10-K 1 inlandamerican1231201410-k.htm 10-K Inland American 12.31.2014 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM            TO          
COMMISSION FILE NUMBER: 000-51609
 
 
 
 
 
 
Inland American Real Estate Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
34-2019608
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
2809 Butterfield Road, Suite 360, Oak Brook, Illinois
 
60523
(Address of principal executive offices)
 
(Zip Code)
630-218-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.001 par value per share
(Title of Class)
 
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer
¨
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
There is no established market for the registrant’s shares of common stock. The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2014 (the last business day of the registrant’s most recently completed second quarter) was approximately $5,963,835,477, based on the estimated per share value of $6.94, as established by the registrant on December 31, 2013.
As of March 23, 2015, there were 861,824,777 shares of the registrant’s common stock outstanding.




INLAND AMERICAN REAL ESTATE TRUST, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
Special Note Regarding Forward-Looking Statements
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
 
This Annual Report on Form 10-K includes registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International, Inc., Hilton Worldwide Inc., Hyatt Hotels Corporation, Starwood Hotels and Resorts Worldwide, Inc., The Kimpton Hotel & Restaurant Group Inc., Aston Hotels & Resorts LLC, Fairmont Hotels & Resorts and Loews Hotels, or their respective parents, subsidiaries or affiliates. Hyatt Place® and Andaz trademarks are the property of Hyatt Hotels Corporation. Intercontinental Hotels ® trademark is the property of InterContinential Hotels Group PLC. Fairmont Hotels and Resorts is a trademark. The Aloft service name and the Westin service name are the property of Starwood Hotels and Resorts Worldwide, Inc. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above-referenced terms are used.





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, 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. These statements include statements about Inland American Real Estate Trust, Inc.’s (the "Company") 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 the Company 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 Annual Report on Form 10-K. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under "Part I, Item IA. -- Risk Factors" and "Part II, Item 7 -- Management’s Discussion and Analysis of Financial Condition and Results of Operations," and the risks and uncertainties related to the following:

market and economic volatility experienced by the U.S. economy or real estate industry as a whole, and the local economic conditions in the markets in which the Company’s properties are located;
the Company’s ability to identify, execute and complete strategic transactions;
the Company’s ability to refinance maturing debt or to obtain new financing on attractive terms;
the Company's ability to identify disposition opportunities and to successfully execute on such dispositions;
the Company's ability to identify, execute and complete acquisition opportunities and to integrate and successfully operate any properties acquired in the future and the risks associated with such properties;
the Company’s ability to access capital for renovations and acquisitions on terms and at times that are acceptable to us;
the impact of leasing and capital expenditures to improve the Company’s properties in order to retain and attract tenants;
the Company’s organizational and governance structure, including its recent transition to becoming a self-managed company;
loss of members of the Company’s senior management team or key personnel;
adverse litigation judgments or settlements;
the Company’s ability to collect rent from tenants or to rent space on favorable terms or at all;
the economic success and viability of the Company’s anchor retail tenants;
forthcoming expirations of certain of the Company’s leases and the Company’s ability to re-lease such properties;
changes in the competitive environment in the leasing market and any other market in which the Company operates;
events beyond the Company’s control, such as war, terrorist attacks, natural disasters and severe weather incidents, and any uninsured or underinsured loss resulting therefrom;
the availability of cash flow from operating activities to fund distributions;
future increases in interest rates;
actions or failures by the Company’s joint venture partners, including development partners;
the Company’s investment in equity and debt securities and in companies that the Company does not control, including Xenia Hotels & Resorts, Inc.;
the Company’s status as a real estate investment trust ("REIT") for federal tax purposes;
the cost of compliance with and liabilities under environmental, health and safety laws;
changes in real estate and zoning laws and increases 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 and United States accounting standards or interpretations thereof; and
the Company’s debt financing, including risk of default, loss and other restrictions placed on the Company.




PART I

Item 1. Business
General
References in this Annual Report on Form 10-K ("Annual Report") to "we", "our", "us", "Inland American" and the "Company" are references to Inland American Real Estate Trust, Inc. and our business and operations conducted through our direct or indirect subsidiaries.
Inland American was incorporated in October 2004 as a Maryland corporation and has elected to be taxed, and currently qualifies, as a real estate investment trust ("REIT") for federal tax purposes. We were formed to own, manage, acquire and develop a diversified portfolio of commercial real estate located throughout the United States and to own properties in development and partially own properties through joint ventures, as well as investments in marketable securities and other assets.
As of December 31, 2014, our portfolio was comprised of 188 properties representing 15.5 million square feet of retail space, 12,636 hotel rooms, 7,986 student housing beds and 6.4 million square feet of non-core space.
Over the past two years, we have been implementing our strategy of focusing our diverse portfolio of real estate into three asset classes - retail, lodging and student housing. By tailoring, expanding and refining these three components of our portfolio, our goals have been to enhance long-term stockholder value and position the Company to explore various strategic transactions and liquidity events for our stockholders. In 2014 and the beginning of 2015, we achieved several important milestones in our efforts to enhance stockholder value and create liquidity for our stockholders as described below.
Recent Developments
Self-Management Transaction
On March 12, 2014, we entered into a series of agreements and amendments to existing agreements with affiliates of The Inland Group, Inc. (the "Inland Group") to begin the process of becoming self-managed (collectively, the "Self-Management Transactions"). We did not pay an internalization fee or self-management fee to the Inland Group in connection with the Self-Management Transactions. As of March 12, 2014, functions previously carried out by Inland American Business Manager & Advisor, Inc. (the "Business Manager") and certain functions performed by Inland American Holdco Management LLC and its affiliates (the “Property Managers”), such as property-level accounting, lease administration, leasing, marketing and construction functions, were transitioned to the Company. We transitioned the remaining property management functions on December 31, 2014. Many of the employees of our former Business Manager and former Property Managers are now directly employed by the Company. Long-term, we expect that becoming self-managed will positively impact our net income and cash flow from operations.
Dutch Tender Offer
On April 25, 2014, we completed a modified Dutch tender offer ("Offer"), and accepted for purchase 60,761,166 shares for a final aggregate purchase price of $394.9 million as of December 31, 2014, excluding fees and expenses relating to the Offer and paid by us.
Triple Net Portfolio Sale
On August 8, 2013, we entered into an equity interest purchase agreement to sell certain equity interests in certain of our direct and indirect subsidiaries that collectively owned certain of our net lease assets (the "triple net sale"), consisting of 294 retail, office, and industrial properties. The triple net sale was consummated through multiple closings, with the final closing occurring on May 8, 2014. In total, we sold equity interests in direct and indirect subsidiaries owning an aggregate of 280 total net lease assets for approximately $2.6 billion, including the assumption of approximately $656.8 million of debt and the repayment of $386.7 million of debt, secured by the properties and certain other properties. This portfolio was classified as held for sale on August 8, 2013 and therefore the operations are reflected as discontinued operations on the consolidated statements of operations and comprehensive income for the years ended December 31, 2014, 2013 and 2012. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 8. Note 4 to the Consolidated Financial Statements."

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Lodging Segment
Select Service Portfolio Sale
On September 17, 2014, we entered into a definitive agreement to sell a portfolio consisting of 52 select service hotels for approximately $1.1 billion. On this date, the portfolio was classified as held for sale on the consolidated balance sheet and the assets and liabilities associated with this portfolio were recorded at the lesser of the carrying value or fair value less costs to sell. The transaction closed on November 17, 2014 for an aggregate gross disposition price of $1.1 billion. This sale represented the first step in the disposition of our lodging segment. The operations of these sold properties are reflected within discontinued operations on the consolidated statement of operations and comprehensive income for the years ended December 31, 2014, 2013 and 2012. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 8. Note 4 to the Consolidated Financial Statements."
Spin-Off of Xenia Hotels & Resorts, Inc.
On February 3, 2015, we completed the spin-off ("Spin-Off") of our subsidiary, Xenia Hotels & Resorts, Inc. ("Xenia"), which at the time owned 46 premium full service, lifestyle and urban upscale hotels and two hotels in development, through the pro rata taxable distribution of 95% of the outstanding common stock of Xenia to holders of record of the Company’s common stock as of the close of business on January 20, 2015 (the "Record Date"). Each holder of record of the Company’s common stock received one share of Xenia’s common stock for every eight shares of the Company’s common stock held at the close of business on the Record Date (the "Distribution"). In lieu of fractional shares, stockholders of the Company received cash. On February 4, 2015, Xenia’s common stock began trading on the New York Stock Exchange ("NYSE") under the ticker symbol "XHR." In connection with the Spin-Off, we entered into certain agreements that, among other things, provide a framework for our relationship with Xenia as two separate companies, including a Transition Services Agreement, and an Employee Matters Agreement and an Indemnity Agreement. See "Part III, Item 13. Certain Relationships and Transactions, and Director Independence - Agreements with Xenia Hotels & Resorts, Inc."
New Distribution Rate
Upon completing the Spin-Off, our board of directors analyzed and reviewed our distribution rate, and on February 24, 2015, we announced that the board of directors reduced our annual distribution rate from $0.50 per share of common stock to $0.13 per share of common stock.
A number of factors were considered in establishing the new distribution rate. Xenia generated a substantial portion of our cash flows from operations and as a result, our previous distribution rate was not sustainable after the Spin-Off. In addition, our board of directors determined that it is in the best interests of the Company to retain additional operating cash flow in order to accumulate an appropriate level of capital reserves to enable the Company to tailor and grow its retail and student housing segments, consistent with our strategy and objectives, as well as to address future lease maturities and disposition plans related to several properties in our non-core segment. See "Part I, Item 2. Properties" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Strategy and Objectives
Following the completion of the transactions described above, our portfolio is now comprised of 142 properties, excluding our development properties, representing 15.5 million square feet of retail space, 7,986 student housing beds and and 6.4 million square feet of non-core space. With our current portfolio, our strategy is to tailor and grow our retail and student housing segments and dispose of our remaining non-core assets. Our objective has been, and will continue to be, maximizing stockholder value over the long-term.
We believe we have built a strong foundation in our retail segment. Our strategy with respect to our retail segment includes focusing on key markets across the country and growing our presence in those markets. These key markets share fundamental characteristics such as job growth, increasing wages and population growth. Within these markets, we will look to invest in properties with high traffic patterns and in desirable locations. We are confident about our investment opportunities in this space, particularly as national and regional retailers continue to place a premium on retail space in leading markets. We also may opportunistically dispose of retail properties to take advantage of market conditions or in situations where the properties no longer fit within our strategic objectives.
We believe that through the active management of our retail portfolio, we can positively impact our financial performance as follows:
increase rental rates by replacing underperforming tenants with stronger tenants who better meet the needs of the applicable market and improve the overall shopping experience of the property;

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expand our network of regional offices to continue to focus our regional leasing and operating teams on maximizing local market knowledge;
invest capital in our properties to ensure we continue to meet the needs of our tenants and their customers;
continue to reduce property expense levels to minimize overhead and operating costs;
utilize the combined expertise of our staff in striving to provide the optimal shopping experience for our merchants and their customers;
proactively manage tenant mix and lease rollover to minimize exposure to any one tenant or concentration of lease renewals in a particular period; and
strive to maximize portfolio net operating income through implementation of select re-development opportunities.
With respect to our student housing segment, our focus is to continue to expand our portfolio through tactical acquisitions and the development of new properties. We believe we will meet this objective if we continue to focus on growing our student housing portfolio with assets that have one or more of the following key characteristics: student housing communities located within walking distance to universities that have competitive student acceptance rates, stable and growing enrollments and Division I athletics; student housing communities located in markets with high barriers to entry; and properties that have high-end amenities, such as swimming pools, fitness centers, and multimedia lounges.
We believe that through the active management of our student housing portfolio, we can positively impact our financial performance as follows:
pursue development opportunities in order to maximize portfolio net operating income;
deploy capital in our properties to ensure we continue to meet the needs of our targeted student populations;
continue to reduce property expense levels to minimize overhead and operating costs; and
utilize the combined expertise of our staff in striving to provide the optimal community living experience for our students.
Our strategy also includes the disposition of our non-core assets, which includes multi-tenant office and triple net properties. This disposition strategy will continue as we look to sell these assets in individual and portfolio transactions over time or engage in other strategic transactions in an effort to maximize their value.
We continue to use our expertise to capitalize on opportunities in the real estate industry. We believe our ability to identify and execute on investment opportunities is one of our strengths. Our strategy will take time as we further refine our retail and student housing segments by disposing of properties that no longer fit within our strategic objectives, acquiring properties that align with our objectives, and dispose of assets in our non-core segment in a value maximizing manner. The disposition activity could cause us to experience dilution in our operating performance during the period we dispose of properties and prior to investment of the proceeds received from those dispositions. We believe this strategy presents the best opportunity to capitalize on current market trends in commercial real estate and realize income growth in the retail and student housing segments.
Segment Data
For the year ended December 31, 2014, our business segments are retail, lodging, student housing and non-core. We evaluate segment performance primarily based on net operating income. Net operating income of the segments does not include interest expense, depreciation and amortization, general and administrative expenses, and other investment income from corporate investments. The non-segmented assets consist of our cash and cash equivalents, investment in marketable securities, construction in progress, investment in unconsolidated entities and notes receivable. Information related to our business segments, including a measure of profits or loss and revenues from our tenants for each of the last three fiscal years and total assets for each of the last two fiscal years, is set forth in "Part II, Item 8. Note 13 to the Consolidated Financial Statements."
Significant Tenants
For the year ended December 31, 2014, we generated approximately 15.5% of our total annualized rental income (excluding lodging and student housing) from three non-core properties leased to one tenant, AT&T Inc., which leases expire in 2016, 2017, and 2019. AT&T, Inc. may not renew such leases and we may be unable to re-lease such assets on comparably favorable terms or at all.

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Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), beginning with the tax year ended December 31, 2005. Because we qualify for taxation as a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, we will be subject to federal and state income tax on our taxable income at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income, property or net worth, respectively, and to federal income and excise taxes on our undistributed income.
Competition
The commercial real estate market is highly competitive. We compete for tenants in all of our markets with other owners and operators of commercial properties. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on a property’s occupancy levels, rental rates and operating income.
We compete with many third parties engaged in real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities. There are also other REITs with investment objectives similar to ours and others may be formed in the future. In addition, these same entities seek financing through the same channels that we do. Therefore, we compete for funding in a market where funds for real estate investment may decrease, or grow less than the underlying demand.
Employees
As of December 31, 2014, we had 287 full-time individuals employed at the Company.
As described above, as of March 12, 2014, functions previously carried out by the Business Manager and certain functions performed by our Property Managers, such as property-level accounting, lease administration, leasing, marketing and construction functions, were transitioned to the Company. We transitioned the remaining property management functions on December 31, 2014. Many of the employees of our former Business Manager and former Property Managers are now directly employed by the Company. See "Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence - Self-Management Transactions."
Environmental Matters
Compliance with federal, state and local environmental laws has not had a material adverse effect on our business, assets, or results of operations, financial condition and ability to pay distributions, and we do not believe that our existing portfolio will require us to incur material expenditures to comply with these laws and regulations. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on our properties.
Seasonality
The student housing segment experiences increases in operating expenses, such as repairs and maintenance, during the third quarter when turning beds from a prior lessee to a new lessee. Student housing occupancy also drops during the third quarter while the beds are vacated during the turn period for approximately two weeks. The lodging segment is seasonal in nature, reflecting lower revenue and operating income during the first quarter. As a result of the Spin-Off and other dispositions of our lodging properties, going forward we will no longer have a lodging segment.
Access to Company Information
We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission ("SEC"). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available, free of charge, by responding to requests addressed to our investor relations group, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports on our website, www.inlandamerican.com. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC.

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Item 1A. Risk Factors
The occurrence of any of the risks discussed below could have a material adverse effect on our business, condition (financial or otherwise), results of operations and ability to pay distributions to our stockholders.
Risks Related to Our Business
Disruptions in the financial markets or economic conditions could adversely affect our ability to refinance or secure additional debt financing at attractive terms.
Credit markets are subject to rapid changes from macroeconomic factors, including rising interest rates, perceptions of the overall health in the U.S. economy and real estate in particular, and the regulatory environment in which we, our lenders and tenants operate.
In addition, disruptions in the financial markets or economic conditions may negatively impact commercial real estate fundamentals, which could have various negative impacts on the value of our investments, including:
a decrease in the values of our investments in commercial properties below the amounts paid for these investments; or
a decrease in revenues from our properties due to lower occupancy and rental rates, which may make it more difficult for us to pay distributions or meet our debt service obligations on debt financing.
Our management and our board of directors may explore various strategic transactions related to our platforms designed to increase share value and provide liquidity for our stockholders. Such strategic transactions may not occur, and even if they do occur, they may not be successful in increasing share value or providing liquidity for our stockholders.
Our management and our board of directors may explore various strategic transactions related to our platforms designed to increase share value and provide liquidity for our stockholders. We do not know the form that any such strategic transaction might take. It is possible that, in the future, we may apply to have our shares of common stock listed for trading on a national securities exchange or included for quotation on a national market system, subject to satisfying existing listing requirements. Alternatively, our board of directors may decide to sell our assets individually; seek to sell all or substantially all our assets, liquidate or engage in a merger transaction; contribute substantial assets to a joint venture in exchange for cash; spin off one or more of our segments or portions thereof; or approve a strategic transaction whose form we cannot yet reasonably anticipate. It is possible that no such strategic transaction will ever occur. Even if a strategic transaction does occur, it may not be successful in increasing share value or providing liquidity for our stockholders, and may have the opposite effect, eroding share value and failing to deliver any meaningful liquidity, in which case your investment would lose value.
Our ongoing strategy involves the selling of properties, including our non-core assets; however, we may be unable to sell a property at acceptable terms and conditions, if at all.
As part of our strategy we intend to dispose of our remaining non-core assets and dispose of retail properties that no longer fit within our strategic objectives for our retail platform. In addition, it may make economic sense for us to sell properties in any asset class when we believe the cash flows of a property will significantly decline over the long-term, or where we conclude that the property has limited or no equity value with a near-term debt maturity, or when a property has equity but the projected returns do not justify further investment, or when the equity in a property can be redeployed in the portfolio in order to achieve better returns or strategic goals. As we sell these properties, general economic conditions along with property-specific issues, such as vacancies, lease terminations and debt defeasance, may negatively affect the value of our properties and therefore reduce our return on the investment or prevent us from selling the property on acceptable terms. Real estate investments often cannot be sold quickly. As a result, economic conditions may prevent potential purchasers from obtaining financing on acceptable terms, if at all, thereby delaying or preventing our ability to sell our properties.
Our ongoing strategy depends, in part, upon completing future acquisitions, and we may not be successful in identifying and consummating these transactions.
As part of our strategy, we intend to tailor and grow our retail and student housing segments. We cannot assure you that we will be able to identify opportunities or complete transactions on commercially reasonable terms or at all, or that we will actually realize any anticipated benefits from such acquisitions or investments. There may be high barriers to entry in many key markets and scarcity of available acquisition and investment opportunities in desirable locations. We face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significant capital resources such as domestic and foreign corporations and financial institutions, sovereign wealth funds, public and private REITs, private institutional investment funds, domestic and foreign high-net-worth individuals,

5



life insurance companies and pension funds. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated. Similarly, we cannot assure you that we will be able to obtain financing for acquisitions or investments on attractive terms or at all, or that the ability to obtain financing will not be restricted by the terms of credit facility or other indebtedness we may incur.
Additionally, we regularly review our business to identify properties or other assets that we believe are in markets or of a property type that may not benefit us as much as other markets or property types. One of our strategies is to selectively dispose of retail properties and use sale proceeds to fund our growth in markets and with properties that will enhance our retail platform. We cannot assure you that we will be able to consummate any such sales on commercially reasonable terms or at all, or that we will actually realize any anticipated benefits from such sales. Additionally, we may be unable to successfully identify attractive and suitable replacement assets even if we are successful in completing such dispositions. We may face delays in reinvesting net sales proceeds in new assets, which would impact the return we earn on our assets. Dispositions of real estate assets can be particularly difficult in a challenging economic environment, as financing alternatives are often limited for potential buyers. Our inability to sell assets, or to sell such assets at attractive prices, could have an adverse impact on our ability to realize proceeds for reinvestment. In addition, even if we are successful in consummating sales of selected retail properties, such dispositions may result in losses.
Any such acquisitions, investments or dispositions could also demand significant attention from our management that would otherwise be available for our regular business operations, which could harm our business.
We recently became a self-managed company, and our transition to self-management may not prove successful.
On March 12, 2014, we entered into a series of agreements, and amendments to existing agreements, with our former Business Manager and former Property Managers, under which we began the process of becoming fully self-managed, which we refer to as the Self-Management Transactions. As a result of the Self-Management Transactions and related agreements, we terminated our business management agreement, hired all the employees of our former Business Manager and acquired the assets necessary to conduct the functions previously performed by our former Business Manager. Functions previously carried out by our former Business Manager and certain functions performed by our former Property Managers, such as property-level accounting, lease administration, leasing, marketing and construction functions, were transitioned to the Company on March 12, 2014. We transitioned the remaining property management functions on December 31, 2014.
As a newly self-managed company, we could have difficulty integrating business management and property management services into our organization and will bear risks to which we have not historically been exposed. An inability to operate effectively as a self-managed company could, therefore, result in our incurring additional costs or experiencing other problems. There may also be unforeseen costs, expenses and difficulties associated with self-providing the services previously provided by our former Business Manager and our former Property Managers. Such difficulties could cause us to incur additional costs, and our management’s attention could be diverted from most effectively managing our business and properties.
As a result of the Self-Management Transactions, our direct expenses have increased. We are now responsible for paying the salaries and benefits (including employee benefit plan costs) of all our employees as well as costs associated with legal, accounting, information technology, human resources, general office and other services. We also have become subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes and other employee-related grievances. We have also issued equity awards to employees, which will dilute your investment. Furthermore, there may be unforeseen costs, expenses and difficulties associated with providing services previously provided by our former business manager and our former property managers. As a consequence, we cannot be certain that the transition to self-management will improve our financial performance.
If we lose or are unable to obtain key personnel, our ability to implement our business strategies could be delayed or hindered.
We believe that our future success depends, in large part, on our ability to retain and hire highly-skilled managerial and operating personnel. Competition for persons with managerial and operational skills is intense, and we cannot assure you that we will be successful in retaining or attracting skilled personnel. If we lose or are unable to obtain the services of our executive officers and other key personnel, or do not establish or maintain the necessary strategic relationships, our ability to implement our business strategy could be delayed or hindered.

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The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.
We have deposited our cash and cash equivalents in several banking institutions in an attempt to minimize exposure to the failure of any one of these entities. However, the Federal Deposit Insurance Corporation ("FDIC") generally only insures limited amounts per depositor per insured bank. At December 31, 2014 we had cash and cash equivalents and restricted cash deposited in interest-bearing transaction accounts at certain financial institutions exceeding these federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over the federally insured levels. The loss of our deposits could reduce the amount of cash we have available to distribute or invest.
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations or a compromise or corruption of our confidential information, or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include an intruder gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationships with our tenants and private data exposure. Our financial results may be negatively impacted by such an incident.
A failure of our information technology ("IT") infrastructure could adversely impact our business and operations.
We rely upon the capacity, reliability and security of our IT infrastructure and our ability to expand and continually update this infrastructure in response to changing needs of our business. Following our transition to self-management, we face the challenge of integrating new systems and hardware into our operations. We may not be able to successfully implement these upgrades in an effective manner. In addition, we may incur significant increases in costs and extensive delays in the implementation and roll-out of any upgrades or new systems. If there are technological impediments, unforeseen complications, errors or breakdowns in implementation, the disruptions could have an adverse effect on our business and financial condition.
We disclose funds from operations ("FFO"), a non-GAAP (U.S. generally accepted accounting principles, or "GAAP") financial measure, in communications with investors, including documents filed with the SEC; however, FFO is not equivalent to our net income or loss as determined under GAAP, and you should consider GAAP measures to be more relevant to our operating performance.
We use internally, and disclose to investors, FFO, a non-GAAP financial measure. FFO is not equivalent to our net income or loss as determined under GAAP, and investors should consider GAAP measures to be more relevant to our operating performance. Because of the manner in which FFO differs from GAAP net income or loss, it may not be an accurate indicator of our operating performance. Furthermore, FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO. Also, because not all companies calculate FFO the same way, comparisons with other companies may not be meaningful.

Risks Related to our Real Estate Assets
There are inherent risks with real estate investments.
Investments in real estate assets are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly converted to cash, limiting our ability to promptly re-balance our portfolio in response to changing economic, financial and investment conditions. Investments in real estate assets also are subject to adverse changes in general economic conditions which, for example, reduce the demand for rental space or impact a tenant’s ability to pay rent.
Among the factors that could impact our real estate assets and the value of an investment in us are:
local conditions such as an oversupply of space or reduced demand for real estate assets of the type that we own or seek to acquire;

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inability to collect rent from tenants;
vacancies or inability to rent space on favorable terms (which also can reduce the market value of the affected assets);
inflation and other increases in operating costs, including insurance premiums, payments for utilities and building materials and real estate taxes;
deflation, which would lead to downward pressure on rents and other sources of income;
adverse changes in the federal, state or local laws and regulations applicable to us, including those affecting rents, zoning, prices of goods, fuel and energy consumption, water and environmental restrictions;
the relative illiquidity of real estate investments;
changing market demographics;
an inability to acquire properties on favorable terms, if at all;
acts of God, such as earthquakes, floods or other uninsured losses; and
changes or increases in interest rates and the availability of financing.
In addition, periods of economic slowdown or recession, or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or increased defaults under existing leases.
For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our real estate properties.
We depend on tenants for our revenue, and accordingly, lease terminations, tenant defaults and bankruptcies could adversely affect the income produced by our properties.
The success of our investments depends on the financial stability of our tenants. Certain economic conditions may adversely affect one or more of our tenants. For example, business failures and downsizings can affect the tenants of our office and industrial properties and may also contribute to reduced consumer demand for retail products and services, which would impact tenants of our retail properties. In addition, our retail shopping center properties typically are anchored by large, nationally recognized tenants, any of which may experience a downturn in its business that may weaken significantly its financial condition and thus the performance of the applicable shopping center. Further, mergers or consolidations among large retail establishments could result in the closure of existing stores or duplicate or geographically overlapping store locations, which could include tenants at our retail properties.
As a result of these factors, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments, or declare bankruptcy. Any of these actions could result in the termination of the tenants’ leases, the expiration of existing leases without renewal or the loss of rental income attributable to the terminated or expired leases, any of which could have a material adverse effect on our cash flows, results of operations, and our ability to pay distributions. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our property. Specifically, a bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past-due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.
Our portfolio is subject to geographic concentration, which exposes us to risks of oversupply and competition in the relevant markets. Significant increases in the supply of certain property types without corresponding increases in demand in those markets could have a material adverse effect on our financial condition, our results of operations and our ability to pay distributions.
As of December 31, 2014, approximately, 9%, 5% and 5% of the base rental income of our consolidated portfolio, excluding the lodging properties, was generated by properties located in the Chicago, Dallas, Houston metropolitan areas, respectively. An oversupply of retail and student housing properties in any of these markets, without a corresponding increase in demand, could have a material adverse effect on our financial condition, our results of operations and our ability to pay distributions.

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One of our tenants generated a significant portion of our revenue for the year ended December 31, 2014, and rental payment defaults by this significant tenant could adversely affect our cash flows and results of operations. Additionally, the tenant is party to three leases with us, which will expire in 2016, 2017 and 2019, and the tenant may not renew such leases and we may not be able to re-lease or dispose of the relevant assets on favorable terms or at all.
For the year ended December 31, 2014, approximately 15.5% of our total annualized rental income (excluding lodging and student housing) was generated by three properties leased to AT&T, Inc. The leases, with approximately 1.7 million, 1.5 million and 0.3 million, rentable square feet, will expire in 2016, 2017 and 2019, respectively. As a result of the concentration of revenue generated from these properties, if AT&T were to cease paying rent or fulfilling its other monetary obligations, we could have significantly reduced rental revenues or higher expenses until the defaults were cured or the properties were leased to a new tenant or tenants. Additionally, if AT&T does not renew its leases, we may not be able to re-lease or dispose of the respective assets on favorable terms or at all. The loss of such tenant may have an adverse effect on our financial condition, cash flows and results of operations.
Leases representing approximately 8.9% and 1.40% of the rentable square feet of our retail and non-core portfolio, respectively, are scheduled to expire in 2015. We may be unable to renew leases or lease vacant space at favorable rates or at all.
As of December 31, 2014, leases representing approximately 8.9% of the 15,477,188 rentable square feet of our retail portfolio and 1.40% of the 6,410,817 rentable square feet of our non-core portfolio are scheduled to expire in 2015. We may be unable to extend or renew any of these leases, or we may be able to lease these spaces only at rental rates equal to or below existing rental rates. We also may not be able to lease space which is currently not occupied on acceptable terms and conditions, if at all. In addition, some of our tenants have leases that include early termination provisions that permit the lessee to terminate all or a portion of its lease with us after a specified date or upon the occurrence of certain events with little or no liability to us. We may be required to offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options to retain these tenants or attract new ones. Portions of our properties may remain vacant for extended periods of time. Further, some of our leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof. If we are unable to obtain new rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted.
We may be required to make significant expenditures to improve our properties in order to retain and attract tenants.
In order to retain tenants whose leases are expiring or to attract replacement tenants, we may be required to provide rent or other concessions, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services. As a result, we may have to pay for significant leasing costs or tenant improvements. Additionally, if we have insufficient capital reserves, we may need to raise capital to fund these expenditures. If we are unable to do so, we may be unable to fund the necessary or desirable improvements to our properties. This could result in non-renewals by tenants upon the expiration of their leases or an inability to attract new tenants, which would result in declines in revenues from operations and adversely affect our cash flows and results of operations.
Furthermore, deferring necessary improvements to a property may cause the property to suffer from a greater risk of obsolescence or a decline in value, or a greater risk of decreased cash flow as a result of fewer potential tenants being attracted to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted.
We face significant competition in the leasing market, which may decrease or prevent increases in the occupancy and rental rates of our properties.
We own properties located throughout the U.S. We compete with numerous developers, owners and operators of commercial properties, many of which own properties similar to, and in the same market areas as, our properties. In addition, many of these competitors have greater resources than we have and may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to attract new tenants or retain existing tenants when their leases expire. Also, if our competitors develop additional properties in locations near our properties, there may be increased competition for creditworthy tenants, which may require us to make capital improvements to properties that we would not have otherwise made.

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We are subject to risks from natural disasters and severe weather.
Natural disasters and severe weather such as earthquakes, wildfires, tornadoes, hurricanes, blizzards, hailstorms or floods may result in significant damage to our properties, disrupt operations at our properties and adversely affect both the value of our properties and the ability of our tenants and operators to make their scheduled rent payments to us. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. These losses may not be insured or insurable at commercially reasonable rates. When we have a geographic concentration, a single catastrophe or destructive weather event affecting a region may have a significant negative effect on our financial condition and results of operations. As a result, our operating and financial results may vary significantly from one period to the next. We also are exposed to the risk of an increased need for the maintenance and repair of our buildings due to inclement weather.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property.
The seller of a property often sells the property to us in its "as is" condition on a "where is" basis and "with all faults," without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some of or all our invested capital in the property, as well as the loss of rental income from that property.
Actions of our joint venture partners could negatively impact our performance.
With respect to our joint venture investments, we are not in a position to exercise sole decision-making authority regarding the property or the joint venture. Consequently, our joint venture investments may involve risks not present with other methods of investing in real estate. For example, our joint venture partner may have economic or business interests or goals which are or which become inconsistent with our economic or business interests or goals or may take action contrary to our instructions or requests or contrary to our policies or objectives. We have experienced these events from time to time with our former joint venture partners, which in some cases has resulted in litigation. An adverse outcome in any lawsuit could have a material effect on our business, financial condition or results of operations. In addition, any litigation increases our expenses and prevents our officers and directors from focusing their time and effort on our core strategic holdings and business plans. Our relationships with our joint venture partners are contractual in nature. These agreements may restrict our ability to sell our interest when we desire or on advantageous terms and may be terminated or dissolved and, in each event, we may not continue to own or operate the interests or assets underlying the relationship or may need to purchase the interests or assets at an above-market price to continue ownership. Such joint venture investments may involve other risks not otherwise present with a direct investment in real estate, including, for example:
the possibility that our joint venture partner might become bankrupt;
the possibility that the investment may require additional capital that we or our joint venture partner does not have, which lack of capital could affect the performance of the investment or dilute our interest if our joint venture partner were to contribute our share of the capital;
the possibility that our joint venture partner in an investment might breach a loan agreement or other agreement or otherwise, by action or inaction, act in a way detrimental to us or the investment;
the possibility that we may incur liabilities as the result of the action taken by our joint venture partner; or
that such joint venture partner may exercise buy/sell rights that force us to either acquire the entire investment, or dispose of our share, at a time and price that may not be consistent with our investment objectives.
The operating results of our student housing segment may be negatively affected by potential development and construction delays and resulting increases in costs and risks, which could diminish the return on a stockholder’s investment.
We intend to continue to expand our student housing portfolio through the development of new properties. We could incur substantial capital obligations with respect to our development activities. We are subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities or community groups and the ability of our builders to control construction costs or to build in conformity with plans, specifications and timetables. A builder’s failure to perform may necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance also may be affected or delayed by conditions beyond the builder’s control. Delays in completion of construction also could give tenants the right to terminate preconstruction leases at a newly developed community. We may incur additional risks when we make periodic progress payments or other advances to a builder prior to completion of construction. These and other such factors can result in increased costs of a project or loss of our investment. Substantial capital

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obligations could diminish our ability to make distributions. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of the fair market value of a property upon completion of construction when agreeing on the property’s contract purchase price. If our projections are inaccurate, we may pay too much for a property. The realization of any of the foregoing risks could diminish the return on a stockholder’s investment.
The financial covenants under our credit agreement may restrict our ability to make distributions and our operating and acquisition activities. If we breach the financial covenants we could be held in default under the credit agreement, which could accelerate our repayment date and materially adversely affect our liquidity and financial condition.
On February 3, 2015, we entered into an amended and restated credit agreement for a $300 million unsecured revolving credit facility with KeyBank National Association, KeyBanc Capital Markets Inc., J. P. Morgan Securities LLC and JPMorgan Chase Bank, N.A., among other financial institutions. The revolving credit facility provides us with the ability from time to time to increase the size of the revolving credit facility, subject to certain conditions. Certain of our subsidiaries have guaranteed our obligations under the revolving credit facility. As of March 23, 2015, we had $0.04 million outstanding under the revolving credit facility.
The revolving credit facility requires compliance with certain financial covenants, including, among other conditions: a minimum net worth requirement; restrictions on indebtedness; a dividend limitation and other material covenants. These covenants could inhibit our ability to make distributions to our stockholders and to pursue certain business initiatives or effect certain transactions that might otherwise be beneficial to us.
The revolving credit facility also provides for several customary events of default, including: (i) our failure to make timely payments; (ii) our or any of the guarantors’ failure to perform as required; (iii) certain breaches of representations, warranties or covenants; (iv) the occurrence of certain bankruptcy-related events; and (v) an unapproved change in control of our company. Declaration of a default by the lenders under the revolving credit facility could restrict our ability to borrow additional monies and could cause all amounts to become immediately due and payable, which would materially adversely affect our liquidity and financial condition.
Our investments in equity and debt securities involve special risks and may lose value.
As of December 31, 2014, we owned investments in real estate-related equity and debt securities with an aggregate market value of $154.8 million. Real estate-related equity securities are always unsecured and subordinated to other obligations of the issuer. Investments in real estate-related equity securities are subject to numerous risks including: (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities; (2) substantial market price volatility resulting from, among other things, changes in prevailing interest rates in the overall market or related to a specific issuer, as well as changing investor perceptions of the market as a whole, REIT or real estate securities in particular or the specific issuer in question; (3) subordination to the liabilities of the issuer; (4) the possibility that the earnings of the issuer may be insufficient to meet the issuer’s debt service obligations or to pay distributions; and (5) with respect to investments in real estate-related preferred equity securities, the operation of mandatory sinking fund or call or redemption provisions during periods of declining interest rates that could motivate the issuer to redeem the securities. In addition, investments in real estate-related securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer, as well as the risks inherent with real estate-related investments discussed herein.
The prices of some of the securities we have invested in have declined since our initial purchase, and in certain cases we have sold these investments at a loss. As of March 23, 2015, we also owned 5.0% of the outstanding common stock of Xenia, which had a market value of $23.79 per share as of such date. Under certain provisions of the federal securities laws, we are limited in our ability to sell down our stake because we may be deemed to be in possession of material nonpublic information about Xenia, which means that our Xenia stake is particularly illiquid.
An increase in real estate taxes may decrease our income from properties.
From time to time, the amount we pay for property taxes increases as either property values increase or assessment rates are adjusted. Increases in a property’s value or in the assessment rate result in an increase in the real estate taxes due on that property. If we are unable to pass the increase in taxes through to our tenants, our net operating income for the property will decrease.

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Uninsured losses or premiums for insurance coverage may adversely affect a stockholder’s returns.
There are types of losses, generally catastrophic in nature, such as losses due to wars, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Additionally, mortgage lenders sometimes require commercial property owners to purchase specific coverage against any of the above types of casualty loss as a condition for providing mortgage loans. These policies may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. If we incur any casualty losses not fully covered by insurance, the value of our assets will be reduced by the amount of the uninsured loss. In addition, other than any reserves we may establish, we have no designated source of funding to repair or reconstruct any uninsured damaged property.
Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability.
We own real estate assets located in areas that are susceptible to attack. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs. More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in or damage to the U.S. and worldwide financial markets and economy.
The cost of complying with environmental and other laws and regulations may adversely affect us.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above‑ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. We also are required to comply with various federal, state and local fire, health, life-safety and similar laws and regulations. Some of these laws and regulations may impose joint and several liabilities on tenants or owners for the costs of investigating or remediating contaminated properties. These laws and regulations often impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The cost of removing or remediating could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.
Environmental laws and regulations also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require substantial expenditures by us. Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Third parties may seek recovery from owners of real properties for personal injury or property damage associated with exposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require material expenditures by us. For example, various federal, state and local laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, "green" building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency and waste management, which could increase the costs of maintaining or improving our existing properties or developing new properties.
Environmental laws in the U.S. also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, if that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our properties may contain asbestos-containing building materials.
Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
The presence of mold at any of our properties could require us to undertake a costly program to remediate, contain or remove the mold. Mold growth may occur when moisture accumulates in buildings or on building materials. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing because exposure to mold

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may cause a variety of adverse health effects and symptoms, including allergic or other reactions. The presence of mold could expose us to liability from our tenants, their employees and others if property damage or health concerns arise.
We may incur significant costs to comply with the Americans with Disabilities Act.
Our properties generally are subject to the Americans with Disabilities Act of 1990, as amended. Under this act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The act has separate compliance requirements for "public accommodations" and "commercial facilities" that generally require that buildings and services be made accessible and available to people with disabilities. The act’s requirements could require us to remove access barriers and any noncompliance could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. Our funds used for compliance with these laws may affect cash available for distributions and the amount of your distributions.
We depend on the availability of public utilities and services, especially for water and electric power. Any reduction, interruption or cancellation of these services may adversely affect us.
Public utilities, especially those that provide water and electric power, are fundamental for the sound operation of our assets. The delayed delivery or any material reduction or prolonged interruption of these services could allow certain tenants to terminate their leases or result in an increase in our costs, as we may be forced to use backup generators, which also could be insufficient to fully operate our facilities and could result in our inability to provide services. Accordingly, any interruption or limitation in the provision of these essential services may adversely affect us.
Risks Related to our Retail Assets
Our retail properties face considerable competition for the tenancy of our lessees and the business of retail shoppers.
There are numerous shopping venues that compete with our retail properties in attracting retailers to lease space and shoppers to patronize their properties. In addition, our retail tenants face changing consumer preferences and increasing competition from other forms of retailing, such as e-commerce websites and catalogues as well as other retail centers located within the geographic market areas of our retail properties that compete with our properties for customers. All these factors may adversely affect our tenants’ cash flows and, therefore, their ability to pay rent. To the extent that our tenants do not pay their rent or do not pay on a timely basis, it could have a negative impact on our financial condition and result of operations.
Retail conditions may adversely affect our income and our ability to make distributions to our stockholders.
A retail property’s revenues and value may be adversely affected by a number of factors, many of which apply to real estate investment generally, but which also include trends in the retail industry and perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property. Our properties are located in public places, and any incidents of crime or violence, including acts of terrorism, could result in a reduction of business traffic to tenant stores in our properties. Any such incidents may also expose us to civil liability or harm our reputation. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our retail properties may be negatively impacted.
An economic downturn could have an adverse impact on the retail industry generally. Slow or negative growth in the retail industry could result in defaults by retail tenants, which could have an adverse impact on our business, financial condition or result of operations.
An economic downturn could have an adverse impact on the retail industry generally. As a result, the retail industry could face reductions in sales revenues and increased bankruptcies. Adverse economic conditions may result in an increase in distressed or bankrupt retail companies, which in turn would result in an increase in defaults by tenants at our commercial properties. Additionally, slow economic growth could hinder new entrants into the retail market, which may make it difficult for us to fully lease our real properties. Tenant defaults and decreased demand for retail space would have an adverse impact on the value of our retail properties and our results of operations.
Competition may impede our ability to renew leases or re-let space as leases expire and require us to undertake unbudgeted capital improvements, which could harm our operating results.
Our properties are located in developed areas. Any competitive properties that are developed close to our existing properties also may impact our ability to lease space to creditworthy tenants. Increased competition for tenants may require us to make capital improvements to properties that we would not have otherwise planned to make. Any unbudgeted capital improvements may negatively impact our financial position. Also, to the extent we are unable to renew leases or re-let space as leases expire, it would result in decreased cash flow from tenants and reduce the income produced by our properties. Excessive vacancies

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(and related reduced shopper traffic) at any of our properties may hurt sales of other tenants at that property and may discourage them from renewing leases.
We may be restricted from re-leasing space at our retail properties.
Leases with retail tenants may contain provisions giving the particular tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center. These provisions may limit the number and types of prospective tenants interested in leasing space in a particular retail property.
Our revenue will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space and adversely affect the returns on your investment.
In the retail sector, a tenant occupying all or a large portion of the gross leasable area of a retail center, commonly referred to as an anchor tenant, may become insolvent, may suffer a downturn in business or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition. A lease termination by an anchor tenant also could result in lease terminations or reductions in rent by other tenants whose leases may permit cancellation or rent reduction if another tenant’s lease is terminated. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could reduce customer traffic in the retail center and thereby reduce the income generated by that retail center. A transfer of a lease to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases in accordance with lease terms. If we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to remodel the space to be able to re-lease the space to more than one tenant.
Our retail leases may contain co-tenancy provisions, which would have an adverse effect on our operation of such retail properties if exercised.
With respect to any retail properties we own or acquire, we may enter into leases containing co-tenancy provisions. Co-tenancy provisions may allow a tenant to exercise certain rights if, among other things, another tenant fails to open for business, delays its opening or ceases to operate, or if a percentage of the property’s gross leasable space or a particular portion of the property is not leased or subsequently becomes vacant. A tenant exercising co-tenancy rights may be able to abate minimum rent, reduce its share or the amount of its payments for common area operating expenses and property taxes or cancel its lease.
Risks Related to our Student Housing Assets
Our results of operations are subject to the following risks inherent in the collegiate housing industry: leasing cycles, concentrated lease-up period, seasonal cash flows and, with respect to 11.5-month leases, an increased risk of student defaults during the summer months.
We generally lease our student housing properties under 11.5-month leases, and, in certain cases, under nine-month or shorter-term semester leases. As a result, we may experience significantly reduced cash flows during the summer months at properties with lease terms shorter than 12 months. Furthermore, all our student housing properties must be entirely re-leased each year, exposing us to significant leasing risk. We may not be able to re-let the property on similar terms, if we are able to re-let the property at all. The terms of renewal or re-lease (including the cost of required renovations or concessions to tenants) may be less favorable to us than the prior lease. If we are unable to re-let all or a substantial portion of our student housing properties, or if the rental rates upon such re-letting are significantly lower than expected rates, our cash flow from operations and our ability to make distributions to stockholders and service indebtedness could be adversely affected.
In addition, we are subject to increased leasing risk on our student housing properties under construction and student housing properties we acquire that we have not previously managed due to our lack of experience leasing those properties and unfamiliarity with their leasing cycles. Collegiate housing properties are typically leased during a leasing season that begins in November and ends in August of each year. We are therefore highly dependent on the effectiveness of our marketing and leasing efforts and personnel during this season. Prior to the commencement of each new lease period, mostly in August but also in September at some communities, we prepare the units for new incoming tenants. Other than revenue generated by in-place leases for returning tenants, we do not generally recognize lease revenue during this period, referred to as "Turn," as we have no leases in place. In addition, during Turn, we incur significant expenses making our units ready for occupancy, which we recognize immediately. This lease Turn period results in seasonality in our operating results during the third quarter of each year. As a result, we may experience significantly reduced cash flows during the summer months at properties leased for terms shorter than twelve months.

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In addition, students leasing shorter than 11.5-month leases may be more likely to default on their rental payments during the summer months, which could further reduce our revenues during this period. We may have to spend considerable effort and expense in pursuing payment upon a defaulted lease, and our efforts may not be successful.
We rely on our relationships with universities, and changes in university personnel or policies could adversely affect our operating results.
In some cases, we rely on our relationships with universities for referrals of prospective tenants or for mailing lists of prospective tenants and their parents. Any failure to maintain good relationships with personnel at these universities could therefore have a material adverse effect on us. If universities refuse to provide us with referrals or make their lists of prospective student-tenants and their parents available to us or increase the costs of these lists, the increased costs or failure to obtain such lists or referrals could also have a material adverse effect on us.
We may be adversely affected by a change in university admission and housing policies. For example, if a university reduces the number of student admissions, the demand for our student housing properties may be reduced and our occupancy rates may decline. In addition, universities may institute a policy that a certain class of students, such as freshmen, must live in a university-owned facility, which would also reduce the demand for our properties.
It is also important that the universities from which our communities draw tenants maintain good reputations and are able to attract the desired number of incoming students. Any degradation in a university’s reputation could inhibit its ability to attract students and reduce the demand for our communities.
We face significant competition from university-owned collegiate housing and from other private collegiate housing communities located within close proximity to universities.
Many students prefer on-campus housing to off-campus housing because of the closer physical proximity to campus and integration of on-campus facilities into the academic community. Universities can generally avoid real estate taxes and borrow funds at lower interest rates, while we must pay full real estate tax rates and have higher borrowing costs. Consequently, universities often can offer more convenient or less expensive collegiate housing than we can, which can adversely affect our occupancy and rental rates.
We also compete with other national and regional owner-operators of off-campus collegiate housing in a number of markets as well as with smaller local owner-operators. There are a number of purpose-built collegiate housing properties that compete directly with us located near or in the same general vicinity of many of our collegiate housing communities. Such competing collegiate housing communities may be newer than our collegiate housing communities, located closer to campus, charge less rent, possess more attractive amenities or offer more services, shorter lease terms or more flexible leases. The construction of competing properties could adversely affect our rental income.
Revenue at a particular property could also be adversely affected by a number of other factors, including the construction of new on-campus and off-campus housing, decreases in the general levels of rents for housing at competing properties, decreases in the number of students enrolled at one or more of the colleges or universities from which the property draws student-tenants and other general economic conditions.
We compete with larger national companies, colleges and universities with greater resources and superior access to capital. Furthermore, a number of other large national companies with substantial financial and marketing resources may enter the student housing business. The activities of any of these companies, colleges or universities could cause an increase in competition for student-tenants and for the acquisition, development and management of other student housing properties, which could reduce the demand for our student housing properties.
The reporting of on-campus crime statistics required of universities may negatively impact our communities.
Federal and state laws require universities to publish and distribute reports of on-campus crime statistics, which may result in negative publicity and media coverage associated with crimes occurring in the vicinity of, or on the premises of, our student housing communities. Reports of crime or other negative publicity regarding the safety of the students residing on, or near, our communities may have an adverse effect on both our on-campus and off-campus communities.
A weak economic environment could reduce enrollments and limit the demand for our student housing properties, which could materially and adversely affect our cash flows, profitability and results of operations.
We own, directly or indirectly, interests in collegiate housing properties located near major universities in the U.S. Accordingly, we are dependent upon the levels of student enrollment and the admission policies of the respective universities,

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which attract a significant portion of our student housing leasing base. Economic conditions that adversely affect household disposable income, such as high unemployment levels, weak business conditions, reduced access to credit, increasing tax rates or high fuel and energy costs could reduce overall student leasing or cause students to shift their leasing practices as students may determine to forego college or live at home and commute to college.
In a distressed market, many students may be unable to obtain student loans on favorable terms. In addition, tuition and other costs associated with attending college may continue to rise. If student loans are not available or the costs of attending college are prohibitively high, enrollment numbers for universities may decrease. The demand for, occupancy rates at, rental income from and value of our student housing properties would be adversely affected if student enrollment levels become stagnant or decreased. Accordingly, difficult financial or macroeconomic conditions could have a significant adverse effect on our cash flows, profitability and results of operations.
Risks Associated with Debt Financing
Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the properties securing the loans.
We have acquired, and will continue to acquire, real estate assets by assuming existing financing or borrowing new monies. In addition, we may obtain loans secured by some of or all our properties or other assets to fund additional acquisitions or operations, including to satisfy the requirement that we distribute at least 90% of our annual "REIT taxable income" (subject to certain adjustments) to our stockholders, or as is otherwise necessary or advisable to assure that we qualify as a REIT for federal income tax purposes. Payments required on any amounts we borrow reduce the funds available for, among other things, distributions to our stockholders because cash otherwise available for distribution is required to pay principal and interest associated with amounts we borrow.
Defaults on loans secured by a property we own may result in us losing the property as a result of foreclosure actions initiated by a lender. For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the property. If the outstanding balance of the debt exceeds our tax basis in the property, we would recognize taxable gain on the foreclosure but would not receive any cash proceeds. We also may fully or partially guarantee any monies that subsidiaries borrow to purchase or operate real estate assets. In these cases, we will be responsible to the lender for repaying the loans if the subsidiary is unable to do so. If any mortgage contains cross-collateralization or cross-default provisions, more than one property may be affected by a default.
Lenders may restrict certain aspects of our operations, which could, among other things, limit our ability to make distributions.
The terms and conditions contained in our loan documents may require us to maintain cash reserves; limit the aggregate amount we may borrow on a secured and unsecured basis; require us to satisfy restrictive financial covenants; prevent us from entering into certain business transactions, such as a merger or other business combination or a sale of assets; restrict our leasing operations; or require us to obtain consent from the lender to complete transactions or make investments that are ordinarily approved only by our board of directors.
In addition, secured lenders typically restrict our ability to discontinue insurance coverage on a mortgaged property even though we may believe that the insurance premiums paid to insure against certain losses, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, are greater than the potential risk of loss.
Our mortgage agreements contain certain provisions that may limit our ability to sell our properties.
In order to assign or transfer our rights and obligations under certain of our mortgage agreements, we generally must obtain the consent of the lender, pay a fee equal to a fixed percentage of the outstanding loan balance and pay any costs incurred by the lender in connection with any such assignment or transfer.
These provisions of our mortgage agreements may limit our ability to sell our properties which, in turn, could adversely impact the price realized from any such sale. To the extent we receive lower sale proceeds, we could experience a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to stockholders.
Interest-only indebtedness may increase our risk of default.
We have obtained, and continue to borrow, interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan is not reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this

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period. After the interest-only period, we are required either to make scheduled payments of amortized principal and interest or to make a lump-sum or "balloon" payment at maturity. These required principal or balloon payments increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan if we are unable to fund the lump-sum or balloon amount.
Increases in interest rates could increase the amount of our debt payments.
As of December 31, 2014, approximately $764.3 million of our mortgages payable and $200.0 million of our line of credit debt bore interest at variable rates. Increases in interest rates on variable rate debt that has not otherwise been hedged through the use of swap agreements reduce the funds available for other needs, including distribution to our stockholders. As of December 31, 2014, approximately $964.3 million of our total indebtedness bore interest at fixed rates. As fixed-rate debt matures, we may not be able to borrow at rates equal to or lower than the rates on the expiring debt. In addition, if rising interest rates cause us to need additional capital to repay indebtedness, we may be forced to sell one or more of our properties or investments in real estate at times that may not permit us to realize the return on the investments we would have otherwise realized.
To hedge against interest rate fluctuations, we use derivative financial instruments, which may be costly and ineffective.
From time to time, we use derivative financial instruments to hedge exposures to changes in interest rates on certain loans secured by our assets. Our derivative instruments currently consist of interest rate swap contracts but may, in the future, include, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge. There is no assurance that our hedging strategy will achieve our objectives. We may be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.
To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we are exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. A counterparty could fail, shut down, file for bankruptcy or be unable to pay out contracts. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then-current market price. Additionally, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot provide assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Further, the REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. We may be unable to manage these risks effectively.
We may be contractually obligated to purchase property even if we are unable to secure financing for the acquisition.
We typically finance a portion of the purchase price for each property that we acquire. However, to ensure that our offers are as competitive as possible, we generally do not enter into contracts to purchase property that include financing contingencies. Thus, we may be contractually obligated to purchase a property even if we are unable to secure financing for the acquisition. In this event, we may choose to close on the property by using cash on hand, which would result in less cash available for other purposes, including funding operating costs or paying distributions to our stockholders. Alternatively, we may choose not to close on the acquisition of the property and default on the purchase contract. If we default on any purchase contract, we could lose our earnest money, become subject to liquidated or other contractual damages and remedies and suffer reputational harm in the commercial real estate market, which could make future sellers less likely to accept our bids or cause them to require a higher purchase price or more onerous contractual terms.
Risks Related to Our Common Stock
Since Inland American shares are not currently traded on a national stock exchange, there is no established public market for our shares and you may not be able to sell your shares.
Our shares of common stock are not listed on a national securities exchange. There is no established public trading market for our shares and no assurance that one may develop. Our charter also prohibits the ownership of more than 9.8% (in value or

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number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of our common stock by any single investor unless exempted prospectively or retrospectively by our board. This may inhibit investors from purchasing a large portion of our shares. Our charter also does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading on a national exchange by a specified date. There is no assurance the board will pursue a listing or other liquidity event. In addition, even if our board decides to seek a listing of our shares of common stock, there is no assurance that we will satisfy the listing requirements or that our shares will be approved for listing. If and when a listing occurs there is no guarantee you will be able to sell your common stock at a price equal to your initial investment value or the current estimated share value.
The estimated value per share of our common stock is based on a number of assumptions and estimates that may not be accurate or complete and is also subject to a number of limitations.
On February 24, 2015, we announced an estimated value of our common stock equal to $4.00 per share. The audit committee of the Company’s board of directors engaged Real Globe Advisors, LLC ("Real Globe"), an independent third-party real estate advisory firm, to estimate the per share value of our common stock on a fully diluted basis as of February 4, 2015. As with any methodology used to estimate value, the methodology employed by Real Globe and the recommendations made by us were based upon a number of estimates and assumptions that may not have been accurate or complete. Further, different parties using different assumptions and estimates could have derived a different estimated value per share, which could be significantly different from our estimated value per share. The estimated per share value does not represent: (i) the price at which our shares would trade at a national securities exchange, (ii) the amount per share a stockholder would obtain if he, she or it tried to sell his, her or its shares or (iii) the amount per share stockholders would receive if we liquidated our assets and distributed the proceeds after paying all our expenses and liabilities. Accordingly, with respect to the estimated value per share, we can give no assurance that:
a stockholder would be able to resell his, her or its shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;
our shares would trade at a price equal to or greater than the estimated value per share if we listed them on a national securities exchange; or
the methodology used to estimate our value per share would be acceptable to FINRA or that the estimated value per share will satisfy the applicable annual valuation requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code with respect to employee benefit plans subject to ERISA and other retirement plans or accounts subject to Section 4975 of the Code.
There is no assurance that we will be able to continue paying cash distributions or that distributions will increase over time.
Historically we have paid, and we intend to continue to pay, regular cash distributions to our stockholders. Following the completion of the Spin-Off, our board of directors analyzed and reviewed our distribution rate and announced a new distribution rate of $0.13 per share on an annualized basis, which represents a decrease from the monthly distribution rate that we paid immediately prior to the Spin-Off. A number of factors were considered in establishing the new distribution rate. Prior to the Spin-Off, Xenia generated a substantial portion of our cash flows from operations and as a result, our previous distribution rate was not sustainable after the Spin-Off. In addition, our board of directors determined that it is in the best interest of the company to retain additional operating cash flow in order to accumulate an appropriate level of capital reserves to enable the Company to tailor and grow its retail and student housing segments, consistent with our strategy and objectives as described in "Part I, Item 1. Business", as well as to address future lease maturities and disposition plans related to several significant properties in our non-core segment.
There are many factors that can affect the availability and timing of cash distributions, such as our ability to earn positive yields on our real estate assets, the yields on securities in which we invest and our operating expense levels, as well as many other variables. Our portfolio strategy may also affect our ability to pay our cash distributions if we are not able to reinvest the capital we receive from our property dispositions in a reasonable amount of time into assets that generate cash flow yields similar to or greater than those of the properties sold or if we engage in further spin-off transactions. There is no assurance that we will be able to continue paying distributions at the current level or that the amount of distributions will increase, or not continue to decrease, over time. Even if we are able to continue paying distributions, the actual amount and timing of distributions is determined by our board of directors in its discretion and typically depends on the amount of funds available for

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distribution, which depends on items such as current and projected cash requirements and tax considerations. As a result, our distribution rate and payment frequency may vary from time to time.
Funding distributions from sources other than cash flow from operating activities may negatively impact our ability to sustain or pay future distributions and result in us having less cash available for other uses, such as property purchases.
If our cash flow from operating activities is not sufficient to fully fund the payment of distributions, the level of our distributions may not be sustainable and some of or all our distributions will be paid from other sources. For the year ended December 31, 2014, distributions were paid from cash flow from operations, distributions from unconsolidated entities and gain on sales of properties. We also may use cash from financing activities, components of which may include borrowings (including borrowings secured by our assets), and have used proceeds from the sales of our properties, to fund distributions. To the extent distributions are paid from these sources, we will have less cash available for other uses, such as to refinance existing indebtedness or to purchase new assets. Additionally, to the extent that the aggregate amount of cash distributed in any given year exceeds the amount of our current and accumulated earnings and profits for the same period, the excess amount will be deemed a return of capital for federal income tax purposes, rather than a return on capital. Furthermore, in the event that we are unable to fund future distributions from our cash flows from operating activities, the value of your shares upon any listing of our stock, the sale of our assets or any other exit event may be negatively affected.
Risks Related to Our Organization and Structure
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including our investment policies and strategies and policies regarding financing, debt and equity capitalization, REIT qualification and distributions. Our board of directors may amend or revise certain of these and other policies without a vote of the stockholders.
Stockholders’ interest in us will be diluted if we issue additional shares.
Stockholders do not have preemptive rights with respect to any shares issued by us in the future. Our charter authorizes our board of directors, without stockholder approval, to amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Company has authority to issue. Future issuances of common stock, including issuances through our distribution reinvestment plan ("DRP") (which was suspended effective August 12, 2014), reduce the percentage of our shares owned by our current stockholders who do not participate in future stock issuances. Stockholders are not entitled to vote on whether or not we issue additional shares. In addition, depending on the terms and pricing of an additional offering of our shares and the value of our properties, our stockholders may experience dilution in the value of their shares. Further, our board could issue stock on terms and conditions that subordinate the rights of the holders of our current common stock or have the effect of delaying, deferring or preventing a change in control in us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for our stockholders.
Stockholders’ returns may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered, and do not intend to register our company or any of our subsidiaries, as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act"). If we or any of our subsidiaries become obligated to register as an investment company, the registered entity would have to comply with regulation under the Investment Company Act with respect to capital structure (including the registered entity’s ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act) and portfolio composition, including disclosure requirements and restrictions with respect to diversification and industry concentration, and other matters. Compliance with the Investment Company Act may not be feasible as it would limit our ability to make certain investments and require us to significantly restructure our operations and business plan. The costs we would incur and the limitations that would be imposed on us as a result of such compliance and restructuring would negatively affect the value of our common stock, our ability to make distributions and the sustainability of our business and investment strategies.
We believe that neither we nor any subsidiaries we own fall within the definition of an investment company under Section 3(a)(1) of the Investment Company Act because we primarily engage in the business of investing in real property, through our wholly or majority owned subsidiaries, each of which has at least 60% of its assets in real property. The company conducts its operations, directly and through wholly or majority-owned subsidiaries, so that neither the company nor any of its subsidiaries is registered or will be required to register as an investment company under the Investment Company Act. Section 3(a)(1) of the Investment Company Act, in relevant part, defines an investment company as (i) any issuer that is, or holds itself out as

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being, engaged primarily in the business of investing, reinvesting or trading in securities, or (ii) any issuer that is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns, or proposes to acquire, "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis (the "40% Test"). The term "investment securities" generally includes all securities except government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exemption from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. We and our subsidiaries are primarily engaged in the business of investing in real property and, as such, should fall outside of the definition of an investment company under Section 3(a)(1)(A) of the Investment Company Act. We also conduct our operations and the operations of our subsidiaries so that each complies with the 40% Test.
Accordingly, we believe that neither we nor any of our wholly and majority-owned subsidiaries are considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of "investment company," we intend to rely on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. To rely upon Section 3(c)(5)(C) of the Investment Company Act as it has been interpreted by the SEC staff, an entity would have to invest at least 55% of its total assets in "mortgage and other liens on and interests in real estate," which we refer to as "qualifying real estate investments" and maintain an additional 25% of its total assets in qualifying real estate investments or other real estate-related assets. The remaining 20% of the entity’s assets can consist of miscellaneous assets. These criteria may limit what we buy, sell and hold.
We classify our assets for purposes of Section 3(c)(5)(C) based in large measure upon no-action letters issued by the SEC staff and other interpretive guidance provided by the SEC and its staff. The no-action positions are based on factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than 20 years ago. Pursuant to this guidance, and depending on the characteristics of the specific investments, certain mortgage-backed securities, other mortgage-related instruments, joint venture investments and the equity securities of other entities may not constitute qualifying real estate assets, and therefore, we may limit our investments in these types of assets. The SEC or its staff may not concur with the way we classify our assets. Future revisions to the Investment Company Act or further guidance from the SEC or its staff may cause us to no longer be in compliance with the exemption from the definition of an "investment company" provided by Section 3(c)(5)(C) and may force us to re-evaluate our portfolio and our investment strategy. (e.g., in 2011 the SEC staff published a Concept Release in which it reviewed and questioned certain interpretative positions taken under Section 3(c)(5)(C)). To the extent that the SEC or its staff provides more specific or different guidance, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC or its staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.
A change in the value of any of our assets could cause us to fall within the definition of "investment company" and negatively affect our ability to be free from registration and regulation under the Investment Company Act. To avoid being required to register the company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. Sales may be required under adverse market conditions, and we could be forced to accept a price below that which we would otherwise consider acceptable. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. Any such selling, acquiring or holding of assets driven by Investment Company Act considerations could negatively affect the value of our common stock, our ability to make distributions and the sustainability of our business and investment strategies.
If we or our subsidiaries were required to register as an investment company but failed to do so, we or the applicable subsidiary would be prohibited from engaging in our or its business, and criminal and civil actions could be brought against us or the applicable subsidiary. If we or any of our subsidiaries were deemed an unregistered investment company, we or the applicable subsidiary could be subject to monetary penalties and injunctive relief and we or the applicable subsidiary could be unable to enforce contracts with third parties and third parties could seek to obtain rescission of transactions undertaken during the period we or the applicable subsidiary were deemed an unregistered investment company, unless the court found that under the circumstances, enforcement (or denial of rescission) would produce a more equitable result than no enforcement (or grant of rescission) and would not be inconsistent with the Investment Company Act.
Our rights, and the rights of our stockholders, to recover claims against our officers and directors are limited by Maryland law.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter eliminates our directors’ and officers’ liability to the

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maximum extent permitted by Maryland law and our charter and bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for any claim or liability to which they may become subject or which they may incur by reason of their service as directors or officers. Maryland law generally permits a corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action and to indemnify its directors and officers for losses, liabilities and expenses unless it is established that: (i) the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty; (ii) the director or officer actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law, which could reduce our and our stockholders’ recovery from these persons if they act in a negligent or grossly negligent manner. In addition, we may be obligated to fund the defense costs incurred by our officers and directors in some cases.
Our charter places limits on the amount of common stock that any person may own without the prior approval of our board of directors.
To qualify as a REIT, no more than 50% of the outstanding shares of our common stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year. Our charter prohibits any persons or groups from owning more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of our common stock unless exempted prospectively or retroactively by our board of directors. These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all our assets that might involve a premium price for holders of our common stock. Further, any person or group attempting to purchase shares exceeding these limits could be compelled to sell the additional shares and, as a result, to forfeit the benefits of owning the additional shares.
Our charter permits our board of directors to authorize the issuance of preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.
Our board of directors is permitted to authorize the issuance of preferred stock without stockholder approval. Further, our board may classify or reclassify any unissued shares of stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of any such preferred stock. Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all our assets, that might provide a premium price for holders of our common stock.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the holder becomes an "interested stockholder." These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An "interested stockholder" is defined as:
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the then-outstanding voting stock of the corporation; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding voting stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved, in advance, the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may condition its approval on compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the expiration of the five-year period described above, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

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80% of the votes entitled to be cast by holders of the then-outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority voting requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. Maryland law also permits various exemptions from these provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits, in some cases, the ability of a third party to vote shares acquired in a "control share acquisition."
Under the Maryland Control Share Acquisition Act, persons or entities owning "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights with respect to those shares except to the extent approved by a vote of two-thirds of the votes entitled to be cast by the corporation’s disinterested stockholders. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are not considered disinterested for these purposes. "Control shares" are shares of stock that, taken together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
one-tenth or more but less than one-third of all voting power;
one-third or more but less than a majority of all voting power; or
a majority or more of all voting power.
Control shares do not include shares of stock the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of issued and outstanding control shares, subject to certain exceptions. The Control Share Acquisition Act does not apply to (i) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (ii) acquisitions approved or exempted by the corporation’s bylaws. Our bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Federal Income Tax Risks
If we fail to qualify as a REIT, we will have less cash to distribute to our stockholders.
Our qualification as a REIT depends on our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets as well as other tests imposed by the Code. We cannot assure you that our actual operations for any one taxable year will satisfy these requirements. Further, new legislation, regulations, administrative interpretations or court decisions could significantly affect our ability to qualify as a REIT or the federal income tax consequences of our qualification as a REIT. If we were to fail to qualify as a REIT and did not qualify for certain statutory relief provisions:
we would not be allowed to deduct distributions paid to stockholders when computing our taxable income;
we would be subject to federal, state and local income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;
we would be disqualified from being taxed as a REIT for the four taxable years following the year during which we failed to qualify, unless we qualify for certain statutory relief provisions;
we would have less cash to pay distributions to stockholders; and
we may be required to borrow additional funds or sell some of our assets in order to pay the corporate tax obligations we may incur as a result of being disqualified.
In addition, if we were to fail to qualify as a REIT, all distributions to stockholders that we did pay would be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. This means that our U.S. stockholders who are taxed at individual rates would be taxed on our dividends at long-term capital gains rates of up to 20% and that our corporate stockholders generally would be entitled to the dividends received deduction with respect to such dividends, subject, in each case, to applicable limitations under the Code.

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To maintain REIT status, we may be forced to borrow funds or dispose of assets during unfavorable market conditions to make distributions to our stockholders, which could increase our operating costs and decrease the value of an investment in our company.
To qualify as a REIT, we must comply with the requirement that we currently distribute 90% of our REIT taxable income to our stockholders each year (the "90% Distribution Test"). At times, we may not have sufficient funds to satisfy the 90% Distribution Test and may need to borrow funds or dispose of assets to make these required distributions and maintain our REIT status and avoid the payment of income and excise taxes. Our inability to satisfy the 90% Distribution Test with operating cash flow could result from (i) differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes; (ii) the effect of non-deductible capital expenditures; (iii) the creation of reserves; or (iv) required debt amortization payments. We may need to borrow funds at times when market conditions are unfavorable. Further, if we are unable to borrow funds when needed for this purpose, we would have to find alternative sources of funding or risk losing our status as a REIT.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets. For example:
We will be subject to tax on any undistributed income. We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year plus amounts retained for which federal income tax was paid are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% "prohibited transactions" tax.
Our taxable REIT subsidiaries are subject to regular corporate federal, state and local taxes.
We will be subject to a 100% penalty tax on transactions with a taxable REIT subsidiary that are not conducted on an arm’s-length basis.
Any of these taxes would decrease cash available for distributions to our stockholders.
The prohibited transactions tax may limit our ability to dispose of our properties, and we could incur a material tax liability if the Internal Revenue Service (the "IRS") successfully asserts that the 100% prohibited transaction tax applies to some of or all our past or future dispositions.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of a property. As part of our plan to refine our portfolio, we have selectively disposed of certain of our properties in the past and intend to make additional dispositions in the future. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, not all of our past dispositions have qualified for that safe harbor and some or all of our future dispositions may not qualify for that safe harbor. We believe that our past dispositions will not be treated as prohibited transactions, and we intend to avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. To avoid the prohibited transaction tax, we may choose not to engage in certain sales of our properties or may conduct such sales through a taxable REIT subsidiary, which would be subject to federal, state and local income taxation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our past or future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material.
We may fail to qualify as a REIT if the IRS successfully challenges the valuation of our common stock used for purposes of our DRP.
In order to satisfy the 90% Distribution Requirement, the dividends we pay must not be "preferential." A dividend determined to be preferential will not qualify for the dividends paid deduction. To avoid paying preferential dividends, we must treat every stockholder of a class of stock with respect to which we make a distribution the same as every other shareholder of that class,

23



and we must not treat any class of stock other than according to its dividend rights as a class. For example, if certain shareholders receive a distribution that is more or less than the distributions received by other stockholders of the same class, the distribution will be preferential. If any part of a distribution is preferential, none of that distribution will be applied towards satisfying the 90% Distribution Requirement.
We suspended our DRP in August 2014, but we may reactivate our DRP in the future. Stockholders who participated in our DRP received distributions in the form of shares of our common stock rather than in cash. Immediately prior to the suspension of our DRP, the purchase price per share under our DRP was equal to 100% of the "market price" of a share of our common stock. Because our common stock was not, and is not yet, listed for trading, for these purposes, "market price" means the fair market value of a share of our common stock, as estimated by us. In the past, our DRP has offered participants the opportunity to acquire newly-issued shares of our common stock at a discount to the "market price." Pursuant to an IRS ruling, the prohibition on preferential dividends does not prohibit a REIT from offering shares under a distribution reinvestment plan at discounts of up to 5% of fair market value, but a discount in excess of 5% of the fair market value of the shares would be considered a preferential dividend. Any discount we have offered in the past was intended to fall within the safe harbor for such discounts set forth in the ruling published by the IRS. However, the fair market value of our common stock has not been susceptible to a definitive determination. If the purchase price under our DRP is deemed to have been at more than a 5% discount at any time, we would be treated as having paid one or more preferential dividends. Similarly, we would be treated as having paid one or more preferential dividends if the IRS successfully asserted that the value of the common stock distributions paid to stockholders participating in our DRP exceeded on a per-share basis the cash distribution paid to our other stockholders, which could occur if the IRS successfully asserted that the fair market value of our common stock exceeded the "market value" used for purposes of calculating the distributions under our DRP. If we are determined to have paid preferential dividends as a result of our DRP, we would likely fail to qualify as a REIT.
Complying with the REIT requirements may force us to liquidate otherwise attractive investments.
To maintain qualification as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including shares of stock in other REITs, certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than governmental securities, qualified real estate assets and securities of taxable REIT subsidiaries) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and securities of taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within thirty days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments in order to maintain our REIT status.
Rapid changes in the values of potential investments in real estate-related investments may make it more difficult for us to maintain our qualification as a REIT.
If the market value or income potential of our real estate-related investments declines, including as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income or liquidate our non-qualifying assets in order to maintain our REIT qualification. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estate assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT considerations.
If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, pursuant to which specified percentages of our gross income must be passive income such as rent. For the rent we receive under our lease to be treated as qualifying income for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. There are no controlling Treasury regulations, published rulings or judicial decisions involving leases with terms substantially the same as our former hotel leases that discuss whether such leases constitute true leases for federal income tax purposes. We believe that all our leases, including our former hotel leases, will be respected as true leases for federal income tax purposes. There can be no assurance, however, that the IRS will agree with this characterization. If a significant portion of our leases were not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests and we would likely lose our REIT status.

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We may fail to qualify as a REIT as a result of our investments in joint ventures and other REITs.
We have owned, and intend to continue to own, limited partner or non-managing member interests in partnerships and limited liability companies that are joint ventures. In addition, we have owned, and intend to continue to own, significant equity ownership interests in other REITs, such as MB REIT (Florida), Inc., Cobalt Industrial REIT II and Xenia. If a partnership or limited liability company in which we own an interest takes or expects to take actions that could jeopardize our qualification as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity. In addition, it is possible that a partnership or limited liability company could take an action which could cause us to fail a REIT gross income or asset test, and that we would not become aware of such action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis. Similarly, if one of the REITs in which we own or have owned a significant equity interest were to fail to qualify as a REIT, we would likely fail to satisfy one or more of the REIT gross income and asset tests. If we failed to satisfy a REIT gross income or asset test as a result of an investment in a joint venture or another REIT, we would fail to continue to qualify as a REIT unless we are able to qualify for a statutory REIT "savings" provisions, which may require us to pay a significant penalty tax to maintain our REIT qualification.
If our former hotel managers did not qualify as "eligible independent contractors," we would fail to qualify as a REIT.
Rent paid by a lessee that is a "related party tenant" of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. Prior to the disposition of our hotel portfolio, we leased our hotels to certain of our taxable REIT subsidiaries. A taxable REIT subsidiary will not be treated as a "related party tenant," and will not be treated as directly operating a lodging facility, which is prohibited, to the extent that hotels that our taxable REIT subsidiaries lease are managed by an "eligible independent contractor."
We believe that the rent paid by our taxable REIT subsidiaries that leased our hotels was qualifying income for purposes of the REIT gross income tests and that our taxable REIT subsidiaries qualified to be treated as "taxable REIT subsidiaries" for federal income tax purposes, but there can be no assurance that the IRS will not challenge this treatment or that a court would not sustain such a challenge. If the IRS successfully challenged this treatment, we would likely fail to satisfy the asset tests applicable to REITs and a significant portion of our income would fail to qualify for the gross income tests. If we failed to satisfy either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes, unless we qualified for certain statutory relief provisions.
If our former hotel managers did not qualify as "eligible independent contractors," we may be deemed to have failed to qualify as a REIT. Each of the hotel management companies that entered into a management contract with our taxable REIT subsidiaries that leased our hotels must have qualified as an "eligible independent contractor" under the REIT rules in order for the rent paid to us by taxable REIT subsidiaries to be qualifying income for gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, (i) a manager must be actively engaged in the trade or business of operating hotels for third parties at the time the manger enters into a management contract with a taxable REIT subsidiary lessee and (ii) the manager must not own more than 35% of our outstanding shares (by value) and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the manager. Although we believe that all our former hotel managers qualified as eligible independent contractors, no complete assurance can be provided that the IRS will not successfully challenge that position.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risk with respect to borrowings made to acquire or carry real estate assets generally will not constitute gross income for purposes of the two gross income tests applicable to REITs, so long as we clearly identify any such transactions as hedges for tax purposes before the close of the day on which they are acquired or entered into and we satisfy other identification requirements. In addition, any income from other hedging transactions would generally not constitute gross income for purposes of both the gross income tests. Accordingly, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
Legislative or regulatory action could adversely affect you.
Changes to the tax laws are likely to occur, and these changes may adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Future legislation might result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed, for federal income tax purposes, as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT

25



election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders. You are urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our stock.
The taxation of dividends may adversely affect the value of our stock.
The maximum tax rate applicable to "qualified dividend income" payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.


Item 1B. Unresolved Staff Comments
None.

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Item 2. Properties
As of December 31, 2014, we owned interests in retail, lodging, student housing, and non-core properties. We owned an interest in 142 properties, excluding our lodging and development properties, located in 28 states. In addition, we owned 46 lodging properties in 20 states and the District of Columbia. As a result of the Spin-Off and other dispositions of our lodging properties, going forward we will no longer have a lodging segment. (Dollar amounts stated in thousands, except for revenue per available room ("RevPAR"), average daily rate ("ADR") and average rent per square foot.)
General
The following table sets forth information regarding our ten largest individual tenants in descending order based on annualized rent paid in 2014 but excluding our lodging and student housing properties. Annualized rent is computed as revenue for the last month of the period multiplied by twelve months. Average rent per square foot is computed as annualized rent divided by the total occupied square footage at the end of the period. Annualized rent includes the effect of rent abatements, lease inducements and straight-line rent GAAP adjustments. Physical occupancy is defined as the percentage of total gross leasable ("GLA") area actually used or occupied by a tenant. 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 that tenant of the area being leased.
Tenant Name
 
Type
 
Total Annualized Rental Income 
2014
(in thousands)
 
Percent of 
Total Annualized Income
 
Gross
Leasable
Area
 
Percentage of Gross Leasable Area
AT&T, Inc.
 
Non-core
 
$44,327
 
15.5%
 
3,404,451
 
15.6%
The Geo Group, Inc.
 
Non-core
 
9,850

 
3.4%
 
301,029
 
1.4%
Ross Dress for Less
 
Retail
 
8,810

 
3.1%
 
823,765
 
3.8%
Lockheed Martin
 
Non-core
 
7,206

 
2.5%
 
314,196
 
1.4%
Best Buy
 
Retail
 
7,017

 
2.4%
 
491,785
 
2.2%
Publix
 
Retail
 
5,818

 
2.0%
 
620,233
 
2.8%
Tom Thumb
 
Retail
 
5,656

 
2.0%
 
618,633
 
2.8%
Petsmart
 
Retail
 
5,088

 
1.8%
 
389,543
 
1.8%
Bed Bath & Beyond
 
Retail
 
4,631

 
1.6%
 
446,449
 
2.0%
Dick's Sporting Goods
 
Retail
 
3,888

 
1.4%
 
345,073
 
1.6%
Totals
 
 
 
$102,291
 
 
 
7,755,157
 
 
As described above, our top tenant, AT&T, Inc. represents approximately 15.5% of our total annualized rental income. AT&T, Inc. occupies three properties with lease expirations occurring in 2016, 2017 and 2019. One property with a lease expiration in 2016 and approximately 1.7 million square feet is in Hoffman Estates, Illinois, which is in the greater metro Chicago market. The second property with a lease expiration in 2017 and approximately 1.5 million square feet is in St. Louis, Missouri. AT&T, Inc. may not renew such leases. If AT&T, Inc. does not renew such leases, based on current market conditions, we may be unable to re-lease some or all of these properties at a comparable rate in a timely manner. To the extent we are able to re-lease any or all of such properties, the tenant improvement and leasing costs associated with any new tenants would likely be significant. As part of our strategy, we intend to dispose of our non-core assets, including the properties currently leased by AT&T, Inc. This disposition strategy of our non-core assets will continue to evolve as we look to sell these assets in individual and portfolio transactions over time or engage in other strategic transactions in an effort to maximize their value.
The following sections set forth certain summary information about the character of the properties that we owned at December 31, 2014. Certain of our properties are encumbered by mortgages, totaling $2,954,851 as of December 31, 2014. Exclusive of those properties included in the Spin-Off, our properties are encumbered by mortgages totaling $1,775,375 as of December 31, 2014. Additional detail about the properties can be found on Schedule III – Real Estate and Accumulated Depreciation.


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Retail Segment
As of December 31, 2014, our retail segment consisted of 108 properties, with an average of approximately 143,300 square feet per property. The properties are located principally in primary or secondary markets. Approximately 41% and 23% of our properties by GLA are located in the Southeastern regions of the country and Texas, respectively.
We own the following types of retail centers:
Community or neighborhood centers, which are generally open air and designed for tenants that offer a wide array of types of merchandise including apparel and other soft goods. Typically, community centers contain large anchor stores and a significant presence of national retail tenants. Our neighborhood shopping centers are generally smaller open air centers with a grocery store anchor and/or drugstore, and other small service type retailers.
Power centers are generally larger and consist of several anchors, such as department stores, off-price stores, warehouse clubs or stores that offer a large selection of merchandise. Typically, the number of specialty tenants is limited and most are national or regional in scope.
We have not experienced bankruptcies or receivable write-offs in our retail portfolio that have materially impacted our results of operations. Our retail business is not highly dependent on specific retailers or specific retail industries, nor is it subject to lease roll over concentration. We believe this minimizes risk to the portfolio of significant revenue variances over time.
The following table reflects the types of properties within our retail segment as of December 31, 2014.
Retail Properties
 
Number
of
Properties
 
Total GLA
(Sq. Ft.)
 
Percentage of 
Economic
Occupancy
 
Total Number of
Financially
Active Leases 
 
Total
Annualized
Rent ($)
 
Average Rent
per Square Foot ($)
Community & Neighborhood Center
 
67
 
6,137,893

 
92%
 
964
 
$78,607
 
$13.99
Power Center
 
41
 
9,339,295

 
94%
 
994
 
121,608

 
13.80

 
 
108
 
15,477,188

 
93%
 
1,958
 
$200,215
 
$13.87

The following table represents lease expirations for the retail segment:
Lease Expiration Year
 
Number of
Expiring 
Leases
 
GLA of 
Expiring
Leases
(Sq. Ft.)
 
Annualized
Rent of Expiring
Leases ($)
 
Percent of
Total GLA
 
Percent of 
Total
Annualized 
Rent
 
Expiring
Rent per Square
Foot ($)
2015
 
243
 
1,376,261

 

$16,715

 
9.5%
 
8.3%
 
$12.15
2016
 
302
 
1,654,295

 
23,961

 
11.5%
 
11.9%
 
14.48

2017
 
365
 
1,857,277

 
31,131

 
12.9%
 
15.5%
 
16.76

2018
 
292
 
1,767,026

 
27,497

 
12.2%
 
13.7%
 
15.56

2019
 
287
 
2,417,518

 
32,880

 
16.9%
 
16.4%
 
13.60

2020
 
141
 
1,329,296

 
18,396

 
9.2%
 
9.1%
 
13.84

2021
 
62
 
627,299

 
8,264

 
4.3%
 
4.1%
 
13.17

2022
 
42
 
682,621

 
8,376

 
4.7%
 
4.2%
 
12.27

2023
 
50
 
653,151

 
9,715

 
4.5%
 
4.8%
 
14.87

2024
 
60
 
840,355

 
10,148

 
5.8%
 
5.0%
 
12.08

MTM
 
37
 
112,766

 
2,035

 
0.8%
 
1.0%
 
18.05

Thereafter
 
74
 
1,108,090

 
12,062

 
7.7%
 
6.0%
 
10.89

 
 
1,955
 
14,425,955

 

$201,180

 
100%
 
100%
 
$13.95
We believe the percentage of leases expiring annually over the next five years will allow us to capture an appropriate portion of future market rent increases while allowing us to manage any potential re-leasing risk. For purposes of preparing the table, we have not assumed that contractual lease options contained in certain of our leases and which have not yet been exercised as of December 31, 2014 will in fact be exercised.

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The following table represents lease spread metrics for leases that commenced in 2014 compared to expiring leases for the prior tenant in the same unit:
 
No. of Leases Commenced
as of Dec 31, 2014
GLA SF
New Contractual Rent per Square Foot ($PSF) (a)
Prior Contractual Rent ($PSF) (a)
% Change over Prior Contract Rent (a)
Weighted Average Lease Term
Tenant Improvement Allowance ($PSF)
Lease Commissions ($PSF)
Comparable Renewal Leases (b)
218
1,235,977
$15.02
$14.32
4.89%
4.73
$0.07
$—
Comparable New Leases (b)
22
72,892
18.80
18.72
0.43%
8.94
26.75
7.97
Non-Comparable Renewal and New Leases
84
316,614
16.27
n/a
n/a
8.59
14.00
5.08
Total
324
1,625,483
$15.23
$14.57
4.53%
5.67
$3.98
$1.35
(a) Non-comparable leases are not included in totals.
(b) Comparable lease is defined as a lease that meets all of the following criteria: same unit, leased within one year of prior tenant, square footage of unit stayed the same or within 10% of prior unit square footage, and rent structure is consistent.
During 2014, 102 new leases and 222 renewals commenced with gross leasable area totaling 1,625,483 square feet, of which 240 were comparable. For our comparable new leases, base rent increased by 0.43% from prior base rent, going from $18.72 to $18.80 per square foot. The weighted average term for comparable new leases was 8.94 years, with tenant improvement allowances and commissions at $26.75 and $7.97 per square foot, respectively. The small spread increase for comparable new leases was driven down by an anchor tenant, representing 24,960 square feet, who took possession in 2014. The prior tenant terminated early and paid a termination fee, which is reflected in other property income on the consolidated statement of operations and comprehensive income for the year ended December 31, 2014. Excluding this lease, overall comparable new leases saw rent growth of 4.05%.
Our comparable renewal leases saw rent growth of 4.89%, increasing from $14.32 to $15.02 per square foot. The weighted average term was 4.73 years. Tenant improvement allowance was at $0.07 per square foot, and there were no lease commissions.
The 84 non-comparable leases commenced with rents starting at $16.27 in year 1 and had a weighted average term of 8.59 years. Tenant improvement allowances and lease commissions were $14.00 and $5.08 per square foot, respectively.
Tenant improvement allowances were primarily given for our new leases, one of which represents 10% of the total tenant improvement allowance. Lease commissions were consistent across the new lease activity.
As of December 31, 2013, we had 262 leases set to expire in 2014, of which GLA totaled 1.4 million square feet. During the twelve months ended December 31, 2014, we achieved a retention rate of 77% by number of leases.


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Lodging Segment
Lodging properties have characteristics different from those found in retail, student housing, and non-core properties. Revenue, operating expenses, and net income of lodging properties are directly tied to the daily hotel sales operation whereas these other asset classes generate revenue from medium to long-term lease contracts. Lodging properties have the benefit of capturing increased revenue opportunities on a daily or weekly basis but are also subject to immediate decreases in lodging revenue as a result of declines in daily rental rates or daily occupancy when demand is reduced.
The majority of our formerly owned lodging properties are classified in the "upscale" or "upper-upscale" lodging categories. The classifications are defined by Smith Travel Research, an independent provider of lodging industry statistical data. The classification of a property is based on lodging industry standards, which take into consideration many factors such as guest facilities and amenities, level of service and quality of accommodations.
As a result of the Xenia Spin-Off and other dispositions of our lodging properties, going forward we will no longer have a lodging segment.
The following table reflects the types of properties within our lodging segment as of December 31, 2014.
Lodging
 
Number
of
Properties
 
Number 
of
Rooms
 
Average Occupancy
for the year ended
December 31, 2014
 
Average RevPAR for
the year ended
December 31, 2014 ($)
 
ADR
for
2014 ($)
Luxury
 
5
 
1,281
 
69%
 
$137
 
$198
Upper-Upscale
 
27
 
8,319
 
76%
 
132
 
174
Upscale
 
12
 
2,772
 
81%
 
146
 
181
Upper-Midscale
 
2
 
264
 
82%
 
129
 
156
 
 
46
 
12,636
 
76%
 
$135
 
$178


30


Student Housing Segment
Our student housing portfolio consists of residential and mixed-use communities located close to or on university campuses and some communities in urban infill locations. Our portfolio includes communities designed as high-rise buildings, clusters of mid-rise buildings, garden-style and cottage-style apartments. These communities include outdoor amenities such as swimming pools, grilling areas, volleyball courts, putting greens, and rooftop decks. Indoor amenities include study lounges, coffee bars, fitness centers, and multimedia lounges. The properties are leased on a per-bed basis and are typically one year leases commencing in the fall season in conjunction with the beginning of the school year.
The following table reflects the types of properties within our student-housing segment as of December 31, 2014.
 
 
Number of Properties
 
Total Beds
 
Total No. of
Beds Occupied
 
Average Physical
Occupancy
 
Rent per
Bed ($)
Student Housing
 
14
 
7,986
 
7,254
 
91%
 
$742


31


Non-core Segment
As described above, our strategy is focused on our retail and student housing asset classes. The remaining assets outside of retail and student housing are grouped together in the non-core segment. Our non-core segment is comprised of multi-tenant office and triple net properties, such as distribution centers, correctional facilities and single-tenant office properties. Our strategy includes the disposition of non-core assets in individual and portfolio transactions over time or engage in other strategic transactions in an effort to maximize their value.
The following table reflects the types of properties within our non-core segment as of December 31, 2014.
Non-core
 
Number of
Properties
 
Total Gross
Leasable 
Area
(Sq. Ft.)
 
Percentage of 
Economic
Occupancy as of
December 31, 2014
 
Total No. of
Financially
Active Leases as of
December 31, 2014
 
Sum of
Annualized
Rent ($)
Multi-tenant office
 
7
 
1,704,777

 
71%
 
23
 
$
23,647

Triple net
 
13
 
4,706,040

 
100%
 
13
 
62,658

 
 
20
 
6,410,817

 
92%
 
36
 
$
86,305

The following table represents lease expirations for the non-core segment:
Lease Expiration Year
 
Number of
Expiring 
Leases
 
GLA of 
Expiring
Leases
(Sq. Ft.)
 
Annualized
Rent of Expiring
Leases ($)
 
Percent of
Total GLA
 
Percent of 
Total
Annualized 
Rent
 
Expiring
Rent/Square
Foot ($)
2015
 
6
 
90,065

 

$1,189

 
1.5%
 
1.4%
 
$13.20
2016
 
8
 
2,412,155

 
36,325

 
40.8%
 
41.7%
 
15.06

2017
 
7
 
1,685,750

 
20,305

 
28.5%
 
23.3%
 
12.05

2018
 
4
 
231,315

 
6,054

 
3.9%
 
7.0%
 
26.17

2019
 
5
 
538,775

 
8,182

 
9.1%
 
9.4%
 
15.19

2020
 
1
 
301,029

 
9,850

 
5.1%
 
11.3%
 
32.72

2021
 
1
 
17,795

 
85

 
0.3%
 
0.1%
 
4.78

2022
 
1
 
41,690

 
1,145

 
0.7%
 
1.3%
 
27.46

2023
 
 

 

 
—%
 
—%
 

2024
 
 

 

 
—%
 
—%
 

Month to Month
 
1
 
108,600

 
1,857

 
1.8%
 
2.1%
 
17.10

Thereafter
 
2
 
489,649

 
2,113

 
8.3%
 
2.4%
 
4.32


 
36
 
5,916,823

 

$87,105

 
100%
 
100%
 
$14.72
As described above, leases expiring in 2016 and 2017 represent approximately 41.7% and 23.3%, respectively, of our total annualized rental income of our non-core segment. In 2016 and 2017, the leases on two properties occupied by AT&T, Inc. expire. One property with approximately 1.7 million square feet is in Hoffman Estates, Illinois, which is in the greater metro Chicago market. The second property with approximately 1.5 million square feet is in St. Louis, Missouri. AT&T, Inc. may not renew such leases. If AT&T, Inc. does not renew such leases, based on current market conditions, we may be unable to re-lease some or all of these properties at a comparable rate in a timely manner. To the extent we are able to re-lease any or all of such properties, the tenant improvement and leasing costs associated with any new tenants would likely be significant.





32



Item 3. Legal Proceedings
In May 2012, we disclosed that the SEC was conducting a non-public, formal, fact-finding investigation to determine whether there had been violations of certain provisions of the federal securities laws regarding the payment of fees to our former Business Manager and Property Managers, transactions with our former affiliates, timing and amount of distributions paid to our investors, determination of property impairments, and any decision regarding whether we would become a self-administered REIT (the "SEC Investigation").
We subsequently received three related demands (“Derivative Demands”) by stockholders to conduct investigations regarding claims that our officers, our board of directors, our former Business Manager, and affiliates of our former Business Manager breached their fiduciary duties to us in connection with the matters that we disclosed were subject to the SEC Investigation.
Upon receiving the first of the Derivative Demands, on October 16, 2012, the full board of directors responded by authorizing the independent directors to investigate the claims contained in the first Derivative Demand, any subsequent stockholder demands, as well as any other matters the independent directors saw fit to investigate. Pursuant to this authority, the independent directors formed a special litigation committee comprised solely of independent directors to review and evaluate the alleged claims and to recommend to the full board of directors whether the maintenance of a derivative proceeding was in the best interests of the Company. The special litigation committee engaged independent legal counsel and experts to assist in the investigation.
On March 21, 2013, counsel for the stockholders who made the first Derivative Demand filed a derivative lawsuit in the Circuit Court of Cook County, Illinois, on behalf of the Company. The court stayed the case - Trumbo v. The Inland Group, Inc. - pending completion of the special litigation committee's investigation.
On December 8, 2014, the special litigation committee completed its investigation and issued its report and recommendation. The special litigation committee concluded that there is no evidence to support the allegations of wrongdoing in the Derivative Demands. Nonetheless, in the course of its investigation, the special litigation committee uncovered facts indicating that certain then-related parties breached their fiduciary duties to the Company by failing to disclose to the independent directors certain facts and circumstances associated with the payment of fees to our former Business Manager and Property Managers. The special litigation committee determined that it is advisable and in the best interests of the Company to maintain a derivative action against our former Business Manager, Property Managers, and Inland American Holdco Management LLC. The special litigation committee found that it was not in the best interests of the Company to pursue claims against any other entities or against any individuals.
On January 20, 2015, the board of directors adopted the report and recommendation of the special litigation committee in full and authorized the Company to file a motion to realign the Company as the party plaintiff in Trumbo v. The Inland Group, Inc., and to take such further actions as are necessary to reject and dismiss claims related to allegations that the board of directors has determined lack merit and to pursue claims against our former Business Manager, Property Managers, and Inland American Holdco Management LLC for breach of fiduciary duties in connection with the failure to disclose facts and circumstances associated with the payment of fees to related parties.
On March 2, 2015, counsel for the stockholders who made the second Stockholder Demand filed a derivative lawsuit in the Circuit Court of Cook County, Illinois, on behalf of the Company. The parties have agreed to seek an order consolidating the action with the Trumbo case.
On March 24, 2015, the Staff of the SEC informed the Company that it had concluded its investigation and that, based on the information received to date, it did not intend to recommend any enforcement action against the Company.
In connection with Xenia's filing of the Registration Statement on Form 10 and its potential separation from the Company, we entered into an Indemnity Agreement with Xenia on August 8, 2014, as amended. Pursuant to the Indemnity Agreement, we agreed, to the fullest extent allowed by law or government regulation, to absolutely, irrevocably and unconditionally indemnify, defend and hold harmless Xenia and its subsidiaries, directors, officers, agents, representatives and employees (in each case, in such person’s respective capacity as such) and their respective heirs, executors, administrators, successors and assigns from and against all against losses, including but not limited to “actions” (as defined in the Indemnity Agreement), arising from: the SEC Investigation; the Derivative Demands; the Trumbo action; and the investigation by the special litigation committee of our board of directors, in each case, regardless of when or where the loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the loss existed prior to, on or after Xenia’s separation from the Company or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on or after

33



Xenia’s separation from the Company. See "Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence - Agreements with Xenia Hotels & Resorts, Inc. - Indemnity Agreement."
While, to the best of its knowledge, we do not presently anticipate Xenia or Xenia’s subsidiaries, directors, officers, agents, representatives and employees to be made a party to any actions related to the above matters, in connection with the separation, we have determined that it is in the Company's best interests to enter into the Indemnity Agreement.

Item 4. Mine Safety Disclosures
Not applicable.



34



PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our shares of common stock are not listed on a national securities exchange and there is not otherwise an established public trading market for our shares. We publish an estimated per share value of our common stock to assist broker dealers that sold our common stock in our initial and follow-on "best efforts" offerings to comply with the rules published by the Financial Industry Regulatory Authority ("FINRA").  On February 24, 2015, we announced an estimated value of our common stock as of February 4, 2015 equal to $4.00 per share.
The audit committee of our board of directors ("Audit Committee") engaged Real Globe Advisors, LLC ("Real Globe"), an independent third-party real estate advisory firm, to estimate the per share value of our common stock on a fully diluted basis as of February 4, 2015. Real Globe has extensive experience estimating the fair values of commercial real estate. The report furnished to the Audit Committee by Real Globe complies with the reporting requirements set forth under Standard Rule 2-2(a) of the Uniform Standards of Professional Appraisal Practice and is certified by a member of the Appraisal Institute with the MAI designation. The Real Globe report, dated February 11, 2015, reflects values as of February 4, 2015. Real Globe does not have any direct or indirect interests in any transaction with us or in any currently proposed transaction to which we are a party, and there are no conflicts of interest between Real Globe, on one hand, and ourselves or any of our directors, on the other.
To estimate our per share value, Real Globe utilized the "net asset value" or "NAV" method which is based on the fair value of real estate, real estate related investments and all other assets, less the fair value of total liabilities. The fair value estimate of our real estate assets is equal to the sum of its individual real estate values. Generally, Real Globe estimated the value of the Company’s wholly-owned core and non-core real estate and real estate-related assets, using a discounted cash flow, or "DCF", of projected net operating income, less capital expenditures, for each property, for the ten-year period ending January 31, 2025, and applying a market supported discount rate and capitalization rate. For all other assets, including cash, other current assets, certain non-core assets, joint ventures, land developments, and marketable securities, fair value was determined separately. Real Globe also estimated the fair value of the Company’s long-term debt obligations, including the current liabilities, by comparing market interest rates to the contract rates on the Company’s long-term debt and discounting to present value the difference in future payments. Real Globe determined NAV in a manner consistent with the definition of fair value under GAAP set forth in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 820 Fair Value Measurements and Disclosures.
Net asset value per share was estimated by subtracting the fair value of our total liabilities from the fair value of our total assets and dividing the result by the number of common shares outstanding on a fully diluted basis as of February 4, 2015. Real Globe then applied a discount rate and capitalization rate sensitivity analysis on the weighted average terminal capitalization and discount rates used to value all wholly owned real estate assets, resulting in a value range equal to $3.85 - $4.18 per share. The mid-point in that range was $4.00.
On February 17, 2015, the Audit Committee met to review and discuss Real Globe’s report. Following this review, the Audit Committee unanimously adopted a resolution accepting the Real Globe analysis. The Audit Committee also unanimously adopted a resolution recommending an estimate of per share value as of February 4, 2015 equal to $4.00 per share. At a full meeting of our board of directors held on February 18, 2015, the Audit Committee made a recommendation to the board that we publish an estimate of per share value as of February 4, 2015 equal to $4.00 per share. The board unanimously adopted this recommendation of estimated per share value, which estimated value assumes a weighted average exit capitalization rate equal to 6.63% and a discount rate equal to 7.68%.
As with any methodology used to estimate value, the methodology employed by Real Globe and the recommendations made by the Company were based upon a number of estimates and assumptions that may not be accurate or complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated per share value does not represent (i) the amount at which our shares would trade at a national securities exchange, (ii) the amount a stockholder would obtain if he or she tried to sell his or her shares or (iii) the amount stockholders would receive if we liquidated our assets and distributed the proceeds after paying all of our expenses and liabilities. Accordingly, with respect to the estimated value per share, we can give no assurance that:
a stockholder would be able to resell his or her shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of

35



our assets and settlement of our liabilities or a sale of the Company;
our shares would trade at a price equal to or greater than the estimated value per share if we listed them on a national securities exchange; or
the methodology used to estimate our value per share would be acceptable to FINRA or that the estimated value per share will satisfy the applicable annual valuation requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code") with respect to employee benefit plans subject to ERISA and other retirement plans or accounts subject to Section 4975 of the Code.

 The estimated value per share was approved by our board on February 18, 2015 and reflects the fact that the estimate was calculated at a moment in time. The value of our shares will likely change over time and will be influenced by changes to the value of our individual assets as well as changes and developments in the real estate and capital markets. We currently anticipate publishing a new estimated share value at the end of 2015. Nevertheless, stockholders should not rely on the estimated value per share in making a decision to buy or sell shares of our common stock.
Share Repurchase Program
Our board of directors adopted a Share Repurchase Program ("SRP"), which became effective February 1, 2012 and was suspended as of February 28, 2014. In connection with our SRP, in January 2014, we repurchased 1,077,829 shares requested in fourth quarter 2013. There are no additional requests outstanding. The price per share for all shares repurchased was $6.94 and all repurchases were funded from proceeds from our distribution reinvestment plan. The board of directors voted to suspend the SRP on January 29, 2014 in order to comply with the securities laws while we executed a series of strategic transactions. The SRP will remain suspended indefinitely until further notice.
Month
 
Total number of share purchase requests
 
Total number of shares repurchased (a)
 
Price per share at date of redemption
 
Total value of
shares repurchased
(in thousands)
January 2014
 
 
1,077,829
 
$6.94
 
$7,480
(a) Shares are repurchased in the month subsequent to the quarter in which the requests are received.
On April 25, 2014, we completed a modified Dutch tender offer (the "Offer"), and accepted for purchase 60,761,166 shares for a final aggregate purchase price of $394.9 million as of December 31, 2014, excluding fees and expenses relating to the Offer and paid by us.
Stockholders
As of March 23, 2015, we had 172,217 stockholders of record.
Distributions
We have been paying monthly cash distributions since October 2005. During the years ended December 31, 2014 and 2013, we declared cash distributions, which are paid monthly in arrears to stockholders, totaling $436.9 million and $450.1 million, respectively, in each case equal to $0.50 per share on an annualized basis. During the years ended December 31, 2014 and 2013, we paid cash distributions of $438.9 million and $449.3 million, respectively. For Federal income tax purposes for the years ended December 31, 2014 and 2013, 12% and 0% of the distributions paid constituted a return of capital in the applicable year, respectively. The remaining portion of the distributions paid constituted ordinary income.
On February 3, 2015, we completed the Spin-Off through the pro rata taxable distribution of 95% of the outstanding common stock of Xenia to holders of record of the Company’s common stock as of the close of the Record Date. Each holder of record of the Company’s common stock as of the Record Date received one share of Xenia’s common stock for every eight shares of the Company’s common stock held at the close of business on the Record Date. In lieu of fractional shares, stockholders of the Company received cash. On February 4, 2015, Xenia’s common stock began trading on the NYSE under the ticker symbol "XHR."
Upon completing the Spin-Off, our board of directors analyzed and reviewed our distribution rate, and, on February 24, 2015, we announced that the board of directors has reduced our annual distribution rate from $0.50 per share of common stock to $0.13 per share of common stock.
A number of factors were considered in establishing the new distribution rate. Xenia generated a substantial portion of our cash flows from operations and as a result, our previous distribution rate was not sustainable after the Spin-Off. In addition, the

36



board of directors determined that it is in the best interests of the Company to retain additional operating cash flow in order to accumulate an appropriate level of capital reserves to enable the Company to tailor and grow its retail and student housing segments, consistent with our strategy and objectives, as well as address future lease maturities and disposition plans related to several properties in our non-core segment.
Notification Regarding Payments of Distributions
Stockholders should be aware that the method by which a stockholder has chosen to receive his or her distributions affects the timing of the stockholder's receipt of those distributions. Specifically, under our transfer agent's payment processing procedures, distributions are paid in the following manner:
(1) those stockholders who have chosen to receive their distributions via ACH wire transfers receive their distributions on the distribution payment date (as determined by our board of directors);
(2) those stockholders who have chosen to receive their distributions by paper check are typically mailed those checks on the distribution payment date, but sometimes paper checks are mailed on the day following the distribution payment date; and
(3) for those stockholders holding shares through a broker or other nominee, the distributions payments are wired, or paper checks are mailed, to the broker or other nominee on the day following the distribution payment date.
All stockholders who hold shares directly in record name may change at any time the method through which they receive their distributions from our transfer agent, and those stockholders will not have to pay any fees to us or our transfer agent to make such a change. Accordingly, each stockholder may select the timing of receipt of distributions from our transfer agent by selecting the method above that corresponds to the desired timing for receipt of the distributions. Because all stockholders may elect to have their distributions sent via ACH wire on the distribution payment date, we treat all of our stockholders, regardless of the method by which they have chosen to receive their distributions, as having constructively received their distributions from us on the distribution payment date for federal income tax purposes.
Stockholders who hold shares directly in record name and who would like to change their distribution payment method should complete a "Change of Distribution Election Form." The form is available on our website under "Investor Relations Forms."
We note that the payment method for stockholders who hold shares through a broker or nominee is determined by the broker or nominee. Similarly, the payment method for stockholders who hold shares in a tax-deferred account, such as an IRA, is generally determined by the custodian for the account. Stockholders that currently hold shares through a broker or other nominee and would like to receive distributions via ACH wire or paper check should contact their broker or other nominee regarding their processes for transferring shares to record name ownership. Similarly, stockholders who hold shares in a tax-deferred account may need to hold shares outside of their tax-deferred accounts to change the method through which they receive their distributions. Stockholders who hold shares through a tax-deferred account and who would like to change the method through which they receive their distributions should contact their custodians regarding the transfer process and should consult their tax advisor regarding the consequences of transferring shares outside of a tax-deferred account.
Recent Sales of Unregistered Securities
None.


37



Item 6. Selected Financial Data
The following table shows our consolidated selected financial data relating to our consolidated historical financial condition and results of operations. Such selected data should be read in conjunction with "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes appearing elsewhere in this report (dollar amounts are stated in thousands, except per share amounts).
 
As of and for the year ended December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
7,497,317

 
$
9,662,464

 
$
10,759,884

 
$
10,919,190

 
$
11,391,502

Debt
$
3,190,636

 
$
3,641,552

 
$
6,006,146

 
$
5,902,712

 
$
5,532,057

Operating Data:
 
 
 
 
 
 
 
 
 
Total income
$
1,379,141

 
$
1,108,122

 
$
909,661

 
$
920,385

 
$
802,402

Total interest and dividend income
$
13,024

 
$
19,261

 
$
23,377

 
$
22,860

 
$
33,068

Net income (loss) attributable to Company
$
486,642

 
$
244,048

 
$
(69,338
)
 
$
(316,253
)
 
$
(176,431
)
Net income (loss) per common share, basic and diluted
$
0.56

 
$
0.27

 
$
(0.08
)
 
$
(0.37
)
 
$
(0.21
)
Common Stock Distributions:
 
 
 
 
 
 
 
 
 
Distributions declared to common stockholders
$
436,875

 
$
450,106

 
$
440,031

 
$
429,599

 
$
417,885

Distributions per weighted average common share
$
0.50

 
$
0.50

 
$
0.50

 
$
0.50

 
$
0.50

Funds from Operations:
 
 
 
 
 
 
 
 
 
Funds from operations (a)
$
442,512

 
$
459,607

 
$
476,713

 
$
443,460

 
$
321,828

Cash Flow Data:
 
 
 
 
 
 
 
 
 
Cash flows provided by operating activities
$
340,335

 
$
422,813

 
$
456,221

 
$
397,949

 
$
356,660

Cash flows provided by (used in) investing activities
$
1,922,890

 
$
922,624

 
$
(118,162
)
 
$
(286,896
)
 
$
(380,685
)
Cash flows used in financing activities
$
(1,849,312
)
 
$
(1,246,979
)
 
$
(335,443
)
 
$
(160,597
)
 
$
(208,759
)
Other Information:
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding, basic and diluted
878,064,982

 
899,842,722

 
879,685,949

 
858,637,707

 
835,131,057

 
(a)
We consider Funds from Operations, or "FFO" a widely accepted and appropriate measure of performance for a REIT. 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 ("NAREIT"), an industry trade group, has promulgated a standard known as FFO, which it believes reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization and impairment charges on depreciable property and after adjustments for unconsolidated partnerships and joint ventures in which we hold an interest. In calculating FFO, 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, it is consistent and appropriate that impairments, which are often early recognition of losses on prospective sales of property, also be excluded. If evidence exists that a loss reflected in the investment of an unconsolidated entity is due to the write-down of depreciable real estate assets, these impairment charges are added back to FFO. The methodology is consistent with the concept of excluding impairment charges of depreciable assets or early recognition of losses on sale of depreciable real estate assets held by the Company.

FFO is neither 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. We believe that FFO is a better measure of our properties’ operating performance because FFO excludes non-cash items from GAAP net income. FFO is calculated as follows (in thousands):
 

38



 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Funds from Operations:
 
 
 
 
 
 
Net income (loss) attributable to Company
$
486,642

 
$
244,048

 
$
(69,338
)
Add:
Depreciation and amortization related to investment properties
331,683

 
383,969

 
438,755

 
Depreciation and amortization related to investment in unconsolidated entities
39,247

 
34,766

 
48,840

 
Provision for asset impairment
85,439

 
248,230

 
37,830

 
Provision for asset impairment included in discontinued operations

 
4,476

 
45,485

 
Impairment of investment in unconsolidated entities
8,464

 
6,532

 
9,365

 
Impairment reflected in equity in earnings of unconsolidated entities

 

 
470

 
Gain on sale of property reflected in net income attributed to noncontrolling interest

 

 
5,439

Less:
Gains from property sales and transfer of assets
360,934

 
456,563

 
40,691

 
Net gains from property sales reflected in equity in earnings of unconsolidated entities, net
78,705

 
2,792

 
2,399

 
Gains (loss) from sales of investment in unconsolidated entities
69,324

 
3,059

 
(2,957
)
 
Funds from operations
$
442,512

 
$
459,607

 
$
476,713

Below is additional information related to certain items that significantly impact the comparability of our Funds from Operations and Net Income (Loss) or significant non-cash items from the periods presented (in thousands):
 
 
Year ended December 31,
 
2014
 
2013
 
2012
Gain on notes receivable
$

 
$
(5,334
)
 
$

Impairment on securities

 
1,052

 
1,899

Straight-line rental income
(3,326
)
 
(8,147
)
 
(11,010
)
Amortization of above/below market leases
(273
)
 
(2,659
)
 
(2,271
)
Amortization of mark to market debt discounts
5,919

 
5,929

 
6,488

(Gain) loss on extinguishment of debt
41,980

 
18,777

 
(9,478
)
Gain on extinguishment of debt reflected in equity in earnings of unconsolidated entities

 
(5,709
)
 
(2,176
)
Acquisition costs
1,529

 
2,987

 
1,644


39


The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Part II, Item 6. Selected Financial Data" and our consolidated financial statements included in this annual report. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in "Special Note Regarding Forward-Looking Statements" and "Part I, Item 1A. Risk Factors" included elsewhere in this annual report.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis relates to the years ended December 31, 2014, 2013 and 2012 and as of December 31, 2014 and 2013. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included in this report.
Overview
Over the past two years, we have been implementing our strategy of focusing our portfolio into three asset classes - retail, lodging and student housing. By tailoring, expanding and refining these three components of our portfolio, our goals have been to enhance long-term stockholder value and position the Company to explore various strategic transactions and liquidity events for our stockholders.
Following the completion of the transactions described below, our portfolio is now comprised of 142 properties, excluding our development properties, representing 15.5 million square feet of retail space, 7,986 student housing beds and and 6.4 million square feet of non-core space. With our current portfolio, our strategy is to tailor and grow our retail and student housing segments and dispose of our remaining non-core assets. Our objective has been, and will continue to be, maximizing stockholder value over the long-term.
On a consolidated basis, substantially all of our revenues and cash flows from operations for the year ended December 31, 2014 were generated by collecting rental payments from our tenants, room revenues from lodging properties, distributions from unconsolidated entities and dividend income earned from investments in marketable securities. Our largest cash expenses relate to the operation of our properties and the interest expense on our mortgages. Our property operating expenses include, but are not limited to: real estate taxes, regular repair and maintenance, management fees, utilities, and insurance (some of which are recoverable). Our lodging operating expenses include, but are not limited to: rooms, food and beverage, utility, administrative and marketing, payroll, franchise and management fees, and repairs and maintenance expenses.
In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:
Funds from Operations ("FFO"), a supplemental non-GAAP (U.S. generally accepted accounting principles, or "GAAP") measure to net income determined in accordance with GAAP;
Property net operating income ("NOI"), which excludes interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest, and other investment income from corporate investments;
Cash flow from operations as determined in accordance with GAAP;
Economic and physical occupancy and rental rates;
Leasing activity and lease rollover;
Managing operating expenses;
Managing general and administrative expenses;
Debt maturities and leverage ratios; and
Liquidity levels.
Highlights in 2014
In 2014, we made significant strides in the execution of our strategy of tailoring our diversified portfolio in three specific real estate asset classes (retail, lodging and student housing), while maintaining distributions funded by our operations, distributions from unconsolidated entities, and gain on sale of properties. We disposed of assets we determined to be less strategic and

40


reinvested the capital in real estate assets that we believe are aligned with our strategic objectives of maximizing stockholder return over the long-term.
Self-Management Transaction
On March 12, 2014, we entered into a series of agreements and amendments to existing agreements with affiliates of The Inland Group, Inc. (the "Inland Group") to begin the process of becoming self-managed (collectively, the "Self-Management Transactions"). We did not pay an internalization fee or self-management fee to the Inland Group in connection with the Self-Management Transactions. As of March 12, 2014, functions previously carried out by Inland American Business Manager & Advisor, Inc. (the "Business Manager") and certain functions performed by Inland American Holdco Management LLC and its affiliates (the “Property Managers”), such as property-level accounting, lease administration, leasing, marketing and construction functions, were transitioned to the Company. We transitioned the remaining property management functions on December 31, 2014. Many of the employees of our former Business Manager and former Property Managers are now directly employed by the Company. Long-term, we expect that becoming self-managed will positively impact our net income and cash flow from operations.
Portfolio Realignment Activities
As part of our strategy to realign our asset segments, in 2014 we sold 313 properties for a gross disposition price of $2.7 billion, consisting of 244 non-core properties for $1.4 billion, 55 lodging properties for $1.1 billion, 13 retail properties for $176.3 million, and one student housing property for $25.4 million.
Of the 244 non-core properties sold in 2014, 223 were a part of a net lease asset portfolio sale. On August 8, 2013, we entered into an equity interest purchase agreement to sell certain equity interests in direct and indirect subsidiaries that collectively owned certain of our net lease assets (the "triple net sale"), consisting of 294 retail, office, and industrial properties. The triple net sale was consummated through multiple closings, with the final closing occurring on May 8, 2014. In 2014, we sold equity interests in direct and indirect subsidiaries owning an aggregate of 223 total net lease assets for approximately $1.2 billion, consisting of 182 bank branches, 24 industrial properties, 12 single and multi-tenant retail properties, and five office properties. On the same day, the purchaser elected to terminate the purchase agreement solely with respect to the equity interest in a subsidiary owning a net lease asset with a disposal price of $228.4 million, and in connection with such termination, the purchaser forfeited to us $10.0 million of the deposit posted into escrow. This portfolio was classified as held for sale on August 8, 2013 and therefore the operations are reflected as discontinued operations on the consolidated statements of operations and comprehensive income for the years ended December 31, 2014, 2013 and 2012.
Of the 55 lodging properties sold for $1.1 billion, 52 were a part of the select service portfolio sale. On September 17, 2014, we entered into a definitive agreement to sell a portfolio of lodging assets, consisting of 52 select service lodging properties with 6,976 rooms for approximately $1.1 billion. On this date, the portfolio was classified as held for sale on the consolidated balance sheet and the assets and liabilities associated with this portfolio were recorded at the lesser of the carrying value or fair value less costs to sell. The transaction closed on November 17, 2014 for an aggregate gross disposition price of $1.1 billion. This sale reflected a strategic shift for the Company and has a major impact on our consolidated financial statements; therefore the sold operations are reflected as discontinued operations on the consolidated statements of operations and comprehensive income for the years ended December 31, 2014, 2013, and 2012.
Our acquisition and disposition activities highlight our move to divest of non-strategic assets and redeploy the capital into our strategic segments, retail and student housing, as well as pay down debt and provide capital for Xenia. In 2014, we acquired one student housing property consisting of 352 beds for $41.0 million. In addition, we acquired three retail properties consisting of 374,574 square feet for $78.4 million.
Distributions
On February 3, 2015, we completed the spin-off ("Spin-Off") of our subsidiary, Xenia Hotels & Resorts, Inc. ("Xenia"), which at the time owned 46 premium full service, lifestyle and urban upscale hotels and two hotels in development, through the pro rata taxable distribution of 95% of the outstanding common stock of Xenia to holders of record of the Company’s common stock as of the close of business on January 20, 2015 (the "Record Date"). Each holder of record of the Company’s common stock received one share of Xenia’s common stock for every eight shares of the Company’s common stock held at the close of business on the Record Date (the "Distribution"). In lieu of fractional shares, stockholders of the Company received cash. On February 4, 2015, Xenia’s common stock began trading on the New York Stock Exchange ("NYSE") under the ticker symbol "XHR." In connection with the Spin-Off, we entered into certain agreements that, among other things, provide a framework for our relationship with Xenia as two separate companies, including a Transition Services Agreement, and an Employee Matters

41


Agreement and an Indemnity Agreement. See "Part III, Item 13. Certain Relationships and Transactions, and Director Independence - Agreements with Xenia Hotels & Resorts, Inc."
We paid monthly cash distributions to our stockholders which totaled in the aggregate $438.9 million for the year ended December 31, 2014, which was equal to $0.50 per share for 2014, assuming that a share was outstanding the entire year. The distributions paid for the year ended December 31, 2014 were funded from cash flow from operations, distributions from unconsolidated joint ventures, and gains on sale of properties.
Upon completing the Spin-Off, our Board analyzed and reviewed our distribution rate and has announced a new distribution rate of $0.13 per share on an annualized basis beginning with the distribution to be paid in March 2015. A number of factors were considered in establishing the new distribution rate. Xenia generated a substantial portion of our cash flows from operations and as a result, our previous distribution rate was not sustainable after the Spin-Off. In addition, the board of directors determined that it is in the best interests of the Company to retain additional operating cash flow in order to accumulate an appropriate level of capital reserves to enable the Company to tailor and grow its retail and student housing segments, consistent with our strategy and objectives, as well as to address future lease maturities and disposition plans related to several properties in our non-core segment.
On April 25, 2014, we completed a modified Dutch tender offer ("Offer") and accepted for purchase 60,761,166 shares for a final aggregate purchase price of $394.9 million as of December 31, 2014, excluding fees and expenses relating to the Offer and paid by us.
Financing Activities
During the year ended December 31, 2014, we successfully refinanced or paid off our 2014 maturities of approximately $418.5 million as well as $427.7 million of our 2015 maturities. Additionally, we placed debt of approximately $300.1 million on new and existing properties. We were able to obtain favorable rates while still maintaining what we believe is a manageable debt maturity schedule for future years. As of December 31, 2014, we had $300 million available under our revolving line of credit and borrowed the full amount of our $200 million term loan. As of December 31, 2014, the interest rate for the term loan was 1.67%. Subsequently on January 30, 2015, we paid off the full amount of our $200 million term loan. In connection with the Spin-Off, on February 3, 2015, we entered into an amended and restated credit agreement for a $300 million unsecured revolving credit facility. The facility will assist us by providing liquidity to bridge the potential timing difference between generating proceeds from disposing of non-strategic assets and funding the acquisition of retail and student housing assets.
As of December 31, 2014, we had mortgage debt of approximately $3.0 billion and a weighted average interest rate of 4.63%. Our mortgage debt maturities for 2015 were $116.8 million with a weighted average interest rate of 4.73%. After the Spin-Off, we have mortgage debt of approximately $1.8 billion and a weighted average interest rate of 5.08% and our mortgage debt maturities for 2015 are $25.8 million with a weighted average interest rate of 6.22%.
Total Segment Net Operating Income
Including lodging properties, we saw total net operating income increase from $515.6 million to $598.7 million for the year ended December 31, 2013 to 2014. The increase of $83.1 million or 16.1% was primarily generated by the lodging properties purchased in 2013 and 2014. As a result of the Xenia Spin-Off and other dispositions of our lodging properties, going forward we will no longer have a lodging segment.
Excluding lodging properties, we saw total net operating income decrease from $321.2 million to $316.0 million for the year ended December 31, 2013 to 2014. The decrease of $5.2 million or 2% was primarily generated by the contribution of fourteen properties in 2013 to IAGM Retail Fund I, LLC ("IAGM"), our joint venture with PGGM Private Real Estate Fund ("PGGM"). The decrease was offset by an increase in student housing total net operating income of $6.3 million from 2013 to 2014.

42


Same Store Segment Net Operating Income
The following table represents our same store net operating income for the years ended December 31, 2014 and 2013. Same store properties are properties we have owned and operated for the same period during each year. Net operating income is calculated and reconciled to U.S. generally accepted accounting principles ("GAAP") net income in "Part II, Item 8. Note 13 to the Consolidated Financial Statements."
 
2014
Net Operating Income
 
2013
Net Operating Income
 
Increase (Decrease)
 
Increase (Decrease)
 
2014
Average
Occupancy (a)
 
2013
Average
Occupancy (a)
Retail
$
170,256

 
$
165,922

 
$
4,334

 
2.6
 %
 
93%
 
93%
Lodging
179,901

 
164,794

 
15,107

 
9.2
 %
 
74%
 
73%
Student Housing
19,778

 
25,220

 
(5,442
)
 
(21.6
)%
 
90%
 
92%
Non-core
70,788

 
72,851

 
(2,063
)
 
(2.8
)%
 
92%
 
95%
 
$
440,723

 
$
428,787

 
$
11,936

 
2.8
 %
 
 
 
 
(a) Economic occupancy, shown for the retail and non-core segments, 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 that tenant of the area being leased. Physical occupancy is shown for the lodging and student housing segments.
Including lodging properties, we experienced an increase in our same store net operating income due to organic growth in our lodging segment as our same store net operating income results increased $15.1 million, or 9.2%, for the year ended December 31, 2014 compared to 2013. These increases in our lodging portfolio can be attributed to higher occupancy and revenue per available room ("RevPAR").
Excluding lodging properties, we experienced a decrease in our same store net operating income of $3.2 million or 1.2%, from December 31, 2013 to 2014 due to a one-time major repair project at one of our student housing properties, of which $5.8 million was incurred for the year ended December 31, 2014. Our student housing same store net operating income has decreased $5.4 million, or 21.6%, for the year ended December 31, 2014 compared to 2013 as a result of this project. Overall, student housing revenues are holding steady. Our retail segment experienced an increase in same store net operating income of $4.3 million, or 2.6%, exhibiting stable occupancy and contractual rental rates. Our non-core segment's net operating income decreased slightly from prior year due to a decline in occupancy coupled with decreased rental rates.
Outlook
During 2015, we will seek to deliver value by continuing to refine and grow our retail and student housing segments and dispose of our remaining non-core assets. On February 3, 2015, we completed the Spin-Off of our lodging subsidiary, Xenia, which generated a substantial portion of our cash flows from operations, through the pro rata taxable distribution of 95% of the outstanding common stock of Xenia to holders of record of the Company’s common stock as of the close of business on January 20, 2015. Our retail portfolio is expected to maintain high occupancy and have manageable lease rollover in the next three years. A significant focus in our retail segment will be to continue to maximize the portfolio by accretive acquisitions in key markets and select dispositions of properties that are in markets that we do not believe offer the same opportunities for growth. Our leasing staff actively seeks to lease space at favorable rates, and our management team is focused on controlling expenses and maintaining strong tenant relationships. We believe the retail segment same store income will be consistent with 2014 results while improving the tenant mix and continuing to upgrade the quality of the tenancies.
We expect to see increased same store operating performance in our student housing segment as we continue to execute our investment strategy. In 2015, we anticipate the estimated mid-year delivery of approximately 1,618 beds from three current development projects. We also anticipate the 2016 delivery of approximately 831 beds from two developments. In 2015, we expect increases in operating results compared to 2014 in our student housing portfolio due to increasing rental rates driven by the quality of our property metrics and strong demand. Occasionally, we may recycle capital through strategic dispositions in order to maximize the financial performance of our student housing segment.
We expect to see similar or decreased operating performance in our non-core portfolio in 2015. We will look to sell these assets in individual and portfolio transactions or engage in other strategic transactions over time in an effort to maximize their value.
While we believe we will continue to see overall operating performance increases in 2015, we expect to see continued disposition activity in 2015. This disposition activity could cause us to experience dilution in our operating performance during the period we dispose of properties and prior to reinvestment. We believe that our debt maturities over the next five years are

43


manageable and although we believe interest rates will rise in the future, we anticipate low interest rates to continue in 2015. We believe we will be able to continue cash distributions at our new distribution rate of $0.13 per share on an annualized basis and anticipate distributions to be funded by cash flow from operations as well as distributions from unconsolidated entities and gains on sales of properties.

44


Results of Operations
General
Consolidated Results of Operations
This section describes and compares our results of operations for the years ended December 31, 2014, 2013 and 2012. We generate most of our net income from property operations. In order to evaluate our overall portfolio, management analyzes the operating performance of all properties from period to period and properties we have owned and operated for the same period during each year. Investment properties owned for the entire years ended December 31, 2014 and 2013 and December 31, 2013 and 2012, respectively, are referred to herein as "same store" properties. Unless otherwise noted, all dollar amounts are stated in thousands (except per share amounts, per square foot amounts, revenue per available room, or "RevPAR", and average daily rate, or "ADR").
Comparison of the years ended December 31, 2014, 2013 and 2012
 
Year ended
December 31, 2014
 
Year ended
December 31, 2013
 
Year ended
December 31, 2012
Net income (loss) attributable to Company
$
486,642

 
$
244,048

 
$
(69,338
)
Net income (loss) per common share, basic and diluted
$
0.56

 
$
0.27

 
$
(0.08
)
Our net income increased from the year ended December 31, 2013 to 2014 primarily due to income from discontinued operations of $233,646, which included a $287,722 gain on sale of properties. We also experienced a $64,333 increase in gain, loss, and impairment of investment in unconsolidated entities, net, due to a gain on the termination of one of our joint ventures. Additionally, lodging net operating income increased by $88,352 from 2013 to 2014 due to a full year of operations for 14 acquisitions in 2013, as well as an increase in ADR from $162 to $178 and RevPAR from $119 to $135 from 2013 to 2014, respectively, for all hotels.
Our net income increased from the year ended December 31, 2012 to 2013 primarily due to the gains on sales of properties in 2013. A gain on sale of property of $442,577 was included in our income from discontinued operations for the year ended December 31, 2013. This gain was offset by our asset impairments of $242,896 in continuing operations for the same period.
A detailed discussion of our financial performance is outlined below.
Operating Income and Expenses:
 
Year ended
December 31, 2014
 
Year ended
December 31, 2013
 
Year ended
December 31, 2012
 
2014 Increase
(decrease) 
from 2013
 
2013 Increase
(decrease) 
from 2012
Income:
 
 
 
 
 
 
 
 
 
Rental income

$377,297

 

$377,919

 

$363,888

 

($622
)
 

$14,031

Tenant recovery income
66,055

 
71,207

 
73,214

 
(5,152
)
 
(2,007
)
Other property income
9,362

 
7,202

 
5,714

 
2,160

 
1,488

Lodging income
926,427

 
651,794

 
466,845

 
274,633

 
184,949

Operating Expenses:
 
 
 
 
 
 

 

Lodging operating expenses

$607,100

 

$433,595

 

$312,034

 

$173,505

 

$121,561

Property operating expenses
91,111

 
84,730

 
78,276

 
6,381

 
6,454

Real estate taxes
82,244

 
74,244

 
67,548

 
8,000

 
6,696

Provision for asset impairment
85,439

 
242,896

 
37,830

 
(157,457
)
 
205,066

General and administrative expenses
83,027

 
55,535

 
36,797

 
27,492

 
18,738

Business management fee
2,605

 
37,962

 
39,892

 
(35,357
)
 
(1,930
)

45


Property Income and Operating Expenses
Rental income for non-lodging properties consists of basic monthly rent, straight-line rent adjustments, amortization of acquired above and below market leases, other property income, and percentage rental income recorded pursuant to tenant leases. Tenant recovery income consists of reimbursements for real estate taxes, common area maintenance costs, management fees, and insurance costs. Other property income for non-lodging properties consists of lease termination fees and other miscellaneous property income. Property operating expenses for non-lodging properties consist of regular repair and maintenance, management fees, utilities, and insurance (some of which are recoverable from the tenant).
There was a slight increase in property income for the year ended December 31, 2014 compared to 2013. The increase was a result of the full year of operations for the properties acquired in 2013 as well as the operating performance of the properties acquired in 2014. Same store property performance remained stable, with property income of $376,018 in 2014 compared to $376,200 in 2013. Comparatively, same store property operating expenses were $138,831 in 2014 and $131,921 in 2013, which was an increase of 5.2%.
There was a slight increase in property income for the year ended December 31, 2013 compared to 2012. The increase was a result of the full year of operations for the properties acquired in 2012 as well as the operating performance of the properties acquired in 2013. Same store property performance remained stable, with property income of $356,222 in 2013 compared to $353,492 in 2012, which was an increase of less than 1%. Comparatively, same store property operating expenses were $118,246 in 2013 and $117,033 in 2012, which was also an increase of less than 1%.
Lodging Income and Operating Expenses
Our lodging properties generate revenue through sales of rooms and associated food and beverage services. Lodging operating expenses include room maintenance, food and beverage, utilities, administrative and marketing, payroll, franchise and management fees, and repair and maintenance expenses.
The $274,633 increase in lodging operating income for the year ended December 31, 2014 compared to 2013 was primarily a result of the addition of hotels acquired in 2013 and 2014, which were mostly in the upper-upscale or luxury classification. We acquired fourteen hotels in 2013 and one hotel in 2014. Additionally, $43,799 of the increase was due to improved same store performance as a result of higher ADR and RevPAR. Same store average daily rates increased from $160 in 2013 to $168 in 2014. The addition of these upper-upscale and luxury properties to our portfolio resulted in higher operating costs. The increase in lodging expenses of $173,505, or 40%, for 2014 was directly correlated to the percentage increase in income of 42%.
The $184,949 increase in lodging operating income for the year ended December 31, 2013 compared to 2012 was primarily a result of the addition of hotels acquired in 2012 and 2013, which were mostly in the upper-upscale or luxury classification. We acquired seven hotels in 2012 and fourteen hotels in 2013. Additionally, $18,632 of the increase was due to improved same store performance as a result of higher rates. Same store average daily rates increased from $152 in 2012 to $160 in 2013. The increase in lodging expenses of $121,561, or 39%, for 2013 was directly correlated to the percentage increase in income of 40%.
As a result of the Xenia Spin-Off and other dispositions of our lodging properties, going forward we will no longer have a lodging segment.
Provision for Asset Impairment
For the year ended December 31, 2014, we identified certain properties which may have a reduction in the expected holding period and reviewed the probability that we would dispose of these assets. As a result of our analysis, we identified six properties (two lodging and four non-core) for the year ended December 31, 2014 that we determined were impaired and subsequently written down to fair value. We sold all six properties by December 31, 2014. Additionally, one asset which was previously classified as held for sale as of December 31, 2013, was re-classified as held and used and was re-measured at the lesser of the carrying value or fair value as of May 8, 2014, resulting in an impairment charge to this asset of $71,599. This asset was not evaluated for impairment at the date it was classified as held for sale as the asset was included in a larger portfolio. Overall, we recorded a provision for asset impairment of $85,439 during the year ended December 31, 2014.
For the year ended December 31, 2013, we identified certain properties which may have a reduction in the expected holding period and reviewed the probability that we would dispose of these assets. As part of our analysis, we identified one property, a large single tenant office property, in which we were exploring a potential disposition. After

46


we began exploring a potential sale of the property, we became aware of circumstances in which the tenant would reduce the space they occupied. Although the lease does not expire until 2016, we analyzed various leasing and sale scenarios for the single tenant property. Based on the probabilities assigned to such scenarios, it was determined the property was impaired and therefore, written down to fair value. As a result, we recorded a provision for asset impairment of $147,480, with respect to this asset, during the second quarter 2013. Overall, we recorded a provision for asset impairment of $248,230 for continuing operations and $4,476 for discontinued operations, to reduce the book value of certain investment properties to their fair values for the year ended December 31, 2013. Offsetting the impairment charges, due to a change in the amount of an impaired note's expected future cash flows, we reduced the note's impairment allowance, resulting in a gain of $5,334.
General Administrative Expenses and Business Management Fee
We incurred a business management fee of $2,605, $37,962 and $39,892 for the years ended December 31, 2014, 2013 and 2012, respectively.
As noted earlier, on March 12, 2014, we entered into a series of agreements and amendments to existing agreements with affiliates of the Inland Group pursuant to which the Company began the process of becoming entirely self-managed (collectively, the "Self-Management Transactions"). On March 12, 2014, as part of the Self-Management Transactions, we; our Business Manager; Inland American Lodging Advisor, Inc. a wholly owned subsidiary of the Business Manager ("ILodge"); our property managers, Inland American Industrial Management LLC ("Inland Industrial"), Inland American Office Management LLC ("Inland Office") and Inland American Retail Management LLC ("Inland Retail"); their parent, Inland American Holdco Management LLC ("Holdco" and collectively with Inland Industrial, Inland Office and Inland Retail, the "Property Managers"); and Eagle I Financial Corp. ("Eagle"), entered into a Master Modification Agreement (the "Master Modification Agreement") pursuant to which we agreed with the Business Manager to terminate the management agreement with the Business Manager, hire all of the Business Manager’s employees and acquire the assets or rights necessary to conduct the functions previously performed for us by the Business Manager. We also hired certain Property Manager employees and assumed responsibility for performing significant property management activities. We assumed certain limited liabilities of the Business Manager and the Property Managers, including accrued liabilities for employee holiday, sick and vacation time for those Business Manager, ILodge and Property Manager employees who became our employees and liabilities arising after the closing of the Master Modification Agreement under leases and contracts assigned to us. We did not assume, and the Business Manager is obligated to indemnify, us against any liabilities related to the pre-closing operations of the Business Manager. Eagle, an indirect wholly owned subsidiary of the Inland Group, guaranteed the Business Manager’s indemnity and other obligations under the Master Modification Agreement. We did not pay an internalization fee or self-management fee in connection with the Master Modification Agreement but reimbursed the Business Manager and Property Managers for specified transaction related expenses and employee payroll costs. We entered into a consulting agreement with Inland Group affiliates for a term of three months at $200 per month, which we elected not to renew. The Master Modification Agreement contained a ninety-day reconciliation of certain payments and reimbursements, including the January 2014 business management fee. The reconciliation was completed during the year ended December 31, 2014, which resulted in $728 of SEC-related investigation costs and an adjusted January 2014 business management fee expense of $2,605.
Concurrently, pursuant to its terms, we entered into an Asset Acquisition Agreement (the "Asset Acquisition Agreement") with the Property Managers and Eagle, pursuant to which we agreed to terminate the management agreements with the Property Managers at the end of 2014, hire certain of the remaining Property Manager employees and acquire the assets or rights necessary to conduct the remaining functions performed for us by the Property Managers. We agreed to assume certain limited liabilities, including accrued liabilities for employee holiday, sick and vacation time for Property Manager employees that become our employees and liabilities arising after the closing of the Asset Acquisition Agreement under leases and other contracts that we decide to assume in the transaction. We did not assume any liabilities related to the pre-closing operations of the Property Managers, and we did not pay an internalization fee or self-management fee in connection with the Asset Acquisition Agreement. We consummated the transactions contemplated thereby on December 31, 2014.
Also on March 12, 2014, as part of the Self-Management Transactions, we entered into separate Amended and Restated Master Management Agreements (collectively, the "Amended Property Management Agreements") with each of the Property Managers, excluding Holdco, pursuant to which the Property Managers continued to provide property management services to us through December 31, 2014, other than the property-level accounting, lease administration, leasing, marketing and construction functions that we began performing pursuant to the Master Modification Agreement.

47


The business management fee of $37,962 and $39,892 for the years ended December 31, 2013 and 2012, respectively, was equal to 0.37%, and 0.35% of average invested assets, respectively. Long-term, we expect that becoming self-managed will positively impact our net income and funds from operations. We cannot, however, estimate the impact due to uncertainties regarding the anticipated transition-related expenses.
The increase in general and administrative expenses of $27,492 from $55,535 to $83,027 from the year ended December 31, 2013 to 2014, respectively, was the result of an increase in expenses connected to payroll, legal, and other professional fees primarily related to our transition to self-management, transaction readiness associated with the lodging portfolio, and additional legal costs.
The increase in general and administrative expenses of $18,738 from $36,797 to $55,535 from the year ended December 31, 2012 to 2013, respectively, was primarily a result of increased legal costs, increased consulting and professional fees due to our large amount of transaction activity and the execution of our portfolio strategy, as well as increased salary expenses resulting from additional personnel, which was reimbursed to the Business Manager.
Non-Operating Income and Expenses:
 
Year ended
December 31, 2014
 
Year ended
December 31, 2013
 
Year ended
December 31, 2012
 
2014 Increase
(decrease) 
from 2013
 
2013 Increase
(decrease) 
from 2012
Non-operating income and expenses:
 
 
 
 
 
 
 
 
 
Interest and dividend income

$13,024

 

$19,261

 

$23,377

 

($6,237
)
 

($4,116
)
Gain on sale of investment properties
73,212

 
14,001

 

 
59,211

 
14,001

Gain (loss) on extinguishment of debt
32,801

 
(472
)
 

 
33,273

 
(472
)
Other income
2,296

 
1,859

 
1,741

 
437

 
118

Interest expense
(176,193
)
 
(185,724
)
 
(181,009
)
 
(9,531
)
 
4,715

Equity in earnings of unconsolidated entities
80,886

 
11,958

 
1,998

 
68,928

 
9,960

Gain, (loss) and (impairment) of investment in unconsolidated entities, net
60,860

 
(3,473
)
 
(12,322
)
 
64,333

 
8,849

Realized gain on sale of marketable securities, net
43,025

 
31,539

 
4,319

 
11,486

 
27,220

Income from discontinued operations, net
233,646

 
450,939

 
26,815

 
(217,293
)
 
424,124


48


Gain on Sale of Investment Properties
In line with our early adoption of the new accounting standard governing discontinued operations, ASU No. 2014-08, effective January 1, 2014, only disposals representing a strategic shift that has (or will have) a major effect on our results and operations would qualify as discontinued operations. For the years ended December 31, 2014 and 2013, the operations reflected in discontinued operations include the net lease assets that were classified as held for sale at December 31, 2013 and the select service lodging properties classified as held for sale at September 17, 2014. All other asset disposals are now included as a component of income from continuing operations, except for those assets classified as discontinued operations prior to our adoption of the new accounting standard governing discontinued operations.
During the year ended December 31, 2014, the gain on sale of properties was $73,212, which was primarily attributed to 38 properties sold during the year ended December 31, 2014. Additionally, we recognized a gain of $21,720 due to the transfer of four assets to the lender in satisfaction of non-recourse debt.
During the year ended December 31, 2013, the gain on sale of properties was $14,001, which was primarily attributed to the contribution of thirteen properties to our joint venture, IAGM, in April 2013 and one property in July 2013. We have an equity interest in the IAGM joint venture; therefore we have a continued ownership interest in the properties. As such, we treated this disposition as a partial sale, recognizing a gain on sale in continuing operations on the consolidated statements of operations and comprehensive income.
Gain (Loss) on Extinguishment of Debt
Gain on extinguishment of debt of $32,801 at December 31, 2014 was primarily due to the gain on extinguishment of debt of $34,220 for three properties we surrendered to the lender in 2014.
The loss on extinguishment of debt at December 31, 2013 relates to activity on properties still held by the Company or sold subsequent to our adoption of ASU No. 2014-08. Properties classified as discontinued operations in 2013 and 2012 are included as discontinued operations on the consolidated statement of operations as they were classified as discontinued operations prior to our adoption of ASU No. 2014-08.
Interest Expense
Interest expense from continuing operations decreased for the year ended December 31, 2014 compared to 2013 with balances of $176,193 and $185,724, respectively. Additional interest expense of $35,448 and $99,445 was reflected in discontinued operations for the years ended December 31, 2014 and 2013, respectively. In total, interest expense decreased for the year ended December 31, 2014 compared to 2013 with balances of $211,641 and $285,169, respectively. This was primarily due to the decrease in the principal amount of our total debt (including mortgages, line of credit, and mortgages held for sale) as of December 31, 2014 compared to 2013 with balances of $3,190,636 and $4,920,180, respectively.
Interest expense from continuing operations remained largely unchanged for the year ended December 31, 2013 compared to 2012 with balances of $185,724 and $181,009, respectively. However, additional interest expense of $99,445 and $139,625 was reflected in discontinued operations for the years ended December 31, 2013 and 2012, respectively. In total, interest expense decreased for the year ended December 31, 2013 compared to 2012 with balances of $285,169 and $320,634, respectively. This was primarily due to the decrease in the principal amount of our total debt as of December 31, 2013 compared to 2012 with balances of $4,920,180 to $5,867,004, respectively.
Our weighted average interest rate on total outstanding debt was 4.63%, 5.09%, and 5.10% per annum for the years ended December 31, 2014, 2013 and 2012, respectively.
Equity in Earnings of Unconsolidated Entities
Our equity in earnings of unconsolidated entities includes our share of the unconsolidated entity's operating income or loss. Also included in this amount are any one-time adjustments associated with the transactions of the unconsolidated entity.
For the year ended December 31, 2014, the equity in earnings of unconsolidated entities in 2014 was primarily a result of preferred distributions from one unconsolidated entity of $3,122 and our share of a gain on the property sales of $78,705 in one unconsolidated entity.

49


For the year ended December 31, 2013, the equity in earnings of unconsolidated entities in 2013 was primarily a result of our share of a gain on the property sales of $3,015 in one unconsolidated entity and our share of a gain on the extinguishment of debt of $5,709 in one unconsolidated entity.
For the year ended December 31, 2012, the equity in earnings of unconsolidated entities in 2012 was primarily a result of a $4,575 gain from our share of property sales and extinguishment of debt in two unconsolidated entities offset by a property impairment charge recognized by one unconsolidated entity of which our portion was $470.
Gain, (Loss) and (Impairment) of Investment in Unconsolidated Entities, net
For the year ended December 31, 2014, we recognized a gain of $64,815 on the termination of one of our retail unconsolidated entities and an impairment of $8,464 on one of our industrial unconsolidated entities.
For the year ended December 31, 2013, we recorded an impairment of $6,532 on two of our unconsolidated entities and recorded a gain on the termination of two of our unconsolidated entities of $3,059. Of the impairment and gain recorded in 2013, $5,528 and $4,411, respectively, related to one previously unconsolidated entity which was purchased from the Company's joint venture partner.
For the year ended December 31, 2012, we recorded an impairment of $9,365 on three of our unconsolidated entities. Additionally, we recorded losses on the sales of 100% of our equity in one unconsolidated entity of $1,556 and a lodging unconsolidated entity of $1,401.
Realized Gain and (Impairment) on Marketable Securities, net
For the year ended December 31, 2014, we recognized a $43,025 net realized gain as a result of sales.
For the year ended December 31, 2013, there was a $1,052 impairment charge on one equity security which was offset by a $32,591 net realized gain as a result of sales.
For the year ended December 31, 2012, there was a $1,899 impairment charge on one equity security which was offset by a $6,218 net realized gain as a result of sales.
Discontinued Operations
In line with our early adoption of the new accounting standard governing discontinued operations, only disposals representing a strategic shift that has (or will have) a major effect on our results and operations would qualify as discontinued operations. Only the net lease assets previously classified as held for sale on the consolidated balance sheet as of December 31, 2013 and the select service hotels are included in discontinued operations for the year ended December 31, 2014. The net lease assets, the select service hotels, and properties classified as sold prior to our adoption of ASU No. 2014-08, are included in discontinued operations for the years ended December 31, 2013 and 2012.
For the year ended December 31, 2014, as we complete the triple net and select service portfolio sales, we recorded net income of $233,646 from discontinued operations, which primarily included a gain on sale of properties of $287,722 and a loss on extinguishment of debt of $74,781. Discontinued operations generated operating income of $59,736 for the year ended December 31, 2014.
For the year ended December 31, 2013, we recorded net income of $450,939 from discontinued operations, which primarily included a gain on sale of properties of $442,577, a loss on extinguishment of debt of $18,305, a loss on transfer of assets of $16, and provision for asset impairment of $4,476. Discontinued operations generated operating income of $126,324 for the year ended December 31, 2013.
For the year ended December 31, 2012, we recorded net income of $26,815 from discontinued operations, which primarily included a gain on sale of properties of $39,236, a gain on extinguishment of debt of $9,478, a gain on transfer of assets of $2,175 and a provision for asset impairment of $45,485. Discontinued operations generated operating income of $115,314 for the year ended December 31, 2012.

50


Segment Reporting
Over the past two years, we have been implementing our strategy of focusing our diverse portfolio of real estate into three asset classes - retail, lodging and student housing. By tailoring, expanding and refining these three components of our portfolio, our goals are to enhance stockholder value and position the Company to explore various strategic transactions and liquidity events for our stockholders. In 2015, we successfully completed the Spin-Off. As a result of the Spin-Off and other dispositions of our lodging properties, going forward we will no longer have a lodging segment. Moving forward, we will seek to deliver value by continuing to tailor and grow our retail and student housing segments, consistent with our strategy and objectives, as well as to address future lease maturities and disposition plans related to several properties in our non-core segment.
We evaluate segment performance primarily based on net operating income. Net operating income of the segments excludes interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest and other investment income from corporate investments.
In order to evaluate our overall portfolio, management analyzes the operating performance of all properties from period to period and properties we have owned and operated for the same period during each year. A total of 157 and 146 of our investment properties satisfied the criteria of being owned for the entire years ended December 31, 2014 and 2013 and December 31, 2013 and 2012, respectively, and are referred to herein as "same store" properties. This same store analysis allows management to monitor the operations of our existing properties for comparable periods to determine the effects of our new acquisitions on net income.
An analysis of results of operations by segment is below. The tables contained throughout summarize certain key operating performance measures for the years ended December 31, 2014, 2013 and 2012. The rental rates reflected in retail and non-core are inclusive of rent abatements, lease inducements and straight-line rent GAAP adjustments, and exclusive of tenant improvements and lease commissions. The rental rates reflected for student housing are inclusive of rent concessions. Economic occupancy, shown for our retail and non-core segments, 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 that tenant of the area being leased. Physical occupancy is defined as the percentage of occupied beds compared to the total number of leasable beds.

51


Retail Segment
Our retail segment consists solely of multi-tenant retail properties, primarily community and neighborhood centers and power centers, as described in "Part I, Item 2. Properties". Our retail segment net operating income on a same store basis grew by 2.6% for the year ended December 31, 2014 compared to the year ended December 31, 2013. This was a result of stable same store economic occupancy and comparable lease rates year to year. On a total segment basis, we saw a decrease in net operating income of $9,985 or 5.1%. This was a result of our contribution of thirteen properties to the IAGM joint venture in April 2013 and one property in July 2013. For the year ended December 31, 2013, a full quarter of operations for these properties is included in net operating income as we did not contribute the properties until second quarter 2013. For the year ended December 31, 2014, there are no operating results for these properties included in net operating income. Total segment net operating income also increased due to a $3,665 decrease in property operating expenses from December 31, 2013 to 2014.
Our retail segment net operating income on a same store basis grew slightly for the year ended December 31, 2013 compared to the year ended December 31, 2012, up $1,650 or 1.0%. This was a result of stable same store economic occupancy and comparable lease rates year to year. On a total segment basis, we saw a decrease in total net operating income of $8,945 or 4.4%. Again, this was primarily a result of the properties we contributed to the IAGM joint venture. For the year ended December 31, 2012, a full year of operations was included in net operating income, whereas for the year ended December 31, 2013, only operations through the disposition date in the second quarter are included in net operating income.
We believe that fundamentals in the retail segment are improving. As our community and neighborhood centers and power centers are typically grocery-anchored and necessity-based retail centers, we believe that there continues to be strong demand due to their relative resiliency to e-commerce as compared with other retail asset classes. With limited new development and construction, we believe rental rates will grow, and we have a positive view of this segment. Our strategy includes focusing on key markets across the country and growing our presence in those markets. These key markets share fundamental characteristics such as job growth, increasing wages and population growth. We also may opportunistically dispose of retail properties to take advantage of market conditions or in situations where the properties no longer fit within our strategic objectives.
For current properties in the portfolio, we continue to maintain our expense controls and believe our property marketing programs enhance current tenant relationships. We will support our key market approach by expanding our regional offices and further embed leasing and operations staff in our respective markets. We see this continuing in 2015 and beyond as we continue to source acquisitions in key markets. We also continue to focus on new consumer trends and re-evaluate tenant synergies and complimentary uses as leases mature in an effort to maximize tenant performance at our properties.

 
Total Retail Properties
 
As of December 31,
 
2014
 
2013
 
2012
Economic occupancy
93%
 
93%
 
94%
Rent per square foot
$13.87
 
$13.67
 
$13.41
Investment in properties, undepreciated
$2,539,790
 
$2,641,706
 
$3,076,434


52


Comparison of Years Ended December 31, 2014 and 2013
The table below represents operating information for the retail segment and for the same store retail segment consisting of properties acquired prior to January 1, 2013. The properties in the same store portfolio were owned for the entire years ended December 31, 2014 and 2013. Activity in the non-same store column for the year ended December 31, 2013 includes those properties contributed to the IAGM joint venture.
Retail
For the year ended
December 31, 2014
 
For the year ended
December 31, 2013
 
Same Store Change
Favorable/
(Unfavorable)
 
Total Change
Favorable/
(Unfavorable)
 
Same Store
Non Same Store
Total
 
Same Store
Non Same Store
Total
 
Amount
%
 
Amount
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
$184,770
$18,423
$203,193
 
$183,349
$31,713
$215,062
 
$1,421
0.8
 %
 
$(11,869)
(5.5
)%
Straight line adjustment
3,260

1,405

4,665

 
3,491

1,749

5,240

 
(231
)
(6.6
)%
 
(575
)
(11.0
)%
Tenant recovery income
55,094

4,775

59,869

 
55,753

9,177

64,930

 
(659
)
(1.2
)%
 
(5,061
)
(7.8
)%
Other property income
3,952

862

4,814

 
3,362

460

3,822

 
590

17.5
 %
 
992

26.0
 %
Total income
247,076

25,465

272,541

 
245,955

43,099

289,054

 
1,121

0.5
 %
 
(16,513
)
(5.7
)%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
43,094

7,372

50,466

 
46,349

7,782

54,131

 
3,255

7.0
 %
 
3,665

6.8
 %
Real estate taxes
33,726

2,906

36,632

 
33,684

5,811

39,495

 
(42
)
(0.1
)%
 
2,863

7.2
 %
Total operating expenses
76,820

10,278

87,098

 
80,033

13,593

93,626

 
3,213

4.0
 %
 
6,528

7.0
 %
Net operating income
$170,256
$15,187
$185,443
 
$165,922
$29,506
$195,428
 
$4,334
2.6
 %
 
$(9,985)
(5.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Economic occupancy as of December 31
93%
N/A
93%
 
93%
N/A
93%
 
 
 
 
 
 
Number of properties owned as of December 31
101
7
108
 
101
4
105
 
 
 
 
 
 



53


Comparison of Years Ended December 31, 2013 and 2012
The table below represents operating information for the retail segment and for the same store retail segment consisting of properties acquired prior to January 1, 2012. The properties in the same store portfolio were owned for the entire years ended December 31, 2013 and 2012. Activity in the non-same store column for the years ended December 31, 2013 and 2012 includes those properties contributed to the IAGM joint venture.
Retail
For the year ended
December 31, 2013
 
For the year ended
December 31, 2012
 
Same Store Change
Favorable/
(Unfavorable)
 
Total Change
Favorable/
(Unfavorable)
  
Same Store
Non Same Store
Total
 
Same Store
Non Same Store
Total
 
Amount
%
 
Amount
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
$183,349
$31,713
$215,062
 
$182,301
$44,212
$226,513
 
$1,048
0.6
 %
 
$(11,451)
(5.1
)%
Straight line adjustment
3,491

1,749

5,240

 
2,700

2,124

4,824

 
791

29.3
 %
 
416

8.6
 %
Tenant recovery income
55,753

9,177

64,930

 
54,051

12,103

66,154

 
1,702

3.1
 %
 
(1,224
)
(1.9
)%
Other property income
3,362

460

3,822

 
2,674

11

2,685

 
688

25.7
 %
 
1,137

42.3
 %
Total income
245,955

43,099

289,054

 
241,726

58,450

300,176

 
4,229

1.7
 %
 
(11,122
)
(3.7
)%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
46,349

7,782

54,131

 
45,573

11,034

56,607

 
(776
)
(1.7
)%
 
2,476

4.4
 %
Real estate taxes
33,684

5,811

39,495

 
31,881

7,315

39,196

 
(1,803
)
(5.7
)%
 
(299
)
(0.8
)%
Total operating expenses
80,033

13,593

93,626

 
77,454

18,349

95,803

 
(2,579
)
(3.3
)%
 
2,177

2.3
 %
Net operating income
$165,922