UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER: 000-55146

Inland Real Estate Income Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

630-218-8000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

As of November 10, 2015, there were 86,088,756 shares of the registrant’s common stock, $.001 par value, outstanding.

 

 

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

TABLE OF CONTENTS

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share amounts)

 

 

See accompanying notes to consolidated financial statements.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited, dollar amounts in thousands, except per share amounts)

 

 

See accompanying notes to consolidated financial statements.

 

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INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited, dollar amounts in thousands) 

 

 

See accompanying notes to consolidated financial statements.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, dollar amounts in thousands) 

 

 

See accompanying notes to consolidated financial statements.

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INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited, dollar amounts in thousands) 

 

 

See accompanying notes to consolidated financial statements.

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited, dollar amounts in thousands, except per share amounts) 

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited consolidated financial statements of Inland Real Estate Income Trust, Inc. (which may be referred to herein as the “Company,” “we,” “us,” or “our”) for the year ended December 31, 2014, which are included in the Company’s 2014 Annual Report, as certain footnote disclosures contained in such audited consolidated financial statements have been omitted from this Quarterly Report.

 

 

NOTE 1 – ORGANIZATION

Inland Real Estate Income Trust, Inc. was formed on August 24, 2011 to acquire and manage a portfolio of commercial real estate investments located in the United States. To date, the Company has focused on acquiring retail properties. The Company entered into a Business Management Agreement with IREIT Business Manager & Advisor, Inc. (the “Business Manager”), an affiliate of Inland Real Estate Investment Corporation (the “Sponsor”), to be the Business Manager to the Company.

At September 30, 2015, the Company owned 47 retail properties, totaling 4,633,023 square feet.  The properties are located in 20 states.  At September 30, 2015, the portfolio had a weighted average physical occupancy of 96.2% and economic occupancy of 97.0%. Economic occupancy excludes square footage associated with an earnout component.

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In the opinion of management, all adjustments necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods are presented. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.

Consolidation

The accompanying consolidated financial statements include the accounts of the Company, as well as all wholly owned subsidiaries. Wholly owned subsidiaries generally consist of limited liability companies (“LLCs”). All intercompany balances and transactions have been eliminated in consolidation.

Each property is owned by a separate legal entity which maintains its own books and financial records and each entity’s assets are not available to satisfy the liabilities of other affiliated entities.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

Fair Value Measurements

The Company’s cash equivalents, accounts receivable and payables and accrued expenses all approximate fair value due to the short term nature of these financial instruments. The Company’s financial instruments measured on a recurring basis include derivative interest rate instruments.

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:

 

 

With the assistance of a third party, the fair value of derivative instruments was estimated based on data observed in the forward yield curve which is widely observed in the marketplace. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the counterparty's nonperformance risk in the fair value measurements which utilize Level 3 inputs, such as estimates of current credit spreads. The Company has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative interest rate swap agreements and therefore has classified these in Level 2 of the hierarchy. 

Acquisitions

Upon acquisition, the Company determines the total purchase price of each property (see Note 4 – “Acquisitions”), which includes the estimated contingent consideration to be paid or received in future periods, if any. The Company allocates the total purchase price of properties based on the fair value of the tangible and intangible assets acquired and liabilities assumed based on Level 3 inputs, such as comparable sales values, discount rates, capitalization rates, revenue and expense growth rates and lease-up assumptions, from a third party appraisal or other market sources.

Certain of the Company’s properties included earnout components to the purchase price, meaning the Company did not pay a portion of the purchase price of the property at closing, although the Company owns the entire property. The Company is not obligated to settle the contingent portion of the purchase price unless space which was vacant at the time of acquisition is later leased by the seller within the time limits and parameters set forth in the related acquisition agreements. The earnout payments are based on a predetermined formula applied to rental income received. The earnout agreements have a limited obligation period from the date of acquisition, as defined. If at the end of the time period certain space has not been leased, occupied and rent producing, the Company will have no further obligation to pay additional purchase price consideration and will retain ownership of that entire property. Based on its best estimate, the Company has recorded a liability for the potential future earnout payments using estimated fair value at the date of acquisition using Level 3 inputs including market rents ranging from $14.00 to $28.00 per square foot, probability of occupancy ranging from 10% to 100% based on leasing activity and utilizing a discount rate of 6.50% to 8.25%. The Company has recorded this earnout amount as additional purchase price of the related property and as a liability included in deferred investment property acquisition obligations on the accompanying consolidated balance sheets. The liability increases as the anticipated payment date draws near based on a present value; such increases in the liability are recorded as amortization expense on the accompanying consolidated statements of operations and comprehensive loss. The Company records changes in the underlying liability assumptions to acquisition related costs on the accompanying consolidated statements of operations and comprehensive loss.

Capitalization and Depreciation

Real estate acquisitions are recorded at cost less accumulated depreciation. Improvement and betterment costs are capitalized, and ordinary repairs and maintenance are expensed as incurred. Transactional costs in connection with the acquisition of real estate properties and businesses are expensed as incurred.

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

Cost capitalization and the estimate of useful lives require judgment and include significant estimates that can and do change.  Depreciation expense is computed using the straight-line method. The Company anticipates the estimated useful lives of its assets by class to be generally:

 

 

Depreciation expense was $5,473 and $1,869 for the three months ended September 30, 2015 and 2014, respectively, and $13,936 and $3,422 for the nine months ended September 30, 2015 and 2014, respectively.

REIT Status

The Company has qualified and elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, for federal income tax purposes commencing with the tax year ended December 31, 2013. As a result, the Company generally will not be subject to federal income tax on taxable income that is distributed to stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distributes at least 90% of its taxable income (subject to certain adjustments) to its stockholders. The Company will monitor the business and transactions that may potentially impact its REIT status. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal (including any applicable alternative minimum tax) and state income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.

Recent Accounting Pronouncements

In September 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments. The amendments in the ASU eliminate the requirement of an acquirer to retrospectively account for provisional amounts that are identified during the measurement period after a business combination.  This ASU requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The ASU also requires the acquirer to disclose the amount recorded in current-period earnings, by line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been issued and will be applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt – Issuance Costs Associated with Line-of-Credit Arrangements – Amendments to Security and Exchange Paragraphs Pursuant to Staff Announcement at June 18, 2015 Emerging Issues Task Force Meeting on August 18, 2015. ASU 2015-15 amends subtopic 835-30 and clarifies guidance on the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The amendment allows an entity to present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 provides clarification of current accounting guidance and is effective immediately. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest. The ASU requires that debt issuance costs be deducted from the carrying value of the financial liability and not recorded as separate assets, classified as deferred financing costs. The ASU is effective for public entities for financial statements issued for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued and will be applied on a retrospective basis. The Company does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018 with early application permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

 

NOTE 3 – EQUITY

The Company was authorized to sell up to 150,000,000 shares of common stock at $10 each in an initial public “best efforts” offering (the “Offering”) which commenced on October 18, 2012 and to issue 30,000,000 shares at $9.50 each issuable pursuant to the Company’s distribution reinvestment plan (“DRP”). The Offering closed on October 16, 2015. Effective November 2, 2015, the Company amended its DRP. The Company is offering up to 25,000,000 shares of its common stock at a price of $9.50 per share to stockholders who elect to participate in the amended DRP.

As of September 30, 2015, the Company issued 79,717,028 shares of common stock generating gross proceeds of $793,358, excluding the DRP.

The Company provides the following programs to facilitate future investment in the Company’s shares and to provide limited liquidity for stockholders.

Distribution Reinvestment Plan

The Company provides existing stockholders with the option to purchase additional shares from the Company by automatically reinvesting cash distributions through the DRP, subject to certain share ownership restrictions. The Company does not pay any selling commissions or the marketing contribution and due diligence expense allowance in connection with the DRP. Shares are currently sold at a price of $9.50 per share until such time as the Company reports an estimated value of its shares. On and after the date on which the Company reports an estimated value of its shares, the price per share under the DRP will be equal to the estimated value of a share, as determined by the Company’s board of directors and reported by the Company from time to time.

Distributions reinvested through the DRP were $5,905 and $1,462 for the three months ended September 30, 2015 and 2014, respectively, and $14,115 and $2,890 for the nine months ended September 30, 2015 and 2014, respectively.

Share Repurchase Program

Under the share repurchase program (“SRP”), the Company is authorized to purchase shares from stockholders who purchased their shares from the Company or received their shares through a non-cash transfer and who have held their shares for at least one year, if requested, if the Company chooses to repurchase them. Subject to funds being available, the Company will limit the number of shares repurchased during any calendar year to 5% of the number of shares outstanding on December 31^st of the previous calendar year. Funding for the SRP will come from proceeds the Company receives from the DRP. In the case of repurchases made upon the death of a stockholder or qualifying disability, as defined in the SRP, neither the one year holding period, the limit regarding funds available from the DRP nor the 5% limit will apply. The SRP will immediately terminate if the Company’s shares become listed for trading on a national securities exchange. In addition, the Company’s board of directors, in its sole direction, may, at any time, amend, suspend or terminate the SRP.

Repurchases through the SRP were $811 and $40 for the three months ended September 30, 2015 and 2014, respectively, and $2,510 and $77 for the nine months ended September 30, 2015 and 2014, respectively.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

NOTE 4 – ACQUISITIONS

2015 Acquisitions

 

 

During the nine months ended September 30, 2015, the Company acquired, through its wholly owned subsidiaries, the 16 properties listed above and financed a portion of these acquisitions by borrowing or assuming $110,944 in mortgage debt.

The Company incurred $1,071 and $1,020 during the three months ended September 30, 2015 and 2014, respectively, and $5,941 and $4,384 during the nine months ended September 30, 2015 and 2014, respectively, of acquisition, dead deal and transaction related costs, including changes to initial assumptions related to deferred investment property acquisition obligations that were recorded in acquisition related costs in the consolidated statements of operations and comprehensive loss related to both closed and potential transactions. These costs include third party due diligence costs such as appraisals, environmental studies, and legal fees as well as acquisition fees and time and travel expense reimbursements to the Sponsor and its affiliates. For the nine months ended September 30, 2015, the Business Manager permanently waived acquisition fees of $2,510.

For properties acquired during the nine months ended September 30, 2015, the Company recorded revenue of $17,867 and property net income of $3,501,which excludes expensed acquisition related costs.

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

The following table presents certain additional information regarding the Company’s acquisitions during the nine months ended September 30, 2015. The amounts recognized for major assets acquired and liabilities assumed as of the acquisition date are as follows:

 

 

Pro Forma Disclosures

The following condensed pro forma consolidated financial statements for the three and nine months ended September 30, 2015 and 2014 include pro forma adjustments related to the acquisitions and financings during 2014 and 2015. The 2014 and 2015 acquisitions are presented assuming the acquisitions occurred on January 1, 2013 and January 1, 2014, respectively. Acquisition expenses for the three months ended September 30, 2015 and 2014 of $445 and $955, respectively, and acquisition expenses for the nine months ended September 30, 2015 and 2014 of $4,873 and $4,219, respectively, related to each acquisition are not expected to have a continuing impact and, therefore, have been excluded from these pro forma results.

 

 

The 2014 acquisitions consist of Park Avenue, North Hills Square, Mansfield Shopping Center, Lakeside Crossing, MidTowne Shopping Center, Dogwood Festival, Pick N Save Center, Harris Plaza, Dixie Valley, The Landings at Ocean Isle, Shopps at Prairie Ridge, Harvest Square, Heritage Square, The Shoppes at Branson Hills, Branson Hills Plaza, Copps Grocery Store and Fox Point Plaza.

The pro forma financial information above is not necessarily indicative of what the actual results of operations of the Company would have been assuming acquisitions had been consummated at the beginning of the period, nor does it purport to represent the results of operations for future periods.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

NOTE 5 – ACQUIRED INTANGIBLE ASSETS AND LIABILITIES

The following table summarizes the Company’s identified intangible assets and liabilities as of September 30, 2015 and December 31, 2014: 

 

 

As of September 30, 2015, the weighted average amortization periods for acquired in place lease, above market lease intangibles and below market lease intangibles are 9, 11 and 17 years, respectively.

The portion of the purchase price allocated to acquired above market lease value and acquired below market lease value are amortized on a straight-line basis over the term of the related lease as an adjustment to rental income. For below market lease values, the amortization period includes any renewal periods with fixed rate renewals. The portion of the purchase price allocated to acquired in place lease value is amortized on a straight-line basis over the acquired leases’ weighted average remaining term.

As of September 30, 2015, no amount has been allocated to customer relationship value.

Amortization pertaining to acquired in place lease value, above market lease value and below market lease value is summarized below:

 

 

Estimated amortization of the respective intangible lease assets and liabilities as of September 30, 2015 for each of the five succeeding years and thereafter is as follows:  

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

 

NOTE 6 – DEBT AND DERIVATIVE INSTRUMENTS

 

As of September 30, 2015 and December 31, 2014, the Company had the following mortgages and credit facilities payable:

 

 

The Company’s indebtedness bore interest at a weighted average interest rate of 3.23% per annum at September 30, 2015, which includes the effects of interest rate swaps. The Company estimates the fair value of its total debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by the Company’s lenders using Level 3 inputs.  The carrying value of the Company’s debt was $399,762 and $186,034 as of September 30, 2015 and December 31, 2014, respectively, and its estimated fair value was $398,677 and $185,260 as of September 30, 2015 and December 31, 2014, respectively.

As of September 30, 2015, scheduled principal payments and maturities on the Company’s debt were as follows:

 

 

Credit Facilities Payable

On September 30, 2015, the Company entered into a credit agreement (“Credit Facility”) with KeyBanc Capital Markets Inc. for a $100,000 revolving Credit Facility.  The Company has an accordion feature to increase available borrowings up to $400,000, subject to certain conditions.  The Credit Facility matures on September 30, 2019.  The Company has a one year extension option which it may exercise as long as there is no existing default, it is in compliance with all covenants and it pays an extension fee equal to 0.15% of the commitment amount being extended, as defined.  Upon closing, the Company borrowed $100,000, the full amount of the revolving Credit Facility. As of September 30, 2015, the interest rate on the Credit Facility was 1.60%.  

As of September 30, 2015, the terms of the Credit Facility stipulate:

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

The credit agreement requires compliance with certain covenants including a minimum tangible net worth requirement, a distribution limitation, restrictions on indebtedness and investment restrictions, as defined. It also contains customary default provisions including the failure to comply with the Company's covenants and the failure to pay when amounts outstanding under the credit agreement become due. 

 

 

Mortgages Payable

The mortgage loans require compliance with certain covenants, such as debt service ratios, investment restrictions and distribution limitations. As of September 30, 2015, the Company was current on all of the payments and other covenants. All of the Company’s mortgage loans are secured by first mortgages on the respective real estate assets or were guaranteed by the Sponsor. No fees were paid in connection with any guarantees issued by the Sponsor. As of September 30, 2015, the weighted average years to maturity for the Company’s mortgages payable was approximately 5 years.  

Interest Rate Swap Agreements

The Company entered into interest rate swaps to fix certain of its floating LIBOR based debt under variable rate loans to a fixed rate to manage its risk exposure to interest rate fluctuations. The Company will generally match the maturity of the underlying variable rate debt with the maturity date on the interest swap. For the three and nine months ended September 30, 2015 and 2014, the Company recorded interest expense of $(98) and $0 and $(267) and $71, respectively, related to interest rate swaps.

The following table summarizes the Company’s interest rate swap contracts outstanding as of September 30, 2015.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

The table below presents the fair value of the Company’s cash flow hedges as well as their classification on the consolidated balance sheets as of September 30, 2015 and December 31, 2014.

 

 

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the unrealized gain or loss on the derivative is reported as a component of comprehensive loss (“OCL”).  The ineffective portion of the change in fair value, if any, is recognized directly in earnings. The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations and OCL for the three and nine months ended September 30, 2015 and 2014.

 

 

 

The amount that is expected to be reclassified from Accumulated OCL into income in the next twelve months is approximately $3,189.

 

 

NOTE 7 – DISTRIBUTIONS

The Company currently pays distributions based on daily record dates, payable in arrears the following month, equal to a daily amount of $0.001643836 per share based upon a 365-day period.  The table below presents the distributions paid and declared for the three and nine months ended September 30, 2015 and 2014.

 

 

 

NOTE 8 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period (the “common shares”). Diluted EPS is computed by dividing net income (loss) by the common shares plus potential common shares issuable upon exercising options or other contracts. As of September 30, 2015 and 2014, the Company did not have any dilutive common share equivalents outstanding.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

The acquisition of certain of the Company’s properties included an earnout component to the purchase price that was recorded as a deferred investment property acquisition obligation (“Earnout liability”). The maximum potential earnout payment was $3,645 at September 30, 2015.

The table below presents the change in the Company’s earnout liability for the nine months ended September 30, 2015 and 2014.

 

 

The Company may be subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the consolidated financial statements of the Company.

 

 

NOTE 10 – SEGMENT REPORTING

The Company has one reportable segment, retail real estate, as defined by U.S. GAAP for the nine months ended September 30, 2015 and 2014.

Concentration of credit risk with respect to accounts receivable currently exists due to the small number of tenants currently comprising the Company's rental revenue. The concentration of revenues for these tenants increases the Company’s risk associated with nonpayment by these tenants. In an effort to reduce risk, the Company performs ongoing credit evaluations of its larger tenants.

For the nine months ended September 30, 2015, approximately 5.8% of the Company’s rental revenue was generated by three locations leased to Roundy’s Supermarkets, Inc.

 

 

NOTE 11 – TRANSACTIONS WITH RELATED PARTIES

The Company is a member of a limited liability company formed as an insurance association captive which is wholly-owned by the Company, Inland Real Estate Corporation, InvenTrust Properties Corp. and Retail Properties of America, Inc. This amount is recorded as an asset in investment in unconsolidated entity in the accompanying consolidated balance sheets.

The Company owns 1,000 shares of common stock in The Inland Real Estate Group of Companies, Inc. with a recorded value of $1 at September 30, 2015 and December 31, 2014. This amount is included in other assets in the accompanying consolidated balance sheets.

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

The following table summarizes the Company’s related party transactions for the three and nine months ended September 30, 2015 and 2014. Certain compensation and fees payable to the Business Manager for services provided to the Company are limited to maximum amounts.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

 

 

NOTE 12 – OPERATING LEASES

Minimum lease payments to be received under operating leases, including ground leases, as of September 30, 2015 for the years indicated are as follows:

 

 

The remaining lease terms range from less than 1 year to 22 years. Most of the revenue from the Company’s properties consists of rents received under long-term operating leases. Some leases require the tenant to pay fixed base rent paid monthly in advance, and to reimburse the Company for the tenant’s pro rata share of certain operating expenses including real estate taxes, special assessments, insurance, utilities, common area maintenance, management fees, and certain building repairs paid by the Company and recoverable under the terms of the lease. Under these leases, the Company pays all expenses and is reimbursed by the tenant for the tenant’s pro rata share of recoverable expenses paid.

Certain other tenants are subject to net leases which provide that the tenant is responsible for fixed base rent as well as all costs and expenses associated with occupancy. Under net leases where all expenses are paid directly by the tenant rather than the landlord, such expenses are not included in the consolidated statements of operations and comprehensive loss. Under leases where all expenses are paid by the Company, subject to reimbursement by the tenant, the expenses are included within property operating expenses and reimbursements are included in tenant recovery income on the consolidated statements of operations and comprehensive loss.

 

 

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INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited, dollar amounts in thousands, except per share amounts)

 

NOTE 13 – SUBSEQUENT EVENTS

The board of directors of the Company declared distributions payable to stockholders of record each day beginning on the close of business on October 1, 2015 through the close of business on December 31, 2015. Distributions were declared in a daily amount equal to $0.001643836 per share, based upon a 365-day period, which equates to $0.60 or a 6% annualized rate based on a purchase price of $10.00 per share. Distributions were paid monthly in arrears, as follows:

 

 

The Company purchased the following properties from unaffiliated third parties subsequent to September 30, 2015.

 

 

Due to the timing of the acquisitions, the purchase price allocation for assets acquired and liabilities assumed at acquisition date and pro forma financial information are not being presented as the information was not available at the time of this filing.

 

The Company entered into the following financings subsequent to September 30, 2015.

 

 

The Company terminated its Offering on October 16, 2015.  As of the termination date, the Company had issued 86,161,431 shares of common stock, generating aggregate gross proceeds of $856,500.  Of those amounts, 83,835,055 shares, generating aggregate gross proceeds of $834,399, were sold pursuant to the best efforts portion of the Offering and 2,326,376 shares, generating aggregate gross proceeds of $22,101, were sold pursuant to the DRP.  On October 19, 2015, the Company filed a Registration Statement on Form S-3D pursuant to which the Company is offering up to 25,000,000 shares of common stock to its existing stockholders pursuant to the DRP at a price equal to $9.50 per share until such time as the Company reports an estimated value of its shares.  On and after the date on which the Company reports an estimated value of its shares, the purchase price under the DRP will be equal to the estimated value of a share of common stock, as determined by the Company’s board of directors and reported by the Company from time to time.

 

 

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Words such as “may,” “could,” “should,” “expect,” “intend,” “plan,” “goal,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “variables,” “potential,” “continue,” “expand,” “maintain,” “create,” “strategies,” “likely,” “will,” “would” and variations of these terms and similar expressions, or the negative of these terms or similar expressions, are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of the management of Inland Real Estate Income Trust, Inc. (which we refer to herein as the “Company,” “we,” “our” or “us”) based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on March 30, 2015, and factors described below:

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Quarterly Report, and may ultimately prove to be incorrect or false. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

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The following discussion and analysis relates to the three and nine months ended September 30, 2015 and 2014 and as of September 30, 2015 and December 31, 2014. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included in this report.

OVERVIEW

We are an externally managed Maryland corporation formed in August 2011 to acquire a portfolio of commercial real estate located throughout the United States. We are managed by our business manager, IREIT Business Manager & Advisor, Inc., referred to herein as our “Business Manager.” While we may acquire retail properties, office buildings, multi-family properties and industrial/distribution and warehouse facilities, within these property types, we focus primarily on “core” real estate assets. To date, we have focused on acquiring retail properties. We will continue to focus on retail properties unless and until the returns from other properties exceed those that we believe are available from investing in retail.

Core real estate assets are those assets that typically satisfy some, but not necessarily all, of the following criteria:

Core real estate assets also typically generate predictable, steady cash flow and have a lower risk profile than non-core real estate assets. We have purchased single-tenant, net-leased retail properties and may continue to purchase single-tenant, net-leased properties within any of the four property types listed above.  We may purchase existing or newly-constructed properties as well as properties that are under development or construction, including those where development has not commenced. In addition, in all cases, we may acquire properties directly, by purchasing the property, also known as a “fee interest,” or through joint ventures, including joint ventures in which we do not own a controlling interest. We also may invest in real estate-related equity securities of both publicly traded and private real estate companies, as well as commercial mortgage-backed securities.

On October 18, 2012, we commenced our initial public offering, referred to herein as the “Offering,” and it concluded on October 16, 2015. We offered 150,000,000 shares of our common stock at a price of $10.00 per share on a “best efforts” basis through Inland Securities Corporation, or “Inland Securities,” our dealer manager, a wholly owned subsidiary of our Sponsor. “Best efforts” means that Inland Securities was not obligated to purchase any specific number or dollar amount of shares. We also offered up to 30,000,000 shares of our common stock at a price of $9.50 per share to stockholders who elected to participate in our distribution reinvestment plan (“DRP”). On October 5, 2015, our board of directors approved the amendment and restatement of the DRP, effective on November 2, 2015. On October 19, 2015, we filed a Registration Statement on Form S-3D pursuant to which we are offering up to 25,000,000 shares of our common stock at a price of $9.50 per share to existing stockholders who elect to participate in the amended DRP. On and after the date on which we report an estimated value of our shares, the price per share under the DRP will be equal to the estimated value of a share, as determined by our board of directors and reported by us from time to time. We qualified and elected to be taxed as a REIT commencing with the tax year ended December 31, 2013 for federal income tax purposes.

At September 30, 2015, we owned 47 retail properties, totaling approximately 4.6 million square feet. At September 30, 2015, our portfolio had weighted average physical and economic occupancy of 96.2% and 97.0%, respectively. Economic occupancy excludes square footage associated with an earnout component. At the time of acquisition, some properties were subject to an earnout component to the purchase price, meaning we did not pay a portion of the purchase price at closing related to certain vacant spaces, although we own the entire property. We are not obligated to pay this contingent purchase price unless the seller obtains leases for the vacant space within the time limits and parameters set forth in the acquisition agreement. As of September 30, 2015 and 2014, annualized base rent (“ABR”) per square foot averaged $15.85 and $16.25, respectively, for all properties owned. ABR is calculated by annualizing the current, in place monthly base rent for leases, including any tenant concessions, such as rent abatement or allowances, which may have been granted and excluding ground leases. ABR including ground leases averaged $13.45 and $14.89, as of September 30, 2015 and 2014, respectively.

Company Highlights - Nine Months Ended September 30, 2015

Acquisitions

We acquired 16 retail properties totaling 2.1 million square feet for approximately $361.6 million, net of debt assumed. Subsequent to September 30, 2015, we acquired 6 additional retail properties totaling 1.2 million square feet for approximately $304.7 million, net of debt assumed.

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Financings

We financed 8 properties through borrowing $70.6 million and assuming $40.3 million in secured first mortgages with a weighted average stated interest rate of 4.00% per annum and a weighted average maturity of 5.9 years.  In addition, we secured a $100 million credit agreement (“Credit Facility”) with the ability to expand to $400 million. Subsequent to September 30, 2015, we financed 3 properties through borrowing $25.1 million and assuming $17.7 million in secured first mortgages with a weighted average stated interest rate of 4.14% per annum and a weighted average maturity of 6.3 years.

Capital

We generated gross proceeds (excluding DRP proceeds) totaling $381.9 million from our "best-efforts" offering which closed on October 16, 2015.

Outlook

We continue to expand our portfolio by acquiring multi-tenant necessity-based retail shopping centers.  We believe we will see overall operating performance increase in 2015 as we increase the number of retail properties owned.  

Our management team continues to believe that we can produce better risk adjusted returns by investing in multi-tenant necessity-based retail shopping centers than other types of commercial real estate. Multi-tenant retail assets tend to be relatively stable, yet they allow for growth opportunities in a recovering market. A needs-based shopping center is usually anchored by a supermarket that draws patrons to the property along with a number of supporting tenants in smaller shop space. The anchor generally has a long-term lease providing stable cash flow to the property. All of the properties purchased during 2015 were multi-tenant retail properties.

At the September 2015, Federal Open Market Committee meeting of the Federal Reserve Board (“Federal Reserve”), the Federal Reserve “reaffirmed its view that the current zero to ¼ percent target range for the federal funds rate remains appropriate.” The Federal Reserve noted economic activity is expanding at a moderate pace and inflation is expected to remain near its recent low level, however, it expects inflation to rise gradually towards its objective of two percent. The Federal Reserve has not provided any clear indication as to when it will raise the federal funds rate.   We believe interest rates will rise in the future as the economy continues to expand. We anticipate low interest rates to continue in the near term.

Real estate pricing is generally influenced by, among other things, market interest rates. However, the movements are not simultaneous and pricing generally lags behind interest rate adjustments for a period of time. Since part of our business strategy is to utilize debt to finance a portion of our real estate assets, we may be challenged in finding appropriately priced real estate in the event of a rapidly rising interest rate environment.

SELECT PROPERTY INFORMATION

Investment Properties

 

 

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The table below presents information for each of our investment properties as of September 30, 2015.

 

 

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Tenancy Highlights

The following table presents information regarding the top ten tenants in our portfolio based on annualized base rent for leases in place as of September 30, 2015.

 

 

The following table sets forth a summary of our tenant diversity for our entire portfolio and is based on leases in place at September 30, 2015.

 

 

The following table sets forth a summary, as of September 30, 2015, of the percent of total annualized base rent and the weighted average lease expiration by size of tenant.

 

 

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Lease Expirations

The following table sets forth a summary, as of September 30, 2015, of lease expirations scheduled to occur during the remainder of 2015 and each of the calendar years from 2016 to 2024 and thereafter, assuming no exercise of renewal options or early termination rights for leases commenced on or prior to September 30, 2015.

 

 

LIQUIDITY AND CAPITAL RESOURCES

General

Our principal demand for funds is to acquire real estate assets, to pay operating and offering expenses, to pay interest on our outstanding indebtedness, to pay distributions to our stockholders and to fund our Share Repurchase Program (“SRP”).  We generally seek to fund our cash needs for items other than asset acquisitions and offering costs from operations. Our cash needs for acquisitions are funded primarily from the sale of our shares, including those offered for sale through our DRP, as well as financing obtained concurrent with an acquisition or in the future. There may be a delay between the sale of our shares and our purchase of assets, which could result in a delay in generating returns, if any, from our investment operations. Our Business Manager and Inland Real Estate Acquisitions, Inc. evaluate potential acquisitions and engage in negotiations with sellers and lenders on our behalf. Pending investment in real estate assets, we may decide to invest our cash (including proceeds from the Offering) in investments that yield lower returns than those earned on real estate assets.

As our Offering concluded on October 16, 2015, potential future sources of liquidity include property operations, proceeds from our amended DRP, proceeds from secured or unsecured financings from banks or other lenders, including our Credit Facility, and proceeds from the sale of assets.  If necessary, we may use financings or other sources of liquidity (capital) in the event of unforeseen significant capital expenditures.

Although we entered into a Credit Facility agreement on September 30, 2015, our financing strategy will remain consistent with recent acquisitions. Management expects overall debt to be at approximately 50% of the purchase price of the properties, including any proceeds from the Credit Facility.

From our formation through September 30, 2015, our liquidity needs have primarily been to purchase 47 retail properties, to pay operating, organization and offering costs and to pay distributions. During the nine months ended September 30, 2015, we funded the purchase of 16 retail properties with mortgage debt of approximately $110.9 million and proceeds from the Offering of $290.9 million.

As of September 30, 2015, we had total debt outstanding of approximately $395.6 million, excluding mortgage premiums, net of accumulated amortization, which bore interest at a weighted average interest rate of 3.23% per annum, of which approximately $3.0 million is due in 2016, $6.5 million is due in 2017, $15.5 million is due in 2018, $242.9 million is due in 2019 and the remaining amount of approximately $127.7 million is due after 2019. As of September 30, 2015 and December 31, 2014, our borrowings were 47% and 42%, respectively, of the purchase price of our properties.

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Cash Flow Analysis

 

 

Cash provided by operating activities increased $17.0 million to $19.2 million during the nine months ended September 30, 2015 from $2.2 million during the nine months ended September 30, 2014. For the nine months ended September 30, 2015 and 2014, funds generated from rental and tenant recovery income were partially offset by property operating, interest, acquisition and general and administrative expenses. The increase from 2014 to 2015 is due to the growth of our real estate portfolio.

Cash used in investing activities increased $147.6 million to $362.8 million during the nine months ended September 30, 2015 from $215.2 million during the nine months ended September 30, 2014.  The increase was primarily attributable to:

Cash provided by financing activities increased $182.8 million to $491.2 million during the nine months ended September 30, 2015 from $308.4 million during the nine months ended September 30, 2014.  The increase was primarily attributable to:

partially offset by:

A summary of the distributions declared, distributions paid and cash flows provided by operations for the nine months ended September 30, 2015 and 2014 follows (dollar amounts in thousands):

 

 

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Results of Operations

The following discussions are based on our consolidated financial statements for the three and nine months ended September 30, 2015 and 2014. Dollar amounts are stated in thousands.

These sections describe and compare our results of operations for the three and nine months ended September 30, 2015 and 2014. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the net operating income of properties that we have owned and operated for both periods presented, in their entirety, referred to herein as “same store” properties. By evaluating the property net operating income of our "same store" properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of our new acquisitions on net income.

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Comparison of the three months ended September 30, 2015 and 2014

A total of 20 of our 47 investment properties were acquired on or before July 1, 2014 and represent our “same store” properties during the three months ended September 30, 2015 and 2014. “Non-same store,” as reflected in the table below, includes properties acquired after July 1, 2014. For the three months ended September 30, 2015, 27 properties were included in non-same store and for the three months ended September 30, 2014, 2 properties were included in non-same store. The following table presents the property net operating income broken out between same store and non-same store, prior to straight-line rental income, amortization of lease intangibles, interest, and depreciation and amortization for the three months ended September 30, 2015 and 2014, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.

 

 

Total property net operating income. On a “same store” basis, comparing the results of operations of investment properties owned during the three months ended September 30, 2015, with the results of the same investment properties owned during the three months ended September 30, 2014, property net operating income increased $146, total property income increased $179 and total property operating expenses including real estate tax expense increased $33 for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014.

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The increase in “same store” total property income is primarily due to scheduled rent increases, earnout closings mid-2014 and early 2015 and higher total property operating expenses which led to higher tenant recovery income.  The increase in total property operating expenses is primarily due to an increase in real estate tax expense and an increase in repairs and maintenance expense during the three months ended September 30, 2015 as compared to the three months ended September 30, 2014.

“Non-same store” total property net operating income increased $9,351 for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase is a result of acquiring 27 retail properties after July 1, 2014. On a “non-same store” basis, total property income increased $12,977 and total property operating expenses increased $3,626 during the three months ended September 30, 2015 as a result of these acquisitions.

Other income. Other income increased $504 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase is due to the acquisition of investment properties throughout 2014 and 2015, which increased straight-line rental income by $493 and amortization of lease intangibles, net by $71. The increase is also due to an increase in interest income of $39 as a result of increased cash available to invest due to an increase in offering proceeds offset by a decrease of $99 in equity in earnings (loss) of unconsolidated entity.

Other expense. Other expense increased $9,446 for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. The increase is primarily due to an increase in depreciation and amortization, interest expense, business management fees and acquisition related expenses.

General and administrative expenses increased $444 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.  This increase is due to the growth in our real estate portfolio year over year.

Depreciation and amortization increased $6,366 for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014. This increase is due to the acquisition of 27 retail properties after July 1, 2014.

Interest expense increased $1,665 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The increase is due to the financing of 20 properties after July 1, 2014.

Business management fees increased $920 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to an increase in the Company’s average invested assets.

Acquisition related expenses increased $51 for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. These expenses include acquisition, dead deal and transaction related costs and relate to both closed and potential transactions. These costs include third party due diligence costs such as appraisals, environmental studies, and legal fees as well as acquisition fees and time and travel expense reimbursements to the Sponsor and its affiliates.

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Comparison of the nine months ended September 30, 2015 and 2014

A total of 14 of our 47 investment properties were acquired on or before January 1, 2014 and represent our “same store” properties during the nine months ended September 30, 2015 and 2014. “Non-same store,” as reflected in the table below, includes properties acquired after January 1, 2014. For the nine months ended September 30, 2015, 33 properties were included in non-same store and for the nine months ended September 30, 2014, 8 properties were included in non-same store. The following table presents the property net operating income broken out between same store and non-same store, prior to straight-line rental income, amortization of lease intangibles, interest, and depreciation and amortization for the nine months ended September 30, 2015 and 2014, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.

 

 

Total property net operating income. On a “same store” basis, comparing the results of operations of investment properties owned during the nine months ended September 30, 2015, with the results of the same investment properties owned during the nine months ended September 30, 2014, property net operating income increased $36, total property income increased $72 and total property operating expenses including real estate tax expense increased $36 for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014.

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The increase in “same store” total property income is primarily due to scheduled rent increases partially offset by decreased tenant recovery income due to a lower recovery percentage.  The increase in total property operating expenses is primarily due to an increase in real estate tax expense and an increase in repairs and maintenance expense during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.

“Non-same store” total property net operating income increased $26,721 for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase is a result of acquiring 33 retail properties after January 1, 2014. On a “non-same store” basis, total property income increased $36,854 and total property operating expenses increased $10,133 during the nine months ended September 30, 2015 as a result of these acquisitions.

Other income. Other income increased $1,432 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. This increase is due to the acquisition of investment properties throughout 2014 and 2015, which increased straight-line rental income by $1,010 and amortization of lease intangibles, net by $493. The increase is also due to an increase in interest income of $125 as a result of increased cash available to invest due to an increase in offering proceeds offset by a decrease of $196 in equity in earnings (loss) of unconsolidated entity.

Other expense. Other expense increased $28,830 for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. The increase is primarily due to an increase in depreciation and amortization, interest expense, business management fees and acquisition related expenses.

General and administrative expenses increased $1,381 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.  This increase is due to the growth in our real estate portfolio year over year.

Depreciation and amortization increased $17,758 for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014. This increase is due to the acquisition of 33 retail properties after January 1, 2014.

Interest expense increased $4,798 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase is due to the financing of 21 properties after January 1, 2014.

Business management fees increased $3,336 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. For the nine months ended September 30, 2014, the Business Manager was entitled to a business management fee in the amount equal to $433, which was permanently waived. During the nine months ended September 30, 2014, the Business Manager also permanently waived business management fees of $226 incurred for the year ended December 31, 2013.

Acquisition related expenses increased $1,557 for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. These expenses include acquisition, dead deal and transaction related costs and relate to both closed and potential transactions. These costs include third party due diligence costs such as appraisals, environmental studies, and legal fees as well as acquisition fees and time and travel expense reimbursements to the Sponsor and its affiliates. The increase for the nine months ended September 30, 2015 is due to an increase in acquisition activity during 2015.

Critical Accounting Policies

Disclosures discussing all critical accounting policies are set forth in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on March 30, 2015, under the heading “Critical Accounting Policies.”

Share Repurchase Program

The SRP is designed to provide existing stockholders with limited interim liquidity by enabling them to sell shares back to us subject to certain restrictions, as defined in the SRP. The prices at which shares may be sold back to us as Ordinary Repurchases, as defined in the SRP, are as follows:

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We are authorized to fund any repurchases by using only the proceeds generated from sales of shares under our DRP and we will limit the number of Ordinary Repurchases, as defined in the SRP, during any calendar year to 5% of the number of shares of common stock outstanding on December 31st of the previous calendar year. Prior to the date the Company reports an estimated value of its shares, the repurchase price will be equal to or below the price of the shares specified in the Offering.

In the case of an Exceptional Repurchase, as defined in the SRP, upon the death or qualifying disability of a stockholder, the price at which shares may be repurchased under the plan is equal to 100% of the share price. Exceptional Repurchases are not subject to a one-year holding period, or the 5% repurchase limit discussed above, and may be repurchased with funds from any source.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Non-GAAP Financial Measures

Accounting for real estate assets in accordance with U.S. GAAP assumes the value of real estate assets is reduced over time. Because real estate values may rise and fall with market conditions, operating results from real estate companies that use U.S. GAAP accounting may not present a complete view of their performance. We use Funds from Operations, or FFO, a widely accepted metric to evaluate our performance. FFO provides a supplemental measure to compare our performance and operations to other REITs. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, has promulgated a standard known as FFO, which it believes more accurately reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of operating property, plus depreciation and amortization and after adjustments for unconsolidated entities in which the REIT holds an interest. In addition, NAREIT has further clarified the FFO definition to add-back impairment write-downs of depreciable real estate or of investments in unconsolidated entities that are driven by measurable decreases in the fair value of depreciable real estate. We have adopted the NAREIT definition for computing FFO.

Under U.S. GAAP, acquisition related costs are treated as operating expenses reducing our income. Publicly registered, non-listed REITs typically engage in a significant amount of acquisition activity in the early years of their operations, and thus incur significant acquisition related costs, during these initial years. Although other start up entities may engage in significant acquisition activity during their initial years, REITs such as us that are not listed on an exchange are unique in that they typically have a limited timeframe during which they acquire a significant number of properties and thus incur significant acquisition related costs. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or “IPA,” an industry trade group, published a standardized measure known as Modified Funds from Operations, or “MFFO”, which the IPA has promulgated as a supplemental measure for publicly registered non-listed REITs and which may be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT.

MFFO excludes costs associated with investing activities, some of which are acquisition related costs that affect our operations only in periods in which properties are acquired, and other non-operating items that are included in FFO. By excluding acquisition related costs, the use of MFFO provides another measure of our operating performance. Because MFFO may be a recognized measure of operating performance within the non-listed REIT industry, MFFO and the adjustments used to calculate it may be useful in order to evaluate our performance against other non-listed REITs. Like FFO, MFFO is not equivalent to our net income or loss as determined under U.S. GAAP, as detailed in the table below, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we continue to acquire a significant amount of properties. MFFO should only be used as a measurement of our operating performance while we are acquiring a significant amount of properties because it excludes, among other things, acquisition costs incurred during the periods in which properties were acquired.

We believe our definition of MFFO, a non-U.S. GAAP measure, is consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the “Practice Guideline,” issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of U.S. GAAP net income: acquisition fees and expenses; amounts relating to straight-line rents and amortization of above and below market lease assets and liabilities, accretion of discounts and amortization of premiums on

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debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.

Our presentation of FFO and MFFO may not be comparable to other similarly titled measures presented by other REITs. We believe that the use of FFO and MFFO provides a more complete understanding of our operating performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs. Neither FFO nor MFFO is intended to be an alternative neither to “net income” nor to “cash flows from operating activities” as determined by U.S. GAAP as a measure of our capacity to pay distributions. Management uses FFO and MFFO to compare our operating performance to that of other REITs and to assess our operating performance.

Our FFO and MFFO for the nine months ended September 30, 2015 and 2014 is calculated as follows:

 

 

Subsequent Events

Our board of directors declared distributions payable to stockholders of record each day beginning on the close of business on October 1, 2015 through the close of business on December 31, 2015. Distributions were declared in a daily amount equal to $0.001643836 per share, based upon a 365-day period, which equates to $0.60 or a 6% annualized rate based on a purchase price of $10.00 per share. Distributions were paid monthly in arrears, as follows:

 

(Dollar amounts in thousands)

 

The Company purchased the following properties from unaffiliated third parties subsequent to September 30, 2015.

 

 

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The Company entered into the following financings subsequent to September 30, 2015.

 

 

We terminated our Offering on October 16, 2015.  As of the termination date, we had issued 86,161,431 shares of common stock, generating aggregate gross proceeds of $856.5 million.  Of those amounts, 83,835,055 shares, generating aggregate gross proceeds of $834.4 million, were sold pursuant to the best efforts portion of the Offering and 2,326,376 shares, generating aggregate gross proceeds of $22.1 million, were sold pursuant to the DRP.  On October 19, 2015, we filed a Registration Statement on Form S-3D pursuant to which we are offering up to 25,000,000 shares of common stock to our existing stockholders pursuant to the DRP at a price equal to $9.50 per share until such time as we report an estimated value of our shares.  On and after the date on which we report an estimated value of our shares, the purchase price under the DRP will be equal to the estimated value of a share of common stock, as determined by our board of directors and reported by us from time to time.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We are exposed to various market risks, including those caused by changes in interest rates and commodity prices. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and commodity prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We have entered into, and may continue to enter into, financial instruments to manage and reduce the impact of changes in interest rates. We may also enter into financial instruments to manage and reduce the impact of changes in commodity prices. The counterparties are, and are expected to continue to be, major financial institutions.

Interest Rate Risk

We are exposed to interest rate changes primarily as a result of long-term debt used to purchase properties or other real estate assets and fund capital expenditures. We currently have exposure to financial market risks as approximately 32% of our long-term debt has a variable rate of interest as of September 30, 2015. As of September 30, 2015, we had outstanding debt, which is subject to fixed interest rates and variable rates, of $395,568,951, excluding mortgage premiums, bearing interest rates in the range of 1.94% to 5.95% per annum and a weighted average interest rate of 3.23%, which includes the effect of interest rate swaps.

If interest rates on all debt which bears interest at variable rates as of September 30, 2015 permanently increased by 1% (100 basis points), the increase in interest expense on all debt would decrease earnings and cash flows by approximately $2,270,990 annually. If interest rates on all debt which bears interest at variable rates as of September 30, 2015 permanently decreased by 1% (100 basis points), the decrease in interest expense would increase earnings and cash flows by the same amount.

We use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge. We have used derivative financial instruments, specifically interest rate swap contracts, to hedge against interest rate fluctuations on variable rate debt, which exposes us to both credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us because the counterparty may not perform. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We seek to manage the market risk associated with interest-rate contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. There is no assurance we will be successful.

With regard to variable rate financing, our Business Manager assesses our interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our Business Manager maintains risk management control systems to monitor interest rate cash flow risk attributable to both of our outstanding or forecasted debt obligations as well as our potential offsetting hedge positions.

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With regard to fixed rate financing, interest rate fluctuations generally affect the fair value, but not our earnings or cash flows. Therefore, interest rate risk does not have a significant impact on our fixed rate debt obligations until their maturity or earlier prepayment.

With regard to variable rate financing, our Business Manager assesses our interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our Business Manager maintains risk management control systems to monitor interest rate cash flow risk attributable to both of our outstanding or forecasted debt obligations as well as our potential offsetting hedge positions.

Derivatives

The following table summarizes our interest rate swap contracts outstanding as of September 30, 2015:

 

(Dollar amounts in thousands)

 

Item 4.  Controls and Procedures

Controls and Procedures

The Company’s management has evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the principal executive and principal financial officers have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) or Rule 15d-15(f)) during the nine months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II - Other Information

Item 1.  Legal Proceedings

We are not a party to, and none of our properties are subject to, any material pending legal proceedings.

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Item 1A.  Risk Factors

The following risk factors supplement the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014.

We have incurred net losses on a U.S. GAAP basis for the quarterly period ended September 30, 2015.

We have incurred a net loss on a U.S. GAAP basis for the three and nine months ended September 30, 2015 of $0.3 million and $4.4 million, respectively. Our losses can be attributed, in part, to acquisition related expenses and depreciation and amortization. We may incur net losses in the future, which could have a material adverse impact on our financial condition, operations, cash flow, and our ability to service our indebtedness and pay distributions to our stockholders. We are subject to all of the business risks and uncertainties associated with any business, including the risk that the value of a stockholder’s investment could decline substantially. We were formed in August 2011 and, as of September 30, 2015, had acquired 47 retail properties. We cannot assure you that, in the future, we will be profitable or that we will realize growth in the value of our assets.

The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and invest in real estate assets.

The Federal Deposit Insurance Corporation, or “FDIC,” generally only insures limited amounts per depositor per insured bank. The FDIC insures up to $0.25 million per depositor per insured bank account. At September 30, 2015, we had cash and cash equivalents exceeding these federally insured levels. If the banking institutions in which we have deposited funds ultimately fail, we may lose our deposits over the federally insured levels. The loss of our deposits could reduce the amount of cash we have available to distribute or invest.

Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.

We have borrowed money, which bears interest at variable rates, and therefore are exposed to increases in costs in a rising interest rate environment. Increases in interest rates would increase our interest expense on any variable rate debt, as well as any debt that must be refinanced at higher interest rates at the time of maturity. Our future earnings and cash flows could be adversely affected due to the increased requirement to service our debt and could reduce the amount we are able to distribute to our stockholders. As of September 30, 2015, we had $127.6 million or 32% of our total debt that bore interest at variable rates with a weighted average interest rate of 1.69%.

To date, we have not generated sufficient cash flow from operations to pay distributions, and, therefore, we have paid, and may continue to pay, distributions from the net proceeds of our Offering and DRP, which reduces the amount of cash we ultimately have to invest in assets, negatively impacting the value of our stockholders’ investment, and is dilutive to our stockholders.

We have not yet generated positive cash flow from operations to cover distribution payments and may not do so unless our asset base grows significantly. Our organizational documents permit us to pay distributions from sources other than cash flow from operations. Specifically, some or all of our distributions may be paid from retained cash flow, from borrowings and from cash flow from investing activities, including the net proceeds from the sale of our assets, or from the net proceeds of our Offering. Accordingly, until such time as we are generating cash flow from operations sufficient to cover distributions, during the pendency of our Offering, we have paid and will likely continue to pay distributions from the net proceeds of our Offering. We have not established any limit on the extent to which we may use alternate sources, including borrowings or proceeds of the Offering and DRP, to pay distributions. There is no assurance we will generate sufficient cash flow from operations to cover distributions. We began declaring distributions to stockholders of record during December 2012. Approximately 37% ($15.5 million) of the distributions paid to stockholders through September 30, 2015, have been paid from the net proceeds of our Offering, which reduces the proceeds available for other purposes. To the extent we pay cash distributions, or a portion thereof, from sources other than cash flow from operations, we will have less capital available to invest in properties and other real estate-related assets, the book value per share may decline, and there will be no assurance that we will be able to sustain distributions at that level. In addition, by using the net proceeds of our Offering to fund distributions, earlier investors may have benefitted from the investments made with funds raised later in our Offering, while later investors may not have benefitted from all of the net offering proceeds raised from earlier investors.

An estimated value of our shares of common stock may not exceed the price at which we are offering shares under the DRP.

Under rules published by the Financial Industry Regulatory Authority (“FINRA”), registered broker-dealers must disclose a per share estimated value.  Due to uncertainties in the marketplace and other factors which could impact our results of operations and financial

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condition, the future per share estimated value of our shares may be less than the price at which stockholders purchased shares in the Offering or the price of our shares currently offered through our DRP.

The financial covenants under our credit agreement may restrict our ability to make distributions and our operating and acquisition activities. If we breach the financial covenants we could be held in default under the credit agreement, which could accelerate our repayment date and materially adversely affect our liquidity and financial condition.

On September 30, 2015, we entered into a credit agreement with KeyBanc Capital Markets Inc. for a $100 million revolving Credit Facility. The credit agreement provides us with the ability from time to time to increase the size of the revolving Credit Facility, subject to certain conditions. Our performance of the obligations under the credit agreement, including the payment of any outstanding indebtedness, is secured by a minimum pool of five unencumbered properties with an unencumbered pool value of $100 million or above and by a guaranty by certain of our subsidiaries. Upon closing, we borrowed $100 million, the full amount of the revolving Credit Facility.

The credit agreement requires compliance with certain financial covenants, including, among other conditions, a minimum tangible net worth requirement, restrictions on indebtedness, a distribution limitation and other material covenants. These covenants could inhibit our ability to make distributions to our stockholders and to pursue certain business initiatives or effect certain transactions that might otherwise be beneficial to us. For example, without lender consent, we may not declare and pay distributions or honor any redemption requests if any default under the agreement then exists or if distributions, excluding any distributions reinvested through our DRP, for the then-current quarter and the three immediately preceding quarters would exceed 95% of our funds from operations, excluding acquisition expenses, or adjusted “FFO,” for that period. For the fiscal quarter ended September 30, 2015, distributions did not exceed 95% of our adjusted FFO.

The credit agreement also provides for several customary events of default, including, among other things, the failure to comply with our covenants and the failure to pay when amounts outstanding under the credit agreement become due. Declaration of a default by the lenders under the credit agreement could restrict our ability to borrow additional monies and could cause all amounts to become immediately due and payable, which would materially adversely affect our liquidity and financial condition.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

On October 18, 2012, our Registration Statement on Form S-11 (File No. 333-176775), covering a public offering of up to 180,000,000 shares of common stock, was declared effective under the Securities Act. The Offering commenced on October 18, 2012 and closed on October 16, 2015.

 

Pursuant to the Offering, we sold 83,835,055 shares on a “best efforts” basis, equal to $834,399,343 in aggregate gross proceeds, and 2,326,376 shares under the DRP, equal to $22,100,569 in aggregate gross proceeds, as of the termination date.

From the effective date of the Offering through September 30, 2015, we had sold the following securities in the Offering and the DRP for the following aggregate offering prices:

From the effective date of the Offering through September 30, 2015, we have paid the following costs in connection with the issuance and distribution of the registered securities:

 

 

From the effective date of the Offering through September 30, 2015, the net offering proceeds to us from the Offering, after deducting the total expenses incurred described above, were approximately $732.4 million. As of September 30, 2015, we had used approximately $431.5 million of these net proceeds to purchase interests in real estate and pay related costs, of which $5.9 million was

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paid to related parties, approximately $25.2 million for repayment of indebtedness used to purchase interests in real estate, approximately $4.1 million to pay loan origination costs, approximately $15.5 million to pay distributions, $100,000 to fund our investment in the insurance captive, and approximately $1.1 million to fund our operations. The remaining net proceeds were held as cash at September 30, 2015.

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act.

Share Repurchase Program

Under the SRP, we are authorized to purchase shares from stockholders who purchased their shares from us or received their shares through a non-cash transfer and who have held their shares for at least one year, if requested, if we choose to repurchase them. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to 5% of the number of shares outstanding at December 31st of the previous calendar year. Funding for the SRP will come from proceeds we receive from the DRP. In the case of repurchases made upon the death of a stockholder or qualifying disability, as defined in the SRP, neither the one year holding period, the limit regarding funds available from the DRP nor the 5% limit will apply. The SRP will immediately terminate if our shares become listed for trading on a national securities exchange. In addition, our board of directors, in its sole direction, may, at any time, amend, suspend or terminate the SRP.

The table below outlines the shares we repurchased pursuant to our SRP during the quarter ended September 30, 2015.

 

 

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

Not Applicable.

Item 6.  Exhibits

The representations, warranties and covenants made by us in any agreement filed as an exhibit to this Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties or covenants to, or with, you. Moreover, these representations, warranties and covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto and are incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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Exhibit Index

 

 

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