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EX-32.2 - EX-32.2 - Inland Real Estate Income Trust, Inc.ck0001528985-ex322_8.htm
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EX-31.2 - EX-31.2 - Inland Real Estate Income Trust, Inc.ck0001528985-ex312_6.htm
EX-31.1 - EX-31.1 - Inland Real Estate Income Trust, Inc.ck0001528985-ex311_7.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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)

 

Maryland

45-3079597

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

2901 Butterfield Road, Oak Brook, Illinois

60523

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: 630-218-8000

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

None

 

None

 

None

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 such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

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 November 13, 2020, there were 36,022,331 shares of the registrant’s common stock, $.001 par value, outstanding.

 

 


 

INLAND REAL ESTATE INCOME TRUST, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

Part I - Financial Information

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

3

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2020 and 2019 (unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Equity for the three months ended September 30, 2020 and 2019 (unaudited)

5

 

 

 

 

 

 

Consolidated Statements of Equity for the nine months ended September 30, 2020 and 2019 (unaudited)

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

 

Item 4.

 

Controls and Procedures

39

 

 

 

 

 

 

Part II - Other Information

 

Item 1.

 

Legal Proceedings

39

 

 

 

 

Item 1A.

 

Risk Factors

39

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

44

 

 

 

 

Item 4.

 

Mine Safety Disclosures

44

 

 

 

 

Item 5.

 

Other Information

44

 

 

 

 

Item 6.

 

Exhibits

45

 

 

 

 

Signatures

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share amounts) 

 

 

 

 

September 30, 2020

(unaudited)

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Investment properties held and used:

 

 

 

 

 

 

 

 

Land

 

$

267,946

 

 

$

267,946

 

Building and other improvements

 

 

986,219

 

 

 

983,923

 

Total

 

 

1,254,165

 

 

 

1,251,869

 

Less accumulated depreciation

 

 

(198,408

)

 

 

(170,269

)

Net investment properties held and used

 

 

1,055,757

 

 

 

1,081,600

 

Investment properties and related assets held for sale

 

 

 

 

 

38,752

 

Cash and cash equivalents

 

 

43,514

 

 

 

4,516

 

Restricted cash

 

 

1,079

 

 

 

1,017

 

Accounts and rent receivable, net

 

 

21,734

 

 

 

17,231

 

Acquired lease intangible assets, net

 

 

76,383

 

 

 

89,352

 

Operating lease right-of-use asset, net

 

 

15,127

 

 

 

15,478

 

Other assets

 

 

4,653

 

 

 

6,613

 

Total assets

 

$

1,218,247

 

 

$

1,254,559

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgages and credit facility payable, net

 

$

668,904

 

 

$

681,327

 

Accounts payable and accrued expenses

 

 

11,026

 

 

 

7,951

 

Operating lease liability

 

 

23,948

 

 

 

23,696

 

Distributions payable

 

 

 

 

 

10,841

 

Acquired intangible liabilities, net

 

 

43,207

 

 

 

46,820

 

Due to related parties

 

 

3,083

 

 

 

5,023

 

Liabilities associated with investment properties held for sale

 

 

 

 

 

1,716

 

Other liabilities

 

 

24,821

 

 

 

16,666

 

Total liabilities

 

 

774,989

 

 

 

794,040

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value, 40,000,000 shares authorized, none outstanding

 

 

 

 

 

 

Common stock, $.001 par value, 1,460,000,000 shares authorized, 36,022,221 and

  35,799,388 shares issued and outstanding as of September 30, 2020 and December

   31, 2019, respectively

 

 

36

 

 

 

36

 

Additional paid in capital

 

 

810,192

 

 

 

805,722

 

Accumulated distributions and net loss

 

 

(347,456

)

 

 

(338,331

)

Accumulated other comprehensive loss

 

 

(19,514

)

 

 

(6,908

)

Total stockholders’ equity

 

 

443,258

 

 

 

460,519

 

Total liabilities and stockholders’ equity

 

$

1,218,247

 

 

$

1,254,559

 

 

See accompanying notes to consolidated financial statements.

 

 

3


 

INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

27,643

 

 

$

31,970

 

 

$

84,519

 

 

$

95,904

 

Other property income

 

 

29

 

 

 

69

 

 

 

143

 

 

 

191

 

Total income

 

 

27,672

 

 

 

32,039

 

 

 

84,662

 

 

 

96,095

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

4,460

 

 

 

5,762

 

 

 

13,994

 

 

 

16,875

 

Real estate tax expense

 

 

3,557

 

 

 

4,068

 

 

 

10,979

 

 

 

12,206

 

General and administrative expenses

 

 

1,185

 

 

 

1,013

 

 

 

3,872

 

 

 

3,886

 

Business management fee

 

 

2,231

 

 

 

2,339

 

 

 

6,691

 

 

 

7,007

 

Depreciation and amortization

 

 

13,149

 

 

 

14,629

 

 

 

39,286

 

 

 

43,244

 

Total expenses

 

 

24,582

 

 

 

27,811

 

 

 

74,822

 

 

 

83,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(6,283

)

 

 

(7,117

)

 

 

(19,060

)

 

 

(21,440

)

Interest and other income

 

 

2

 

 

 

57

 

 

 

95

 

 

 

102

 

Net loss

 

$

(3,191

)

 

$

(2,832

)

 

$

(9,125

)

 

$

(8,461

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

 

$

(0.09

)

 

$

(0.08

)

 

$

(0.25

)

 

$

(0.24

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic

   and diluted

 

 

36,022,221

 

 

 

35,805,323

 

 

 

36,020,594

 

 

 

35,692,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(3,191

)

 

$

(2,832

)

 

$

(9,125

)

 

$

(8,461

)

Unrealized loss on derivatives

 

 

(32

)

 

 

(2,550

)

 

 

(16,514

)

 

 

(13,956

)

Reclassification adjustment for amounts included in net loss

 

 

1,935

 

 

 

(194

)

 

 

3,908

 

 

 

(1,091

)

Comprehensive loss

 

$

(1,288

)

 

$

(5,576

)

 

$

(21,731

)

 

$

(23,508

)

 

See accompanying notes to consolidated financial statements.

 

4


 

INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, dollar amounts in thousands) 

 

 

 

For the three months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of

Shares

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Distributions

and

Net Loss

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at June 30, 2020

 

 

36,020,345

 

 

$

36

 

 

$

810,173

 

 

$

(344,265

)

 

$

(21,417

)

 

$

444,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

Unrealized loss on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

(32

)

Reclassification adjustment for amounts included in net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,935

 

 

 

1,935

 

Equity-based compensation

 

 

1,876

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

19

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,191

)

 

 

 

 

 

(3,191

)

Balance at September 30, 2020

 

 

36,022,221

 

 

$

36

 

 

$

810,192

 

 

$

(347,456

)

 

$

(19,514

)

 

$

443,258

 

 

For the three months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of

Shares

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Distributions

and

Net Loss

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance at June 30, 2019

 

 

35,571,709

 

 

$

36

 

 

$

800,967

 

 

$

(310,891

)

 

$

(6,810

)

 

$

483,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared ($0.3018 per share)

 

 

 

 

 

 

 

 

 

 

 

(10,808

)

 

 

 

 

 

(10,808

)

Proceeds from distribution reinvestment plan

 

 

234,904

 

 

 

 

 

 

4,727

 

 

 

 

 

 

 

 

 

4,727

 

Shares repurchased

 

 

(118,606

)

 

 

 

 

 

(2,309

)

 

 

 

 

 

 

 

 

(2,309

)

Unrealized loss on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,550

)

 

 

(2,550

)

Reclassification adjustment for amounts included in net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(194

)

 

 

(194

)

Equity-based compensation

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,832

)

 

 

 

 

 

(2,832

)

Balance at September 30, 2019

 

 

35,688,007

 

 

$

36

 

 

$

803,399

 

 

$

(324,531

)

 

$

(9,554

)

 

$

469,350

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5


 

INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited, dollar amounts in thousands) 

 

 

 

For the nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of

Shares

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Distributions

and

Net Loss

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance as of December 31, 2019

 

 

35,799,388

 

 

$

36

 

 

$

805,722

 

 

$

(338,331

)

 

$

(6,908

)

 

$

460,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared ($0.226875 per share)

 

 

 

 

 

 

 

 

 

 

 

(8,173

)

 

 

 

 

 

(8,173

)

Rescission of Q1 2020 distribution (See Note 8)

 

 

 

 

 

 

 

 

 

 

 

8,173

 

 

 

 

 

 

8,173

 

Proceeds from distribution reinvestment plan

 

 

225,940

 

 

 

 

 

 

4,547

 

 

 

 

 

 

 

 

 

4,547

 

Shares repurchased

 

 

(6,730

)

 

 

 

 

 

(127

)

 

 

 

 

 

 

 

 

(127

)

Unrealized loss on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16,514

)

 

 

(16,514

)

Reclassification adjustment for amounts included in

   net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,908

 

 

 

3,908

 

Equity-based compensation

 

 

3,623

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(9,125

)

 

 

 

 

 

(9,125

)

Balance at September 30, 2020

 

 

36,022,221

 

 

$

36

 

 

$

810,192

 

 

$

(347,456

)

 

$

(19,514

)

 

$

443,258

 

 

 

For the nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of

Shares

 

 

Common

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Distributions

and

Net Loss

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

Balance at December 31, 2018

 

 

35,343,256

 

 

$

35

 

 

$

795,409

 

 

$

(283,859

)

 

$

5,493

 

 

$

517,078

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared ($0.9054 per share)

 

 

 

 

 

 

 

 

 

 

 

(32,321

)

 

 

 

 

 

(32,321

)

Proceeds from distribution reinvestment plan

 

 

719,652

 

 

 

1

 

 

 

15,024

 

 

 

 

 

 

 

 

 

15,025

 

Shares repurchased

 

 

(376,346

)

 

 

 

 

 

(7,074

)

 

 

 

 

 

 

 

 

(7,074

)

Unrealized loss on derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,956

)

 

 

(13,956

)

Reclassification adjustment for amounts included in

   net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(957

)

 

 

(957

)

Cumulative reversal of recognized hedge ineffectiveness (see Note 2)

 

 

 

 

 

 

 

 

 

 

 

134

 

 

 

(134

)

 

 

 

Cumulative-effect adjustment recognized upon adoption of ASC 842 (see Note 2)

 

 

 

 

 

 

 

 

 

 

 

(24

)

 

 

 

 

 

(24

)

Equity-based compensation

 

 

1,445

 

 

 

 

 

 

40

 

 

 

 

 

 

 

 

 

40

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(8,461

)

 

 

 

 

 

(8,461

)

Balance at September 30, 2019

 

 

35,688,007

 

 

$

36

 

 

$

803,399

 

 

$

(324,531

)

 

$

(9,554

)

 

$

469,350

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

6


 

INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, dollar amounts in thousands)

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(9,125

)

 

$

(8,461

)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39,286

 

 

 

43,244

 

Amortization of debt issuance costs and mortgage premiums, net

 

 

436

 

 

 

452

 

Amortization of acquired market leases, net

 

 

(1,324

)

 

 

(858

)

Amortization of equity-based compensation

 

 

50

 

 

 

40

 

Reduction in the carrying amount of the right-of-use-asset

 

 

351

 

 

 

366

 

Straight-line income, net

 

 

(1,129

)

 

 

(1,215

)

Other non-cash adjustments

 

 

31

 

 

 

18

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

2,630

 

 

 

3,876

 

Accounts and rent receivable

 

 

(2,680

)

 

 

734

 

Due to related parties

 

 

(1,941

)

 

 

2,375

 

Operating lease liability

 

 

252

 

 

 

237

 

Other liabilities

 

 

(1,108

)

 

 

536

 

Other assets

 

 

496

 

 

 

(530

)

Net cash flows provided by operating activities

 

 

26,225

 

 

 

40,814

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,863

)

 

 

(5,301

)

Proceeds from sale of investment properties

 

 

37,255

 

 

 

 

Net cash flows provided by (used in) investing activities

 

 

34,392

 

 

 

(5,301

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of credit facility

 

 

(43,022

)

 

 

(9,000

)

Proceeds from credit facility

 

 

31,000

 

 

 

 

Payment of mortgages payable

 

 

(563

)

 

 

(159

)

Payment of debt issuance costs

 

 

(273

)

 

 

 

Proceeds from the distribution reinvestment plan

 

 

4,547

 

 

 

15,025

 

Shares repurchased

 

 

(2,405

)

 

 

(10,228

)

Distributions paid

 

 

(10,841

)

 

 

(33,437

)

Net cash flows used in financing activities

 

 

(21,557

)

 

 

(37,799

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

39,060

 

 

 

(2,286

)

Cash, cash equivalents and restricted cash, at beginning of the period

 

 

5,533

 

 

 

16,240

 

Cash, cash equivalents and restricted cash, at end of period

 

$

44,593

 

 

$

13,954

 

 

See accompanying notes to consolidated financial statements.

7


 

INLAND REAL ESTATE INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited, dollar amounts in thousands) 

 

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

18,617

 

 

$

20,447

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Establishment of operating lease right-of-use asset

 

$

 

 

$

15,963

 

 

 

 

 

 

 

 

 

 

Establishment of operating lease liability

 

$

 

 

$

23,377

 

 

 

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

292

 

 

$

2,105

 

 

 

 

 

 

 

 

 

 

Accrued share repurchase program liability

 

$

 

 

$

2,309

 

 

 

 

 

 

 

 

 

 

Distributions payable

 

$

 

 

$

10,808

 

 

See accompanying notes to consolidated financial statements.

 

8


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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, 2019, which are included in the Company’s 2019 Annual Report on Form 10-K, 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. The Company is primarily focused on owning retail properties and targets a portfolio of 100% grocery-anchored properties. The Company has invested in joint ventures and may continue to invest in additional joint ventures or acquire other real estate assets if its management believes the expected returns from those investments exceed that of retail properties. The Company 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.


The Company has no employees. The Company is managed by IREIT Business Manager & Advisor, Inc. (the “Business Manager”), an indirect wholly owned subsidiary of Inland Real Estate Investment Corporation (the “Sponsor”), pursuant to a Business Management Agreement with the Business Manager.

 

On February 11, 2019, the Company’s board of directors approved a strategic plan (the “Strategic Plan”) with the goals of providing future liquidity to investors and creating long-term stockholder value. The Strategic Plan centers around owning a portfolio of 100% grocery-anchored properties with lower exposure to big box retailers. As part of this strategy, the Company’s management team and board have completed the sale of 15 properties, including the sale of three properties during January 2020, as further described in Note 4 – “Dispositions,” with the goal of redeploying capital into the acquisition of strategically located grocery-anchored centers. The Company plans to move toward a liquidity event in the future, market conditions permitting, most likely through a listing on a public securities exchange.

In connection with the Strategic Plan, the Company’s share repurchase program (as amended, the “SRP”) was amended and restated, effective March 21, 2019, and the Business Management Agreement with the Business Manager was amended and restated on February 11, 2019 to, among other things, eliminate all future acquisition and disposition fees. On March 3, 2020, the Company’s SRP was further amended and restated (the “Third A&R SRP”), which became effective on April 10, 2020, as further described below in Note 3 – “Equity”. The Strategic Plan may evolve or change over time. For example, the Company may decide to focus more on redeveloping existing properties relative to investing in new grocery-anchored centers, depending on such factors, including, but not limited to, market prices for its properties, availability of capital for redevelopment and construction costs. There is no assurance, particularly in light of the COVID-19 pandemic, that the Company will be able to successfully implement the Strategic Plan, including making strategic sales or purchases of properties or listing the Company’s common stock, within the timeframe we expected or would prefer or at all.

On March 3, 2020, as reported in the Company’s Form 8-K filed with the Securities and Exchange Commission on March 5, 2020, the Company announced that the Company’s board of directors unanimously approved: (i) an estimated per share net asset value (the “Estimated Per Share NAV”) as of December 31, 2019; (ii) the same per share purchase price for shares issued under the Company’s distribution reinvestment plan (as amended, the “DRP”) beginning with the first quarter distribution payment to stockholders that was expected April 2020 until the Company announces a new Estimated Per Share NAV, and (iii) that, in accordance with the SRP, beginning with repurchases that were expected in April 2020 and until the Company announces a new Estimated Per Share NAV, any shares accepted for ordinary repurchases and “exceptional repurchases” will be repurchased at 80% of the Estimated Per Share NAV.

Due to the uncertainty surrounding the COVID-19 pandemic and the need to preserve cash for the payment of operating and other expenses, such as debt payments, the Company’s board of directors has suspended distributions, rescinded the first quarter distribution that was previously declared and suspended the Company’s DRP and SRP until further notice. The suspension of the DRP was effective on June 6, 2020 and the suspension of the SRP was effective on June 26, 2020. Any unfulfilled repurchase requests will automatically roll over for processing under the terms and conditions of the SRP when the Company restarts the plan, unless a stockholder withdraws the request for repurchase.

At September 30, 2020, the Company owned 44 retail properties, totaling 6,470,717 square feet. The properties are located in 21 states. At September 30, 2020, the portfolio had a weighted average physical occupancy of 93.3% and economic occupancy of 93.8%.

9


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

 

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, 2019, as filed with the Securities and Exchange Commission on March 18, 2020, under the heading Note 2 – “Summary of Significant Accounting Policies.” There have been no changes to the Company’s significant accounting policies during the nine months ended September 30, 2020, except as noted below. 

General

The 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.

Certain amounts in the prior period consolidated financial statements have been reclassified to conform with the current year presentation.

Significant Risks and Uncertainties related to COVID-19 Pandemic

Currently, one of the most significant risks and uncertainties is the potential further adverse effect of the current pandemic of the novel coronavirus, or COVID-19. A number of our tenants had temporarily closed their stores and requested rent deferral or rent abatement during this pandemic. Many experts predict that the outbreak will trigger, or even has already triggered, a period of global economic slowdown or a global recession.

The COVID-19 pandemic has already had a material impact on the Company’s operations (See Note 5 – “Leases”) and could continue to have material and adverse effects on our financial condition, results of operations and cash flows in the near term due to, but not limited to, the following:

 

reduced economic activity severely impacts our tenants' businesses, financial condition and liquidity and has caused tenants to be unable to fully meet their obligations to us or to otherwise seek modifications of such obligations, resulting in increases in uncollectible receivables and reductions in rental income;

 

a prolonged economic recession in the U.S. would negatively impact the Company’s ability to lease space and negotiate and maintain favorable rents causing reductions in occupancy and rental income;

 

the negative financial impact of the pandemic could impact our future compliance with financial covenants of our credit facility and other debt agreements; and

 

weaker economic conditions and defaults or failures by tenants to pay rent when due could cause us to recognize impairment in value of our tangible or intangible assets.

The extent to which the COVID-19 pandemic impacts the Company’s operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Recently Adopted Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. Among other things, the guidance eliminated the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. As ASU 2017-12 was effective for fiscal years beginning after December 15, 2018, the Company adopted the ASU on January 1, 2019 with a modified retrospective transition. For cash flow hedges existing at January 1, 2019, the Company eliminated the separate measurement of ineffectiveness by means of a cumulative reversal of recognized hedge ineffectiveness with a credit to the opening balance of accumulated distributions and net loss and a debit to accumulated other comprehensive income of $134 on its consolidated balance sheet and consolidated statement of equity.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which amends the guidance in ASC Topic 840, Leases. The Company adopted the lease standard effective January 1, 2019. As a lessor, the Company’s recognition of rental income remained mainly consistent with previous guidance. As a result of the adoption of ASC 842, the Company includes both billed and accrued

10


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

charges in its quarterly evaluation of the collectability of a tenant’s receivable balance. Prior to the adoption of ASC 842, uncollectible tenant revenues were recorded as bad debt expense in property operating expenses on its consolidated statements of operations and comprehensive loss. For tenant receivables that the Company determines to be uncollectible, the Company now records an offset for uncollectible tenant revenues directly to rental income. Upon adoption of ASC 842 on January 1, 2019, a cumulative-effect adjustment of $24 was recognized for uncollectible tenant revenues as a result of this change. The standard’s changes related to capitalized initial direct costs did not impact the Company’s accounting for such costs, because historically, the Company capitalized initial direct costs (commissions) that are still considered capitalizable under the new standard.

As part of its adoption of the lease standard, the Company has elected and qualifies to utilize the practical expedient in ASU No. 2018-11, Targeted Improvements, Leases (Topic 842) issued in July 2018, which allows, by class of underlying assets, to not separate non-lease components from the related lease components and, instead, to account for those components as a single lease. This practical expedient for lessors is limited to circumstances in which the non-lease component or components would be accounted for under the new revenue guidance and both (1) the timing and pattern of transfer are the same for the non-lease component(s) and associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease.

 

The Company also elected the package of practical expedients in ASU No. 2018-11, which permitted the Company to adopt the new leases standard under a transition method whereby it initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Therefore, the Company adopted ASU No. 2016-02 on its effective date without restating comparative periods and utilized the practical expedients available in the amendment as part of its adoption. The package of practical expedients included relief from re-assessing a lease using the standard’s new definition of a lease, relief from re-assessing the classification of a lease and allowing previously capitalized initial direct costs (see above) to continue to be amortized. The adoption of the package of practical expedients, as a lessor, did not require the Company to recognize a cumulative effect adjustment.

 

For lessees, ASU No. 2016-02 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. The Company is the lessee of a ground lease. The Company has elected the practical expedient that, for leases that commenced before the effective date, the lessee need not reassess whether the contract is a lease nor reassess lease classification for existing leases. The lease liability for the ground lease was based on the present value of the ground lease’s future lease payments using an interest rate which it considers reasonable and within the range of the Company’s incremental borrowing rate. At January 1, 2019, the Company recorded a lease liability of $23,377 and a ROU asset of $15,963 on its consolidated balance sheet. Rental expense for lease payments related to the operating lease will continue to be recognized on a straight-line basis over the lease term.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of the effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

 

In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A grants relief to entities, allowing them an election to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. An entity that makes this election can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. The Company has elected to apply such relief and will avail itself of the election to avoid performing a lease by lease analysis.

11


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

Restricted Cash

 

Amounts included in restricted cash represent those required to be set aside by lenders for real estate taxes, insurance, capital expenditures and tenant improvements on our existing properties. These amounts also include post close escrows for tenant improvements, leasing commissions, master lease, general repairs and maintenance, and are classified as restricted cash on the Company’s consolidated balance sheets.

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Company’s consolidated balance sheets to such amounts shown in the Company’s consolidated statements of cash flows:

 

 

September 30,

 

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

43,514

 

 

$

12,937

 

Restricted cash

 

 

1,079

 

 

 

1,017

 

Total cash, cash equivalents, and restricted cash

 

$

44,593

 

 

$

13,954

 

 

Income Tax

 

During the year ended December 31, 2018, the Company recorded an impairment charge of $15,405 related to its investment in Mainstreet Texas Development Fund, LLC, a joint venture formed to develop three transitional care/rapid recovery centers (“Mainstreet JV”). The Company’s investment in Mainstreet JV was held through a taxable REIT subsidiary. The TRS reported both capital and net operating losses relating to its joint venture in its 2019 tax return. Based on an effective tax rate of 28.51%, which is calculated by combining a 21% Federal tax rate and an IL tax rate of 7.51% (9.5% state rate net of the Federal benefit), the deferred tax benefit related to this investment is approximately $4,400. Since the taxable REIT subsidiary does not currently conduct any activities outside the investment in Mainstreet JV, management does not believe it is more likely than not that the taxable REIT subsidiary will be able to utilize these losses in future tax periods. As a result, management recorded a full valuation allowance of $4,400 to account for this uncertainty.

 

NOTE 3 – EQUITY

The Company commenced an initial public “best efforts” offering (the “Offering”) on October 18, 2012, which concluded on October 16, 2015. The Company sold 33,534,022 shares of common stock generating gross proceeds of $834,399 from the Offering. As of September 30, 2020, there were 36,022,221 shares of common stock outstanding including 5,574,215 shares issued through the DRP, net of 3,092,634 shares repurchased through the SRP.

On March 3, 2020, the Company’s board of directors determined the Estimated Per Share NAV as of December 31, 2019. The previously Estimated Per Share NAV as of December 31, 2018 was established on March 5, 2019.

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

 

Through the DRP, the Company provides stockholders with the option to purchase additional shares from the Company by automatically reinvesting cash distributions, 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.

 

Distributions reinvested through the DRP were $4,727 for the three months ended September 30, 2019. There were no distributions reinvested through the DRP during the three months ended September 30, 2020 due to the suspension of the DRP discussed in Note 1 – “Organization.” Distributions reinvested through the DRP were $4,547 and $15,025 for the nine months ended September 30, 2020 and 2019, respectively.

12


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

Share Repurchase Program

 

The Company adopted the SRP effective October 18, 2012, under which 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. The SRP may be amended or terminated at the Company’s sole discretion. In the case of repurchases made upon the death of a stockholder or qualifying disability (“Exceptional Repurchases”), as defined in the SRP, the one year holding period does not apply. On February 11, 2019, the Company’s board of directors adopted a second amended and restated SRP, effective March 21, 2019, which reduced the price the Company was authorized to make ordinary repurchases from a range of 92.5% to 100% of the “share price” down to 80% of the “share price.” The “share price” is defined in the second amended and restated SRP as an amount equal to the lesser of: (A) $25, as adjusted under certain circumstances, including, among other things, if the applicable shares were purchased from the Company at a discounted price; or (B) the most recently disclosed estimated value per share. On March 3, 2020 the Company’s board of directors adopted the Third A&R SRP. Under the Third A&R SRP, the Company is authorized to make ordinary repurchases and Exceptional Repurchases at a price equal to 80.0% of the “share price,” which is defined in the Third A&R SRP the same way as described above for the second amended and restated SRP. Prior to the amendment, the Company was authorized to make Exceptional Repurchases at a price equal to 100% of the “share price.”

The Third A&R SRP provides the Company’s board of directors with the discretion to reduce the funding limit for share repurchases. The Third A&R SRP limits the dollar amount for any repurchases made by the Company each calendar quarter to an amount equal to a percentage determined in the sole discretion of the board on a quarterly basis that will not be less than 50% of the net proceeds from the DRP during the applicable quarter. As the Company’s board of directors has suspended the SRP, there is no current effective funding limit based on % of the net proceeds from the DRP. See Note 1 – “Organization” for further discussion on the suspension of the SRP. The Company continues to limit the number of shares repurchased during any calendar year to 5% of the number of shares outstanding on December 31st of the previous calendar year, as adjusted for any stock splits or other combinations.

If either or both of the repurchase limitations prevent the Company from repurchasing all of the shares offered for repurchase during a calendar quarter, the Company will repurchase shares, on a pro rata basis within each category below, in accordance with the repurchase limitations in the following order: (a) first, all Exceptional Repurchases and (b) second, all ordinary repurchases. 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 discretion, may, at any time, amend, suspend or terminate the SRP.

 

Repurchases through the SRP were zero and $2,309 for the three months ended September 30, 2020 and 2019, respectively. Repurchases through the SRP were $127 and $7,074 for the nine months ended September 30, 2020 and 2019, respectively. At December 31, 2019, the Company’s liability related to the SRP was $2,278, recorded in other liabilities on the Company’s consolidated balance sheet. There was no liability related to the SRP at September 30, 2020 due to the suspension of the SRP. See Note 1 – “Organization” for further discussion on the suspension of the SRP.

NOTE 4 – DISPOSITIONS

In connection with the Strategic Plan, the Company sold three properties in January 2020 that met the criteria to be classified as held for sale on the consolidated balance sheet at December 31, 2019. The criteria were met for these properties because, amongst other criteria, the Company had collected non-refundable earnest money from the buyer. The Company collected proceeds of $37,255 net of selling costs upon completion of the three sales.

 

13


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

The following table reflects the major components of the assets and liabilities associated with investment properties held for sale as of December 31, 2019:

 

 

December 31, 2019

 

Investment properties and related assets held for sale:

 

 

 

 

Land

 

$

6,275

 

Building and other improvements

 

 

27,758

 

Accounts and rent receivable

 

 

1,167

 

Acquired lease intangible assets, net

 

 

3,337

 

Deferred costs, net

 

 

186

 

Other assets

 

 

29

 

Investment properties and related assets held for sale

 

$

38,752

 

Liabilities associated with investment properties held for sale:

 

 

 

 

Accounts payable and accrued expenses

 

$

691

 

Due to related parties

 

 

6

 

Acquired intangible liabilities, net

 

 

743

 

Other liabilities

 

 

276

 

Liabilities associated with investment properties held for sale

 

$

1,716

 

NOTE 5 – LEASES

The Company is lessor to approximately 700 retail operating leases. The remaining lease terms for the Company’s leases range from less than one year to 17 years. The Company considers the date on which it makes a leased space available to a lessee as the commencement date of the lease. At commencement, the Company determines the lease classification utilizing the classification tests under ASC 842. Options to extend a lease are included in the lease term when it is reasonably certain that the tenant will exercise its option to extend. Termination penalties are included in income when there is a termination agreement, all the conditions of the agreement have been met and amounts due are considered collectible. Such termination fees are recognized on a straight-line basis over the remaining lease term in rental income. If an operating lease is modified and the modification is not accounted for as a separate contract, the Company accounts for the modification as if it were a termination of the existing lease and the creation of a new lease. The Company considers any prepaid or accrued rentals relating to the original lease as part of the lease payments for the modified lease.

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 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. As of January 1, 2019, the date on which the Company adopted the new leasing standard, reimbursements for common area maintenance are considered non-lease components that are permitted to be combined with rental income. The combined lease component and reimbursements for insurance and taxes are reported as rental income on the consolidated statements of operations and comprehensive loss.

14


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

Rental income related to the Company's operating leases is comprised of the following:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Rental income - fixed payments

 

$

21,609

 

 

$

25,280

 

 

$

66,577

 

 

$

76,084

 

Rental income - variable payments (a)

 

 

5,538

 

 

 

6,432

 

 

 

16,618

 

 

 

18,962

 

Amortization of acquired market leases, net

 

 

496

 

 

 

258

 

 

 

1,324

 

 

 

858

 

Rental income

 

$

27,643

 

 

$

31,970

 

 

$

84,519

 

 

$

95,904

 

 

 

(a)

Primarily includes tenant recovery income for real estate taxes, common area maintenance and insurance.

The Company is closely monitoring the impact of the COVID-19 pandemic on the collectability of lease payments. As of September 30, 2020, the Company’s accounts and rent receivable, net balance is $21,734, which is net of an allowance for bad debts of $5,829 and includes $5,428 of deferred rent receivable related to COVID-19 agreements negotiated with tenants. Such agreements generally allow tenants to defer the payment of a portion of rent with no substantive changes to the consideration in the original lease. Consistent with the guidance in the Lease Modification Q&A issued by the FASB, such deferrals affect the timing, but not the amount, of the lease payments. The Company is accounting for these deferrals as if no changes to the lease were made. Under this accounting, the Company increases its rent receivable as tenant payments accrue and continues to recognize rental income.

 

NOTE 6 – ACQUIRED INTANGIBLE ASSETS AND LIABILITIES

The following table summarizes the Company’s identified intangible assets and liabilities as of September 30, 2020 and December 31, 2019: 

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Intangible assets:

 

 

 

 

 

 

 

 

Acquired in-place lease value

 

$

156,918

 

 

$

160,214

 

Acquired above market lease value

 

 

45,742

 

 

 

45,783

 

Accumulated amortization

 

 

(126,277

)

 

 

(113,308

)

Less: Assets related to investment properties held for sale

 

 

 

 

 

(3,337

)

Acquired lease intangibles, net

 

$

76,383

 

 

$

89,352

 

Intangible liabilities:

 

 

 

 

 

 

 

 

Acquired below market lease value

 

$

70,260

 

 

$

71,153

 

Accumulated amortization

 

 

(27,053

)

 

 

(23,590

)

Less: Liabilities related to investment properties held for sale

 

 

 

 

 

(743

)

Acquired below market lease intangibles, net

 

$

43,207

 

 

$

46,820

 

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. Prior to January 1, 2019, the acquired above market ground lease was amortized on a straight-line basis as an adjustment to property operating expense over the term of the lease and included renewal periods. At date of the adoption of ASC 842 on January 1, 2019, the remaining balance of the intangible related to the above market ground lease was derecognized as a cumulative-effect adjustment to establish the operating lease ROU asset. 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.

15


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(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:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Amortization recorded as amortization expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired in-place lease value

 

$

3,647

 

 

$

4,290

 

 

$

10,680

 

 

$

13,319

 

Amortization recorded as a (reduction) increase to rental income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquired above market leases

 

$

(760

)

 

$

(920

)

 

$

(2,289

)

 

$

(2,670

)

Acquired below market leases

 

 

1,256

 

 

 

1,178

 

 

 

3,613

 

 

 

3,528

 

Net rental income increase

 

$

496

 

 

$

258

 

 

$

1,324

 

 

$

858

 

 

Estimated amortization of the respective intangible lease assets and liabilities as of September 30, 2020 for each of the five succeeding years and thereafter is as follows:

 

 

 

Acquired

In-Place

Leases

 

 

Above Market Leases

 

 

Below

Market

Leases

 

2020 (remainder of year)

 

$

2,889

 

 

$

744

 

 

$

921

 

2021

 

 

10,396

 

 

 

2,950

 

 

 

3,625

 

2022

 

 

7,765

 

 

 

2,660

 

 

 

3,404

 

2023

 

 

6,555

 

 

 

2,473

 

 

 

3,146

 

2024

 

 

5,563

 

 

 

2,306

 

 

 

2,969

 

Thereafter

 

 

18,587

 

 

 

13,495

 

 

 

29,142

 

Total

 

$

51,755

 

 

$

24,628

 

 

$

43,207

 

 

 

NOTE 7 – DEBT AND DERIVATIVE INSTRUMENTS

 

As of September 30, 2020 and December 31, 2019, the Company had the following mortgages and credit facility payable:

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Type of Debt

 

Principal Amount

 

 

Weighted

Average

Interest Rate

 

 

Principal

Amount

 

 

Weighted

Average

Interest Rate

 

Fixed rate mortgages payable

 

$

163,820

 

 

 

4.25

%

 

$

163,986

 

 

 

4.25

%

Variable rate mortgages payable with swap agreements

 

 

251,847

 

 

 

3.34

%

 

 

252,244

 

 

 

3.33

%

Variable rate mortgages payable without swap agreements

 

 

684

 

 

 

1.77

%

 

 

684

 

 

 

3.29

%

Mortgages payable

 

$

416,351

 

 

 

3.69

%

 

$

416,914

 

 

 

3.69

%

Credit facility payable

 

 

255,000

 

 

 

3.57

%

 

 

267,022

 

 

 

3.92

%

Total debt before unamortized mortgage premiums and debt issuance costs including impact of interest rate swaps

 

$

671,351

 

 

 

3.65

%

 

$

683,936

 

 

 

3.78

%

Add: Unamortized mortgage premiums

 

 

577

 

 

 

 

 

 

 

1,051

 

 

 

 

 

Less: Unamortized debt issuance costs

 

 

(3,024

)

 

 

 

 

 

 

(3,660

)

 

 

 

 

Total debt

 

$

668,904

 

 

 

 

 

 

$

681,327

 

 

 

 

 

 

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 $671,351 and $683,936 as of September 30, 2020 and December 31, 2019, respectively, and its estimated fair value was $685,148 and $689,790 as of September 30, 2020 and December 31, 2019, respectively.

16


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

As of September 30, 2020, scheduled principal payments and maturities on the Company’s debt were as follows:

 

 

 

September 30,

2020

 

Scheduled Principal Payments and Maturities by Year:

 

Scheduled

Principal

Payments

 

 

Maturities of Mortgage Loans

 

 

Maturity of Credit Facility

 

 

Total

 

2020 (remainder of the year)

 

$

352

 

 

$

 

 

$

 

 

$

352

 

2021

 

 

1,532

 

 

 

82,740

 

 

 

 

 

 

84,272

 

2022

 

 

615

 

 

 

101,537

 

 

 

105,000

 

 

 

207,152

 

2023

 

 

326

 

 

 

91,230

 

 

 

150,000

 

 

 

241,556

 

2024

 

 

341

 

 

 

 

 

 

 

 

 

341

 

Thereafter

 

 

295

 

 

 

137,383

 

 

 

 

 

 

137,678

 

Total

 

$

3,461

 

 

$

412,890

 

 

$

255,000

 

 

$

671,351

 

 

Credit Facility Payable

The Company’s credit facility (the “Credit Facility”) consisting of a $200,000 revolving credit facility (the “Revolving Credit Facility”) and a $150,000 term loan (the “Term Loan”) has an accordion feature that allows for an increase in available borrowings up to $700,000, subject to subject to the terms and conditions, including compliance with the covenants, of the Amended and Restated Credit Agreement that governs the Credit Facility.

At September 30, 2020, the Company had $105,000 outstanding under the Revolving Credit Facility and $150,000 outstanding under the Term Loan. At September 30, 2020 the interest rate on the Revolving Credit Facility and the Term Loan was 2.05% and 4.64%, respectively. The Revolving Credit Facility matures on August 1, 2022, and the Company has the option to extend the maturity date for one additional year subject to the payment of an extension fee and certain other conditions. The Term Loan matures on August 1, 2023. As of September 30, 2020, the Company had $95,000 available for borrowing under the Revolving Credit Facility, subject to the terms and conditions, including compliance with the covenants, of the Amended and Restated Credit Agreement that governs the Credit Facility. During October 2020, the Company paid down $40,000 of the outstanding balance on the Revolving Credit Facility, increasing the amount available for borrowing to $135,000, again subject to the terms and conditions noted above.

The Company’s performance of the obligations under the Credit Facility, including the payment of any outstanding indebtedness under the Credit Facility, is guaranteed by certain subsidiaries of the Company, including each of the subsidiaries of the Company which owns or leases any of the properties included in the pool of unencumbered properties comprising the borrowing base. Additional properties will be added to and removed from the pool from time to time to support amounts borrowed under the Credit Facility. At September 30, 2020, there were 25 properties included in the pool of unencumbered properties.

 

The Credit Facility 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 Facility become due. On September 29, 2020, the Company entered into a first amendment to the Company’s Amended and Restated Credit Agreement dated as of August 1, 2018 with KeyBank National Association individually and as administrative agent, KeyBanc Capital Markets Inc., PNC Capital Markets LLC and Merrill Lynch Pierce, Fenner & Smith Incorporated (now BofA Securities, Inc.) as joint lead arrangers, and other lenders from time to time parties to the agreement. This amendment provides a waiver of the minimum tangible net worth requirement for three consecutive quarters beginning with the quarter ended September 30, 2020. In exchange, our leverage ratio may be increased only to 62.5% (formerly 65%) for two consecutive fiscal quarters two times prior to the facility termination date, the Company is restricted, during this waiver period, from making any share repurchases or distributions without lender approval, a LIBOR floor of 25 basis points will remain in effect for the remainder of the term, and the Company paid a set fee to the arranging bank and all the participating lenders. As of September 30, 2020, the Company is in compliance with all financial covenants related to the Credit Facility as amended.

Mortgages Payable

The mortgage loans require compliance with certain covenants, such as debt service ratios, investment restrictions and distribution limitations. As of September 30, 2020, 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 September 30, 2020, the weighted average years to maturity for the Company’s mortgages payable was 2.9 years.

17


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

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. See Note 14 – "Fair Value Measurements" for further information.

 

The following table summarizes the Company’s interest rate swap contracts outstanding as of September 30, 2020.

 

Date

Entered

 

Effective

Date

 

Maturity

Date

 

Pay

Fixed

Rate (a)

 

 

Notional

Amount

 

 

Fair Value at

September 30,

2020

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 11, 2015

 

March 2, 2015

 

March 1, 2022

 

 

2.02

%

 

 

6,114

 

 

 

(162

)

April 7, 2015

 

April 7, 2015

 

April 7, 2022

 

 

1.74

%

 

 

49,003

 

 

 

(1,171

)

September 17, 2015

 

September 17, 2015

 

September 17, 2022

 

 

1.90

%

 

 

13,700

 

 

 

(473

)

October 2, 2015

 

November 1, 2015

 

November 1, 2022

 

 

1.79

%

 

 

13,100

 

 

 

(450

)

December 23, 2015

 

December 23, 2015

 

January 2, 2026

 

 

2.30

%

 

 

26,000

 

 

 

(2,698

)

January 25, 2016

 

February 1, 2016

 

February 1, 2021

 

 

1.40

%

 

 

38,000

 

 

 

(161

)

June 7, 2016

 

July 1, 2016

 

July 1, 2023

 

 

1.42

%

 

 

43,680

 

 

 

(1,533

)

July 21, 2016

 

August 1, 2016

 

August 1, 2023

 

 

1.30

%

 

 

47,550

 

 

 

(1,548

)

June 5, 2017

 

May 31, 2017

 

May 15, 2022

 

 

1.90

%

 

 

14,700

 

 

 

(419

)

August 23, 2018

 

September 4, 2018

 

August 1, 2023

 

 

2.73

%

 

 

60,000

 

 

 

(4,358

)

August 23, 2018

 

September 4, 2018

 

August 1, 2023

 

 

2.74

%

 

 

25,000

 

 

 

(1,816

)

August 23, 2018

 

September 4, 2018

 

August 1, 2023

 

 

2.74

%

 

 

25,000

 

 

 

(1,819

)

August 23, 2018

 

September 4, 2018

 

August 1, 2023

 

 

2.73

%

 

 

40,000

 

 

 

(2,906

)

 

 

 

 

 

 

 

 

 

 

$

401,847

 

 

$

(19,514

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)   Receive floating rate index based upon one-month LIBOR. At September 30, 2020, the one-month LIBOR was 0.15%.

 

On January 1, 2019, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities which eliminated the requirement to separately measure and report hedge ineffectiveness. For derivative instruments that are designated and qualify as a cash flow hedge, the entire change in fair value of the hedging instrument included in the assessment of hedge effectiveness should be recorded in other comprehensive income (OCI). When the amounts recorded in OCI are reclassified to earnings, they should be presented in the same income statement line item as the effect of the hedged item. 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 and nine months ended September 30, 2020 and 2019.

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

Derivatives in Cash Flow Hedging Relationships

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Effective portion of derivatives

 

$

(32

)

 

$

(2,550

)

 

$

(16,514

)

 

$

(13,956

)

Reclassification adjustment for amounts included in net gain or loss (effective portion)

 

$

1,935

 

 

$

(194

)

 

$

3,908

 

 

$

(1,091

)

 

 

The total amount of interest expense presented on the consolidated statements of operations and comprehensive loss was $6,283 and $7,117, for the three months ended September 30, 2020 and 2019, respectively. The total amount of interest expense presented on the consolidated statements of operations and comprehensive loss was $19,060 and $21,440 for the nine months ended September 30, 2020 and 2019, respectively. The location of the net gain or loss reclassified into income from accumulated other comprehensive loss is reported in interest expense on the consolidated statements of operations and comprehensive loss. The amount that is expected to be reclassified from accumulated other comprehensive loss into income in the next twelve months is $7,355.

 

 

18


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

NOTE 8 – DISTRIBUTIONS

Due to the uncertainty surrounding the COVID-19 pandemic and the need to preserve cash for the payment of operating and other expenses, during the second quarter the Company’s board of directors rescinded the first quarter distribution and suspended distributions until further notice.

In 2019, the Company declared quarterly distributions in the amount of $0.3018 per share, payable in arrears the following quarter.

The table below presents the distributions paid, declared and rescinded during the three and nine months ended September 30, 2020 and 2019.

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Distributions paid

 

$

 

 

$

10,771

 

 

$

10,841

 

 

$

33,437

 

Distributions declared

 

$

 

 

$

10,808

 

 

$

8,173

 

 

$

32,321

 

Distributions rescinded

 

$

 

 

$

 

 

$

(8,173

)

 

$

 

 

NOTE 9 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) is 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 and nine months ended September 30, 2020, 2,098 shares and 3,952 shares, respectively, were excluded from the computation of diluted EPS, because they would have been antidilutive. As a result of a net loss in the three and nine months ended September 30, 2019, 1,713 shares and 2,763 shares, respectively, were excluded from the computation of diluted EPS, because they would have been antidilutive.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

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 11 – 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 are issued to non-employee directors as compensation. Each restricted share and restricted share unit entitles the holder to receive one common share when it vests. Restricted shares are included in common stock outstanding on the date of vesting. Restricted share units are included in common stock outstanding on the date they are transferred to the non-employee director or their beneficiary. The grant-date value of the restricted shares and restricted share units is 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 $19 and $50, in the aggregate, for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, the Company had $86 of unrecognized compensation expense 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 1.6 years. The total fair value at the vesting date for restricted shares and restricted share units that vested during the nine months ended September 30, 2020 and 2019 was $46 and $39, respectively. No restricted shares or restricted shares units vested during the three months ended September 30, 2020 and 2019.

19


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

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

 

 

 

Restricted Shares

 

 

Restricted Share Units

 

Outstanding at December 31, 2019

 

 

3,906

 

 

 

1,480

 

Granted (at grant date fair value of $18.15 per share)

 

 

4,408

 

 

 

 

Vested

 

 

(1,747

)

 

 

(760

)

Outstanding at September 30, 2020

 

 

6,567

 

 

 

720

 

 

 

 

NOTE 12 – SEGMENT REPORTING

The Company has one reportable segment as defined by U.S. GAAP, retail real estate, for the nine months ended September 30, 2020 and 2019.

 

 

 

NOTE 13 – TRANSACTIONS WITH RELATED PARTIES

 

The following table summarizes the Company’s related party transactions for the three and nine months ended September 30, 2020 and 2019. Certain compensation and fees payable to the Business Manager for services provided to the Company are limited to maximum amounts.

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

Unpaid amounts as of

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

September 30,

2020

 

 

December 31,

2019

 

General and administrative reimbursements

(a)

 

$

415

 

 

$

227

 

 

$

1,205

 

 

$

952

 

 

$

254

 

 

$

188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate management fees

 

 

$

1,105

 

 

$

1,213

 

 

$

2,974

 

 

$

3,506

 

 

$

326

 

 

$

 

Property operating expenses

 

 

 

272

 

 

 

284

 

 

 

818

 

 

 

852

 

 

 

181

 

 

 

 

Construction management fees

 

 

 

17

 

 

 

95

 

 

 

26

 

 

 

169

 

 

 

18

 

 

 

23

 

Leasing fees

 

 

 

52

 

 

 

82

 

 

 

158

 

 

 

236

 

 

 

72

 

 

 

143

 

Total real estate management related costs

(b)

 

$

1,446

 

 

$

1,674

 

 

$

3,976

 

 

$

4,763

 

 

$

597

 

 

$

166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business management fees

(c)

 

$

2,231

 

 

$

2,339

 

 

$

6,691

 

 

$

7,007

 

 

$

2,232

 

 

$

4,675

 

 

(a)

The Business Manager and its related parties are entitled to reimbursement for certain general and administrative expenses incurred by the Business Manager or its related parties relating to the Company’s administration. Such costs are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss. Unpaid amounts are included in due to related parties in the consolidated balance sheets.

(b)

For each property that is managed by Inland Commercial Real Estate Services LLC (the “Real Estate Manager”) (and its predecessor), the Company pays a monthly real estate management fee of up to 1.9% of the gross income from any single-tenant, net-leased property, and up to 3.9% of the gross income from any other property type. The Real Estate Manager determines, in its sole discretion, the amount of the fee with respect to a particular property, subject to the limitations. For each property that is managed directly by the Real Estate Manager or its affiliates, the Company pays the Real Estate Manager a separate leasing fee. Further, in the event that the Company engages its Real Estate Manager to provide construction management services for a property, the Company pays a separate construction management fee. Leasing fees are included in deferred costs, net and construction management fees are included in building and other improvements in the consolidated balance sheets. The Company also reimburses the Real Estate Manager and its affiliates for property-level expenses that they pay or incur on the Company’s behalf, including the salaries, bonuses and benefits of persons performing services for the Real Estate Manager and its affiliates except for the salaries, bonuses and benefits of persons who also serve as an executive officer of the Real Estate Manager or the Company. Real estate management fees and reimbursable expenses are included in property operating expenses in the consolidated statements of operations and comprehensive loss. As of December 31, 2019, unpaid

20


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

construction management fees of $6 are included in liabilities associated with investment properties held for sale on the consolidated balance sheet. The remaining unpaid amounts are included in due to related parties on the consolidated balance sheet.

(c)

The Company pays the Business Manager an annual business management fee equal to 0.65% of its “average invested assets.” The fee is payable quarterly in an amount equal to 0.1625% of its average invested assets as of the last day of the immediately preceding quarter. “Average invested assets” means, for any period, the average of the aggregate book value of the Company’s assets, including all intangibles and goodwill, invested, directly or indirectly, in equity interests in, and loans secured by, properties, as well as amounts invested in securities and consolidated and unconsolidated joint ventures or other partnerships, before reserves for amortization and depreciation or bad debts, impairments or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the relevant calendar quarter. Unpaid amounts are included in due to related parties on the consolidated balance sheets.  

 

NOTE 14 – FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

The Company defines fair value based on the price that it believes would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

 

Level 1 −

 

Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

 

 

 

Level 2 −

 

Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

 

 

Level 3 −

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company has estimated the fair value of its financial and non-financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes.

Recurring Fair Value Measurements

 

For assets and liabilities measured at fair value on a recurring basis, 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, 2020 and December 31, 2019, respectively.

 

 

Fair Value

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements - Other assets

 

$

 

 

$

 

 

$

 

 

$

 

Interest rate swap agreements - Other liabilities

 

$

 

 

$

19,514

 

 

$

 

 

$

19,514

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap agreements - Other assets

 

$

 

 

$

715

 

 

$

 

 

$

715

 

Interest rate swap agreements - Other liabilities

 

$

 

 

$

7,622

 

 

$

 

 

$

7,622

 

 

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.

21


INLAND REAL ESTATE INCOME TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

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

 

NOTE 15 – SUBSEQUENT EVENTS

In connection with the preparation of its financial statements, the Company has evaluated events that occurred subsequent to September 30, 2020 through the date on which these financial statements were issued to determine whether any of these events required disclosure in the financial statements.

Paydown of Revolving Credit Facility

During October 2020, the Company repaid $40,000 of the outstanding balance on the Revolving Credit Facility.

22


 

 

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, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on August 14, 2020, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the Securities and Exchange Commission on May 13, 2020, and in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 18, 2020, and factors described below:

 

Market disruptions resulting from the economic effects of the COVID-19 pandemic or otherwise will adversely impact many aspects of our operating results and financial condition, including our ability to service our debt obligations, borrow additional monies or pay distributions;

 

We have incurred net losses on a U.S. generally accepted accounting principles (“U.S. GAAP”) basis for the three and nine months ended September 30, 2020 and 2019 and for the year ended December 31, 2019;

 

There is no established public trading market for our shares, our stockholders cannot currently sell their shares under our share repurchase program (as amended, “SRP”), which has been suspended and may be amended or terminated in our sole discretion, and even if the SRP is restarted, stockholders may not be able to sell all of the shares they would like to sell;

 

Even if our stockholders are able to sell their shares under the SRP, or otherwise, they may not be able to recover the amount of their investment in our shares;

 

There is no assurance our board of directors will pursue a listing or other liquidity event at any time in the future, particularly in light of the COVID-19 pandemic;

 

Our charter generally limits the total amount we may borrow to 300% of our net assets, equivalent to 75% of the costs of our assets;

 

Inland Real Estate Investment Corporation (our “Sponsor”) may face a conflict of interest in allocating personnel and resources between its affiliates, our Business Manager (as defined below) and Inland Commercial Real Estate Services LLC, referred to herein as our “Real Estate Manager”;

 

We do not have arm’s-length agreements with our Business Manager, our Real Estate Manager or any other affiliates of our Sponsor;

 

We pay fees, which may be significant, to our Business Manager, Real Estate Manager and other affiliates of our Sponsor;

 

Our Business Manager and its affiliates face conflicts of interest caused by, among other things, their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders;

 

Our properties may compete with the properties owned by other programs sponsored by our Sponsor or Inland Private Capital Corporation or other affiliates for, among other things, tenants;

 

Our Business Manager is under no obligation, and may not agree, to forgo or defer its business management fee;

 

If we fail to continue to qualify as a REIT, our operations and distributions to stockholders, if any, will be adversely affected; and

23


 

 

The strategic plan adopted by our board of directors on February 11, 2019, which is discussed further below, may evolve or change over time, and there is no assurance we will be able to successfully achieve our board’s objectives under the strategic plan, including making strategic sales or purchases of properties or listing our common stock, within the timeframe we expected or would prefer or at all.

 

We are subject to risks associated with a pandemic, epidemic or outbreak of a contagious disease, such as the ongoing global COVID-19 pandemic, including negative impacts on our tenants and their respective businesses, and we have agreed to defer a significant amount of rent owed to us, which tenants will be obligated to pay over time in addition to their regular rent, which they may not be able or willing to do, particularly if their results of operations or future prospects have been or become materially adversely affected by the COVID-19 pandemic;

 

The use of the internet by consumers to shop is expected to continue to expand, and this expansion may be accelerated by the effects of the COVID-19 pandemic, which would result in a further downturn in the business of our current tenants in their “brick and mortar” locations and could affect their ability to pay rent and the way they lease retail center space; and

 

We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in credit markets of the United States from time to time, including disruptions and dislocations caused by the ongoing COVID-19 pandemic.

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.

The following discussion and analysis relates to the three and nine months ended September 30, 2020 and 2019 and as of September 30, 2020 and December 31, 2019. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included in this report.

We routinely post important information about us and our business, including financial and other information for investors, on our website. We encourage investors to visit our website at inland-investments.com/inland-income-trust from time to time, as information is updated and new information is posted.

Overview

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 have no employees. We are managed by our business manager, IREIT Business Manager & Advisor, Inc., referred to herein as our “Business Manager.”

We are primarily focused on owning retail properties and target a portfolio of 100% grocery-anchored properties as described below. We have invested in joint ventures and may continue to invest in additional joint ventures or acquire other real estate assets if management believes the expected returns from those investments exceed that of retail properties. 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.

At September 30, 2020, we had total assets of $1.2 billion on our balance sheet and owned 44 properties located in 21 states containing 6.5 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. As of September 30, 2020, 86% of our annualized base rental income was generated from grocery-anchored or grocery shadow-anchored shopping centers. A grocery shadow-anchored shopping center is a shopping center which we own that is located near a grocery store that we do not own but that generates traffic for our shopping center. The portfolio properties have staggered lease maturity dates. Grocery anchor tenants accounted for 15.6% of our annualized base rent (“ABR”) as of September 30, 2020.

We commenced our “best efforts” offering (the “Offering”) on October 18, 2012, which concluded on October 16, 2015. We sold 33,534,022 shares of common stock generating gross proceeds of $834.4 million from the Offering. On March 3, 2020, our board of directors determined an estimated per share net asset value of our common stock of $18.15 as of December 31, 2019.


24


 

COVID-19 Pandemic

We are closely monitoring the impact of the novel coronavirus (“COVID-19”) pandemic on all aspects of our business and locations, including how it is impacting our tenants and vendors. In the third quarter, we recognized bad debt expense of $2.2 million mostly as a result of the pandemic. Additionally, we deferred an additional $1.0 million of rent during the third quarter pursuant to agreements negotiated with tenants in the wake of the COVID-19 pandemic. See Note 5 – “Leases” for additional information. We are unable to predict with certainty the future impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties.

In addition, we cannot predict the entire impact that COVID-19 will have on our tenants and other business partners, such as vendors and service providers; however, any material further effect on these parties would continue to adversely impact us. As of November 9, 2020, many tenants are operating in a materially reduced capacity. As of November 9, 2020, rents collected as a percentage of billings, applying cash received to the billed amounts that have been outstanding for the longest period of time, were 89% in April, 87% in May, 84% in June, 93% in July, 94% in August, 93% in September and 95% in October. Cash rent payments received (without applying the cash to any particular amount due) during the month of August remained steady with July, decreasing slightly by $0.4 million from July (from $10.0 million to $9.6. million). September cash rent receipts decreased $1.1 million from August (from $9.6 million to $8.5 million). October cash rent receipts increased by $1.7 million from September (from $8.5 million to $10.2 million). Payment plans mostly in the form of rent deferrals have been agreed upon with tenants representing a total of 270 leases comprising 44% of ABR and we are still in active negotiations with other tenants. As of November 9, 2020, deferrals represent $5.8 million in total rent, or approximately 30% of ABR, and modifications and rent abatements represent $2.2 million in total rent, or 13% of ABR. Deferrals and abatements agreed upon with anchor tenants represent $4.6 million in rent, versus $3.4 million agreed upon with junior box and small-shop tenants. Not all tenant requests will ultimately result in payment plans, and we manage negotiations with tenants on a case-by-case basis. We have sent some tenants notices of default, including to one of our ten largest tenants by ABR, which has since resumed paying rent but with which we are still negotiating with respect to unpaid amounts still owed. September and October collections and rent relief requests to-date may not be indicative of collections or requests in any future period. We are closely monitoring the impact of the COVID-19 pandemic on the collectability of lease payments.

The impact of the COVID-19 pandemic on our rental revenue for the fourth quarter of 2020 and thereafter cannot, however, be determined at present. The deferral periods for tenants averaged four months and most have ended. While some payments from tenants of deferred amounts will begin during the fourth quarter of 2020, the vast majority will be repaid through 2021. If tenants cannot or will not pay these deferred amounts of rent in addition to their normal rent due, they may request additional deferrals, breach their lease agreements with us, cease doing business, file for bankruptcy or some combination of the foregoing, any of which may have adverse effects on our operating results or financial position. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with tenants, government officials and business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse developments in our business.

Of our bad debt expense recorded this year through September 30, 2020 (see Note 5 – “Leases”), we estimate that 71% of the total bad debt has been from tenants significantly affected by the pandemic, especially apparel and restaurants, and a considerable number of the apparel tenants have filed for bankruptcy. Two of our top 30 tenants by ABR (nos. 18 (Ascena Retail Group) and 29 (JCPenney)) have filed for Chapter 11 bankruptcy protection, and a third, Bed Bath & Beyond (no. 23) has publicly announced that it is closing 200 of its stores and has initiated discussions with us regarding its locations at three of our centers that may result in rent reductions, term extensions or store closures. Tenants representing 22 locations and $3.3 million ABR (3.6% of total ABR) have filed for bankruptcy protection. As of November 9, 2020, certain tenants, estimated to be approximately 20% of the tenants with which we have entered into deferral agreements, have overdue balances some of which have been included in our allowance for bad debts. To the extent that the effects of the pandemic continue for a prolonged period of time or become more severe, the effects of the pandemic, including governmental actions taken to combat the pandemic, are likely to result in additional tenant requests for deferrals or other lease modifications, failures to pay rent, bad debt expense or vacancies in the future. Conversely, if an affordable and widely available treatment or vaccine for COVID-19 is created, pent-up demand may follow for products and services such as those provided by restaurants, health, wellness and personal care service providers and apparel and accessory retailers in these categories.

We rely on the Business Manager to manage our day-to-day operations. Though many people have been able to work remotely effectively, the business and operations of our Business Manager and its affiliates may also be adversely impacted by further coronavirus outbreaks, including illness or quarantine of members of its workforce, which may negatively impact on its ability to provide us services to the same degree as it had prior to the outbreak.

For further information regarding the potential impact of COVID-19 on the Company, see Part II, Item 1A titled “Risk Factors.”


25


 

Company UpdateThree and Nine Months Ended September 30, 2020

On February 11, 2019, our board of directors approved a strategic plan with the goal of providing a future liquidity to investors and creating long-term stockholder value. The strategic plan centers around owning a portfolio of 100% grocery-anchored properties with lower exposure to big box retailers. As part of this strategy, our management team and our board of directors are considering the opportunistic sale of certain assets with the goal of redeploying capital into the acquisition of strategically located grocery-anchored centers. We plan to move toward a liquidity event in the future, market conditions permitting, most likely through a listing on a public securities exchange. As part of the strategic plan, we preliminarily identified a select number of properties we would consider selling and marketed them. As further described in Note 4 – “Dispositions”, we have completed the sale of three of the selected properties in the first quarter. The strategic plan may evolve or change over time. For example, we may decide to focus more on redeveloping existing properties relative to investing in new grocery-anchored centers, depending on such factors, including, but not limited to, market prices for our properties, availability of capital for redevelopment and construction costs. There is no assurance we will be able to successfully implement the strategic plan, including making strategic sales or purchases of properties or listing our common stock, and it is likely that no liquidity event will occur before the adverse effects of the COVID-19 pandemic on the economy and the retail commercial real estate market subside.

26


 

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

Investment Properties

 

 

 

As of September 30, 2020

 

Number of properties

 

44

 

Purchase price

 

$

1,346,514

 

Total square footage

 

 

6,470,717

 

Weighted average physical occupancy

 

 

93.3

%

Weighted average economic occupancy

 

 

93.8

%

Weighted average remaining lease term (years)

 

 

5.1

 

 

27


 

The table below presents information for each of our investment properties as of September 30, 2020.

 

Property

 

Location

 

Square

Footage

 

 

Physical

Occupancy

 

 

Economic

Occupancy

 

 

Mortgage

Balance

 

 

Interest

Rate (b)

 

Newington Fair (a)

 

Newington, CT

 

 

186,205

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Wedgewood Commons (a)

 

Olive Branch, MS

 

 

159,258

 

 

 

97.3

%

 

 

97.3

%

 

 

 

 

 

 

Park Avenue (a)

 

Little Rock, AR

 

 

79,131

 

 

 

62.2

%

 

 

85.4

%

 

 

 

 

 

 

North Hills Square (a)

 

Coral Springs, FL

 

 

63,829

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Mansfield Shopping Center (a)

 

Mansfield, TX

 

 

148,529

 

 

 

96.3

%

 

 

96.3

%

 

 

 

 

 

 

Lakeside Crossing (a)

 

Lynchburg, VA

 

 

67,034

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

MidTowne Shopping Center (a)

 

Little Rock, AR

 

 

126,288

 

 

 

84.1

%

 

 

84.1

%

 

 

 

 

 

 

Dogwood Festival (a)

 

Flowood, MS

 

 

187,610

 

 

 

85.7

%

 

 

85.7

%

 

 

 

 

 

 

Pick N Save Center (a)

 

West Bend, WI

 

 

94,446

 

 

 

98.4

%

 

 

98.4

%

 

 

 

 

 

 

Harris Plaza (a)

 

Layton, UT

 

 

125,965

 

 

 

91.0

%

 

 

91.0

%

 

 

 

 

 

 

Dixie Valley

 

Louisville, KY

 

 

119,981

 

 

 

92.5

%

 

 

92.5

%

 

 

6,798

 

 

 

3.43

%

The Landings at Ocean Isle (a)

 

Ocean Isle, NC

 

 

53,203

 

 

 

94.6

%

 

 

94.6

%

 

 

 

 

 

 

Shoppes at Prairie Ridge (a)

 

Pleasant Prairie, WI

 

 

232,606

 

 

 

91.9

%

 

 

91.9

%

 

 

 

 

 

 

Harvest Square

 

Harvest, AL

 

 

70,590

 

 

 

92.1

%

 

 

92.1

%

 

 

6,400

 

 

 

4.65

%

Heritage Square

 

Conyers, GA

 

 

22,510

 

 

 

95.8

%

 

 

95.8

%

 

 

4,460

 

 

 

5.10

%

The Shoppes at Branson Hills (a)

 

Branson, MO

 

 

256,244

 

 

 

80.9

%

 

 

80.9

%

 

 

 

 

 

 

Branson Hills Plaza (a)

 

Branson, MO

 

 

210,201

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Copps Grocery Store (a)

 

Stevens Point, WI

 

 

69,911

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Fox Point Plaza (a)

 

Neenah, WI

 

 

171,121

 

 

 

86.1

%

 

 

86.1

%

 

 

 

 

 

 

Shoppes at Lake Park (a)

 

W. Valley City, UT

 

 

52,997

 

 

 

86.7

%

 

 

86.7

%

 

 

 

 

 

 

Plaza at Prairie Ridge (a)

 

Pleasant Prairie,WI

 

 

9,035

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Green Tree Shopping Center

 

Katy, TX

 

 

147,621

 

 

 

98.3

%

 

 

98.3

%

 

 

13,100

 

 

 

3.24

%

Eastside Junction

 

Athens, AL

 

 

79,675

 

 

 

85.7

%

 

 

85.7

%

 

 

5,945

 

 

 

4.60

%

Fairgrounds Crossing

 

Hot Springs, AR

 

 

155,127

 

 

 

98.5

%

 

 

98.5

%

 

 

13,453

 

 

 

5.21

%

Prattville Town Center

 

Prattville, AL

 

 

168,842

 

 

 

100.0

%

 

 

100.0

%

 

 

15,930

 

 

 

5.48

%

Regal Court

 

Shreveport, LA

 

 

363,061

 

 

 

96.2

%

 

 

96.2

%

 

 

26,000

 

 

 

4.50

%

Shops at Hawk Ridge (a)

 

St. Louis, MO

 

 

75,951

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Walgreens Plaza

 

Jacksonville, NC

 

 

42,219

 

 

 

79.0

%

 

 

79.0

%

 

 

4,650

 

 

 

5.30

%

Frisco Marketplace (a)

 

Frisco, TX

 

 

112,024

 

 

 

89.7

%

 

 

93.6

%

 

 

 

 

 

 

White City

 

Shrewsbury, MA

 

 

257,121

 

 

 

89.6

%

 

 

89.6

%

 

 

49,002

 

 

 

3.24

%

Yorkville Marketplace (a)

 

Yorkville, IL

 

 

111,591

 

 

 

91.3

%

 

 

91.3

%

 

 

 

 

 

 

Shoppes at Market Pointe

 

Papillion, NE

 

 

253,903

 

 

 

98.2

%

 

 

98.2

%

 

 

13,700

 

 

 

3.30

%

Marketplace at El Paseo

 

Fresno, CA

 

 

224,683

 

 

 

98.2

%

 

 

99.0

%

 

 

38,000

 

 

 

2.95

%

The Village at Burlington Creek

 

Kansas City, MO

 

 

157,937

 

 

 

72.4

%

 

 

72.4

%

 

 

17,723

 

 

 

4.25

%

Milford Marketplace

 

Milford, CT

 

 

111,720

 

 

 

86.3

%

 

 

86.3

%

 

 

18,727

 

 

 

4.02

%

Settlers Ridge

 

Pittsburgh, PA

 

 

473,763

 

 

 

97.6

%

 

 

97.6

%

 

 

76,533

 

 

 

3.70

%

Blossom Valley Plaza (a)

 

Turlock, CA

 

 

111,435

 

 

 

96.2

%

 

 

96.2

%

 

 

 

 

 

 

Oquirrh Mountain Marketplace (a)

 

South Jordan, UT

 

 

75,950

 

 

 

91.6

%

 

 

91.6

%

 

 

 

 

 

 

Marketplace at Tech Center

 

Newport News, VA

 

 

210,501

 

 

 

89.8

%

 

 

94.9

%

 

 

47,550

 

 

 

3.15

%

Coastal North Town Center

 

Myrtle Beach, SC

 

 

304,662

 

 

 

95.6

%

 

 

95.6

%

 

 

43,680

 

 

 

3.17

%

Oquirrh Mountain Marketplace II (a)

 

South Jordan, UT

 

 

10,150

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Wilson Marketplace (a)

 

Wilson, NC

 

 

311,030

 

 

 

99.1

%

 

 

99.1

%

 

 

 

 

 

 

Pentucket Shopping Center

 

Plaistow, NH

 

 

198,469

 

 

 

98.0

%

 

 

98.0

%

 

 

14,700

 

 

 

3.65

%

Coastal North Town Center - Phase II

 

Myrtle Beach, SC

 

 

6,588

 

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

Portfolio total

 

 

 

 

6,470,717

 

 

 

93.3

%

 

 

93.8

%

 

$

416,351

 

 

 

3.69

%

 

 

(a)

Property is included in the pool of unencumbered properties under our Credit Facility.

 

(b)

Portfolio total is equal to the weighted average interest rate.

 

28


 

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, 2020.

 

Tenant Name

 

Number

of

Leases

 

 

Annualized

Base Rent (a)

 

 

Percent of

Total

Portfolio

Annualized

Base Rent

 

 

Annualized

Base Rent

Per Square

Foot

 

 

Square

Footage

 

 

Percent of

Total

Portfolio

Square

Footage

 

The Kroger Co

 

 

4

 

 

$

3,374

 

 

 

3.6

%

 

$

13.52

 

 

 

249,493

 

 

 

3.8

%

The TJX Companies, Inc.

 

 

12

 

 

 

3,043

 

 

 

3.3

%

 

 

9.87

 

 

 

308,253

 

 

 

4.8

%

Ross Dress for Less, Inc.

 

 

9

 

 

 

2,449

 

 

 

2.6

%

 

 

10.32

 

 

 

237,165

 

 

 

3.7

%

Albertsons/Jewel/Shaw's

 

 

2

 

 

 

2,304

 

 

 

2.5

%

 

 

18.02

 

 

 

127,892

 

 

 

2.0

%

Ulta Salon, Cosmetics & Fragrance Inc.

 

 

9

 

 

 

2,151

 

 

 

2.3

%

 

 

22.73

 

 

 

94,658

 

 

 

1.5

%

PetSmart

 

 

7

 

 

 

2,020

 

 

 

2.2

%

 

 

14.58

 

 

 

138,578

 

 

 

2.1

%

Dicks Sporting Goods, Inc.

 

 

4

 

 

 

2,012

 

 

 

2.2

%

 

 

11.13

 

 

 

180,766

 

 

 

2.8

%

LA Fitness (Fitness International)

 

 

2

 

 

 

1,966

 

 

 

2.1

%

 

 

21.94

 

 

 

89,600

 

 

 

1.4

%

Kohl's Department Stores

 

 

4

 

 

 

1,888

 

 

 

2.0

%

 

 

5.68

 

 

 

332,461

 

 

 

5.1

%

Giant Eagle

 

 

1

 

 

 

1,805

 

 

 

2.0

%

 

 

13.96

 

 

 

129,340

 

 

 

2.0

%

Top ten tenants

 

 

54

 

 

$

23,012

 

 

 

24.8

%

 

$

12.19

 

 

 

1,888,206

 

 

 

29.2

%

 

 

(a)

We have entered into rent deferral agreements with the tenants above that have generally been heavily impacted by the effects of the COVID-19 pandemic, which is a majority of the top ten tenants. To the extent we have agreed with a tenant to defer rent due in the base year to a later period, that deferred rent is still reflected in the annualized base rent amount above.

 

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, 2020.

 

Tenant Type

 

Gross Leasable

Area –

Square Footage

 

 

Percent of

Total Gross

Leasable Area

 

 

Percent of

Total Annualized

Base Rent

 

Discount and Department Stores

 

 

1,418,634

 

 

 

23.4

%

 

 

11.6

%

Home Goods

 

 

976,834

 

 

 

16.1

%

 

 

9.1

%

Grocery

 

 

950,042

 

 

 

15.6

%

 

 

14.8

%

Lifestyle, Health Clubs, Books & Phones

 

 

735,634

 

 

 

12.1

%

 

 

16.1

%

Restaurant

 

 

534,434

 

 

 

8.8

%

 

 

16.8

%

Apparel & Accessories

 

 

388,428

 

 

 

6.4

%

 

 

9.2

%

Pet Supplies

 

 

245,245

 

 

 

4.0

%

 

 

4.2

%

Consumer Services, Salons, Cleaners, Banks

 

 

243,619

 

 

 

4.0

%

 

 

7.3

%

Sporting Goods

 

 

238,447

 

 

 

3.9

%

 

 

3.5

%

Other

 

 

183,799

 

 

 

3.1

%

 

 

2.6

%

Health, Doctors & Health Foods

 

 

156,175

 

 

 

2.6

%

 

 

4.8

%

Total

 

 

6,071,291

 

 

 

100.0

%

 

 

100.0

%

 

The following table sets forth a summary of our property type based on annualized base rent for in-place leases and rents collected as a percentage of billings, applying cash received to the billed amounts that have been outstanding for the longest period of time, as of November 9, 2020.

 

29


 

Property Type

 

Percent of Total Annualized Base Rent

 

Collections Applied to April Rent

 

Collections Applied to May Rent

 

Collections Applied to June Rent

 

Collections Applied to July Rent

 

Collections Applied to August Rent

 

Collections Applied to September Rent

 

Collections Applied to October Rent

 

Grocery

 

 

54

%

 

89

%

 

85

%

 

83

%

 

91

%

 

94

%

 

93

%

 

95

%

Grocery Shadow-Anchored

 

 

32

%

 

91

%

 

91

%

 

89

%

 

100

%

 

97

%

 

97

%

 

97

%

Community Center

 

 

7

%

 

84

%

 

86

%

 

86

%

 

86

%

 

91

%

 

85

%

 

86

%

Power Center

 

 

7

%

 

84

%

 

76

%

 

46

%

 

84

%

 

77

%

 

82

%

 

88

%

Total

 

 

100

%

 

89

%

 

87

%

 

84

%

 

93

%

 

94

%

 

93

%

 

95

%

The following table sets forth a summary, as of September 30, 2020, of the percent of total annualized base rent and the weighted average lease expiration by size of tenant.

 

Size of Tenant

 

Description -

Square Footage

 

Percent of Total Annualized Base Rent

 

 

Weighted Average Lease Expiration – Years

 

Anchor

 

10,000 and over

 

 

52

%

 

 

5.9

 

Junior Box

 

5,000-9,999

 

 

14

%

 

 

5.0

 

Small Shop

 

Less than 5,000

 

 

34

%

 

 

3.7

 

Total

 

 

 

 

100

%

 

 

5.1

 

 

Lease Expirations

The following table sets forth a summary, as of September 30, 2020, of lease expirations scheduled to occur during the remainder of 2020 and each of the calendar years from 2021 to 2029 and thereafter, assuming no exercise of renewal options or early termination rights for leases commenced on or prior to September 30, 2020. Annualized base rent represents the rent in-place of the applicable property at September 30, 2020. The table below includes ground leases. If ground leases are excluded, annualized base rent would equal $83,043 or $17.94 per square foot for total expiring leases.

 

Lease Expiration Year

 

Number of

Expiring

Leases

 

 

Gross

Leasable

Area of

Expiring

Leases -

Square

Footage

 

 

Percent of

Total Gross

Leasable

Area of

Expiring

Leases

 

 

Total

Annualized

Base Rent

of Expiring

Leases

 

 

Percent of

Total

Annualized

Base Rent

of Expiring

Leases

 

 

Annualized Base Rent per Leased Square Foot

 

2020 (including month-to-month)

 

 

41

 

 

 

158,403

 

 

 

2.6

%

 

$

2,077

 

 

 

2.2

%

 

$

13.11

 

2021

 

 

81

 

 

 

292,448

 

 

 

4.8

%

 

 

6,231

 

 

 

6.7

%

 

 

21.31

 

2022

 

 

93

 

 

 

584,490

 

 

 

9.6

%

 

 

10,924

 

 

 

11.8

%

 

 

18.69

 

2023

 

 

109

 

 

 

830,125

 

 

 

13.7

%

 

 

12,737

 

 

 

13.8

%

 

 

15.34

 

2024

 

 

107

 

 

 

766,436

 

 

 

12.6

%

 

 

14,276

 

 

 

15.4

%

 

 

18.63

 

2025

 

 

114

 

 

 

814,748

 

 

 

13.4

%

 

 

14,541

 

 

 

15.7

%

 

 

17.85

 

2026

 

 

45

 

 

 

424,172

 

 

 

7.0

%

 

 

6,253

 

 

 

6.8

%

 

 

14.74

 

2027

 

 

28

 

 

 

373,357

 

 

 

6.2

%

 

 

5,120

 

 

 

5.5

%

 

 

13.71

 

2028

 

 

32

 

 

 

700,359

 

 

 

11.5

%

 

 

6,544

 

 

 

7.1

%

 

 

9.34

 

2029

 

 

12

 

 

 

170,091

 

 

 

2.8

%

 

 

2,431

 

 

 

2.6

%

 

 

14.29

 

Thereafter

 

 

35

 

 

 

956,662

 

 

 

15.8

%

 

 

11,503

 

 

 

12.4

%

 

 

12.02

 

Leased Total

 

 

697

 

 

 

6,071,291

 

 

 

100.0

%

 

$

92,637

 

 

 

100.0

%

 

$

15.26

 

30


 

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary uses and sources of cash are as follows:

Uses

 

Sources

Interest & principal payments on mortgage loans and

Credit Facility

 

Cash receipts from our tenants

Property operating expenses

 

Sale of shares through the DRP

General and administrative expenses

 

Proceeds from new or refinanced mortgage loans

Distributions to stockholders

 

Borrowing on our Credit Facility

Fees payable to our Business Manager and Real Estate

Manager

 

Proceeds from sales of real estate

Repurchases of shares under the SRP

 

 

 

 

 

 

Acquisitions of real estate directly or through joint ventures

 

 

 

 

 

 

Capital expenditures, tenant improvements and leasing commissions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During January 2020, we completed the sale of three properties generating net proceeds of $37.3 million.

At September 30, 2020, we had $105 million outstanding under the Revolving Credit Facility and $150 million outstanding under the Term Loan. At September 30, 2020 the interest rate on the Revolving Credit Facility and the Term Loan was 2.05% and 4.64%, respectively. The Revolving Credit Facility matures on August 1, 2022, and we have the option to extend the maturity date for one additional year subject to the payment of an extension fee and certain other conditions. The Term Loan matures on August 1, 2023. As of September 30, 2020, we had $95 million available for borrowing under the Revolving Credit Facility, subject to the terms and conditions, and assuming compliance with the covenants, of the Amended and Restated Credit Agreement that governs the Credit Facility. During October 2020, the Company paid down $40 million of the outstanding balance on the Revolving Credit Facility, increasing the amount available for borrowing to $135 million, again subject to the terms and conditions noted above. Although $135 million is the maximum available, covenant limitations, particularly the leverage ratio, affect what we can actually draw, and we expect to have substantially less than $135 million actually available to draw or otherwise undertake as additional debt in the fourth quarter of 2020, and we will likely have less than $135 million actually available to draw or undertake as additional debt through 2021, depending on the future effects of the pandemic on our tenants, among other things. By “additional debt,” we mean debt in addition to existing debt such as existing mortgages. Our leverage ratio generally cannot exceed 60%, provided however that two times during the term of our Revolving Credit Facility our leverage ratio may be 62.5% for two consecutive quarters.

As of September 30, 2020, we had total debt outstanding of $671.4 million, excluding mortgage premiums and unamortized debt issuance costs, which bore interest at a weighted average interest rate of 3.65% per annum. As of September 30, 2020, the weighted average years to maturity for our debt was 2.7 years. As of September 30, 2020 and December 31, 2019, our borrowings were 50% and 49%, respectively, of the purchase price of our investment properties. At September 30, 2020 our cash and cash equivalents balance was $43.5 million.

In the next twelve months, we have four mortgage loans maturing with an aggregate principal balance of $63.0 million, which we have the intent to refinance or repay by drawing on the line of credit. For information related to our debt maturities reference is made to Note 7 – “Debt and Derivative Instruments” which is included in our September 30, 2020 Notes to Consolidated Financial Statements in Item 1.

To preserve cash for the payment of operating and other expenses, such as debt payments, our board of directors has suspended distributions and rescinded the first quarter distribution that was expected to be paid on June 1, 2020 to stockholders of record on May 29, 2020. Our board of directors has also suspended our DRP and SRP until further notice. We have also delayed making non-essential capital improvements and other non-essential capital expenditures at our properties since the onset of the pandemic, where possible, to reduce expenses and preserve cash and expect to continue to delay non-essential capital expenditures until they become essential or until the adverse effects of the COVID-19 pandemic on our tenants subside. These actions are being taken until there is better clarity on our tenants’ ability and willingness to pay rent and meet other lease obligations and, ultimately, the performance of our shopping centers. The suspension of the DRP was effective on June 6, 2020 and the suspension of the SRP was effective on June 26, 2020. Any unfulfilled repurchase requests will automatically roll over for processing under the terms and conditions of the SRP when we restart our plan, unless a stockholder withdraws the request for repurchase.

31


 

On September 29, 2020, we entered into a first amendment to the Company’s Amended and Restated Credit Agreement dated as of August 1, 2018 with KeyBank National Association individually and as administrative agent, KeyBanc Capital Markets Inc., PNC Capital Markets LLC and Merrill Lynch Pierce, Fenner & Smith Incorporated (now BofA Securities, Inc.) as joint lead arrangers, and other lenders from time to time parties to the agreement. This amendment provides a waiver of the minimum tangible net worth requirement for three consecutive quarters beginning with the quarter ended September 30, 2020. In exchange, we agreed that our leverage ratio may be increased only to 62.5% (formerly 65%) for two consecutive fiscal quarters two times prior to the facility termination date, that we are restricted, during this waiver period, from making any share repurchases or distributions without lender approval, and that a LIBOR floor of 25 basis points will remain in effect for the remainder of the term. As of September 30, 2020, we have paid all interest and principal amounts when due, and are in compliance with all financial covenants related to the Credit Facility as amended. See our Part II, Item 1A titled “Risk Factors” below and in our Annual Report on Form 10-K for discussion of risks stemming from our use of debt and a potential failure to comply with a covenant under the Credit Facility.

Cash Flow Analysis

 

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2020

 

 

2019

 

 

2020 vs. 2019

 

 

 

(Dollar amounts in thousands)

 

Net cash flows provided by operating activities

 

$

26,225

 

 

$

40,814

 

 

$

(14,589

)

Net cash flows provided by (used in) investing activities

 

$

34,392

 

 

$

(5,301

)

 

$

39,693

 

Net cash flows used in financing activities

 

$

(21,557

)

 

$

(37,799

)

 

$

16,242

 

 

 

Operating activities

The decrease in cash from operating activities during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to a decrease and delay in rent collections due to the COVID-19 pandemic and the timing of business manager fee payments.

Investing activities

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2020

 

 

2019

 

 

2020 vs. 2019

 

 

 

(Dollar amounts in thousands)

 

Capital expenditures

 

$

(2,863

)

 

$

(5,301

)

 

$

2,438

 

Proceeds from sale of investment properties

 

 

37,255

 

 

 

 

 

 

37,255

 

Net cash provided by (used in) investing activities

 

$

34,392

 

 

$

(5,301

)

 

$

39,693

 

Cash was provided by our investing activities in the nine months ended September 30, 2020 compared to the cash used in the nine months ended September 30, 2019. The primary change from the prior year was our receipt of $37.3 million of proceeds from the sale of three properties during January 2020 offset partially by lower capital expenditures during the current year.

Financing activities

 

 

Nine Months Ended

September 30,

 

 

Change

 

 

 

2020

 

 

2019

 

 

2020 vs. 2019

 

 

 

(Dollar amounts in thousands)

 

Total changes related to debt

 

$

(12,858

)

 

$

(9,159

)

 

$

(3,699

)

Proceeds from the distribution reinvestment plan, net of shares repurchased

 

 

2,142

 

 

 

4,797

 

 

 

(2,655

)

Distributions paid

 

 

(10,841

)

 

 

(33,437

)

 

 

22,596

 

Net cash used in financing activities

 

$

(21,557

)

 

$

(37,799

)

 

$

16,242

 

 

During the nine months ended September 30, 2020, cash used by debt increased $3.7 million from the nine months ended September 30, 2019, primarily due to $3.0 million higher net paydowns on the credit facility in 2020 compared to the paydowns in 2019. During the nine months ended September 30, 2020 and 2019, we generated proceeds from the sale of shares pursuant to the DRP of $4.5 million and $15.0 million, respectively. For the nine months ended September 30, 2020 and 2019, share repurchases were

32


 

$2.4 million and $10.2 million, respectively. During the nine months ended September 30, 2020 and 2019, we paid $10.8 million and $33.4 million, respectively, in distributions. The decreases in distributions paid, proceeds from DRP and share repurchases in 2020 compared to 2019 is due to the suspensions of the authorization and payment of distributions, the DRP and the SRP.

 

Distributions

For 2020 and 2019, distributions were payable quarterly in arrears. A summary of the distributions declared, distributions paid and cash flows provided by operations for the nine months ended September 30, 2020 and 2019 follows (Dollar amounts in thousands except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

Distributions Paid (2)

 

 

 

 

 

 

Nine Months Ended

September 30,

 

Distributions

Declared (1)

 

 

Distributions

Declared Per

Share

 

 

Cash

 

 

Reinvested

via DRP

 

 

Total

 

 

Cash Flows

From

Operations

 

 

2020

 

$

 

 

$

 

 

$

6,294

 

 

$

4,547

 

 

$

10,841

 

 

$

26,225

 

 

2019

 

$

32,321

 

 

$

0.9054

 

 

$

18,412

 

 

$

15,025

 

 

$

33,437

 

 

$

40,814

 

 

 

 

(1)

The distribution declared during the first quarter of 2020 was rescinded during the second quarter.

 

(2)

Distributions were funded by cash flow from operations and cash on hand during the nine months ended September 30, 2020 and 2019.

Due to the uncertainty surrounding the COVID-19 pandemic and the need to preserve cash for the payment of operating and other expenses, such as debt payments, our board of directors rescinded the first quarter distribution and suspended distributions until further notice.

Results of Operations

The following discussions are based on our consolidated financial statements for the three and nine months ended September 30, 2020 and 2019. Dollar amounts are stated in thousands.

This section describes and compares our results of operations for the three and nine months ended September 30, 2020 and 2019. 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, which is a supplemental non-GAAP performance measure. A total of 44 investment properties (which are all of the properties we currently own) that were acquired on or before January 1, 2019 represent our “same store” properties during the three and nine months ended September 30, 2020 and 2019. “Non-same store,” as reflected in the table below, consists of properties sold after January 1, 2019. For the three and nine months ended September 30, 2020 and 2019, 15 properties that were sold constituted non-same store properties.

We believe that net operating income is useful to investors in measuring the operating performance of our property portfolio because our primary business is the ownership of real estate, and net operating income excludes various items included in GAAP net income that do not relate to, or are not indicative of, our operating performance, such as depreciation and amortization and parent-level corporate expenses (including general and administrative expenses). Same store net operating income is useful because it eliminates differences in net operating income resulting from the acquisition or disposition of properties during the periods presented and therefore provides a better comparison of the operating performance of our properties between periods.

The following tables present the property net operating income prior to straight-line income (expense), net, amortization of intangibles, interest, and depreciation and amortization for the three and nine months ended September 30, 2020 and 2019, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.


33


 

Comparison of the three months ended September 30, 2020 and September 30, 2019

 

Total

 

 

Same Store

 

 

Non-Same Store

 

 

Three Months Ended

September 30,

 

 

Three Months Ended

September 30,

 

 

Three Months Ended

September 30,

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Rental income

$

26,700

 

 

$

31,339

 

 

$

(4,639

)

 

$

26,700

 

 

$

29,908

 

 

$

(3,208

)

 

$

 

 

$

1,431

 

 

$

(1,431

)

Other property income

 

29

 

 

 

69

 

 

 

(40

)

 

 

29

 

 

 

69

 

 

 

(40

)

 

 

 

 

 

 

 

 

 

Total income

$

26,729

 

 

$

31,408

 

 

$

(4,679

)

 

$

26,729

 

 

$

29,977

 

 

$

(3,248

)

 

$

 

 

 

1,431

 

 

$

(1,431

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

$

4,259

 

 

$

5,561

 

 

$

(1,302

)

 

$

4,259

 

 

$

5,388

 

 

$

(1,129

)

 

$

 

 

 

173

 

 

$

(173

)

Real estate tax expense

 

3,557

 

 

 

4,068

 

 

 

(511

)

 

 

3,557

 

 

 

3,785

 

 

 

(228

)

 

 

 

 

 

283

 

 

 

(283

)

Total property operating expenses

$

7,816

 

 

$

9,629

 

 

$

(1,813

)

 

$

7,816

 

 

$

9,173

 

 

$

(1,357

)

 

$

 

 

 

456

 

 

$

(456

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property net operating income

$

18,913

 

 

$

21,779

 

 

$

(2,866

)

 

$

18,913

 

 

$

20,804

 

 

$

(1,891

)

 

$

 

 

 

975

 

 

$

(975

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line income (expense), net

$

269

 

 

$

189

 

 

$

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of intangibles and lease incentives

$

473

 

 

 

241

 

 

 

232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

(1,185

)

 

 

(1,013

)

 

 

(172

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business management fee

 

(2,231

)

 

 

(2,339

)

 

 

108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(13,149

)

 

 

(14,629

)

 

 

1,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(6,283

)

 

 

(7,117

)

 

 

834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

2

 

 

 

57

 

 

 

(55

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(3,191

)

 

$

(2,832

)

 

$

(359

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss. Net loss was $3,191 and $2,832 for the three months ended September 30, 2020 and 2019, 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 September 30, 2020 with the results of the same investment properties owned during the three months ended September 30, 2019, property net operating income decreased $1,891, total property income decreased $3,248, and total property operating expenses including real estate tax expense decreased $1,357.

 

The decrease in “same store” total property income is primarily due to an increase in bad debt and lower reimbursements billed to tenants resulting from lower expenses during the three months ended September 30, 2020, both primarily caused by the COVID-19 pandemic. See Note 5 – “Leases” for additional information regarding the effects of deferred rent and bad debt on rental income.

 

“Non-same store” total property net operating income decreased $975 during 2020 compared to 2019. The decrease was due to 12 properties sold in the fourth quarter of 2019 and an additional three properties sold during the first quarter of 2020. On a “non-same store” basis, total property income decreased $1,431 and total property operating expenses decreased $456 during the three months ended September 30, 2020.

 

Straight-line income (expense), net. Straight-line income (expense), net increased $80 in 2020 compared to 2019. This increase is primarily due to an increase in rent abatements during the three months ended September 30, 2020.

Amortization of intangibles and lease incentives. Income from the amortization of intangibles and lease incentives increased $232 in 2020 compared to 2019. The increase is primarily attributable to higher below market lease intangible write-offs during the third quarter of 2020 due to early tenant move-outs.

General and administrative expenses. General and administrative expenses increased $172 in 2020 compared to 2019. This increase is primarily due to higher legal expenses for the three months ended September 30, 2020.

Business management fee. Business management fees decreased $108 in 2020 compared to 2019. The decrease is primarily due to 15 properties sold since September 30, 2019, including 12 in the fourth quarter of 2019 and three during January 2020.

34


 

Depreciation and amortization. Depreciation and amortization decreased $1,480 in 2020 compared to 2019. The decrease is primarily due to properties sold in the fourth quarter 2019 and January 2020 that are no longer depreciating.

Interest expense. Interest expense decreased $834 in 2020 compared to 2019. The decrease is primarily due to lower average interest rates and a decrease in average debt outstanding in 2020 compared to 2019. 

Interest and other income. Interest and other income decreased $55 in 2020 compared to 2019. The decrease is primarily due to lower average interest rates earned on cash balances during the three months ended September 30, 2020.

Comparison of the nine months ended September 30, 2020 and September 30, 2019

 

Total

 

 

Same Store

 

 

Non-Same Store

 

 

Nine Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Rental income

$

82,138

 

 

$

93,873

 

 

$

(11,735

)

 

$

81,955

 

 

$

89,613

 

 

$

(7,658

)

 

$

183

 

 

$

4,260

 

 

$

(4,077

)

Other property income

 

143

 

 

 

191

 

 

 

(48

)

 

 

143

 

 

 

191

 

 

 

(48

)

 

 

 

 

 

 

 

 

-

 

Total income

$

82,281

 

 

$

94,064

 

 

$

(11,783

)

 

$

82,098

 

 

$

89,804

 

 

$

(7,706

)

 

$

183

 

 

$

4,260

 

 

$

(4,077

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

$

13,391

 

 

$

16,272

 

 

$

(2,881

)

 

$

13,354

 

 

$

15,808

 

 

$

(2,454

)

 

$

37

 

 

 

464

 

 

$

(427

)

Real estate tax expense

 

10,979

 

 

 

12,206

 

 

 

(1,227

)

 

 

10,941

 

 

 

11,319

 

 

 

(378

)

 

 

38

 

 

 

887

 

 

 

(849

)

Total property operating expenses

$

24,370

 

 

$

28,478

 

 

$

(4,108

)

 

$

24,295

 

 

$

27,127

 

 

$

(2,832

)

 

$

75

 

 

$

1,351

 

 

$

(1,276

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property net operating income

$

57,911

 

 

$

65,586

 

 

$

(7,675

)

 

$

57,803

 

 

$

62,677

 

 

$

(4,874

)

 

$

108

 

 

$

2,909

 

 

$

(2,801

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Straight-line income (expense), net

$

526

 

 

$

612

 

 

$

(86

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible amortization and inducement

 

1,252

 

 

 

816

 

 

 

436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

(3,872

)

 

 

(3,886

)

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business management fee

 

(6,691

)

 

 

(7,007

)

 

 

316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

(39,286

)

 

 

(43,244

)

 

 

3,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(19,060

)

 

 

(21,440

)

 

 

2,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

95

 

 

 

102

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(9,125

)

 

$

(8,461

)

 

$

(664

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss. Net loss was $9,125 and $8,461 for the nine months ended September 30, 2020 and 2019, respectively.

 

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, 2020 with the results of the same investment properties owned during the nine months ended September 30, 2019, property net operating income decreased $4,874, total property income decreased $7,706, and total property operating expenses including real estate tax expense decreased $2,832.

 

The decrease in “same store” total property income is primarily due to an increase in bad debt and lower reimbursements billed to tenants resulting from lower expenses during the nine months ended September 30, 2020, both primarily caused by the COVID-19 pandemic. See Note 5 – “Leases” for additional information regarding the effects of deferred rent and bad debt on rental income.

 

“Non-same store” total property net operating income decreased $2,801 during 2020 as compared to 2019. The decrease was due to 12 properties sold in the fourth quarter of 2019 and an additional three properties sold during the first quarter of 2020. On a “non-same store” basis, total property income decreased $4,077 and total property operating expenses decreased $1,276 during the nine months ended September 30, 2020.

 

Straight-line income (expense), net. Straight-line income (expense), net decreased $86 in 2020 compared to 2019. This decrease is primarily due to greater write-offs during the nine months ended September 30, 2020.

35


 

Amortization of intangibles and lease incentives. Income from the amortization of intangibles and lease incentives increased $436 in 2020 compared to 2019. The increase is primarily attributable to higher below market lease intangible write-offs during 2020 due to early tenant move-outs.

General and administrative expenses. General and administrative expenses remained consistent, increasing by only $14 in 2020 compared to 2019.

Business management fee. Business management fees decreased $316 in 2020 compared to 2019. The decrease is primarily due to 15 properties sold since September 30, 2019, including 12 in the fourth quarter of 2019 and three during January 2020.

Depreciation and amortization. Depreciation and amortization decreased $3,958 in 2020 compared to 2019. The decrease is primarily due to properties sold in the fourth quarter 2019 and January 2020 that are no longer depreciating.

Interest expense. Interest expense decreased $2,380 in 2020 compared to 2019. The decrease is primarily due to lower average interest rates and a decrease in average debt outstanding in 2020 compared to 2019. 

Interest and other income. Interest and other income remained consistent, decreasing by only $7 in 2020 compared to 2019.

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, 2019, as filed with the Securities and Exchange Commission on March 18, 2020, under the heading “Critical Accounting Policies.” We are adding one critical accounting policy during the nine months ended September 30, 2020 for collectability of accounts and rents receivable.

 

We make estimates and take into consideration certain factors that require judgments to be made as to the collectability of accounts and rents receivable. Collectability factors taken into consideration are the amounts outstanding, tenant credit worthiness, current economic trends and payment history of the tenant. We include both billed and accrued charges in our evaluation of the collectability of a tenant’s receivable balance. For tenant receivables that are considered not probable of being collected, we record an offset for uncollectable tenant revenues directly to rental income. Although we estimate uncollectible receivables and provide for them through a direct write-off against rental income, actual experience may differ from those estimates.

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.

Leasing Activity

The following table sets forth leasing activity during the nine months ended September 30, 2020. Leases with terms of less than 12 months have been excluded from the table.

 

 

 

Number of Leases Signed

 

 

Gross Leasable Area

 

 

New Contractual Rent per Square Foot

 

 

Prior Contractual Rent per Square Foot

 

 

% Change over Prior Annualized Base Rent

 

 

Weighted Average Lease Term

 

 

Tenant Allowances per Square Foot

 

Comparable Renewal Leases

 

 

40

 

 

 

301,655

 

 

$

18.15

 

 

$

17.96

 

 

 

1.1

%

 

 

3.4

 

 

$

0.27

 

Comparable New Leases

 

 

2

 

 

 

5,666

 

 

$

27.42

 

 

$

26.65

 

 

 

2.9

%

 

 

5.7

 

 

$

24.68

 

Non-Comparable New and Renewal Leases (a)

 

 

28

 

 

 

168,852

 

 

$

12.82

 

 

N/A

 

 

N/A

 

 

 

4.3

 

 

$

10.72

 

Total

 

 

70

 

 

 

476,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes leases signed on units that were vacant for over 12 months, leases signed without fixed rent amounts and leases signed where the previous and current lease do not have similar lease structures.

 

36


 

Lease extensions are treated as renewals and included in the above table only if the lease extension period exceeds any abatement period. Six leases comprising 95,447 square feet (58% of total square footage renewed during the three months ended September 30, 2020) were extended early in connection with COVID-19 related abatement or deferral agreements.

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 due primarily to non-cash depreciation and amortization expense. 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. On November 7, 2018, NAREIT’s Executive Board approved the White Paper restatement, effective December 15, 2018. The purpose of the restatement was not to change the fundamental definition of FFO but to clarify existing guidance. The restated definition of FFO by NAREIT is net income (loss) computed in accordance with U.S. GAAP, excluding depreciation and amortization related to real estate, excluding gains (or losses) from sales of certain real estate assets, excluding impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate and excluding gains and losses from change in control. We have adopted the restated NAREIT definition for computing FFO. Previously presented periods were not impacted.

Under U.S. GAAP, acquisition related costs are treated differently if the acquisition is a business combination or an asset acquisition. An acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and acquisition related costs will be capitalized rather than expensed when incurred. 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, publicly registered, non-listed REITs 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 Institute for Portfolio Alternatives, 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. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year-over-year, both before and after we have deployed all of our Offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

MFFO excludes expensed 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, such as straight-lining of rents as required by U.S. GAAP. By excluding costs that we consider more reflective of acquisition activities and other non-operating items, the use of MFFO provides another measure of our operating performance once our portfolio is stabilized. 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 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.

37


 

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 nine months ended September 30, 2020 and 2019 are calculated as follows:

 

 

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

2020

 

 

2019

 

 

 

 

 

(Dollar amounts in thousands)

 

 

 

Net loss

 

$

(9,125

)

 

$

(8,461

)

Add:

 

Depreciation and amortization related to investment properties

 

 

39,286

 

 

 

43,244

 

 

 

Funds from operations (FFO)

 

 

30,161

 

 

 

34,783

 

 

 

 

 

 

 

 

 

 

 

 

Less:

 

Amortization of acquired market lease intangibles, net

 

 

(1,324

)

 

 

(858

)

 

 

Straight-line income (expense), net

 

 

(526

)

 

 

(612

)

 

 

Modified funds from operations (MFFO)

 

$

28,311

 

 

$

33,313

 

Subsequent Events

For information related to subsequent events, reference is made to Note 15 – “Subsequent Events” which is included in our September 30, 2020 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. 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 September 30, 2020, we had outstanding debt of $671.4 million, excluding mortgage premium and unamortized debt issuance costs, bearing interest rates ranging from 1.77% to 5.48% per annum. The weighted average interest rate was 3.65%, which includes the effect of interest rate swaps. As of September 30, 2020, the weighted average years to maturity for our mortgages and credit facility payable was 2.7 years.

 

As of September 30, 2020, our fixed-rate debt consisted of secured mortgage financings with a carrying value of $163.8 million and a fair value of $176.5 million. Changes in interest rates do not affect interest expense incurred on our fixed-rate debt until their maturity or earlier repayment, but interest rates do affect the fair value of our fixed rate debt obligations. If market interest rates were to increase by 1% (100 basis points), the fair market value of our fixed-rate debt would decrease by $6.2 million at September 30, 2020. If market interest rates were to decrease by 1% (100 basis points), the fair market value of our fixed-rate debt would increase by $6.5 million at September 30, 2020.

As of September 30, 2020, we had $105.7 million of debt or 15.7% of our total debt, excluding mortgage premium and unamortized debt issuance costs, bearing interest at variable rates with a weighted average interest rate equal to 2.05% per annum. We had variable rate debt subject to swap agreements of $401.8 million, or 59.9% of our total debt, excluding mortgage premium and unamortized debt issuance costs, at September 30, 2020.

If interest rates on all debt which bears interest at variable rates as of September 30, 2020 increased by 1% (100 basis points), the increase in interest expense on all debt would decrease earnings and cash flows by $1.0 million annually. If interest rates on all debt

38


 

which bears interest at variable rates as of September 30, 2020 decreased by 1% (100 basis points), interest expense would not change earnings and cash flows primarily due to the impact of the LIBOR floor on the Revolving Credit Facility.

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.

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.

Derivatives

For information related to our derivatives, reference is made to Note 7 – “Debt and Derivative Instruments” which is included in our September 30, 2020 Notes to Consolidated Financial Statements in Item 1.

Item 4.  Controls and Procedures

Disclosure 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 September 30, 2020 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.

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, 2019, our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020:

The outbreak of the novel coronavirus (COVID-19) continues to spread in various locations throughout the U.S., and its impacts are uncertain and hard to measure, but it has already had material adverse effects on our business, and these effects may continue and may worsen, depending in part on the severity and duration of the pandemic in the U.S. and its immediate and lingering economic effects.

The continued spread of the COVID-19 pandemic globally has had, and could have a significantly greater, material adverse effect on the global and U.S. economies as a whole, as well as the states and cities where we own properties in particular, leading to significant adverse impacts on economic activity as well as significant volatility and lack of liquidity in financial markets, including commercial lending markets.

39


 

A sustained downturn in the U.S. economy and reduced consumer spending, including reduced consumer activity at brick-and-mortar commercial establishments, due to the prolonged existence and threat of the COVID-19 pandemic has caused an economic recession in the U.S. that has negatively impacted, and could further impact, the ability and willingness of many of our tenants to pay their rent when due. Our ability to lease space and negotiate and maintain favorable rents is also likely to be negatively impacted by a prolonged recession in the U.S. economy, which would result in a decline in our occupancy percentage and reduction in rental revenues as tenants default and leases expire over time. An increase in the number of co-tenancy claims at various properties could result if the occupancy at those properties falls below required thresholds or large spaces otherwise go dark, which may provide remaining tenants at such a property with certain rights that may include the right to cease operations or stop paying or abate (reduce) rent owed.

Because substantially all of our income is derived from rentals of commercial real property, our business, income, cash flow, results of operations, financial condition, liquidity and ability to comply with the terms of, draw upon or increase the size of our Credit Facility, prospects and ability to service our debt obligations, our ability to consummate future property acquisitions and our ability to pay future distributions to our stockholders would be materially adversely affected if a significant number of tenants continue to be unable to meet their obligations to us. Also, there is no assurance that we will be able to refinance maturing debt on terms and conditions acceptable to us.

The impact of the COVID-19 pandemic has been rapidly evolving and is ever-changing. The coronavirus outbreak is negatively impacting almost every industry directly or indirectly, particularly the travel, hotel and retail industries, and businesses that rely on or require close personal contact, such as live entertainment venues, gyms and exercise facilities, health and wellness service providers and beauty salons, restaurants and bars. Many of our tenants have been required by the local, state or federal authorities to cease or limit operations thereby preventing them from generating revenue. Our tenants rely on retail customers and many of their businesses require close personal contact. Even if not prevented by the local, state or federal authorities, concern regarding the transmission of COVID-19 has impacted, and will likely continue to impact, the willingness of persons to engage in in-person commerce which will likely further result in reductions in customer foot traffic and reduced demand for our tenants’ products and services and may diminish the demand for space and the corresponding amounts of rent we can obtain for our properties and harm our tenants’ ability or willingness to pay us rent. As of November 9, 2020, many tenants continue to operate in a materially reduced capacity. As disclosed in our filings with the Securities and Exchange Commission since the onset of the pandemic, we have been collecting less than all rent billed, and rent billed has not included amounts that we have agreed to defer. In addition, tenants representing 59% of our portfolio, as measured by annualized base rent (“ABR”), have requested short-term rent relief, and we have finalized payment plans with tenants representing 44% of ABR. Rent deferrals will reduce our cash available to pay operating expenses and service our debt obligations. When the deferred rent becomes due, our tenants will be required to pay these deferred rent amounts in addition to the regular rent due, which may be difficult or impossible for tenants whose businesses have not recovered to pre-pandemic levels or are otherwise not performing well. Any rent forgiveness would further reduce our available cash.

Enforcing our rights as landlord against tenants who fail to pay rent or otherwise do not comply with the terms of their leases may be costly and may consume valuable time and resources, and even if we obtain a judgment, tenants that have been severely impacted may not be able to pay us what we are owed. Our ability to recover amounts under the terms of our leases may further be restricted or delayed due to moratoriums imposed by various jurisdictions in light of the COVID-19 pandemic on landlord-initiated commercial eviction and collection actions. If any of our tenants, or any guarantor of a tenant’s lease obligations, files for bankruptcy, we could be further adversely affected due to loss of revenue but also because the bankruptcy may also make it more difficult for us to lease the remainder of the property or properties in which the bankrupt tenant operates. Two of our top 30 tenants by ABR (nos. 18 (Ascena Retail Group) and 29 (JCPenney)) have filed for Chapter 11 bankruptcy protection, and a third, Bed Bath & Beyond (no. 23) has publicly announced that it is closing 200 of its stores and has initiated discussions with us regarding its locations at three of our centers that may result in rent reductions, term extensions or store closures. Even if co-tenancy rights do not exist at centers affected by anchor store closings, other tenants may experience downturns in their businesses that could further threaten their ongoing ability to continue paying rent and remain solvent. Further, certain of our tenants may not be eligible for or may not be successful in securing stimulus funds under government aid programs, if any, and there is no assurance they will pay rent even if they qualify.

As referenced above, a decrease in demand for in-person retail businesses could make it difficult for us to renew or re-lease our properties at lease rates equal to or above historical rates and we could incur significant re-leasing costs and the re-leasing process with respect to both anticipated and unanticipated vacancies could take longer. Some tenants that have been or are forced to close or have had their operations severely limited by government order or some other government action or whose customers and potential customers change their habits in light of the coronavirus, e.g., by shopping more online, may not re-open even after the aforementioned restrictions are lifted or may go out of business, which could have a material impact on occupancy at our properties and may continue to materially impact our results. To the extent that unemployment remains high and government assistance decreases significantly from recent levels, for example, if unemployment assistance provided by the U.S. government is decreased or discontinued, retail consumer spending may correspondingly decrease, and our tenants may be materially adversely affected and forced to close. Additionally, many manufacturers of goods and suppliers and processors of food in many countries have experienced complete or partial shut downs and may not be able to function at full capacity in an attempt to curb the spread of the illness, which could lead to temporary or long-term disruptions in supply chains and may also impact the operations of our tenants, further impacting their revenues and ability to pay rent when due.

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The business and operating results of our tenants may also be negatively impacted if the outbreak of the coronavirus occurs within their respective workforces or otherwise disrupts their management and other personnel, their supply chains or their ability to operate their businesses. Many companies have implemented policies and procedures designed to protect against the introduction of the coronavirus to the workforce, including permitting or requiring personnel to work offsite, among others. These changes in the work processes of our tenants could lead to disruptions, such as a reduced ability to effectively transact with customers and colleagues and a loss of IT system functionality due to unusual or excess burdens on IT infrastructures.

We rely on the Business Manager to manage our day-to-day operations. Non-essential businesses were previously closed and are subject to limited operations in Illinois per the order of the Governor of Illinois, including our corporate headquarters in Oak Brook. Though many people are able to work remotely, the business and operations of our Business Manager and its affiliates may also be adversely impacted by the coronavirus outbreak, including illness or quarantine of members of its workforce, which may negatively impact its ability to provide us services to the same degree as it had prior to the outbreak and may adversely affect our financial reporting systems and internal controls and procedures and increase vulnerability to security breaches, information technology disruptions and other similar events.

The extent to which the COVID-19 pandemic, or a future pandemic, impacts our operations and those of our tenants will depend on future developments, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others, which are highly uncertain and cannot be predicted with confidence but could be material. The situation is ever-changing, and additional impacts to the business may arise that we are not aware of currently. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic, but a prolonged outbreak as well as related mitigation efforts could continue to have a material impact on the cash rents that we are able to collect and would materially and adversely affect our business, results of operations and financial condition.

Many risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic, including but not limited to risk factors related to the economy, competition (including e-commerce and online sales), leasing, debt financing, tenant bankruptcies, distributions, share repurchases, and anchor tenants. We have suspended distributions, distribution reinvestments under our DRP, and share repurchases under our share repurchase program, and we cannot provide any assurance as to when they will be restarted, if at all.

The strategic plan adopted by our board of directors on February 11, 2019, may evolve or change over time, particularly in light of the COVID-19 pandemic, and there is no assurance we will be able to successfully achieve our board’s objectives under the strategic plan, including making strategic sales or purchases of properties or listing our common stock, within the timeframe we expected or would prefer or at all.

The financial covenants under our credit agreement may restrict our ability to make distributions and our operating and acquisition activities. Any breach of a financial covenant would be a 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, for a $350.0 million credit facility (the “Credit Facility”) consisting of a revolving credit facility providing initial revolving credit commitments in an aggregate amount of $200.0 million (the “Revolving Credit Facility”) and a term loan facility providing initial term loan commitments in an aggregate amount of $150.0 million (the “Term Loan”). 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 ten unencumbered properties with an unencumbered pool value of $200.0 million or above and by a guaranty by certain of our subsidiaries. At October 31, 2020, we had $215 million outstanding of the $350 million available under the Credit Facility. Our maximum availability under the Credit Facility was $135 million as of October 31, 2020, subject to the terms and conditions, including compliance with the covenants, of the Amended and Restated Credit Agreement that governs the Credit Facility. Although $135 million is the maximum available, covenant limitations, particularly the leverage ratio, affect what we can actually draw or otherwise undertake as additional debt. Our leverage ratio generally cannot exceed 60%, provided however that two times during the term of our Revolving Credit Facility our leverage ratio may be 62.5% for two consecutive quarters. There has been substantially less available to actually draw or undertake as additional debt during the pandemic than the maximum amount available, and there may be additional periods during which the amount we can actually draw or otherwise undertake as additional debt is considerably less than the maximum amount available, particularly while the COVID-19 pandemic continues to negatively affect our tenants.

The credit agreement requires compliance with certain financial covenants, including, among other conditions, a Consolidated Tangible Net Worth requirement, restrictions on indebtedness, a distribution limitation and other material covenants. Compliance with 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 during the period of the waiver of our Consolidated Tangible Net Worth covenant and

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after this waiver 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, or “FFO,” excluding acquisition expenses, or “adjusted FFO,” for that period.

The credit agreement provides for several customary events of default, including, among other things, the failure to comply with our covenants, such as the Consolidated Tangible Net Worth covenant, and the failure to pay when amounts outstanding under the credit agreement become due. Due to the current level of operations of our tenants as a result of the COVID-19 pandemic, and based on certain assumptions related to tenant bankruptcies and bad debt expense in our projections, we negotiated a waiver of compliance with the Consolidated Tangible Net Worth covenant for three quarters ending on March 31, 2021. Defaults 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

We adopted the SRP effective October 18, 2012, under which 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. The SRP may be amended or terminated in our sole discretion. In the case of repurchases made upon the death of a stockholder or qualifying disability (“Exceptional Repurchases”), as defined in the SRP, the one year holding period does not apply. The SRP was amended and restated effective January 1, 2018 to change the processing of repurchase requests from a monthly to a quarterly basis to align with the move to quarterly distributions. On February 11, 2019, our board of directors adopted a second amended and restated SRP, effective March 21, 2019. On March 3, 2020 our board of directors adopted a third amended and restated SRP (the “Third A&R SRP”).

Under the Third A&R SRP, we are authorized to make ordinary repurchases and Exceptional Repurchases at a price equal to 80.0% of the “share price,” which is defined in the Third A&R SRP as an amount equal to the lesser of: (A) $25, as adjusted under certain circumstances, including, among other things, if the applicable shares were purchased from us at a discounted price; or (B) the most recently disclosed estimated value per share. Prior to the amendment, we were authorized to make Exceptional Repurchases at a price equal to 100% of the “share price.”

The Third A&R SRP provides our board of directors with the discretion to reduce the funding limit for share repurchases. Prior to the amendment, the funding for ordinary repurchases was limited to the proceeds from the DRP during a particular quarter. The A&R SRP limits the dollar amount for any repurchases made by us each calendar quarter to an amount equal to a percentage determined in the sole discretion of our board on a quarterly basis that will not be less than 50% of the net proceeds from the DRP during the applicable quarter. As our board of directors has suspended the SRP, as discussed below, the current effective funding limit is irrelevant, and in any case there have been no net proceeds from the DRP, which has also been suspended. We continue to limit the number of shares repurchased during any calendar year to 5% of the number of shares outstanding on December 31st of the previous calendar year, as adjusted for any stock splits or other combinations.

When the SRP is reinstated, if either or both of the repurchase limitations prevent us from repurchasing all of the shares offered for repurchase during a calendar quarter, we will repurchase shares, on a pro rata basis within each category below, in accordance with the repurchase limitations in the following order: (a) first, all Exceptional Repurchases and (b) second, all ordinary repurchases. The Third A&R SRP provides that a requesting party must own shares of at least $500 after giving effect to any repurchase by the Company. If a requesting party would fail to maintain this minimum balance after giving effect to any repurchase, we may, in our discretion, repurchase the remaining balance of shares which is less than $500, subject to the 5% share limit described above. For any quarter ended, unfulfilled repurchase requests will be included in the list of requests for the following quarter unless the request is withdrawn in accordance with the SRP. However, each stockholder who has submitted a repurchase request must submit an acknowledgment annually after we publish a new estimated value per share acknowledging, among other things, that the stockholder wishes to maintain the request. If we do not receive the acknowledgment prior to the repurchase date, we will deem the request to have been withdrawn.

The SRP will immediately terminate if our shares are listed on any national securities exchange. In addition, our board of directors, in its sole discretion, may amend, suspend (in whole or in part), or terminate our SRP. In the event that we amend, suspend or terminate the SRP, however, we will send stockholders notice of the change at least thirty days prior to the change, and we will disclose the

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change in a report filed with the Securities and Exchange Commission on either Form 8-K, Form 10-Q or Form 10-K, as appropriate. Further, our board reserves the right in its sole discretion, at any time, and from time to time to reject any requests for repurchases.

Due to the uncertainty surrounding the COVID-19 pandemic and the need to preserve cash for the payment of operating and other expenses, such as debt payments, in this environment, our board of directors has suspended our SRP until further notice. The suspension of the SRP was effective on June 26, 2020 and no shares were repurchased during the period covered by this quarterly report. Any unfulfilled repurchase requests will automatically roll over for processing under the terms and conditions of the SRP when we restart the plan, unless a stockholder withdraws the request for repurchase.


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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.

Exhibit Index

 

Exhibit

No.

 

Description

 

 

 

3.1

 

Second Articles of Amendment and Restatement of Inland Real Estate Income Trust, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 5 to the Registrant’s Form S-11 Registration Statement, as filed by the Registrant with the Securities and Exchange Commission on October 11, 2012 (file number 333-176775))

 

 

 

3.2

 

Inland Real Estate Income Trust, Inc. Articles of Amendment (Reverse Stock Split) (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, as filed by the Registrant with the Securities and Exchange Commission on January 16, 2018 (file number 000-55146))

 

 

 

3.3

 

Inland Real Estate Income Trust, Inc. Articles of Amendment (Par Value Decrease) (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, as filed by the Registrant with the Securities and Exchange Commission on January 16, 2018 (file number 000-55146))

 

 

 

3.4

 

Second Amended and Restated Bylaws of Inland Real Estate Income Trust, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, as filed by the Registrant with the Securities and Exchange Commission on August 13, 2015 (file number 000-55146))

 

 

 

10.1

 

First Amendment, dated September 29, 2020, to Amended and Restated Credit Agreement, dated as of August 1, 2018, by and among Inland Real Estate Income Trust, Inc., as borrower, KeyBank National Association, individually and as administrative agent, KeyBanc Capital Markets Inc., PNC Capital Markets LLC and Merrill Lynch Pierce, Fenner & Smith Incorporated, as joint lead arrangers, and other lenders parties thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed by the Registrant with the Securities and Exchange Commission on October 5, 2020 (file number 000-55146))

 

 

 

31.1

 

Certification by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

31.2

 

Certification by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

 

 

32.1

 

Certification by Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

 

32.2

 

Certification by Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

 

101

 

The following financial information from our Quarterly Report on Form 10-Q for the period ended September 30, 2020, filed with the Securities and Exchange Commission on November 13, 2020 is formatted in Extensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive Loss; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements (tagged as blocks of text) 

 

*

Filed herewith.

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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.

 

 

INLAND REAL ESTATE INCOME TRUST, INC. 

 

 

 

 

 

/s/ Mitchell A. Sabshon

 

By:

Mitchell A. Sabshon

 

 

President and Chief Executive Officer

(principal executive officer)

 

Date:

November 13, 2020

 

 

 

 

 

/s/ Catherine L. Lynch

 

By:

Catherine L. Lynch

 

 

Chief Financial Officer and Treasurer

(principal financial officer)

 

Date:

November 13, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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