HIGHLANDS REIT, INC. References to "Highlands," the "Company," "we" or "us" are toHighlands 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 Condensed 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 theU.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 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, 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. The ongoing impact of the COVID-19 pandemic on theU.S. , regional and global economies and the broader financial markets is currently one of the most significant factors impacting our Company. The COVID-19 pandemic has also impacted, and is likely to continue to impact, many of the other important factors described above. 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 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 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 persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. 23
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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 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
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, 2021 , our portfolio of assets consisted of one office
asset, two industrial assets, four retail assets, twelve multi-family
assets, one correctional facility and one parcel of unimproved land. We
currently have four business segments, consisting of (i) net lease, (ii) retail,
(iii) multi-tenant office and (iv) multi-family. Our unimproved land asset is
presented in "other." We may have additional or fewer segments in the future to
the extent we enter into additional real property sectors, dispose of
properties, or change the character of our assets. For the complete presentation
of our reportable segments, see Note 10 to our Condensed Consolidated Financial
Statements for the quarters ended March 31, 2021 , and 2020.
Basis of Presentation
The accompanying condensed consolidated financial statements reflect the
accounts of 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 condensed 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
("LLCs"). The effects of all significant intercompany transactions have been
eliminated.
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Critical accounting policies are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the "Notes to Consolidated Financial Statements" for the year endedDecember 31, 2020 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 Condensed 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. Our Revenues and Expenses Revenues Our revenues are primarily derived from rental 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 and general and administrative expenses. 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 flows 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. See "Selected Financial Data" for further discussion of the Company's use, definitions and limitations of FFO and AFFO. Impact of COVID-19 The following discussion is intended to provide certain information regarding the impacts of the COVID-19 pandemic on our business and our efforts to respond to those impacts. The COVID-19 pandemic, the significant and wide-ranging responses of international, federal, state and local public health and governmental authorities in regions acrossthe United States and the world to the COVID-19 pandemic, and the volatile economic, business and financial market conditions resulting therefrom, have negatively impacted our business, financial condition and results of operations and we anticipate that such factors will continue to negatively impact our business, financial condition and results of operations for the remainder of 2021 and in future periods. Unless otherwise specified, the information set forth below regarding the Company's portfolio and tenants is based on estimates and other data available to the Company as ofMarch 31, 2021 . As a result of the high degree of uncertainty surrounding the COVID-19 pandemic and its impact on our business, we expect that such information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our business, financial condition and results of operations for the first quarter of 2021 and future periods. We have taken a number of proactive measures to manage the impact of the COVID-19 pandemic on our business, results of operations and liquidity.We have adapted our operations to protect employees, including implementing a work-from-home policy and canceling non-essential corporate travel until further notice. We believe the remote-work technology we have 25
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provided to our workforce has enabled a smooth transition to working from home with minimal impact on our operations. The health and safety of our employees and their families remains a top priority for us. We also maintain frequent communication with our tenants and assist them in identifying state and federal resources that may be available to support their businesses and employees during the pandemic. Other Developments The loan documents governing the mortgage encumbering theState Street property include a "cash trap" provision that is triggered if DICK'S Sporting Goods, which is an anchor tenant at theState Street property, fails to renew its lease agreement. DuringSeptember 2020 , we were informed that DICK'S Sporting Goods will not renew its lease at theState Street property. As a result, we received notice that the lender under theState Street mortgage exercised its right to trigger this "cash trap" provision, and, during the fourth quarter of 2020 and first quarter of 2021, all of the revenue from theState Street property which would otherwise have been available for our use was trapped into a blocked account controlled by the lender until a substitute lease is approved. If, during that period, the terms of the loan agreement are not satisfied, those funds will be swept by the lender in mandatory prepayment of the mortgage. 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$20,000 until the Company is in compliance with all such covenants. OnJanuary 21, 2021 , the Company repaid$5,000 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$15,000 of principal plus accrued and unpaid interest thereon. The Credit Agreement and related security interests, and all commitments thereunder, were terminated in conjunction with such payment in full. The Revolving Credit Facility would have matured onFebruary 15, 2022 . Acquisition and Disposition Activity There were no asset acquisitions during the three months endedMarch 31, 2021 and 2020. There were no asset dispositions during the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2020 , consistent with our strategy of disposing of legacy "non-core" assets, we sold the following property: (in thousands) Gross Disposition Sale Proceeds, Property Location Disposition Date Price Net Gain on Sale CitizensProvidence, Rhode Island March 31, 2020$ 1,425 $ 1,287 $ 82
Results of Operations
Comparison of the three months ended
As of March 31,
2021 2020
Economic occupancy (a) 72.9 % 75.4 %
Rent per square foot (b)
(a)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.
(b)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.
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