INLAND REAL ESTATE INCOME TRUST, INC. Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K 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 our management 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 Annual Report on Form 10-K , which include the risks described below:
•
Our strategic plan, which is discussed further below, 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 completing a liquidity event, within any timeframe we might expect or would prefer or at all;
•
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 certain 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;
•
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;
•
Our Business Manager and its affiliates face conflicts of interest caused by, among other things, their compensation arrangements with us, and the simultaneous overlapping leadership roles our executive officers have at the Business Manager and its affiliates, which could result in actions that are not in the long-term best interests of our stockholders;
•
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 will be 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 when the deferred amounts become due, 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 any future disruptions from the pandemic, the war inUkraine , high inflation, increases in interest rates, supply chain shortages that affect our tenants or other disruptions caused by events beyond our control may 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 a GAAP basis for the years endedDecember 31, 2022 , 2021 and 2020, and future net losses could have a material adverse impact on our financial condition, operations, cash flow, and our ability to service our indebtedness or pay distributions to our stockholders;
•
Our Sponsor may face a conflict of interest in allocating personnel and resources between its affiliates, our Business Manager and 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 properties may compete with the properties owned by other programs sponsored by our Sponsor or IPCC for, among other things, tenants;
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•
Our Business Manager is under no obligation, and may not agree, to continue 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
•
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 Annual Report on Form 10-K reflect our management's view only as of the date of this 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 is based on the consolidated financial statements for the years endedDecember 31, 2022 , 2021 and 2020. Our stockholders should read the following discussion and analysis along with our consolidated financial statements and the related notes thereto.
Unless otherwise stated all amounts are stated in thousands, except share data.
Overview We were formed as aMaryland corporation onAugust 24, 2011 and elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with the year endedDecember 31, 2013 . We have no employees. We are managed by our business manager,IREIT Business Manager & Advisor, Inc. We are primarily focused on acquiring and owning retail properties and intend to target a portfolio substantially all of which would be comprised of grocery-anchored properties as described below. We have invested in joint ventures and, to the extent we have available capital, may invest again 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. AtDecember 31, 2022 , we had total assets of$1.4 billion 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. 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 . AtDecember 31, 2022 , grocery-anchored or grocery shadow-anchored shopping center properties represented 88% of our annualized base rent. 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 the shopping center. The portfolio properties have a weighted average economic occupancy of 93.5% and staggered lease maturity dates. We commenced the Offering onOctober 18, 2012 , and concluded it onOctober 16, 2015 . We sold 33,534,022 shares of common stock in the Offering generating gross proceeds of$834.4 million . OnMarch 2, 2023 , our board of directors determined an Estimated Per Share NAV of our common stock as ofDecember 31, 2022 of$19.86 . The previously estimated per share net asset value as ofDecember 31, 2021 equal to$20.20 was established onMarch 4, 2022 .
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 a resurgence might
impact 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 December 31, 2022 , our deferred rent balance was less
than $0.1 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. Tenants with
which we agreed to defer rent mostly paid both their regular rental obligations
as well as the amounts of deferred rent. See Note 14 - "Leases" for additional
information.
44
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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
emergence and potential and actual spreading of a new variant of the coronavirus
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 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 I, Item 1A titled "Risk Factors."
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 951 leasable spaces, there are 123 non-grocery big box (anchor spaces of at least 10,000 square feet) in the portfolio, and of those seven are vacant, and one is dark (meaning that the tenant is still obligated by their lease to pay rent but has vacated the space and left it unused) as ofFebruary 28, 2023 . As part of the strategic plan, we sold three properties in the first quarter of 2020. We used the proceeds to pay down the Revolving Credit Facility. We are not actively marketing any properties as of the date of this Annual Report on Form 10-K. We believe increasing the size and profitability of the Company would enhance our ability to complete a successful liquidity event. OnMay 17, 2022 , the Company acquired seven grocery-anchored retail shopping center properties and one additional retail shopping center, collectively referred to as theIRPF Properties , from certain subsidiaries ofInland Retail Property Fund, LP , for approximately$278 million . Although we are not actively pursuing any new acquisitions as of the date of this Annual Report, we may seek and evaluate potential acquisitions and, if we have the requisite capital and financing available to us, opportunistically acquire retail properties that we believe complement our existing portfolio in terms of relevant characteristics such as tenant mix, demographics and geography and are 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, such as listing our common stock on a national securities exchange, but given our intention to opportunistically grow the portfolio, execute redevelopment opportunities, and execute strategic sales and acquisitions in the context of (i) changes in retail market conditions resulting from the effects of the COVID-19 pandemic and other complex factors such as (ii) competition for our tenants from evolving internet businesses, (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 of the use of the proceeds and (v) changes in general economic conditions such as persistent high inflation and high interest rates, 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 any timeframe we might prefer or at all. 45
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LIQUIDITY AND CAPITAL RESOURCES
General
Our primary uses and sources of cash are as follows:
Uses Sources
? Interest & principal payments on ? Cash receipts from our tenants
mortgage loans and Credit Facility
? 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 ? Proceeds from sales of real
and Real Estate Manager estate (if any)*
? Repurchases of shares under the SRP ? Proceeds from issuance of
securities (if any) other than
through the DRP*
? Capital expenditures, tenant
improvements and leasing commissions
? Acquisitions of real estate directly
or through joint ventures*
? 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 we are not listed, our ability to access the public or private
market, particularly for equity capital, is limited.
During January 2020 , we sold three properties generating net proceeds of $37.3
million . We are not currently actively marketing any properties and do not
expect any strategic sales to occur until we believe the effects of the COVID-19
pandemic on retail commercial real estate have subsided.
At December 31, 2022 , we had $102 million outstanding under the Revolving Credit
Facility and $575 million outstanding under the Term Loan. At December 31, 2022
the interest rate on the Revolving Credit Facility and the Term Loan was 6.12%
and 4.28%, respectively. On February 3, 2022 , we extended the Revolving Credit
Facility maturity date to February 3, 2026 plus a twelve month extension option.
We also increased the Term Loan outstanding balance to $275 million which now
matures on February 3, 2027 . On May 17, 2022 , we amended our Credit Agreement to
increase the size of the Term Loan to $575 million and modify several covenants
to fund our acquisition of a portfolio of eight retail shopping center
properties from Inland Retail Property Fund, LP , a Delaware limited partnership.
As of March 22, 2023 , 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 and all of it is
available to pay off existing mortgages, 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. 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 65%
for two consecutive quarters. Our leverage ratio was 58.8% as of December 31,
2022 , as defined in the Revolving Credit Facility's agreement.
As of December 31, 2022 , we had total debt outstanding of $856.7 million ,
excluding mortgage premiums and unamortized debt issuance costs, which bore
interest at a weighted average interest rate of 4.40% per annum. As of December
31, 2022 , the weighted average years to maturity for our debt was 3.6 years. As
of December 31, 2022 and December 31, 2021 , our borrowings were 53% and 44%,
respectively, of the purchase price of our investment properties. At December
31, 2022 our cash and cash equivalents balance was $4.9 million .
In the next twelve months, we have one mortgage loan maturing with an aggregate
principal balance of $41.3 million , which we intend to refinance or repay by
drawing on the Credit Facility, which was amended on February 3, 2022 and May
17, 2022 as noted above.
To preserve cash for the payment of operating and other expenses, such as debt
payments, during the second quarter of 2020 our board of directors rescinded the
distribution that was declared in the first quarter of 2020, and we did not
declare another distribution until June 29, 2021 . We also suspended our DRP and
SRP. The suspension of the DRP was effective on June 6, 2020 and the suspension
of
46
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the SRP was effective on June 26, 2020 . On June 29, 2021 , we reinstated the DRP
and the SRP and declared a distribution on our common stock in the amount of
$0.135600 per share to stockholders of record as of June 30, 2021 , that was paid
on or about July 26, 2021 . The effective date of the DRP reinstatement was July
22, 2021 and was available for this distribution. The first share repurchases
following the reinstatement of the SRP were on August 16, 2021 and totaled $1.9
million . On or about October 7, 2021 , we paid a distribution on our common stock
in the amount of $0.135600 per share to stockholders of record as of September
30, 2021 , and have continued to pay quarterly distributions in the amount of
$0.135600 per share to stockholders of record as of each quarter end since then.
See "Share Repurchase Program" under "Item 5. Market for Registrant's Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities "
above for the number of shares requested for repurchase and other information
regarding our SRP.
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. As we have seen rent collections
increase during 2021 and 2022, we have been increasing our funding of capital
expenditures at our properties to levels similar to pre-pandemic periods, 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 year ended
December 31, 2022 , we spent $12.4 million on capital expenditures and tenant
improvements, which is approximately $6.5 million more than we did in the year
ended December 31, 2021 . Additionally, we expect to materially increase spending
on tenant improvements in connection with new or renewed leases and capital
expenditures in 2023 but do not anticipate a material effect on our liquidity
from this increase, assuming the businesses of our tenants, including those that
were negatively affected by the COVID-19 pandemic, remain steady or improve or
they otherwise continue to pay their rent and fulfill their lease obligations.
As of December 31, 2022 , we have paid all interest and principal amounts when
due, and were in compliance with all financial covenants under the Credit
Facility, as amended.
Cash Flow Analysis
For the year ended December 31, Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
(Dollar amounts in thousands)
Net cash flows provided by
operating activities $ 44,787 $ 48,150 $ 37,140 $ (3,363 ) $ 11,010
Net cash flows (used in) provided
by investing activities $ (290,505 ) $ (5,883 ) $ 33,234 $ (284,622 ) $ (39,117 )
Net cash flows provided by (used
in) financing activities $ 237,669 $ (42,869 ) $ (61,922 ) $ 280,538 $ 19,053
Operating activities
Cash provided by operating activities decreased $3.4 million during 2022
compared to 2021 and increased $11 million during 2021 compared to 2020. The
decrease from 2021 to 2022 was due to an increase in deferred costs and a
decrease in collections in 2022 (due to pandemic-related deferrals from 2020
that were collected in 2021). The increase from 2020 to 2021 was due to
increased collections from tenants during 2021 (due to pandemic-related
deferrals from 2020 that were collected in 2021).
Investing activities
For the year ended December 31, Change
2022 2021 2020 2022 vs. 2021 2021 vs. 2020
(Dollar amounts in thousands)
Proceeds from the sale of investment
properties - - 37,255 - (37,255 )
Purchase of investment properties (277,880 ) - - (277,880 ) -
Capital expenditures (12,404 ) (5,883 ) (4,021 ) (6,521 ) (1,862 )
Other assets (221 ) - - (221 ) -
Net cash (used in) provided by
investing activities $ (290,505 ) $ (5,883 ) $ 33,234 $ (284,622 ) $ (39,117 )
During the year ended December 31, 2022 , there was an increase in cash used by
investing activities compared to 2021 primarily due to the acquisition of the
IRPF Properties on May 17, 2022 . During the year ended December 31, 2021 , cash
was used in investing activities for capital expenditures. Cash was provided by
investing activities in in 2020 primarily due to the sale of three investment
properties during January 2020 .
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Financing activities
For the year ended December 31, Change
2021 vs.
2022 2021 2020 2022 vs. 2021 2020
(Dollar amounts in thousands)
Total net changes related to debt $ 253,837 $ (34,074 ) $ (53,223 ) $ 287,911 $ 19,149
Proceeds from DRP 7,287 3,749 4,547 3,538 (798 )
Shares repurchased (3,645 ) (2,777 ) (2,405 ) (868 ) (372 )
Distributions paid (19,583 ) (9,767 ) (10,841 ) (9,816 ) 1,074
Early termination of interest rate
swap agreements, net (227 ) - - (227 ) -
Net cash provided by (used in)
financing activities $ 237,669 $ (42,869 ) $ (61,922 ) $ 280,538 $ 19,053
During 2022, cash was drawn on debt to finance the acquisition of the IRPF
properties for a purchase price of approximately $278 million , accounting for
the majority of the flux from 2021. During 2021, cash expended on debt decreased
$19.0 million from 2020, primarily due to lower net debt paydowns in 2021
compared to 2020. During the years ended December 31, 2022 , 2021 and 2020, we
generated proceeds from the sale of shares pursuant to the DRP of $7.3 million ,
$3.7 million and $4.5 million , respectively. For the years ended December 31,
2022 , 2021 and 2020, share repurchases were $3.6 million , $2.8 million and $2.4
million , respectively. During the years ended December 31, 2022 , 2021 and 2020,
we paid $19.6 million , $9.8 million and $10.8 million , respectively, in
distributions.
Distributions
A summary of the distributions declared, distributions paid and cash flows
provided by operations during the years ended
Cash Cash
Distributions Cash Distributions Flows
Distributions Declared Per Distributions Distributions Reinvested Total Cash From
Year Ended December 31, (1) Declared Share Rescinded Paid via DRP Distributions Paid Operations
2022 $ 19,602 $ 0.54 (2) $ - $ 12,296 $ 7,287 $ 19,583 $ 44,787
2021 $ 14,655 $ 0.41 (3) $ - $ 6,018 $ 3,749 $ 9,767 $ 48,150
2020 $ 8,173 $ 0.23 (4) $ (8,173 ) $ 6,294 $ 4,547 $ 10,841 $ 37,140
(1)
For the years ended December 31, 2022 , 2021 and 2020, distributions were funded
by cash flows from operations. Note that some distributions may be declared in
one year but will not be paid until the next year, so for any given year the
total distributions declared often will not match the total distributions paid.
(2)
This amount represents a continuation of distributions at an annualized rate
that was used during the year ended
(3)
This amount represents an annualized rate of 3% based on the previously estimated per share NAV of our common stock as ofDecember 31, 2020 equal to$18.08 which was established onMarch 5, 2021 . The distributions declared during the year endedDecember 31, 2021 began with the second quarter distribution following the reinstatement of regular distributions.
(4)
This amount represents an annualized rate of 5% based on the previously estimated per share NAV of our common stock as ofDecember 31, 2019 equal to$18.15 which was established onMarch 3, 2020 . This distribution was rescinded during the second quarter of 2020, and distributions were suspended by our board. See "Distributions" under "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities " above for the number of shares requested for repurchase and other information regarding our distributions to stockholders.
Results of Operations
The following discussion is based on our consolidated financial statements for
the years ended
This section describes and compares our results of operations for the years endedDecember 31, 2022 , 2021 and 2020. 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 the periods presented, in their entirety, referred to herein as "same store" properties. By evaluating the property net operating income of our "same store" properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of any acquisitions or dispositions on net income. (Dollar amounts in thousands) 48
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Comparison of the Years ended
We consider property net operating income an important financial measure because it reflects only those income and expense items that are incurred at the property level, and when compared across periods, reflects the impact on operations from trends in occupancy rates, rental rates and operating expenses. Although property net operating income is a widely used measure among REITs, there can be no assurance that property net operating income presented by us is comparable to similarly titled metrics used by other REITs. We calculate property net operating income using net income and excluding adjustments to straight-line income (expense) on operating leases, amortization of intangibles and lease incentives, general and administrative expenses, acquisition related costs, the business management fee, provisions for impairment, depreciation and amortization, interest expense, gains on sale of investment properties, gains on termination of interest rate swap agreements, losses on extinguishment of debt, and interest or other income. A total of 44 investment properties that were acquired on or beforeJanuary 1, 2021 and classified as held and used atDecember 31, 2021 represent our "same store" properties during the year endedDecember 31, 2021 and 2022. "Non-same store," as reflected in the table below, consists of properties acquired afterJanuary 1, 2021 . For the year endedDecember 31, 2022 , eight properties that were acquired onMay 17, 2022 constituted non-same store properties. The following table presents the property net operating income broken out between same store and non-same store, prior to straight-line income, net, amortization of intangibles, interest, and depreciation and amortization for the years endedDecember 31, 2022 and 2021, along with a reconciliation to net loss, calculated in accordance with GAAP. Total Same Store Non-Same Store For the year ended For the year ended For the year ended December 31, December 31, December 31, 2022 2021 Change 2022 2021 Change 2022 2021 Change Rental income$ 132,030 $ 117,846 $ 14,184 $
117,492
214 183 31 112 183 (71 ) 102 - 102
Total income $ 132,244 $ 118,029 $ 14,215 $
117,604
Property operating expenses$ 24,332 $ 20,845 $ 3,487 $ 21,881 $ 20,845 $ 1,036 $ 2,451 $ -$ 2,451 Real estate tax expense 17,210 14,388 2,822 14,307 14,388 (81 ) 2,903 - 2,903 Total property operating expenses$ 41,542 $ 35,233 $ 6,309 $ 36,188 $ 35,233 $ 955 $ 5,354 $ -$ 5,354 Property net operating income$ 90,702 $ 82,796 $ 7,906 $ 81,416 $ 82,796 $ (1,380 ) $ 9,286 $ -$ 9,286
Straight-line income, net
lease incentives 698 669 29
General and administrative
expenses (5,400 ) (4,784 ) (616 ) Business management fee (10,212 ) (8,950 ) (1,262 ) Depreciation and amortization (55,319 ) (48,906 ) (6,413 ) Interest expense (33,069 ) (23,240 ) (9,829 ) Interest and other income 19 274 (255 ) Net loss$ (12,618 ) $ (2,503 ) $ (10,115 )
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 year ended
The decrease in "same store" total property income is primarily due to a decrease in recovery income due to lower recovery percentage and an increase in property operating expenses during the year endedDecember 31, 2022 . See Note 14 - "Leases" for additional information regarding the effects of deferred rent and bad debt on rental income. "Non-same store" total property net operating income increased$9,286 during 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$14,640 and total property operating expenses increased$5,354 during the year endedDecember 31, 2022 . Straight-line income, net. Straight-line rent income, net increased$325 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 year endedDecember 31, 2022 . 49 -------------------------------------------------------------------------------- Amortization of intangibles and lease incentives. Income from the amortization of intangibles and lease incentives increased$29 in 2022 compared to 2021. The increase is primarily due to the acquisition of theIRPF Properties .
General and administrative expenses. General and administrative expenses
increased
Business management fee. Business management fees increased
Depreciation and amortization. Depreciation and amortization increased$6,413 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$9,829 in 2022 compared to 2021. The increase is primarily due to an increase in average debt outstanding driven by the acquisition ofIRPF Properties and an increase in average interest rates.
Interest and other income. Interest and other income decreased
Comparison of the Years ended
A total of 44 investment properties that were acquired on or beforeJanuary 1, 2020 and classified as held and used atDecember 31, 2021 represent our "same store" properties during the years endedDecember 31, 2021 and 2020. "Non-same store," as reflected in the table below, consists of properties sold afterJanuary 1, 2020 . For the years endedDecember 31, 2021 and 2020, three properties constituted non-same store properties. The following table presents the property net operating income broken out between same store and non-same store, prior to straight-line income, net, amortization of intangibles, interest, and depreciation and amortization for the years endedDecember 31, 2021 and 2020, along with a reconciliation to net loss, calculated in accordance with GAAP. Total Same Store Non-Same Store For the year ended December 31, For the year ended December 31, For the year ended December 31, 2021 2020 Change 2021 2020 Change 2021 2020 Change Rental income$ 117,846 $ 111,782 $ 6,064 $
117,846
183 162 21 183 162 21 - - -
Total income $ 118,029 $ 111,944 $ 6,085 $ 118,029 $ 111,761 $ 6,268 $ - $ 183 $ (183 )
Property operating
expenses $ 20,845 $ 18,613 $ 2,232 $
20,845
(38 ) Real estate tax expense 14,388 14,505 (117 ) 14,388 14,467 (79 ) - 38 (38 ) Total property operating expenses$ 35,233 $ 33,118 $ 2,115 $
35,233
(76 )
Property net operating income$ 82,796 $ 78,826 $ 3,970 $
82,796
(107 )
Straight-line income, net$ (362 ) $ 965 $ (1,327 ) Amortization of intangibles and lease incentives 669 1,977 (1,308 ) General and administrative expenses (4,784 ) (5,206 ) 422 Business management fee (8,950 ) (8,924 ) (26 ) Depreciation and amortization (48,906 ) (52,834 ) 3,928 Interest expense (23,240 ) (25,349 ) 2,109 Interest and other income 274 157 117 Net loss$ (2,503 ) $ (10,388 ) $ 7,885
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 year endedDecember 31, 2021 with the results of the same investment properties owned during the year endedDecember 31, 2020 , property income increased$6,268 , and total property operating expenses including real estate tax expense increased$2,191 . The increase in "same store" total property income is primarily due to lower bad debt in 2021. See Note 14 - "Leases" for additional information regarding the effects of deferred rent and bad debt on rental income. 50 -------------------------------------------------------------------------------- "Non-same store" total property net operating income decreased$107 during 2021 as compared to 2020. The decrease was due to three properties sold in the first quarter of 2020. On a "non-same store" basis, total property income decreased$183 and total property operating expenses decreased$76 during the year endedDecember 31, 2021 . Straight-line income, net. Straight-line rent income decreased$1,327 in 2021 compared to 2020. This decrease is primarily due to scheduled rent increases and a decrease in rent abatements in 2021. Intangible amortization. Intangible amortization income decreased$1,308 in 2021 compared to 2020. The decrease is primarily attributable to lower below market lease intangible write-offs in 2021.
General and administrative expenses. General and administrative expenses
decreased
Business management fee. Business management fees increased
Depreciation and amortization. Depreciation and amortization decreased$3,928 in 2021 compared to 2020. The decrease is primarily due to fully amortized assets and properties sold inJanuary 2020 . Interest expense. Interest expense decreased$2,109 in 2021 compared to 2020. The decrease is primarily due to lower average interest rates and a decrease in average debt outstanding in 2021 compared to 2020.
Interest and other income. Interest and other income increased
Leasing Activity
The following table sets forth leasing activity during the year endedDecember 31, 2022 . Leases with terms of less than 12 months have been excluded from the table. New Prior % Change Weighted Tenant Number Gross Contractual Contractual over Prior Average Improvements of Leases Leasable Rent per Rent per Annualized Lease per Square Signed Area Square Foot Square Foot Base Rent Term Foot
Comparable Renewal Leases 102 990,242$ 12.80 $ 12.66 1.1 % 5.0$ 0.43 Comparable New Leases 5 7,637$ 29.47 $ 24.73 19.1 % 6.1$ 24.01 Non-Comparable New and Renewal Leases (a) 69 332,786$ 15.27 N/A N/A 8.2$ 14.02 Total 176 1,330,665 (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
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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, 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. 52
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Our FFO and MFFO for the years ended
For the year ended December 31,
2022 2021 2020
Net loss $ (12,618 ) $ (2,503 ) $ (10,388 )
Add: Depreciation and amortization related to
investment properties 55,319 48,906 52,834
Funds from operations (FFO) 42,701 46,403 42,446
Less: Amortization of acquired market lease
intangibles, net (818 ) (773 ) (2,073 )
Straight-line income, net 37 362 (965 )
Modified funds from operations (MFFO)
Critical Accounting Estimates Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. Our significant accounting policies are described in Note 2 - "Summary of Significant Accounting Policies" which is included in ourDecember 31, 2022 Notes to Consolidated Financial Statements in Item 15. We have identified Impairment of Investment Properties as a critical accounting policy. We consider this policy to be critical because it requires our management to use judgment in the application of accounting policy, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. If management's judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.
Impairment of Investment Properties
We assess the carrying values of the respective long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. If it is determined that the carrying value is not recoverable because the undiscounted cash flows do not exceed the carrying value, we will be required to record an impairment loss to the extent that the carrying value exceeds fair value. The valuation and possible subsequent impairment of investment properties will be a significant estimate that can change based on our continuous process of analyzing each property and reviewing assumptions about inherently uncertain factors, as well as the economic condition of the property at a particular point in time.
Recent Accounting Pronouncements
For information related to recently issued accounting pronouncements, reference is made to Note 2 - "Summary of Significant Accounting Policies" which is included in ourDecember 31, 2022 Notes to Consolidated Financial Statements in Item 15.
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.
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