The following information should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10-K.
OVERVIEW (dollars to thousands, excluding per share and per square foot data)
We are a REIT organized underMaryland law. As ofDecember 31, 2021 , our wholly owned properties were comprised of 178 properties and we had noncontrolling ownership interests of 51% and 50% in two unconsolidated joint ventures that own three properties containing approximately 444,000 rentable square feet. As ofDecember 31, 2021 , our properties are located in 33 states and theDistrict of Columbia and contain approximately 23,271,000 rentable square feet. As ofDecember 31, 2021 , our properties were leased to 333 different tenants, with a weighted average remaining lease term (based on annualized rental income) of approximately 5.9 years. TheU.S. government is our largest tenant, representing approximately 19.5% of our annualized rental income as ofDecember 31, 2021 . The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including theU.S. economy. Many of the restrictions that had been imposed inthe United States during the pandemic have since been lifted and commercial activity inthe United States generally has increasingly returned to pre-pandemic practices and operations, although recent variants of the virus have caused increased infections and resulted in governments and businesses implementing or 43 -------------------------------------------------------------------------------- Table of Contents adopting certain requirements, including proof of vaccinations and mask wearing. We are continuing to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. To date, the COVID-19 pandemic has not had a significant adverse impact on our business and we continue to believe that our financial resources, the characteristics of our portfolio, including the diversity of our tenant base, both geographically and by industry, and the financial strength and resources of our tenants, will enable us to withstand the COVID-19 pandemic. However, as a result of the COVID-19 pandemic, we granted temporary rent assistance totaling$2,483 to 18 tenants. This assistance generally entailed a deferral of, in most cases, one month of rent pursuant to deferred payment plans which required the deferred rent amounts be payable over a 12-month period. As ofDecember 31, 2021 , we had collected 100% of our granted rent deferrals. The ultimate adverse impact of the COVID-19 pandemic is highly uncertain and subject to change. As a result, we do not yet know the full extent of potential impacts on our business and operations, our tenants' businesses and operations or the global economy as a whole. For more information and risks relating to the COVID-19 pandemic on us and our business, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward-Looking Statements" and Part I, Item 1A, "Risk Factors". Property Operations Unless otherwise noted, the data presented in this section includes properties classified as held for sale as ofDecember 31, 2021 and excludes three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. For more information regarding our properties classified as held for sale and our two unconsolidated joint ventures, see Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Occupancy data for our properties since
All Properties (1) Comparable Properties (2)
December 31, December 31,
2021 2020 2021 2020
Total properties (3) 178 181 167 167
Total rentable square feet (4) 23,271 24,889 21,223 21,217
Percent leased (5) 89.5 % 91.2 % 91.2 % 92.0 %
(1)Based on properties we owned on December 31, 2021 and 2020, respectively.
(2)Based on properties we owned continuously since January 1, 2020 ; excludes
properties classified as held for sale and properties undergoing significant
redevelopment, if any, and three properties owned by two unconsolidated joint
ventures in which we own 51% and 50% interests.
(3)Includes one leasable land parcel.
(4)Subject to changes when space is remeasured or reconfigured for tenants.
(5)Percent leased includes (i) space being fitted out for tenant occupancy
pursuant to our lease agreements, if any, and (ii) space which is leased, but is
not occupied or is being offered for sublease by tenants, if any, as of the
measurement date.
The average effective rental rate per square foot for our properties for the ended year
Year Ended December 31,
Average effective rental rate per square foot (1): 2021 2020
All properties (2)
Comparable properties (3)
(1)Average effective rental rate per square foot represents total rental income during the period specified divided by the average rentable square feet leased during the period specified. (2)Based on properties we owned onDecember 31, 2021 and 2020, respectively. (3)Based on properties we owned continuously sinceJanuary 1, 2020 ; excludes properties classified as held for sale and properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. 44 -------------------------------------------------------------------------------- Table of Contents During the year endedDecember 31, 2021 , changes in rentable square feet leased and available for lease at our properties were as follows (square feet in thousands): Year Ended December 31, 2021 Available Leased for Lease Total Beginning of year 22,705 2,184 24,889 Changes resulting from: Acquisition of properties 899 27 926 Disposition of properties (2,491) (74) (2,565) Lease expirations (2,796) 2,796 - Lease renewals (1) 1,638 (1,638) - New leases (1) 846 (846) - Remeasurements (2) 16 5 21 End of year 20,817 2,454 23,271
(1) Based on leases entered into in the year ended
Leases at our properties totaling approximately 2,796,000 rentable square feet expired during the year endedDecember 31, 2021 . During the year endedDecember 31, 2021 , we entered into new and renewal leases as summarized in the following table (square feet in thousands): Year Ended December 31, 2021 New Leases Renewals Total Rentable square feet leased 846 1,638 2,484 Weighted average rental rate change (by rentable square feet) 7.6 % 5.6 % 6.3 % Tenant leasing costs and concession commitments (1)(2)$ 107,060
Tenant rental costs and concession commitments per square foot rented (1) (2)
$ 126.54 $ 21.53 $ 57.29 Weighted (by square feet) average lease term (years) 16.5 5.9 9.5
Total leasing costs and concession commitments per rented square foot per year (1) (2)
$ 7.66
(1)Includes commitments made for leasing expenditures and concessions, such as tenant improvements, leasing commissions, tenant reimbursements and free rent. (2)Includes commitments totaling approximately$66,000 in connection with the lease we entered with Sonesta inJune 2021 related to the redevelopment of a property inWashington, D.C. These costs represent the estimated costs related to the planned hotel component of the property. During the year endedDecember 31, 2021 , changes in effective rental rates per square foot achieved for new leases and lease renewals at our properties that commenced during the year endedDecember 31, 2021 , when compared to prior effective rental rates per square foot in effect for the same space (and excluding space acquired vacant), were as follows (square feet in thousands): Year Ended December 31, 2021 Old Effective New Effective Rent Per Rent Per Rentable Square Foot (1) Square Foot (1) Square Feet New leases$24.79 $28.47 185 Lease renewals$27.20 $28.82 1,359 Total leasing activity$26.91 $28.78 1,544
(1) The effective rental rate includes the contractual basis rents from our tenants in accordance with our rental agreements, along with straight-line rent adjustments and estimated cost payments to be paid to us , and does not include amortization on the lease amount.
45 -------------------------------------------------------------------------------- Table of Contents During the years endedDecember 31, 2021 and 2020, amounts capitalized at our properties for lease related costs, building improvements and development, redevelopment and other activities were as follows: Year Ended December 31, 2021 2020 Lease related costs (1)$ 42,751 $ 34,972 Building improvements (2) 30,103 41,280 Recurring capital expenditures 72,854 76,252 Development, redevelopment and other activities (3) 56,243 16,858 Total capital expenditures$ 129,097 $ 93,110 (1)Lease related costs generally include capital expenditures used to improve tenants' space or amounts paid directly to tenants to improve their space and leasing related costs, such as brokerage commissions and other tenant inducements.
(2) Building improvements generally include expenditures to replace obsolete building parts and expenditures that extend the useful life of current assets.
(3) Development, redevelopment and other activities generally include capital expenditure projects that reposition a property or result in new sources of income.
As of
As ofDecember 31, 2021 , we had leases at our properties totaling approximately 1,753,000 rentable square feet that were scheduled to expire during 2022. As ofFebruary 15, 2022 , we expect tenants with leases totaling approximately 935,000 rentable square feet that are scheduled to expire during 2022, to not renew their leases upon expiration and we cannot be sure as to whether other tenants will renew their leases upon expiration. Of the approximately 935,000 rentable square feet that is expiring and expected to not renew in 2022, approximately 300,000 rentable square feet is in the planning stage of a redevelopment project at a three-property campus located inSeattle, WA. As a result of the COVID-19 pandemic and its economic impact, leasing activity has been volatile and may remain so until office property market conditions meaningfully improve and stabilize for a sustained period. However, we remain focused on proactive dialogues with our existing tenants and overall tenant retention. Prevailing market conditions and government and other tenants' needs at the time we negotiate and enter leases or lease renewals will generally determine rental rates and demand for leased space at our properties, and market conditions and our tenants' needs are beyond our control. Whenever we renew or enter into new leases for our properties, we intend to seek rents which are equal to or higher than our historical rents for the same properties; however, our ability to maintain or increase the rents for our current properties will depend in large part upon market conditions, which are beyond our control. We cannot be sure of the rental rates which will result from our ongoing negotiations regarding lease renewals or any new or renewed leases we may enter; also, we may experience material declines in our rental income due to vacancies upon lease expirations or early terminations. Additionally, we may incur significant costs to renew our leases with current tenants or lease our properties to new tenants. 46 -------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2021 , our lease expirations by year are as follows (square feet in thousands): Annualized Number of Leases Leased Square Feet Rental Income Year (1) Expiring Expiring (2) Percent of Total Cumulative Percent of Total Expiring Percent of Total Cumulative Percent of Total 2022 83 1,753 8.4% 8.4%$ 49,420 8.5% 8.5% 2023 68 2,752 13.2% 21.6% 87,458 15.1% 23.6% 2024 58 3,209 15.4% 37.0% 84,080 14.5% 38.1% 2025 53 2,147 10.3% 47.3% 45,830 7.9% 46.0% 2026 40 1,858 8.9% 56.2% 49,015 8.4% 54.4% 2027 36 1,958 9.4% 65.6% 51,208 8.8% 63.2% 2028 16 1,277 6.1% 71.7% 47,262 8.1% 71.3% 2029 19 970 4.7% 76.4% 27,233 4.7% 76.0% 2030 15 522 2.5% 78.9% 15,350 2.6% 78.6% 2031 and thereafter 45 4,371 21.1% 100.0% 123,262 21.4% 100.0% Total 433 20,817 100.0%$ 580,118 100.0% Weighted average remaining lease term (in years) 5.8 5.9 (1)The year of lease expiration is pursuant to current contract terms. Some of our leases allow the tenants to vacate the leased premises before the stated expirations of their leases with little or no liability. As ofDecember 31, 2021 , tenants occupying approximately 5.6% of our rentable square feet and responsible for approximately 5.7% of our annualized rental income as ofDecember 31, 2021 , currently have exercisable rights to terminate their leases before the stated terms of their leases expire. Also, in 2022, 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030, 2035 and 2040 early termination rights become exercisable by other tenants who currently occupy an additional approximately 1.5%, 2.8%, 2.5%, 3.9%, 1.1%, 0.8%, 1.2%, 0.5%, 0.6%, 0.4% and 0.3% of our rentable square feet, respectively, and contribute an additional approximately 1.7%, 3.9%, 2.9%, 7.1%, 1.4%, 1.3%, 1.3%, 0.9%, 0.7%, 0.5% and 0.3% of our annualized rental income, respectively, as ofDecember 31, 2021 . In addition, as ofDecember 31, 2021 , pursuant to leases with 14 of our tenants, these tenants have rights to terminate their leases if their respective legislature or other funding authority does not appropriate rent amounts in their respective annual budgets. These 14 tenants occupy approximately 6.0% of our rentable square feet and contribute approximately 6.6% of our annualized rental income as ofDecember 31, 2021 . (2)Leased square feet is pursuant to leases existing as ofDecember 31, 2021 , and includes (i) space being fitted out for tenant occupancy pursuant to our lease agreements, if any, and (ii) space which is leased, but is not occupied or is being offered for sublease by tenants, if any. Square feet measurements are subject to changes when space is remeasured or reconfigured for new tenants. We generally will seek to renew or extend the terms of leases at properties with single or majority tenants when they expire. Because of the capital many of the tenants in these properties have invested in the properties and because many of these properties appear to be of strategic importance to the tenants' businesses, we believe that it is likely that these tenants will renew or extend their leases prior to when they expire. However, recent shifts in workplace practices, including as a result of the COVID-19 pandemic, have resulted in a significant increase in alternative work arrangements, including work from home practices. It is uncertain to what extent and how long work from home arrangements may continue, or if other hybrid work arrangements will continue or increase. If these arrangements continue or increase, our single or majority tenants may not seek to renew or extend their leases when they expire, or may seek to renew their leases for less space than the currently occupy. If we are unable to extend or renew our leases, or we renew leases for reduced space, it may be time consuming and expensive to relet some of these properties. We believe that recent government budgetary and spending priorities and enhancements in technology have resulted in a decrease in government office use for employees. Furthermore, over the past several years, government tenants have reduced their space utilization per employee and consolidated government tenants into existing government owned properties. This activity has reduced the demand for government leased space. Our historical experience with respect to properties of the type we own that are majority leased to government tenants has been that government tenants frequently renew leases to avoid the costs and disruptions that may result from relocating their operations. However, efforts to manage space utilization rates may result in our tenants exercising early termination rights under our leases, vacating our properties upon expiration of our leases in order to relocate, or renewing their leases for less space than they currently occupy. Also, our government tenants' desire to reconfigure leased office space to manage utilization per employee may require us to spend significant amounts for tenant improvements, and tenant relocations are often more prevalent in those circumstances. Increasing uncertainty with respect to government agency budgets and funding to implement relocations, consolidations and reconfigurations has resulted in delayed decisions by some of our government tenants and their reliance on short term lease renewals; however, activity prior to the outbreak of the COVID-19 pandemic suggested that theU.S. government had begun to shift its leasing strategy to include longer term leases and was actively exploring 10 to 20 year lease terms at renewal, in some instances. However, the COVID-19 pandemic and its aftermath have had negative impacts on government budgets and resources, although there are indications that, to date, certain of those impacts may not have been as negative as originally expected, and it is unclear what the effect of these impacts will be on government demand for leasing office space. Given the significant uncertainties, including as to the 47
-------------------------------------------------------------------------------- Table of Contents COVID-19 pandemic, its economic impact and its aftermath, we are unable to reasonably project what the financial impact of market conditions or changing government circumstances will be on the demand for leased space at our properties and our financial results for future periods. As ofDecember 31, 2021 , we derive 21.8% of our annualized rental income from our properties located in the metropolitanWashington, D.C. market area, which includesWashington, D.C. ,Northern Virginia and suburbanMaryland . A downturn in economic conditions in this area, including as a result of the COVID-19 pandemic, could result in reduced demand from tenants for our properties or reduce the rents that our tenants in this area are willing to pay when our leases expire or terminate and when renewal or new terms are negotiated. Additionally, in recent years there has been a decrease in demand for new leased office space by theU.S. government in the metropolitanWashington, D.C. market area, and that could increase competition for government tenants and adversely affect our ability to retain government tenants when our leases expire. Our manager,RMR LLC , employs a tenant review process for us.RMR LLC assesses tenants on an individual basis based on various applicable credit criteria. In general, depending on facts and circumstances,RMR LLC evaluates the creditworthiness of a tenant based on information concerning the tenant that is provided by the tenant and, in some cases, information that is publicly available or obtained from third party sources. We consider investment grade tenants to include: (a) investment grade rated tenants; (b) tenants with investment grade rated parent entities that guarantee the tenant's lease obligations; and/or (c) tenants with investment grade rated parent entities that do not guarantee the tenant's lease obligations. As ofDecember 31, 2021 , tenants contributing 51.6% of annualized rental income were investment grade rated (or their payment obligations were guaranteed by an investment grade rated parent) and tenants contributing an additional 10.2% of annualized rental income were subsidiaries of an investment grade rated parent (although these parent entities were not liable for the payment of rents). 48 -------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2021 , tenants representing 1% or more of our total annualized rental income were as follows (square feet in thousands): % of Total % of Leased Annualized
Annual Rent
Tenant Credit Rating Sq. Ft. Sq. Ft. Rental Income Income
1 U.S. Government Investment Grade 4,196 20.2 % $ 112,905 19.5 %
2 Alphabet Inc. (Google) Investment Grade 386 1.9 % 20,924 3.6 %
3 Shook, Hardy & Bacon L.L.P. Not Rated 596 2.9 % 19,187 3.3 %
4 Bank of America Corporation Investment Grade 577 2.8 % 15,803 2.7 %
5 State of California Investment Grade 523 2.5 % 15,578 2.7 %
6 IG Investments Holdings LLC Not Rated 333 1.6 % 15,466 2.7 %
7 F5 Inc. Not Rated 299 1.4 % 12,752 2.2 %
8 Commonwealth of Massachusetts Investment Grade 311 1.5 % 12,260 2.1 %
9 CareFirst Inc. Not Rated 207 1.0 % 11,870 2.0 %
10 Northrop Grumman Corporation Investment Grade 337 1.6 % 11,350 2.0 %
11 Tyson Foods, Inc. Investment Grade 248 1.2 % 11,198 1.9 %
Sonesta International Hotels
12 Corporation (1) Not Rated 230 1.1 % 10,745 1.9 %
13 CommScope Holding Company Inc Non Investment Grade 228 1.1 % 9,245 1.6 %
14 Micro Focus International plc Non Investment Grade 242 1.2 % 7,430 1.3 %
15 State of Georgia Investment Grade 308 1.5 % 7,248 1.2 %
16 PNC Bank Investment Grade 441 2.1 % 6,924 1.2 %
17 ServiceNow, Inc. Investment Grade 149 0.7 % 6,623 1.1 %
18 Allstate Insurance Co. Investment Grade 468 2.2 % 6,475 1.1 %
19 Compass Group plc Investment Grade 267 1.3 % 6,442 1.1 %
Automatic Data Processing,
20 Inc. Investment Grade 289 1.4 % 6,037 1.0 %
21 Church & Dwight Co., Inc. Investment Grade 250 1.2 % 6,031 1.0 %
10,885 52.4 % $ 332,493 57.2 %
(1)In June 2021 , we entered into a 30-year lease with Sonesta. The lease relates
to the redevelopment of a property we own in Washington, D.C to a mixed use and
Sonesta's lease relates to the planned hotel component of the property. The term
of the lease commences upon our delivery of the completed hotel, which is
estimated to occur in the first quarter of 2023. For more information about our
lease with Sonesta, see Note 6 to the Notes to Consolidated Financial Statements
included in Part IV, Item 15 of this Annual Report on Form 10-K.
Acquisition Activities
During the year endedDecember 31, 2021 , we acquired three properties containing approximately 926,000 rentable square feet for an aggregate purchase price of$576,975 , excluding purchase price adjustments and acquisition related costs. For more information about our acquisition activities, see "Business -Acquisition Policies" in Part I, Item 1 of this Annual Report on Form 10-K and Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. 49 -------------------------------------------------------------------------------- Table of Contents Disposition Activities During the year endedDecember 31, 2021 , we sold six properties, a warehouse facility adjacent to a property we own located inKansas City, MO and two vacant land parcels adjacent to properties we own located inSterling, VA containing approximately 2,565,000 rentable square feet for an aggregate sales price of$226,915 , excluding closing costs. SinceJanuary 1, 2022 , we also sold three of the properties classified as held for sale as ofDecember 31, 2021 containing approximately 301,000 rentable square feet for an aggregate sales price of$25,695 , excluding closing costs. We continue to evaluate our portfolio for opportunities to strategically recycle capital and are currently in various stages of marketing for sale more than 30 properties containing over 3,000,000 rentable square feet. As ofFebruary 15, 2022 , we have entered into an agreement to sell one property containing approximately 29,000 rentable square feet for a sales price of$3,850 , excluding closing costs. We cannot be sure we will sell any properties we are marketing for sale for prices in excess of their carrying values or otherwise. In addition, our pending sale is subject to conditions; accordingly, we cannot be sure that we will complete this sale or that this sale will not be delayed or the terms will not change. For more information about our disposition activities, see "Business -Disposition Policies" in Part I, Item 1 of this Annual Report on Form 10-K and Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Funding Activities
Senior Unsecured Note Issuance
InMay 2021 , we issued$300,000 of 2.650% senior unsecured notes due 2026 in an underwritten public offering, raising net proceeds of$296,826 , after deducting underwriters' discounts and offering expenses, which we used, together with cash on hand, to redeem all$310,000 of our 5.875% senior unsecured notes due 2046. InAugust 2021 , we issued$350,000 of 2.400% senior unsecured notes due 2027 in an underwritten public offering, raising net proceeds of$346,607 , after deducting underwriters' discounts and offering expenses, which we used to redeem all$300,000 of our 4.15% senior unsecured notes due 2022. InSeptember 2021 , we issued$400,000 of 3.450% senior unsecured notes due 2031 in an underwritten public offering, raising net proceeds of$395,632 , after deducting underwriters' discounts and offering expenses, which we used to repay amounts outstanding under our revolving credit facility and for general business purposes.
Senior Unsecured Note Acquisitions
InJune 2021 , we redeemed, at par plus accrued interest, all$310,000 of our 5.875% senior unsecured notes due 2046 using cash on hand and the net proceeds from the issuance of our 2.650% senior unsecured notes due 2026. InSeptember 2021 , we redeemed, at a premium plus accrued interest, all$300,000 of our 4.15% senior unsecured notes due 2022 using a portion of the net proceeds from the issuance of our 2.400% senior unsecured notes due 2027.
Mortgage Note Payments
InJune 2021 , we prepaid, at a premium plus accrued interest, a mortgage note secured by three properties with an outstanding principal balance of$71,000 , an annual interest rate of 3.55% and a maturity date inMay 2023 using cash on hand and borrowings under our revolving credit facility. InFebruary 2022 , we gave notice of our intention to prepay, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of$25,055 atDecember 31, 2021 , an annual interest rate of 4.22% and a maturity date inJuly 2022 . We expect to make this prepayment inApril 2022 using cash on hand. For more information about our financing activities, see "Business -Our Financing Policies" in Part I, Item 1 of this Annual Report on Form 10-K and Note 8 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.
Segment Information
We operate in one business segment: real estate property ownership.
50
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Table of contents
RESULTS OF OPERATIONS (amounts in thousands, excluding per share values)
The Year is over
Non-Comparable
Properties Results
Comparable Properties Results (1) Year Ended Consolidated Results
Year Ended December 31 , December 31 , Year Ended December 31 ,
$ % $ %
2021 2020 Change Change 2021 2020 2021 2020 Change Change
Rental income $ 522,704 $ 526,359 $ (3,655) (0.7 %) $ 53,778 $ 61,560 $ 576,482 $ 587,919 $ (11,437) (1.9 %)
Operating expenses:
Real estate taxes 57,011 57,871 (860) (1.5 %) 14,959 7,248 71,970 65,119 6,851 10.5 %
Utility expenses 23,280 23,082 198 0.9 % 1,971 2,302 25,251 25,384 (133) (0.5 %)
Other operating expenses 95,695 95,535 160 0.2 % 10,130 9,930 105,825 105,465 360 0.3 %
Total operating expenses 175,986 176,488 (502) (0.3 %) 27,060 19,480 203,046 195,968 7,078 3.6 %
Net operating income (2) $ 346,718 $ 349,871 $ (3,153) (0.9 %) $ 26,718 $ 42,080 373,436 391,951 (18,515) (4.7 %)
Other expenses:
Depreciation and amortization 241,494 251,566 (10,072) (4.0 %)
Loss on impairment of real estate 62,420 2,954 59,466 n/m
Acquisition and transaction related costs - 232 (232) n/m
General and administrative 26,858 28,443 (1,585) (5.6 %)
Total other expenses 330,772 283,195 47,577 16.8 %
Gain on sale of real estate 78,354 10,855 67,499 n/m
Interest and other income 7 779 (772) (99.1 %)
Interest expense (112,385) (108,303) (4,082) 3.8 %
Loss on early extinguishment of debt (14,068) (3,839) (10,229) n/m
Income (loss) before income tax expense and equity in net losses of investees (5,428) 8,248 (13,676) (165.8 %)
Income tax expense (251) (377) 126 (33.4 %)
Equity in net losses of investees (2,501) (1,193) (1,308) 109.6 %
Net income (loss) $ (8,180) $ 6,678 $ (14,858) n/m
Weighted average common shares outstanding (basic and diluted) 48,195 48,124 71 0.1 %
Values of each standard component (basic and diluted):
Net income (loss)$ (0.17) $ 0.14 $ (0.31) n/m n/m - not meaningful (1)Comparable properties consists of 167 properties we owned onDecember 31, 2021 and which we owned continuously sinceJanuary 1, 2020 and excludes properties classified as held for sale, properties undergoing significant redevelopment, if any, and three properties owned by two unconsolidated joint ventures in which we own 51% and 50% interests. (2)Our definition of net operating income, or NOI, and our reconciliation of net income (loss) to NOI are included below under the heading "Non-GAAP Financial Measures." References to changes in the income and expense categories below relate to the comparison of consolidated results for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . For a comparison of consolidated results for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Rental income. The decrease in rental income reflects decreases in rental income of$27,158 related to property disposition activities,$12,675 related to properties undergoing significant redevelopment and$3,655 related to comparable properties, 51
-------------------------------------------------------------------------------- Table of Contents offset by an increase in rental income of$32,051 for acquired properties. The decrease in rental income for properties undergoing significant redevelopment is primarily due to the reduction in occupied space at a property located inWashington, D.C. that began a redevelopment project during 2021. The decrease in rental income for comparable properties is primarily due to reductions in occupied space at certain of our properties in 2021. Rental income includes non-cash straight line rent adjustments totaling$15,368 in 2021 and$16,079 in 2020, and amortization of acquired real estate leases and assumed real estate lease obligations totaling ($2,288 ) in 2021 and ($5,440 ) in 2020. Real estate taxes. The increase in real estate taxes primarily reflects an increase in real estate taxes of$11,729 for acquired properties, offset by decreases in real estate taxes of$2,174 related to property disposition activities,$1,844 related to properties undergoing significant redevelopment and$860 for comparable properties. Real estate taxes for comparable properties declined primarily due to decreases in assessed values and refunds received in 2021 at certain of our properties as a result of successful real estate tax appeals. Utility expenses. The decrease in utility expenses reflects decreases in utility expenses of$559 related to property disposition activities and$393 for properties undergoing significant redevelopment, offset by increases of$621 for acquired properties and$198 for comparable properties. Utility expenses for comparable properties increased primarily due to utility expenses previously paid directly by one of our tenants that are now being paid by us pursuant to a lease amendment with that tenant effective inJanuary 2021 . Other operating expenses. Other operating expenses consist of salaries and benefit costs of property level personnel, repairs and maintenance expense, cleaning expense, other direct costs of operating our properties and property management fees. The increase in other operating expenses reflects increases of$4,683 for acquired properties and$160 for comparable properties, offset by decreases of$3,226 related to property disposition activities and$1,257 related to properties undergoing significant redevelopment. Depreciation and amortization. The decrease in depreciation and amortization primarily reflects decreases of$14,505 for comparable properties and$11,131 related to property disposition activities, offset by an increase of$15,564 for acquired properties. Depreciation and amortization for comparable properties declined due to certain leasing related assets becoming fully depreciated afterJanuary 1, 2020 , partially offset by depreciation and amortization of improvements made to certain of our properties during 2020 and 2021. Loss on impairment of real estate. We recorded a$62,420 loss on impairment of real estate in 2021 to reduce the carrying value of eight properties to their estimated fair value less costs to sell, which includes$45,196 related to three properties containing approximately 2,001,000 rentable square feet that were sold during the year endedDecember 31, 2021 ,$6,991 related to two properties containing approximately 158,000 rentable square feet that were classified as held for sale as ofDecember 31, 2021 and$10,233 related to three properties containing approximately 448,000 rentable square feet that were previously classified as held for sale as ofSeptember 30, 2021 and were removed from held for sale status as ofDecember 31, 2021 . We recorded a$2,954 loss on impairment of real estate in 2020 to reduce the carrying value of four properties to their estimated fair value less costs to sell that were sold during 2020.
Costs associated with procurement and transactions. Acquisition -related and transaction costs incurred in 2020 represent costs associated with a acquisition that we terminated in
General and administrative. General and administrative expenses consist of fees pursuant to our business management agreement, equity compensation expense, legal and accounting fees, Trustees' fees and expenses, securities listing and transfer agency fees and other costs relating to our status as a publicly traded company. The decrease in general and administrative expenses is primarily the result of the expiration of an office lease inJanuary 2021 for which we were the lessee, as well as decreases in equity compensation expense, legal fees and state franchise tax expense, partially offset by an increase in business management fees in 2021 resulting from an increase in average total market capitalization in 2021 compared to 2020. Gain on sale of real estate. We recorded a$78,354 net gain on sale of real estate in 2021 resulting from the sale of six properties, a warehouse facility adjacent to a property we own located inKansas City, MO and two vacant land parcels adjacent to properties we own located inSterling, VA . We recorded a$10,855 net gain on sale of real estate in 2020 resulting from the sale of 10 properties. Interest and other income. The decrease in interest and other income is primarily due to a settlement payment we received in 2020 resulting from a dispute with a vendor, theJune 2020 payoff of a mortgage note receivable in connection with a property we sold in 2016 and the effect of lower returns on cash invested in 2021 compared to 2020. 52 -------------------------------------------------------------------------------- Table of Contents Interest expense. The increase in interest expense is primarily due to higher average outstanding debt balances in 2021 resulting from the aggregate issuance of$1,462,000 of senior unsecured notes with a weighted average interest rate of 3.5% sinceJanuary 1, 2020 , partially offset by the aggregate redemption or repayment of debt totaling$833,187 with a weighted average interest rate of 4.8% sinceJanuary 1, 2020 , lower interest expense incurred as a result of having a lower average balance outstanding under our revolving credit facility during 2021 compared to 2020 and lower average interest rates on amounts outstanding and an increase in interest expense capitalized related to redevelopment projects. Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of$14,068 in 2021 from prepayment fees incurred and the write off of unamortized discounts and debt issuance costs associated with the prepayment of one mortgage note due in 2023 and the redemption of our senior unsecured notes due 2022 and 2046. In 2020, we recorded a loss on early extinguishment of debt of$3,839 from prepayment fees incurred, the write off of unamortized discounts, premiums and debt issuance costs associated with the prepayment of three mortgage notes and a loss on the settlement of a mortgage note receivable that was repaid in 2020 related to a property sold in 2016. Income tax expense. The decrease in income tax expense reflects lower operating income in certain jurisdictions in 2021 where we are subject to state income taxes. Equity in net losses of investees. Equity in net losses of investees represents our proportionate share of losses from our investments in two unconsolidated joint ventures. Net income (loss). Our net income (loss) and net income (loss) per basic and diluted common share decreased in 2021 compared to 2020 primarily as a result of the changes noted above.
Non-GAAP Financial Measures
We present certain "non-GAAP financial measures" within the meaning of the applicableSEC rules, including the calculations below of NOI, FFO and Normalized FFO. These measures do not represent cash generated by operating activities in accordance with GAAP and should not be considered alternatives to net income (loss) as indicators of our operating performance or as measures of our liquidity. These measures should be considered in conjunction with net income (loss) as presented in our consolidated statements of comprehensive income (loss). We consider these non-GAAP measures to be appropriate supplemental measures of operating performance for a REIT, along with net income (loss). We believe these measures provide useful information to investors because by excluding the effects of certain historical amounts, such as depreciation and amortization expense, they may facilitate a comparison of our operating performance between periods and with other REITs and, in the case of NOI, reflecting only those income and expense items that are generated and incurred at the property level may help both investors and management to understand the operations of our properties.
Net Operating Income
The calculation of NOI excludes certain components of net income (loss) in order
to provide results that are more closely related to our property level results
of operations. We calculate NOI as shown below. We define NOI as income from our
rental of real estate less our property operating expenses. NOI excludes
amortization of capitalized tenant improvement costs and leasing commissions
that we record as depreciation and amortization expense. We use NOI to evaluate
individual and company-wide property level performance. Other real estate
companies and REITs may calculate NOI differently than we do.
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The following table presents the reconciliation of net income (loss) to NOI for
the years ended December 31, 2021 and 2020.
Year Ended December 31,
2021 2020
Net income (loss) $ (8,180) $ 6,678
Equity in net losses of investees 2,501 1,193
Income tax expense 251 377
Income (loss) before income tax expense and
equity in net losses of investees (5,428) 8,248
Loss on early extinguishment of debt 14,068 3,839
Interest expense 112,385 108,303
Interest and other income (7) (779)
Gain on sale of real estate (78,354) (10,855)
General and administrative 26,858 28,443
Acquisition and transaction related costs - 232
Loss on impairment of real estate 62,420 2,954
Depreciation and amortization 241,494 251,566
NOI $ 373,436 $ 391,951
Funds From Operations and Normalized Funds From Operations
We calculate FFO and Normalized FFO as shown below. FFO is calculated on the basis defined byThe National Association of Real Estate Investment Trusts , which is net income (loss), calculated in accordance with GAAP, plus real estate depreciation and amortization of consolidated properties and our proportionate share of the real estate depreciation and amortization of unconsolidated joint venture properties, but excluding impairment charges on real estate assets and any gain or loss on sale of real estate, as well as certain other adjustments currently not applicable to us. In calculating Normalized FFO, we adjust for the other items shown below and include business management incentive fees, if any, only in the fourth quarter versus the quarter when they are recognized as an expense in accordance with GAAP due to their quarterly volatility not necessarily being indicative of our core operating performance and the uncertainty as to whether any such business management incentive fees will be payable when all contingencies for determining such fees are known at the end of the calendar year. FFO and Normalized FFO are among the factors considered by ourBoard of Trustees when determining the amount of distributions to our shareholders. Other factors include, but are not limited to, requirements to maintain our qualification for taxation as a REIT, limitations in our credit agreement and public debt covenants, the availability to us of debt and equity capital, our expectation of our future capital requirements and operating performance and our expected needs for and availability of cash to pay our obligations. Other real estate companies and REITs may calculate FFO and Normalized FFO differently than we do. 54 -------------------------------------------------------------------------------- Table of Contents The following table presents the reconciliation of net income (loss) to FFO and Normalized FFO for the years endedDecember 31, 2021 and 2020. Year Ended December 31, 2021 2020 Net income (loss) $ (8,180) $ 6,678 Add (less): Depreciation and amortization: Consolidated properties 241,494 251,566 Unconsolidated joint venture properties 3,427 4,803 Loss on impairment of real estate 62,420 2,954 Gain on sale of real estate (78,354) (10,855) FFO 220,807 255,146 Add (less): Acquisition and transaction related costs - 232 Loss on early extinguishment of debt 14,068 3,839 Normalized FFO $ 234,875 $ 259,217 Weighted average common shares outstanding (basic and diluted) 48,195 48,124 FFO per common share (basic and diluted) $ 4.58 $ 5.30 Normalized FFO per common share (basic and diluted) $ 4.87 $ 5.39
LIQUIDITY AND CAPITAL RESOURCES
Our Operating Liquidity and Resources (dollar value in the thousands, excluding per share value)
Our principal sources of funds to meet operating and capital expenses, pay debt service obligations and make distributions to our shareholders are the operating cash flows we generate from our properties, net proceeds from property sales and borrowings under our revolving credit facility. We believe that these sources of funds will be sufficient to meet our operating and capital expenses, pay debt service obligations and make distributions to our shareholders for the next 12 months and for the foreseeable future thereafter. Our future cash flows from operating activities will depend primarily upon:
• our ability to collect rent from our tenants;
• our ability to maintain or increase the occupancy of, and the rental rates on, our property;
• our ability to control operating and capital costs on our assets;
• our ability to successfully sell the properties we sell;
• our ability to build, reconstruct or reposition assets to generate cash flows beyond our value of capital; at
•our ability to purchase additional properties which produce cash flows from operations in excess of our cost of acquisition capital and property operating and capital expenses.
On
per common component (
We expect to accretively grow our property portfolio through our capital recycling program, pursuant to which we plan to selectively sell certain properties from time to time to fund future acquisitions and to manage leverage at levels we believe appropriate with a goal of (1) improving the asset quality of our portfolio by reducing the average age of our properties, lengthening the weighted average term of our leases and increasing the likelihood of retaining our tenants and (2) increasing our cash available for distribution. During the year endedDecember 31, 2021 , we acquired three properties for an aggregate purchase price of$576,975 , excluding purchase price adjustments and acquisition related costs, and we sold six properties, a warehouse facility adjacent to a property we own located inKansas City, MO and two vacant land parcels adjacent to properties we own inSterling, VA for an aggregate sales price of$226,915 , excluding closing costs. SinceJanuary 1, 2022 , we also sold three additional properties for an aggregate sales price of$25,695 , excluding closing costs. We continue to evaluate our portfolio for opportunities to strategically recycle capital and are currently in various stages of marketing for sale more than 30 55 -------------------------------------------------------------------------------- Table of Contents properties containing over 3,000,000 rentable square feet. As ofFebruary 15, 2022 , we have entered into an agreement to sell one property for a sales price of$3,850 , excluding closing costs. We continue to carefully consider our capital allocation strategy and believe we are well positioned to opportunistically recycle and deploy capital. Our future purchases of properties cannot be accurately projected because such purchases depend upon purchase opportunities which come to our attention and our ability to successfully complete the acquisitions. We generally do not intend to purchase "turn around" properties, or properties which do not generate positive cash flows.
The following is a summary of our sources and uses of cash flows for the periods presented, as reflected in our aggregate cash flow statements:
Year
Finished
2021 2020
Cash, cash equivalents and restricted cash at the beginning of the period
$ 56,855 $ 100,696 Net cash provided by (used in): Operating activities 221,492 233,628 Investing activities (442,985) (22,987) Financing activities 249,153 (254,482)
Cash, cash equivalent and restricted cash at the end of the period
$ 84,515
The decrease in cash provided by operating activities for the year endedDecember 31, 2021 compared to the prior year is primarily the result of property sales and reductions in occupied space at certain of our properties in 2021, partially offset by properties acquired during 2021 and favorable changes in working capital. The increase in cash used in investing activities for the year endedDecember 31, 2021 compared to the prior year is primarily due to higher acquisition activity and real estate improvement activity in 2021 compared to the prior year, partially offset by higher cash proceeds received from our sales of properties. The increase in cash provided by financing activities for the year endedDecember 31, 2021 compared to the prior year is primarily due to the aggregate issuance of$1,050,000 of senior unsecured notes in 2021 compared to$412,000 of such issuances in the prior year, partially offset by higher debt repayment activity in 2021, which included the aggregate redemption of$610,000 of senior unsecured notes and the repayment of$71,000 of mortgage debt compared to the redemption of$400,000 of senior unsecured notes and the repayment of$152,187 of mortgage debt in 2020.
Our Investment and Funding Liquidity and Resources (dollar value in the thousands, excluding per share value)
In order to fund acquisitions and to meet cash needs that may result from our desire or need to make distributions or pay operating or capital expenses, we maintain a$750,000 revolving credit facility. The maturity date of our revolving credit facility isJanuary 31, 2023 and, subject to our payment of an extension fee and meeting certain other conditions, we have the option to extend the stated maturity date of our revolving credit facility by two additional six month periods. We can borrow, repay and reborrow funds available under our revolving credit facility until maturity, and no principal repayment is due until maturity. We are required to pay interest at a rate of LIBOR plus a premium, which was 110 basis points per annum atDecember 31, 2021 , on the amount outstanding under our revolving credit facility, if any. We also pay a facility fee on the total amount of lending commitments under our revolving credit facility, which was 25 basis points per annum atDecember 31, 2021 . Both the interest rate premium and facility fee are subject to adjustment based upon changes to our credit ratings. As ofDecember 31, 2021 , the annual interest rate payable on borrowings under our revolving credit facility was 1.2%. As ofDecember 31, 2021 andFebruary 15, 2022 , we had no amounts outstanding under our revolving credit facility and$750,000 available for borrowing.
Our credit agreement includes a feature where maximum borrowing availability can be increased up to
Our credit agreement provides that, with certain exceptions, a subsidiary of ours is required to guaranty our obligations under our$750,000 revolving credit facility only if that subsidiary has separately incurred debt (other than non-recourse debt), within the meaning specified in our credit agreement, or provided a guarantee of debt incurred by us or any of our other subsidiaries.
At the end of the year
56 -------------------------------------------------------------------------------- Table of Contents Senior Unsecured Note Issuances InMay 2021 , we issued$300,000 of 2.650% senior unsecured notes due 2026 in an underwritten public offering, raising net proceeds of$296,826 , after deducting underwriters' discounts and offering expenses. We used the net proceeds from this offering plus cash on hand to redeem all$310,000 of our 5.875% senior unsecured notes due 2046. These notes require semi-annual payments of interest only through maturity onJune 15, 2026 and may be repaid at par plus accrued and unpaid interest on or afterMay 15, 2026 . InAugust 2021 , we issued$350,000 of 2.400% senior unsecured notes due 2027 in an underwritten public offering, raising net proceeds of$346,607 , after deducting underwriters' discounts and offering expenses. We used the net proceeds from this offering to redeem all$300,000 of our 4.15% senior unsecured notes due 2022, repay amounts outstanding under our revolving credit facility and for general business purposes. These notes require semi-annual payments of interest only through maturity onFebruary 1, 2027 and may be repaid at par plus accrued and unpaid interest on or afterJanuary 1, 2027 . InSeptember 2021 , we issued$400,000 of 3.450% senior unsecured notes due 2031 in an underwritten public offering, raising net proceeds of$395,632 , after deducting underwriters' discounts and offering expenses. We used the net proceeds of this offering to repay amounts outstanding under our revolving credit facility and for general business purposes. These notes require semi-annual payments of interest only through maturity onOctober 15, 2031 and may be repaid at par plus accrued and unpaid interest on or afterJuly 15, 2031 .
Senior Unsecured Note Acquisitions
InJune 2021 , we redeemed, at par plus accrued interest, all$310,000 of our 5.875% senior unsecured notes due 2046 using cash on hand and the net proceeds from the issuance of our 2.650% senior unsecured notes due 2026. InSeptember 2021 , we redeemed, at a premium plus accrued interest, all$300,000 of our 4.15% senior unsecured notes due 2022 using a portion of the net proceeds from the issuance of our 2.400% senior unsecured notes due 2027.
Mortgage Note Payment
InJune 2021 , we prepaid, at a premium plus accrued interest, a mortgage note secured by three properties with an outstanding principal balance of$71,000 , an annual interest rate of 3.55% and a maturity date inMay 2023 using cash on hand and borrowings under our revolving credit facility. As ofDecember 31, 2021 , our debt maturities (other than our revolving credit facility), consisting of senior unsecured notes and mortgage notes, are as follows: Year Debt Maturities 2022 (1)(2)$ 325,517 2023 72,784 2024 350,000 2025 650,000 2026 300,000 Thereafter 912,000 Total$ 2,610,301 (1)InFebruary 2022 , we gave notice of our intention to prepay, at par plus accrued interest, a mortgage note secured by one property with an outstanding principal balance of$25,055 atDecember 31, 2021 , an annual interest rate of 4.22% and a maturity date inJuly 2022 . We expect to make this prepayment inApril 2022 using cash on hand.
(2) Our
None of our unsecured debt obligations require sinking fund payments prior to their maturity dates. Our$98,301 in mortgage debts generally require monthly payments of principal and interest through maturity. In addition to our debt obligations, as ofDecember 31, 2021 , we have estimated unspent leasing related obligations of$121,754 , of which we expect to spend$72,516 over the next 12 months.
We are currently in the process of redeveloping a property located in
57 -------------------------------------------------------------------------------- Table of Contents first quarter of 2023. As ofDecember 31, 2021 , we have incurred approximately$47,330 related to this project. InJune 2021 , we entered into a 30-year lease for approximately 230,000 rentable square feet at this property that is approximately 25.1% higher than the prior rental rate for the same space, making the redevelopment project 54% pre-leased. We are also in the planning stage for a redevelopment project at a three-property campus located inSeattle, WA containing approximately 300,000 rentable square feet. This project includes the repositioning of two properties from office to life science and maintaining the third building for office use. We currently estimate the total project costs associated with this redevelopment will be approximately$144,000 and completion of the redevelopment in the second quarter of 2023. We currently expect to use cash balances, borrowings under our revolving credit facility, net proceeds from property sales, incurrences or assumptions of mortgage debt and net proceeds from offerings of debt or equity securities to fund our future operations, capital expenditures, distributions to our shareholders and property acquisitions. When significant amounts are outstanding under our revolving credit facility or the maturities of our indebtedness approach, we expect to explore refinancing alternatives. Such alternatives may include incurring term debt, issuing debt or equity securities, extending the maturity date of our revolving credit facility and entering into a new revolving credit facility. We may assume additional mortgage debt in connection with our acquisitions or elect to place new mortgages on properties we own as a source of financing. We may also seek to participate in additional joint venture or other arrangements that may provide us with additional sources of financing. Although we cannot be sure that we will be successful in consummating any particular type of financing, we believe that we will have access to financing, such as debt and equity offerings, to fund future acquisitions and capital expenditures and to pay our obligations. We currently have an effective shelf registration statement that allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for such securities. Our ability to obtain, and the costs of, our future debt financings will depend primarily on credit market conditions and our creditworthiness. We have no control over market conditions. Potential investors and lenders likely will evaluate our ability to pay distributions to shareholders, fund required debt service and repay debts when they become due by reviewing our business practices and plans to balance our use of debt and equity capital so that our financial profile and leverage ratios afford us flexibility to withstand any reasonably anticipated adverse changes. Similarly, our ability to raise equity capital in the future will depend primarily upon equity capital market conditions and our ability to conduct our business to maintain and grow our operating cash flows. We intend to conduct our business in a manner that will afford us reasonable access to capital for investment and financing activities, but we cannot be sure that we will be able to successfully carry out this intention. For instance, it is uncertain what the duration and severity of the COVID-19 pandemic and its ultimate economic impact will be. A protracted and extensive economic downturn may cause a decline in financing availability and increased costs for financings. Further, such conditions could also disrupt capital markets and limit our access to financing from public sources. During the year endedDecember 31, 2021 , we paid quarterly distributions to our shareholders totaling$106,368 using cash on hand and borrowings under our revolving credit facility. OnJanuary 13, 2022 , we declared a regular quarterly distribution payable to shareholders of record onJanuary 24, 2022 in the amount of$0.55 per share, or approximately$26,600 . We expect to pay this distribution on or aboutFebruary 17, 2022 using cash on hand. For more information regarding the distributions we paid during 2021, see Note 10 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. We own 51% and 50% interests in two unconsolidated joint ventures which own three properties. The properties owned by these joint ventures are encumbered by an aggregate$82,000 principal amount of mortgage indebtedness, none of which is recourse to us. We do not control the activities that are most significant to these joint ventures and, as a result, we account for our investments in these joint ventures under the equity method of accounting. For more information on the financial condition and results of operations of these joint ventures, see Note 3 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. Other than these joint ventures, as ofDecember 31, 2021 , we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Debt Covenants (dollars in thousands)
Our principal debt obligations atDecember 31, 2021 consisted of an aggregate outstanding principal balance of$2,512,000 of public issuances of senior unsecured notes and mortgage notes with an aggregate outstanding principal balance of$98,301 that were assumed in connection with certain of our acquisitions. Also, the three properties owned by two joint ventures in which we own 51% and 50% interests secure two additional mortgage notes. Our publicly issued senior unsecured notes are governed by indentures and their supplements. Our credit agreement and our senior unsecured notes indentures and their supplements provide for acceleration of payment of all amounts outstanding upon the occurrence and continuation of certain events of default, such as, in the case of our credit agreement, a change of control of us, which includesRMR LLC ceasing to 58
-------------------------------------------------------------------------------- Table of Contents act as our business and property manager. Our credit agreement and our senior unsecured notes indentures and their supplements also contain a number of covenants, including those that restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to comply with certain financial covenants and, in the case of our credit agreement, restrict our ability to make distributions to our shareholders under certain circumstances. As ofDecember 31, 2021 , we believe we were in compliance with the terms and conditions of our respective covenants under our credit agreement and senior unsecured notes indentures and their supplements. Our mortgage notes are non-recourse, subject to certain limited exceptions, and do not contain any material financial covenants. Neither our credit agreement nor our senior unsecured notes indentures and their supplements contain provisions for acceleration which could be triggered by our credit ratings. However, under our credit agreement our highest senior credit rating is used to determine the fees and interest rates we pay. Accordingly, if that credit rating is downgraded, our interest expense and related costs under our credit agreement would increase. Our credit agreement has cross default provisions to other indebtedness that is recourse of$25,000 or more and indebtedness that is non-recourse of$50,000 or more. Similarly, our senior unsecured notes indentures and their supplements contain cross default provisions to any other debts of more than$25,000 (or up to$50,000 in certain circumstances).
Related Human Transactions
We have relationships and historical and continuing transactions withRMR LLC ,RMR Inc. and others related to them. For more information about these and other such relationships and related person transactions, see Notes 5 and 6 to the Notes to Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which are incorporated herein by reference, and our other filings with theSEC , including our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, or our definitive Proxy Statement, to be filed with theSEC within 120 days after the fiscal year endedDecember 31, 2021 . For more information about the risks that may arise as a result of these and other related person transactions and relationships, see elsewhere in this Annual Report on Form 10-K, including "Warning Concerning Forward Looking Statements," Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors." We may engage in additional transactions with related persons, including businesses to whichRMR LLC or its subsidiaries provide management services.
Critical Accounting Estimates
Our critical accounting policies are those that will have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates have been and will be consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in real property. These policies affect our:
• allocation of purchase prices between different asset categories, including allocations above and below market rents and the associated impact on recognizing rental income and depreciation and amortization costs; at
• assessment of carrying amounts and impairments of long-lived assets.
We allocate the acquisition cost of each property investment to various property
components such as land, buildings and improvements and intangibles based on
their fair values, and each component generally has a different useful life. For
acquired real estate, we record land, buildings and improvements, and, if
applicable, the value of in place leases, the fair market value of above or
below market leases and tenant relationships at fair value. For transactions
that qualify as business combinations, we allocate the excess, if any, of the
consideration over the fair value of assets acquired to goodwill. We base
purchase price allocations and the determination of useful lives on our
estimates and, under some circumstances, studies from independent real estate
appraisers to provide market information and evaluations, which may involve
estimated cash flows that are based on a number of factors, including
capitalization rates and discount rates, among others, that are relevant to our
purchase price allocations and determinations of useful lives; however, our
management is ultimately responsible for the purchase price allocations and
determination of useful lives.
We compute depreciation expense using the straight line method over estimated
useful lives of up to 40 years for buildings and improvements, and up to
12 years for personal property. We do not depreciate the allocated cost of land.
We amortize capitalized above market lease values as a reduction to rental
income over the terms of the respective leases. We amortize capitalized below
market lease values as an increase to rental income over the terms of the
respective leases. We amortize the value of acquired in place leases exclusive
of the value of above market and below market acquired leases to expense over
the periods of the respective leases. If a lease is terminated prior to its
stated expiration, all unamortized amounts relating to that lease are written
off. Purchase price allocations require us to make certain assumptions and
estimates. Incorrect assumptions and estimates may result in inaccurate
depreciation and amortization charges over future periods.
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We periodically evaluate our properties for impairment. Impairment indicators
may include declining tenant occupancy, our concerns about a tenant's financial
condition (which may be endangered by a rent default or other information which
comes to our attention) or our decision to dispose of an asset before the end of
its estimated useful life and legislative, as well as market or industry changes
that could permanently reduce the value of a property. If indicators of
impairment are present, we evaluate the carrying value of the related property
by comparing it to the expected future undiscounted cash flows to be generated
from that property. If the sum of these expected future cash flows is less than
the carrying value, we reduce the net carrying value of the property to its fair
value. This analysis requires us to judge whether indicators of impairment exist
and to estimate likely future cash flows. The future net undiscounted cash flows
are subjective and are based in part on assumptions regarding hold periods,
market rents and terminal capitalization rates. If we misjudge or estimate
incorrectly or if future tenant operations, market or industry factors differ
from our expectations we may record an impairment charge that is inappropriate
or fail to record a charge when we should have done so, or the amount of any
such charges may be inaccurate.
These accounting policies involve significant judgments made based upon our
experience and the experience of our management and our Board of Trustees ,
including judgments about current valuations, ultimate realizable value,
estimated useful lives, salvage or residual value, the ability and willingness
of our tenants to perform their obligations to us, current and future economic
conditions and competitive factors in the markets in which our properties are
located. Competition, economic conditions, changing government priorities and
other factors may cause occupancy declines in the future. In the future, we may
need to revise our carrying value assessments to incorporate information which
is not now known, and such revisions could increase or decrease our depreciation
expense related to properties we own or decrease the carrying values of our
assets.
Impact of Climate Change
Concerns about climate change have resulted in various treaties, laws and regulations that are intended to limit carbon emissions and address other environmental concerns. These and other laws may cause energy or other costs at our properties to increase. We do not expect the direct impact of these increases to be material to our results of operations, because the increased costs either would be the responsibility of our tenants directly or in the longer term, passed through and paid by tenants of our properties. Although we do not believe it is likely in the foreseeable future, laws enacted to mitigate climate change may make some of our properties obsolete or cause us to make material investments in our properties, which could materially and adversely affect our financial condition or the financial condition of our tenants and their ability to pay rent to us. In an effort to reduce the effects of any increased energy costs in the future, we continuously study ways to improve the energy efficiency at all of our properties. Our manager,RMR LLC , is a member of the ENERGY STAR program, a joint program of theU.S. Environmental Protection Agency and theU.S. Department of Energy that is focused on promoting energy efficiency at commercial properties through its "ENERGY STAR" program, and a member of theU.S. Green Building Council , a nonprofit organization focused on promoting energy efficiency at commercial properties through its LEED® green building program.RMR LLC's annual Sustainability Report summarizes the environmental, social and governance initiativesRMR LLC and its client companies, including OPI, employ.RMR LLC's Sustainability Report may be accessed onRMR Inc.'s website at www.rmrgroup.com/corporate-sustainability/default.aspx. The information on or accessible throughRMR Inc.'s website is not incorporated by reference into this Annual Report on Form 10-K. For more information, see "Business-Corporate Sustainability" in Part I, Item 1 of this Annual Report on Form 10-K. Some observers believe severe weather in different parts of the world over the last few years is evidence of global climate change. Severe weather may have an adverse effect on certain properties we own. Rising sea levels could cause flooding at some of our properties, which may have an adverse effect on individual properties we own. We mitigate these risks by procuring, or requiring our tenants to procure, insurance coverage we believe adequate to protect us from material damages and losses resulting from the consequences of losses caused by climate change. However, we cannot be sure that our mitigation efforts will be sufficient or that future storms, rising sea levels or other changes that may occur due to future climate change could not have a material adverse effect on our financial results.
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