of the current COVID-19 pandemic, including, without limitation, its impact on the Company's ability to pay common stock dividends and/or the amount and frequency of those dividends;
Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion and analysis is based on, and should be read in conjunction with our unaudited financial statements and notes thereto for the periods ended September 30, 2021 and 2020 included elsewhere in this Quarterly Report, as well as information contained in our Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 10-K") filed with the United States Securities and Exchange Commission (the "SEC") on February 26, 2021, including the audited historical financial statements and related notes thereto as of and for the years ended December 31, 2020 and 2019 contained therein, which is accessible on the SEC's website at www.sec.gov .
The Company is a real estate investment trust strategically focused on the acquisition, ownership and management of single and multi-tenant industrial properties, including distribution centers, warehouses, light industrial and small bay industrial properties, located in primary and secondary markets within the main industrial, distribution and logistics corridors of the United States. As of September 30, 2021, the Company, through its subsidiaries, owned 117 industrial properties comprising 152 buildings with an aggregate of approximately 26.6 million square feet.
We are also evaluating diversifying our portfolio of real estate assets to include the origination or acquisition of mortgage, bridge or mezzanine loans, all of which would be collateralized by properties that meet investment criteria that are substantially the same as our real estate portfolio or that are complementary to our existing assets. The Company believes expanding its investment strategy to include these types of real estate-related assets will enable it to deploy its capital efficiently to continue to grow at times when acquisitions of industrial properties are limited due either to availability or cost.
We seek to generate attractive risk-adjusted returns for our stockholders through a combination of dividends and capital appreciation.
Factors That May Influence Future Results of Operations
Business and Strategy
Our core investment strategy is to acquire industrial properties located in primary and secondary markets across the U.S. We expect to acquire these properties through third-party purchases and structured sale-leasebacks where we believe we can achieve high initial yields and strong ongoing cash-on-cash returns.
Our target markets are located in primary and secondary markets because we believe these markets tend to have less occupancy and rental rate volatility and less buyer competition relative to gateway markets. We also believe that the systematic aggregation of such properties will result in a diversified portfolio that will produce sustainable risk-adjusted returns. Future results of operations may be affected, either positively or negatively, by our ability to effectively execute this strategy.
We also intend to continue pursuing joint venture arrangements with institutional partners which could provide management fee income as well as residual profit-sharing income. Such joint ventures may involve investing in industrial assets that would be characterized as opportunistic or value-add investments. These may involve development or redevelopment strategies that may require significant up-front capital expenditures, lengthy lease-up periods and result in inconsistent cash flows. As such, these properties' risk profiles and return metrics would likely differ from the non-joint venture properties that we target for acquisition.
Impact of COVID-19
The Company did not incur any significant disruptions during the three and nine months ended September 30, 2021 related to the COVID-19 pandemic. While our results for the third quarter of 2021 were in line with our expectations, the continuation of the COVID-19 pandemic and the significant and wide-ranging efforts of federal, state, and local public health and governmental authorities in regions across the United States to combat the spread of the virus and provide stimulus to their respective economies has increased volatility within the financial markets.
As a result of the continued uncertainty surrounding the economic environment due to the COVID-19 pandemic, we expect that such statistical and other information provided below may change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our business, operations, cash flows and financial condition for future periods.
As of September 30, 2021, we have collected approximately 99.3% of recurring base rents and tenant recoveries billed for the third quarter of 2021; however, collections to-date may not be indicative of collections in any future period.
In an effort to stabilize our operations and manage the impact of COVID-19, we continue to take a number of proactive measures to maintain the strength of our business, including the following:
The health and safety of our employees and their families is a top priority. We have adapted our operations to protect employees, including implementing a work from home policy, and our systems have enabled our team to work seamlessly.
Rental Revenue and Tenant Recoveries
We receive income primarily from rental revenue from our properties. The amount of rental revenue generated by the Company's portfolio depends principally on the occupancy levels and lease rates at our properties, our ability to lease currently available space and space that becomes available as a result of lease expirations and on the rental rates at our properties. As of September 30, 2021, the Company's portfolio was approximately 96.3% occupied. Our occupancy rate is impacted by general market conditions in the geographic areas which our properties are located and the financial condition of tenants in our target markets.
Scheduled Lease Expirations
Our ability to re-lease space subject to expiring leases will impact our results of operations and will be affected by economic and competitive conditions in the markets in which we operate and by the desirability of our individual properties. During the period from October 1, 2021 through to December 31, 2023, an aggregate of 27.3% of the annualized base rent leases in the Company's portfolio are scheduled to expire, which we believe will provide us an opportunity to adjust below market rates as market conditions continue to improve.
The table below reflects certain data about our new and renewed leases with terms of greater than six months executed in the nine months ended September 30, 2021.
% of Total Tenant Lease Square Square Expiring Improvements Commissions Period Type Footage Footage Rent New Rent % Change $/SF/YR $/SF/YR Nine Months Ended September 30, 2021 Renewals 2,284,695 51.3% $ 4.11 $ 4.36 6.1% $ 0.19 $ 0.09 New Leases 2,169,348 48.7% $ 3.83 $ 4.36 13.8% $ 0.22 $ 0.22 Total/weighted average 4,454,043 100% $ 3.98 $ 4.36 9.5% $ 0.20 $ 0.14
Conditions in Our Markets
The Company's portfolio is located in various primary and secondary markets within the main industrial distribution and logistics corridors of the United States. Positive or negative changes in economic or other conditions, adverse weather conditions and natural disasters in these markets are likely to affect our overall performance.
Our rental expenses generally consist of utilities, real estate taxes, insurance and repair and maintenance costs. For the majority of the Company's portfolio, property expenses are controlled, in part, by either the triple net provisions or modified gross lease expense reimbursement provisions in tenant leases. However, the terms of our tenant leases vary and in some instances the leases may provide that we are responsible for certain property expenses. Accordingly, our overall financial results will be impacted by the extent to which we are able to pass-through property expenses to our tenants.
General and Administrative Expenses
We expect to incur increased general and administrative expenses, including legal, accounting and other expenses related to corporate governance and public reporting and compliance. In addition, we anticipate that our staffing levels will increase from current levels as of September 30, 2021 during the subsequent 12 to 24 months and, as a result, our general and administrative expenses will increase further.
Critical Accounting Policies
Our financial statements are prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes significant estimates regarding the allocation of tangible and intangible assets or business acquisitions, impairments of long-lived assets, stock-based compensation and its common stock warrants liability. These estimates and assumptions are based on management's best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Management adjusts such estimates when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from those estimates and assumptions.
During the nine months ended September 30, 2021, there were no material changes to our critical accounting policies. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Judgments and Estimates" in our Annual Report on Form 10-K filed with the SEC on February 26, 2021 and the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. We believe that the following critical accounting policies involve the most judgment and complexity:
Investments in Real Estate
Accordingly, we believe the policies set forth in our 2020 10-K are critical to fully understand and evaluate our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.
Results of Operations (amounts in thousands)
Our consolidated results of operations are often not comparable from period to period due to the effect of property acquisitions and dispositions completed during the comparative reporting periods. Our Total Portfolio represents all of the properties owned during the reported periods. To eliminate the effect of changes in our Total Portfolio due to acquisitions, dispositions and other, and to highlight the operating results of our on-going business, we have separately presented the results of our Same Store Properties Portfolio and Acquisitions, Dispositions and Other.
For the three and nine months ended September 30, 2021 and 2020, we define the Same Store Portfolio as a subset of our Total Portfolio and includes properties that were wholly-owned by us for the entire period presented. We define Acquisitions, Dispositions and Other as any properties that were acquired, sold or held for development or repurposing during the period from January 1, 2020 through September 30, 2021.
Three Months Ended September 30, 2021 Compared to September 30, 2020 The following table summarizes the results of operations for our Same Store Portfolio, our acquisitions, dispositions and other and total portfolio for the three months ended September 30, 2021 and 2020 (dollars in thousands): Same Store Portfolio Acquisitions, Dispositions and Other Total Portfolio Three Months Ended Three Months Ended Three Months Ended September 30, Change September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % 2021 2020 $ % Revenue: Rental revenue $ 24,778 $ 23,986 $ 792 3.3% $ 11,099 $ 3,532 $ 7,567 214.2% $ 35,877 $ 27,518 $ 8,359 30.4% Management fee revenue and other income - - - - 85 - 85 - 85 - 85 - Total revenues 24,778 23,986 792 3.3% 11,184 3,532 7,652 216.6% 35,962 27,518 8,444 30.7% Property expenses 9,363 9,015 348 3.9% 2,669 1,049 1,620 154.4% 12,032 10,064 1,968 19.6% Depreciation and amortization 18,305 13,985 4,320 30.9% General and administrative 3,264 2,280 984 43.2% Total operating expenses 33,601 26,329 7,272 27.6% Other income (expense): Interest expense (4,906 ) (4,538 ) (368 ) 8.1% Impairment on real estate lease - (311 ) 311 100.0% Earnings (loss) in investment of unconsolidated joint venture (178 ) - (178 ) - Unrealized (appreciation) depreciation of warrants (926 ) (103 ) (823 ) 799.0% Total other income (expense) (6,010 ) (4,952 ) (1,058 ) 21.4% Net loss $ (3,649 ) $ (3,763 ) $ 114 (3.0% )
Rental revenue: Rental revenue increased by $8,359 to $35,877 for the three months ended September 30, 2021 as compared to $27,518 for the three months ended September 30, 2020. This was primarily related to a net increase of $7,567 within acquisitions, dispositions and other due to an increase in rental revenue from acquisitions, an increase of $792 from same store properties primarily from an increase in rent income of $105 due to scheduled rent steps, leasing activities, and an increase of $691 in tenant reimbursements partially offset by a decrease in non-cash rent adjustments of $4 for the three months ended September 30, 2021.
Property expenses: Property expenses increased $1,968 for the three months ended September 30, 2021 to $12,032 as compared to $10,064 for the three months ended September 30, 2020. This was primarily due to a net increase of $1,620 within acquisitions, dispositions and other due to property expenses related to acquisitions. Property expenses for the same store properties increased approximately $348 driven by an increase in real estate taxes and operating expenses.
Depreciation and amortization: Depreciation and amortization expense increased by $4,320 to $18,305 for the three months ended September 30, 2021 as compared to $13,985 for the three months ended September 30, 2020, primarily due to a net increase of $5,831 within acquisitions, dispositions and other, partially offset by a decrease of $1,511 for the same store properties.
General and administrative: General and administrative expenses increased approximately $984 to $3,264 for the three months ended September 30, 2021 as compared to $2,280 for the three months ended September 30, 2020. The increase is attributable primarily to increased compensation expense of $396 due to increased head count, an increase in non-cash stock compensation of $16 and an increase in director's fees of $50.
Interest expense: Interest expense increased by approximately $368 to $4,906 for the three months ended September 30, 2021, as compared to $4,538 for the three months ended September 30, 2020. The increase is primarily due to additional borrowings associated with our acquisition activity during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The schedule below is a comparative analysis of the components of interest expense for the three months ended September 30, 2021 and 2020.
Three Months Ended September 30, 2021 2020 Changes in accrued interest $ 41 $ (169 ) Amortization of debt related costs 424 386 Total change in accrued interest and amortization of debt related costs 465 217 Cash interest paid 4,441 4,321 Total interest expense $ 4,906 $ 4,538
Impairment on real estate lease: Change in impairment on real estate lease represents a non-cash impairment against the carrying value of the right of use asset associated with the primary lease for our prior head-quarters recorded during the three months ending September 30, 2020. There were no impairment on real estate leases during the three months ending September 30, 2021.
Earnings (loss) in investment of unconsolidated joint venture: Earnings (loss) in investment of unconsolidated joint venture represents the Company's pro-rata share of the net loss recognized by the MIR JV of $178 during the three months ending September 30, 2021. There was no pro-rata share of net loss recognized for the MIR JV during the three months ended September 30, 2020.
Unrealized (appreciation) depreciation of warrants: Unrealized appreciation of warrants represents the change in the fair market value of our common stock warrants. The fair value of warrant derivative adjustment increased by approximately $823 to $926 for the three months ended September 30, 2021, as compared to $103 for the three months ended September 30, 2020. The increase was due to an increase in the common stock warrant liability during the third quarter of 2021.
Nine Months Ended September 30, 2021 Compared to September 30, 2020 The following table summarizes the results of operations for our Same Store Portfolio, our acquisitions, dispositions and other and total portfolio for the nine months ended September 30, 2021 and 2020 (dollars in thousands): Same Store Portfolio Acquisitions, Dispositions and Other Total Portfolio Nine Months Ended Nine Months Ended Nine Months Ended September 30, Change September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % 2021 2020 $ % Revenue: Rental revenue $ 73,099 $ 71,048 $ 2,051 2.9% $ 27,369 $ 8,836 $ 18,533 209.7% $ 100,468 $ 79,884 $ 20,584 25.8% Management fee revenue and other income - - - - 265 - 265 - 265 - 265 - Total revenues 73,099 71,048 2,051 2.9% 27,634 8,836 18,798 212.7% 100,733 79,884 20,849 26.1% Property expenses 27,633 25,454 2,179 8.6% 6,765 2,647 4,118 155.6% 34,398 28,101 6,297 22.4% Depreciation and amortization 50,984 41,602 9,382 22.6% General and administrative 9,582 7,378 2,204 29.9% Total operating expenses 94,964 77,081 17,883 23.2% Other income (expense): Interest expense (14,489 ) (14,309 ) (180 ) 1.3% Impairment on real estate lease - (311 ) 311 100.0% Earnings (loss) in investment of unconsolidated joint venture (675 ) - (675 ) - Unrealized (appreciation) depreciation of warrants (1,809 ) (103 ) (1,706 ) 1,656.3% . . .
Nov 05, 2021
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