INLAND REAL ESTATE INCOME TRUST, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
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 and the factors described below:
• We are subject to risks associated with a pandemic, epidemic or outbreak
a contagious disease, such as the current global COVID-19 pandemic,
including negative impacts on our tenants and their respective businesses,
and we have agreed to defer a significant amount of rent owed to us, which
tenants will be obligated to pay over time in addition to their
rent but which they cannot or do not want to do, in particular those
whose results of operations or future prospects have been materially
affected by or becoming affected by the COVID-19 pandemic;
• Market disruptions resulting from the economic effects of COVID-19
pandemic have negatively impacted many aspects of our operating results and
the financial situation and current or future disruptions due to the pandemic
or otherwise could again have an impact on our results and our financial situation,
including our ability to service our debts, borrow
cash or pay distributions;
• We incurred net losses on a
December 31, 2021, 2020 and 2019; • There is no established public trading market for our shares, our
shareholders cannot currently sell their shares under our share buyback program
program (as amended, “PRS”), which has been suspended during 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
The SRP is subject to limits and shareholders may not be able to sell all of
the shares they would like to sell;
• Even if our shareholders are able to sell their shares under the SRP, or
otherwise, they may not be able to recover their investment amount
in our actions;
• There is no assurance that our Board of Directors will pursue a listing or
other liquidity event at any time in the future, particularly in light of
the COVID-19 pandemic;
• Our sponsor may face a conflict of interest in the assignment of personnel and
resources between its affiliates, our Business Manager and our Real Estate
• We do not have arm’s length agreements with our Business Manager, our Real
Estate Manager or any other affiliate of our Sponsor;
• We pay fees, which may be significant, to our commercial director, Real
Domain manager and other affiliates of our sponsor;
• Our Business Manager and its affiliates face conflicts of interest caused
by, among other things, their compensation agreements with us, which
could result in actions that are not in the long-term interest of
• Our properties may compete with properties belonging to other programs
sponsored by our sponsor or IPCC for, among others, tenants;
• 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;
• Our strategic plan, which is discussed further below, may evolve or change
over time, and there is no guarantee that we will be able to succeed
achieve our board's objectives under the Strategic Plan, including making strategic sales or purchases of properties or listing our common stock, within the timeframe we expect or would prefer or at all; 40
• Consumers’ use of the Internet for shopping is expected to continue to grow.
expand, and this expansion was probably accelerated by the effects of
the COVID-19 pandemic, which would lead to a further decline in the
the activity of our current tenants in their “bricks and mortar” locations and
could affect their ability to pay rent and their demand for space at our
commercial properties; and
• We are subject to the risks associated with any dislocation or liquidity
disruptions that may exist or occur in credit markets of
the United Statesfrom time to time, including disruptions and dislocations caused by the ongoing COVID-19 pandemic. 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 ended December 31, 2021, 2020 and 2019. Our stockholders should read the following discussion and analysis along with our consolidated financial statements and the related notes thereto.
Unless otherwise indicated, all amounts are expressed in thousands, with the exception of share data.
Overview We were formed as a
Marylandcorporation on August 24, 2011and elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with the year ended December 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 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. At December 31, 2021, we had total assets of $1.1 billionand owned 44 properties located in 21 states containing 6.5 million square feet. A majority of our properties are multi-tenant, necessity-based retail shopping centers primarily located in major regional markets and growing secondary markets throughout the United States. At December 31, 2021, grocery-anchored or grocery shadow-anchored shopping center properties represented 87% of our annualized base rent. A grocery shadow-anchored shopping center is a shopping center near a grocery store that generates traffic for the shopping center but is not a part of the shopping center. The portfolio properties have a weighted average economic occupancy of 93.9% and staggered lease maturity dates. We commenced the Offering on October 18, 2012, and concluded it on October 16, 2015. We sold 33,534,022 shares of common stock in the Offering generating gross proceeds of $834.4 million. On March 4, 2022, our board of directors determined an Estimated Per Share NAV of our common stock as of December 31, 2021of $20.20. The previously estimated per share net asset value as of December 31, 2020equal to $18.08was established on March 5, 2021.
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
December 31, 2021, our deferred rent balance was $0.4 million, down from $4.5 millionat December 31, 2020due primarily to collections during the year. We recognized bad debt recoveries of $2.0 millionduring the year ended December 31, 2021, based on favorable trends in collections from our tenants impacted by the pandemic. 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. See Note 13 - "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 or of the emergence and potential and actual spreading of any other variant of COVID-19 in the U.Sor any place from which our tenants may receive goods or services. 41 -------------------------------------------------------------------------------- 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 more information regarding the potential impact of COVID-19 on the Company, see Part I, Section 1A entitled “Risk Factors”.
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 centered 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 824 leasable spaces, there are 111 occupied non-grocery big box (anchor spaces of at least 10,000 square feet) and five vacant big box spaces in the portfolio as of
February 28, 2022. 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, and to that end we 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 intention to opportunistically grow the portfolio, execute redevelopment opportunities, and execute strategic sales and acquisitions in the context of (i) fluid and changing retail market conditions resulting from the effects of the COVID-19 pandemic and other complex factors such as (ii) competition with our tenants from evolving internet businesses, (iii) the state of the commercial real estate market and financial markets, (iv) our ability to raise capital on terms that are acceptable to the Company in light of the use of the proceeds and (v) general economic conditions, we do not know when we will complete a liquidity event. The timing of the execution of the Strategic Plan has already extended beyond our original expectations and cannot be predicted with certainty. There is no assurance, particularly in light of the uncertainties inherent in the unpredictable nature of the effects of the COVID-19 pandemic, 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. 42
CASH AND CAPITAL RESOURCES
Our main uses and sources of cash are:
Uses Sources • Interest & principal payments on • Cash receipts from our tenants mortgage loans and Credit Facility • Sale of shares through the DRP • Property operating expenses • Proceeds from new or
• 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 and Real Estate Manager (if any)*
• Share repurchases under the SRP • Proceeds from the issuance of • Capital expenditures, tenant
securities (if any) other than
improvements and leasing commissions the DRP* •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. 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, 2021, we had $129 millionoutstanding under the Revolving Credit Facility and $150 millionoutstanding under the Term Loan. At December 31, 2021the interest rate on the Revolving Credit Facility and the Term Loan was 1.75% and 4.13%, respectively. On February 3, 2022, we extended the Revolving Credit Facility maturity date to February 3, 2026plus a twelve month extension option. We also increased the Term Loan outstanding balance to $275 millionwhich now matures on February 3, 2027. As of March 15, 2022, we had $121 millionavailable for borrowing under the Revolving Credit Facility, subject to the terms and conditions, and assuming compliance with the covenants, of the Amended and Restated Credit Agreement that governs the Credit Facility. 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 49.0% as of December 31, 2021, as defined in the Revolving Credit Facility's agreement. As of December 31, 2021, we had total debt outstanding of $597 million, excluding mortgage premiums and unamortized debt issuance costs, which bore interest at a weighted average interest rate of 3.33% per annum. As of December 31, 2021, the weighted average years to maturity for our debt was 1.7 years. As of December 31, 2021and December 31, 2020, our borrowings were 44% and 47%, respectively, of the purchase price of our investment properties. At December 31, 2021our cash and cash equivalents balance was $8.2 million. In the next twelve months, we have two mortgage loans maturing with an aggregate principal balance of $26.8 million, which we intend to refinance or repay by drawing on the Credit Facility, which was amended on February 3, 2022as noted above. Two of our mortgage loans, Marketplace at Tech Center and Coastal North Town Center, each have covenants that required us to calculate an assumed debt service coverage ratio (the "Assumed DSCR") and make principal paydowns or deposit additional collateral to achieve a minimum Assumed DSCR of at least 0.975 to 1.00. The minimum assumed debt service coverage ratio was calculated by dividing (1) adjusted net cash flow by (2) the aggregate principal and interest projected to be due and payable over the twelve month period subsequent to the date of the calculation based upon an imputed interest rate equal to ten percent (10%). On September 30, 2021, we drew on the Credit Facility and used cash on hand to pay a combined total of $13.8 millionto achieve the minimum Assumed DSCR at the two properties. For information related to our debt maturities reference is made to Note 6 - "Debt and Derivative Instruments" which is included in our December 31, 2021Notes to Consolidated Financial Statements in Item 15. 43 -------------------------------------------------------------------------------- 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, 2020and the suspension of 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 $0.135600per 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, 2021and was available for this distribution. The first share repurchases following the reinstatement of the SRP were on August 16, 2021and totaled $1.9 million. On or about October 7, 2021, we paid a distribution on our common stock in the amount of $0.135600per share to stockholders of record as of September 30, 2021. On or about January 7, 2022, we paid a distribution on our common stock in the amount of $0.135600per share to stockholders of record as of December 31, 2021. 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 have delayed making non-essential capital improvements and other non-essential capital expenditures at our properties since the onset of the pandemic, 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 subside and there is more clarity on our tenants' ability and willingness to pay rent and meet other lease obligations and, ultimately, on the performance of our shopping centers. As we have seen rent collections increasing during 2021, we have been gradually funding capital expenditures at our properties, and we do not expect the 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, 2021, we spent $5.9 millionon capital expenditures, which is approximately $1.9 millionmore (46% more), than we did in the year ended December 31, 2020. Although we expect the total spending on tenant improvements, leasing commissions and other capital expenditures to double in 2022 relative to 2021 as a result of an expected return to spending at pre-pandemic levels and a relatively large number of tenant leases expiring over the next few years, we expect to maintain sufficient liquidity, assuming the businesses of our tenants that have been negatively affected by the COVID-19 pandemic continue to improve or they otherwise pay their rent. As of December 31, 2021, we have paid all interest and principal amounts when due and are in compliance with all financial covenants related to the Credit Facility as amended. Cash Flow Analysis For the year ended December 31, Change 2020 vs. 2021 2020 2019 2021 vs. 2020 2019 (Dollar amounts in thousands) Net cash flows provided by operating activities $ 48,150 $ 37,140 $ 46,763 $ 11,010 $ (9,623 )Net cash flows (used in) provided by investing activities $ (5,883 ) $ 33,234 $ 4,860 $ (39,117 ) $ 28,374Net cash flows used in financing activities $ (42,869 ) $ (61,922 ) $ (62,330 ) $ 19,053 $ 408Operating activities Cash provided by operating activities increased $11 millionduring 2021 compared to 2020 and decreased $9.6 millionduring 2020 compared to 2019. The increase from 2020 to 2021 was due to increased collections from tenants during 2021.The decrease from 2019 to 2020 was due to reduced collections in 2020 due to COVID-19 and the sale of properties in 2019 and 2020. Investing activities For the year ended December 31, Change 2020 vs. 2021 2020 2019 2021 vs. 2020 2019 (Dollar amounts in thousands) Proceeds from the sale of investment properties - 37,255 14,872 (37,255 ) 22,383 Capital expenditures (5,883 ) (4,021 ) (10,012 ) (1,862 ) 5,991 Net cash (used in) provided by investing activities $ (5,883 ) $ 33,234 $ 4,860 $ (39,117 ) $ 28,374During the year ended December 31, 2021, cash was used by investing activities compared to cash provided in 2020 primarily due to the sale of investment properties in 2020 which did not occur in 2021. During the year ended December 31, 2020, cash provided by investing activities was higher than 2019 primarily due to higher proceeds from the sale of investment properties and lower capital expenditures in 2020. 44
-------------------------------------------------------------------------------- Financing activities For the year ended December 31, Change 2021 vs. 2021 2020 2019 2020 2020 vs. 2019 (Dollar amounts in thousands) Total net changes related to debt
$ (34,074 ) $ (53,223 ) $ (25,161 ) $ 19,149 $ (28,062 )Proceeds from DRP 3,749 4,547 19,642 (798 ) (15,095 ) Shares repurchased (2,777 ) (2,405 ) (12,566 ) (372 ) 10,161 Distributions paid (9,767 ) (10,841 ) (44,245 ) 1,074 33,404
Net cash used in financing activities
408 During 2021, cash expended on debt decreased
$19.0 millionfrom 2020, primarily due to lower net debt paydowns in 2021 compared to 2020. During 2020, cash expended on debt increased $28.1 millionfrom 2019, primarily due to paydowns of the line of credit. During the years ended December 31, 2021, 2020 and 2019, we generated proceeds from the sale of shares pursuant to the DRP of $3.7 million, $4.5 millionand $19.6 million, respectively. For the years ended December 31, 2021, 2020 and 2019, share repurchases were $2.8 million, $2.4 millionand $12.6 million, respectively. During the years ended December 31, 2021, 2020 and 2019, we paid $9.8 million, $10.8 millionand $44.2 million, respectively, in distributions. Distributions
A summary of distributions declared, distributions paid and cash flows generated from operations during the years ended
Cash Distributions Cash Cash Distributions Flows Distributions Declared Per Distributions Distributions Reinvested Total Cash From
Year Ended December 31, (1) Declared Share Rescinded Paid via DRP
Distributions Transactions paid
$ 14,655$ 0.41 (2) $ - $ 6,018 $ 3,749 $ 9,767 $ 48,1502020 $ 8,173 $ 0.23 (3) $ (8,173 ) $ 6,294 $ 4,547 $ 10,841 $ 37,1402019 $ 43,162$ 1.21 (4) $ - $ 24,603 $ 19,642 $ 44,245 $ 46,763
(1) For completed fiscal years
financed by operating cash flow. Note that some distributions may be
declared in one year but will only be paid the following year, so for everything
given year, the total distributions reported will often not add up to the total
distributions paid, even if all distributions declared have been
paid at the time of disclosure.
(2) This amount represents an annualized rate of 3% based on the
estimated net asset value per share of our common stock at
during the year ended
distribution following the reinstatement of distributions.
(3) This amount represents the first quarter statement on an annualized rate of
5% based on the previously estimated net asset value per share of our common stock as of
This distribution was canceled during the second quarter of 2020 and
distributions have been suspended by our Board of Directors.
(4) This amount represents an annualized rate of 6% based on the
estimated net asset value per share of our common stock at
See "Distributions" 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 distributions to stockholders.
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 ended
December 31, 2021, 2020 and 2019. 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) 45
Comparison of 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 (which are all of the properties we currently own) that were acquired on or before
January 1, 2020and classified as held and used at December 31, 2021represent our "same store" properties during the years ended December 31, 2021and 2020. "Non-same store," as reflected in the table below, consists of properties sold after January 1, 2020. For the years ended December 31, 2021and 2020, three properties that were sold 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 ended December 31, 2021and 2020, along with a reconciliation to net loss, calculated in accordance with U.S.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, 2021 2020 Change 2021 2020 Change 2021 2020 Change Rental income $ 117,846 $ 111,782 $ 6,064 $ 117,846
Other property income 183
162 21 183 162 21 - - - Total income
$ 118,029 $ 111,944 $ 6,085 $ 118,029
Property operating expenses
$ 20,845 $ 18,613 $ 2,232 $ 20,845
Property tax expense 14,388 14,505 (117) 14,388
14,467 (79 ) – 38 (38 ) Total building operating expenses
Property net operating income
$ 82,796 $ 78,826 $ 3,970 $ 82,796 $ 78,719 $ 4,077$ - $ 107 $ (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. The net loss was
and 2020, respectively.
Total property net operating income. On a "same store" basis, comparing the results of operations of investment properties owned during the year ended
December 31, 2021with the results of the same investment properties owned during the year ended December 31, 2020, property net operating income increased $4,077, total 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 13 - "Leases" for additional information regarding the effects of deferred rent and bad debt on rental income. "Non-same store" total property net operating income decreased $107during 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 $183and total property operating expenses decreased $76during the year ended December 31, 2021. 46 -------------------------------------------------------------------------------- Straight-line income, net. Straight-line rent income decreased $1,327in 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 $1,308in 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 fees. Business management fees have increased
Depreciation and amortization. Depreciation and amortization decreased
$3,928in 2021 compared to 2020. The decrease is primarily due to fully amortized assets and properties sold in January 2020. Interest expense. Interest expense decreased $2,109in 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
Comparison of years ended
A total of 44 investment properties that were acquired on or before
January 1, 2019and classified as held and used at December 31, 2020represent our "same store" properties during the years ended December 31, 2020and 2019. "Non-same store," as reflected in the table below, consists of properties sold after January 1, 2019or classified as held for sale at December 31, 2020. For the years ended December 31, 2020and 2019, 15 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 ended December 31, 2020and 2019, along with a reconciliation to net loss, calculated in accordance with U.S.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, 2020 2019 Change 2020 2019 Change 2020 2019 Change Rental income $ 111,782 $ 125,673 $ (13,891 )$
Other property income
162 254 (92 ) 162 254 (92 ) - -
$ 111,944 $ 125,927 $ (13,983 )$
Property operating expenses
$ 18,613 $ 22,279 $ (3,666 ) $ 18,575 $ 21,642 $ (3,067 ) $ 38 $ 637 $ (599 )Real estate tax expense 14,505 15,869 (1,364 ) 14,467 14,760 (293 ) 38 1,109 (1,071 ) Total property operating expenses $ 33,118 $ 38,148 $ (5,030 ) $ 33,042 $ 36,402 $ (3,360 ) $ 76 $ 1,746 $ (1,670 )Property net operating income $ 78,826 $ 87,779 $ (8,953 ) $ 78,719 $ 83,883 $ (5,164 ) $ 107 $ 3,896 $ (3,789 )Straight-line income, net $ 965 $ 840 $ 125Amortization of intangibles and lease incentives 1,977 1,337 640 General and administrative expenses (5,206 ) (5,040 ) (166 ) Business management fee (8,924 ) (9,342 ) 418 Provision for asset impairment - (4,420 ) 4,420 Depreciation and amortization (52,834 ) (57,691 ) 4,857 Interest expense (25,349 ) (28,305 ) 2,956 Gain on sale of investment properties - 3,279 (3,279 ) Interest and other income 157 143 14 Net loss $ (10,388 ) $ (11,420 ) $ 1,032
Net loss. The net loss was
and 2019, respectively.
47 -------------------------------------------------------------------------------- Total property net operating income. On a "same store" basis, comparing the results of operations of investment properties owned during the year ended
December 31, 2020with the results of the same investment properties owned during the year ended December 31, 2019, property net operating income decreased $5,164, total property income decreased $8,524, and total property operating expenses including real estate tax expense decreased $3,360. The decrease in "same store" total property income is primarily due to an increase in bad debt and lower reimbursements billed to tenants resulting from lower expenses during the year ended December 31, 2020, both primarily caused by the COVID-19 pandemic. See Note 13 - "Leases" for additional information regarding the effects of the deferred rent and bad debt on rental income. "Non-same store" total property net operating income decreased $3,789during 2020 compared to 2019. The decrease was due to 12 properties sold in the fourth quarter of 2019 and an additional three properties sold during the first quarter of 2020. On a "non-store" basis, total property income decreased $5,459and total property operating expenses decreased $1,670during the year ended December 31, 2020.
Linear, net income. Linear rental income increased
Intangible amortization. Intangible amortization income increased
$640in 2020 compared to 2019. The increase is primarily attributable to higher below market lease intangible write-offs during 2020 due to early tenant move-outs.
General and administrative expenses. General and administrative expenses increased
Business management fees. Business management fees have decreased
Provision for asset impairment. During the year ended
December 31, 2019, we recorded $4,420of impairment charges for our investment properties that were classified as held for sale at December 31, 2019, because these properties had a carrying value that exceeded the fair value less selling costs. No asset impairment charges were recorded during the year ended December 31, 2020. Depreciation and amortization. Depreciation and amortization decreased $4,857in 2020 compared to 2019. The decrease is primarily due to properties sold in the fourth quarter 2019 and January 2020. Interest expense. Interest expense decreased $2,956in 2020 compared to 2019. The decrease is primarily due to lower average interest rates and a decrease in average debt outstanding in 2020 compared to 2019.
Gain on sale of investment properties. During the year ended
Interest and other income. Interest and other income increased
The following table sets forth leasing activity during the year ended
December 31, 2021. 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 68 476,909 $ 16.75 $ 17.06-1.8 % 4.8 $ 0.07Comparable New Leases 13 39,879 $ 23.09 $ 20.0215.3 % 7.9 $ 15.61Non-Comparable New and Renewal Leases (a) 47 221,316 $ 14.12N/A N/A 4.1 $ 6.84Total 128 738,104
(a) Includes leases signed on lots vacant for more than 12 months, leases
signed without fixed rental amounts and signed leases where the previous and
the current lease does not have a similar lease structure
48 -------------------------------------------------------------------------------- Lease extensions are treated as renewals and included in the above table only if the lease extension period exceeds any abatement period. Seven leases comprising 33,373 square feet (5.9% of total renewal square footage) renewed during the year ended
December 31, 2021were extended early in connection with COVID-19 related abatement or deferral agreements.
Non-GAAP Financial Measures
Accounting for real estate assets in accordance with
U.S.GAAP assumes the value of real estate assets is reduced over time due primarily to non-cash depreciation and amortization expense. Because real estate values may rise and fall with market conditions, operating results from real estate companies that use U.S.GAAP accounting may not present a complete view of their performance. We use Funds from Operations, or "FFO", a widely accepted metric to evaluate our performance. FFO provides a supplemental measure to compare our performance and operations to other REITs. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or "NAREIT", has promulgated a standard known as FFO, which it believes more accurately reflects the operating performance of a REIT. On November 7, 2018, NAREIT's Executive Board approved the White Paper restatement, effective December 15, 2018. The purpose of the restatement was not to change the fundamental definition of FFO but to clarify existing guidance. The restated definition of FFO by NAREIT is net income (loss) computed in accordance with U.S.GAAP, excluding depreciation and amortization related to real estate, excluding gains (or losses) from sales of certain real estate assets, excluding impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate and excluding gains and losses from change in control. We have adopted the restated NAREIT definition for computing FFO. Previously presented periods were not impacted. Under U.S.GAAP, acquisition related costs are treated differently if the acquisition is a business combination or an asset acquisition. An acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and acquisition related costs will be capitalized rather than expensed when incurred. Publicly registered, non-listed REITs typically engage in a significant amount of acquisition activity in the early years of their operations, and thus incur significant acquisition related costs, during these initial years. Although other start up entities may engage in significant acquisition activity during their initial years, publicly registered, non-listed REITs are unique in that they typically have a limited timeframe during which they acquire a significant number of properties and thus incur significant acquisition related costs. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Institute for Portfolio Alternatives, or "IPA", an industry trade group, published a standardized measure known as Modified Funds from Operations, or "MFFO", which the IPA has promulgated as a supplemental measure for publicly registered non-listed REITs and which may be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year-over-year, both before and after we have deployed all of our Offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO excludes expensed costs associated with investing activities, some of which are acquisition related costs that affect our operations only in periods in which properties are acquired, and other non-operating items that are included in FFO, such as straight-lining of rents as required by U.S.GAAP. By excluding costs that we consider more reflective of acquisition activities and other non-operating items, the use of MFFO provides another measure of our operating performance once our portfolio is stabilized. Because MFFO may be a recognized measure of operating performance within the non-listed REIT industry, MFFO and the adjustments used to calculate it may be useful in order to evaluate our performance against other non-listed REITs. Like FFO, MFFO is not equivalent to our net income or loss as determined under U.S.GAAP, as detailed in the table below, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we continue to acquire a significant amount of properties. MFFO should only be used as a measurement of our operating performance while we are acquiring a significant amount of properties because it excludes, among other things, acquisition costs incurred during the periods in which properties were acquired. We believe our definition of MFFO, a non- U.S.GAAP measure, is consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the "Practice Guideline," issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of U.S.GAAP net income: acquisition fees and expenses; amounts relating to straight-line rents and amortization of above and below market lease assets and liabilities, accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. 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 49 -------------------------------------------------------------------------------- income" or to "cash flows from operating activities" as determined by U.S.GAAP as a measure of our capacity to pay distributions. Management uses FFO and MFFO to compare our operating performance to that of other REITs and to assess our operating performance.
Our FFO and MFFO for the past years
For the year ended
2021 2020 2019 Net loss
$ (2,503 ) $ (10,388 ) $ (11,420 )Add: Depreciation and amortization related to investment properties
48,906 52,834 57,691
Provision for asset impairment - - 4,420 Less: Gain on sale of investment properties - - (3,279 ) Funds from operations (FFO)
46,403 42,446 47,412
Less: Amortization of acquired market lease intangibles, net
(773 ) (2,073 ) (1,405 )
Straight-line income, net 362 (965 ) (840 ) Modified funds from operations (MFFO)
$ 45,992 $ 39,408 $ 45,167Critical Accounting Estimates Our accounting policies have been established to conform with U.S.GAAP. The preparation of financial statements in conformity with U.S.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 our December 31, 2021Notes to Consolidated Financial Statements in Item 15. We have identified Impairment of Investment Properties and Collectability of Accounts and Rents Receivable as critical accounting policies. We consider these policies 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.
Collection of accounts and rents receivable
We make estimates and take into consideration certain factors that require judgments to be made as to the collectability of accounts and rents receivable. Collectability factors taken into consideration are the amounts outstanding, tenant credit worthiness, current economic trends and payment history of the tenant. We include both billed and accrued charges in our evaluation of the collectability of a tenant's receivable balance. For tenant receivables that are considered not probable of being collected, we record an offset for uncollectable tenant revenues directly to rental income. Although we estimate uncollectible receivables and provide for them through a direct write-off against rental income, actual experience may differ from those estimates.
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 our
December 31, 2021Notes to Consolidated Financial Statements in Item 15. 50
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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