PART 1
Item 1. Business
Our Company
We are a real estate investment trust, or REIT, that was organized under Maryland law in 2017. We own and lease industrial and logistics properties throughout the United States. We intend to elect and qualify for taxation as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2018, and to maintain such qualification thereafter.
On January 17, 2018, we completed an initial public offering and listing on The Nasdaq Stock Market LLC, or Nasdaq, of 20,000,000 of our common shares, or our IPO. At that time, we owned 266 properties, or our Initial Properties, with a total of approximately 28.5 million rentable square feet (all square footage amounts included within this Annual Report on Form 10-K are unaudited). Our Initial Properties were contributed to us on September 29, 2017 by Select Income REIT, or SIR, a former publicly traded REIT that merged with a wholly owned subsidiary of Office Properties Income Trust (formerly Government Properties Income Trust), or OPI, on December 31, 2018. In connection with our formation and the contribution of our Initial Properties, we (i) issued to SIR 45,000,000 of our common shares, (ii) issued to SIR a $750.0 million non-interest bearing demand note, or the SIR Note, and (iii) assumed three mortgage notes totaling $63.1 million, excluding premiums, that were secured by three of our Initial Properties. In December 2017, we obtained a $750.0 million secured revolving credit facility, and we used the proceeds of an initial borrowing under this credit facility to pay the SIR Note in full. Also in December 2017, SIR prepaid on our behalf two of the mortgage notes totaling approximately $14.3 million that had encumbered two of our Initial Properties. Upon the closing of our IPO, our secured revolving credit facility converted into a four year unsecured revolving credit facility and we used substantially all of the net proceeds from our IPO to reduce amounts outstanding under our revolving credit facility. We also reimbursed SIR for costs that SIR incurred in connection with our formation and the preparation for our IPO. On December 27, 2018, SIR distributed all 45,000,000 of our common shares that SIR owned to SIR's shareholders of record as of the close of business on December 20, 2018.
As of December 31, 2018, we owned 270 properties that were approximately 99.3% leased to 248 tenants with a weighted average (by annualized rental revenues) remaining lease term of approximately 11 years. These properties consisted of 226 buildings, leasable land parcels and easements with a total of approximately 16.8 million rentable square feet that were primarily industrial lands located on the island of Oahu, HI, or our Hawaii Properties, and 44 buildings with a total of approximately 12.7 million rentable square feet that were industrial and logistics properties located in 25 other states, or our Mainland Properties.
As of December 31, 2018, our Hawaii Properties represented 58.1% of our annualized rental revenues and our Mainland Properties represented 41.9% of our annualized rental revenues. We define the term annualized rental revenues as used in this Annual Report on Form 10-K as the annualized contractual rents as of December 31, 2018, including straight line rent adjustments and excluding lease value amortization, adjusted for tenant concessions including free rent and amounts reimbursed to tenants, plus estimated recurring expense reimbursements from tenants.
Our principal executive offices are located at Two Newton Place, 255 Washington Street, Suite 300, Newton, Massachusetts 02458-1634, and our telephone number is (617) 219-1460.
Our Business and Growth Strategies
We own and lease industrial and logistics properties located throughout the United States. We believe our current properties provide a stable base of increasing income. We intend to expand our business by acquiring additional industrial and logistics properties in the United States that may benefit from the growth of e-commerce.
Internal Growth through Rent Resets and Leasing Activity, Fixed Increases in Our Leases and Selective Development. Certain of the leases for our Hawaii Properties provide for rents to be reset to fair market value periodically during the lease terms. Since our predecessors began acquiring our Hawaii Properties in December 2003, our Hawaii Properties have remained over 98.0% leased, and periodic rent resets, together with lease extensions and new leasing activity following lease expirations, at our Hawaii Properties have resulted in significant rent increases. Because of the limited availability of land suitable for industrial uses that might compete with our Hawaii Properties, we believe that our Hawaii Properties offer the potential for rent growth as a result of periodic rent resets, lease extensions and new leasing following current lease expirations. In addition to the internal rent growth which may result from our rent resets and lease expirations at our Hawaii Properties, a majority of the leases at our Mainland Properties and certain leases at our Hawaii Properties include periodic set dollar amount or percentage increases that raise the cash rent payable to us.
Since the leases at certain of our Hawaii Properties were originally entered, in some cases, as long as 40 or 50 years ago, the characteristics of the neighborhoods in the vicinity of some of those properties have changed. In such circumstances, we and our predecessors have sometimes engaged in redevelopment activities to change the character of certain properties in order to increase rents (e.g., from industrial to retail use). Because our Hawaii Properties are currently experiencing strong demand from tenants for industrial and logistics uses, we do not currently expect redevelopment efforts in Hawaii to become a major activity of ours in the near term; however, we may undertake such activities on a selective basis. Also, we and our predecessors have sometimes built expansions for tenants at our Mainland Properties in return for lease extensions and rent increases, and we expect to continue such activities.
External Growth through Acquisitions. Our external growth strategy is to acquire additional industrial and logistics properties that we believe will produce net operating income, or NOI, in excess of our cost of capital used to purchase the properties. We intend to grow our business by investing primarily in industrial and logistics properties that serve the growing needs of e-commerce. We believe that e-commerce sales will continue to grow, in both dollar value and as a percentage of total retail sales, and that this will create strong demand for industrial and logistics properties and rental growth for the next several years. We are focused on acquiring industrial and logistics properties that are of strategic importance to our tenants’ businesses, such as build to suit properties, strategic distribution hubs or other properties in which tenants have invested a significant amount of capital. We target occupied properties, where tenants are financially responsible for all, or substantially all, property operating expenses, including increases with respect thereto. Because there are a limited number of industrial and logistics properties in Hawaii, we expect that most of our acquisitions will be in other states.
We believe we have two competitive advantages which may allow us to successfully implement our external growth strategy, as follows:
First, we have and expect to maintain a strong capitalization which may allow us to access reasonably priced capital throughout business cycles. As of February 19, 2019, we had approximately $758.8 million of total debt and approximately $1.4 billion of market value of common equity, and approximately $690.0 million of available borrowing capacity under our revolving credit facility.
Second, we believe we have an experienced management team to implement our growth strategies. Our executive officers have extensive experience acquiring and operating real estate. We believe our manager, The RMR Group LLC, or RMR LLC, a Maryland limited liability company, can and will provide us with an extensive array of services to assist with our acquisitions. The RMR Group Inc. (Nasdaq: RMR), a Maryland corporation, or RMR Inc., the majority owner of RMR LLC, is an alternative asset management company that has been managing commercial real estate companies and related businesses since 1986. As of December 31, 2018, RMR LLC had $29.7 billion of real estate assets under management. Because of the experience and depth of our management, we believe we will be able to acquire industrial and logistics properties throughout the United States and successfully compete with many of our competitors.
Our Investment Policies
Our target investments include all industrial and logistics buildings in top tier markets. Outside of top tier markets, our focus is on newer buildings, high credit quality tenants and longer lease terms. We target estimated capitalization rates of 5% - 7% for new investments. If and as market conditions change, our target investments and target estimated capitalization rates may change.
In evaluating potential property acquisitions, we consider various factors, including, but not limited to, the following: