UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

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  ☒    No  ☐

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  ☒   No  ☐

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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  ☐    No  ☒

As of April 26, 2017, there were 88,850,052 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

(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 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

March 31, 2017

(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, 2016, which are included in the Company’s 2016 Annual Report, as certain footnote disclosures contained in such audited consolidated financial statements have been omitted from this Quarterly Report.

 

 

NOTE 1 – ORGANIZATION

The Company 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 indirect wholly owned subsidiary of Inland Real Estate Investment Corporation (the “Sponsor”), to be the Business Manager to the Company.

At March 31, 2017, the Company owned 57 retail properties, totaling 6,655,965 square feet.  The properties are located in 23 states.  At March 31, 2017, the portfolio had a weighted average physical occupancy of 94.5% and economic occupancy of 95.4%. Economic occupancy excludes square footage associated with an earnout component.  

 

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Disclosures discussing all significant accounting policies are set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 15, 2017, under the heading Note 2 – “Summary of Significant Accounting Policies.” There have been no changes to the Company’s significant accounting policies during the three months ended March 31, 2017. 

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.

Recent Accounting Pronouncements

 

In November 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new update will require that amounts described as restricted cash and restricted cash equivalents be included in beginning and ending-of-period reconciliation of cash shown on the statement of cash flows. The amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. At March 31, 2017 and December 31, 2016, restricted cash of $5,416 and $5,996, respectively, was classified as other assets on the Company’s consolidated balance sheets and the Company does not believe that the adoption of ASU No. 2016-18 will have a material impact on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The issues addressed in the new guidance include the cash flow classification of: debt prepayment and debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investments, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The standard will be effective for fiscal years beginning after December 15, 2017, for public companies. The Company does not believe that ASU No. 2016-15 will have a material impact on its consolidated financial statements and related disclosures.

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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 February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU No. 2016-02 supersedes the previous leases standard, Leases (Topic 840). The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company continues to analyze the effect of implementing this guidance, developing an inventory of all leases and identifying any non-lease components in its lease arrangements. The Company is evaluating the impact of implementing the new standard on its consolidated financial statements both from the perspective of lessee and lessor.

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, although it will not affect the accounting for rental related revenues. The new standard is effective for the Company on January 1, 2018. Early adoption is permitted but not prior to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company continues analyzing the effect of implementing this guidance, including identifying each of the revenue streams and evaluating potential process changes necessary to meet the standard’s reporting and disclosure requirements. The Company intends to implement the standard retrospectively with the cumulative effect (if any) recognized in retained earnings at the date of initial application.

 

NOTE 3 – EQUITY

The Company was authorized to sell up to 150,000,000 shares of common stock at $10 per share in an initial public “best efforts” offering (the “Offering”) which commenced on October 18, 2012 and concluded on October 16, 2015.  The Company issued 83,835,055 shares of common stock generating gross proceeds of $834,399 from the Offering.  As of March 31, 2017, there were 88,593,002 shares of common stock outstanding including 6,596,137 shares issued through the distribution reinvestment plan (“DRP”), net of 1,838,190 shares repurchased through the share repurchase program (“SRP”).    

 

On March 29, 2017 the Company’s board of directors determined an estimated per share net asset value (the “Estimated Per Share NAV”) of the Company’s common stock of $9.05 as reported in the Company’s Form 8-K filed with the Securities and Exchange Commission on March 30, 2017.  The Company’s previously estimated per share net asset value of $9.02 was established on April 7, 2016.

The Company provides the following programs to facilitate additional 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 distributions through the DRP, subject to certain share ownership restrictions. The Company does not pay any selling commissions or a marketing contribution and due diligence expense allowance in connection with the DRP. Pursuant to the DRP, the price per share for shares of common stock purchased under the DRP is 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, until the shares become listed for trading, if a listing occurs, assuming that the DRP has not been terminated or suspended in connection with such listing. Prior to April 7, 2016 shares were sold through the DRP at a price of $9.50 per share.  Subsequently, shares were sold through the DRP at a price of $9.02 until March 30, 2017, when the Company reported a new Estimated Per Share NAV. Accordingly, under the DRP, beginning with reinvestments made on and after March 30, 2017, and until the Company announces a new estimated per share net asset value, distributions may be reinvested for shares of the Company’s common stock at a price equal to $9.05 per share. 

 

Distributions reinvested through the DRP were $6,780 and $6,924 for the three months ended March 31, 2017 and 2016, 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)

 

Share Repurchase Program

 

Under the 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 purchase them. Subject to funds being available, the Company limits 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 comes 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 applies. 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.

Pursuant to the SRP, the Company may repurchase shares at prices ranging from 92.5% of the “share price,” as defined in the SRP, for stockholders who have owned shares for at least one year to 100% of the “share price” for stockholders who have owned shares for at least four years. For repurchases sought upon a stockholder’s death or qualifying disability, the Company may repurchase shares at a price equal to 100% of the “share price.” As used in the SRP, “share price” means the lesser of (1) the offering price of the Company’s shares in the Offering (unless the shares were purchased at a discount from that price, and then that purchase price), reduced by any distributions of net sale proceeds that the Company designates as constituting a return of capital; or (2) the most recently disclosed estimated value per share. Accordingly, under the SRP, beginning with repurchases on and after March 30, 2017, and until we announce a new Estimated Per Share NAV, the “share price” will be equal to $9.05 per share.

 

Repurchases through the SRP were $2,737 and $2,371 for the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017 and December 31, 2016, the Company’s liability related to the SRP was $1,382 and $1,448, respectively, recorded in other liabilities on the Company’s consolidated balance sheets.

 

NOTE 4 – ACQUISITIONS

2017 Acquisitions

During the three months ended March 31, 2017, the Company, through its wholly owned subsidiary, acquired the property listed below from an unaffiliated third party and financed entirely the acquisition with proceeds from its credit agreement with KeyBanc Capital Markets Inc. (the “Credit Facility”).

 

 

 

The above acquisition was accounted for as an asset acquisition. For the three months ended March 31, 2017, the Company incurred $788 of total acquisition costs and fees, $717 of which are capitalized as the acquisition of net investment properties in the accompanying consolidated balance sheets and $71 of such costs are included in acquisition related costs in the accompanying consolidated statements of operations and comprehensive loss. The Company incurred $161 during the three months ended March 31, 2016 of acquisition, dead deal and transaction related costs, including changes to initial assumptions related to deferred investment property acquisition obligations (See Note 9 – “Commitments and Contingencies”) 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 properties acquired during the three months ended March 31, 2017, the Company recorded revenue of $735 and property net income of $218, 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 three months ended March 31, 2017. The amounts recognized for major assets acquired and liabilities assumed as of the acquisition date are as follows:

 

NOTE 5 – ACQUIRED INTANGIBLE ASSETS AND LIABILITIES

The following table summarizes the Company’s identified intangible assets and liabilities as of March 31, 2017 and December 31, 2016: 

 

 

As of March 31, 2017, the weighted average amortization periods for acquired in place lease, above market lease intangibles, below market lease intangibles and above market ground leases are 10, 13, 19 and 55 years, respectively.

The portion of the purchase price allocated to acquired above market lease value and acquired below market lease value is 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 acquired above market ground lease is amortized on a straight-line basis as an adjustment to property operating expense over the term of the lease and includes renewal periods. 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 March 31, 2017, no amount has been allocated to customer relationship value.

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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)

 

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

 

 

Estimated amortization of the respective intangible lease assets and liabilities as of March 31, 2017 for each of the five succeeding years and thereafter is as follows:  

 

 

 

NOTE 6 – DEBT AND DERIVATIVE INSTRUMENTS

 

As of March 31, 2017 and December 31, 2016, the Company had the following mortgages and credit facility payable:

 

 

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 excluding mortgage premium and unamortized debt issuance costs was $651,292 and $607,836 as of March 31, 2017 and December 31, 2016, respectively, and its estimated fair value was $639,238 and $595,404 as of March 31, 2017 and December 31, 2016, 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)

 

As of March 31, 2017, scheduled principal payments and maturities on the Company’s debt were as follows:

 

 

Credit Facility Payable

On September 30, 2015, the Company entered into a Credit Facility for $100,000. 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. In 2016, the Company amended its Credit Facility to, among other matters, increase the aggregate commitment under the Credit Facility by $10,000 to $110,000. At March 31, 2017, the interest rate on the Credit Facility was 2.34%. As of March 31, 2017, the Company had $35,500 available for borrowing under the Credit Facility.

 

The Credit Facility requires compliance with certain covenants, as amended, 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 Facility become due.  The Company is in compliance with all financial covenants related to the Credit Facility.

Mortgages Payable

The mortgage loans require compliance with certain covenants, such as debt service ratios, investment restrictions and distribution limitations. As of March 31, 2017, the Company was current on all of the payments and in compliance with all financial covenants. All of the Company’s mortgage loans are secured by first mortgages on the respective real estate assets. As of March 31, 2017, the weighted average years to maturity for the Company’s mortgages payable was approximately 5.2 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.

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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 interest rate swap contracts outstanding as of March 31, 2017.

 

(a)   Receive floating rate index based upon 1 month LIBOR. At March 31, 2017, the 1 month LIBOR was 0.98%.

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 March 31, 2017 and December 31, 2016, respectively.

 

 

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 income (loss).  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 comprehensive loss for the three months ended March 31, 2017 and 2016.

 

 

 

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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 amount that is expected to be reclassified from accumulated other comprehensive income into income in the next twelve months is approximately $1,634.

 

 

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, which equates to $0.60 per share per year, based upon a 365-day year.  The table below presents the distributions paid and declared during the three months ended March 31, 2017 and 2016.

 

 

 

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 common share equivalents. The Company excludes antidilutive restricted shares and units from the calculation of weighted-average shares for diluted EPS.  As a result of a net loss in the three months ended March 31, 2017, 2,832 shares were excluded from the computation of diluted EPS, because they would have been antidilutive. The Company had a net loss in the three months ended March 31, 2016, and there were no common stock equivalents outstanding. Therefore, there were no antidilutive restricted shares or units at March 31, 2016.

 

 

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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 $10,172 at March 31, 2017.

The table below presents the change in the Company’s Earnout liability for the three months ended March 31, 2017 and 2016.

 

 

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 – EQUITY-BASED COMPENSATION

Under the Company’s Employee and Director Restricted Share Plan (“RSP”), restricted shares and restricted share units generally vest over a one to three year vesting period from the date of the grant, subject to the specific terms of the grant. In accordance with the RSP, restricted shares and restricted share units were issued to non-employee directors as compensation. Each restricted share and restricted share unit entitle the holder to receive one common share when it vests. Restricted shares and restricted share units are included in common stock outstanding on the date of vesting. The grant-date value of the restricted shares and restricted share units are amortized over the vesting period representing the requisite service period. Compensation expense associated with the restricted shares and restricted share units issued to the non-employee directors was $6, in the aggregate, for the three months ended March 31, 2017. As of March 31, 2017, the Company had $20 of unrecognized compensation cost related to the unvested restricted shares and restricted share units, in the aggregate. The weighted average remaining period that compensation expense related to unvested restricted shares and restricted share units will be recognized is 1.5 years.

A summary table of the status of the restricted shares and restricted share units is presented below:

 

 

 

 

NOTE 11 – SEGMENT REPORTING

The Company has one reportable segment as defined by U.S. GAAP, retail real estate, for the three months ended March 31, 2017 and 2016.

 

 

 

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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 – TRANSACTIONS WITH RELATED PARTIES

 

The Company is a member of a limited liability company formed as an insurance association captive (“Captive”), which is owned by the Company, IRC Retail Centers LLC, InvenTrust Properties Corp. and Retail Properties of America, Inc.  The Company recorded its investment in investment in unconsolidated entity in the accompanying consolidated balance sheets. The Company’s share of net income from its investment is based on the ratio of each member’s premium contribution to the venture.

In 2016, the Company received $126 representing a portion of its undistributed retained earnings in the Captive. The Captive submitted a formal plan to wind up its business affairs, which was approved by the state insurance regulator.  The Captive continues to work with its members with the goal of concluding its business affairs as soon as possible and currently anticipates completing in 2017. As of the date of this report, the Company is unable to determine if there will be any additional liability for any proportional cost associated with the termination of the Captive, which has not been previously identified.

 

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 March 31, 2017 and December 31, 2016. 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 months ended March 31, 2017 and 2016. 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 13 – OPERATING LEASES

Minimum lease payments to be received under operating leases, including ground leases, as of March 31, 2017 for the years indicated, assuming no expiring leases are renewed, are as follows:

 

 

The remaining lease terms range from less than 1 year to 20 years. Most of the revenue from the Company’s properties consists of rents received under long-term operating leases. Most 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 costs and expenses are paid directly by the tenant rather than the landlord, the costs and expenses are not included in the consolidated statements of operations and comprehensive loss. Under leases where all costs and expenses are paid by the Company, subject to reimbursement by the tenant, the costs and expenses are included within property operating expenses and reimbursements are included in tenant recovery income on the consolidated statements of operations and comprehensive loss.

 

 

NOTE 14 – SUBSEQUENT EVENTS

Distributions

The Company’s board of directors declared monthly distributions payable to stockholders of record each day beginning on the close of business on April 1, 2017 through the close of business on June 30, 2017. Through that date, distributions were declared in a daily amount equal to $0.001643836 per share, which equates to $0.60 per share per year, based upon a 365-day year. Distributions were paid monthly in arrears as follows:

 

 

Acquisition

 

The Company purchased the following property from an unaffiliated third party subsequent to March 31, 2017:

 

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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)

 

Financing

The Company entered into the following financing subsequent to March 31, 2017:

 

 

On April 17, 2017, the Company entered into a third amendment (the “Amendment”) to its Credit Facility.  Among other things, the Amendment changes the consolidated tangible net worth covenant the Company must maintain to $500,000 effective beginning with the fiscal calendar quarter ending March 31, 2017.

 

 

 

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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, 2016, as filed with the Securities and Exchange Commission on March 15, 2017, 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 except as required by applicable law. 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 months ended March 31, 2017 and 2016 and as of March 31, 2017 and December 31, 2016. 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 principally engaged in owning retail properties throughout the United States. At March 31, 2017, we had total assets of approximately $1.4 billion and owned 57 properties located in 23 states containing approximately 6.7 million square feet.  A majority of our properties are multi-tenant, necessity-based retail shopping centers primarily located in major regional markets and growing secondary markets throughout the United States. The portfolio properties generally have occupancy rates above 90% with staggered lease maturity dates and anchor tenants with strong credit ratings.

We were formed as a Maryland corporation on August 24, 2011 and elected to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the year ended December 31, 2013.  We are managed by our business manager, IREIT Business Manager & Advisor, Inc., referred to herein as our “Business Manager.”

We concluded our “best efforts” offering (the “Offering”) in October 2015. Using available resources, including the DRP and additional financing proceeds, our team is committed to identifying acquisition opportunities that meet our investment strategy and that offer growth potential for our stockholders, namely quality, necessity-based retail centers in markets with projected rent growth. Based upon the growth of our portfolio over the past several years, we anticipate overall property operating performance to continue to increase in 2017 due to the increased number of retail properties owned and future acquisitions.

Company Highlights – Three Months Ended March 31, 2017

Acquisitions

We acquired one investment property in the three months ending March 31, 2017 for approximately $40.8 million. Wilson Marketplace is a 311,030 square foot retail center located in Wilson, North Carolina. We financed the acquisition with proceeds from our credit facility with KeyBanc Capital Markets Inc. (the “Credit Facility”).

Outlook

Demand for necessity-based shopping centers remains high and supply remains low. The U.S. economy is posting balanced growth as households and corporations are modestly reducing their levels of debt (Bureau of Labor Statistics, April 19, 2017). The engine behind this growth is the consumer, reinforced by 76 consecutive months of job gains (Bureau of Labor Statistics, April 19, 2017). With the millennial generation outnumbering the baby boomers, we anticipate potential increased consumer demand as this group ages.

SELECT PROPERTY INFORMATION (All dollar amounts in thousands, except per square foot amounts)

Investment Properties

 

 

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The table below presents information for each of our investment properties as of March 31, 2017.

 

 

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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 March 31, 2017.

 

 

The following table sets forth a summary of our tenant diversity for our entire portfolio and is based on leases in place at March 31, 2017.

 

 

The following table sets forth a summary, as of March 31, 2017, of the percent of total annualized base rent and the weighted average lease expiration by size of tenant.

 

 

Lease Expirations

The following table sets forth a summary, as of March 31, 2017, of lease expirations scheduled to occur during the remainder of 2017 and each of the calendar years from 2018 to 2026 and thereafter, assuming no exercise of renewal options or early termination rights

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for leases commenced on or prior to March 31, 2017. Annualized base rent represents the rent in place of the applicable property at March 31, 2017. The table below includes ground leases. If ground leases are excluded, annualized base rent would equal $17.03 per square foot for total expiring leases.

 

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary uses and sources of cash are as follows:

As of March 31, 2017, we had total debt outstanding of approximately $651.3 million, excluding mortgage premiums and unamortized debt issuance costs, which bore interest at a weighted average interest rate of 3.50% per annum.  As of March 31, 2017 and December 31, 2016, our borrowings were 47% and 45%, respectively, of the purchase price of our properties. As of March 31, 2017, we had borrowed $74.5 million of the $110 million available under our Credit Facility.

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. The maximum potential earnout payment was $10.2 million at March 31, 2017.

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For information related to our debt maturities reference is made to Note 6 – “Debt and Derivative Instruments” which is included in our March 31, 2017 Notes to Consolidated Financial Statements in Item 1.

 

Cash Flow Analysis

 

 

Operating activities

The increase in cash from operating activities during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was due to a decrease in the payment of acquisition related costs and cash generated by rental and tenant recovery income from the acquisition of two properties in the second quarter of 2016 and one property in 2017.

Investing activities

We used more cash in our investing activities during the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The increase was primarily attributable to the purchase of an investment property in the three months ending March 31, 2017 compared to no acquisitions in the three months ended March 31, 2016.

Financing activities

 

During the three months ended March 31, 2017 and 2016, we generated proceeds from the sale of shares through the DRP, net of share repurchases, of approximately $4.0 million and $5.0 million, respectively. During the three months ended March 31, 2017 and 2016, we generated approximately $45.5 million and $56.7 million, respectively, from borrowings. During the three months ended March 31, 2017 and 2016, we paid approximately $13.1 million and $12.9 million, respectively, in distributions. We also paid off mortgage debt and reduced the amount outstanding on our Credit Facility in the amount of $2.0 million and $97.0 million for the three months ended March 31, 2017 and 2016, respectively.

 

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Distributions

A summary of the distributions declared, distributions paid and cash flows provided by operations for the three months ended March 31, 2017 and 2016 follows (Dollar amounts in thousands except per share amounts):

 

 

 

Results of Operations

The following discussions are based on our consolidated financial statements for the three months ended March 31, 2017 and 2016. Dollar amounts are stated in thousands.

This section describes and compares our results of operations for the three months ended March 31, 2017 and 2016. 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 March 31, 2017 and 2016

A total of 54 investment properties were acquired on or before January 1, 2016 and represent our “same store” properties during the three months ended March 31, 2017 and 2016.  “Non-same store,” as reflected in the table below, consists of properties acquired after January 1, 2016. For the three months ended March 31, 2017, three properties constituted non-same store properties and for the three months ended March 31, 2016, two properties constituted non-same store properties. The following table presents the property net operating income broken out between same store and non-same store, prior to straight-line income, net, amortization of intangibles, interest, and depreciation and amortization for the three months ended March 31, 2017 and 2016, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.

 

 

Net loss.  Net loss was $1,804 and $4,241 for the three months ended March 31, 2017 and 2016, respectively.

 

Total property net operating income.  On a “same store” basis, comparing the results of operations of investment properties owned during the three months ended March 31, 2017 with the results of the same investment properties owned during the three months ended March 31, 2016 property net operating income decreased $701, total property income decreased $229, and total property operating expenses including real estate tax expense increased $473.

The decrease in “same store” total property income is primarily due to the bankruptcy of three Sports Authority tenants and a decrease in occupancy at certain of our other properties.

The increase in “same store” total property operating expenses is primarily due to a net increase in real estate tax expense at certain of our properties during 2017 as compared to 2016.

 

“Non-same store” total property net operating income increased $1,705 during 2017 as compared to 2016. The increase is a result of acquiring three additional retail properties after January 1, 2016. On a “non-same store” basis, total property income increased $2,234 and total property operating expenses increased $529 during the three months ended March 31, 2017 as a result of these acquisitions.

Straight-line income, net. Straight-line rent income decreased $201 in 2017 compared to 2016. This decrease is due to certain tenant rent abatements in 2016.

Intangible amortization.  Intangible amortization income increased $428 in 2017 compared to 2016. The increase is primarily attributable to changes in intangible assets and liabilities due to acquisitions in 2016 and 2017.

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General and Administrative expenses.  General and administrative expenses decreased $324 in 2017 compared to 2016.  This decrease is primarily due to a decrease in various administrative expenses.

Acquisition related costs.  Acquisition related expenses decreased $90 in 2017 compared to 2016. The decrease is attributed to fewer acquisitions in 2017 and adjustments in deferred investment property acquisition obligations. The decrease is also the result of a change in the accounting for acquisition costs which may allow the capitalization of costs, if the acquisition meets certain criteria.

Business management fee. Business management fees increased $210 in 2017 compared to 2016. The increase is due to more properties under management in 2017 compared to 2016.

Depreciation and Amortization.  Depreciation and amortization decreased $1,500 in 2017, as compared to 2016. The decrease is primarily due to assets written off in 2016 as a result of the three Sports Authority tenant bankruptcy.

Interest Expense.  Interest expense increased $423 in 2017 compared to 2016. The increase is primarily due to additional financing of properties after April 1, 2016, increased amounts drawn under the Credit Facility and higher interest rates on our floating rate debt.

Interest and other income.  Interest and other income decreased $74.  The decrease is primarily due to lower interest earned as a result of lower cash balances in 2017 compared to 2016.

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, 2016, as filed with the Securities and Exchange Commission on March 15, 2017, under the heading “Critical Accounting Policies.” There have been no changes to our critical accounting policies during the three months ended March 31, 2017.

 

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

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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 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 stockholders 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 to “net income” or 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 three months ended March 31, 2017 and 2016 are calculated as follows:

 

Subsequent Events

For information related to subsequent events, reference is made to Note 14 – “Subsequent Events” which is included in our March 31, 2017 Notes to Consolidated Financial Statements in Item 1.

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 to fund capital expenditures.

As of March 31, 2017, we had outstanding debt of approximately $651.3 million, excluding mortgage premium and unamortized debt issuance costs, bearing interest rates ranging from 2.34% to 5.95% per annum. The weighted average interest rate was 3.50%, which

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includes the effect of interest rate swaps. At March 31, 2017, we had $118.5 million or 18.24% bearing interest at variable rates with a weighted average interest rate equal to 2.48% per annum. We had variable rate debt subject to swap agreements of $354.5 million or 54.43% of our total debt at March 31, 2017. As of March 31, 2017, the weighted average years to maturity for our mortgages and credit facility payable was approximately 4.9 years.

If interest rates on all debt which bears interest at variable rates as of March 31, 2017 increased by 1% (100 basis points), the increase in interest expense on all debt would decrease earnings and cash flows by approximately $1.2 million annually. If interest rates on all debt which bears interest at variable rates as of March 31, 2017 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.

With regard to fixed rate financing, interest rate fluctuations generally affect the fair value of debt and net asset value per share, 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.

Derivatives

For information related to our derivatives, reference is made to Note 6 – “Debt and Derivative Instruments” which is included in our March 31, 2017 Notes to Consolidated Financial Statements in Item 1.

Item 4.  Controls and Procedures

Controls and Procedures

Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our 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 our 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 three months ended March 31, 2017 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, 2016.

We have incurred a net loss on a U.S. GAAP basis for the quarterly period ended March 31, 2017.

We have incurred a net loss on a U.S. GAAP basis for the three months ended March 31, 2017 of $1.8 million. Our loss can be attributed, in part, to property operating expenses, interest expense, 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. We cannot assure our stockholders that, in the future, we will be profitable or that we will realize growth in the value of our assets.

 

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 March 31, 2017, we had $118.5 million or 18.24% of our total debt that bore interest at variable rates with a weighted average interest rate of 2.48%. We had variable rate debt subject to swap agreements fixing the rate of $354.5 million or 54.4% of our total debt at March 31, 2017.

If we cannot generate sufficient cash flow from operations to fully fund distributions, some or all of our distributions may be paid from other sources, including from the proceeds of our DRP, which will reduce the amount of cash we ultimately have to invest in assets.

Historically, we had not yet generated sufficient cash flow from operations to fund distribution payments. 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 and DRP. Accordingly, if we cannot generate sufficient cash flow from operations to fully fund distributions, some or all of our distributions may be paid from other sources, including from the proceeds of our DRP. We have not established any limit on the extent to which we may use alternate sources, including borrowings or proceeds of the 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 26% ($31.2 million) of the distributions paid to stockholders through March 31, 2017, have been paid from the net proceeds of our Offering and DRP, which reduced 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.

 

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.

We entered into a credit agreement, as amended, with KeyBanc Capital Markets Inc. for a $110 million revolving Credit Facility. The credit agreement provides us with the ability from time to time to increase the size of the 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 $110 million or above and by a guaranty by certain of our subsidiaries. As of March 31, 2017, we have borrowed $74.5 million of the $110 million available.

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 adjusted FFO, which is

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FFO excluding acquisition expenses for that period. For the fiscal quarter ended March 31, 2017, 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

Recent Sales of Unregistered Equity Securities

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 comes 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 applies. 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 March 31, 2017.

 

(Dollar amounts in thousands, except per share amounts)

 

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

Not Applicable.

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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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