INLAND REAL ESTATE INCOME TRUST, INC. 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 ofInland 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 endedJune 30, 2022 , as filed with theSecurities and Exchange Commission onAugust 10, 2022 , our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2022 , as filed with theSecurities and Exchange Commission onMay 11, 2022 and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSecurities and Exchange Commission onMarch 16, 2022 , some of which are summarized below:
•
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 agreed in 2020 and 2021 to defer a significant amount of rent owed to us, which tenants were obligated to pay over time in addition to their regular rent. If there is a resurgence of COVID-19, we may agree again to defer rent owed to us, and our tenants may not be able or willing to pay the deferred amounts on top of their regular rent, particularly if their results of operations or future prospects have been materially adversely affected by the COVID-19 pandemic or become so affected;
•
Market disruptions resulting from the economic effects of the COVID-19 pandemic adversely impacted many aspects of our operating results and financial condition, and ongoing or future disruptions from the pandemic, the war inUkraine , increases in interest rates and supply chain shortage or otherwise may again adversely impact our results and financial condition, including our ability to service our debt obligations, borrow additional monies or pay distributions;
•
We have incurred net losses on aU.S. generally accepted accounting principles ("GAAP") basis for the three and nine months endedSeptember 30, 2022 and 2021 and for the year endedDecember 31, 2021 ;
•
There is no established public trading market for our shares, our stockholders may not be able to sell their shares under our share repurchase program (as amended, "SRP"), which was suspended during the COVID-19 pandemic and may be suspended again, amended or terminated in our sole discretion, and even when repurchases are made pursuant to the SRP, the SRP is subject to limits, and 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 uncertainties surrounding the COVID-19 pandemic, persistent high inflation and increasing interest rates;
•
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) andInland 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 orInland Private Capital Corporation or other affiliates for, among other things, tenants; 21 --------------------------------------------------------------------------------
•
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
•
The Company's strategic plan may continue to 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, redeveloping properties or listing our common stock, within the timeframe we expect or would prefer or at all;
•
We may pursue redevelopment activities, which are subject to a number of risks, including, but not limited to: expending resources to determine the feasibility of the project or projects that are then not pursued or completed; construction delays or cost overruns; failure to meet anticipated occupancy or rent levels within the projected time frame, if at all; exposure to fluctuations in the general economy due to the significant time lag between commencing and completing the project; and reduced rental income during the period of time we are redeveloping an asset or assets;
•
The use of the internet by consumers to shop may continue to expand, and this expansion has likely been accelerated by the effects of the COVID-19 pandemic, which could result in a further downturn in the businesses of our current tenants in their "brick and mortar" locations and could affect their ability to pay rent and their demand for space at our retail properties; and
•
We are subject to risks associated with any dislocations or liquidity
disruptions that may exist or occur in credit markets of
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 endedSeptember 30, 2022 and 2021 and as ofSeptember 30, 2022 andDecember 31, 2021 . 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 aMaryland corporation onAugust 24, 2011 and elected to be taxed as a real estate investment trust forU.S. federal income tax purposes ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with the year endedDecember 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 acquiring and owning retail properties and intend to target a portfolio substantially comprised of 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 such as office and medical office buildings, multi-family properties and industrial/distribution and warehouse facilities 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. OnMarch 4, 2022 , our board of directors determined an estimated per share net asset value of our common stock of$20.20 as ofDecember 31, 2021 , compared to the previous estimated value of$18.08 as ofDecember 31, 2020 . AtSeptember 30, 2022 , we had total assets of$1.4 billion on our balance sheet and owned 52 properties located in 24 states containing 7.2 million square feet. OnMay 17, 2022 , we acquired eight retail shopping center properties (the "IRPF Properties ") from certain subsidiaries ofInland Retail Property Fund, LP .The IRPF Properties are located across seven states and aggregate approximately 686,851 square feet. As seven of the eight properties are grocery-anchored, this acquisition increases our portfolio of grocery-anchored properties, which is our focus as described above. We acquired theIRPF Properties for an aggregate purchase price of$278 million , excluding closing costs. A majority of our properties are multi-tenant, necessity-based retail shopping centers primarily located in major regional markets and growing secondary markets throughoutthe United States . As ofSeptember 30, 2022 , 88% 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 we believe generates traffic for our shopping center. The portfolio 22 --------------------------------------------------------------------------------
properties have staggered lease maturity dates. Grocery tenants accounted for
17% of our annualized base rent ("ABR") as of
COVID-19 Pandemic
We continue to monitor 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. The Company's deferrals, modifications and rent abatements
have proven effective helping our tenants endure the economic impacts of the
pandemic. As of September 30, 2022 , our deferred rent balance was $0.04 million ,
down from $0.4 million at December 31, 2021 and $4.5 million at December 31,
2020 , due primarily to collections of such rent. As of September 30, 2022 ,
except for one 1,144 square foot tenant, we have not received any notice of, and
are not otherwise aware of any of our tenants being in bankruptcy, voluntarily
or otherwise. Tenants with which we have agreed to defer rent have generally
been paying both their regular rental obligations as well as the amounts of
deferred rent during the three and nine months ended September 30, 2022 . See
Note 5 - "Leases" for additional information.
However, 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, including the effects of the
Omicron variant and its sub-variants, or of the emergence and potential and
actual spreading of any other variant of COVID-19 in the U.S. or any place from
which our tenants may receive goods or services.
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.
Inflation and Interest Rates
Inflationary pressures and rising interest rates could result in reductions in consumer spending and retailer profitability that impacts the Company's ability to grow rents and tenant demand for new and existing store locations. Regardless of accelerating inflation levels, base rent under most of the Company's long-term anchor leases will remain constant (subject to tenants' exercise of renewal options at pre-negotiated rent increases) until the expiration of their lease terms. While many of these leases require tenants to pay their share of shopping center operating expenses (including common area maintenance, real estate tax and insurance expenses), the Company's ability to collect the expense increases passed through to tenants is dependent on their ability to absorb and pay these increases. Inflation may also impact other aspects of the Company's operating costs, including fees paid to service providers, the cost to complete redevelopments and build-outs of recently leased vacancies and interest rate costs relating to variable rate loans and refinancing of lower fixed-rate indebtedness. While the Company has not been significantly impacted by any of these items to date, no assurances can be provided that these inflationary pressures will not have a material adverse effect on the Company's business in the future.
Company Update - Strategic Plan
The Company has a strategic plan that includes the goals of providing a future liquidity event to investors and creating long-term stockholder value. The strategic plan centers around owning a portfolio of grocery-anchored properties with lower exposure to big box retailers. As part of this strategy, our management team continually evaluates possibilities for the opportunistic sale of certain assets with the goal of redeploying capital into the acquisition of strategically located grocery-anchored centers. Of the Company's 949 leasable spaces, there are 117 occupied non-grocery big box (anchor spaces of at least 10,000 square feet) and 6 vacant big box spaces in the portfolio as ofOctober 31, 2022 . We are not actively marketing any properties as of the date of this quarterly report on Form 10-Q. We believe increasing the size and profitability of the Company would enhance our ability to complete a successful liquidity event, and to that end, onMay 17, 2022 , we acquired eight retail shopping center properties, seven of which are grocery-anchored, from certain subsidiaries ofInland Retail Property Fund, LP , for approximately$278 million . We do not presently expect to have access to financing to acquire additional properties on terms and conditions that would be acceptable to us, but if such financing were to become available, we may seek and evaluate potential acquisitions and may, for example, opportunistically acquire a portfolio of retail properties that we believe complements our existing portfolio in terms of relevant characteristics such as tenant mix, demographics and geography and is consistent with our plan to own a portfolio substantially all of which is comprised of grocery-anchored or shadow-anchored properties. We may also consider other transactions, such as redeveloping certain of our properties or portions of certain of our properties, for example, big-box spaces, to repurpose them for alternative commercial or multifamily residential uses. We expect to consider liquidity events, including listing our common stock on a national securities exchange, but given our desire to opportunistically grow the portfolio, execute redevelopment opportunities, execute strategic sales and acquisitions and the complex factors surrounding our strategic decisions such as (i) changes in retail market conditions resulting from the effects of the COVID-19 pandemic (ii) the effects of competition from evolving internet businesses on the performance and financial condition of our tenants, (iii) the state of the commercial real estate market and financial markets, (iv) our ability to raise capital or borrow on terms that are acceptable to the Company in light 23 -------------------------------------------------------------------------------- of the use of the proceeds and (v) general economic conditions, among other factors, we do not know when we will complete a liquidity event. The timing of the completion of the strategic plan has already extended beyond our original expectations and cannot be predicted with certainty. There is no assurance that the Company will be able to successfully implement its strategic plan, for example by making strategic sales or purchases of properties or listing the Company's common stock, within the timeframe we would prefer or at all. SELECT PROPERTY INFORMATION (All dollar amounts in thousands, except per square foot amounts) Investment Properties As of September 30, 2022 Number of properties 52 Purchase price $ 1,624,667 Total square footage 7,167,822 Weighted average physical occupancy 93.7 % Weighted average economic occupancy 93.9 % Weighted average remaining lease term (years) 4.3 24 -------------------------------------------------------------------------------- The table below presents information for each of our investment properties as ofSeptember 30, 2022 . Square Physical Economic Mortgage Interest Property Location Footage Occupancy Occupancy Balance Rate (b) Newington Fair (a) Newington, CT 186,205 100.0 % 100.0 % - - Wedgewood Commons (a) Olive Branch, MS 169,558 97.9 % 100.0 % - - Park Avenue (a) Little Rock, AR 79,131 66.7 % 66.7 % - - North Hills Square (a) Coral Springs, FL 63,829 97.5 % 97.5 % - -Mansfield Shopping Center (a) Mansfield, TX 148,529 95.0 % 95.0 % - - Lakeside Crossing (a) Lynchburg, VA 67,034 97.8 % 97.8 % - -MidTowne Shopping Center (a) Little Rock, AR 126,288 70.3 % 70.3 % - - Dogwood Festival (a) Flowood, MS 187,468 81.2 % 81.2 % - - Pick N Save Center (a) West Bend, WI 94,446 98.9 % 98.9 % - - Harris Plaza (a) Layton, UT 125,965 96.7 % 96.7 % - - Dixie Valley (a) Louisville, KY 119,981 84.8 % 84.8 % - - The Landings at Ocean Isle (a) Ocean Isle, NC 53,203 94.9 % 94.9 % - - Shoppes atPrairie Ridge (a) Pleasant Prairie, WI 232,606 98.8 % 98.8 % - - Harvest Square (a) Harvest, AL 70,590 92.1 % 92.1 % - - Heritage Square (a) Conyers, GA 22,510 95.8 % 95.8 % - - The Shoppes atBranson Hills (a) Branson, MO 256,244 97.2 % 97.2 % - - 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 171,121 100.0 % 100.0 % - -
Shoppes at
- -
Plaza at Prairie Ridge
(a) Pleasant Prairie,WI 9,035 100.0 % 100.0 % - -
Green Tree Shopping
Center (a) Katy, TX 147,621 98.3 % 98.3 % - -
Eastside Junction (a) Athens, AL 79,675 91.0 % 91.0 % - -
Fairgrounds Crossing (a) Hot Springs, AR 155,127 100.0 % 100.0 % - -
Prattville Town Center
(a) Prattville, AL 168,842 100.0 % 100.0 % - -
Regal Court Shreveport, LA 363,061 96.9 % 96.9 % 26,000 4.50 %
Shops at Hawk Ridge (a) St. Louis, MO 75,951 100.0 % 100.0 % - -
Walgreens Plaza (a) Jacksonville, NC 42,219 79.0 % 79.0 % - -
Frisco Marketplace (a) Frisco, TX 112,024 89.7 % 89.7 % - -
White City (a) Shrewsbury, MA 256,974 97.0 % 97.0 % - -
Yorkville Marketplace (a) Yorkville, IL 111,591 94.7 % 94.7 % - -
Shoppes at Market Pointe
(a) Papillion, NE 253,903 96.3 % 96.3 % - -
Marketplace at El Paseo Fresno, CA
(a) 224,683 99.2 % 100.0 % - -
The Village at Burlington Kansas City, MO
Creek 157,937 88.3 % 88.3 % 17,165 4.25 %
Milford Marketplace Milford, CT 111,959 89.2 % 89.2 % 18,727 4.02 %
Settlers Ridge Pittsburgh, PA 473,763 91.7 % 91.7 % 76,533 3.70 %
Blossom Valley Plaza (a) Turlock, CA 111,435 90.5 % 90.5 % - -
Oquirrh Mountain South Jordan, UT
Marketplace (a) 75,950 100.0 % 100.0 % - -
Marketplace at Tech Newport News, VA
Center (a) 210,505 74.9 % 79.9 % - -
Coastal North Town Center Myrtle Beach, SC 304,662 95.3 % 95.3 % 41,348 3.17 %
Oquirrh Mountain South Jordan, UT
Marketplace II (a) 10,150 100.0 % 100.0 % - -
Wilson Marketplace (a) Wilson, NC 311,030 100.0 % 100.0 % - -
Pentucket Shopping Center Plaistow, NH
(a) 198,469 98.0 % 98.0 % - -
Hickory Tavern Myrtle Beach, SC 6,588 100.0 % 100.0 % - -
New Town (a) Owings Mill, MD 117,593 47.0 % 47.0 % - -
Olde Ivy Village (a) Smyrna, GA 46,500 93.7 % 93.7 % - -
Northpark Village Square Santa Clarita, CA
(a) 87,103 97.2 % 97.2 % - -
Lower Makefield Shopping Lower Makefield, PA
Center (a) 74,953 94.9 % 94.9 % - -
Denton Village (a) Denton, TX 48,280 100.0 % 100.0 % - -
Rusty Leaf Plaza (a) Orange, CA 59,188 95.7 % 95.7 % - -
Northville Park Place (a) Northville, MI 78,421 100.0 % 100.0 % - -
CityPlace (a) Woodbury, MN 174,813 98.5 % 98.5 % - -
Portfolio total 7,167,822 93.7 % 93.9 % $ 179,773 3.78 %
(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.
25
--------------------------------------------------------------------------------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 ofSeptember 30, 2022 . Percent of Percent of Total Annualized Total Number Portfolio Base Rent Portfolio of Annualized Annualized Per Square Square Square Tenant Name Leases Base Rent Base Rent Foot Footage Footage The Kroger Co 5$ 4,735 4.3 %$ 15.99 296,150 4.1 % The TJX Companies, Inc. 13 3,436 3.1 % 10.44 329,067 4.6 % Albertsons/Jewel/Shaw's 2 2,436 2.2 % 19.05 127,892 1.8 % Ulta Salon, Cosmetics & Fragrance Inc. 11 2,428 2.2 % 21.88 110,958 1.5 %Amazon/Whole Foods Market Group, Inc. 3 2,340 2.1 % 20.27 115,410 1.6 % Ross Dress for Less, Inc. 10 2,340 2.1 % 8.93 262,080 3.7 % Sprouts Farmers Market, LLC 4 2,159 2.0 % 19.09 113,092 1.6 % PetSmart 7 2,032 1.8 % 14.67 138,578 1.9 % Dicks Sporting Goods, Inc. 4 2,012 1.8 % 11.13 180,766 2.5 % LA Fitness (Fitness International) 2 1,966 1.8 % 21.94 89,600 1.3 % Top ten tenants 61$ 25,884 23.4 %$ 14.68 1,763,593 24.6 %
The following table sets forth a summary of our tenant diversity for our entire
portfolio and is based on leases in-place at
Gross Leasable Percent of Percent of
Area - Total Gross Total Annualized
Tenant Type Square Footage Leasable Area Base Rent
Discount and Department Stores 1,410,724 20.9 % 10.6 %
Grocery 1,290,044 19.2 % 16.5 %
Home Goods 926,402 13.8 % 7.4 %
Lifestyle, Health Clubs, Books & Phones 825,355 12.3 % 15.8 %
Restaurant 642,522 9.5 % 18.4 %
Apparel & Accessories 430,507 6.4 % 8.4 %
Consumer Services, Salons, Cleaners, Banks 358,252 5.3 % 9.4 %
Pet Supplies 256,913 3.8 % 4.0 %
Health, Doctors & Health Foods 213,883 3.2 % 5.4 %
Sporting Goods 205,596 3.0 % 2.3 %
Other 173,194 2.6 % 1.8 %
Total 6,733,392 100.0 % 100.0 %
The following table sets forth a summary, as of September 30, 2022 , of the
percent of total annualized base rent and the weighted average lease expiration
by size of tenant.
Percent of Total Weighted Average
Description - Annualized Base Lease Expiration
Size of Tenant Square Footage Rent - Years
Anchor 10,000 and over 49 % 5.6
Junior Box 5,000-9,999 13 % 4.3
Small Shop Less than 5,000 38 % 2.8
Total 100 % 4.3
Lease Expirations
The following table sets forth a summary, as of September 30, 2022 , of lease
expirations scheduled to occur during the remainder of 2022 and each of the
calendar years from 2023 to 2031 and thereafter, assuming no exercise of renewal
options or early termination rights for leases commenced on or prior to
September 30, 2022 . Annualized base rent represents the rent in-place of the
applicable
26
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property at
Gross
Leasable Percent of Percent of
Area of Total Gross Total Total
Expiring Leasable Annualized Annualized Annualized
Number of Leases - Area of Base Rent Base Rent Base Rent
Expiring Square Expiring of Expiring of Expiring per Leased
Lease Expiration Year Leases Footage Leases Leases Leases Square Foot
2022 (including month-to-month) 61 211,344 3.1 % $ 3,080 2.8 % $ 14.57
2023 106 607,333 9.0 % 9,866 8.9 % 16.25
2024 126 856,242 12.7 % 16,079 14.6 % 18.78
2025 138 871,725 13.0 % 17,527 15.9 % 20.11
2026 107 593,662 8.8 % 10,967 9.9 % 18.47
2027 115 901,123 13.4 % 16,002 14.5 % 17.76
2028 56 958,235 14.3 % 10,629 9.6 % 11.09
2029 23 234,490 3.5 % 3,375 3.1 % 14.39
2030 24 237,783 3.5 % 4,471 4.0 % 18.80
2031 20 191,813 2.8 % 3,615 3.3 % 18.85
Thereafter 58 1,069,642 15.9 % 14,754 13.4 % 13.79
Leased Total 834 6,733,392 100.0 % $ 110,365 100.0 % $ 16.39
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Liquidity and Capital Resources
General
Our primary uses and sources of cash are as follows:
Uses Sources
• Interest and principal payments on • Cash receipts from our tenants
mortgage loans and
Credit Facility • Property operating expenses • Sale of shares through the DRP • • Proceeds from new or
refinanced
General and administrative expenses mortgage loans • Distributions to stockholders
• Borrowing on our Credit Facility
• Fees payable to our Business Manager • Proceeds from sales of real estate (if
and Real Estate any)*
Manager
• Repurchases of shares under the SRP • Proceeds from issuance of securities
(if any) other than through the DRP*
• Acquisitions of real estate directly
or through joint ventures
• Capital expenditures, tenant
improvements and leasing commissions
• Redevelopments of entire properties
or certain spaces within our
properties*
*We cannot provide any assurance that we will be able to sell properties or issue new securities to raise capital when we would like, for example, to increase the proportion of grocery-anchored or shadow-anchored properties or increase the size of our portfolio of properties, or under terms that would be acceptable to us considering factors such as the anticipated use of the proceeds. Because the Company's common stock is not listed on a securities exchange, its ability to access the public or private securities markets is likely to be very limited, particularly for equity capital.
We are not currently actively marketing any properties.
AtSeptember 30, 2022 , we had$102 million outstanding under the Revolving Credit Facility and$575 million outstanding under the Term Loan. AtSeptember 30, 2022 the interest rates on the Revolving Credit Facility and the Term Loan were 4.56% and 4.11%, respectively. OnFebruary 3, 2022 , we extended the Revolving Credit Facility maturity date toFebruary 3, 2026 plus a twelve month extension, at the Company's option. We also increased the Term Loan outstanding balance to$275 million which now matures onFebruary 3, 2027 . OnMay 17, 2022 , we amended our Credit Agreement to increase the size of the Term Loan by$300 million to$575 million and modify several covenants in each case to fund our acquisition of a portfolio of eight retail shopping center properties fromInland Retail Property Fund, LP , aDelaware limited partnership. As ofNovember 9, 2022 , we had$98 million available for borrowing under the Revolving Credit Facility, subject to the terms and conditions, including compliance with the covenants, of the Credit Agreement that governs the Credit Facility. Although$98 million is the maximum available, covenant limitations affect what we can actually draw, and we expect to have substantially less than$98 million actually available to draw or otherwise undertake as additional debt as a result of, among other things, completing the aforementioned acquisition of the eight properties and increasing the amount of the Term Loan. By "additional debt," we mean debt in addition to existing debt such as existing mortgages. The properties comprising the borrowing base for the Credit Facility are not available to be used as collateral for other debt unless removed from the borrowing base, which would shrink availability under the Credit Facility. As ofSeptember 30, 2022 , we had total debt outstanding of$857 million , excluding mortgage premiums and unamortized debt issuance costs, which bore interest at a weighted average interest rate of 4.09% per annum. As ofSeptember 30, 2022 , the weighted average years to maturity for our debt was 3.9 years. As ofSeptember 30, 2022 andDecember 31, 2021 , our borrowings were 53% and 44%, respectively, of the purchase price of our investment properties. AtSeptember 30, 2022 our cash and cash equivalents balance was$9.2 million . As ofNovember 9, 2022 , in the next twelve months, we have one mortgage loan maturing with an aggregate principal balance of$41.3 million , which we intend to repay with cash flows from operating activities or by drawing on the Revolving Credit Facility.
During the nine months ended
We delayed making non-essential capital improvements and other non-essential
capital expenditures at our properties at the onset of the pandemic in 2020 and
into 2021, where possible, to preserve cash and expect to continue to delay
non-essential capital expenditures until they become essential or until the risk
of adverse effects of the COVID-19 pandemic on our tenants subsides and there is
clarity on our tenants' ability and willingness to pay rent and meet other lease
obligations and, ultimately, on the performance of our shopping
28
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centers. As we have seen rent collections increasing during 2021 and into 2022,
we have been funding capital expenditures at our properties, and we do not
expect the prior delay in making these capital expenditures to have any material
effect on our tenants or our ability to lease space. In the nine months ended
September 30, 2022 , we spent $3.8 million (99%) more on capital expenditures
than we did in the nine months ended September 30, 2021 . Additionally, we do not
anticipate a material effect on our liquidity from returning to pre-pandemic
levels of capital expenditures, assuming the businesses of our tenants
negatively affected by the COVID-19 pandemic continue to improve or they
otherwise pay their rent and fulfill their obligations under their leases.
As of September 30, 2022 , we have paid all interest and principal amounts when
due, and are in compliance with all financial covenants under the Credit
Facility as amended.
Cash Flow Analysis
Nine Months Ended
September 30, Change
2022 2021 2022 vs. 2021
(Dollar amounts in thousands)
Net cash flows provided by operating
activities $ 40,322 $ 36,464 $ 3,858
Net cash flows used in investing activities $ (285,763 ) $ (3,869 ) $ (281,894 )
Net cash flows provided by (used in) financing
activities $ 241,752 $ (32,321 ) $ 274,073
Operating activities
The increase in cash from operating activities during the nine months ended
September 30, 2022 compared to the nine months ended September 30, 2021 was
primarily due to the fact that during the nine months ended September 30, 2021 ,
we paid amounts due to the business manager for the third quarter of 2020
business management fees that had been deferred by the business manager and an
increase in prepaid rent during the nine months ended September 30, 2022 .
Investing activities
Nine Months Ended
September 30, Change
2022 2021 2022 vs. 2021
(Dollar amounts in thousands)
Purchase of investment properties $ (277,849 ) $ - $ (277,849 )
Capital expenditures (7,693 ) (3,869 ) (3,824 )
Other assets (221 ) -
(221 )
Net cash used in investing activities
The increase in cash used for investing activities during the nine months ended
Financing activities
Nine Months Ended
September 30, Change
2022 2021 2022 vs. 2021
(Dollar amounts in thousands)
Total changes related to debt $ 253,916 $ (27,435 ) $ 281,351
Proceeds from the distribution reinvestment
plan, net of shares repurchased 2,742 - 2,742
Distributions paid (14,679 ) (4,886 ) (9,793 )
Early termination of interest rate swap
agreements, net (227 ) - (227 )
Net cash provided by (used in) financing
activities $ 241,752 $ (32,321
)
During the nine months endedSeptember 30, 2022 , changes in total debt increased$281.4 million from the nine months endedSeptember 30, 2021 primarily due to an increase of$300 million under our term loan that is part of our credit facility and the use of proceeds from the term loan for the acquisition of theIRPF Properties . During the nine months endedSeptember 30, 2022 , we generated proceeds from the sale of shares pursuant to the DRP of$5.5 million . For the nine months endedSeptember 30, 2022 , share repurchases were$2.7 million . During the nine months endedSeptember 30, 2022 , we paid$14.7 million in distributions. The DRP and the SRP were both reinstated during the second half of 2021. 29 --------------------------------------------------------------------------------
Distributions
Distributions when declared are paid quarterly in arrears. A summary of the distributions declared, distributions paid and cash flows provided by operations for the nine months endedSeptember 30, 2022 and 2021 follows (Dollar amounts in thousands except per share amounts): Distributions Paid (1) Nine Months Ended Distributions Cash Flows September Distributions Declared Per Reinvested From 30, Declared Share Cash via DRP Total Operations 2022$ 14,694 $ 0.406800 $ 9,194 $ 5,485 $ 14,679 $ 40,322 2021 $ 9,767$ 0.271200 $ 3,000 $ 1,886 $ 4,886 $ 36,464 (1)
Distributions were funded by cash flow from operating activities and cash on
hand during the nine months ended
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, we had not paid any distributions since the first quarter of 2020. On or aboutJuly 26, 2021 , we resumed paying distributions on our common stock with this first distribution in the amount of$0.135600 per share to stockholders of record as ofJune 30, 2021 . Results of Operations
This section describes and compares our results of operations for the three and
nine months ended
We generate primarily 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. A total of 44 investment properties that were acquired on or beforeJanuary 1, 2021 represent our "same store" properties during the three and nine months endedSeptember 30, 2022 and 2021. "Non-same store," as reflected in the table below, consists of properties acquired afterJanuary 1, 2021 . For the three and nine months endedSeptember 30, 2022 , eight properties that were acquired onMay 17, 2022 constituted non-same store properties. Net operating income is a supplemental non-GAAP performance measure that we believe 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 property 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. 30 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2022 and 2021, along with a reconciliation to net loss, calculated in accordance with GAAP. Comparison of the three months endedSeptember 30, 2022 andSeptember 30, 2021 Total Same Store Non-Same Store Three Months Ended Three Months Ended Three Months Ended September 30, September 30, September 30, 2022 2021 Change 2022
2021 Change 2022 2021 Change Rental income
$ 35,312 $ 29,519 $ 5,793 $ 29,487
84 60 24 38 60 (22 ) 46 - 46
Total income $ 35,396 $ 29,579 $ 5,817 $ 29,525 $ 29,579 $ (54 ) $ 5,871 $ - $ 5,871
Property operating
expenses $ 6,299 $ 4,839 $ 1,460 $ 5,303 3,784 (215 ) 1,152 - 1,152 Total property operating expenses
$ 11,020 $ 8,623 $ 2,397 $ 8,872
Property net operating income$ 24,376 $ 20,956 $ 3,420 $ 20,653
Straight-line income (expense), net$ 178 $ (247 ) $ 425 Amortization of intangibles and lease incentives 241 126 115 General and administrative expenses (1,294 ) (1,169 ) (125 ) Business management fee (2,707 ) (2,239 ) (468 ) Depreciation and amortization (14,979 ) (12,110 ) (2,869 ) Interest expense (8,721 ) (5,876 ) (2,845 ) Interest and other (expense) income 6 - 6 Net loss$ (2,900 ) $ (559 ) $ (2,341 )
Net loss. Net loss was
Total property net operating income. On a "same store" basis, comparing the results of operations of investment properties owned during the three months endedSeptember 30, 2022 with the results of the same investment properties owned during the three months endedSeptember 30, 2021 , property net operating income decreased$303 , total property income decreased$54 , and total property operating expenses including real estate tax expense increased$249 .
The decrease in "same store" total property income is primarily due to a
decrease in recovery income due to a lower recovery percentage and an increase
in property operating expenses during the three months ended
"Non-same store" total property net operating income increased$3,723 during the three months endedSeptember 30, 2022 as compared to 2021. The increase is a result of acquiring eight properties onMay 17, 2022 . On a "non-same store" basis, total property income increased$5,871 and total property operating expenses increased$2,148 during the three months endedSeptember 30, 2022 as compared to 2021 as a result of this acquisition.
Straight-line income (expense), net. Straight-line income (expense), net
increased
Amortization of intangibles and lease incentives. Income from the amortization of intangibles and lease incentives increased$115 in 2022 compared to 2021. The increase is primarily due to the acquisition ofIRPF Properties .
General and administrative expenses. General and administrative expenses
increased
Business management fee. Business management fees increased
31
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Depreciation and amortization. Depreciation and amortization increased $2,869 in
2022 compared to 2021. The increase is primarily due to the acquisition of eight
properties on May 17, 2022 , partially offset by fully amortized assets in 2022
compared to 2021.
Interest expense. Interest expense increased $2,845 in 2022 compared to 2021.
The increase is primarily due to an increase in average debt outstanding driven
by the acquisition of IRPF Properties , as well as rising interest rates.
Interest and other income. Interest and other income increased
Comparison of the nine months endedSeptember 30, 2022 andSeptember 30, 2021 Total Same Store Non-Same Store Nine Months Ended Nine Months Ended Nine Months Ended September 30, September 30, September 30, 2022 2021 Change 2022
2021 Change 2022 2021 Change Rental income
$ 95,924 $ 88,340 $ 7,584 $ 87,305
170 (6 ) 101 170 (69 ) 63 - 63
Total income $ 96,088 $ 88,510 $ 7,578 $ 87,406 Property operating expenses$ 17,235 $ 15,214 $ 2,021 $ 15,891 $ 15,214 $ 677 $ 1,344 -$ 1,344
Real estate tax expense 12,694 11,132 1,562 10,942
11,132 (190 ) 1,752 - 1,752
Total property operating
expenses $ 29,929 $ 26,346 $ 3,583 $ 26,833 Property net operating income$ 66,159 $ 62,164 $ 3,995 $ 60,573
Straight-line income (expense), net$ (96 ) $ (384 ) $ 288 Intangible amortization and inducement 715 412 303 General and administrative expenses (4,057 ) (3,400 ) (657 ) Business management fee (7,500 ) (6,709 ) (791 ) Depreciation and amortization (40,622 ) (36,783 ) (3,839 ) Interest expense (21,394 ) (17,719 ) (3,675 ) Interest and other income 5 86 (81 ) Net loss$ (6,790 ) $ (2,333 ) $ (4,457 )
Net loss. Net loss was
Total property net operating income. On a "same store" basis, comparing the results of operations of investment properties during the nine months endedSeptember 30, 2022 with the results of the same investment properties owned during the nine months endedSeptember 30, 2021 , property net operating income decreased$1,591 , total property income decreased$1,104 , and total property operating expenses including real estate tax expense increased$487 .
The decrease in "same store" total property income is primarily due to a
decrease in recovery income due to a lower recovery percentage during the nine
months ended
"Non-same store" total property net operating income increased$5,586 during 2022 as compared to 2021. The increase is a result of acquiring eight retail properties onMay 17, 2022 . On a "non-same store" basis, total property income increased$8,682 and total property operating expenses increased$3,096 during the nine months endedSeptember 30, 2022 as compared to 2021 as a result of this acquisition. Straight-line income (expense), net. Straight-line income (expense), net increased$288 in 2022 compared to 2021. This increase is primarily due to the acquisition of eight properties onMay 17, 2022 , partially offset by lower rent abatements during the nine months endedSeptember 30, 2022 . Amortization of intangibles and lease incentives. Income from the amortization of intangibles and lease incentives increased$303 in 2022 compared to 2021. The increase is primarily due to the acquisition ofIRPF Properties . 32 --------------------------------------------------------------------------------
General and administrative expenses. General and administrative expenses
increased
Business management fee. Business management fees increased
Depreciation and amortization. Depreciation and amortization increased$3,839 in 2022 compared to 2021. The increase is primarily due to the acquisition of eight properties onMay 17, 2022 , partially offset by fully amortized assets in 2022 compared to 2021. Interest expense. Interest expense increased$3,675 in 2022 compared to 2021. The increase is primarily due to an increase in average debt outstanding driven by the acquisition ofIRPF Properties , as well as rising interest rates.
Interest and other income. Interest and other income decreased
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 endedSeptember 30, 2022 . Leases with terms of less than 12 months have been excluded from the table. % Change Gross New Contractual Prior Contractual over Prior Tenant Number of Leasable Rent per Square Rent per Square Annualized Weighted Average Allowances per Leases Signed Area Foot Foot Base Rent Lease Term Square Foot Comparable Renewal Leases 74 594,275 $ 14.89 $ 14.89 - 4.9 $ 0.72 Comparable New Leases 4 6,031 $ 29.59 $ 25.86 14.4 % 6.3 $ 22.41 Non-Comparable New and Renewal Leases (a) 48 216,222 $ 14.94 N/A N/A 7.7 $ 10.18 Total 126 816,528 (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.
Non-GAAP Financial Measures
Accounting for real estate assets in accordance with 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 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, theNational 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. OnNovember 7, 2018 , NAREIT's Executive Board approved the White Paper restatement, effectiveDecember 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 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 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, 33 -------------------------------------------------------------------------------- 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, theInstitute 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 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 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-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 inNovember 2010 . The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to straight-line rents and amortization of above and below market lease assets and liabilities, accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Our presentation of FFO and MFFO may not be comparable to other similarly titled measures presented by other REITs. We believe that the use of FFO and MFFO provides a more complete understanding of our operating performance to stockholders and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs. Neither FFO nor MFFO is intended to be an alternative to "net income" or to "cash flows from operating activities" as determined by 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 endedSeptember 30, 2022 and 2021 are calculated as follows: Nine Months Ended September 30, 2022 2021 (Dollar amounts in thousands) Net loss $ (6,790 )$ (2,333 ) Depreciation and amortization related to Add: investment properties 40,622 36,783 Funds from operations (FFO) 33,832 34,450 Amortization of acquired market lease Less: intangibles, net (798 ) (488 ) Straight-line income (expense), net 96 384 Modified funds from operations (MFFO) $ 33,130$ 34,346 Subsequent Events
For information related to subsequent events, reference is made to Note 15 -
"Subsequent Events" which is included in our
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