HIGHLANDS REIT, INC. References to "Highlands," "the Company," "we" or "us" are to
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Part I-Item 1A. Risk Factors," "Part I-Item 1. Business," "Part I-Item 2. Properties" and the historical consolidated financial statements, and related notes included elsewhere in this Annual Report. 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." The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and accompanying notes, which appear elsewhere in this Annual Report on Form 10-K.
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 severe 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, and 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
introduce a liquidity option during 2022. However, we may be unable to execute
on such a liquidity option 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 December 31, 2021 , our portfolio of assets consisted of twelve
multi-family assets, four 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 assets 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 property
sectors, or change the character of our assets. For the complete presentation of
our reportable segments, see Note 11 to our consolidated financial statements
for the years ended December 31, 2021 and 2020.
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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 beneficiary, if any,
are accounted for under appropriate GAAP. Highlands' subsidiaries generally
consist of limited liability companies. The effects of all significant
intercompany transactions have been eliminated.
Our 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 Pandemic
The COVID-19 pandemic had a less pronounced impact on our results of operations and financial condition during the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 . 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.
Further discussion of the potential risks facing our business from the COVID-19 pandemic is provided under "Part I - Item 1A. Risk Factors."
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Acquisition and Disposition Activity
There were no asset acquisitions during the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , we acquired one multi-family asset for a gross acquisition price of$7.4 million: (in thousands) Property Location Acquisition Date Acquisition Price The Sterling San Diego, California April 22, 2020 $
7,372
There were no asset dispositions during the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , consistent with our strategy of disposing of legacy "non-core" assets we sold the following asset: (in thousands) Gross Disposition Sale Proceeds, Property Location Disposition Date Price Net Gain on Sale CitizensProvidence, Rhode Island March 31, 2020$ 1,425 $ 1,287 $ 82 Results of Operations
Comparison of the years ended
Key performance indicators are as follows:
As of December 31,
2021 2020
Economic occupancy (1) 72.5 % 72.8 %
Rent per square foot (2) $ 15.98 $ 14.54
(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 base 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 years ended
(in thousands)
For the Year ended December 31,
2021 2020 Increase/(Decrease)
Net loss $ (13,058) $ (33,659) $ 20,601 61.2 %
Net loss during the year ended December 31, 2021 was $13.1 million compared to
$33.7 million during the year ended December 31, 2020 . Factors contributing to
the change in net loss include lower total compensation expense, depreciation
and amortization expense, interest expense and provision for asset impairment.
Details of these changes are provided below.
The following table presents the changes in our revenues for the years ended
December 31, 2021 and 2020.
(in thousands)
For the Year ended
2021 2020 Increase/(Decrease)
Revenues:
Lease income $ 27,692 $ 27,230 $ 462 1.7 %
Other property income 937 1,712 (775) (45.3) %
Total revenues $ 28,629 $ 28,942 $ (313) (1.1) %
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Total revenues decreased$0.3 million in the year endedDecember 31, 2021 compared to the same period in 2020 as a result of the termination of the leases with GEO at the correctional facility and Alta atTrimble , which both occurred in early 2020. Partially offsetting the decrease in revenue are the commencement of rental income on the Northwestern Medical lease atSherman Plaza upon its 2021 lease commencement date, increased occupancy at our multi-family assets and fewer pandemic-related concessions. The following table presents the changes in our expenses for the years endedDecember 31, 2021 and 2020. (in thousands)
For the Year ended
2021 2020 Increase/(Decrease)
Expenses:
Property operating expenses$ 8,195 $ 8,702 $ (507) (5.8) % Real estate taxes 5,557 6,029 (472) (7.8) % Depreciation and amortization 10,586 12,774 (2,188) (17.1) % General and administrative expenses 12,716 14,131 (1,415) (10.0) % Provision for asset impairment 1,412 16,804 (15,392) (91.6) % Total expenses$ 38,466 $ 58,440 $ (19,974) (34.2) % Property operating expenses decreased$0.5 million in the year endedDecember 31, 2021 compared to the same period in 2020 primarily as a result of lower bad debt expense, caused by partial recovery from the impacts of the COVID-19 pandemic and lower property related legal expenses. Partially offsetting this decrease in property operating expenses were increased property insurance premiums, various repairs and maintenance projects postponed from 2020 and higher utility costs. Real estate taxes decreased$0.5 million for the year endedDecember 31, 2021 compared to the same period in 2020 due to occupancy related lower assessments on our correctional facility asset and one retail asset. Depreciation and amortization decreased$2.2 million for the year endedDecember 31, 2021 compared to the same period in 2020 primarily as a result of the reduction in carrying value of the correctional facility asset driven by a full asset impairment recognized during the fourth quarter of 2020 and reduced amortization on in-please leases for certain multi-family assets being fully amortized during 2020. General and administrative expenses decreased$1.4 million for the year endedDecember 31, 2021 , primarily due to reduced total compensation expense and lower consulting and legal expenses. General and administrative expenses for the year endedDecember 31, 2020 included salary and severance related expenses in accordance with an executive's employment contract upon their departure from the Company. Provision for asset impairment was$1.4 million for the year endedDecember 31, 2021 , due to adjusting the fair market value of one retail asset as a result of entering into a contract to sell the asset at a price below its current book value. During the year endedDecember 31, 2020 , we identified a reduction in fair market value related to the correctional facility and recorded an impairment of investment properties of$16.8 million .
The following table presents the changes in our other income and expenses for
the years ended
(in thousands)
For the Year ended
2021 2020 Increase/(Decrease)
Other income and (expenses):
Interest income $ 30 $ 242 $ (212) (87.6) %
Interest expense (3,251) (4,485) (1,234) (27.5) %
Gain on sale of investment properties - 82 (82) (100.0) %
Interest Income
Interest income decreased $0.2 million during the year ended December 31, 2021
compared to the same period in 2020 as a result of a decrease in average cash
balances during 2021.
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Interest Expense
Interest expense decreased$1.2 million to$3.3 million for the year endedDecember 31, 2021 compared to the same period in 2020 due to the termination of the Credit Agreement duringMarch 2021 and to interest charged on lower balances for our mortgage debt on those loans with monthly amortization requirements.
Gain on Sale of Investment Properties
There were no investment property dispositions during the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , the gain on sale of investment properties was$0.1 million , which was attributed to Highlands' sale of the bank branch asset. 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 ofDecember 31, 2021 , 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 5 134,080 $ 1,901 12.7 % 15.6 %$ 14.18 2023 4 29,298 293 2.8 % 2.4 % 10.01 2024 5 48,148 772 4.6 % 6.3 % 16.04 2025 15 81,461 1,203 7.7 % 9.9 % 14.77 2026 4 20,191 423 1.9 % 3.5 % 20.94 2027 7 534,539 2,844 50.6 % 23.3 % 5.32 2028 6 49,315 869 4.7 % 7.1 % 17.62 2029 2 26,542 308 2.5 % 2.5 % 11.60 2030 1 2,790 75 0.3 % 0.6 % 27.00 2031 - - - - % - % - Month to Month 1 2,875 42 0.3 % 0.3 % 14.61 Thereafter 2 126,113 3,456 11.9 % 28.5 % 27.41 52 1,055,352 $ 12,186 100.0 % 100.0 %$ 11.55 The following table represents new and renewed leases that commenced (not including multi-family leases) in the year endedDecember 31, 2021 and 2020. For the year ended December 31, 2021 For the year ended December 31, 2020 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 2 30,113$ 33.71 14.77 3 6,986 $ 25.80 7.85 Renewals 3 22,699$ 10.16 2.51 11 66,100 $ 14.75 5.28 Total 5 52,812$ 23.59 9.50 14 73,086 $ 15.81 5.53
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
properties, and
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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. 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 the respective 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 period 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
Our primary sources and uses of capital are as follows:
Sources
•cash flows from our investment properties;
•proceeds from sales of properties; and
•proceeds from debt.
Uses:
•to pay the operating expenses of our properties;
•to pay our general and administrative expenses;
•to pay for acquisitions;
•to pay for capital commitments;
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•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 includeFitness International atSherman Plaza expiring inApril 2022 ,Burlington Coat Factory atState Street expiring inAugust 2022 and Office Max at Market at Hilliard expiring inMarch 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.
Material Cash Requirements
InApril 2020 , the Company executed a lease withNorthwestern Medical Group for approximately 29,000 square feet at ourSherman Plaza asset. The lease required a significant amount of landlord work, a tenant allowance and a broker commission. The total cost commitment is estimated to be approximately$3.9 million . As ofDecember 31, 2021 , we estimate that remaining costs under this commitment are approximately$1.3 million . InSeptember 2020 , the Company entered into a Separation Agreement and General Release (the "Agreement") with 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 beforeMay 31, 2022 , which is included in accounts payable and accrued expenses on the accompanying consolidated balance sheets. InFebruary 2021 , the Company executed a lease with Veeco Instruments, Inc. for approximately 97,000 square feet at ourTrimble 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 ofDecember 31, 2021 , we estimate that remaining costs under this commitment are approximately$1.7 million .
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 ofDecember 31, 2021 and 2020 was$62.8 million and$83.9 million , respectively, with a weighted average interest rate of 4.18% and 3.78% 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
Fixed and variable rate debt maturing during the year As of December
Weighted average
ended December 31, 31, 2021 interest rate
2022 $ 8,736 5.24 %
2023 17,893 3.28 %
2024 - - % (1)
2025 - - %
2026 24,743 4.56 %
Thereafter 11,449 3.99 %
Total $ 62,821 4.18 %
(1)See Note 9 in the accompanying consolidated financial statements for
discussion of the swap agreement entered into with the mortgage loan obtained in
connection with the acquisition of The Locale. The weighted average interest
rate reflected is the strike rate.
As of December 31, 2021 and 2020, 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
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. InJuly 2017 , theFinancial 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, theFederal Reserve Board and theFederal 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 theFCA 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 ofJune 2023 , it is possible that LIBOR will become unavailable prior to that point. This could result, 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.
OnNovember 6, 2020 , the Company entered into the Third Amendment to the Credit Agreement, pursuant to which the Company "right-sized" the Credit Agreement by eliminating the Term Loan (as defined in the Third Amendment) previously available under the Credit Agreement. In connection with the execution of the Third Amendment, the Company borrowed sufficient funds under the Revolving Credit Loan (as defined in the Third Amendment) to repay all of its obligations under the Term Loan. Additionally, pursuant to the Third Amendment, the lender under the Credit Agreement waived the Company's obligation to comply with certain financial covenants for the period fromJuly 1, 2020 toDecember 31, 2020 (the "Waiver Period") and restricted the Company from drawing on the Revolving Credit Loan in amounts in excess of$20.0 million until the Company is in compliance with all such covenants. OnJanuary 21, 2021 , the Company repaid$5.0 million of the outstanding principal balance of the Revolving Credit Loan and onMarch 29, 2021 , repaid in full all of the remaining outstanding indebtedness 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.
Capital Expenditures and Reserve Funds
During the year endedDecember 31, 2021 , we made total capital expenditures of$7.7 million and during the year endedDecember 31, 2020 , capital expenditures totaled$2.8 million . 41
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Summary of Cash Flows
Comparison of the years ended
(in thousands)
For
the Year ended
2021 2020
Net cash flows provided by (used in) operating activities $
217 $ (2,106)
Net cash flows used in investing activities (9,040) (9,398)
Net cash flows used in financing activities (22,804) (12,914)
Net decrease in cash and cash equivalents and restricted cash and escrows
(31,627) (24,418)
Cash and cash equivalents and restricted cash and escrows, at beginning of year
53,637 78,055
Cash and cash equivalents and restricted cash and escrows, at end of year
$
22,010
Cash provided by operating activities was$0.2 million for the year endedDecember 31, 2021 . Cash used in operating activities was$2.1 million for the same period in 2020. The increase in cash from operations was primarily due to higher cash collections from tenants as a result of fewer abatements granted and a decrease in cash paid for interest and general and administrative expenses during the year endedDecember 31, 2021 compared to prior year. Cash used in investing activities was$9.0 million for the year endedDecember 31, 2021 , compared to$9.4 million for the year endedDecember 31, 2020 . Cash used in investing activities decreased$0.4 million compared to the same period in 2020 as a result of the acquisition of a multi-family asset and was partially offset by proceeds received from the disposition of the bank branch asset during the year endedDecember 31, 2020 . Additional factors include an increase in cash used for capital expenditures and to pay leasing commissions during the year endedDecember 31, 2021 , primarily related to new leases. See also Note 13 to the consolidated financial statements for a summary of commitments related to new leases. Cash used in financing activities was$22.8 million for the year endedDecember 31, 2021 . Cash used in financing activities for the year endedDecember 31, 2021 was related to payoff of the revolving loan related to the Credit Agreement in the amount of$20.0 million , principal payments on mortgage debt in the amount of$1.1 million and payment of tax withholding for share-based compensation in the amount of$1.7 million . Cash used in financing activities in the amount of$12.9 million for the year endedDecember 31, 2020 was primarily related to pay down of the revolving loan related to the Credit Agreement in the amount of$10.0 million , principal payments on mortgage debt in the amount of$1.0 million , payment of tax withholding for share-based compensation in the amount of$1.1 million and the repurchase of a former executives shares totaling$0.6 million We consider all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements with a maturity of three months or less, at the date of purchase, to be cash equivalents. We maintain our cash and cash equivalents at financial institutions. The combined account balances at one or more institutions exceed theFederal Depository Insurance Corporation ("FDIC") insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess ofFDIC insurance coverage.
Funds From Operations and Adjusted Funds From Operations
The National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a non-GAAP financial measure known as Funds From Operations, or FFO. As defined by NAREIT, FFO is net income (loss) in accordance with GAAP excluding gains (or losses) resulting from dispositions of properties, plus depreciation and amortization and impairment charges on depreciable property. We have adopted the NAREIT definition in our calculation of FFO as management considers FFO a widely accepted and appropriate measure of performance for REITs. FFO is not equivalent to our net income or loss as determined under GAAP. Since the definition of FFO was promulgated by NAREIT, management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we also use Adjusted Funds From Operations, or AFFO as a measure of our operating performance. We define AFFO, a non-GAAP financial measure, to exclude from FFO adjustments for gains or losses related to early extinguishment of debt instruments as these items are not related to our continuing operations. By excluding these items, management believes that AFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other public, non-traded REITs. AFFO is not equivalent to our net income or loss as determined under GAAP. 42
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In calculating FFO and AFFO, impairment charges of depreciable real estate
assets are added back even though the impairment charge may represent a
permanent decline in value due to decreased operating performance of the
applicable property. Further, because gains and losses from sales of property
are excluded from FFO and AFFO, it is consistent and appropriate that
impairments, which are often early recognition of losses on prospective sales of
property, also be excluded.
We believe that FFO and AFFO are useful measures of our properties' operating
performance because they exclude noncash items from GAAP net income. Neither FFO
nor AFFO is intended to be an alternative to "net income" nor to "cash flows
from operating activities" as determined by GAAP as a measure of our capacity to
pay distributions. Other REITs may use alternative methodologies for calculating
similarly titled measures, which may not be comparable to our calculation of FFO
and AFFO.
The following table presents our calculation of FFO and AFFO (in thousands):
Year Ended December 31,
2021 2020
Net loss attributable to
$ (13,046) $ (33,589)
Depreciation and amortization related to investment assets (1)
10,432 12,538
Impairment of investment properties 1,412 16,804
Gain on sale of investment properties, net - (82)
Funds From Operations and Adjusted Funds From Operations
$ (4,329)
(1)The depreciation and amortization add-back excludes the portion of expense
attributable to the non-controlling interest.Use and Limitations of Non-GAAP Financial Measures
FFO and AFFO do not represent cash generated from operating activities under GAAP and should not be considered as an alternative to net income or loss, operating profit, cash flows from operations or any other operating performance measure prescribed by GAAP. Although we present and use FFO and AFFO because we believe they are useful to investors in evaluating and facilitating comparisons of our operating performance between periods and between REITs that report similar measures, the use of this non-GAAP measure has certain limitations as an analytical tool. This non-GAAP financial measure is not a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to fund capital expenditures, contractual commitments, working capital, service debt or make cash distributions. This measurement does not reflect cash expenditures for long-term assets and other items that we have incurred and will incur. This non-GAAP financial measure may include funds that may not be available for management's discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions and other commitments and uncertainties. This non-GAAP financial measure, as presented, may not be comparable to non-GAAP financial measures as calculated by other real estate companies. We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliation to the most comparable GAAP financial measures, and our consolidated statements of operations and comprehensive loss and cash flows, include interest expense, capital expenditures and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measure. This non-GAAP financial measure reflects an additional way of viewing our operations that we believe, when viewed with our GAAP results and the reconciliation to the corresponding GAAP financial measure, provides a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure. Distributions
For the years ended
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