References to “Highlands,” the “Company,” “we” or “us” are to Highlands REIT,
Inc., as well as all of Highlands’ wholly-owned and consolidated subsidiaries.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and accompanying notes, which appear elsewhere in this Quarterly
Report on Form 10-Q, and the historical consolidated financial statements, and
related notes included elsewhere in our Annual Report on Form 10-K. The
following discussion and analysis contains forward-looking statements based upon
our current expectations, estimates and assumptions that involve risks and
uncertainties. Our actual results could differ materially from those discussed
in these forward-looking statements due to a variety of risks, uncertainties and
other factors, including but not limited to, factors discussed in “Part I – Item
1A. Risk Factors” and “Disclosure Regarding Forward-Looking Statements” in our
Annual Report on Form 10-K.
Certain statements in this Quarterly Report on Form 10-Q, other than purely
historical information, are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). These statements include
statements about Highlands’ plans, objectives, strategies, financial performance
and outlook, trends, the amount and timing of future cash distributions,
prospects or future events and involve known and unknown risks that are
difficult to predict. As a result, our actual financial results, performance,
achievements or prospects may differ materially from those expressed or implied
by these forward-looking statements. In some cases, you can identify
forward-looking statements by the use of words such as “may,” “could,” “expect,”
“intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,”
“predict,” “potential,” “continue,” “likely,” “will,” “would,” “illustrative”
and variations of these terms and similar expressions, or the negative of these
terms or similar expressions. Such forward-looking statements are necessarily
based upon estimates and assumptions that, while considered reasonable by
Highlands and its management based on their knowledge and understanding of the
business and industry, are inherently uncertain. These statements are not
guarantees of future performance, and stockholders should not place undue
reliance on forward-looking statements. There are a number of risks,
uncertainties and other important factors, many of which are beyond our control,
that could cause our actual results to differ materially from the
forward-looking statements contained in this Quarterly Report on Form 10-Q. Such
risks, uncertainties and other important factors include, among others: the
uncertainty and economic impact of pandemics, epidemics or other public health
emergencies or fear of such events, such as the novel coronavirus disease 2019
(“COVID-19”) pandemic; the risks, uncertainties and factors set forth in our
filings with the U.S. Securities and Exchange Commission, including our Annual
Report on Form 10-K; business, financial and operating risks inherent to real
estate investments and the industry; our ability to renew leases, lease vacant
space, or re-lease space as leases expire; our ability to repay or refinance our
debt as it comes due; difficulty selling or re-leasing our investment properties
due to their specific characteristics as described elsewhere in this report;
contraction in the global economy or low levels of economic growth; our ability
to sell our assets at a price and on a timeline consistent with our investment
objectives, or at all; our ability to service our debt; changes in interest
rates and operating costs; compliance with regulatory regimes and local laws;
uninsured or underinsured losses, including those relating to natural disasters
or terrorism; domestic or international instability or political or civil
unrest, including the ongoing hostilities between Russia and Ukraine and its
worldwide economic impact; our status as an emerging growth company; the amount
of debt that we currently have or may incur in the future; provisions in our
debt agreements that may restrict the operation of our business; our separation
from InvenTrust and our ability to operate as a stand-alone public reporting
company; our organizational and governance structure; our status as a REIT; the
cost of compliance with and liabilities under environmental, health and safety
laws; adverse litigation judgments or settlements; changes in real estate and
zoning laws and increase in real property tax rates; changes in federal, state
or local tax law, including legislative, administrative, regulatory or other
actions affecting REITs; changes in governmental regulations or interpretations
thereof; and estimates relating to our ability to make distributions to our
stockholders in the future.
There are a number of risks, uncertainties and other important factors, many of
which are beyond our control, that may be heightened as a result of the ongoing
and numerous adverse impacts of the COVID-19 pandemic. It is difficult to fully
assess the impact of the COVID-19 pandemic at this time due to, among other
factors, uncertainty regarding the severity, duration and any resurgences of the
pandemic domestically and internationally, the rise of variants of the virus,
the efficacy and public acceptance of COVID-19 vaccines, the effectiveness and
duration of federal, state and local governments’ efforts to contain the spread
of COVID-19, and the effect of the COVID-19 pandemic in the markets where we own
and operate investment properties, including the effect on our tenants’
operations and ability to pay rent.
These factors are not necessarily all of the important factors that could cause
our actual financial results, performance, achievements or prospects to differ
materially from those expressed in or implied by any of our forward-looking
statements. Other unknown or unpredictable factors also could harm our results.
All forward-looking statements attributable to us or
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persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth above. Forward-looking statements speak only as
of the date they are made, and we do not undertake or assume any obligation to
update publicly any of these forward-looking statements to reflect actual
results, new information or future events, changes in assumptions or changes in
other factors affecting forward-looking statements, except to the extent
required by applicable laws. If we update one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect to those or other forward-looking statements.
Overview
We are a self-advised and self-administered real estate investment trust
(“REIT”) created to own and manage substantially all of the “non-core” assets
previously owned and managed by our former parent, InvenTrust Properties Corp.,
a Maryland corporation (“InvenTrust”). On April 28, 2016, we were spun-off from
InvenTrust through a pro rata distribution (the “Distribution”) by InvenTrust of
100% of the outstanding shares of our common stock to holders of InvenTrust’s
common stock. Prior to or concurrent with the separation, we and InvenTrust
engaged in certain reorganization transactions that were designed to consolidate
substantially all of InvenTrust’s remaining “non-core” assets in Highlands.
This portfolio of “non-core” assets, which were acquired by InvenTrust between
2005 and 2008, included assets that are special use, single tenant or build to
suit; face unresolved legal issues; are in undesirable locations or in weak
markets or submarkets; are aging or functionally obsolete; and/or have
sub-optimal leasing metrics. A number of our assets are retail properties
located in tertiary markets, which are particularly susceptible to the negative
trends affecting retail real estate, including the effects of the COVID-19
pandemic. As a result of these characteristics, such assets are difficult to
lease, finance and refinance and are relatively illiquid compared to other types
of real estate assets. These factors also significantly limit our asset
disposition options, impact the timing of such dispositions and restrict the
viable options available to the Company for a future potential liquidity option.
Our strategy is focused on preserving, protecting and maximizing the total value
of our portfolio with the long-term objective of providing stockholders with a
return of their investment. We engage in rigorous asset management, seek to
sustain and enhance our portfolio, and improve the quality and income-producing
ability of our portfolio by engaging in selective dispositions, acquisitions,
capital expenditures, financing, refinancing and enhanced leasing. We are also
focused on cost containment efforts across our portfolio, improving our overall
capital structure and making select investments in our existing “non-core”
assets to maximize their value. To the extent we are able to generate cash flows
from operations or dispositions of assets, in addition to the cash uses outlined
above, our board of directors has determined that it is in the best interests of
the Company to seek to reinvest in assets that are more likely to generate more
reliable and stable cash flows, such as multi-family assets, as part of the
Company’s overall strategy to optimize the value of the portfolio, enhance our
options for a future potential liquidity option and maximize shareholder value.
Given the nature and quality of the “non-core” assets in our portfolio as well
as current market conditions, a definitive timeline for execution of our
strategy cannot be made. The impact of the COVID-19 pandemic on our business has
disrupted our efforts to implement a liquidity option and, although we cannot
predict when circumstances will improve, we will continue to evaluate options to
implement a liquidity option during 2022. However, we may be unable to execute
on such a transaction on terms we would find attractive for our stockholders and
our ability to do so will be influenced by external and macroeconomic factors,
including, among others, the effects and duration of the COVID-19 pandemic and
future resurgences, the timing and nature of recovery of the COVID-19 pandemic,
interest rate movements, local, regional, national and global economic
performance, government policy changes and competitive factors.
As of March 31, 2022, our portfolio of assets consisted of twelve multi-family
assets, three retail assets, one office asset, two industrial
assets, one correctional facility and one parcel of unimproved land. We
currently have two business segments, consisting of multi-family and other
assets. We may have additional or fewer segments in the future to the extent we
enter into additional real property sectors, dispose of investment properties,
or change the character of our assets. For the complete presentation of our
reportable segments, see Note 9 to our consolidated financial statements for the
three months ended March 31, 2022 and 2021.
Basis of Presentation
The accompanying consolidated financial statements reflect the accounts of
Highlands and its consolidated subsidiaries (collectively, the “Company”).
Highlands consolidates its wholly-owned subsidiaries and any other entities
which it controls (i) through voting rights or similar rights or (ii) by means
other than voting rights if Highlands is the primary beneficiary of a variable
interest entity (“VIE”). The portions of the equity and net income of
consolidated subsidiaries that are not attributable to the Company are presented
separately as amounts attributable to non-controlling interests in our
consolidated financial statements. Entities which Highlands does not control and
entities which are VIEs in which Highlands is not a primary
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beneficiary, if any, are accounted for under appropriate GAAP. Highlands’
subsidiaries generally consist of limited liability companies (“LLCs”). The
effects of all significant intercompany transactions have been eliminated.
Critical accounting policies are described in the “Notes to Consolidated
Financial Statements” for the year ended December 31, 2021 contained in the
Company’s latest Annual Report on Form 10-K. Any new accounting policies or
updates to existing accounting policies as a result of new accounting
pronouncements have been discussed in the “Notes to Consolidated Financial
Statements” in this Quarterly Report on Form 10-Q. The application of critical
accounting policies may require management to make assumptions, judgments and
estimates about the amounts reflected in the Consolidated Financial Statements.
Management uses historical experience and all available information to make
these estimates and judgments, and different amounts could be reported using
different assumptions and estimates.
Revenues and Expenses
Revenues
Our revenues are primarily derived from lease income and expense recoveries we
receive from our tenants under leases with us, including monthly rent and other
property income pursuant to tenant leases. Tenant recovery income primarily
consists of reimbursements for real estate taxes, common area maintenance costs,
management fees and insurance costs.
Expenses
Our expenses consist of property operating expenses, real estate taxes,
depreciation and amortization expense, general and administrative expenses and
provision for asset impairment. Property operating expenses primarily consist of
repair and maintenance, management fees, utilities and insurance (in each case,
some of which are recoverable from the tenant).
Key Indicators of Operating Performance
In evaluating our financial condition and operating performance, management
focuses on the following financial and non-financial indicators, discussed in
further detail herein:
•Cash flow from operations as determined in accordance with GAAP;
•Economic and physical occupancy and rental rates;
•Leasing activity and lease rollover;
•Management of operating expenses;
•Management of general and administrative expenses;
•Debt maturities and leverage ratios;
•Liquidity levels;
•Funds From Operations (“FFO”), a supplemental non-GAAP measure; and
•Adjusted Funds From Operations (“AFFO”), a supplemental non-GAAP measure.
Impact of COVID-19
The impact of the COVID-19 pandemic was not as material during the three months
ended March 31, 2022 and 2021, as compared to prior periods. The primary impact
of the pandemic was and continues to be related to our tenants’ ability to make
rental payments in a timely fashion or at all. We have been working with our
tenants to collect rental payments pursuant to our contractual rights under our
lease agreements.
At this time, given the uncertainty related to variants of the virus, we are
unable to predict whether cases of COVID-19 in our markets will decrease,
increase, or remain the same, whether the approved COVID-19 vaccines will be
effective against new variants of the virus, efficiently distributed in our
markets and widely accepted by the public, and whether local governments will
mandate closures of our tenants’ businesses or implement other restrictive
measures on their and our operations in the future in response to any future
resurgence of the pandemic. We have taken and will continue to take a number of
measures to mitigate the impact of the pandemic on our business and financial
condition.
Acquisition and Disposition Activity
There were no asset acquisitions during the three months ended March 31, 2022
and 2021.
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During the three months ended March 31, 2022, consistent with our strategy of
disposing of legacy “non-core” assets, we sold the following investment
property:
(in thousands)
Gross Disposition Sale Proceeds,
Property Location Disposition Date Price Net Loss on Sale
State Street Market Rockford, Illinois March 10, 2022 $ 9,000 $ 8,938 $ (6)
During the three months ended March 31, 2021, there were no asset dispositions.
Results of Operations
Comparison of the three months ended March 31, 2022 and 2021
Key performance indicators are as follows:
As of March 31,
2022 2021
Economic occupancy (1) 77.7 % 72.9 %
Rent per square foot (2) $ 15.06 $ 14.50
(1)Economic occupancy is defined as the percentage of total gross leasable area
for which a tenant is obligated to pay rent under the terms of its lease
agreement, regardless of the actual use or occupation by the tenant of the area
being leased. Actual use may be less than economic square footage.
(2)Rent per square foot is computed as annualized rent divided by the total
occupied square footage at the end of the period. Annualized rent is computed as
revenue for the last month of the period multiplied by twelve months. Annualized
rent includes the effect of rent abatements, lease inducements and straight-line
rent GAAP adjustments.
Consolidated Results of Operations
The following section describes and compares our consolidated results of
operations for the three months ended March 31, 2022 and 2021.
(dollar amounts in thousands)
For the three months ended March 31,
2022 2021 Increase (Decrease)
Net loss $ (888) $ (4,688) $ (3,800) (81.1) %
Net loss decreased $3.8 million for the three months ended March 31, 2022,
compared to the three months ended March 31, 2021, due to an increase in total
revenues and lower compensation expenses, real estate taxes and interest
expense. Details of these changes are provided below.
The following table presents the changes in our revenues for the three months
ended March 31, 2022 and 2021.
(in thousands)
For the three months ended March 31,
2022 2021 Increase (Decrease)
Income:
Rental income $ 7,958 $ 6,758 $ 1,200 17.8 %
Other property income 216 249 (33) (13.3) %
Total revenues $ 8,174 $ 7,007 $ 1,167 16.7 %
Total revenues increased $1.2 million during the three months ended March 31,
2022, compared to the three months ended March 31, 2021, due to commencement of
straight-line rental income on the Veeco Instruments, Inc. lease at Trimble and
on rental income from the Northwestern Medical lease at Sherman Plaza.
Additionally, rental income increased due to increased occupancy and rental
rates at our multi-family assets.
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The following table presents the changes in our expenses for the three months
ended March 31, 2022 and 2021.
(dollar amounts in thousands)
For the three months ended March 31,
2022 2021 Increase (Decrease)
Expenses:
Property operating expenses $ 2,260 $ 2,183 $ 77 3.5 %
Real estate taxes 1,106 1,557 (451) (29.0) %
Depreciation and amortization 2,638 2,667 (29) (1.1) %
General and administrative expenses 2,365 4,188 (1,823) (43.5) %
Total expenses $ 8,369 $ 10,595 $ (2,226) (21.0) %
Property operating expenses remained consistent for the three months ended March
31, 2022, compared to the three months ended March 31, 2021.
Real estate taxes decreased $0.5 million for the three months ended March 31,
2022, compared to the three months ended March 31, 2021, due primarily to
adjustments to the real estate tax estimate as a result of the sale of State
Street Market and a lower estimate of taxes to be owed on our correctional
facility.
Depreciation and amortization remained consistent for the three months ended
March 31, 2022, compared to the three months ended March 31, 2021.
General and administrative expense decreased $1.8 million for the three months
ended March 31, 2022, compared to the three months ended March 31, 2021,
primarily due to reduced compensation expense. During the three months ended
March 31, 2021, compensation expense included an employee stock grant and no
such grant occurred during the three months ended March 31, 2022, resulting in
reduced compensation expense for the three months ended March 31, 2022 compared
to the three months ended March 31, 2021.
The following table presents the changes in our other income and expenses for
the three months ended March 31, 2022 and 2021.
(dollar amounts in thousands)
For the three months ended March 31,
2022 2021 Increase (Decrease)
Other income and (expenses):
Interest income $ 2 $ 8 $ (6) (75.0) %
Loss on sale of investment properties, net (6) – (6) – %
Interest expense (689) (1,108) (419) (37.8) %
Interest income remained consistent during the three months ended March 31,
2022, as compared to the same period in 2021.
During the three months ended March 31, 2022, the loss on sale of investment
properties of $0.01 million was attributed to the sale of State Street Market.
There were no sales of investment properties during the the three months ended
March 31, 2021.
Interest expense decreased $0.4 million during the three months ended March 31,
2022, as compared to the same period in 2021, due to the termination of the
Credit Agreement during March 2021.
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Leasing Activity
Our primary source of funding for our property-level operating activities and
debt payments is rent collected pursuant to our tenant leases. The following
table represents lease expirations, excluding multi-family leases, as of
March 31, 2022, assuming none of the tenants exercise renewal options:
Annualized
Gross Leasable Area (GLA) of Rent of Percent of Total Expiring
Number of Expiring Leases Expiring Leases Percent of Total Annualized Rent/Square
Lease Expiration Year Expiring Leases (Sq. Ft.) (in thousands) GLA Rent Foot
2022 3 58,130 $ 1,338 6.3 % 12.2 % $ 23.02
2023 4 29,298 294 3.2 % 2.7 % 10.03
2024 4 29,348 538 3.2 % 4.9 % 18.32
2025 15 81,461 1,205 8.9 % 11.0 % 14.80
2026 3 10,441 328 1.1 % 3.0 % 31.38
2027 5 502,032 2,449 54.6 % 22.4 % 4.88
2028 7 50,095 896 5.5 % 8.2 % 17.89
2029 2 26,542 308 2.9 % 2.8 % 11.60
2030 1 2,790 75 0.3 % 0.7 % 27.00
2031 – – – – % – % –
MTM 1 2,875 42 0.3 % 0.4 % 14.61
Thereafter 2 126,113 3,457 13.7 % 31.7 % 27.41
Grand Total 47 919,125 $ 10,930 100.0 % 100.0 % $ 11.89
The following table represents new and renewed leases that commenced during
the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, 2022 Three Months Ended March 31, 2021
Gross Rent Weighted Gross Weighted
# of Leasable per square Average # of Leasable Rent Average
Leases Area foot Lease Term Leases Area per square foot Lease Term
New 1 96,780 $ 25.56 16.00 1 29,333 $ 33.50 15.00
Renewals 2 8,608 28.25 3.32 – – – –
Total 3 105,388 $ 25.78 14.96 1 29,333 $ 33.50 15.00
Critical Accounting Estimates
General
The accompanying consolidated financial statements have been prepared in
accordance with GAAP, which require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates, judgments, and assumptions are
required in a number of areas, including, but not limited to, evaluating the
collectability of accounts receivable, allocating the purchase price of acquired
investment properties, and evaluating the impairment real estate assets. We base
these estimates, judgments and assumptions on historical experience and various
other factors that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates.
Acquisition of Real Estate
We evaluate the inputs, processes and outputs of each asset acquired to
determine if the transaction is a business combination or asset acquisition. If
an acquisition qualifies as a business combination, the related transaction
costs are recorded as an expense in the consolidated statements of operations
and comprehensive loss. If an acquisition qualifies as an asset acquisition, the
related transaction costs are generally capitalized and amortized over the
useful life of the acquired assets. Generally, acquisition of real estate
qualifies as an asset acquisition.
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We allocate the purchase price of real estate to land, building, other building
improvements, tenant improvements, and intangible assets and liabilities (such
as the value of above- and below-market leases and in-place leases. The values
of above- and below-market leases are recorded as intangible assets, net, and
intangible liabilities, net, respectively, in the consolidated balance sheets,
and are amortized as either a decrease (in the case of above-market leases) or
an increase (in the case of below-market leases) to lease income over the
remaining term of the associated tenant lease. The values associated with
in-place leases are recorded in intangible assets, net in the consolidated
balance sheets and are amortized to depreciation and amortization expense in the
consolidated statements of operations and comprehensive income over the
remaining lease term.
The difference between the contractual rental rates and our estimate of market
rental rates is measured over a period equal to the remaining non-cancelable
term of the leases, including below-market renewal options for which exercise of
the renewal option appears to be reasonably assured. The remaining term of
leases with renewal options at terms below market reflect the assumed exercise
of such below-market renewal options and assume the amortization period would
coincide with the extended lease term.
Impairment of Real Estate
The Company assesses the carrying values of its long-lived assets whenever
events or changes in circumstances indicate that the carrying amounts of these
assets may not be fully recoverable, such as a reduction in the expected holding
period of the asset. If it is determined that the carrying value is not
recoverable because the undiscounted cash flows do not exceed carrying value,
the Company records an impairment loss to the extent that the carrying value
exceeds fair value. The valuation and possible subsequent impairment of
investment properties is a significant estimate that can and does change based
on the Company’s continuous process of analyzing each asset and reviewing
assumptions about uncertain inherent factors, as well as the economic condition
of the asset at a particular point in time.
The use of projected future cash flows and related holding periods is based on
assumptions that are consistent with the estimates of future expectations and
the strategic plan the Company uses to manage its underlying business. However,
assumptions and estimates about future cash flows and capitalization rates are
complex and subjective. Changes in economic and operating conditions and the
Company’s ultimate investment intent that occur subsequent to the impairment
analyses could impact these assumptions and result in future impairment charges
of the real estate assets.
Liquidity and Capital Resources
As of March 31, 2022, we had $18.1 million of cash and cash equivalents, and
$4.0 million of restricted cash and escrows.
Sources:
•cash flows from our investment properties;
•proceeds from sales of investment properties; and
•proceeds from debt.
Uses:
•to pay the operating expenses of our investment properties;
•to pay our general and administrative expenses;
•to pay for acquisitions;
•to pay for capital commitments;
•to pay for short-term obligations;
•to service or pay-down our debt; and
•to fund capital expenditures and leasing related costs.
Certain of our assets have lease maturities within the next two years that we
expect to reduce our cash flows from operations if they are not renewed or
replaced. Significant lease maturities include Fitness International at Sherman
Plaza expiring in April 2022 and Office Max at Market at Hilliard expiring in
March 2023.
We may, from time to time, repurchase our outstanding equity and/or debt
securities, if any, through cash purchases or via other transactions. Such
repurchases or transactions, if any, will depend on our liquidity requirements,
contractual restrictions, and other factors. The amounts involved may be
material.
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Material Cash Requirements
In April 2020, the Company executed a lease with Northwestern Medical Group for
approximately 29,000 square feet at our Sherman Plaza asset. The lease requires
a significant amount of landlord work, a tenant allowance and a broker
commission. The total commitment is estimated to be approximately $3.9 million.
As of March 31, 2022, we estimate that remaining costs under this commitment are
approximately $1.3 million. Rent commenced on this lease in the third quarter of
2021 and payment of the outstanding tenant allowance will be made upon tenant’s
request and verification that all requirements for payment have been met.
In September 2020, the Company entered into a Separation Agreement and General
Release (the “Agreement”) with its former Chief Financial Officer, Paul Melkus.
The Agreement included a severance package which includes a payment in the
amount of $1 million to be paid on or before May 31, 2022, which is included in
accounts payable and accrued expenses on the accompanying consolidated balance
sheets.
In February 2021, the Company executed a lease with Veeco Instruments, Inc. for
approximately 97,000 square feet at our Trimble office asset. The lease requires
a significant tenant allowance and broker commission. The total cost commitment
is estimated to be approximately $9.1 million. As of March 31, 2022, we estimate
that remaining costs under this commitment are approximately $1.0 million. The
tenant was responsible for rent pursuant to this lease beginning January 1,
2022, however, the tenant has 12 months of rent abatement before any amounts are
payable. A portion of the leasing commission related to this lease remains
payable by the Company upon the date the tenant’s rent abatement ends, which is
January 1, 2023. The remainder of the tenant allowance will be paid by the
Company upon the tenant receiving its final certificate of occupancy.
The loan documents governing the mortgage that encumbered State Street Market
included a “cash trap” provision that was triggered when DICK’S Sporting Goods,
which was an anchor tenant at the property, failed to renew its lease agreement.
The lender exercised its right to trigger this “cash trap” provision, and,
beginning in the fourth quarter of 2020, all of the cash flows from State Street
Market which would otherwise have been available for our use were trapped into a
blocked account controlled by the lender pending approval of a substitute lease
or repayment of the loan. The Company sold the State Street Market asset on
March 10, 2022 and the mortgage was simultaneously repaid. The funds previously
trapped and held by the lender, along with all required lender escrows, totaling
$2.0 million, were returned to the Company subsequent to the end of the first
quarter. See also Note 7 (Debt) in the accompanying consolidated financial
statements for additional discussion.
The Company expects to use cash on hand, cash flows from operations and proceeds
from financings to fund the above commitments.
Borrowings
Total debt outstanding as of March 31, 2022 and December 31, 2021 was
$53.9 million and $62.8 million, respectively, with a weighted average interest
rate of 4.01% and 4.18% per annum, respectively.
The table below presents, on a consolidated basis, the principal amount,
weighted average interest rates and maturity date (by year) on our mortgage
debt, as of March 31, 2022 (dollar amounts are stated in thousands).
Debt maturing during the year Weighted average
ended December 31, As of March 31, 2022 interest rate
2022 (remaining) $ – – %
2023 17,794 3.28 % (1)
2024 – – %
2025 – – %
2026 24,619 4.56 %
Thereafter 11,449 3.99 %
Total $ 53,862 4.01 %
(1) See below for discussion of the swap agreement entered into with the
mortgage loan obtained in connection with the acquisition of The Locale asset.
The weighted average interest rate reflected is the strike rate.
As of March 31, 2022 and December 31, 2021, none of our mortgage debt was
recourse to the Company, although we have provided certain customary,
non-recourse carve-out guarantees in connection with obtaining mortgage loans on
certain of our investment properties.
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Our ability to pay off our mortgages when they become due is, in part, dependent
upon our ability either to refinance the related mortgage debt or to sell the
related asset. With respect to each loan, if we are unable to refinance or sell
the related asset, or in the event that the estimated asset value is less than
the mortgage balance, we may, if appropriate, satisfy a mortgage obligation by
transferring title of the asset to the lender or permitting a lender to
foreclose.
Volatility in the capital markets could expose us to the risk of not being able
to borrow on terms and conditions acceptable to us for refinancing.
The Company obtained a mortgage loan in the principal amount of $18.8 million in
connection with the acquisition of The Locale in 2019. Because that loan is
indexed to LIBOR, the Company is monitoring and evaluating certain risks that
have arisen in connection with transitioning to an alternative rate, including
any resulting value transfer that may occur. The value of derivative instruments
tied to LIBOR, as well as interest rates on our current or future indebtedness,
may also be impacted if LIBOR is limited or discontinued. For some instruments,
the method of transitioning to an alternative reference rate may be challenging,
especially if we cannot agree with the respective counterparty about how to make
the transition.
In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR
announced it intends to stop compelling banks to submit rates for the
calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the
Federal Reserve Bank of New York organized the Alternative Reference Rates
Committee (“ARRC”), which identified the Secured Overnight Financing Rate
(“SOFR”) as its preferred alternative rate for USD LIBOR in derivatives and
other financial contracts. The Company is not able to predict when LIBOR will
cease to be available or when there will be sufficient liquidity in the SOFR
markets. Any changes adopted by the FCA or other governing bodies in the method
used for determining LIBOR may result in a sudden or prolonged increase or
decrease in reported LIBOR. If that were to occur, our interest payments could
change. In addition, uncertainty about the extent and manner of future changes
may result in interest rates and/or payments that are higher or lower than if
LIBOR were to remain available in its current form.
While we expect LIBOR to be available in substantially its current form until at
least the end of June 2023, it is possible that LIBOR will become unavailable
prior to that point. This could occur, for example, if sufficient banks decline
to make submissions to the LIBOR administrator. In that case, the risks
associated with the transition to an alternative reference rate will be
accelerated and magnified.
Alternative rates and other market changes related to the replacement of LIBOR,
including the introduction of financial products and changes in market
practices, may lead to risk modeling and valuation challenges, such as adjusting
interest rate accrual calculations and building a term structure for an
alternative rate.
The introduction of an alternative rate also may create additional basis risk
and increased volatility as alternative rates are phased in and utilized in
parallel with LIBOR.
Adjustments to systems and mathematical models to properly process and account
for alternative rates will be required, which may strain the model risk
management and information technology functions and result in substantial
incremental costs for the company.
On January 21, 2021, the Company repaid $5.0 million of the outstanding
principal balance of the Revolving Credit Loan and on March 29, 2021, repaid in
full all of the remaining outstanding indebtedness related to the Revolving
Credit Loan consisting of approximately $15.0 million of principal plus accrued
and unpaid interest thereon. The Credit Agreement and related security
interests, and all commitments thereunder, were terminated in conjunction with
such payment in full.
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