S-11/A 1 d768925ds11a.htm S-11/A S-11/A
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As filed with the Securities and Exchange Commission on April 27, 2015

Registration No. 333-200079

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

to

Form S-11

REGISTRATION STATEMENT

FOR REGISTRATION UNDER

THE SECURITIES ACT OF 1933 OF SECURITIES

OF CERTAIN REAL ESTATE COMPANIES

 

 

International Market Centers, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

475 S. Grand Central Parkway, Suite 1615

Las Vegas, Nevada 89106

(702) 599-9621

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

Robert J. Maricich

Chief Executive Officer and President

475 S. Grand Central Parkway, Suite 1615

Las Vegas, Nevada 89106

(702) 599-9621

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

Edward J. Schneidman, P.C.

Christopher P. Bennett, Esq.
Kirkland & Ellis LLP
300 North LaSalle
Chicago, IL 60654
(312) 862-2200

David Goldschmidt, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, NY 10036

(212) 735-3000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of

securities to be registered

Amount to be

registered(1)

Proposed maximum

offering price

per share(2)

Proposed
maximum

aggregate
offering price(2)

Amount of

registration fee(3)(4)

Common stock, par value $0.01 per share

  13,225,000   $14.00   $185,150,000   $21,514.43

 

 

(1) Includes 1,725,000 shares subject to the underwriters’ option to purchase additional shares.
(2) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(a) of the Securities Act of 1933.
(3) Calculated by multiplying 0.0001162 by the proposed maximum aggregate offering price.
(4) This amount was previously paid in connection with the initial filing of this registration statement.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated April 27, 2015

11,500,000 Shares

 

LOGO

International Market Centers, Inc.

Common Stock

 

 

This is the initial public offering of common stock of International Market Centers, Inc. We are selling 11,500,000 shares of our common stock. We expect the public offering price to be between $12.00 and $14.00 per share. Currently, no public market exists for the common stock. Our common stock has been approved for listing, subject to official notice of issuance, on The New York Stock Exchange under the symbol “IMC.”

We have elected to qualify to be taxed as a real estate investment trust (a “REIT”) for U.S. federal income tax purposes. Shares of our common stock are subject to limitations on ownership and transfer that are intended to assist us in maintaining our qualification as a REIT. Our charter contains certain restrictions relating to the ownership and transfer of our capital stock, including, subject to certain exceptions, an ownership limit of 9.8%, in value or by number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock and an ownership limit of 9.8%, in value, of the aggregate of the outstanding shares of all classes or series of our stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

After the completion of this offering, International Market Centers, LP, a limited partnership controlled by funds affiliated with Bain Capital Partners, LLC and an entity affiliated with Oaktree Capital Management, L.P., will continue to own a majority of the voting power of our common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of The New York Stock Exchange. See “Management—Controlled Company Exception.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements.

 

 

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 33 of this prospectus.

 

     Per Share      Total  

Public offering price

   $                        $                    

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

  (1) See “Underwriting” for a description of all compensation payable to the underwriters.

We have granted the underwriters the option to purchase up to 1,725,000 additional shares of common stock on the same terms and conditions set forth above if the underwriters sell more than 11,500,000 shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                 , 2015.

 

 

Book Running Managers

 

Barclays                       Credit Suisse   Wells Fargo Securities
Deutsche Bank Securities   J.P. Morgan

Co-Managers

 

KeyBanc Capital Markets   Raymond James

 

The date of this prospectus is                     , 2015.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     PAGE  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     33   

FORWARD-LOOKING STATEMENTS

     56   

USE OF PROCEEDS

     58   

DISTRIBUTION POLICY

     59   

CAPITALIZATION

     63   

DILUTION

     65   

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     67   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     74   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     75   

INDUSTRY OVERVIEW

     100   

BUSINESS

     103   

MANAGEMENT

     127   

EXECUTIVE COMPENSATION

     136   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     145   

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     148   

PRINCIPAL STOCKHOLDERS

     151   

DESCRIPTION OF INDEBTEDNESS

     154   

DESCRIPTION OF CAPITAL STOCK

     157   

MATERIAL PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

     162   

DESCRIPTION OF PARTNERSHIP AGREEMENT OF IMC OP, LP

     170   

SHARES ELIGIBLE FOR FUTURE SALE

     179   

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     180   

CERTAIN CONSIDERATIONS FOR EMPLOYEE BENEFIT PLANS AND OTHER RETIREMENT ARRANGEMENTS

     197   

UNDERWRITING

     201   

LEGAL MATTERS

     206   

EXPERTS

     206   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     206   

INDEX TO FINANCIAL STATEMENTS

     F-1   

You should rely only on the information contained in this prospectus and any free writing prospectus that we authorize to be delivered to you. We have not and the underwriters have not, authorized any other person to provide you with any additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is only accurate as of the date on the front cover of this prospectus or another date specified herein. Our business, financial condition, liquidity, results of operations and prospects may have changed since such dates.

Through and including                     , 2015 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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MARKET INFORMATION

Information regarding market share, market position and industry data pertaining to our business contained in this prospectus consists of estimates based on data and reports compiled by industry professional organizations and analysts (including, Gift and Decorative Accessories Magazine (published in May 2014), Home Accents Today’s (“Home Accents Today”) 2014 Universe Study (published in December 2014), IBISWorld’s (“IBISWorld”) Industry Report 45322: Gift Shops & Card Stores in the US (published in February 2015), Mann, Armistead & Epperson, Ltd.’s (“Mann, Armistead & Epperson, Ltd.”) 2014 Import/Export Study (published in 2014), Stax Inc.’s Stax Survey (as defined herein) and data published by Furniture Today (“Furniture Today”) (as of May 2014, June 2014, December 2014 and January 2015) and by the U.S. Bureau of Economic Analysis (as of August 2014)), and our knowledge of our industry. Although we believe the industry and market data to be reliable, this information could prove inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties.

CERTAIN TERMS USED IN THIS PROSPECTUS

In this prospectus, unless the context otherwise requires, the following terms have the meanings noted below:

 

    “Bain Capital” refers to Bain Capital Partners, LLC;

 

    “High Point Markets” refers to two semi-annual one-week home furniture and home décor Markets held in April and October in High Point, North Carolina;

 

    “High Point Property” refers to the 14 buildings dedicated to showroom and exhibition space that we own in High Point, North Carolina;

 

    “IMC” refers to International Market Centers, Inc., a Maryland corporation and the issuer of the common stock offered hereby, without any of its subsidiaries;

 

    “IMC OP GP, LLC” refers to a Delaware limited liability company and a wholly-owned subsidiary of IMC that is the sole general partner of the Operating Partnership;

 

    “IMC LP” refers to International Market Centers, LP, a limited partnership controlled by funds affiliated with our Sponsors and IMC’s sole stockholder prior to the completion of this offering;

 

    “Las Vegas Markets” refers to two semi-annual one-week home furniture, home décor and gift Markets held in January and July/August in Las Vegas, Nevada;

 

    “Las Vegas Property” refers to the three buildings and three exhibition pavilions dedicated to showroom and exhibition space that we own in Las Vegas, Nevada;

 

    “Markets” refers to business-to-business trade gatherings in the home furniture, home décor and gift industries typically lasting one week where manufacturers and suppliers: (i) meet with their existing and prospective customers (a diverse group of retail outlets and interior design buyers); (ii) showcase their latest designs and products; (iii) discover new and emerging trends in their respective industry; and (iv) enter into sales agreements with their customers;

 

    “Oaktree” refers to Oaktree Capital Management, L.P.;

 

    “Operating Partnership” refers to IMC OP, LP, a Delaware limited partnership and a wholly-owned subsidiary of IMC, that holds substantially all of our assets and conducts our operations;

 

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    “Predecessor Group” refers, collectively, to the Predecessor REIT Subsidiaries, which merged with and into IMC, and IMC Manager, LLC, which became a subsidiary of IMC as a result of a merger transaction whereby a subsidiary of IMC merged with and into IMC Manager, LLC (with IMC Manager, LLC surviving the merger), in each case, on August 15, 2014;

 

    “Predecessor REIT Subsidiaries” refers to IHFC REIT, LLC, Market Square REIT, LLC, Showplace REIT, LLC and IMC LV REIT, LLC, which were wholly-owned by IMC LP prior to August 15, 2014;

 

    “Properties” refers collectively to the High Point Property and Las Vegas Property;

 

    “Sponsors” refers to Bain Capital and Oaktree;

 

    “Stax Survey” refers to a survey conducted by Stax Inc. in July 2010 that Bain Capital commissioned in connection with the due diligence process related to its acquisition of IMC LP in 2011; the survey covered 166 home furniture manufacturers and dealers, including 152 that then participated in the High Point Markets or the Las Vegas Markets; and

 

    “we,” “our,” “us” and “our company” refer to IMC together with its consolidated subsidiaries, including the Operating Partnership and IMC OP GP, LLC.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus, including our business and the material terms of this offering. It does not contain all of the information that may be important to you and your investment decision. You should carefully read the following summary together with the entire prospectus, before you decide to invest in our common stock.

In this prospectus, unless the context otherwise requires, references to “we,” “our,” “us” and “our company” refer to International Market Centers, Inc., a Maryland corporation, together with its consolidated subsidiaries, including IMC OP, LP, a Delaware limited partnership, which we refer to in this prospectus as our “Operating Partnership,” and IMC OP GP, LLC, a Delaware limited liability company wholly-owned by International Market Centers, Inc., which is the sole general partner of our Operating Partnership. Unless the context otherwise requires, references to “IMC” refer to International Market Centers, Inc. without any of its subsidiaries. Unless the context otherwise requires, the historical operations described in this prospectus refer to historical operations of the businesses and assets of the Predecessor Group that we succeeded to on August 15, 2014 upon consummation of the Restructuring Transactions described under “—Restructuring Transactions” as if such operations were conducted by us.

Our Company

Our company, which is structured as an internally-managed REIT, is the largest owner and operator of permanent business-to-business showroom space in North America for the home furniture industry and one of the largest owners and operators of permanent business-to-business showroom space for the home décor and gift industries. We own approximately 12.1 million gross square feet (10.0 million rentable square feet) of premier showroom space across 14 buildings in High Point, North Carolina (the “High Point Property”) and three buildings and three exhibition pavilions in Las Vegas, Nevada (the “Las Vegas Property” and, together with the High Point Property, the “Properties”). Approximately 9.4 million rentable square feet of such showroom space is permanent showroom space and approximately 0.6 million rentable square feet is temporary showroom space. Our showrooms are leased by manufacturers and suppliers of home furniture (such as living room, dining room, and home office furniture, bedroom furniture and mattresses), home décor products (such as rugs, lighting, wall art, pillows and bedding) and gift products (such as candles, stationery, floral, holiday and seasonal items and toys). We host two “Markets” per year at each of our Properties. “Markets” are generally weeklong business-to-business trade gatherings in the home furniture, home décor and gift industries that enable manufacturers and suppliers to: (i) meet with their existing and prospective customers (a diverse group of retail outlets and interior design buyers); (ii) showcase their latest designs and products; (iii) discover new and emerging trends in their respective industry; and (iv) enter into sales agreements with their customers. Our Markets are the largest gatherings of manufacturers and suppliers (our tenants) and buyers (our tenants’ customers) in the home furniture industry. For the year ended December 31, 2014, we generated total revenues of $162.8 million, net loss of $29.6 million and Adjusted EBITDA of $82.0 million. For the three months ended March 31, 2015, we generated total revenues of $42.1 million, net loss of $3.2 million and Adjusted EBITDA of $20.1 million. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States (“GAAP”). For a definition of Adjusted EBITDA and a reconciliation to our GAAP measures for those periods, see “—Summary Consolidated Financial and Other Operating Data.”

Our semi-annual Markets in both High Point and Las Vegas provide our tenants with an efficient and cost-effective means of interacting directly with their customers by providing their customers with a single location that offers access to a broad universe of manufacturers and suppliers as well as a diverse range of their products. We believe this creates significant value for both our tenants and their customers in the U.S. home furniture industry, in the U.S. home décor industry and in the highly fragmented U.S. gift industry. Furniture Today estimates that the U.S. home furniture industry generated approximately $96 billion in revenue in 2014

 

 

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(including mattresses), and Home Accents Today estimates that the U.S. home décor industry generated approximately $61 billion in revenue in 2014. In addition, according to IBISWorld, the U.S. gift industry generated approximately $19.4 billion in sales in 2014 at traditional gift retail stores, such as souvenir shops, greeting card shops, novelty shops, Christmas stores, balloon shops and curiosity shops (excluding sales at retail stores and outlets that are not primarily focused on gifts, such as florists, theme parks, hardware stores and garden stores). The ability to physically assess our tenants’ merchandise is critical to purchasing decisions for buyers of home furniture, home décor and gift products, and such assessments cannot be replicated through other channels, such as online marketplaces. We believe our business model is highly compelling because: (i) these Markets are essential to our tenants and their customers; (ii) the showroom space we own would be expensive to replicate; and (iii) our industry-leading scale and operational capabilities allow us to provide high quality Market experiences and an attractive return-on-investment for our tenants.

 

    Markets are Essential to our Tenants and Their Customers—Home furniture manufacturers and dealers that participated in Markets in 2010 and that were interviewed for the Stax Survey indicated they generate approximately 75% of their annual revenue from orders received or from interactions at Markets generally. In addition, according to a survey conducted in 2014 by Gift and Decorative Accessories Magazine, gift buyers consider Markets and tradeshows to be a very important source of new products. Our Markets bring a large number of manufacturers and suppliers together with their customers in one location, allowing them to conduct business efficiently and productively. Home furniture Markets have been taking place in High Point for over 100 years, and although our Markets in Las Vegas are relatively new, as the first building opened in 2005, they have established themselves as the Western U.S. home furniture counterpart to the High Point Markets. We believe that home furniture Markets have remained important to our tenants’ buyers regardless of economic cycles. For example, according to registration data compiled by the High Point Market Authority, annual buyer registration for the High Point Markets declined only 7% between 2007 and 2009 (the years with the highest and the lowest annual buyer registration, respectively, during the most recent economic downturn). All of the top 20 home furniture manufacturers and suppliers (based on 2013 total furniture shipments to the United States, according to Furniture Today) that participate in the wholesale furniture trade in North America participate in the High Point Markets or the Las Vegas Markets each year and 15 of such manufacturers and suppliers are our tenants. Our Las Vegas Property is also recognized as a growing destination in the Western United States for home décor and gift products. The centralization of top manufacturers within our Properties drives buyer traffic to our Markets. The chart below illustrates the importance of Markets to manufacturers and dealers in the home furniture industry.

 

 

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LOGO

 

  (1) For the year 2013, according to Mann, Armstead & Epperson, Ltd.
  (2) Estimated for the year 2013 (including mattresses), according to Furniture Today.
  (3) Estimated for the year 2014 (including mattresses), according to Furniture Today.
  (4) According to management estimates.
  (5) According to the Stax Survey.

 

    Our Portfolio of Properties Would be Expensive to Replicate—Our showroom space includes 6.7 million gross square feet in High Point and 5.4 million gross square feet in Las Vegas. We and our tenants have invested significant capital in these facilities, which makes them extremely difficult and costly to replicate. Our High Point Property includes the largest and most iconic showroom buildings in High Point, which are recognized throughout the home furniture industry. Their location in the heart of the downtown furniture district and proximity to the main transportation hub, event venues and food and beverage amenities offer incremental value to our tenants and their customers. Our Las Vegas Property offers state-of-the art buildings specifically designed to serve as showroom and commerce space for the industries we serve and cost approximately $860 million to develop.

 

    Our Industry Leading Properties and Operational Capabilities—Since 2011, we have invested in our Properties and our operations to build a business of scale and operational capability that can increase the value of our Markets for both our tenants and their customers. The critical mass of buyers that visit our tenants’ showrooms is one of the factors that make our Markets compelling to our tenants. The opportunity to see a large number of manufacturers and products in a single location makes our Markets compelling to buyers. We have invested considerably and we believe differentially to our competition in an effort to deliver both a critical mass of buyers and the opportunity to see a large number of manufacturers’ products. We have invested approximately $33 million in the High Point Property since 2011, primarily to re-merchandise the showroom space and improve navigation and the overall buyer and exhibitor experience at our High Point Markets. We have invested approximately $47 million in our Las Vegas Property, primarily to re-merchandise the showroom space and develop a strong and growing Western U.S. home décor and gift Market. These investment amounts include our capital expenditures, as well as the costs of operating the marketing and public relations departments, including a 15-person call center that contacts approximately 100,000 buyers a year to recruit them for our Markets. We believe that our unique scale, investment and positioning as an industry leader provide high quality Market experiences and an attractive return-on-investment for our tenants, which we believe positions us to continue to grow rental rates and occupancy rates.

 

 

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We believe that we provide essential venues and services for both our tenants and their customers. We expect that our business will have meaningful opportunities to continue to grow, as we continue to deliver the advantages of our business model to our tenants and their customers. We believe this growth will manifest itself, as it has in recent years, through a combination of rental rate and occupancy rate increases in our Properties.

Our Properties

High Point: High Point hosts two Markets annually, one in April and the other in October. The High Point Markets have long been the seminal sales events in the U.S. home furniture industry. Our High Point Property consists of 14 buildings that encompass approximately 6.7 million gross square feet (5.4 million rentable square feet), making us the largest landlord of showroom space in High Point, with 59% of the total available gross square footage for showrooms (according to High Point showroom tax records). In contrast, no other property owner of showroom space in High Point owns more than 4% of the total available gross square footage for showrooms. We believe we own approximately 88% of the highest-quality showroom properties in High Point based on their location in the heart of the downtown furniture district, proximity to the main transportation hub, event venues and food and beverage amenities and the tenants located in such properties. All of our buildings are located within the core downtown furniture district at the heart of the Markets, have a strong concentration of anchor tenants, including well-known brands such as Ashley Furniture Industries, Bassett Furniture and La-Z-Boy, and attract key industry buyers, such as Mattress Firm, Restoration Hardware, Rooms to Go and Williams Sonoma Home. Also, two of our showroom properties in High Point feature dedicated temporary space that we believe is unique in High Point and serves as an incubator for new tenants who may initially lease space for a single Market before deciding whether to rent showroom space on a longer term lease. We believe this temporary space in High Point is also regarded by buyers as the best opportunity to see new manufacturers with innovative products, which attracts buyers to our buildings and therefore allows us to command premium rental rates in these areas. The average occupancy rate in our High Point Property for the period from January 1, 2012 to March 31, 2015 was approximately 87%. During the period from January 1, 2012 to December 31, 2014, our rental rates increased at a compounded annual growth rate of 5.1%. Multi-year leases currently in effect in our High Point Property have weighted average annual rent escalators of 3.2% on the remaining term.

Las Vegas: Our Las Vegas Property hosts two Markets annually, one in January and the other in July/August. Our Las Vegas Property, which is located a few miles from the Las Vegas Strip and adjacent to downtown Las Vegas, has a world class campus that consists of three main buildings and three exhibition pavilions that have approximately 5.4 million gross square feet (4.6 million rentable square feet). The three buildings include tenants in the home furniture, home décor and gift industries. We host the only Western U.S. home furniture Markets and our Las Vegas Markets have emerged as one of the leading Western U.S. home décor and gift Markets. Our Las Vegas Markets are also uniquely positioned as the nation’s leading bedding marketplace, with over 330,000 occupied square feet dedicated to mattress and bedding companies, including all of the top 15 mattress suppliers according to Furniture Today (based on 2013 shipments to the United States). Some of the iconic furniture brands that rent space in our Las Vegas Property include Ashley Furniture Industries, Bassett Furniture, Lexington Home Brands and Stanley Furniture Company, as well as well-known mattress brands, such as Tempur Sealy, Serta and Simmons. These tenants attract many of the same major industry buyers that attend the High Point Markets, as well as regional Western U.S. retailers and interior designers. In total, in 2014, the Las Vegas Markets attracted approximately 85% of their domestic buyers from states west of the Mississippi River, a region that represented approximately 40% of all home furniture sales in 2014 in the United States based on data published by Furniture Today. From January 1, 2012 to March 31, 2015, we have strategically lowered certain rental rates and improved our Las Vegas Property occupancy rate from 59.5% to 84.1% (excluding a change in the designation of 161,000 square feet in building C of our Las Vegas Property from temporary space to permanent space in 2015). This increase in occupancy has helped create a more vibrant experience for our tenants and their customers at our Las Vegas Markets. As we continue to increase occupancy levels in our Las Vegas Property, we expect our average rental rates will increase. Multi-year leases currently in effect in our Las Vegas Property have weighted average annual rent escalators of 4.0% on the remaining term.

 

 

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Our Operating Model

We believe our business model is similar to that of tradeshow companies in that we bring large numbers of sellers and buyers together at regular events, yet our model is superior in that we own our Properties and the majority of our showroom square footage is leased on a multi-year basis. This permanent showroom space model encourages our tenants to make significant capital investments to customize their showrooms and improve the presentation of their products. Multi-year leases currently in effect have a weighted average term (based on revenue) of approximately 4.5 years with weighted average annual rent escalators of 3.6% on the remaining term. Multi-year leases generate stable and predictable revenues and approximately 83% of our 2014 revenue was generated from rent payments under such leases. Approximately 9% of our 2014 revenue was generated from leases of less than one year (“short-term leases”) (including temporary space), and the remaining 8% from advertising revenue and ancillary tenant services, such as movement of our tenants’ products into and out of their showroom spaces and other related logistics services. We have limited tenant concentration, with no single tenant accounting for more than 3% of our 2014 permanent rental revenue. Our top five tenants represented approximately 8% of our 2014 permanent rental revenue and our next 15 top tenants represented approximately 11% of such revenue. We also maintain longstanding relationships with many of our tenants, as exemplified by some of our key anchor tenants, such as Ashley Furniture Industries, Broyhill Furniture Industries, Hooker Furniture and La-Z-Boy, which have each leased space in our Properties for more than 20 years.

We believe our business is capital efficient with a very low level of investment in tenant improvements compared to many other REITs, averaging only $2.65 per square foot in 2014. It is common for our tenants to make substantial investments in their showroom space to create a premium environment in which to showcase their products. These improvements include new flooring, additional interior walls, fireplaces, moldings and light fixtures as our tenants often seek to merchandise their product as retailers would and as the product would eventually appear in the home. In addition, our tenants often invest in the build-out of additional amenities for their staff and customers, such as office space, meeting space and kitchen and bar areas. Due to our long-term lease structure, our tenants are able to amortize these build-out costs over the full lease term, making these investments more cost-effective for them. We believe that the substantial investments that our tenants make in their showroom space support our high lease renewal rates.

We support our tenants by driving buyer attendance at our Markets through direct marketing channels (mail, email and an in-house call center). At our Markets, we create an exceptional experience by providing entertainment events and hosting on-site networking, social and educational opportunities for tenants and their customers. We also provide advertising opportunities for our tenants, including official publications and on-site large format sponsorships (such as interior and exterior branded banners covering walls and walkways), which help our tenants establish and differentiate their trade brands with a captive buyer audience.

Operational efficiency is a critical component of our business model and we generated an Adjusted EBITDA margin of 48.4% for the three months ended March 31, 2015 and 50.7%, 49.1% and 46.0% for the years ended December 31, 2014, 2013 and 2012, respectively. Our scalable cost structure and low capital expenditures position us well for future earnings and cash flow growth, and we anticipate only minimal expense increases to achieve our internal growth strategies. Adjusted EBITDA margin is not a measure of financial performance under GAAP. For a definition of Adjusted EBITDA margin and a reconciliation of that non-GAAP measure to our GAAP measure for those periods, see “—Summary Consolidated Financial and Other Operating Data.”

Finally, we believe our business model would be expensive to replicate. Our Las Vegas Property was developed at a cost of approximately $860 million, creating a venue catering specifically to the home furniture, home décor, and gift industries. Our scale allows us to attract and retain high quality management, leasing and operations teams that we believe would be difficult to replicate in a smaller business. In addition, tenants in our Properties have invested significantly in tenant improvements, creating bespoke showrooms in each of our

 

 

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facilities, which we believe contributes to increases in our lease renewal rates. Importantly, we believe the risk of disintermediation from other channels, such as online marketplaces, is mitigated because buyers in the home furniture, home décor and gift industries want to examine merchandise in-person to determine quality, craftsmanship and style, which must be done on-site with the product.

Formation in 2011

Showrooms that participate in the High Point Markets are located in approximately 180 buildings that are controlled by more than 100 owners throughout the city of High Point. Before International Market Centers, LP’s (“IMC LP”) formation in 2011, the Showplace, Market Square and International Home Furnishings Center buildings that IMC LP acquired in 2011 were owned by the three largest High Point showroom landlords. During the difficult economic environment in 2007 and 2008, the fragmented ownership in the High Point Markets led to downward pricing pressure. The Showplace buildings were placed in receivership in 2009 following payment defaults on the buildings’ underlying mortgage loans. Similarly, the Market Square buildings were placed into receivership in November 2010.

In the early 2000s, a group of real estate developers (World Market Center Venture, LLC) began the development of the Las Vegas Property to create an alternative to the High Point Markets. Building A of the Las Vegas Property opened in 2005 and was followed by buildings B and C, which opened in 2007 and 2008, respectively. Fueled by strong credit markets, the group leading the development of the Las Vegas Property incurred very high debt levels to fund the development. The Las Vegas Property, which opened shortly before the recession, struggled to reach planned occupancy levels due to the economic decline and a failure to attract key tenants from the High Point Markets. These factors led to financial distress for the Las Vegas Property. Commencing in April 2010, the owners of buildings A and B of the Las Vegas Property entered into forbearance agreements with their loan servicers following defaults on the buildings’ underlying mortgage loans and in April 2011, receivers were appointed for these two buildings.

In 2011, funds affiliated with Bain Capital Partners, LLC (“Bain Capital”) and an entity affiliated with Oaktree Capital Management, L.P. (“Oaktree” and, together with Bain Capital, the “Sponsors”) and their partners formed IMC LP to acquire the entities that owned the Properties. In May and July 2011, IMC LP purchased the High Point Property and the Las Vegas Property and negotiated favorable loan modifications with the receivers of the buildings then in receivership, at which point, the receiverships were dismissed.

IMC LP acquired the Properties to operate them as a single integrated business. We believe that, as a result of this combination, we have created a new business with the ability to serve our tenants and their customers in new and more compelling ways.

Progress Since 2011

In High Point, our ownership of the majority of the showroom space enabled us to create an attractive platform for us and for our tenants. Average rental rates in our High Point Property increased from $13.50 per square foot as of January 1, 2012 to $15.84 per square foot as of March 31, 2015. This increase has been driven by a 6.7% average re-leasing spread with respect to lease agreements that expired during this 39-month period. These lease agreements accounted on average for approximately 29% of our square footage during that period.

We have re-positioned the Las Vegas Markets since taking ownership. Instead of seeking to provide an alternative to the High Point Markets, we have invested in driving a unique set of primarily Western U.S. buyers to the Las Vegas Markets and positioned our Las Vegas Markets as complementary to the High Point Markets for home furniture. In 2014, the Las Vegas Markets attracted approximately 85% of their domestic buyers from states west of

 

 

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the Mississippi River, a region that represented approximately 40% of all home furniture sales in 2014 in the United States based on data published by Furniture Today. In addition, approximately 90% of the home furniture and home décor buyers that attend our Las Vegas Markets are unique relative to the High Point Markets, providing significant incremental opportunity for tenants seeking national distribution. Our efforts to re-position the Las Vegas Markets with respect to the High Point Markets included, among other initiatives, cross-selling key High Point tenants by highlighting the benefit of reaching a national audience with a presence in both Markets. It also involved updating our leasing materials to focus on the value of reaching a unique Western U.S. buyer base rather than positioning Las Vegas as the future of the home furniture showroom industry. We significantly increased the volume of retailer outreach to Western U.S. buyers compared to other regions to direct a Western U.S. audience to the Las Vegas Markets. In response to this re-positioning, our occupancy for home furniture permanent space has increased approximately 40% from approximately 1.5 million square feet on January 1, 2012 to approximately 2.1 million square feet on March 31, 2015. In addition, key tenants from High Point now maintain showroom space in both locations, and we expect to continue to utilize our relationships in High Point to cross-sell our Las Vegas Property.

In our Las Vegas Property, we also invested to re-merchandise the space, relocating tenants by product category, creating dedicated home décor and gift “neighborhoods” within our buildings that group similar exhibitors with similar and complementary products near one another. We have invested approximately $47 million in our Las Vegas Property, primarily to re-merchandise the showroom space and develop a strong and growing Western U.S. home décor and gift Market. We have further supported this growth area with key investments and resource support. For example, we have: (i) hired a highly experienced home décor and gift leasing team; (ii) increased the occupancy of the home décor and gift exhibitor space from approximately 0.8 million occupied square feet as of January 1, 2012 to approximately 1.3 million occupied square feet for our Market in January 2015; and (iii) increased home décor and gift buyer attendance 111% from the Market in January 2012 to our Market in January 2015, due to the increase in the number of tenants in our Properties and to our direct marketing efforts. The co-location of the home furniture, home décor and gift Markets has made the Las Vegas Markets a complete destination for products across the home furniture, home décor and gift industries. We believe this structure enhances our tenants’ experience at our Las Vegas Markets as many buyers cross-shop among these complementary product lines and categories.

Overview of the Home Furniture, Home Décor and Gift Industries in the United States

The retail value of the U.S. home furniture industry (including mattresses) was estimated to total approximately $96 billion in revenue in 2014 according to Furniture Today, the retail value of the U.S. home décor industry was estimated to total approximately $61 billion in revenue in 2014 according to Home Accents Today, and, according to IBISWorld, the U.S. gift industry generated approximately $19.4 billion in sales in 2014 at traditional gift retail stores, such as souvenir shops, greeting card shops, novelty shops, Christmas stores, balloon shops and curiosity shops (excluding sales at retail stores and outlets that are not primarily focused on gifts, such as florists, theme parks, hardware stores and garden stores). Buyers at Markets represent a wide array of re-sellers of merchandise, including traditional home furniture and home décor retail stores, department stores, interior designers and homebuilders as well as other, less traditional furnishings re-sellers, including wholesale clubs, internet/catalog retailers, office supply companies, rent-to-own stores, gift stores, museum shops and specialty décor retailers, such as lighting stores and floor covering retailers. Product manufacturers and suppliers within the home furniture, home décor and gift industries reach these buyers primarily by participating in Markets and showcasing product samples in a customized showroom setting. Some manufacturers and suppliers of home furniture, home décor and gift products also utilize a direct sales force to visit retail locations and showcase products via catalogs and general trade advertising.

 

 

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We operate within the home furniture (High Point and Las Vegas), home décor (High Point and Las Vegas) and gift (Las Vegas) industries. The other U.S. Markets within these industries have different focus areas and product mixes. For example, The Atlanta International Gift & Home Furnishings Market at AmericasMart, the Dallas Total Home & Gift Market at the Dallas Market Center and NY NOW are primarily home décor and gift Markets with some furniture exhibitors, while Tupelo, Mississippi operates purely as a home furniture Market and the International Casual Furniture & Accessories Market at the Merchandise Mart in Chicago, Illinois provides outdoor and casual furnishings. Within this context, our Markets compete with different events and locations depending on the product category.

 

 

LOGO

(1) Estimated for the year 2014 (including mattresses), according to Furniture Today.
(2) For the year 2014, according to Home Accents Today.
(3) For the year 2014, according to IBISWorld.
(4) According to management estimates.

Home Furniture Markets

We operate in the two largest U.S. home furniture Markets, High Point and Las Vegas. Our High Point Property and Las Vegas Property collectively represent approximately 7.3 million rentable square feet in home furniture showroom space, with approximately 4.9 million rentable square feet on our home furniture floors within our High Point Property and approximately 2.4 million rentable square feet on our home furniture floors within our Las Vegas Property. Other home furniture Markets in the United States are smaller venues with niche offerings and include the Tupelo Furniture Market in Mississippi, focused on upholstered furniture, and the International Casual Furniture & Accessories Market at the Merchandise Mart in Chicago, Illinois, providing outdoor and casual furnishings.

We believe that the U.S. home furniture industry has remained stable through economic cycles. According to home furniture sales data from the U.S. Bureau of Economic Analysis, for the 43-year period from 1970 through 2013, the U.S. home furniture industry has grown at a compounded rate of 5.7% and has shown positive growth in 38 of those years. The U.S. home furniture industry experienced year-over-year sales declines of only 3% during the 1982 recession and of 8.0% and 10.2% during the recession in 2008 and 2009, respectively.

 

 

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Because the housing market is an underlying driver of home furniture sales, the collapse of the housing market during the most recent recession in 2008 and 2009 had a particular impact on the U.S. home furniture industry. As the housing market recovers, we believe that the U.S. home furniture industry will benefit from future growth in such market. For detailed information regarding year-over-year changes in sales for the U.S. home furniture industry from 1970 to 2013 as reported by the U.S. Bureau of Economic Analysis, see the table under “Industry Overview—Home Furniture Markets.”

Home Décor and Gift Markets

The landscape for the home décor and gift Markets is more fragmented than the home furniture Markets. In the Eastern United States, there are two major home décor and gift Markets, The Atlanta International Gift & Home Furnishings Market and NY NOW. The Atlanta International Gift & Home Furnishings Market offers approximately 4.6 million rentable square feet, of which approximately 4.0 million is allocated to home décor and gift products across permanent and temporary showroom space. It is held each January and July at AmericasMart, a 7.7 million gross square foot facility that also hosts numerous apparel shows. NY NOW is held each February and August at The Javits Center and Pier 94, which represent approximately 893,000 combined gross square feet of temporary showroom space.

In the Western United States, the home décor and gift Markets are dispersed with select larger Markets and numerous smaller regional Markets. The Dallas Total Home & Gift Market is held four times each year and offers both permanent and temporary showroom space in the Dallas Market Center, an approximately 5.0 million gross square foot facility that also hosts numerous apparel Markets. Our Las Vegas Markets have approximately 1.9 million rentable square feet dedicated to the home décor and gift industries within the 4.6 million rentable square foot Las Vegas Property.

The map below shows home décor and gift Markets held in states west of the Mississippi River with greater than 100,000 rentable square feet of permanent or temporary showroom space dedicated to these industries, highlighting the fragmentation within this region.

LOGO

We have increased the occupancy of our home décor and gift exhibitor space for the Las Vegas Markets from approximately 0.8 million occupied square feet as of January 1, 2012 to approximately 1.3 million occupied

 

 

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square feet for our Market in January 2015. Through the increase in the number of tenants in our Properties and our direct marketing efforts, we have also increased home décor and gift buyer attendance at our Las Vegas Markets 111% from the Market in January 2012 to our Market in January 2015 and established our Las Vegas Markets as a major home décor and gift marketplace. The unique co-location of home décor and gift showroom space with home furniture showroom space has made the Las Vegas Markets a complete destination for the home furniture, home décor and gift industries. We believe this co-location has enhanced our tenants’ and their customers’ experience at our Las Vegas Markets as many of our tenants’ customers cross-shop among these complementary product lines and categories.

Business and Growth Strategies

Our primary business objective is to maximize total return for our stockholders. To accomplish this goal, we are focused on creating value for our tenants and their customers who attend our Markets. We continue to invest our expertise and resources in initiatives that we believe will result in a better buyer experience and ultimately more opportunities for our tenants to generate strong returns on their showroom investments. We intend to pursue the following business and growth strategies.

Deliver Premium Value to Our Tenants in High Point

As of March 31, 2015, our High Point Property average rental rate was $15.84 per square foot, compared to average rental rates of $14.03, $14.67 and $15.74 as of December 31, 2012, 2013 and 2014, respectively. We have achieved re-leasing spreads of 1.8%, 2.8%, 13.9% and 8.7% for the years 2012, 2013 and 2014 and the three months ended March 31, 2015, respectively. The 2013 re-leasing spread excluding a strategic contract renewal with a key anchor tenant was 7.4%. We believe there is an opportunity to increase rental rates in our High Point Property above the weighted average annual rental rate escalators of 3.2%, embedded in multi-year leases currently in effect in our High Point Property, because of the value delivered to our tenants in High Point as evidenced by the following four key factors.

 

    The High Point Markets have been the primary home furniture Markets for over 100 years, are known as the “Furniture Capital of the World” and both home furniture manufacturers and suppliers and their customers recognize the value of having a presence at these Markets.

 

    We continue to add value to our High Point Property and have invested approximately $33 million since 2011 to enhance the experience for our tenants and their customers by creating distinct neighborhoods and investing in facilities and signage. In addition, our marketing team has implemented a comprehensive marketing campaign highlighting our High Point Property and existing tenants to attract home furniture buyers to our buildings. We also offer on-site amenities for buyers, including educational seminars and food court areas.

 

    Our portfolio offers current tenants and prospective tenants access to the highest concentration of premium showroom space in the High Point Markets. The 14 buildings comprising our High Point Property are located in the core downtown market district and we believe represent approximately 88% of the highest quality showroom property in the High Point Markets. Coupled with our investments to improve the quality of our tenants’ and their customers’ experience at our High Point Markets, we believe the location and quality of our High Point Property offer exhibitors a higher value relative to other available home furniture showroom space which allows us to achieve higher rental rates than most of our competitors in High Point.

 

   

Since 2011, we have invested considerably in our High Point Property to build scale and operational capabilities that increase the value of our High Point Markets for both our tenants and their customers. The critical mass of buyers that visit our tenants’ showrooms is one of the factors that make our Markets compelling to our tenants. This strategy has resulted in increased rental rates at our High Point Property. Our ownership of a majority of the High Point showroom space enables us to implement a

 

 

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rationalized rental rate structure for our tenants located in our High Point Property based on the location and quality of each individual showroom space. Accordingly, we believe there is room for continued rental rate growth in our High Point Property.

Continue to Grow the Re-positioned Las Vegas Home Furniture Markets

Since 2011, we have re-positioned the Las Vegas Markets as complementary to the High Point Markets. In particular, the universe of buyers who attend the Las Vegas Markets is distinctly different than the universe of buyers who attend the High Point Markets. The Las Vegas Markets provide significant opportunity for our High Point Property tenants seeking national distribution and exposure to incremental potential customers as approximately 85% of the domestic buyers who attended the Las Vegas Markets in 2014 came from states west of the Mississippi River. In addition, approximately 90% of the home furniture and home décor buyers that attend our Las Vegas Market are unique relative to the High Point Markets. We will continue to seek cross-sell prospects from the High Point Property who do not yet participate in the Las Vegas Markets.

We also invested in relocating tenants by product category in our Las Vegas Property. This relocation increased the concentration of tenants and products in buildings A and B while also allowing us to strategically locate tenants into distinct neighborhoods, which creates an improved shopping experience for buyers. As a result of this strategy, occupancy in buildings A and B combined was approximately 68%, 73%, 86% and 92% as of January 2012, January 2013, January 2014 and January 2015, respectively. Given this increased occupancy rate, we can focus on improving tenant mix and increasing rental rates.

In addition, as a result of these cross-selling and re-positioning efforts, our occupied home furniture dedicated space at our Las Vegas Property reached 1.5 million square feet, 1.8 million square feet, 2.0 million square feet and 2.0 million square feet as of January 2012, January 2013, January 2014 and January 2015, respectively. We believe that we have the opportunity to increase both our Las Vegas Property total occupancy rates and average rental rates over time.

Grow Our Western U.S. Home Décor and Gift Markets to Create a Total Home Destination

The landscape of the home décor and gift Markets in the Western United States is highly fragmented, with numerous smaller Markets that we believe lack a critical mass of exhibitors. Since 2011, we have successfully built the home décor and gift exhibitor space in the Las Vegas Markets to compete with these smaller Markets and provide a more complete product offering to Western U.S. buyers in these categories.

In order to build our home décor and gift exhibitor space, we invested to re-merchandise our Las Vegas Property creating dedicated and contiguous home décor and gift neighborhoods. In addition, we hired a highly experienced home décor and gift leasing team in 2012. This leasing team achieved total occupied square feet in the home décor and gift exhibitor space at our Las Vegas Property of 0.8 million square feet, 1.0 million square feet, 1.2 million square feet, and 1.3 million square feet as of January 2012, January 2013, January 2014 and January 2015, respectively. As a result of the concentration of tenants and products coupled with our innovative marketing techniques, home décor and gift buyer attendance at our Market in January 2015 increased by 111% relative to such attendance at our Market in January 2012. This increase includes a 25% increase from our Market in January 2012 to our Market in January 2013, and a 73% increase from our Market in January 2012 to our Market in January 2014. We believe our leasing efforts in these categories have positioned the Las Vegas Markets as a complete destination for products across the home furniture, home décor and gift industries. We believe this structure enhances the Las Vegas Markets experience as many buyers cross-shop among these complementary product lines and categories. We intend to continue to create value for our tenants and their customers as we add new exhibitors in the home décor and gift industries. We believe this will lead to further occupancy and rental rates increases, on top of the rent growth that is embedded in our current leases in the form of rental rate escalators.

 

 

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Pursue Additional Revenue Opportunities Consistent with our Business Model

We plan to continue to evaluate expansion, both organically, as we have done in the home décor and gift Markets, and through acquisitions, as in the activities that led to IMC LP’s formation in 2011. We believe there are potential expansion opportunities in certain furnishings verticals, such as housewares, hospitality, office, casual and outdoor furniture industries.

On January 16, 2015, we acquired the C&D Building, a furniture showroom building in High Point, North Carolina with approximately 0.3 million gross square feet, for an aggregate purchase price of $11.3 million (including $0.2 million of cash acquired) funded with available cash on hand. The C&D Building represents the 14th building in our High Point Property further establishing our leadership in the High Point Markets. The acquisition of this building is expected to increase buyer traffic flow among the buildings that comprise the High Point Property.

In addition to our existing Properties, we own 29 acres of undeveloped land adjacent to our Las Vegas Property. This additional land provides us with the strategic opportunity to increase available showroom space in the Las Vegas Markets, which would allow us to enter into additional industry verticals. Finally, we believe there are opportunities to deliver a similar value proposition in select international venues which have yet to establish formalized home furniture, home décor and gift Markets. We believe the opportunity exists to partner with or acquire local operators and developers in these international Markets.

Our Competitive Strengths

We believe the following strengths differentiate us from both other real estate owners and tradeshow operators and position us for sustainable growth as a public company.

Markets Are Essential to the Industries We Serve

The home furniture, home décor and gift manufacturing industries are highly fragmented. For example, we believe there are approximately 5,000 distinct manufacturers of products and approximately 60,000 distinct buyers in the home furniture industry. We believe consolidation among manufacturers in these industries is unlikely given the limited capital requirements, low barriers to entry and the absence of significant economies of scale.

We believe that Markets provide a critical and irreplaceable forum for the home furniture, home décor and gift industries to transact business. Markets are a cost efficient venue offering the convenience of a single, large gathering of industry buyers and sellers thus creating a critical mass for participants to maximize their return on time and investments. Home furniture manufacturers and dealers that participated in Markets in 2010 and that were interviewed for the Stax Survey indicated they generate approximately 75% of their annual revenue from orders received or from interactions at Markets generally. In addition, according to a survey conducted in 2014 by Gift and Decorative Accessories Magazine, gift buyers consider Markets and tradeshows as a very important source of new products. Also, due to the highly tactile nature of the products (buyers typically need to physically assess a product prior to making a purchasing decision), we believe Markets are not at risk of disintermediation from other channels.

We Have a Leadership Position in our Industry

We are the largest owner and operator of permanent business-to-business showroom space in North America for the home furniture industry and one of the largest owners and operators of permanent business-to-business showroom space for the home décor and gift industries. This position makes our Markets more efficient for both our tenants and their customers. We own and operate 17 buildings and three exhibition pavilions encompassing 12.1 million gross square feet (10.0 million rentable square feet) of showroom space for the home furniture, home décor and gift industries in High Point and Las Vegas that are strategically located in the Eastern and Western United States. We own 6.7 million gross square feet (5.4 million rentable square feet), or 59%, of the total available gross square feet of showroom space in High Point, which is often referred to as the “Furniture Capital of the World.”

 

 

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Additionally, we believe we own approximately 88% of the highest-quality showroom space in the High Point Markets. We own 5.4 million gross square feet (4.6 million rentable square feet), or 100%, of the total available gross square feet of showroom and exhibition space in the Las Vegas Markets, which offer world-class infrastructure and amenities. The Las Vegas Property was developed at a cost of approximately $860 million.

Tenants recognize Markets as essential to competing in their respective industries, and we own substantially more total square footage and more home furniture-dedicated showroom space than any of our competitors. Our tenants include leaders in their respective industry segments, such as Ashley Furniture, Klaussner Furniture and La-Z-Boy, that utilize our Markets to effectively showcase their products to their industries’ most important buyers, including Mattress Firm, Restoration Hardware, Rooms to Go and Williams Sonoma Home.

Our significant real estate ownership in the High Point Markets and our 100% ownership in the Las Vegas Markets provide us significant flexibility to execute our growth strategy. We believe our High Point Property serves as the center of the home furniture industry and, while the Las Vegas Property was originally built as an alternative to the High Point Markets, we have re-positioned our Las Vegas Property to complement our High Point Property by becoming the premier home furniture market for the Western United States. In addition, we have positioned our Las Vegas Markets as the major home décor and gift Markets in the highly fragmented home décor and gift Markets in the Western United States by relocating home décor and gift industry tenants in a concentrated fashion to create home décor and gift neighborhoods. While many of our tenants maintain a presence in both High Point and Las Vegas, there is limited overlap among the buyers who participate in the Las Vegas Markets and High Point Markets. Approximately 85% of the domestic buyers who attended the Las Vegas Markets in 2014 were from states west of the Mississippi River. In addition, approximately 90% of the home furniture and home décor buyers that attend our Las Vegas Markets are unique versus the High Point Markets, which we believe drives the need for manufacturers to lease space in both Las Vegas and High Point in order to reach a national audience.

Strong Operational Capabilities

Since 2011, we have assembled an experienced senior management team led by our chief executive officer, Robert Maricich, a 39-year veteran of the furnishings and exhibitions industries who maintains strong, long-term relationships with a broad range of our tenants and key industry players. Our remaining senior management team members have significant experience in their respective disciplines, providing us with in-house expertise and resources in lease administration, accounting, financing, acquisitions, marketing, asset and property management, event production and hospitality, and human resources. In addition, we have a 36-person leasing team with deep industry relationships and an average of approximately 17 years of experience across the home furniture, home décor and gift exhibitions industries. Because of the operationally intensive nature of hosting Markets, we also employ a 78-person full time operations team, which we supplement during Markets with approximately 1,400 additional temporary workers. Together, this team creates a platform that is highly scalable. See “Management” for further information regarding our executive officers and other key members of our management.

Driving attendance of buyers that are relevant to our tenants is a key to our success because our tenants’ success at our Markets is dependent upon buyers visiting their showroom space to purchase their products. We employ a team of 40 professionals who execute comprehensive marketing programs to increase buyer attendance at our Markets. These professionals have established strong relationships with both tenants and buyers. Our marketing efforts also include creating and maintaining a database of past, current and prospective buyers in the United States and abroad. We contact more than 200,000 buyers for our Las Vegas Markets through direct mail, email and personal live outreach from a dedicated call center and have found these strategies work to increase buyer attendance at our Markets. For example, we increased home décor and gift buyer attendance at our Las Vegas Markets by 111% from the Market in January 2012 to our Market in January 2015.

 

 

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In High Point, a government-funded organization, the High Point Market Authority, is responsible for hosting the High Point Markets and marketing the events to buyers along with on-site market logistics (such as registration, transportation, entertainment and security). We supplement the High Point Market Authority’s marketing efforts with our own comprehensive outreach to buyers to promote our High Point Property and generate a high-value flow of buyers for our tenants. This comprehensive outreach to buyers includes brand building and awareness vehicles such as sponsoring industry-related conferences and events, social media, web-based advertising, advertising in trade publications and direct marketing to buyers. We believe we provide the most comprehensive marketing plan of any landlord in High Point due to our size and resources.

Stable Business Model With Embedded Growth

We typically enter into multi-year leases with our tenants, and such leases generated approximately 83% of our revenue in 2014. Multi-year leases currently in effect have a weighted average term (based on revenue) of approximately 4.5 years. As of December 31, 2014, leases covering approximately 2.0 million square feet, representing 25% of our annualized contract rent, expire within the next 12 months, leases covering approximately 1.2 million square feet, representing 17% of our annualized contract rent, expire between 12 and 24 months, and leases covering approximately 1.8 million square feet, representing 24% of our annualized contract rent, expire between 24 and 36 months. Our multi-year leases generally include annual rental rate increases. Leases currently in effect have a weighted average annual rent escalators of 3.6% on the remaining term. This represents a significant and contracted source of internal revenue growth for us.

Also, our tenants invest their own capital in customizing their showroom rental space and are generally motivated to renew leases upon expiration. For example, tenants, such as Ashley Furniture Industries, Broyhill Furniture Industries, Hooker Furniture and La-Z-Boy have each leased showroom space in buildings that now comprise our Properties for more than 20 years. In 2014, leases representing 29% of our occupied square footage expired or the tenants under them opted for early renewal and 95% of such showroom space was renewed. Our high renewal rate and the significant capital expenditures by our tenants in their showrooms help limit our capital expenditures, which averaged only approximately $2.65 per square foot in 2014.

Approximately 9% of our 2014 revenue was generated from short-term leases (including temporary space). In our Las Vegas Property we offer approximately 0.3 million rentable square feet of space for temporary exhibitors who lease this space on a short-term basis for use during our Markets similar to how space is leased by tradeshow companies. Two of our showroom properties in High Point, containing approximately 0.3 million square feet, feature dedicated temporary space that we believe is unique in High Point and serves as an incubator for new tenants who may initially lease space for a single Market before deciding whether to rent showroom space pursuant to a longer term lease. We believe this temporary space in Las Vegas and High Point is also regarded by buyers as the best opportunity to see new manufacturers with innovative products, which attracts buyers to our buildings and therefore allows us to command premium rental rates in these areas.

The majority of our cost base is fixed, and expenses are not expected to increase significantly in order to achieve our growth objectives. We achieved an Adjusted EBITDA margin of 48.4% for the three months ended March 31, 2015 and 50.7%, 49.1% and 46.0% for the years ended December 31, 2014, 2013 and 2012, respectively. We believe that our highly scalable cost structure will allow us to continue to generate strong operating results. Adjusted EBITDA margin is not a measure of financial performance under GAAP. For a definition of Adjusted EBITDA margin and a reconciliation of that non-GAAP measure to our GAAP measure for those periods, see “—Summary Consolidated Financial and Other Operating Data.”

We have over 800 distinct permanent tenants, with no single tenant accounting for more than 3% of our rental revenues. Our top five tenants represented approximately 8% of our 2014 permanent rental revenue and our next 15 top tenants represented approximately 11% of such revenue in the same period. Our highly diversified tenant base minimizes our customer concentration risk and provides us with negotiating leverage.

 

 

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Flexible Capital Provides Opportunities for Disciplined Growth

Upon the completion of this offering after giving effect to the use of proceeds therefrom, we expect to have total outstanding debt of $420.4 million, including $399.4 million under our first lien term loan facility and $21.0 million under our $50 million revolving credit facility. Our first lien term loan facility matures on August 15, 2020 and our revolving credit facility matures on August 15, 2019. Upon the completion of this offering after giving effect to the use of proceeds therefrom, we expect our total debt-to-consolidated EBITDA (as defined under our senior secured credit facilities) to be 5.0x. See “—Refinancing Transactions” and “Use of Proceeds.” As a public company, we plan to utilize multiple sources of capital, which will allow us to pursue opportunistic acquisitions and other opportunities at attractive levels.

 

 

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Our Portfolio

The following table provides an overview of our Properties as of March 31, 2015. All of our buildings were acquired as of May 2, 2011, except the Showplace buildings in High Point (Showplace, Showplace West, Hamilton 200, Hamilton 320 and Hamilton 330), which were acquired on July 29, 2011, and the C&D Building, which was acquired on January 16, 2015. We have fee title to the Properties, except for the Commerce wing of the International Home Furnishings Center in High Point, which is subject to a ground lease. See “Business—Our Portfolio.”

 

          As of March 31, 2015  

Property

  

Street Address

   RSF,
Permanent
Space Only(1)
     Number of
Leases
 

High Point, North Carolina(2)

  

International Home Furnishings Center(3)

  

209-211 S. Main Street

     2,615,115         313   

National Furniture Mart

  

200 S. Main Street

     262,075         12   

Furniture Plaza

  

210 S. Main Street

     295,373         27   

Plaza Suites

  

222 S. Main Street

     383,563         14   

South Main

  

300 S. Main Street

     29,653         2   

Historic Market Square

  

200 W. Commerce Avenue

     398,765         51   

Market Square Tower

  

317 W. High Avenue

     140,643         43   

Market Square Suites

  

305 W. High Avenue

     11,866         3   

Hamilton Market

  

101 N. Hamilton

     89,526         1   

Showplace

  

211 E. Commerce Avenue

     396,032         71   

Hamilton 200

  

200 N. Hamilton Street

     227,464         20   

Hamilton 320

  

320 N. Hamilton Street

     12,466         3   

Hamilton 330

  

330 N. Hamilton Street

     56,502           

Commerce & Design

  

201 W. Commerce Avenue

     220,402         32   

Las Vegas, Nevada

  

World Market Center Building A

  

495 S. Grand Central Parkway

     1,143,914         228   

World Market Center Building B

  

475 S. Grand Central Parkway

     1,341,100         215   

World Market Center Building C

  

455 S. Grand Central Parkway

     1,770,210         314   

World Market Center garage

  

320 S. Grand Central Parkway

     (4)      

World Market Center pavilions

  

209 S. Grand Central Parkway

     (5)      
     

 

 

    

 

 

 

Total

  9,394,669      1,349   
     

 

 

    

 

 

 

 

(1) Represents rentable square feet available for long-term leases and does not include approximately 0.3 million rentable square feet and approximately 0.3 million rentable square feet of showroom space available to temporary users in High Point and Las Vegas, respectively, as of March 31, 2015. See “Business—Description of Our Portfolio.”
(2) We also own the Showplace West Building in High Point, which is an eight-story vacant building previously used as commercial office space.
(3) The Commerce wing of the International Home Furnishings Center is 692,996 rentable square feet.
(4) The World Market Center garage is a free-standing parking structure with approximately 3,600 spaces available to tenants, attendees and visitors.
(5) The World Market Center pavilions are an approximately 350,000 rentable square foot space for temporary exhibitors and other events.

 

 

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Restructuring Transactions

We are a Maryland corporation that was formed by IMC LP in anticipation of this offering to operate as a REIT and to succeed in the ownership of the properties and businesses conducted by wholly-owned subsidiaries of IMC LP, IHFC REIT, LLC, Market Square REIT, LLC, Showplace REIT, LLC and IMC LV REIT, LLC (the “Predecessor REIT Subsidiaries”), and IMC Manager, LLC, which managed the day-to-day operations of the Predecessor REIT Subsidiaries and their subsidiaries (collectively, the “Predecessor Group”).

Immediately prior to the consummation of the Refinancing Transactions referred to herein, on August 15, 2014, through a series of transactions, IMC LP caused each of the Predecessor REIT Subsidiaries to merge into IMC, with IMC surviving the merger, and IMC LP continuing as IMC’s sole common stockholder. IMC also caused a wholly-owned subsidiary of IMC to merge with and into IMC Manager, LLC, with IMC Manager, LLC surviving the merger as a subsidiary of IMC, and the interests of IMC LP in IMC Manager, LLC being canceled. Additionally, IMC caused certain of its wholly-owned taxable REIT subsidiaries (each, a “TRS”) to merge with and into IMC TRS, LLC. These transactions were consummated as mergers among subsidiaries of a common parent without consideration. Following the mergers, the Predecessor REIT Subsidiaries ceased to exist and IMC succeeded in the ownership of the properties and businesses that had been operated by the Predecessor REIT Subsidiaries. Until the consummation of this offering, IMC LP will continue to be IMC’s sole common stockholder. Each of the four Predecessor REIT Subsidiaries had been operated as a REIT for U.S. federal income tax purposes and IMC is expected to be treated for U.S. federal income tax purposes as the successor to these entities. We have elected to qualify to be taxed as a REIT for U.S. federal income tax purposes and expect to continue to operate in a manner that will allow us to continue to be classified as such. IMC Manager, LLC has elected to be treated as a corporation for U.S. federal income tax purposes and has elected to be treated as a TRS.

Immediately following these mergers, we contributed substantially all of our assets to our Operating Partnership through which we now conduct our operations. Pursuant to the agreement of limited partnership of the Operating Partnership, IMC OP GP, LLC, our direct, wholly-owned subsidiary, serves as the sole general partner of the Operating Partnership, and we are the sole initial limited partner. Prior to the consummation of this offering, we will enter into an amended and restated agreement of limited partnership pursuant to which we will be obligated to contribute the net proceeds of any offering of our capital stock as additional capital to our Operating Partnership in exchange for additional limited partnership units in the Operating Partnership. In this prospectus, we collectively refer to the transactions described above as the “Restructuring Transactions.”

Concurrently with the consummation of this offering, we intend to redeem 125 shares of our preferred stock held by non-affiliated parties that were issued at the consummation of the Restructuring Transactions to enable us to meet one of the requirements for qualification and taxation as a REIT. This preferred stock was issued in exchange for preferred stock held by the non-affiliated parties in one of the Predecessor REIT Subsidiaries prior to the Restructuring Transactions and in accordance with the documents governing such preferred stock. Following the consummation of this offering, no shares of preferred stock will be outstanding.

Following completion of this offering, IMC LP will own approximately 76.8% of our outstanding common stock (or 74.2% if the underwriters exercise their option to acquire up to 1,725,000 additional shares of our common stock) and investors in this offering will own the remaining 23.2% (or 25.8% if the underwriters exercise their option to acquire up to 1,725,000 additional shares of our common stock). IMC LP is controlled by funds affiliated with Bain Capital, which own approximately 47.3% of IMC LP, and an entity affiliated with Oaktree, which owns approximately 47.4% of IMC LP. See “—Our Sponsors.”

 

 

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Ownership and Structure After the Restructuring Transactions and the Offering

The following diagram depicts our ownership structure upon the completion of the Restructuring Transactions consummated on August 15, 2014 and this offering. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

LOGO

 

 

* Ownership percentages in our Operating Partnership reflect the issuance and full conversion of an aggregate of approximately 1.6 million of long term incentive partnership units (“LTIP units”) to be granted to our management team and certain former officers under the 2015 Incentive Plan (as defined herein) in connection with the completion of this offering. The LTIP units will be only partially vested as of the date of grant. The unvested portion of the LTIP units will be subject to certain time and, in some cases, performance vesting conditions, in each case as specified in the award. Furthermore, certain of the LTIP units will have a “hurdle rate” pursuant to which the LTIP unit will only participate in value above the hurdle rate that applies to such unit. The 1.6 million LTIP units represent the maximum number of LTIP units subject to such awards that may be earned, assuming the highest performance hurdles are achieved and all of the LTIP units subject to such awards ultimately vest. Vested LTIP units may be converted into common units in our Operating Partnership and, ultimately, at our option, be exchanged for cash or shares of our common stock on a one-for-one basis. See “Executive Compensation” and “Description of Partnership Agreement of IMC OP, LP—LTIP Units.”

UPREIT Structure

Because we hold our assets through our Operating Partnership in which our wholly-owned subsidiary, IMC OP GP, LLC, holds the general partnership interest and we hold limited partner interests generally based on the value of capital raised through sales of our capital stock, we are considered an “Umbrella Partnership Real Estate Investment Trust,” or an UPREIT. Using an UPREIT structure may give us an advantage in acquiring properties from persons

 

 

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who may not otherwise be willing to sell their properties to us because of unfavorable tax results. Generally, a sale or contribution of property directly to a REIT is a taxable transaction to the selling property owner. In an UPREIT structure, a property owner who desires to defer taxable gain on the transfer of the owner’s property may contribute the property to the UPREIT in exchange for limited partnership units in our Operating Partnership, each of which will be redeemable for a cash amount equivalent to the fair market value of one share of our common stock or, at our election, one share of our common stock, and defer taxation of gain until (1) the seller later exchanges the units in our Operating Partnership on a one-for-one basis for REIT shares or for cash pursuant to the terms of the amended and restated limited partnership agreement of our Operating Partnership or (2) the UPREIT sells the property.

Our Sponsors

Bain Capital, LLC is a global private investment firm that, together with its affiliates (including Bain Capital Partners, LLC), manages several pools of capital including private equity, venture capital, public equity, credit products and absolute return investments. Founded in 1984, Bain Capital, LLC pioneered a consulting-based approach to private equity investing, partnering with management teams to build better businesses and improve their operations. Since its inception, Bain Capital, LLC has made private equity, growth, and venture capital investments in a variety of industries around the world. Headquartered in Boston, Bain Capital has offices in New York, Chicago, Palo Alto, London, Luxembourg, Munich, Melbourne, Hong Kong, Shanghai, Tokyo and Mumbai.

Oaktree is a leader among global investment managers specializing in alternative investments. The firm emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including high yield debt and senior loans), control investing, convertible securities, real estate and listed equities. Headquartered in Los Angeles, the firm has over 900 employees and offices in 17 cities worldwide.

You should understand that all investments, including real estate investments, involve risks, including the risks identified under “Risk Factors—Risks Related to Our Business and Operations.” Among these risks are those relating to the inability to lease vacant space and renew leases as they expire, tenant underperformance or default, and the risks relating to the illiquid nature of real estate and of fluctuating real estate values. In particular, prior to the Sponsors’ formation of IMC LP, the entities that owned the buildings that compose the High Point Property and the Las Vegas Property experienced financial distress as a result of the recession in 2007 and 2008. The financial position of these entities in early 2011 led to the formation of IMC LP by our Sponsors and the acquisition of such entities by IMC LP. See “—Formation in 2011.”

Refinancing Transactions

On August 15, 2014, our Operating Partnership entered into senior secured credit facilities, which are comprised of a $405 million first lien term loan facility, a $50 million first lien revolving credit facility and a $125 million second lien term loan facility. Our Operating Partnership used the borrowings under the first lien term loan facility and the second lien term loan facility, together with cash on hand, on August 15, 2014, to repay all of the outstanding borrowings under, and terminate, the then existing mortgage based loans. As of March 31, 2015, $21 million was drawn under our revolving credit facility. In this prospectus, we refer to the refinancing transactions described above as the “Refinancing Transactions.” See “Capitalization” and “Unaudited Pro Forma Consolidated Financial Information.”

The first lien term loan facility matures on August 15, 2020 and the second lien term loan facility matures on August 15, 2021 and bear interest initially, at our option, at an adjusted LIBOR (with a 1% floor) plus 4.25% per annum and 7.75% per annum, respectively, or an alternative base rate plus 3.25% per annum and 6.75% per

 

 

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annum, respectively. The revolving credit facility matures on August 15, 2019 and bears interest initially, at our option, at an adjusted LIBOR plus 3.25% per annum or an alternative base rate plus 2.25% per annum.

The senior secured credit facilities are guaranteed by IMC and by all subsidiaries of our Operating Partnership at the time of this offering and are secured by substantially all tangible and intangible assets of the Operating Partnership and the subsidiary guarantors, subject to customary exceptions. These facilities include customary financial and negative covenants, including restrictions on our ability (i) to incur additional indebtedness, (ii) to incur liens, (iii) to engage in certain fundamental changes (including changes in the nature of the business, mergers, liquidations and dissolutions), (iv) to sell assets, make acquisitions, investments, loans and advances, (v) to pay certain subordinated indebtedness, (vi) to modify the terms of organizational documents, (vii) to engage in certain transactions with affiliates, and (viii) to enter into negative pledge clauses and clauses restricting subsidiary distributions. In addition, our senior secured credit facilities generally restrict our Operating Partnership’s ability to make distributions to us, and therefore our ability to make distributions to our equityholders. However, we are allowed to distribute an amount equal to 100% of our annual REIT taxable income. Furthermore, we are allowed to make the following additional distributions: (a) distributions in an amount not to exceed $10 million in any 12 consecutive calendar month period so long as no event of default is continuing under the senior secured credit facilities and no revolving loans are outstanding under our revolving credit facility, (b) distributions in an amount calculated at the time of the distribution that includes $35 million plus, so long as no event of default is continuing, 50% of our consolidated net income (measured as one accounting period from and after July 1, 2014), less the amount of any distributions previously made as distributions of our REIT taxable income and/or in reliance on the immediately preceding clause (a), and (c) distributions with certain proceeds from public offerings of our capital stock or limited partnership interests of our Operating Partnership that have not been used for other purposes as set forth under the senior secured credit facilities. See “Description of Indebtedness.”

The agreement governing our revolving credit facility requires that we maintain a total debt to consolidated EBITDA ratio initially of no more than 7.00 to 1.00 (with step-downs of less than 5.00 to 1.00 during the term of the agreement) on the last day of each fiscal quarter beginning with the fiscal quarter ending March 31, 2015, which test is only in effect when revolving loans, plus drawn and unreimbursed letters of credit, exceed 25% of the commitments under the revolving credit facility as of the last day of such fiscal quarter.

Affiliates of Oaktree are lenders under the senior secured credit facilities, and affiliates of certain of the underwriters participated as joint lead arrangers, joint bookrunners and lenders. See “Certain Relationships and Related Party Transactions” and “Underwriting.”

Benefits to Related Parties

In connection with this offering, IMC LP, which will own a majority of our stock following the completion of this offering, our Sponsors and certain of our directors and executive officers will receive material benefits described in “Certain Relationships and Related Party Transactions,” including the following:

 

   

In connection with this offering, we intend to enter into a stockholders’ agreement with IMC LP, the Sponsors and their affiliates. The stockholders’ agreement will require us to nominate a number of individuals designated by the Sponsors for election as our directors at any meeting of our stockholders (each, a “Sponsor Director”) such that, upon the election of each such individual, and each other individual nominated by or at the direction of our board of directors, the number of Sponsor Directors serving as directors of our company will constitute a majority of the board of directors (initially six), so long as IMC LP, the Sponsors or their affiliates beneficially own (directly or indirectly, without double-counting) 50% or more of, collectively, the total (i) outstanding shares of our common stock and (ii) common units of partnership interests in our Operating Partnership (together, the “Outstanding IMC Interests”). When IMC

 

 

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LP, the Sponsors or their affiliates cease to beneficially own, collectively, at least 5% of the Outstanding IMC Interests, the Sponsors will no longer be entitled to designate a Sponsor Director and the stockholders’ agreement will no longer be in effect. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

 

    In connection with the completion of this offering, we intend to enter into a registration rights agreement that will provide IMC LP and the Sponsors an unlimited number of “demand” registrations and customary “piggyback” registration rights. The registration rights agreement will also provide that we will pay expenses relating to such registrations and indemnify the holders of registration rights against certain liabilities which may arise under the Securities Act of 1933, as amended (the “Securities Act”). See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

    We intend to use a portion of the proceeds from this offering to distribute an aggregate of $9.3 million to IMC LP (x) to pay aggregate fees of $5.3 million to Bain Capital and Oaktree in connection with the termination of the advisory agreement among IMC LP and Bain Capital and Oaktree, and (y) to make a concurrent distribution equal to $4.0 million to a minority limited partner of IMC LP required to be made under the limited partnership agreement of IMC LP upon payment of fees under the advisory agreement. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions—Advisory Agreement.”

 

    We intend to use a portion of the proceeds from this offering to prepay and terminate our second lien term loan facility. Affiliates of Oaktree are lenders under our second lien term loan facility and, upon our repayment of borrowings under such facility with proceeds from this offering, will receive an aggregate of approximately $21.3 million, which is their pro rata share of repayments, including any prepayment penalties, as lenders under such facility. See “Certain Relationships and Related Party Transactions—Loans Under our Senior Secured Credit Facilities.”

 

    We intend to enter into indemnification agreements with directors and executive officers at the completion of this offering, providing for procedures for indemnification by us to the maximum extent permitted by Maryland law and advancements by us of certain expenses and costs relating to claims, suits or proceedings arising from their service to us or, at our request, service to other entities, as officers or directors. See “Certain Relationships and Related Party Transactions—Indemnification Agreements.”

 

    Prior to the completion of this offering, we will adopt the International Market Centers, Inc. 2015 Incentive Plan (the “2015 Incentive Plan”), under which we may grant cash or equity incentive awards to our directors, officers, employees and consultants. Messrs. Maricich, Lacey and Eckman will receive 882,520, 201,373 and 163,016 LTIP units in our Operating Partnership under the 2015 Incentive Plan, respectively, in connection with the completion of this offering. The 882,520 LTIP units to be granted to Mr. Maricich include a number of LTIP units that will be based on the initial public offering price. Assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, the variable LTIP units for Mr. Maricich are equal to 115,385 LTIP units. A $1.00 increase in the assumed initial public offering price of $13.00 per share, would decrease the number of variable LTIP units granted to Mr. Maricich by 8,242 LTIP units, and a $1.00 decrease, would increase the number of variable LTIP units granted to Mr. Maricich by 9,615 LTIP units. For more information about these awards and the LTIP units, see “Executive Compensation” and “Description of Partnership Agreement of IMC OP, LP—LTIP Units.”

 

 

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Risk Factors

An investment in shares of our common stock involves a number of risks which are described in the “Risk Factors” section of this prospectus. If we are unable to effectively manage these risks, we may not meet our investment objectives and, therefore, you may lose some or all of your investment. Some of the more significant risks relating to our business, this offering and investment in our common stock include:

 

    our inability to lease vacant space, renew leases or re-lease space as leases expire;

 

    the bankruptcy, insolvency, or inability to pay rent of our tenants, who are in a competitive industry;

 

    the loss of, or closure of showroom space by, one or more anchor tenants;

 

    the entry into long-term non-cancelable leases that may not result in fair value over time;

 

    our inability to achieve profitability;

 

    the fixed costs associated with our Properties;

 

    the concentration of our Properties in the showroom real estate sector and in the home furniture, home décor and gift industries as well as their geographic concentration of our Properties;

 

    the loss of members of our senior management or our leasing and marketing professionals;

 

    our dependence on external sources of capital to fund our growth strategy and refinance our indebtedness;

 

    our substantial amount of indebtedness following this offering, which will consist of a total of $420.4 million of outstanding borrowings under our first lien term loan facility and our revolving credit facility;

 

    IMC’s failure to meet the conditions for qualification as a REIT or thereafter maintain its status as a REIT;

 

    the immediate and substantial dilution that investors in this offering will experience because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock following this offering;

 

    our status as a “controlled entity,” which will qualify us for exemptions from certain corporate governance requirements, which we intend to rely on;

 

    our status as an “emerging growth company” and the reduced reporting requirements applicable to us;

 

    although we do not currently intend to pay distributions in excess of earnings and cash flow from operations, cash available for distribution to stockholders may be insufficient to pay dividends at expected levels, and we may be unable to make distributions in the future without incurring indebtedness; and

 

    the absence of a current public market for our common stock, the failure to develop an active trading market for our shares and the likelihood of a substantial and quick decline of the market price of our shares.

Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Section 107 of the

 

 

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JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act, which fifth anniversary will occur in 2020. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.0 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

As a result of our status as an emerging growth company, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

REIT Qualification

We have elected to qualify to be taxed as a REIT for U.S. federal income tax purposes and expect to continue to operate in a manner that will allow us to continue to be classified as such. We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT. To maintain REIT qualification, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute at least 90% of our taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax to the extent that we distribute our taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. In addition, the income of any TRS that we own will be subject to taxation at regular corporate rates. See “Material United States Federal Income Tax Considerations.”

Distribution Policy

The Internal Revenue Code of 1986, as amended (the “Code”), generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it distributes annually less than 100% of its REIT taxable income including capital gains. To satisfy the requirements for qualification as a REIT and avoid current entity level U.S. federal income taxes, we intend to make regular quarterly distributions of 100% of our REIT taxable income to holders of our common stock out of assets legally available for such purposes. Future distributions made by us, however, will be at the sole discretion of our board of directors.

 

 

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We may not have sufficient liquidity to meet these distribution standards or may not be able to distribute 100% of our REIT taxable income for a variety of reasons, including because provisions of our proposed financing arrangements may limit our ability to make distributions in some circumstances. See “—Refinancing Transactions.” If we do not distribute 100% of our REIT taxable income, we will be subject to corporate income tax, including applicable alternative minimum tax, on our undistributed net taxable income. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, sell assets or reduce such distributions. Our board of directors will review the alternative funding sources available to us from time to time.

Restrictions on Ownership of our Common Stock

Subject to certain exceptions, our charter provides that no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% (in value or by number of shares, whichever is more restrictive) of the aggregate of the shares of our outstanding common stock or more than 9.8% in value of the aggregate of the outstanding shares of all classes or series of our stock, which we refer to as the “ownership limit,” and imposes certain other restrictions on ownership and transfer of our stock. We expect that, in connection with this offering, our board of directors will grant an exemption from the ownership limit to IMC LP, the Sponsors and their affiliates.

Our charter also prohibits any person from, among other things:

 

    owning shares of our stock that, if effective, would cause us to constructively own 10% or more of the ownership interests, assets or net profits in (i) any of our tenants or (ii) any tenant of one of our direct or indirect subsidiaries, to the extent such ownership would cause us to fail to qualify as a REIT;

 

    owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT; and

 

    transferring shares of our stock if the transfer would result in shares of our stock being beneficially owned by fewer than 100 persons.

Any attempted transfer of our stock which, if effective, would result in violation of the above limitations or the ownership limit (except for a transfer which results in shares being owned by fewer than 100 persons, in which case such transfer will be void ab initio and the intended transferee shall acquire no rights in such shares) will cause the number of shares causing the violation, rounded up to the nearest whole share, to be automatically transferred to a trustee, appointed by us, as trustee of a trust for the exclusive benefit of one or more charitable beneficiaries designated by the trustee, and the intended transferee will not acquire any rights in the shares.

These restrictions are intended to assist with our REIT compliance under the Code and otherwise to promote our orderly governance, among other purposes. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

Corporate Information

We are dual headquartered in Las Vegas, Nevada and High Point, North Carolina. Our principal executive offices in Las Vegas, Nevada are located at 475 South Grand Central Parkway, Suite 1615, Las Vegas, Nevada 89106 and our main telephone number at that location is (702) 599-9621. Our principal executive offices in High Point, North Carolina are located at 209 S. Main Street, High Point, North Carolina 27260 and our main telephone number at that location is (336) 888-3700. Our website address is www.imcenters.com. None of the information on our website or any other website identified herein is part of this prospectus.

 

 

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The Offering

 

Common stock offered by us

11,500,000 shares

 

Common stock to be outstanding after this offering

49,600,000 shares

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $132.3 million (or approximately $153.2 million if the underwriters fully exercise their option to purchase additional shares), assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We will contribute the proceeds we receive from this offering to our Operating Partnership in exchange for partnership units. We expect our Operating Partnership to use the net proceeds from this offering together with cash on hand:

 

    to pay approximately $125.5 million of principal and interest to terminate the second lien term loan facility and approximately $1.3 million of prepayment fees in connection therewith; and

 

    to distribute an aggregate of $9.3 million to IMC LP (x) to pay aggregate fees of $5.3 million to Bain Capital and Oaktree in connection with the termination of the advisory agreement among IMC LP and Bain Capital and Oaktree, and (y) to make a concurrent distribution equal to $4.0 million to a minority limited partner of IMC LP required to be made under the limited partnership agreement of IMC LP upon payment of fees under the advisory agreement. See “Use of Proceeds” and “Certain Relationships and Related Party Transactions—Advisory Agreement.”

 

  Affiliates of Oaktree are lenders under the second lien term loan facility and will receive a portion of the proceeds of this offering due to the above-described pay down of the facility. See “Certain Relationships and Related Party Transactions.”

 

Risk factors

See “Risk Factors” beginning on page 33 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Listing and proposed New York Stock Exchange (“NYSE”) ticker symbol

Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “IMC.”

 

 

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On April 24, 2015, in anticipation of this offering, we effected a 381,000-for-one split of our common stock. The par value of the common stock remains at $0.01 per share following the stock split. All share and per share data of our company presented in this prospectus have been adjusted retroactively to reflect this stock split.

In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon:

 

    gives effect to the 381,000-for-one stock split effected on April 24, 2015;

 

    assumes no exercise by the underwriters of their option to purchase an additional 1,725,000 shares from us; and

 

    does not include:

 

  (i) an aggregate of 3,500,000 shares of our common stock reserved for issuance under the 2015 Incentive Plan, including an aggregate of approximately 1.6 million shares of our common stock that may be issued, at our option, upon exchange of an aggregate of approximately 1.6 million common units that, subject to the satisfaction of certain conditions, are issuable upon conversion of an aggregate of approximately 1.6 million LTIP units to be granted to our executive officers and certain of our employees concurrently with the completion of this offering; and

 

  (ii) an aggregate of approximately 9,836 restricted stock units to be granted to directors who are not employees of our company, our subsidiaries or the Sponsors upon completion of this offering (assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus).

 

 

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Summary Consolidated Financial and Other Operating Data

The summary consolidated financial and other operating data set forth below as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary financial and operating data set forth below as of March 31, 2015 and for the three months ended March 31, 2015 and 2014 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.

The summary unaudited pro forma consolidated balance sheet as of March 31, 2015 is derived from our consolidated balance sheet included elsewhere in this prospectus and reflects the pro forma financial condition of our company after giving effect to the completion of this offering and the use of proceeds therefrom. The summary unaudited pro forma consolidated statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2014 are derived from our consolidated statements of operations included elsewhere in this prospectus and reflect the pro forma results of operations of our company after giving effect to (i) the Restructuring Transactions and the Refinancing Transactions, which were consummated on August 15, 2014 in connection with this offering, and (ii) the completion of this offering and the use of proceeds therefrom. The pro forma adjustments associated with these transactions assume that each transaction was completed as of March 31, 2015 for purposes of the unaudited pro forma consolidated balance sheet and as of January 1, 2014 for purposes of the unaudited pro forma consolidated statements of operations.

Our unaudited pro forma consolidated financial data included in this prospectus is presented for informational purposes only. The unaudited pro forma adjustments are based on information and assumptions that we consider reasonable and factually supportable. This information includes various estimates and assumptions and may not necessarily be indicative of the financial condition that would have resulted if this offering occurred on March 31, 2015 or the results of operations that would have occurred if the Restructuring Transactions, the Refinancing Transactions and this offering, as applicable, occurred at the beginning of the period indicated. The unaudited pro forma consolidated balance sheet and statements of operations and accompanying notes should be read in conjunction with our historical consolidated financial statements and the notes thereto.

Since the information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements or our pro forma consolidated financial statements, including the related notes, you should read it together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Consolidated Financial Statements,” including the related notes, and our consolidated financial statements, including the related notes, which are included elsewhere in this prospectus.

 

 

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(in thousands, except per share data)   Three Months Ended March 31,     Years Ended December 31,  
    2015
Pro Forma(1)
    2015     2014     2014
Pro Forma(1)
    2014     2013     2012  

Statement of Operations Data:

             

Revenues

             

Base rents

  $ 33,893      $ 33,893      $ 30,193      $ 125,432      $ 125,432      $ 114,944      $ 94,822   

Recoveries from tenants

    1,789        1,789        2,795        9,516        9,516        11,841        18,200   

Tradeshow license fees

    2,632        2,632        2,636        15,405        15,405        13,441        15,061   

Sponsorships, publications and other income

    3,765        3,765        3,637        12,448        12,448        10,350        10,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  42,079      42,079      39,261      162,801      162,801      150,576      138,569   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

             

Real estate taxes and insurance

    2,703        2,703        2,645        10,563        10,563        10,806        11,673   

Utilities

    2,696        2,696        2,932        12,009        12,009        11,504        9,883   

Building operations

    3,587        3,587        3,464        12,996        12,996        11,900        13,821   

Market operations

    7,534        7,534        7,353        24,861        24,861        24,684        20,687   

General and administrative

    5,553        6,553        6,753        25,410        29,410        26,893        36,426   

Depreciation and amortization

    12,469        12,469        13,106        51,842        51,842        61,706        76,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  34,542      35,542      36,253      137,681      141,681      147,493      169,181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expenses) income

             

Interest expense

    (5,996     (8,857     (8,121     (23,741     (34,080     (33,131     (32,428

Interest and other investment income

    178        178        179        712        712        757        728   

Loss on extinguishment of debt

    —          —          —          —          (12,533     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

  (5,818   (8,679   (7,942   (23,029   (45,901   (32,374   (31,700
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  1,719      (2,142   (4,934   2,091      (24,781   (29,291   (62,312

Provision for income taxes

    1,078        1,078        1,200        4,770        4,770        3,550        1,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  641      (3,220   (6,134   (2,679   (29,551   (32,841   (63,388
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred share dividends

    —          4        19        —          53        75        70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders/members

  $ 641      $ (3,224   $ (6,153   $ (2,679   $ (29,604   $ (32,916   $ (63,458
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

    $ (0.08   $ (0.16     $ (0.78   $ (0.86   $ (1.67
   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding, basic and diluted(2)

  38,100      38,100      38,100      38,100      38,100   

Pro forma net income (loss) attributable to common stockholders(1):

             

Basic and diluted

  $ 0.01          $ (0.05      
 

 

 

       

 

 

       

Pro forma weighted average common shares outstanding(1):

             

Basic and diluted

    49,600            49,600         

Other Data:

             

FFO(3)

  $ 12,822      $ 8,961      $ 6,763      $ 48,127      $ 21,255      $ 28,314      $ 13,192   

AFFO(3)

    8,605        5,880        5,906        39,580        30,364        24,915        30,144   

EBITDA(4)

    20,006        19,006        16,114        76,962        60,429        64,789        46,079   

Adjusted EBITDA(4)

    20,060        20,060        17,340        82,030        82,030        74,998        68,962   

Cash Flows (Used in) Provided By:

             

Operating activities

    $ (3,667   $ 4,125        $ 27,931      $ 39,205      $ 36,940   

Investing activities

      (17,358     (2,360       7,755        (28,561     (23,132

Financing activities

      4,977        (7,334       (34,444     (14,949     (5,504

 

 

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(in thousands)    As of March 31, 2015  
     Pro Forma(5)      Actual  

Balance Sheet Data:

     

Net investment in rental properties

   $ 678,481       $ 678,481   

Cash

     5,938         8,129   

Total assets

     764,631         773,487   

Long-term debt, net

     420,394         542,925   

Total liabilities

     463,384         590,247   

Total equity

     301,247         183,240   

 

(1) The unaudited pro forma consolidated statement of operations for the year ended December 31, 2014, gives effect to the Restructuring Transactions and the Refinancing Transactions assuming that such transactions occurred on January 1, 2014, and the unaudited pro forma consolidated statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2014, give effect to the completion of this offering and the use of proceeds therefrom assuming that such transactions occurred on January 1, 2014. See “Unaudited Pro Forma Consolidated Financial Information.”
(2) See Note 2 to our consolidated financial statements included elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.
(3) Consistent with real estate industry and investment community practices, we use Funds From Operations (“FFO”) as a supplemental measure of our operating performance, and in conformity with the National Association of Real Estate Investment Trusts (“NAREIT”), we define FFO as net income (loss) (computed in accordance with GAAP) excluding gains or losses from sales of depreciable operating properties, cumulative effects of accounting changes and extraordinary items, plus real estate related depreciation and amortization and impairment write-downs of depreciable real estate and after adjustments for unconsolidated partnership and joint ventures to reflect funds from operations on the same basis.

We consider FFO a useful supplemental measure and a complement to GAAP measures because it facilitates an understanding of the operating performance of our properties. FFO does not include real estate depreciation and amortization required by GAAP because these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides investors with a clearer view of our operating performance.

FFO does not represent cash flow from operating activities as defined by GAAP, should not be considered as an alternative to GAAP net loss attributable to common stockholders and is not necessarily indicative of cash available to fund cash requirements. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose Adjusted FFO (“AFFO”), which is FFO after specific and defined supplemental adjustments (a) to exclude: (i) straight-line rent and above/below market lease adjustments to revenue and bad debt expense; (ii) non-cash incentive unit compensation expense; (iii) equity registration, reorganization and other expenses; (iv) non-core expenditures; (v) loss on extinguishment of debt; (vi) amortization of debt discounts and deferred financing costs; and (vii) Sponsor fees and expenses that were included in net loss to common members; and (b) to include (i) non-strategic capital expenditures incurred to maintain the quality of properties and (ii) additions to deferred leasing costs.

We believe AFFO provides a more meaningful supplemental measure of our operating performance because we believe that by adjusting for the items noted above, analysts and investors are presented with an indicator of our operating performance that more closely achieves the objectives of the real estate industry in presenting FFO.

As with FFO, our reported AFFO may not be comparable to other REITs’ AFFO, should not be used as a measure of our liquidity and is not indicative of our funds available for our cash needs, including our ability to pay dividends.

 

 

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The following table sets forth reconciliations of our net income (loss) to FFO and our FFO to AFFO for the periods presented:

 

(in thousands)   Three Months Ended March 31,     Years Ended December 31,  
    2015
Pro Forma
    2015     2014     2014
Pro Forma
    2014     2013     2012  

Net income (loss)

  $ 641      $ (3,220   $ (6,134   $ (2,679   $ (29,551   $ (32,841   $ (63,388

Depreciation and amortization of rental properties

    12,181        12,181        12,897        50,806        50,806        61,155        76,580   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO

  12,822      8,961      6,763      48,127      21,255      28,314      13,192   

Adjustments to FFO:

Straight-line rent and above/below market lease adjustments to revenue and bad debt expense

  (510   (510   (226   (267   (267   2,274      12,609   

Non-cash incentive unit compensation expense

  131      131      200      793      793      1,300      2,900   

Equity registration, reorganization and other expenses

  398      398      179      4,386      4,386      1,684      3,167   

Legal settlements

  —        —        —        —        —        739      —     

Loss on extinguishment of debt

  —        —        —        —        12,533      —        —     

Amortization of debt discounts and deferred financing costs

  464      600      786      1,881      3,004      3,108      3,006   

Sponsor fees and expenses

  35      1,035      1,073      156      4,156      4,212      4,207   

Non-strategic capital expenditures

  (3,566   (3,566   (2,099  
(10,564

  (10,564   (12,708   (7,096

Additions to deferred leasing costs

  (1,169   (1,169   (770   (4,932   (4,932   (4,008   (1,841
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

AFFO

$ 8,605    $ 5,880    $ 5,906    $ 39,580    $ 30,364    $ 24,915    $ 30,144   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(4) EBITDA is defined as net income (loss) (computed in accordance with GAAP), plus interest expense net of interest income, income tax provision, and depreciation and amortization. We calculate Adjusted EBITDA by adjusting EBITDA for specific and defined supplemental adjustments to exclude (i) straight-line rent and above/below market lease adjustments to revenue and bad debt expense; (ii) non-cash incentive unit compensation expense; (iii) equity registration, reorganization and other expenses; (iv) non-core expenditures; (v) loss on extinguishment of debt; and (vi) Sponsor fees and expenses that were included in net loss.

We present EBITDA, Adjusted EBITDA and Adjusted EBITDA margin because we believe certain investors use them as measures of a company’s historical operating performance and its ability to service and incur debt. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA and Adjusted EBITDA margin is appropriate to provide additional information to investors because Adjusted EBITDA and Adjusted EBITDA margin exclude certain nonrecurring and non-cash items which we believe are not indicative of our core operating performance and which are not excluded in the calculation of EBITDA. Adjusted EBITDA is also similar to the measures used under the debt covenants included in our existing debt agreements.

EBITDA and Adjusted EBITDA should not be considered as alternatives to GAAP net income (loss). EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

    neither reflects our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

    neither reflects changes in, or cash requirements for, our working capital needs;

 

    neither reflects the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

 

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    neither reflects any cash income taxes that we may be required to pay;

 

    assets are depreciated or amortized over differing estimated useful lives and often have to be replaced in the future, and these measures do not reflect any cash requirements for such replacements;

 

    neither is adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; neither reflects the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations;

 

    neither may be calculated in the same manner as research analysts calculate EBITDA or Adjusted EBITDA or in the same manner as required by our revolving credit facility;

 

    neither reflects limitations on, or costs related to, transferring earnings from our subsidiaries to us; and

 

    other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.

The following tables set forth reconciliations of our EBITDA to net income (loss) and our Adjusted EBITDA to EBITDA for the periods presented:

 

(in thousands)   Three Months Ended March 31,     Years Ended December 31,  
    2015
Pro Forma
    2015     2014     2014
Pro Forma
    2014     2013     2012  

Net income (loss)

  $ 641      $ (3,220   $ (6,134   $ (2,679   $ (29,551   $ (32,841   $ (63,388

Interest and other investment income

    (178     (178     (179     (712     (712     (757     (728

Interest expense

    5,996        8,857        8,121        23,741        34,080        33,131        32,428   

Depreciation and amortization

    12,469        12,469        13,106        51,842        51,842        61,706        76,691   

Provision for income taxes

    1,078        1,078        1,200        4,770        4,770        3,550        1,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  20,006      19,006      16,114      76,962      60,429      64,789      46,079   

Adjustments to EBITDA:

Straight-line rent and above/below market lease adjustments to revenue and bad debt expense

  (510   (510   (226   (267   (267   2,274      12,609   

Non-cash incentive unit compensation expense

  131      131      200      793      793      1,300      2,900   

Equity registration, reorganization and other expenses

  398      398      179      4,386      4,386      1,684      3,167   

Legal settlements

  —        —        —        —        —        739      —     

Loss on extinguishment of debt

  —        —        —        —        12,533      —        —     

Sponsor fees and expenses

  35      1,035      1,073      156      4,156      4,212      4,207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

$ 20,060    $ 20,060    $ 17,340    $ 82,030    $ 82,030    $ 74,998    $ 68,962   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

  48.4   48.4   44.5   50.7   50.7   49.1   46.0

 

 

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We define Adjusted EBITDA margin as Adjusted EBITDA divided by total cash revenues. Total cash revenues are total revenues (as reported in accordance with GAAP), excluding the effects of straight-line rent and above/below market lease adjustments. Total cash revenues for the periods presented are:

 

(in thousands)   Three Months Ended March 31,     Years Ended December 31,  
    2015
Pro Forma
    2015     2014     2014
Pro Forma
    2014     2013     2012  

Total revenues

  $ 42,079      $ 42,079      $ 39,261      $ 162,801      $ 162,801      $ 150,576      $ 138,569   

Straight-line rent and above/below market lease adjustments

    (610     (610     (281     (1,010     (1,010     2,274        11,426   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash revenues

$ 41,469    $ 41,469    $ 38,980    $ 161,791    $ 161,791    $ 152,850    $ 149,995   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(5) The unaudited pro forma consolidated balance sheet data as of March 31, 2015 gives effect to the completion of this offering and the use of proceeds therefrom, assuming that such event occurred on March 31, 2015. See “Unaudited Pro Forma Consolidated Financial Information.”

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk and uncertainty. You should carefully consider the following risks, as well as the other information contained in this prospectus, before making an investment in our common stock. If any of the following risks actually occur, our business, results of operations, financial condition and cash flows may be adversely affected. This could cause the value of our common stock to decline and you could lose part or all of your investment. The risks and uncertainties described below are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that, as of the date of this prospectus, we deem immaterial may also harm our business. Some statements included in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements.”

Risks Related to Our Business and Operations

Our financial performance depends on the collection of rent from the tenants at our Properties; if we are unable to lease vacant space, renew leases or re-lease space as leases expire, our financial performance will be adversely affected.

Approximately 83% of our revenues in 2014 were generated from rent payments under multi-year leases. Therefore our results of operations depend on our ability to continue to strategically lease space in our Properties, including renewing current leases, re-leasing space in buildings where leases are expiring, optimizing our tenant mix by leasing to certain tenants or leasing showroom space on more economically favorable terms. As of December 31, 2014, leases covering approximately 2.0 million square feet, representing 25% of our annualized contract rent, expire within the next 12 months, leases covering approximately 1.2 million square feet, representing 17% of our annualized contract rent, expire between 12 and 24 months, and leases covering approximately 1.8 million square feet, representing 24% of our annualized contract rent, expire between 24 and 36 months.

We cannot assure you that we will be able to lease space in our Properties, renew current leases or re-lease space in buildings where leases are expiring, at rental rates equal to or above the current average rental rates or that we will not offer substantial rent abatements, tenant improvements, including renovations, or other lease incentives in order to retain existing tenants or attract new tenants. The loss of rental revenues from a number of tenants and difficulty replacing such tenants, particularly in the case of an anchor tenant, may adversely affect our profitability and our ability to meet debt and other financial obligations. If we are unable to successfully lease, renew current leases or re-lease space on the same or more favorable terms when such leases expire, our business, financial condition and results of operations could be materially adversely affected.

Our tenants include large numbers of smaller manufacturers, and the bankruptcy, insolvency or inability to pay rent of these tenants may adversely affect the income produced by our Properties and could have an adverse effect on our financial condition and results of operations.

Our tenant base consists largely of small manufacturers and wholesalers of home furniture, home décor and gift products. Many of these tenants are privately owned. At any time, our tenants may experience a downturn in their business that may weaken significantly their financial condition. As a result, our tenants, including our anchor and other major tenants, may fail to comply with their contractual obligations to us, seek concessions in order to continue operations or declare bankruptcy, any of which could result in the termination of such tenants’ leases and the loss of rental income attributable to the terminated leases. If a tenant becomes bankrupt or insolvent, federal law may prohibit us from evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be authorized to reject and terminate its lease with us. Any claim against such tenant for unpaid, future rent would be subject to a statutory cap that might be

 

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substantially less than the remaining rent owed under the lease. If a tenant were to experience a downturn in its business or a weakening of its financial condition resulting in failure to make timely rental payments or causing it to default under its lease, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.

Our Properties depend on anchor tenants to attract other tenants and buyers and our business could be adversely affected by the loss of, or closure of showroom space by, one or more of these tenants.

Our Properties typically are anchored by large, nationally recognized tenants. We have created neighborhoods within our Properties by surrounding such anchor tenants with other tenants that offer related and complementary products. This strategy enhances attractiveness of our showroom space for smaller tenants, which seek to be located nearby an anchor tenant to increase sales. Cessation of operations by our anchor tenants in our Properties due to inability to pay rent, bankruptcy, relocation or other causes could decrease buyer foot traffic and the desire of other tenants to renew their leases in our Properties.

In addition, mergers or consolidations among large anchor tenants could result in the closure of certain showroom spaces. Loss of, or a closure of showroom space by, an anchor tenant could significantly reduce our occupancy level, and we may not have the right to re-lease vacated space or we may be unable to re-lease vacated space at attractive rents or at all. The occurrence of any of these situations could seriously harm our performance and revenues and could adversely affect the value of the applicable building.

If we enter into long-term leases with our tenants, those leases may not result in fair value over time.

Leases currently in effect have a weighted average term (based on revenue) of approximately 4.5 years with weighted average annual rent escalators of 3.6% on the remaining term. Long-term leases do not allow for significant changes in rental payments beyond the embedded escalators and do not expire in the near term. If we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases, significant increases in future property operating costs could result in receiving less than fair value from these leases. Such circumstances would adversely affect our revenues and funds available for distribution.

We have experienced losses and we cannot assure you that we will achieve profitability.

For fiscal years 2014, 2013 and 2012, on a consolidated basis we had net losses of $29.6 million, $32.9 million and $63.5 million, respectively. On the same basis, for the three months ended March 31, 2015, we had a net loss of $3.2 million. On a pro forma consolidated basis giving effect to the Restructuring Transactions, the Refinancing Transactions and this offering and the use of proceeds thereof, we would have had a net loss of $2.7 million for the year ended December 31, 2014 and net income of $0.6 million for the three months ended March 31, 2015. Our ability to achieve profitability is dependent upon a number of risks and uncertainties, many of which are beyond our control. We cannot assure you that we will be successful in executing our business strategy and become profitable and our failure to do so could have a material adverse effect on the price of our common stock and our ability to satisfy our obligations, including making payments on our indebtedness. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Our business strategies may not be effective or may change over time.

We may not be able to effectively improve our financial position and maximize the attractiveness of our Markets to our tenants and buyers in accordance with our business strategy. Even if we can appropriately gauge the needs and desires of our tenants or industry trends, we may not be able to execute our business strategies on a timely basis, if at all. In addition, we may not be able to enhance the tenant and buyer experience in our Markets for several reasons outside of our control, including a lack of adequate funding, unforeseen changes to buyer shopping patterns or internal or branding changes among our tenants. New and enhanced technologies could

 

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make it less critical for buyers to attend Markets to touch and to feel a product. Finally, we may not have sufficient capital or funding sources to fully pursue our business strategies, including potential expansion organically or through acquisitions. As a result, our strategies may not effectively grow our business or revenues as intended. We also may change our strategies over time and there can be no assurance that any new strategies will be effective.

Many real estate costs are fixed, even if revenue from our Properties decreases.

Many real estate costs, such as real estate taxes, insurance premiums and maintenance costs, are not reduced even when a property is not fully occupied, rental rates decrease, a tenant fails to pay rent or other circumstances cause a reduction in property revenues. As of December 31, 2014, 17% of permanent showroom space in our Properties remained vacant and we were still obligated to pay real estate taxes, insurance premiums and maintenance costs. In addition, newly acquired properties may not produce significant revenues immediately, and any such properties operating cash flow may be insufficient to pay the operating expenses and debt service associated with these new properties. If we are unable to offset real estate costs with sufficient revenues from our Properties or any future properties, our financial performance and liquidity could be materially and adversely affected.

It may be difficult to sell real estate quickly, and transfer restrictions apply to some of our Properties.

Equity real estate investments are relatively illiquid, and this characteristic may limit our ability to promptly respond to changes in economic or other conditions. Our Properties are uniquely designed and identifying an interested buyer could prove challenging. In addition, significant expenditures required to be made, such as debt service payments, real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. If income from a property declines while the related expenses do not decline, our income and cash available to us would be adversely affected. Our risk of illiquidity may be more significant as our Properties may not be immediately suitable for other types of uses and major capital expenditures could be necessary in order to sell or release such properties for other uses. If it becomes necessary or desirable for us to dispose of one or more of our Properties that is mortgaged as security for our indebtedness, we might not be able to obtain a release of the lien on the mortgaged property without payment of the associated debt. The foreclosure of a mortgage on a property or inability to sell a property could adversely affect the level of cash available to us and adversely affect our business, financial condition and results of operations.

Concentration of our Properties in the showroom real estate sector and in the home furniture, home décor and gift industries as well as their geographic concentration could have an adverse effect on our business.

Our Properties are concentrated in the showroom real estate sector and our tenants are concentrated in the home furniture, home décor and gift industries. These concentrations may expose us to the risk of economic downturns in such sector or such industries to a greater extent than if our business activities included a more significant portion of other sectors and industries.

In general, real property investments are subject to varying degrees of risk that may affect the ability of our Properties to generate sufficient revenues. A number of factors may decrease the income generated by our Properties, including:

 

    the national economy, which may be negatively impacted by plant closings, industry slowdowns, increased unemployment, lack of availability of consumer credit, increased levels of consumer debt, poor housing market conditions, natural disasters and other factors;

 

    changes in operating expenses;

 

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    changes in interest rates and availability, cost and terms of financings;

 

    the convenience and quality of competing showroom properties; and

 

    changes in laws and regulations applicable to real property, including tax and zoning laws.

In particular, because our Properties are currently designed for use as showroom properties, if we determine that it was desirable, or if circumstances required us, to sell one or more of our Properties, the properties may be less attractive for other uses as significant capital expenditures could be required to sell or use such Properties for other purposes.

In addition, our Properties are concentrated in High Point, North Carolina and Las Vegas, Nevada and our operating results are likely to be impacted by economic changes affecting such areas. Your investment will be subject to greater risk because our Properties are not geographically diversified. These concentration risks could adversely affect our results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock.

The loss of members of our senior management or our leasing and marketing professionals could adversely affect our business, financial condition and results of operations.

Our success will continue to depend to a significant extent on the members of our senior management and our leasing and marketing professionals. Since 2011, we have assembled an experienced senior management team led by our chief executive officer, a 39-year veteran of the home furniture and home décor and exhibitions industries who maintains strong, long-term relationships with a broad range of our tenants and key industry players. Our remaining senior management team members have significant experience in their respective disciplines. In addition, we have a 36-person leasing team with deep industry relationships and an average of approximately 17 years of experience across the home furniture, home décor and gift exhibitions industries. See “Management” for further information regarding our executive officers and other key members of management.

We also employ a team of 40 professionals who execute comprehensive programs to increase buyer attendance to our Markets. These professionals have established strong relationships with both tenants and buyers. The loss of members of our senior management or our leasing and marketing professionals could hinder our ability to continue to benefit from business from our existing tenants or attract new tenants and could divert current and future buyers to other Markets. We cannot provide any assurance that we will be able to retain our current senior management team or our leasing and marketing professionals. The loss of any of these individuals could adversely affect our business, financial condition and results of operations.

To fund our growth strategy and refinance our indebtedness, we depend on external sources of capital, which may not be available to us on commercially reasonable terms or at all.

In order to maintain our qualification as a REIT, we are required under the Code to distribute at least 90% of our net taxable income annually, determined without regard to the dividends paid deduction and excluding any net capital gains. We will also be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we intend to rely on third-party sources for debt or equity financing to fund our growth strategy. In addition, we may need external sources of capital to refinance our indebtedness at maturity. We may not be able to obtain the financing on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:

 

    general market conditions;

 

    the market’s perception of our growth potential;

 

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    our then current debt levels;

 

    our historical and expected future earnings, cash flow and cash distributions; and

 

    the market price per share of our common stock.

In addition, our ability to access additional capital may be limited by the terms of our senior secured credit facilities which restrict, or our future indebtedness which may restrict, our incurrence of additional debt. If we cannot obtain capital when needed, we may not be able to acquire or develop properties when strategic opportunities arise or refinance our debt at maturity, which could have a material adverse effect on our business.

Our acquisition activities may pose risks that could harm our business.

As a result of any acquisitions, we may be required to incur debt and expenditures and issue additional common stock to pay for the acquired properties. These acquisitions may dilute our stockholders’ ownership interest, delay or prevent our profitability and may also expose us to risks such as:

 

    the possibility that we may not be able to successfully integrate acquired properties into our operations or achieve the level of quality with respect to such properties to which tenants of our existing properties are accustomed;

 

    the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired properties, diverting their attention from our other objectives;

 

    the possibility that we may overpay for a property;

 

    the possible loss or reduction in value of acquired properties; and

 

    the possibility of pre-existing undisclosed liabilities regarding acquired properties, including environmental or asbestos liability, for which our insurance may be insufficient or for which we may be unable to secure insurance coverage.

If our revenue does not keep pace with our acquisition and expansion costs, we may incur net losses. There is no assurance that we will successfully overcome these risks or other problems encountered with acquisitions.

Possible terrorist activity or other acts of violence could adversely affect our financial condition and results of operations.

Markets attract large numbers of visitors. Terrorist activities or violent acts in High Point, Las Vegas or in other cities in the United States could result in a significant decrease in the number of people willing to attend Markets generally and our Markets in particular. Travel activity to High Point and Las Vegas could significantly decrease resulting in a decrease in buyer attendance during our Markets. Decrease in buyer participation may hurt our tenants’ profits, potentially harming their ability to make rental payments and continue their operations.

In addition, terrorist attacks in the United States or other acts of violence could directly affect the value of our Properties through damage, destruction or loss. The enactment of the Terrorism Risk Insurance Act of 2002 (the “TRIA”), and the subsequent enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2015, which extended TRIA through the end of 2020, requires insurers to make terrorism insurance available under their property and casualty insurance policies in order to receive federal compensation under TRIA for insured losses. However, this legislation does not regulate the pricing of such insurance. If we are unable to obtain affordable insurance coverage, the value of our Properties could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

Terrorist activities or violence may also result in declining economic activity, which could harm the demand for goods offered by our tenants and the value of our Properties and might adversely affect the value of an

 

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investment in our securities. Such a resulting decrease in demand could make it difficult for us to renew or re-lease our Properties at lease rates equal to or above historical rates. Terrorist and violent acts may erode business and consumer confidence and spending and might result in increased volatility in national and international financial markets and economies. Any one of these events might decrease demand for real estate, decrease or delay the occupancy of our new or redeveloped properties, and limit our access to capital or increase our cost of raising capital.

We may incur costs to comply with environmental laws.

We are subject to federal, state and local laws, statutes, regulations, and ordinances relating to pollution, the protection of the environment and human health and safety. These environmental laws 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, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials and other health and safety-related concerns. Under certain environmental laws, we may be subject to permitting or licensing requirements. Environmental laws, and the interpretation or enforcement thereof, are subject to change and may become more stringent in the future, which may result in substantial future capital expenditure requirements or compliance costs.

Under certain environmental laws, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred by the parties in connection with the contamination. In addition, persons who arrange for the disposal or treatment of hazardous or toxic substances may be held liable for the costs of cleaning up contamination at the disposal site. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous or toxic substances. The presence of contamination or the failure to remediate contamination may adversely affect the owner’s ability to sell or lease real estate or to borrow using the real estate as collateral. The Properties and any future property that we acquire may have been used in the past for commercial or industrial purposes, or are currently used for commercial purposes, that involve or involved the use of petroleum products or other hazardous or toxic substances, or are adjacent or near properties that have been or are used for similar commercial or industrial purposes. As a result, such property may have been or may be impacted by contamination arising from releases of such hazardous or toxic substances or petroleum products which could result in significant costs to us.

In addition, environmental laws also regulate the operation and removal of underground storage tanks. The Properties and any properties we acquire in the future may contain or have contained tanks for the storage of petroleum products or other hazardous or toxic substances. In connection with the ownership, operation and management of certain properties, we could be held liable for the costs of remedial action, or related claims, with respect to tanks, which may be substantial.

Environmental laws also govern the presence, maintenance and removal of asbestos-containing building materials and may impose fines and penalties on building owners or operators for failure to comply with these requirements or expose such owners and operators to third party liability for personal injury associated with exposure to asbestos fibers. Such laws require that building owners or operators properly manage and maintain asbestos, adequately notify or train those that come into contact with asbestos and undertake special precautions, including removal or other abatement, if asbestos would be disturbed. We are aware of the presence of asbestos-containing material in several of our buildings in High Point and if any of those buildings were to undergo a renovation that affects these materials, or if any of those buildings is demolished, we would be obligated to handle and dispose of the contaminated material in accordance with the relevant regulations. The cost of removing and disposing of this material may be substantial and we could be liable for related damages, fines and penalties.

 

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Finally, our Properties have been subjected to varying degrees of environmental assessment at various times, including Phase I Environmental Site Assessments. Phase I Environmental Site Assessments are preliminary environmental assessments conducted by independent consultants to identify conditions that could pose potential environmental liabilities. These assessments identified such conditions at some of our properties, primarily relating to petroleum compounds identified in soil and/or groundwater. Unless required by applicable law or our lenders, we may decide not to further investigate, remedy or ameliorate the conditions disclosed in the environmental assessments. However, it is possible that we may choose to or be required by law to do so in which case the costs to address the conditions could be substantial. Further, no assurance can be given that any environmental assessments performed have identified all material environmental conditions that may exist with respect to any of the Properties or accurately assess whether we will incur material environmental liabilities in the future. A prior owner or operator of, or historic operations at, the Properties or any properties we acquire in the future may have created a material environmental condition that we could be liable for even though such condition is not currently known to us or the independent environmental consultants preparing the site assessments. Further, the identification of new areas of contamination, a change in the extent or known scope of contamination, future environmental laws, ordinances, or regulations or changes in cleanup requirements could result in significant costs to us. If we do incur material environmental liabilities in the future, we may face significant remediation costs, and we may find it difficult to sell or finance any affected properties.

Our Properties, and any properties we may acquire in the future, may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for adverse health effects and costs of remediation.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at the Properties, and any properties we may acquire in the future, could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants or others if property damage or personal injury is alleged to have occurred.

The costs of defending against claims of environmental liability or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.

Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. We could be subject to liability in the form of fines, penalties or damages for noncompliance with environmental laws. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with released hazardous substances. The costs of defending against claims of environmental liability or of paying personal injury claims could reduce the amounts available for distribution to our stockholders.

Any losses to our Properties that are not covered by insurance, or that exceed our policy coverage limits, could adversely affect our business, financial condition and results of operations.

Our Properties are subject to casualty risks, including from causes related to riots, war, terrorism or acts of God. Our Las Vegas Property is located in Nevada with a higher risk of earthquakes and our High Point Property could be affected by hurricanes and other severe weather and floods.

 

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While we will carry commercial liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering our Properties under a blanket policy, the amount of insurance coverage may not be sufficient to fully cover the losses we suffer. If we experience a loss that is uninsured or that exceeds our policy coverage limits, we could lose the capital invested in the damaged Properties as well as the anticipated future cash flows from those Properties. In addition, even if damage to our Properties is covered by insurance, a disruption of our business caused by a casualty event may result in the loss of business or customers. The business interruption insurance we carry may not fully compensate us for the loss of business or customers due to an interruption caused by a casualty event. In addition, it is difficult to evaluate the stability, net assets and capitalization of insurance companies and any insurer’s ability to meet its claim payment obligations. A failure of an insurance company to make payments to us upon an event of loss covered by an insurance policy could adversely affect our business, financial condition and results of operations.

We offer a health care self-insurance program that may not be adequate to cover claims thereunder.

Our employees have the option to elect a health care insurance program that is provided by us and that covers the employee and the employee’s dependents. Under our self-funded insurance program we are required to pay up to $125,000 per occurrence and up to $1,000,000 per policy to our employees and their dependents. While based on historical loss trends we believe that our accruals will be adequate to cover future claims, we cannot guarantee that this will remain true. Historical trends may not be indicative of future claims and if a significant number of our employees were to make claims under our self-insurance program, our accruals may prove inadequate.

Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make expenditures that adversely affect our cash flows.

Our Properties are required to comply with the Americans with Disabilities Act (“ADA”). The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the United States government or an award of damages to private litigants, or both. Although we believe our Properties substantially comply with present requirements of the ADA, we have not conducted an audit or investigation of all of our Properties to determine our compliance. While the tenants to whom our Properties are leased are obligated by law to comply with the ADA provisions, and typically under tenant leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected. As a result, we could be required to expend funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition. In addition, we are required to operate our Properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our Properties. We may be required to make substantial capital expenditures to comply with, and we may be restricted in our ability to renovate our Properties subject to, those requirements. The resulting expenditures and restrictions could have a material adverse effect on our ability to meet our financial obligations.

We do not conduct any direct operations and, as such, we rely and will continue to rely on funds received from our Operating Partnership to pay liabilities, and the interests of our stockholders will be structurally subordinated to all liabilities and obligations of our Operating Partnership and its subsidiaries.

We conduct substantially all of our operations through our Operating Partnership. We do not have, apart from an interest in our Operating Partnership, any independent operations. As a result, we rely and will continue to rely on distributions from our Operating Partnership to pay any dividends we might declare on shares of our common stock. We also rely on distributions from our Operating Partnership to meet any of our obligations,

 

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including any tax liability on taxable income allocated to us from our Operating Partnership. In addition your claims as stockholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our Operating Partnership and its subsidiaries will be available to satisfy the claims of our stockholders only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

We may be subject to litigation or threatened litigation, which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business.

We may be subject to litigation or threatened litigation in the ordinary course of business. In particular, we are subject to the risk of complaints and threatened or actual litigation by our tenants involving the lease agreements we enter into and certain of our rights thereunder (such as our right to relocate tenants from their original showrooms to spaces that further our operating model), or premises liability claims, which may give rise to litigation or governmental investigations, as well as claims and litigation relating to real estate rights or uses of our Properties. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. Additionally, whether or not any dispute actually proceeds to litigation, we may be required to devote significant management time and attention to its successful resolution (through litigation, settlement or otherwise), which would detract from our management’s ability to focus on our business. Any such resolution could involve the payment of damages or expenses by us, which may be significant, or involve our agreement with terms that restrict the operation of our business. We generally intend to vigorously defend ourselves; however, we cannot be certain of the ultimate outcomes of currently asserted claims or of those that may arise in the future. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flows, thereby having an adverse effect on our financial condition, results of operations, cash flows and our ability to pay distributions on, and the per share trading price of, our common stock. Certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage and could expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors, which could adversely impact our results of operations, cash flows and our ability to pay distributions on, and the value of, our common stock.

Our property taxes could increase due to property tax rate changes or reassessment, which may adversely impact our cash flows.

Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain other taxes on our properties. The real property taxes on our Properties may increase as property tax rates change or as our Properties are assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase substantially from what we have paid in the past. If the property taxes we pay increase, our cash flow may be adversely impacted, and our ability to pay any expected dividends to our stockholders could be adversely affected.

Our Markets face competition and such competition could adversely and materially affect our financial condition and results of operations.

Our Markets face competition from other Markets that serve manufacturers and suppliers and buyers of home furniture, home décor and gift products. We operate within the home furniture (High Point and Las Vegas), home décor (High Point and Las Vegas) and gift (Las Vegas) industries. The other U.S. Markets within these industries have different focus areas and product mixes. For example, The Atlanta International Gift & Home Furnishings Market at AmericasMart, the Dallas Total Home and Gift Market at the Dallas Market and NY NOW Market are primarily home décor and gift Markets with some furniture exhibitors, while Tupelo,

 

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Mississippi operates purely home furniture Markets and the International Casual Furniture & Accessories Market at the Merchandise Mart in Chicago, Illinois provide outdoor and casual furnishings. Within this context, our Markets compete with other Markets, including smaller, regional Markets depending on the product category. If our existing potential home furniture, home décor or gift tenants and their customers perceive any such other Market to be superior to our Markets, based on location, rental rates, Market experience or other factors, and decide to conduct business in such other Markets, our financial condition and results of operations could be adversely and materially affected.

Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

We review each of our Properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include a significant decrease in market price, a significant adverse change in the extent or manner the property is being used or in its physical condition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development, or a history of operating or cash flow losses. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition and compare to the carrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our future undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to re-evaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our business, financial condition and results of operations.

Risks Related to Our Liquidity

We will have a substantial amount of indebtedness outstanding following this offering, which may affect our ability to pay distributions, may expose us to interest rate fluctuation risk and may expose us to the risk of default under our debt obligations.

On a pro forma basis, giving effect to the consummation of this offering and the use of proceeds therefrom, we will have $420.4 million of outstanding indebtedness under our senior secured credit facilities. Payments of principal and interest on borrowings under our senior secured credit facilities, or any other instruments governing debt we may incur in the future, may leave us with insufficient cash resources to operate our Properties or to pay the distributions currently contemplated or necessary to qualify or maintain qualification as a REIT. Our substantial outstanding indebtedness or future indebtedness, and the limitations imposed on us by our debt agreements, could have other significant adverse consequences, including the following:

 

    our cash flow may be insufficient to meet our required principal and interest payments;

 

    we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon emerging acquisition opportunities or meet operational needs;

 

    we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

    we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

 

    we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate payment of outstanding loans;

 

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    we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under our hedge agreements and these agreements may not effectively hedge interest rate fluctuation risk; and

 

    we may default on our obligations and the lenders or mortgagees may foreclose on our properties that secure their loans.

If any one of these events were to occur, our financial condition, results of operations, cash flows, market price of our common stock and ability to satisfy our debt service obligations and to pay distributions to you could be adversely affected. In addition, the foreclosure on our Properties could create taxable income without accompanying cash proceeds, which could adversely affect our ability to meet the distribution requirements necessary to qualify as a REIT.

The agreements governing our senior secured credit facilities place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.

The agreements governing our senior secured credit facilities contain covenants that place restrictions on us and our subsidiaries. These covenants restrict, among other things, our and our subsidiaries’ ability to:

 

    incur additional indebtedness (including guarantee obligations);

 

    incur liens;

 

    engage in certain fundamental changes, including changes in the nature of the business, mergers, liquidations and dissolutions;

 

    sell assets;

 

    pay dividends, and make stock repurchases and redemptions (with exceptions for customary REIT distributions and certain other additional payments available only under the circumstances described in the agreements governing our senior secured credit facilities);

 

    make acquisitions, investments, loans and advances;

 

    pay certain subordinated indebtedness;

 

    modify the terms of organizational documents;

 

    engage in certain transactions with affiliates; and

 

    enter into negative pledge clauses and clauses restricting subsidiary distributions.

These covenants could impair our ability to grow our business, take advantage of attractive business opportunities or successfully compete. In addition, the agreement governing our revolving credit facility requires that we maintain a total debt to consolidated EBITDA ratio initially of no more than 7.00 to 1.00 (with step-downs of no more than 5.00 to 1.00 during the term of the agreement) on the last day of each fiscal quarter beginning with the fiscal quarter ending March 31, 2015, which test is only in effect when revolving loans, plus drawn and unreimbursed letters of credit, exceed 25% of the commitments under the revolving credit facility as of the last day of such fiscal quarter. Our ability to comply with this ratio may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders could elect to declare all outstanding debt under such agreements to be immediately due and payable. If we were unable to repay or refinance the accelerated debt, the lenders could proceed against any assets pledged to secure that debt, including foreclosing on or requiring the sale of our properties, and our assets may not be sufficient to repay such debt in full.

 

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A rise in interest rates may increase our overall interest rate expense.

On August 15, 2014, our Operating Partnership entered into senior secured facilities, which are subject to variable interest rates. A rise in interest rates may increase our overall interest rate expense and have an adverse impact on distributions to our stockholders. The risk presented by holding variable-rate indebtedness can be managed or mitigated by utilizing interest rate protection products. However, there is no assurance that we will utilize any of these products or that such products will be available to us. In addition, in the event of a rise in interest rates, we may be unable to replace maturing debt with new debt at equal or better interest rates.

Our debt service requirements expose us to the possibility of foreclosure, which could result in the loss of our investment in our Properties.

Upon completion of this offering, we anticipate that our pro forma indebtedness outstanding, giving effect to this offering and the use of proceeds therefrom, will be $420.4 million. The senior secured credit facilities are collateralized by our Properties. If we are unable to meet the required debt service payments, the lenders of the senior secured credit facilities could foreclose on our Properties and we could lose our investment. Alternatively, if we decide to sell assets in the current market to raise funds to repay matured debt, it is possible that these Properties will be disposed of at a loss.

Risks Related to Our Organizational Structure

Upon the listing of our shares on the NYSE, we will be a “controlled company” within the meaning of the NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, IMC LP will continue to control a majority of the voting power of our shares eligible to vote in the election of directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group (as defined by section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including partnerships and limited partnerships) or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

    we have a board that is comprised of a majority of “independent directors,” as defined under the rules of such exchange;

 

    we have a compensation committee that is comprised entirely of independent directors; and

 

    we have a nominating and corporate governance committee that is comprised entirely of independent directors.

Following this offering, we intend to utilize these exemptions. As a result, a majority of the directors on our board will not be required to be independent. In addition, the compensation committee and the nominating and corporate governance committee of our board of directors will not be required to consist entirely of independent directors or be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

We are an “emerging growth company” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue

 

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equals or exceeds $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

Pursuant to the JOBS Act for so long as we are an “emerging growth company,” our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. We will be required to provide management’s attestation on internal controls effective December 31, 2016. However, under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.” We will be an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of this offering, (b) in which we have total annual gross revenue of at least $1 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

Each of our Sponsors beneficially owns a substantial amount of our common stock and will continue to have substantial control over us after this offering and their interests may conflict with or differ from your interests as a stockholder.

Funds affiliated with Bain Capital and an entity affiliated with Oaktree own approximately 47.3% and 47.4% of the equity interests of IMC LP, respectively. Upon completion of this offering, IMC LP will beneficially own approximately 76.8% of our common stock (or 74.2%, if the underwriters’ option to purchase additional shares is exercised in full). The ownership of the Sponsors of IMC LP may provide them control over matters requiring stockholder approval, including the election of directors or a merger, consolidation or a sale of all or substantially all of our assets. The Sponsors may have interests that are different from yours and may vote in a way with which you disagree and which may be adverse to your interests. In addition, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of the common stock to decline or prevent our stockholders from realizing a premium over the market price for their shares.

In addition, six of our director nominees are affiliates of the Sponsors. Pursuant to our bylaws and the stockholders’ agreement between IMC LP, the Sponsors and us, we will continue to nominate to our board individuals designated by the Sponsors for so long as the stockholders’ agreement remains in effect. See “Management—Composition of the Board of Directors after this Offering” and “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.” As a result, the Sponsors will continue to be able to exert a significant degree of influence over our management and the direction of our business.

We may not be able to take advantage of certain business opportunities.

Each of the Sponsors is in the business of making investments in companies. Our charter provides that if any of our directors, officers or employees who is also an officer, employee or agent of the Sponsors or any of their affiliates acquires knowledge of a potential business opportunity, we renounce any potential interest or expectation in, or right to be offered or to participate in, such business opportunity to the maximum extent permitted from time to time by Maryland law, except for any business opportunity presented in writing to such

 

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person expressly in his or her capacity as one of our directors, officers or employees, and not also presented to such person or to any other Sponsor Affiliate, or which such person or any other Sponsor Affiliate became aware of, in any other capacity. Accordingly, other than with respect to the foregoing exception, a director designated by a Sponsor or its affiliates may exploit any business opportunity or direct such opportunity to any person or entity other than us, including acquisition opportunities that may be competitive or complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director has no liability in the capacity of a director if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the company’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the Maryland General Corporation Law (“MGCL”), our charter will limit the liability of our directors and officers to our company and our stockholders for money damages, except for liability resulting from:

 

    actual receipt of an improper benefit or profit in money, property or services; or

 

    a final judgment based upon a finding that his or her action or failure to act was the result of active and deliberate dishonesty by the director or officer and was material to the cause of action adjudicated.

In addition, our charter will authorize us to obligate our company, and our amended and restated bylaws (our “bylaws”) will require us, to indemnify our directors and officers for actions taken by them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the maximum extent permitted by Maryland law. Effective upon completion of this offering, we will enter into indemnification agreements with our directors and executive officers that will provide for indemnification and advance expenses to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. Accordingly, in the event that actions taken by any of our directors or officers are immune or exculpated from, or indemnified against, liability but whose actions impede our performance, our stockholders’ ability to recover damages from that director or officer will be limited.

Our board of directors may change our major corporate, investment and financing policies without stockholder approval and those changes may adversely affect our business.

Our board of directors will determine and may alter or eliminate our major corporate policies, including our acquisition, investment, financing, growth, operations and distribution policies and whether to maintain our status as a REIT. While our stockholders have the power to elect or remove directors, our stockholders will have limited direct control over changes in our policies and those changes could adversely affect our business, financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

Our charter and bylaws will contain provisions that may delay, defer or prevent an acquisition of our common stock or a change in control.

Our charter and bylaws will contain a number of provisions, the exercise or existence of which could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stockholders or otherwise be in their best interests, including the following:

 

    Our charter contains restrictions on the ownership and transfer of our stock.

In order for us to qualify as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each

 

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taxable year. Subject to certain exceptions, our charter prohibits any stockholder from owning beneficially or constructively more than 9.8% in value or by number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock, or 9.8% in value of the aggregate of the outstanding shares of all classes or series of our stock. We refer to these restrictions collectively as the “ownership limits.”

The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common stock or the outstanding shares of all classes or series of our stock by an individual or entity could cause that individual or entity or another individual or entity to own constructively in excess of the relevant ownership limits.

Among other restrictions on ownership and transfer of shares, our charter also prohibits any person from owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT. Any attempt to own or transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void.

These ownership limits may prevent a third-party from acquiring control of us if our board of directors does not grant an exemption from the ownership limits, even if our stockholders believe the change in control is in their best interests. We expect that, before the completion of this offering, our board of directors will grant an exemption from the ownership limits to IMC LP, the Sponsors and their affiliates, subject to certain initial and ongoing conditions designed to protect our status as a REIT.

 

    Our board of directors has the power to cause us to issue and authorize additional shares of our stock without stockholder approval.

Our charter authorizes us to issue authorized but unissued shares of common or preferred stock in addition to the shares of common stock issued and outstanding at the closing of this offering. In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a class or series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interests of our stockholders. See “Description of Capital Stock—Power to Reclassify and Issue Stock.”

Certain provisions of Maryland law may limit the ability of a third-party to acquire control of us.

Certain provisions of the MGCL may have the effect of inhibiting a third-party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

 

    business combination” provisions that, subject to limitations, prohibit certain business combinations between an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate of any interested stockholder and us for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder voting requirements on these combinations; and

 

   

control share provisions that provide that holders of “control shares” of our company (defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the

 

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acquirer (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all votes entitled to be cast by the acquirer of control shares, and our officers and employees who are also our directors.

Pursuant to the MGCL, our board of directors will exempt by resolution a business combination between us and IMC LP, the Sponsors or their affiliates and between us and any other person, provided that in the latter case the business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person). Consequently, the five-year prohibition and the supermajority vote requirements will not apply to a business combination between us and IMC LP, the Sponsors or their affiliates. Our bylaws will contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. There can be no assurance that these exemptions or resolutions will not be amended or eliminated at any time in the future.

Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what will be provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board. See “Material Provisions of Maryland Law and of Our Charter and Bylaws—Business Combinations,” “—Control Share Acquisitions” and “—Subtitle 8.”

Risks Related to Our Status as a REIT

IMC may not maintain its status as a REIT.

We have elected to qualify to be taxed as a REIT for U.S. federal income tax purposes and expect to continue to operate in a manner that will allow us to continue to be classified as such. Once an entity is qualified as a REIT, the Code generally requires that such entity distribute annually at least 90% of its REIT taxable income excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it distributes annually less than 100% of its REIT taxable income including capital gains. In addition, a REIT will be required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. To avoid current entity level U.S. federal income taxes, we expect to distribute 100% of our capital gains and ordinary taxable income to stockholders on a quarterly basis. We may not have sufficient liquidity to meet these distribution standards. If, with respect to any taxable year, we fail to maintain our qualification as a REIT, we would not be allowed to deduct distributions to stockholders in computing our taxable income and federal income tax. The corporate level income tax, including any applicable alternative minimum tax, would apply to our taxable income at regular corporate rates. As a result, the amount available for distribution to holders of equity securities that would otherwise receive dividends would be reduced for the year or years involved. In addition, unless we were entitled to relief under the relevant statutory provisions, we would be disqualified from treatment as a REIT for four subsequent taxable years.

If we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

We intend to continue to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. For example, a significant portion of the value of our properties is attributable to structural components related to

 

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the provision of electricity, heating, ventilation and air conditioning, humidification regulation, security and fire protection and telecommunication services. In addition, we own several valuable intangible assets, such as trademarks, customer relationships and a favorable leasehold interest. If our structural components and/or intangible assets are not real property for purposes of the REIT qualification requirements, we could fail to qualify as a REIT, which would adversely affect the value of our common stock. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, there can be no assurance that the IRS will not contend that our assets or income cause a violation of the REIT requirements. If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

The opinion of our special counsel regarding our status as a REIT does not guarantee our ability to qualify as a REIT.

Our special counsel, Kirkland & Ellis LLP, will render an opinion to us to the effect that we have been organized in conformity with the requirements for qualification as a REIT and our proposed method of operation described in this prospectus and as represented by management has enabled us, and will enable us, to satisfy the requirements for such qualification. This opinion will be based on representations made by us as to certain factual matters relating to our organization and our actual and intended or expected manner of operation. In addition, this opinion will be based on the law existing and in effect on the date of filing of this registration statement. Our qualification and taxation as a REIT will depend on the qualification of each of the Predecessor REIT Subsidiaries as a REIT for U.S. federal income tax purposes. Our qualification and taxation as a REIT will also depend on our ability to meet on a continuing basis, through actual operating results, asset composition, distribution levels, diversity of share ownership and the various qualification tests imposed under the Code discussed below. Kirkland & Ellis LLP will not review our compliance with these tests on a continuing basis. Accordingly, no assurance can be given that we will satisfy such tests on a continuing basis. Also, the opinion of Kirkland & Ellis LLP will represent counsel’s legal judgment based on the law in effect as of the date of the initial closing of this initial public offering, is not binding on the IRS or any court, and could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to U.S. federal income tax laws, any of which could be applied retroactively. Kirkland & Ellis LLP will have no obligation to advise us or the holders of our stock of any subsequent change in the matters stated, represented or assumed in its opinion or of any subsequent change in applicable law.

Qualifying as a REIT involves highly technical and complex provisions of the Code.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT may depend in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from “qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates is currently 20% (and an additional 3.8% tax on net investment income may

 

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also be applicable). Dividends payable by REITs, however, generally are not eligible for the reduced rates applicable to “qualified dividends”. Although these rules do not adversely affect the taxation of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates 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 stock of REITs, including our common stock.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, in order for us to qualify as a REIT so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code. From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income and state or local income, property and transfer taxes. See “Material United States Federal Income Tax Considerations—General.” For example, in order to meet the REIT qualification requirements, we currently hold and expect in the future to hold some of our assets or conduct certain of our activities through one or more TRSs or other subsidiary corporations that will be subject to federal, state, and local corporate-level income taxes as regular C corporations (i.e. corporations generally subject to corporate-level income tax under Subchapter C of the Code). In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s length basis. Any of these taxes would decrease cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities.

To qualify 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 “real estate assets” (as defined in the Code), including certain mortgage loans and securities. The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) 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 total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. See “Material United States Federal Income Tax Considerations—Asset Tests.” If we fail to comply

 

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with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning, among other things, the sources of our income, the amounts we distribute to our stockholders and the ownership of our stock. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

If our Operating Partnership failed to qualify as a partnership for U.S. federal income tax purposes following the admission of a new partner, we would cease to qualify as a REIT and suffer other adverse consequences.

Prior to the admission of a new partner, our Operating Partnership will be an entity disregarded as separate from IMC for U.S. federal income tax purposes. However, we believe that upon the admission of an additional partner, our Operating Partnership will be treated as a partnership for U.S. federal income tax purposes. As a partnership, our Operating Partnership will not be subject to federal income tax on its income. Instead, each of its partners, including us, will be allocated, and may be required to pay tax with respect to, its share of our Operating Partnership’s income. We cannot assure you, however, that the IRS will not challenge the status of our Operating Partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our Operating Partnership or any such other subsidiary partnership as an entity taxable as a corporation for U.S. federal income tax purposes following the admission of a new partner, it is likely that we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our Operating Partnership or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

If any of the Predecessor REIT Subsidiaries failed to qualify as a REIT, we may also fail to qualify as a REIT.

We were formed through a transaction in which the Predecessor REIT Subsidiaries (IHFC REIT, LLC, Market Square REIT, LLC, Showplace REIT, LLC and IMC LV REIT, LLC) merged with and into IMC, in each case with IMC surviving the merger. We believe each of these Predecessor REIT Subsidiaries qualified as REITs for U.S. federal income tax purposes, and that IMC is expected to be treated for U.S. federal income tax purposes as the successor to the Predecessor REIT Subsidiaries. However, if any of the Predecessor REIT Subsidiaries failed to qualify as a REIT in any prior taxable year, that failure could adversely impact IMC’s qualification as a REIT. If we failed to qualify as a REIT, we could become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to holders of our common stock unless we qualify for certain statutory relief provisions as discussed herein.

We are party to certain short term lease arrangements that may not constitute qualifying income under the 75% or 95% gross income tests that apply to REITs.

As a REIT, at least 75% and 95% of our gross income must consist of rents from real property or other specified categories of income. Rents received by us will qualify as “rents from real property” for purposes of satisfying these gross income tests only if certain conditions are met. See “Material United States Federal Income Tax Considerations.” A portion of our rent is received in connection with short term leases. We have reviewed our Properties and our lease arrangements, and we believe that rent attributable to these short term leases qualifies as “rents from real property” for purposes of the 75% and 95% gross income tests. However, we cannot

 

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assure you that the IRS will agree that rent attributable to a particular short term lease qualifies as “rents from real property” for purposes of the 75% and 95% gross income tests. If the amount of any such non-qualifying rent, together with other income that does not otherwise qualify for the 75% or 95% gross income tests, exceeds 25% or 5% of our gross income, as the case may be, we may fail to qualify as a REIT.

We may be subject to built-in gains tax on the disposition of certain of our assets.

We acquired certain properties in tax-deferred transactions, which properties were held by one or more C corporations before they were held by us. If we dispose of any such assets during the ten-year period following acquisition of the assets from the respective C corporation (i.e., during the ten-year period following ownership of such assets by a REIT), we will be subject to U.S. federal income tax (and applicable state and local taxes) at the highest corporate tax rates on any gain recognized from the disposition such assets to the extent of the excess of the fair market value of the assets on the date that they were contributed to or acquired by us or one of our predecessor REITs in a tax-deferred transaction over the adjusted tax basis of such assets on such date, which are referred to as built-in gains. Similarly, if we recognize certain other income considered to be built-in income during the ten-year period following the asset acquisitions described above, we could be subject to U.S. federal tax under the built-in gains tax rules. We would be subject to this corporate-level tax liability (without the benefit of the deduction for dividends paid) even if we qualify and maintain our status as a REIT. Any recognized built-in gain will retain its character as ordinary income or capital gain and will be taken into account in determining REIT taxable income and distribution requirement. Any tax on the recognized built-in gain will reduce REIT taxable income. We estimate that up to approximately $170.1 million of built-in gain might be recognized for tax purposes under these rules if we were to sell all of our assets in taxable transactions. We may choose to forego otherwise attractive opportunities to sell assets in a taxable transaction during the ten-year built-in gain recognition period in order to avoid this built-in gain tax. However, there can be no assurance that such a taxable transaction will not occur. The amount of any such built-in gain tax could be material and the resulting tax liability could have a negative effect on our cash flow and limit our ability to pay distributions required to maintain our status as a REIT.

If cancellation of debt income for U.S. federal income tax purposes is deemed to occur as a result of the Refinancing Transactions, it could materially and adversely affect our cash flows.

In connection with the acquisition of certain of our properties in May of 2011, the debt obligations associated with such properties were substantially modified. In particular, the lenders amended the loan documents at such time so that we could satisfy the loans on or before the maturity date of such loans for an amount that is substantially less than the aggregate face amount of the loans. See the discussion of the discounted payoff amounts of the loans in Note 6 to our consolidated financial statements included elsewhere in this prospectus. For U.S. federal income tax purposes, this reduction in indebtedness was treated as taking place prior to our acquisition of such properties. On August 15, 2014, we refinanced these debt obligations in the Refinancing Transactions by paying the reduced amount pursuant to the terms of the 2011 loan amendments. We do not believe that any cancellation of debt income (“CODI”) for U.S. federal income tax purposes arose as a result of the Refinancing Transactions because the debt obligations were paid off in accordance with their terms. If, however, the U.S. Internal Revenue Service (“IRS”) were to successfully assert that CODI resulted from the Refinancing Transactions, any such CODI could materially and adversely affect our cash flows as a result of additional required tax payments and additional distributions to our stockholders.

Risks Related to this Offering

The cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can we assure you of our ability to make distributions in the future. We may use borrowed funds to make distributions.

After giving effect to this offering and the use of proceeds therefrom, our expected annual distributions for the 12 months ending March 31, 2016 of $0.78 per share are expected to be approximately 83% of estimated cash

 

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available for distribution. However, if cash available for distribution generated by our assets for such 12 month period is less than our estimate, or if such cash available for distribution decreases in future periods from expected levels, our inability to make the expected distributions could result in a decrease in the market price of our common stock. See “Distribution Policy.” All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT qualification and other factors as our board of directors may deem relevant from time to time. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. Although we do not currently intend to pay distributions in excess of earnings and cash flow from operations, to the extent that we decide to make distributions in excess of our current and accumulated earnings and profits in the future, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. To the extent that such distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock. See “Material United States Federal Income Tax Considerations—Taxation of Taxable Domestic Stockholders.” If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

No public market for our common stock currently exists, an active trading market for our shares may not develop and the market price of our shares may decline substantially and quickly.

Prior to this offering, there has been no public market for our common stock. Although our common stock has been approved for listing, subject to official notice of issuance, on the NYSE, we cannot predict the extent to which a trading market will develop or how liquid that market might become. The estimated initial public offering price for our shares was determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the trading market. An active trading market may not develop following the closing of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the market price of your shares. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire additional properties or other businesses by using our shares as consideration, which in turn could materially adversely affect our business. In addition, the stock market in general, and the NYSE and REITs in particular, have recently experienced extreme price and volume fluctuations. These broad market and industry factors may decrease the market price of our shares, regardless of our actual operating performance. For these reasons, among others, the market price of the shares you purchase in this offering may decline substantially and quickly.

Our share price may decline due to the large number of our shares eligible for future sale.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell shares of our common stock in the future at a time and at a price that we deem appropriate. Upon completion of this offering we will have a total of 49,600,000 shares of our common stock outstanding (or 51,325,000 shares of our common stock assuming the underwriters exercise their option to purchase up to 1,725,000 additional shares of our common stock in full). All of the 11,500,000 shares of our common stock sold in this offering (or 13,225,000 shares of our common stock assuming the underwriters exercise their option to purchase additional shares of our common stock in full) will be freely tradable without restriction or further registration under the Securities Act, by persons other than our “affiliates.” See “Shares Eligible for Future Sale.”

The remaining 38,100,000 shares of our common stock outstanding held by our current stockholder, IMC LP, will be “restricted securities” within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. In addition, we, our directors, executive officers, certain other employees,

 

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IMC LP and our Sponsors, have agreed or will agree, subject to certain exceptions, not to dispose of or hedge any shares of our common stock or securities convertible into or exchangeable for shares of our common stock for 180 days from the date of this prospectus, except with the prior written consent of Barclays Capital Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC. As a result of the stockholders’ agreement, however, all of these shares of our common stock will, subject to applicable lock-up arrangements, be eligible for future sale.

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to the 2015 Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover 3,500,000 shares of our common stock. However, any shares granted to our directors and officers are subject to lock-up arrangements, described above, and generally may not be sold for 180 days from the date of this prospectus, except with the prior written consent of Barclays Capital Inc., Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC.

Our charter will provide that we may issue up to 300,000,000 shares of common stock, and 50,000,000 shares of preferred stock, $0.01 par value per share. Moreover, under Maryland law and our charter, our board of directors will have the power to increase the aggregate number of shares of stock or the number of shares of stock of any class or series that we are authorized to issue without stockholder approval. See “Description of Capital Stock—Power to Reclassify and Issue Stock.”

The market price of our common stock could be adversely affected by market conditions and by our actual and expected future earnings and level of cash dividends.

Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares without regard to our operating performance. For example, the trading prices of equity securities issued by REITs have historically been affected by changes in market interest rates. One of the factors that may influence the market price of our common stock is the annual yield from distributions on our common stock as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of shares of our common stock to demand a higher distribution rate or seek alternative investments. As a result, if interest rates rise, it is likely that the market price of our common stock will decrease as market rates on interest-bearing securities increase. In addition, our operating results could be below the expectations of public market analysts and investors, and in response the market price of our shares could decrease significantly. The market value of the equity securities of a REIT is also based upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock and, in such instances, you may be unable to resell your shares at or above the initial public offering price.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase

 

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our common stock in this offering, you will incur an immediate dilution of $7.80 (or approximately 60.0%) in net tangible book value per share from the price you paid, assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. In addition, if we raise funds by issuing additional shares, the newly issued shares may further dilute your ownership interest.

If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on us.

As a publicly-traded REIT, we will be required to develop and implement substantial control systems, policies and procedures in order to maintain our REIT qualification and satisfy our periodic SEC reporting and NYSE listing requirements. We cannot assure you that management’s past experience will be sufficient to successfully develop and implement these systems, policies and procedures and to operate our company or that any such development and implementation will be effective. Failure to do so could jeopardize our status as a REIT or as a public company, and the loss of such status would materially and adversely affect us.

In the past, we have not separately reported our audited results as a public company. In connection with our operation as a public company, we will be required to report our operations on a consolidated basis under GAAP. If we fail to develop, implement or maintain proper overall business controls, including as required to support our growth, our results of operations could be harmed or we could fail to meet our reporting obligations. In addition, the existence of a material weakness or significant deficiency could result in errors in our financial statements that could require a restatement, cause us to fail to meet our public company reporting obligations and cause investors to lose confidence in our reported financial information, which could have a material adverse effect on us.

The requirements of being a public company will increase certain of our costs and require significant management focus.

As a public company, our legal, accounting and other expenses associated with compliance-related and other activities will increase. For example, in connection with this offering, we will create new board of directors committees and appoint one or more independent directors to comply with the corporate governance requirements of the exchange on which we will list our common stock. Costs to obtain director and officer liability insurance will contribute to our increased costs. As a result of the associated liability, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements, which could further increase our compliance costs.

Our business and stock price may suffer as a result of our lack of public company operating experience. In addition, if securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

We are a privately-held company. Our lack of recent public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our business, prospects, financial condition and results of operations may be harmed. In addition, as a new public company we do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

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FORWARD-LOOKING STATEMENTS

Certain statements in this prospectus, including statements such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on our current plans, expectations and projections about future events. Forward-looking statements should not be unduly relied upon. They give our expectations about the future and are not guarantees. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements to materially differ from any future results, performance and achievements expressed or implied by such forward-looking statements. We caution you therefore against relying on any of these forward-looking statements.

The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and may be affected by a variety of risks and other factors, including, among others:

 

    our inability to lease vacant space, renew leases or re-lease space as leases expire;

 

    the bankruptcy, insolvency, or inability to pay rent of our tenants, who are in a competitive industry;

 

    the loss of, or closure of showroom space by, one or more anchor tenants;

 

    the entry into long-term non-cancelable leases that may not result in fair value over time;

 

    our inability to achieve profitability;

 

    our inability to achieve business strategies;

 

    the fixed costs associated with our Properties;

 

    our inability to transfer or sell real estate may be hampered by transfer restrictions and market pressures;

 

    the geographic and industry concentration of our Properties;

 

    the loss of members of senior management or our leasing and marketing professionals;

 

    our inability to access external sources of capital on commercially reasonable terms;

 

    our substantial amount of indebtedness following this offering;

 

    our inability to carry out future acquisition activities;

 

    material disruption due to possible terrorist activity or other acts of violence;

 

    our exposure to environmental liabilities and subjection to environmental laws and regulations and potential environmental claims;

 

    losses to our Properties not covered by insurance, or that exceed our coverage limits;

 

    the cost of our health care self-insurance program and its adequacy in covering all claims;

 

    the cost of maintaining compliance with the ADA, fire, safety, and other regulations;

 

    the inability of our Operating Partnership to generate funds to pay liabilities;

 

    the cost of, and payment of damages and expenses related to, defending litigation or threatened litigation;

 

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    the impact of changing property tax rates and real estate valuations;

 

    the impact of competition from other Markets;

 

    the impact of declining real estate valuations and impairment charges on our earnings;

 

    increased costs as a public company;

 

    the impact of federal, state, local and other laws and regulations;

 

    the continuing ability to meet the conditions for qualification as a REIT;

 

    the insufficiency of cash flow from operations or access to future borrowings;

 

    fluctuations in the market for our equity; and

 

    those discussed herein under the caption “Risk Factors.”

Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this prospectus. All forward-looking statements are made as of the date of this prospectus and the risk that actual results will differ materially from the expectations expressed in this prospectus will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this prospectus, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this prospectus, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this prospectus will be achieved.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $132.3 million (or approximately $153.2 million if the underwriters exercise their option to purchase up to 1,725,000 additional shares in full), assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We will contribute the proceeds we receive from this offering to our Operating Partnership in exchange for partnership units. We expect our Operating Partnership to use the net proceeds from this offering together with cash on hand:

 

    to pay approximately $125.5 million of principal and interest to terminate our second lien term loan facility and approximately $1.3 million of prepayment fees in connection therewith; and

 

    to distribute an aggregate of $9.3 million to IMC LP (x) to pay aggregate fees of $5.3 million to Bain Capital and Oaktree in connection with the termination of the advisory agreement among IMC LP and Bain Capital and Oaktree, and (y) to make a concurrent distribution equal to $4.0 million to a minority limited partner of IMC LP required to be made under the limited partnership agreement of IMC LP upon payment of fees under the advisory agreement. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”

The second lien term loan facility matures on August 15, 2021 and bears interest initially, at our option, at an adjusted LIBOR (with a 1% floor) plus 7.75% per annum, or an alternative base rate 6.75% per annum. Our Operating Partnership entered into the second lien term loan facility on August 15, 2014. Borrowings under the second lien term loan facility, together with borrowings under the first lien term loan facility and cash on hand, were used to repay all of the outstanding borrowings under, and terminate, the then existing mortgage based loans. See “Prospectus Summary—Refinancing Transactions” and “Description of Indebtedness.”

Affiliates of Oaktree are lenders under our second lien term loan facility and will receive a portion of the proceeds of this offering due to the above-described pay down of these facilities. See “Certain Relationships and Related Party Transactions.”

An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, as set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $12.1 million, assuming no change in the assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is based on the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $10.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses.

 

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DISTRIBUTION POLICY

We have elected to qualify as a REIT for U.S. federal income tax purposes. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any taxable income retained by a REIT, including capital gains. To satisfy the requirements for qualification as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock out of assets legally available for such purposes. A REIT must distribute 100% of its capital gains and ordinary income to its stockholders in order to maintain its REIT status and avoid entity level U.S. federal income taxes.

We entered into senior secured credit facilities on August 15, 2014. Such facilities generally restrict our Operating Partnership’s ability to make distributions to us, and therefore our ability to make distributions to our equityholders. However, we are allowed to distribute an amount equal to 100% of our annual REIT taxable income. Furthermore we are allowed to make the following additional distributions: (a) distributions in an amount not to exceed $10 million in any 12 consecutive calendar month period so long as no event of default is continuing under the senior secured credit facilities and no revolving loans are outstanding under our revolving credit facility, (b) distributions in an amount calculated at the time of the distribution that includes $35 million plus, so long as no event of default is continuing, 50% of our consolidated net income (measured as one accounting period from and after July 1, 2014), less the amount of any distributions previously made as distributions of our REIT taxable income and/or in reliance on the immediately preceding clause (a), and (c) distributions with certain proceeds from public offerings of our capital stock or limited partnership interests of our Operating Partnership that have not been used for other purposes as set forth under the senior secured credit facilities. See “Description of Indebtedness.”

We intend to make a pro rata distribution with respect to the quarter during which this offering occurs, based on a distribution rate of $0.195 per share of our common stock for a full quarter. On an annualized basis, this would be $0.78 per share of our common stock, or an annualized distribution rate of 6.0%. We estimate that this initial annual distribution rate will represent approximately 83% of estimated cash available for distribution for the 12 months ending March 31, 2016. We do not intend to reduce the annualized distribution per share of our common stock if the underwriters exercise their option to purchase additional shares. Our intended initial annual distribution rate has been established based on our estimate of cash available for distribution for the 12 months ending March 31, 2016, which we have calculated based on adjustments to our pro forma net income for the 12 months ended March 31, 2015. This estimate was based on our pro forma operating results and does not take into account our long-term business and growth strategies, nor does it take into account any unanticipated expenditures that we may have to make or any financings for such expenditures. In estimating our cash available for distribution for the 12 months ending March 31, 2016, we have made certain assumptions reflected in the table and footnotes below, including that there will be no terminations of existing leases in our Properties after March 31, 2015 (other than scheduled lease expirations) or lease renewals or new leases (other than month-to-month leases) after March 31, 2015 unless a new or renewal lease has been entered into prior to the date of this prospectus.

Our estimate of cash available for distribution does not reflect the effect of any changes in our working capital after March 31, 2015, other than the amount of cash estimated to be used for recurring property capital expenditures and tenant improvements related to leases that may be entered into prior to the date of this prospectus. It also does not reflect the amount of cash estimated to be used for investing activities for acquisition and other activities, other than estimated capital expenditures, or the amount of cash estimated to be used for financing activities. Although we have included all material investing and financing activities that we have commitments to undertake as of March 31, 2015, we may undertake other investing and/or financing activities in the future. Any such investing and/or financing activities may have a material effect on our estimate of cash available for distribution. Because we have made the assumptions set forth above in estimating cash available for distribution, we do not intend this estimate to be a projection or forecast of our actual results of operations or

 

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liquidity. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or ability to pay dividends or make distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for calculating cash available for distribution.

Notwithstanding the estimate set forth below, our future distributions will be at the sole discretion of our board of directors. When determining the amount of future distributions, we expect that our board of directors will consider a variety of factors, which may include, (1) the amount of cash generated from our operating activities, (2) our expectations of future cash flows, (3) our determination of near-term cash needs for debt repayments, existing or future share repurchases, and selective acquisitions or development of new properties, (4) the timing of significant redevelopment and re-leasing activities and the establishment of additional cash reserves for anticipated tenant improvements and general property capital improvements, (5) our ability to continue to access additional sources of capital, (6) the amount required to be distributed to maintain our status as a REIT and to reduce any income and excise taxes that we otherwise would be required to pay, (7) any limitations on our distributions contained in our credit or other agreements, including, without limitation, the agreements governing our first lien term loan facility and our revolving credit facility, and (8) applicable provisions of Maryland law including the sufficiency of legally-available assets.

If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, sell assets or reduce such distributions. Our board of directors will review the alternative funding sources available to us from time to time. Our actual results of operations will be affected by a number of factors, including the revenues we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, please see “Risk Factors.”

IMC will conduct substantially all of its operations through the Operating Partnership. IMC does not have, apart from an interest in the Operating Partnership, any independent operations. As a result, it will rely on distributions from the Operating Partnership to pay any dividends IMC might declare on shares of its common stock in three separate steps:

 

    first, the Operating Partnership will make distributions to those of its partners which are holders of partnership units, including IMC OP GP, LLC. If the Operating Partnership makes such distributions, then in addition to IMC and IMC OP GP, LLC, any other partners of the Operating Partnership holding partnership units will also be entitled to receive equivalent distributions pro rata based on their partnership interests in the Operating Partnership;

 

    second, IMC OP GP, LLC will distribute to IMC its share of such distributions; and

 

    third, IMC will distribute the amount authorized by its board of directors and declared by IMC to its common stockholders on a pro rata basis.

 

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The following table describes our pro forma net income for the 12 months ended March 31, 2015, and the adjustments we have made thereto in order to estimate our initial cash available for distribution for the 12 months ending March 31, 2016 (amounts in thousands except share and per share data, square footage data and percentages). Pro forma net (loss)/income reflects adjustments for certain transactions, as described in “Unaudited Pro Forma Consolidated Financial Statements.” Other than such adjustments, these calculations do not assume any changes to our operations or any acquisitions or dispositions or other developments or occurrences which could affect operating results and cash flows, or changes in outstanding shares of our common stock. We cannot assure you that actual results will be the same as or comparable to the calculations below.

 

Pro forma net loss for the 12 months ended December 31, 2014

$ (2,679

Less: Pro forma net loss for the three months ended March 31, 2014

  2,391   

Add: Pro forma net income for the three months ended March 31, 2015

  641   
  

 

 

 

Pro forma net income for the 12 months ended March 31, 2015

$ 353   

Add: Pro forma depreciation and amortization

  51,205   

Add: Estimated net increase in contractual rent income(1)

  6,527   

Less: Net effects of straight-line rent adjustments to tenant leases(2)

  (2,180

Add: Net effects of above- and below-market rent adjustments(3)

  1,628   

Add: Net effects of non-cash amortization of debt discounts and debt issuance costs

  2,116   

Add: Non-cash stock-based compensation expense(4)

  724   
  

 

 

 

Estimated cash flows from operating activities for the 12 months ending March 31, 2016

$ 60,373   

 

Estimated cash flows from investing activities

Less: Contractual obligations for tenant improvements(5)

  (5,664

Less: Estimated annual provision for recurring property capital expenditures(6)

  (3,658
  

 

 

 

Total estimated cash flows used in investing activities

$ (9,322
  

 

 

 

Estimated cash flows used in financing activities—scheduled debt principal repayments(7)

$ (4,050
  

 

 

 

Estimated cash available for distribution for the 12 months ending March 31, 2016

$ 47,001   

Total estimated initial annual distribution to our stockholders and to other holders of outstanding partnership units

$ 39,011   
  

 

 

 

Total estimated initial annual distribution to holders of outstanding partnership units

$ 235   
  

 

 

 

Total estimated initial annual distribution to our stockholders

$ 38,776   
  

 

 

 

Estimated initial annual distributions per share of our common stock(8)

$ 0.78   
  

 

 

 

Payout ratio based on our share of estimated cash available for distribution(9)

  0.83   
  

 

 

 

 

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(1) Represents the net increase in contractual rent income, net of contractual rent abatements, from:

 

  (i) $131,225 of contractual rent income through March 31, 2016 from existing leases as of March 31, 2015; plus
  (ii) $3,095 of contractual rent income through March 31, 2016 from new leases that were signed prior to the date of this prospectus but that will go into effect during the 12 months ending March 31, 2016; less
  (iii) $127,793 of contractual rent income during the 12-month period ended March 31, 2015.

The calculated net increase in contractual rent income reflects decreases in contractual rent income from scheduled lease expirations during the 12-month period ending March 31, 2016 and excludes any impact from projected lease renewals.

 

(2) Represents the net change from the conversion of estimated rental revenues for the 12 months ending March 31, 2015 from a straight-line accrual basis to a cash basis of revenue recognition.

 

(3) Represents the net change from the elimination of non-cash adjustments for above-market and below-market leases for the 12 months ended March 31, 2015.

 

(4) Represents non-cash stock-based compensation expense associated with long-term equity awards recognized during the 12 months ended March 31, 2015.

 

(5) Represents projected tenant improvements of $5,664, based on the weighted average tenant improvement costs of $3.19 per square foot incurred during the 39 months ended March 31, 2015, multiplied by 1,776,098 of rentable square feet of leased space for which leases expire in our Properties during the 12 months ending March 31, 2016.

 

(6) Represents the estimated cost of recurring property capital expenditures (excluding costs of tenant improvements), of $3,658, based on the weighted average annual recurring capital expenditures at a cost of $0.39 per square foot incurred during the 39 months ended March 31, 2015, multiplied by rentable square feet of 9,394,669 at March 31, 2015.

 

(7) Represents scheduled debt principal payments due during the 12 months ending March 31, 2016, after giving effect to the Refinancing Transactions.

 

(8) Based on a total of 49,600,000 shares of our common stock to be outstanding after this offering.

 

(9) Calculated as estimated initial annual distribution per share divided by IMC’s share of estimated cash available for distribution per share for the 12 months ending March 31, 2016.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of March 31, 2015:

 

    on an actual basis; and

 

    on a pro forma basis giving effect to the sale by us of 11,500,000 shares of common stock in this offering assuming a public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover of this prospectus, our receipt of the estimated net proceeds from this offering after deducting the underwriting discounts and commissions and estimated offering expenses payable by us (assuming no exercise of the underwriters’ option to purchase 1,725,000 additional shares of common stock from us), and the use of the proceeds from this offering. See “Use of Proceeds.”

This table should be read together with “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Consolidated Financial Statements” and our consolidated financial statements and the related notes, each included elsewhere in this prospectus.

 

     As of March 31, 2015  
     Actual      Pro Forma  
     (in thousands, except
share and per share data)
 

Cash

   $ 8,129       $ 5,938   
  

 

 

    

 

 

 

Debt

First lien term loan facility (net of discount of $4,594)(1)

$ 399,394    $ 399,394   

Second lien term loan facility (net of discount of $2,469)(1)

  122,531        

Revolving credit facility(2)

  21,000      21,000   
  

 

 

    

 

 

 

Total debt

  542,925      420,394   

Stockholders’ Equity

Preferred stock, par value $0.01 per share, $125 aggregate redemption value; 50,000,000 shares authorized and 125 shares issued and outstanding, actual; 50,000,000 shares authorized and no shares issued and outstanding, pro forma

         

Common stock, par value $0.01 per share; 300,000,000 shares authorized and 38,100,000 shares issued and outstanding, actual; 300,000,000 shares authorized and 49,600,000 shares issued and outstanding, pro forma    

       496   

Additional paid-in capital

  193,228      320,913   

Accumulated deficit

  (9,988   (20,162
  

 

 

    

 

 

 

Total stockholders’ equity

  183,240      301,247   
  

 

 

    

 

 

 

Total capitalization

$ 726,165    $ 721,641   
  

 

 

    

 

 

 

 

 

(1) The first lien term loan facility matures on August 15, 2020 and the second lien term loan facility matures on August 15, 2021 and bear interest initially, at our option, at an adjusted LIBOR (with a 1% floor) plus 4.25% per annum and 7.75% per annum, respectively, or an alternative base rate plus 3.25% per annum and 6.75% per annum, respectively. We intend to use a portion of the proceeds of this offering to fully prepay and terminate the second lien term loan facility. See “Use of Proceeds.”

 

(2) The revolving credit facility initially matures on August 15, 2019 and has a maximum availability of $50.0 million. Borrowings under the revolving credit facility bear interest initially, at our option, at an adjusted LIBOR plus 3.25% per annum or an alternative base rate plus 2.25% per annum.

 

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An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, as set forth on the cover page of this prospectus, would increase (decrease) each of cash, total stockholders’ equity and total capitalization on a pro forma basis by approximately $12.1 million, assuming no change in the assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus and after deducting the underwriting discounts and commissions and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of cash, total stockholders’ equity and total capitalization on a pro forma basis by approximately $10.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses. The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering.

The number of shares of common stock outstanding after this offering does not include:

 

  (i) an aggregate of 3,500,000 shares of our common stock reserved for issuance under the 2015 Incentive Plan, including an aggregate of approximately 1.6 million shares of our common stock that may be issued, at our option, upon exchange of an aggregate of approximately 1.6 million common units that, subject to the satisfaction of certain conditions, are issuable upon conversion of an aggregate of approximately 1.6 million LTIP units to be granted to our executive officers and certain of our employees concurrently with the completion of this offering; and

 

  (ii) an aggregate of approximately 9,836 restricted stock units to be granted to directors who are not employees of our company, our subsidiaries or the Sponsors upon completion of this offering (assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus).

 

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DILUTION

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after the completion of this offering.

Our historical net tangible book value as of March 31, 2015 was $133.0 million or $3.49 per share of our common stock. Historical net tangible book value represents the amount of total tangible assets less total liabilities. Historical net tangible book value per share represents historical net tangible book value divided by the number of shares outstanding.

After giving effect to this offering and the use of the net proceeds therefrom as described in “Use of Proceeds,” based upon an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2015 would have been $257.7 million, or $5.20 per share. This represents an immediate increase in the pro forma net tangible book value of $1.71 per share and an immediate dilution of $7.80 per share in pro forma net tangible book value per share to new investors purchasing common stock in this offering. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the assumed public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

 

Assumed initial offering price per share

$ 13.00   

Historical net tangible book value per share as of March 31, 2015

$ 3.49   

Increase in historical net tangible book value per share attributable to investors in this offering

  1.71   
  

 

 

    

Pro forma net tangible book value per share as of March 31, 2015 (after giving effect to this offering)

  5.20   
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors participating in this offering

$ 7.80   
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the amount of pro forma net tangible book value attributable to new investors by $0.21 per share, and the dilution to new investors participating in this offering by $0.79 per share, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The following table summarizes, as of March 31, 2015, on a pro forma basis described above, the total number of shares purchased from us, the total cash consideration paid to us and the average price per share paid by IMC LP our current sole stockholder, and by new investors purchasing shares in this offering. The table assumes an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
Per
Share
 
     Number      Percentage     Amount      Percentage    
                  (in thousands)               

Existing stockholder

     38,100,000         76.8   $ 193,228         56.4   $ 5.07   

New investors

     11,500,000         23.2     149,500         43.6   $ 13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

  49,600,000      100.0 $ 342,728      100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the total consideration paid by new investors participating in the offering by $11.5 million, or increase (decrease) the percent of total consideration paid by new investors participating in this offering by 1.8% and 2.0%, respectively, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters’ option to purchase up to 1,725,000 additional shares is exercised in full, the following will occur:

 

    the number of shares purchased by new investors participating in this offering will increase to 13,225,000, or approximately 25.8% of the total number of shares outstanding; and

 

    the immediate dilution experienced by new investors participating in this offering will be $7.57 per share and the pro forma net tangible book value per share will be $5.43 per share.

The number of shares of common stock outstanding after this offering does not include:

 

  (i) an aggregate of 3,500,000 shares of our common stock reserved for issuance under the 2015 Incentive Plan, including an aggregate of approximately 1.6 million shares of our common stock that may be issued, at our option, upon exchange of an aggregate of approximately 1.6 million common units that, subject to the satisfaction of certain conditions, are issuable upon conversion of an aggregate of approximately 1.6 million LTIP units to be granted to our executive officers and certain of our employees concurrently with the completion of this offering; and

 

  (ii) an aggregate of approximately 9,836 restricted stock units to be granted to directors who are not employees of our company, our subsidiaries or the Sponsors upon completion of this offering (assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus).

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

IMC was formed by IMC LP on June 27, 2014 as a Maryland corporation in anticipation of this offering. IMC was formed to operate as a REIT and to succeed in the ownership of the properties and businesses conducted by the wholly-owned subsidiaries of IMC LP: IHFC REIT, LLC, Market Square REIT, LLC, Showplace REIT, LLC, IMC LV REIT, LLC and IMC Manager, LLC, which managed the day-to-day operations of the Predecessor REIT Subsidiaries. On August 15, 2014, through a series of transactions, IMC LP caused each of the Predecessor REIT Subsidiaries to merge into IMC, with IMC surviving the merger, and IMC LP continuing as IMC’s sole common stockholder. IMC also caused a wholly-owned subsidiary of IMC to merge with and into IMC Manager, LLC, with IMC Manager, LLC surviving the merger as a subsidiary of IMC, and the interests of IMC LP in IMC Manager, LLC being canceled. Additionally, IMC caused certain of its wholly-owned TRSs to merge with and into IMC TRS, LLC. These transactions were consummated as mergers among subsidiaries of a common parent without consideration. Immediately following these mergers, IMC contributed substantially all of its assets to the Operating Partnership, its wholly-owned subsidiary.

The unaudited pro forma consolidated balance sheet is derived from our consolidated balance sheet included elsewhere in this prospectus and reflects the pro forma financial condition of our company after giving effect to the completion of this offering and the use of proceeds therefrom. The unaudited pro forma consolidated statements of operations are derived from our consolidated statements of operations included elsewhere in this prospectus and reflect the pro forma results of operations of our company after giving effect to (i) the Restructuring Transactions and the Refinancing Transactions, which were consummated on August 15, 2014 in connection with this offering, and (ii) the completion of this offering and the use of proceeds therefrom (as described below). The pro forma adjustments associated with these transactions assume that each transaction was completed as of March 31, 2015 for purposes of the unaudited pro forma consolidated balance sheet and as of January 1, 2014 for purposes of the unaudited pro forma consolidated statements of operations.

Our pro forma consolidated financial statements are presented for informational purposes only and are based on information and assumptions that we consider appropriate and reasonable. These pro forma consolidated financial statements do not purport to (i) represent our financial position had this offering and the use of proceeds therefrom, described in these pro forma consolidated financial statements, occurred on March 31, 2015, (ii) represent the results of our operations had this offering, and the other transactions described in these pro forma consolidated financial statements, occurred on January 1, 2014 or (iii) project or forecast our financial position or results of operations as of any future date or for any future period, as applicable.

You should read our pro forma consolidated financial information along with all other financial information and analysis presented in this prospectus, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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International Market Centers, Inc.

Unaudited Pro Forma Consolidated Balance Sheet

As of March 31, 2015

 

          Pro Forma
Adjustments
             
    March 31,
2015

Actual
    Offering of
Common Stock(1)
          March 31,
2015

Pro Forma
 
    (in thousands)  

Assets

       

Rental properties:

       

Land and land improvements

  $ 75,328      $ —          $ 75,328   

Buildings and building improvements

    660,711        —            660,711   

Tenant improvements

    36,976        —            36,976   

Furniture, fixtures and equipment

    18,780        —            18,780   
 

 

 

   

 

 

     

 

 

 
  791,795      —        791,795   

Less: Accumulated depreciation

  (113,314   —        (113,314
 

 

 

   

 

 

     

 

 

 

Net investment in rental properties

  678,481      —        678,481   

Cash

  8,129      (2,191   a,b,c      5,938   

Restricted cash

  4,372      —        4,372   

Accounts receivable, net

  9,710      —        9,710   

Straight-line rents receivable, net

  13,183      —        13,183   

Notes receivable, net

  5,499      —        5,499   

Deferred leasing costs, net

  8,699      —        8,699   

Deferred financing costs, net

  8,784      (2,118   b      6,666   

Intangible assets, net

  24,058      —        24,058   

Goodwill

  4,152      —        4,152   

Prepaid expenses and other assets

  8,420      (4,547   a      3,873   
 

 

 

   

 

 

     

 

 

 

Total assets

$ 773,487    $ (8,856 $ 764,631   
 

 

 

   

 

 

     

 

 

 

Liabilities

Long-term debt, net

$ 542,925    $ (122,531   b    $ 420,394   

Accounts payable and accrued expenses

  15,990      (4,328   a,b      11,662   

Taxes payable

  383      —        383   

Prepaid rent

  3,422      —        3,422   

Unearned rent

  12,199      —        12,199   

Tenant security deposits

  5,234      —        5,234   

Below market leases, net

  1,993      —        1,993   

Deferred tax liabilities, net

  1,810      —        1,810   

Other liabilities

  6,291      (4   c      6,287   
 

 

 

   

 

 

     

 

 

 

Total liabilities

  590,247      (126,863   463,384   
 

 

 

   

 

 

     

 

 

 

Stockholders’ Equity

Preferred stock

  —        —        —     

Common stock

  381      115      a      496   

Additional paid-in capital

  192,847      128,066      a,b,c      320,913   

Accumulated deficit

  (9,988   (10,174   b      (20,162
 

 

 

   

 

 

     

 

 

 

Total stockholders’ equity

  183,240      118,007      301,247   
 

 

 

   

 

 

     

 

 

 

Total liabilities and stockholders’ equity

$ 773,487    $ (8,856 $ 764,631   
 

 

 

   

 

 

     

 

 

 

See accompanying notes to unaudited pro forma consolidated financial information.

 

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International Market Centers, Inc.

Unaudited Pro Forma Consolidated Statement of Operations

For the Three Months Ended March 31, 2015

 

          

 

   Pro Forma Adjustments        
     Actual          Offering of
Common Stock (2)
          Pro Forma Total  
     (in thousands, except per share data)  

Revenues

           

Base rents

   $ 33,893         $         —          $ 33,893   

Recoveries from tenants

     1,789           —            1,789   

Tradeshow license fees

     2,632           —            2,632   

Sponsorships, publications and other income

     3,765           —            3,765   
  

 

 

      

 

 

     

 

 

 

Total revenues

  42,079      —        42,079   
  

 

 

      

 

 

     

 

 

 

Expenses

Real estate taxes and insurance

  2,703      —        2,703   

Utilities

  2,696      —        2,696   

Building operations

  3,587      —        3,587   

Market operations

  7,534      —        7,534   

General and administrative

  6,553      (1,000   b      5,553   

Depreciation and amortization

  12,469      —        12,469   
  

 

 

      

 

 

     

 

 

 

Total expenses

  35,542      (1,000   34,542   
  

 

 

      

 

 

     

 

 

 

Other (Expenses) Income

Interest expense

  (8,857   2,861      a      (5,996

Interest and other investment income

  178      —        178   
  

 

 

      

 

 

     

 

 

 

Total other expenses

  (8,679   2,861      (5,818
  

 

 

      

 

 

     

 

 

 

(Loss) income before income taxes

  (2,142   3,861      1,719   

Provision for income taxes

  1,078      —        1,078   
  

 

 

      

 

 

     

 

 

 

Net (loss) income

  (3,220   3,861      641   

Preferred share dividends

  4      (4   c      —     
  

 

 

      

 

 

     

 

 

 

Net (loss) income attributable to common stockholders

$ (3,224 $ 3,865    $ 641   
  

 

 

      

 

 

     

 

 

 

Net loss per share attributable to common stockholders:

Basic and diluted

$ (0.08
  

 

 

          

Weighted average common shares outstanding:

Basic and diluted

  38,100   
  

 

 

          

Pro forma net income per share attributable to common stockholders:

Basic and diluted

$ 0.01   
           

 

 

 

Pro forma weighted average common shares outstanding(5):

Basic and diluted

  11,500      (5   49,600   
    

 

  

 

 

     

 

 

 

See accompanying notes to unaudited pro forma consolidated financial information.

 

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International Market Centers, Inc.

Unaudited Pro Forma Consolidated Statement of Operations

For the Year Ended December 31, 2014

 

          Pro Forma Adjustments        
    Actual     Restructuring
Transactions and
Refinancing
Transactions (3)
          Offering of
Common Stock
(4)
          Pro Forma Total  
    (in thousands, except per share data)  

Revenues

           

Base rents

  $ 125,432      $         —          $         —          $ 125,432   

Recoveries from tenants

    9,516        —            —            9,516   

Tradeshow license fees

    15,405        —            —            15,405   

Sponsorships, publications and other income

    12,448        —            —            12,448   
 

 

 

   

 

 

     

 

 

     

 

 

 

Total revenues

  162,801      —        —        162,801   
 

 

 

   

 

 

     

 

 

     

 

 

 

Expenses

Real estate taxes and insurance

  10,563      —        —        10,563   

Utilities

  12,009      —        —        12,009   

Building operations

  12,996      —        —        12,996   

Market operations

  24,861      —        —        24,861   

General and administrative

  29,410      —        (4,000   b      25,410   

Depreciation and amortization

  51,842      —        —        51,842   
 

 

 

   

 

 

     

 

 

     

 

 

 

Total expenses

  141,681      —        (4,000   137,681   
 

 

 

   

 

 

     

 

 

     

 

 

 

Other (Expenses) Income

Interest expense

  (34,080   (1,268   a      11,607      a      (23,741

Interest and other investment income

  712      —        —        712   

Loss on extinguishment of debt

  (12,533   12,533      c      —        —     
 

 

 

   

 

 

     

 

 

     

 

 

 

Total other expenses

  (45,901   11,265      11,607      (23,029
 

 

 

   

 

 

     

 

 

     

 

 

 

(Loss) income before income taxes

  (24,781   11,265      15,607      2,091   

Provision for income taxes

  4,770      —        —        4,770   
 

 

 

   

 

 

     

 

 

     

 

 

 

Net loss

  (29,551   11,265      15,607      (2,679

Preferred share dividends

  53      (37   b      (16   c      —     
 

 

 

   

 

 

     

 

 

     

 

 

 

Net loss attributable to common stockholders

$ (29,604 $ 11,302    $ 15,623    $ (2,679
 

 

 

   

 

 

     

 

 

     

 

 

 

Net loss per share attributable to common stockholders:

Basic and diluted

$ (0.78
 

 

 

           

Weighted average common shares outstanding:

Basic and diluted

  38,100   
 

 

 

           

Pro forma net loss per share attributable to common stockholders:

Basic and diluted

$ (0.05
           

 

 

 

Pro forma weighted average common shares outstanding(5):

Basic and diluted

  11,500      (5   49,600   
       

 

 

     

 

 

 

See accompanying notes to unaudited pro forma consolidated financial information.

 

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Notes to Unaudited Pro Forma Consolidated Financial Statements (in thousands, except per share data)

A. Basis of Presentation

The accompanying unaudited pro forma consolidated statement of operations for the year ended December 31, 2014 is presented to reflect the following:

 

    Restructuring Transactions

On August 15, 2014, preferred shares held by investors in IHFC REIT, LLC, Market Square REIT, LLC and Showplace REIT, LLC were each redeemed for $125, for a total of $375 in cash paid to these investors upon redemption. The preferred shares of IMC LV REIT, LLC with a redemption value of $125 were exchanged for preferred shares in IMC on a one-for-one as converted basis on the same date.

 

    Refinancing Transactions

On August 15, 2014, our Operating Partnership entered into senior secured credit facilities, which are comprised of a $405,000 first lien term loan facility, a $50,000 first lien revolving credit facility and a $125,000 second lien term loan facility. The first lien revolving credit facility was undrawn at the closing of such transaction. The proceeds from the first lien term loan facility and the second lien term loan facility, together with cash on hand, were used to repay all of the outstanding borrowings under, and terminate, the existing mortgage notes payable balance as of August 15, 2014.

The accompanying unaudited pro forma consolidated statements of operations and balance sheet are presented to reflect the following:

 

    Offering and Use of Proceeds

We estimate that we will receive net proceeds from this offering of approximately $132,309 (or approximately $153,220 if the underwriters exercise their option to purchase up to 1,725 additional shares in full), assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We expect that net proceeds of this offering will be contributed by us to our Operating Partnership in exchange for partnership units. We expect that our Operating Partnership will use the net proceeds from this offering together with cash on hand: (i) to pay approximately $125,000 of principal and $456 of interest to terminate our second lien term loan facility and approximately $1,250 of prepayment fees in connection therewith; and (ii) to distribute an aggregate of $9,340 to IMC LP (x) to pay aggregate fees of $5,337 to Bain Capital and Oaktree in connection with the termination of the advisory agreement among IMC LP and Bain Capital and Oaktree and (y) to make a concurrent distribution equal to $4,003 to a minority limited partner of IMC LP required to be made under the limited partnership agreement of IMC LP upon payment of fees under the advisory agreement.

The unaudited pro forma consolidated balance sheet assumes the transactions described above occurred on March 31, 2015. The unaudited pro forma consolidated statements of operations assume the transactions described above occurred on January 1, 2014. The unaudited pro forma consolidated balance sheet is presented for illustrative purposes only and is not necessarily indicative of what the actual financial position would have been had the transactions referred to above occurred on March 31, 2015, nor does it purport to represent our future financial position. The unaudited pro forma consolidated statements of operations are presented for illustrative purposes only and are not necessarily indicative of what the actual results of operations would have been had the transactions referred to above occurred on January 1, 2014, nor do they purport to represent our future results of operations. In the opinion of management, all material adjustments have been made to reflect the effects of transactions referred to above.

 

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B. Pro Forma Adjustments to the Unaudited Pro Forma Consolidated Balance Sheet

 

  (1a) Reflects the issuance of shares of common stock in this offering, assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

Estimated gross proceeds from the sale of 11,500 shares of common stock assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus

$ 149,500   

Less: the underwriters’ discounts and commissions and estimated offering expenses(i)

  (17,191
  

 

 

 

Estimated net cash proceeds from the offering our common stock hereby

$ 132,309   
  

 

 

 

 

  (i) Represents estimated underwriters’ fees, legal and other offering costs incurred prior to and at closing of the offering of which $4,547 was recorded in prepaid expenses and other assets and $2,872 was recorded in accounts payable and accrued expenses as of March 31, 2015.

 

  (1b) Reflects the cash payment to reflect the use of the net proceeds from this offering, together with cash on hand, by our Operating Partnership to (i) pay approximately $125,000 of principal and $456 of interest to terminate our second lien term loan facility and approximately $1,250 of prepayment fees in connection therewith, and (ii) distribute an aggregate of $9,340 to IMC LP (x) to pay aggregate fees of $5,337 to Bain Capital and Oaktree in connection with the termination of the advisory agreement among IMC LP and Bain Capital and Oaktree ($1,000 of which was recorded in accounts payable and accrued expenses as of March 31, 2015) and (y) to make a concurrent distribution equal to $4,003 to a minority limited partner of IMC LP required to be made under the limited partnership agreement of IMC LP upon payment of fees under the advisory agreement. Also reflects the write-off of the unamortized balance of deferred financing costs of $2,118 and original issue discount of $2,469 related to the second lien term loan facility.

 

  (1c) Reflects the redemption of the preferred shares held by investors in the company as follows:

 

    a decrease of $125 to additional paid-in capital to reflect the removal of the aggregate redemption value of the preferred shares;

 

    a decrease of $4 to other liabilities to reflect the payment of accrued preferred share dividends; and

 

    a decrease to cash of $129 to reflect the net cash paid to investors upon the preferred share redemption.

C. Pro Forma Adjustments to the Unaudited Pro Forma Consolidated Statements of Operations

 

  (2a) Reflects an adjustment for the three months ended March 31, 2015 to reduce interest expense by $2,861 to eliminate interest expense related to the second lien term loan facility that will be terminated with the net proceeds from this offering.

 

  (2b) Reflects an adjustment for the three months ended March 31, 2015 of $1,000 to eliminate the Sponsor fee expenses from general and administrative expense as the advisory agreement will be terminated upon the completion of this offering.

 

  (2c) Reflects an adjustment for the three months ended March 31, 2015 to reduce preferred share dividends by $4 to eliminate dividends associated with the preferred shares held by investors in IMC, which will be redeemed concurrent with the consummation of this offering.

 

  (3a)

Reflects an adjustment for the year ended December 31, 2014 of $21,937 for the interest expense associated with the senior secured credit facilities. The senior secured first lien term loan facility bears interest, at our

 

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  option, at an adjusted LIBOR (with a 1.00% floor), plus 4.25% per annum or an alternative base rate plus 3.25% per annum. The senior secured second lien term loan facility bears interest, at our option, at an adjusted LIBOR (with a 1.00% floor), plus 7.75% per annum or an alternative base rate plus 6.75% per annum. The first lien revolving credit facility incurs a fee on the unused commitments of the lenders based on our net leverage ratio, which ranges from 0.25% to 0.50% per annum. To calculate the interest adjustment for the senior secured credit facilities we used 5.25%, 8.75%, and 0.50% for the senior secured first lien term loan facility, the senior secured second lien term loan facility, and the undrawn balance of the senior secured revolving credit facility, respectively, which are the interest rates in effect as of the date of this prospectus and were the interest rates applicable on the date the senior secured credit facilities were closed. A  18th percent increase in these rates would result in an increase to the above noted interest expense of approximately $676. Also reflects an adjustment to reduce interest expense by $20,669 to eliminate historical interest expense related to our mortgage notes that were terminated on August 15, 2014.

 

  (3b) Reflects an adjustment for the year ended December 31, 2014 to reduce preferred share dividends by $37 to eliminate dividends associated with the preferred shares held by investors in IHFC REIT, LLC, Market Square REIT, LLC and Showplace REIT, LLC, which were each redeemed concurrent with the Restructuring Transactions.

 

  (3c) Reflects an adjustment for the year ended December 31, 2014 to remove the one-time charge of $12,533 for loss on extinguishment of debt (including $4,652 of early prepayment fees) related to the settlement of mortgage notes payable using the proceeds from our senior secured credit facilities.

 

  (4a) Reflects an adjustment for the year ended December 31, 2014 to reduce interest expense by $11,607 to eliminate interest expense related to the second lien term loan facility that will be terminated with the net proceeds from this offering.

 

  (4b) Reflects an adjustment for the year ended December 31, 2014 of $4,000 to eliminate the Sponsor fee expenses from general and administrative expense as the advisory agreement will be terminated upon the completion of this offering.

 

  (4c) Reflects an adjustment for the year ended December 31, 2014 to reduce preferred share dividends by $16 to eliminate dividends associated with the preferred shares held by investors in IMC, which will be redeemed concurrent with the consummation of this offering.

There are no pro forma income tax effects to the pro forma adjustments 2a, 3a and 4a described above as the long-term debt is held, and related interest expense is incurred, by the Operating Partnership, which is not subject to U.S. federal income tax.

 

  (5) The weighted average shares outstanding used to compute basic and diluted net loss per share for the three months ended March 31, 2015 and the year ended December 31, 2014 have been adjusted to give effect to the issuance of 11,500 shares in this offering, which net proceeds will be used to (i) pay $125,000 of principal and $456 of interest to terminate the second lien term loan facility, and $1,250 of prepayment fees in connection therewith; and (ii) distribute $9,340 in aggregate to IMC LP, in each case, as if such termination and distribution had occurred on January 1, 2014.

The unaudited pro forma consolidated statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2014 do not reflect one-time charges to pay aggregate fees of $5,337 to terminate the advisory agreement with Bain Capital and Oaktree and for the loss on extinguishment of debt of $5,837 related to the payment of approximately $125,456 of principal and interest to terminate the second lien term loan facility.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The selected historical consolidated financial and operating data set forth below as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical consolidated financial and operating data set forth below as of March 31, 2015 and for the three months ended March 31, 2015 and 2014 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus.

Since the information presented below is only a summary and does not provide all of the information contained in our consolidated financial statements, including the related notes, you should read it together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the related notes, which are included elsewhere in this prospectus.

 

(in thousands, except per share data)   Three Months Ended
March 31,
    Years Ended December 31,  
    2015     2014     2014     2013     2012  

Statement of Operations Data:

         

Revenues

         

Base rents

  $ 33,893      $ 30,193      $ 125,432      $ 114,944      $ 94,822   

Recoveries from tenants

    1,789        2,795        9,516        11,841        18,200   

Tradeshow license fees

    2,632        2,636        15,405        13,441        15,061   

Sponsorships, publications and other income

    3,765        3,637        12,448        10,350        10,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  42,079      39,261      162,801      150,576      138,569   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

Real estate taxes and insurance

  2,703      2,645      10,563      10,806      11,673   

Utilities

  2,696      2,932      12,009      11,504      9,883   

Building operations

  3,587      3,464      12,996      11,900      13,821   

Market operations

  7,534      7,353      24,861      24,684      20,687   

General and administrative

  6,553      6,753      29,410      26,893      36,426   

Depreciation and amortization

  12,469      13,106      51,842      61,706      76,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  35,542      36,253      141,681      147,493      169,181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expenses) income

Interest expense

  (8,857   (8,121   (34,080   (33,131   (32,428

Interest and other investment income

  178      179      712      757      728   

Loss on extinguishment of debt

  —        —        (12,533   —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

  (8,679   (7,942   (45,901   (32,374   (31,700
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  (2,142   (4,934   (24,781   (29,291   (62,312

Provision for income taxes

  1,078      1,200      4,770      3,550      1,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  (3,220   (6,134   (29,551   (32,841   (63,388

Preferred share dividends

  4      19      53      75      70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders/members

$ (3,224 )  $ (6,153 )  $ (29,604 $ (32,916 $ (63,458
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(1)

$ (0.08 $ (0.16 $ (0.78 $ (0.86 $ (1.67

Weighted average common shares outstanding, basic and diluted(1)

  38,100      38,100      38,100      38,100      38,100   

Cash Flows (Used in) Provided By:

Operating activities

$ (3,667 $ 4,125    $ 27,931    $ 39,205    $ 36,940   

Investing activities

  (17,358   (2,360   7,755      (28,561   (23,132

Financing activities

  4,977      (7,334   (34,444   (14,949   (5,504

Balance Sheet Data (at period end):

Net investment in rental properties

$ 678,481    $ 673,142    $ 684,583   

Cash

  8,129      24,177      22,935   

Total assets

  773,487      788,612      839,341   

Long-term debt, net

  542,925      533,680      526,228   

Total liabilities

  590,247      599,279      589,054   

Total equity

  183,240      189,333      250,287   

 

(1) See Note 2 to our consolidated financial statements included elsewhere in this prospectus for further details on the calculation of basic and diluted net loss per share attributable to common stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis is based upon, and should be read in conjunction with our unaudited consolidated financial statements and notes thereto as of March 31, 2015 and the audited consolidated historical financial statements and related notes thereto as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012, each included elsewhere in this prospectus. Where appropriate, the following discussion includes analysis of the effects of the Restructuring Transactions, the Refinancing Transactions and this offering. Those effects are reflected in the unaudited pro forma consolidated financial statements included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve numerous risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. The forward-looking statements are subject to a number of important factors, including those factors discussed under “Risk Factors” and “Forward-Looking Statements,” that could cause our actual results to differ materially from the results described herein or implied by such forward-looking statements.

Company Overview and Trends

Our company, which is structured as an internally-managed REIT, is the largest owner and operator of permanent business-to-business showroom space in North America for the home furniture industry and one of the largest owners and operators of permanent business-to-business showroom space for the home décor and gift industries. We own approximately 12.1 million gross square feet (10.0 million rentable square feet) of premier showroom space across 14 buildings in High Point, North Carolina and three buildings and three exhibition pavilions in Las Vegas, Nevada. Approximately 9.4 million rentable square feet of such showroom space is permanent showroom space and approximately 0.6 million rentable square feet is temporary showroom space. Our showrooms are leased by manufacturers and suppliers of home furniture (such as living room, dining room, and home office furniture, bedroom furniture and mattresses), home décor products (such as rugs, lighting, wall art, pillows and bedding) and gift products (such as candles, stationery, floral, holiday and seasonal items and toys). We host two Markets per year at each of our Properties.

Our business model is primarily based on generating long-term lease revenues from tenants consisting of a wide array of manufacturers and suppliers of home furniture, home décor products and gift products. Our current portfolio of long-term leases has a weighted average term (based on revenue) of approximately 4.5 years with weighted average annual rent escalators of 3.6% on the remaining term. Multi-year leases generate stable and predictable revenues and approximately 83% of our 2014 revenue was generated from rent payments under such leases. Approximately 9% of our 2014 revenue was generated via short-term leases (including temporary space), and the remaining 8% from advertising revenue and ancillary tenant services, such as movement of our tenants’ products into and out of their showroom spaces and other related logistics services.

We believe we can grow revenues through rental rate increases in High Point where occupancy percentages are expected to be relatively steady at approximately 87%. Average rental rates at our High Point Property increased from $13.50 per square foot as of January 1, 2012 to $15.84 per square foot as of March 31, 2015. This increase has been driven by a 6.7% average re-leasing spread with respect to lease agreements that expired each year during this 39-month period. These lease agreements accounted on average for approximately 29% of our square footage during that period. For the year 2015, 0.9 million rentable square feet of leases expire at the High Point Property at an average annualized contract rental rate of $14.24 per rentable square foot. For the year 2014, 1.7 million rentable square feet of renewed, new or amended leases were entered into for the High Point Property at an average starting rental rate of $16.90 per rentable square foot per annum. For the year 2015, 1.1 million rentable square feet of leases expire at the Las Vegas Property at an average annualized contract rental rate of $20.54 per rentable square foot. For the year 2014, 1.3 million rentable square feet of renewed, new or amended leases were entered into for the Las Vegas Property at an average starting rental rate of $23.28 per rentable square foot per annum. For information regarding lease expirations for leases in place as of December 31, 2014, for the years 2015 through 2024 and thereafter, see “Business—Lease Expirations.”

 

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In Las Vegas, we believe we can generate revenue growth through an increase in occupancy and from contractual rent escalators. Our occupancy for home furniture permanent space has increased approximately 40% from approximately 1.5 million square feet on January 1, 2012 to 2.1 million square feet on March 31, 2015. Additionally, we have increased the occupancy of the home décor and gift exhibitor space from approximately 0.8 million occupied square feet as of January 1, 2012 to approximately 1.3 million occupied square feet for our Market in January 2015; and increased home décor and gift buyer attendance 111% from the Market in January 2012 to our Market in January 2015, due to the increase in the number of tenants in our Properties and to direct marketing efforts.

The majority of our cost base is fixed. Although expenses are not expected to increase significantly in order to achieve our growth objectives, we anticipate certain incremental, recurring general and administrative expenses, including legal, accounting and other expenses related to corporate governance and the Securities and Exchange Commission (the “SEC”) reporting as a result of this offering. We believe our scalable cost structure and low capital expenditures position us well for future earnings and cash flow growth.

Restructuring Transactions

We are a Maryland corporation that was formed by IMC LP in anticipation of this offering to operate as a REIT and to succeed in the ownership of the properties and businesses conducted by the Predecessor REIT Subsidiaries and IMC Manager, LLC, which managed the day-to-day operations of the Predecessor REIT Subsidiaries and its subsidiaries.

On August 15, 2014, through a series of transactions, IMC LP caused each of the Predecessor REIT Subsidiaries to merge into IMC, with IMC surviving the merger, and IMC LP continuing as IMC’s sole common stockholder. IMC also caused a wholly-owned subsidiary of IMC to merge with and into IMC Manager, LLC, with IMC Manager, LLC surviving the merger as a subsidiary of IMC, and the interests of IMC LP in IMC Manager, LLC being canceled. Additionally, IMC caused certain of its wholly-owned TRSs to merge with and into IMC TRS, LLC. These transactions were consummated as mergers among subsidiaries of a common parent without consideration. Following the mergers, the Predecessor REIT Subsidiaries ceased to exist and IMC succeeded in the ownership of the properties and businesses that had been operated by the Predecessor REIT Subsidiaries. Until the consummation of this offering, IMC LP will continue to be IMC’s sole common stockholder. Each of the four Predecessor REIT Subsidiaries had been operated as a REIT for U.S. federal income tax purposes and IMC is expected to be treated for U.S. federal income tax purposes as the successor to these entities. IMC Manager, LLC has elected to be treated as a corporation for U.S. federal income tax purposes and has elected to be treated as a TRS. We have elected to qualify to be taxed as a REIT for U.S. federal income tax purposes and expect to continue to operate in a manner that will allow us to continue to be classified as such.

Immediately following these mergers and contribution, we contributed substantially all of our assets to our Operating Partnership through which we now conduct our operations. Pursuant to the agreement of limited partnership of the Operating Partnership, IMC OP GP, LLC, our direct, wholly-owned subsidiary, serves as the sole general partner of the Operating Partnership, and we are the sole initial limited partner.

Recent Developments

On January 16, 2015, we acquired the C&D Building, a furniture showroom building in High Point, North Carolina, for an aggregate purchase price of $11.3 million (including $0.2 million in cash acquired) funded with available cash on hand. The C&D Building has approximately 0.3 million gross square feet, of which 0.2 million is rentable square feet. All existing tenant leases were assigned and assumed by IMC at the closing of the acquisition.

 

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Factors Affecting Our Results of Operations

Our earnings and cash flow are primarily derived from leased showroom space revenue at our Properties. Key factors that affect our business and financial results include the following:

 

    general economic climate;

 

    occupancy rates;

 

    rental rates;

 

    tenant improvement;

 

    leasing costs incurred to obtain and retain tenants;

 

    tenants’ ability to pay rents;

 

    early lease terminations;

 

    operating expenses; and

 

    cost of capital.

Any negative change in the above key factors could potentially cause a decrease in our revenues and earnings. Such negative changes could include: (1) failure to renew or execute new leases as current leases expire; (2) failure to renew or execute new leases with rental rates at or above the rental rates of current leases; and (3) tenant defaults.

A failure to renew or execute new leases as current leases expire or to execute new leases with rental terms at or above the rental rates of current leases may be affected by several factors such as the local economic climate, which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors.

Significant Components of Our Results of Operations

Revenues

Base Rents

Base rents represent rental payments made to us by our tenants under existing leases. These include leases that we enter into directly with our tenants that typically range from three to five years. We strategically offer abated rent or other concessions in connection with leasing our Properties. These rents and rent concessions are recognized on a straight-line basis over the terms of the respective leases. Revenue is also adjusted by the amortization of above and below market leases associated with the original purchase accounting.

Recoveries from Tenants

Recoveries from tenants are payments made by tenants to us to cover certain estimated costs as provided in certain of our lease agreements. These estimated costs generally include real estate taxes, utilities, insurance, common area maintenance and other costs. We collect payments for these estimated costs and are reimbursed by our tenants for any actual costs that are in excess of our estimated costs or reimburse tenants if our collected estimated costs exceed our actual operating costs. We expect this revenue to decline as we enter into more lease agreements that are full-service gross lease arrangements.

Tradeshow License Fees

Tradeshow license fees are fees paid to us pursuant to short-term exhibitor license agreements for our temporary space, which is leased to new tenants who may initially lease space for a single Market before deciding whether to rent showroom space on a longer term lease.

 

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Also, two of our showroom properties in High Point feature dedicated temporary space that we believe is unique in High Point and serves as an incubator for new tenants who may initially lease space for a single Market before deciding whether to rent showroom space on a long term basis.

Sponsorships, Publications and Other Income

Sponsorships and publications revenue is derived from advertising agreements entered into with certain of our customers and exhibitors. These advertising agreements provide that we include certain of our customers’ and exhibitors’ information in preview guides and market guides and on indoor and outdoor signage for a sponsorship fee. Other income includes revenues generated from tenant use of loading docks and materials, off-market special events offering banquet services and use of our facilities, and other tenant and market related revenues.

Expenses

Real Estate Taxes and Insurance Expenses

Real estate taxes and insurance expenses include property taxes and insurance premiums associated with ownership of our properties.

Utilities Expenses

Utility expenses include electric, gas, water, trash and sewer costs associated with operating our properties.

Building Operations Expenses

Building operations expenses include payroll, benefits and operating costs for the leasing, security, facilities and janitorial departments, routine maintenance and repairs and other property-related expenses.

Market Operations Expenses

Market operations expenses include costs attributable to hosting and increasing attendance at our Markets, such as Market production costs, shipping and receiving, catering, transportation, email deployment, print and media advertising, mailers, Market attendee incentives and sponsorship and publications for showrooms, as well as the related payroll and benefits of the departments providing these services.

General and Administrative Expenses

General and administrative expenses include payroll, including incentive unit compensation and benefits for the accounting, finance, information technology, human resources and legal departments, as well as travel and entertainment, professional fees, advisory fees, bank charges, franchise taxes and various other administrative costs.

Depreciation and Amortization

We incur depreciation expense on our long-lived assets and amortization expense of intangible assets associated with the acquisitions of the various properties in 2011 and 2015. Additionally, we incur amortization expense on other intangible assets, including deferred leasing costs and internal use software.

Interest Expense

We recognize costs incurred on our borrowings as interest expense. We also recognize as interest expense certain loan origination costs and discounts amortized over the term of the respective debt instrument for which the costs were incurred using the effective interest method.

 

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Interest and Other Investment Income

Our interest income primarily consists of the amortization of a discount on our tax incremental financing agreements (“TIF Notes”) with the City of Las Vegas Redevelopment Agency. This interest income is recognized using the straight-line method over the terms of the TIF Notes.

Provision for Income Taxes

Each of the Predecessor REIT Subsidiaries elected to be treated as a REIT under Sections 856 through 860 of the Code. As a result, these Predecessor REIT Subsidiaries generally were not subject to federal or state income tax on their taxable income, provided that the Predecessor REIT Subsidiaries satisfied certain organizational and operational requirements including the requirement to distribute at least 90% of their annual taxable income. If a Predecessor REIT Subsidiary failed to qualify as a REIT in any taxable year, such Predecessor REIT Subsidiary would have been subject to federal and state income taxes on its taxable income at regular corporate tax rates.

We have elected to treat certain of our subsidiaries as TRSs. In general, a TRS may perform additional services for our tenants and generally may engage in any real estate or non-real estate related business. A TRS is subject to corporate federal and state income taxes. Accordingly, the only provision for federal and state income taxes in the consolidated financial statements relates to our TRS entities.

We have elected to qualify to be taxed as a REIT for U.S. federal income tax purposes and expect to continue to operate in a manner that will allow us to continue to be classified as such. We believe that our proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT.

 

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Results of Operations

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014 (in thousands, except square footage and per square foot data)

The following table summarizes our results of operations for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
             
     2015     2014     $ Change
Fav./(Unfav.)
    % Change
Fav./(Unfav.)
 
     (Unaudited)              

Revenues

        

Base rents

   $ 33,893      $ 30,193      $ 3,700        12.3

Recoveries from tenants

     1,789        2,795        (1,006     (36.0)

Tradeshow license fees

     2,632        2,636        (4     (0.2)

Sponsorships, publications and other income

     3,765        3,637        128        3.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  42,079      39,261      2,818      7.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

Real estate taxes and insurance

  2,703      2,645      (58   (2.2)

Utilities

  2,696      2,932      236      8.0

Building operations

  3,587      3,464      (123   (3.6)

Market operations

  7,534      7,353      (181   (2.5)

General and administrative

  6,553      6,753      200      3.0

Depreciation and amortization

  12,469      13,106      637      4.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  35,542      36,253      711      2.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expenses) income

Interest expense

  (8,857   (8,121   (736   (9.1)

Interest and other investment income

  178      179      (1   (0.6)
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

  (8,679   (7,942   (737   (9.3)
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

  (2,142   (4,934   2,792      56.6

Provision for income taxes

  1,078      1,200      122      10.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  (3,220   (6,134   2,914      47.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Preferred share dividends

  4      19      15      78.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss to common stockholders/members

$ (3,224 $ (6,153 $ 2,929      47.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Base rents revenues were $33,893 for the three months ended March 31, 2015 compared to $30,193 for the three months ended March 31, 2014, an increase of $3,700, or 12.3%. The improvement in base rents revenues was driven by an increase of $1,671 related to a rise in our overall average occupancy of approximately 398,000 square feet, which was mostly attributable to the addition of the C&D Building in our High Point Property in mid-January 2015 and the re-designation of 161,000 square feet of temporary space to permanent space in our Las Vegas Property; $894 from higher overall average base rental rates; an increase of $806 from the conversion of triple-net lease agreements to full-service gross lease agreements; and a net favorable change of $329 in non-cash rents related to the amortization of above- and below-market leases and straight-line recognition of rent. The C&D Building contributed $426 to base rents revenues during the three months ended March 31, 2015. The average effective rental rates in our High Point Property increased $0.29 per square foot period over period. The rental rate increase in our High Point Property resulted from an average re-leasing spread of 8.6% on expiring lease agreements that related to 3.6% of our rentable High Point Property average occupied square footage. Additionally, the conversion of triple-net lease agreements to full-service gross lease agreements typically results in a shift in revenue classification from recoveries from tenants to base rents.

 

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Recoveries from tenants revenues were $1,789 for the three months ended March 31, 2015 compared to $2,795 for the three months ended March 31, 2014, a decrease of $1,006, or 36.0%. The decrease was primarily due to the conversion of triple-net lease agreements to full-service gross lease agreements noted above.

Tradeshow license fees revenues were $2,632 for the three months ended March 31, 2015 compared to $2,636 for the three months ended March 31, 2014, a decrease of $4, or 0.2%.

Sponsorships, publications and other income revenues were $3,765 for the three months ended March 31, 2015 compared to $3,637 for the three months ended March 31, 2014, an increase of $128, or 3.5%. The improvement was attributable to an increase of $127 relating to housing and transportation commissions earned during the January 2015 Las Vegas Market.

Expenses

Real estate taxes and insurance expenses were $2,703 for the three months ended March 31, 2015 compared to $2,645 for the three months ended March 31, 2014, an increase of $58, or 2.2%. The increase resulted mostly from the additional real estate taxes associated with the C&D Building that was acquired on January 16, 2015.

Utilities expenses were $2,696 for the three months ended March 31, 2015 compared to $2,932 for the three months ended March 31, 2014, a decrease of $236, or 8.0%. The decrease was mostly due to a $180 reduction in electricity costs, which were higher than normal in 2014 from both above-average temperatures in Las Vegas and unusually cold conditions in High Point. Additionally, the Spring High Point Market is scheduled later in April in 2015 than in 2014, resulting in less showroom preparation activity by the tenants in March 2015 compared to March 2014.

Building operations expenses were $3,587 for the three months ended March 31, 2015 compared to $3,464 for the three months ended March 31, 2014, an increase of $123, or 3.6%. The rise in building operations expenses was primarily attributable to a $182 increase in the accretion of our High Point asset retirement obligation liability, offset slightly by $68 in reduced fire safety certification costs that were incurred in our Las Vegas Property in 2014.

Market operations expenses were $7,534 for the three months ended March 31, 2015 compared to $7,353 for the three months ended March 31, 2014, an increase of $181, or 2.5%. The period-over-period increase in market operations expenses was primarily attributable to an increase of $198 in marketing costs intended to drive key buyer attendance at our January 2015 Las Vegas Market, a $118 rise in signage expense and $82 in higher shuttle service costs, offset slightly by $189 in reduced drayage costs.

General and administrative expenses were $6,553 for the three months ended March 31, 2015 compared to $6,753 for the three months ended March 31, 2014, a decrease of $200, or 3.0%. The decline in general and administrative expenses was mostly attributable to a $307 decrease in bad debt expense from improvements in collection resources resulting in less tenant delinquencies, partially offset by an increase in professional fees of $132, which were mostly related to the equity offering.

Depreciation and amortization expense was $12,469 for the three months ended March 31, 2015 compared to $13,106 for the three months ended March 31, 2014, a decrease of $637, or 4.9%. The decrease was primarily due to the reduced amortization of intangible assets related to leases in place at the time of the 2011 acquisition and tenant relationships, partially offset by $497 in incremental depreciation and amortization expense related to the recently-acquired C&D Building.

Other (Expenses) Income

Interest expense was $8,857 for the three months ended March 31, 2015 compared to $8,121 for the three months ended March 31, 2014, an increase of $736, or 9.1%. The year-over-year increase is mostly due to a higher weighted average interest rate under the senior secured credit facilities as compared to the mortgage notes payable that were outstanding during the first quarter of 2014.

Interest and other investment income was $178 for the three months ended March 31, 2015 compared to $179 for the three months ended March 31, 2014, a decrease of $1, or 0.6%.

 

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Provision For Income Taxes

Provision for income taxes was $1,078 for the three months ended March 31, 2015 compared to $1,200 for the three months ended March 31, 2014, a decrease of $122, or 10.2%. The decrease was mostly attributable to higher non-deductible stock-based compensation expense recognized in the first quarter of 2014.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013 (in thousands, except square footage and per square foot data)

The following table summarizes our results of operations for the years ended December 31, 2014 and 2013:

 

     Years Ended
December 31,
        
     2014      2013      $ Change
Fav./(Unfav.)
     % Change
Fav./(Unfav.)
 

Revenues

           

Base rents

   $ 125,432       $ 114,944       $ 10,488         9.1

Recoveries from tenants

     9,516         11,841         (2,325      (19.6 %) 

Tradeshow license fees

     15,405         13,441         1,964         14.6

Sponsorships, publications and other income

     12,448         10,350         2,098         20.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

  162,801      150,576      12,225      8.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses

Real estate taxes and insurance

  10,563      10,806      243      2.2

Utilities

  12,009      11,504      (505   (4.4 %) 

Building operations

  12,996      11,900      (1,096   (9.2 %) 

Market operations

  24,861      24,684      (177   (0.7 %) 

General and administrative

  29,410      26,893      (2,517   (9.4 %) 

Depreciation and amortization

  51,842      61,706      9,864      16.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

  141,681      147,493      5,812      3.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Other (Expenses) Income

Interest expense

  (34,080   (33,131   (949   (2.9 %) 

Interest and other investment income

  712      757      (45   (5.9 %) 

Loss on extinguishment of debt

  (12,533   —        (12,533   NM   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expenses

  (45,901   (32,374   (13,527   (41.8 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

  (24,781   (29,291   4,510      15.4

Provision for income taxes

  4,770      3,550      (1,220   (34.4 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

  (29,551   (32,841   3,290      10.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Preferred share dividends

  53      75      22      29.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to common stockholders/members

$ (29,604 $ (32,916 $ 3,312      10.1
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NM - not meaningful

Revenues

Base rents revenues were $125,432 for the year ended December 31, 2014 compared to $114,944 for the year ended December 31, 2013, an increase of $10,488, or 9.1%. The improvement in base rents revenues was driven by an increase of $3,525 from higher overall average base rental rates, a net favorable change of $3,284 in non-cash rents related to the amortization of above- and below-market leases and straight-line recognition of rent, an increase of $2,487 from the conversion of triple-net lease agreements to full-service gross lease agreements and a $1,192 increase related to a rise in our overall average occupancy of approximately 74,000 square feet. The average effective rental rates in our High Point Property increased $1.05 per square foot year over year. The rental rate increase in our High Point Property resulted from an average re-leasing spread of 13.9% on expiring

 

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lease agreements that related to 30.7% of our rentable High Point Property average occupied square footage. Our average occupancy rate in our Las Vegas Property increased approximately 5.8 percentage points year over year, but the increase was partially offset by a 2.5% rental rate decline in our Las Vegas Property. Additionally, the conversion of triple-net lease agreements to full-service gross lease agreements typically results in a shift in revenue classification from recoveries from tenants to base rents.

Recoveries from tenants revenues were $9,516 for the year ended December 31, 2014 compared to $11,841 for the year ended December 31, 2013, a decrease of $2,325, or 19.6%. The decrease was primarily due to the conversion of triple-net lease agreements to full-service gross lease agreements noted above.

Tradeshow license fees revenues were $15,405 for the year ended December 31, 2014 compared to $13,441 for the year ended December 31, 2013, an increase of $1,964, or 14.6%. The increase was primarily due to our Properties’ year-over-year tradeshow rental rate increase of $2.23 per square foot.

Sponsorships, publications and other income revenues were $12,448 for the year ended December 31, 2014 compared to $10,350 for the year ended December 31, 2013, an increase of $2,098, or 20.3%. The improvement was mostly attributable to increases of $674 relating to tenants purchasing more sponsorship signage for the Markets, $508 in settlement income, $330 associated with lease termination fees charged to tenants and $182 resulting from an increase in special events held at our Properties.

Expenses

Real estate taxes and insurance expenses were $10,563 for the year ended December 31, 2014 compared to $10,806 for the year ended December 31, 2013, a decrease of $243, or 2.2%. The decrease resulted mostly from a tax re-assessment in the second half of 2013 that reduced the real estate tax rate at our Showplace buildings.

Utilities expenses were $12,009 for the year ended December 31, 2014 compared to $11,504 for the year ended December 31, 2013, an increase of $505, or 4.4%. The increase was mostly due to $401 in higher electricity costs primarily resulting from both above-average temperatures in Las Vegas during the first half of 2014 and unusually cold conditions in High Point during the first quarter of 2014.

Building operations expenses were $12,996 for the year ended December 31, 2014 compared to $11,900 for the year ended December 31, 2013, an increase of $1,096, or 9.2%. The increase was primarily attributable to increases in payroll of $367 and security of $173, as well as from an environmental obligation expense in 2014 of $262 related to soil monitoring at our High Point Properties.

Market operations expenses were $24,861 for the year ended December 31, 2014 compared to $24,684 for the year ended December 31, 2013, an increase of $177, or 0.7%.

General and administrative expenses were $29,410 for the year ended December 31, 2014 compared to $26,893 for the year ended December 31, 2013, an increase of $2,517, or 9.4%. The increase in general and administrative expenses was primarily due to $3,309 in non-capitalizable professional fees incurred during the year ended December 31, 2014 that related to the Restructuring Transactions and this offering. The year-over-year increase was partially offset by $739 in legal settlements that occurred during the year ended December 31, 2013.

Depreciation and amortization expense was $51,842 for the year ended December 31, 2014 compared to $61,706 for the year ended December 31, 2013, a decrease of $9,864, or 16.0%. The decrease was primarily due to the reduced amortization of intangible assets related to leases in place at the time of the 2011 acquisition and tenant relationships.

 

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Other (Expenses) Income

Interest expense was $34,080 for the year ended December 31, 2014 compared to $33,131 for the year ended December 31, 2013, an increase of $949, or 2.9%. The year-over-year increase is mostly due to a higher weighted-average interest rate under the senior secured credit facilities as compared to the mortgage notes payable that were outstanding for all of 2013.

Interest and other investment income was $712 for the year ended December 31, 2014 compared to $757 for the year ended December 31, 2013, a decrease of $45, or 5.9%.

For the year ended December 31, 2014, we incurred a $12,533 loss on the early extinguishment of debt resulting from the August 2014 termination and full repayment of our mortgage notes payable.

Provision For Income Taxes

Provision for income taxes was $4,770 for the year ended December 31, 2014 compared to $3,550 for the year ended December 31, 2013, an increase of $1,220, or 34.4%. The increase was mostly attributable to our TRS entities generating higher pre-tax income over the comparable prior-year period.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 (in thousands, except square footage and per square foot data)

The following table summarizes our results of operations for the years ended December 31, 2013 and 2012:

 

     Years Ended
December 31,
        
     2013      2012      $ Change
Fav./
(Unfav.)
     % Change
Fav./
(Unfav.)
 

Revenues

           

Base rents

   $ 114,944       $ 94,822       $ 20,122         21.2

Recoveries from tenants

     11,841         18,200         (6,359      (34.9 %) 

Tradeshow license fees

     13,441         15,061         (1,620      (10.8 %) 

Sponsorships, publications and other income

     10,350         10,486         (136      (1.3 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

  150,576      138,569      12,007      8.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses

Real estate taxes and insurance

  10,806      11,673      867      7.4

Utilities

  11,504      9,883      (1,621   (16.4 %) 

Building operations

  11,900      13,821      1,921      13.9

Market operations

  24,684      20,687      (3,997   (19.3 %) 

General and administrative

  26,893      36,426      9,533      26.2

Depreciation and amortization

  61,706      76,691      14,985      19.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

  147,493      169,181      21,688      12.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Other (Expenses) Income

Interest expense

  (33,131   (32,428   (703   (2.2 %) 

Interest and other investment income

  757      728      29      4.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other expenses

  (32,374   (31,700   (674   (2.1 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

  (29,291   (62,312   33,021      53.0

Provision for income taxes

  3,550      1,076      (2,474   (229.9 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

  (32,841   (63,388   30,547      48.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Preferred share dividends

  75      70      (5   (7.1 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss to common members

$ (32,916 $ (63,458 $ 30,542      48.1
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Revenues

Base rents revenues were $114,944 for the year ended December 31, 2013 compared to $94,822 for the year ended December 31, 2012, an increase of $20,122, or 21.2%. The increase was primarily due to higher average occupancy rates in our Las Vegas property, that were slightly offset by increased strategic rent abatements at our Las Vegas Property, the conversion of the triple-net lease agreements to full-service gross lease agreements and a net favorable change in non-cash rents related to the amortization of above- and below-market leases and straight-line recognition of rent. The Las Vegas Property home décor and gift leased square footage for the year ended December 31, 2013, increased approximately 185,000 square feet, or 20%, compared to the year ended December 31, 2012. Las Vegas Property average occupancy rate increased from 61% for the year ended December 31, 2012 to 72% for the year ended December 31, 2013. The increase in revenues resulting from an increase in average occupancy was partially offset by a decrease in average rental rate in our Las Vegas Property for the year ended December 31, 2013 compared to the year ended December 31, 2012. Rent abatements increased $2,264, from $1,986 for the year ended December 31, 2012, to $4,250 for the year ended December 31, 2013, which primarily resulted from us strategically offering rent abatements to tenants in the home décor and gift areas of our Las Vegas Property. Additionally, the conversion of triple-net lease agreements to full-service gross lease agreements typically results in a shift in revenue classification from recoveries from tenants to base rents.

Recoveries from tenants revenue were $11,841 for the year ended December 31, 2013 compared to $18,200 for the year ended December 31, 2012, a decrease of $6,359, or 34.9%. The decrease was primarily due to the conversion of triple-net lease agreements to full-service gross lease agreements which typically results in a shift in revenue classification from recoveries from tenants to base rents.

Tradeshow license fees revenues were $13,441 for the year ended December 31, 2013 compared to $15,061 for the year ended December 31, 2012, a decrease of $1,620, or 10.8%. The decrease was due to the conversion of temporary tenant lease agreements to long-term lease agreements that resulted in less temporary showroom space being available for temporary exhibitors as such space was being utilized by long-term tenants.

Sponsorships, publications and other income revenues were $10,350 for the year ended December 31, 2013 compared to $10,486 for the year ended December 31, 2012, a decrease of $136, or 1.3%.

Expenses

Real estate taxes and insurance expenses were $10,806 for the year ended December 31, 2013 compared to $11,673 for the year ended December 31, 2012, a decrease of $867, or 7.4%. The decrease was primarily due to a property assessment that reduced real estate taxes for the year ended December 31, 2013.

Utilities expenses were $11,504 for the year ended December 31, 2013 compared to $9,883 for the year ended December 31, 2012, an increase of $1,621, or 16.4%. The increase was primarily due to an increase in our average occupancy rate and utility rates resulting in higher electricity, gas and water costs of $1,444.

Building operations expenses were $11,900 for the year ended December 31, 2013 compared to $13,821 for the year ended December 31, 2012, a decrease of $1,921, or 13.9%. The decrease was primarily due to lower payroll expenses resulting from an increase in deferred leasing costs associated with a rise in our internal leasing team’s successful execution in leases.

Market operations expenses were $24,684 for the year ended December 31, 2013 compared to $20,687 for the year ended December 31, 2012, an increase of $3,997, or 19.3%. The increase was primarily due to a $1,874 increase in market production costs due to higher attendance and payroll increases of $1,490.

 

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General and administrative expenses were $26,893 for the year ended December 31, 2013 compared to $36,426 for the year ended December 31, 2012, a decrease of $9,533, or 26.2%. The decrease was primarily due to a $4,012 decline in professional fees that were incurred in 2012 as part of several projects to integrate the systems and companies acquired in 2011, a $1,751 decrease in bad debt from improvements in collection resources resulting in less tenant delinquencies, a $1,600 decrease in incentive unit compensation expense as a result of our graded-vesting model and a $1,401 decrease in payroll costs.

Depreciation and amortization expense was $61,706 for the year ended December 31, 2013 compared to $76,691 for the year ended December 31, 2012, a decrease of $14,985, or 19.5%. The decrease was due to tenant improvement disposals and a reduction in amortization of intangible assets related to leases in place at the time of the 2011 acquisition and tenant relationships.

Other (Expenses) Income

Interest expense was $33,131 for the year ended December 31, 2013 compared to $32,428 for the year ended December 31, 2012, an increase of $703, or 2.2%. The increase was primarily due to a scheduled interest rate increase on January 6, 2013, from 3.0% per annum to 5.5% per annum, pursuant to a mortgage on our Showplace property, resulting in $911 of additional interest expense, which was slightly offset by $240 in reduced interest expense from a reduction in our outstanding debt principal balance related to the IHFC mortgage note payable.

Interest and other investment income was $757 for the year ended December 31, 2013 compared to $728 for the year ended December 31, 2012, an increase of $29, or 4.0%.

Provision for Income Taxes

Provision for income taxes was $3,550 for the year ended December 31, 2013 compared to $1,076 for the year ended December 31, 2012, an increase of $2,474, or 229.9%. The increase was attributable to the higher pre-tax income generated by the TRSs that offer marketing and ancillary services related to our Markets.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, pay distributions and other general business needs. We believe our available cash balances, other financing arrangements and cash flows from operations will be sufficient to fund our liquidity requirements with respect to our existing Properties. We expect to raise capital in this offering and expect that our income will increase in future periods resulting from improving leasing spreads on expiring leases in our High Point Property and from increasing occupancy levels as we attempt to grow the Las Vegas Markets. Our cost structure is scalable and expenses will likely increase at a slower pace than revenues. We anticipate our total capital expenditures to be between $10,000 and $15,000 in a normal year. However, in 2015, we expect our total capital expenditures to exceed our normal annual range and be between $25,000 and $30,000. The elevated 2015 capital expenditure totals will be primarily attributable to non-routine capital maintenance projects at our High Point Property (including facade work, roof replacement and HVAC units replacement). Should our liquidity needs exceed our available sources of liquidity, we believe that we could sell assets to raise additional cash.

Our primary cash requirements are to:

 

    pay interest expenses and scheduled repayment of our indebtedness;

 

    pay our operating expenses, including general and administrative expenses;

 

    acquire and maintain property and equipment and internal use software; and

 

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    distribute a minimum of 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding net capital gain) and to make investments in a manner that enables us to maintain our qualification as a REIT.

We intend to meet these liquidity requirements primarily through:

 

    the use of our cash and cash equivalent balance of $8,129 as of March 31, 2015;

 

    cash generated from operating activities;

 

    proceeds from the sale of our common stock pursuant to this offering; and

 

    if required, proceeds from future borrowings and offerings.

Cash Flows

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014 (in thousands)

The following table summarizes our sources and uses of cash for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 
     2015     2014  

Net cash (used in) provided by operating activities

   $ (3,667   $ 4,125   

Net cash used in investing activities

     (17,358     (2,360

Net cash provided by (used in) financing activities

     4,977        (7,334

Net cash used in/provided by operating activities

Net cash from operating activities is primarily generated from operating income from our leasing activities. Net cash used in operating activities was $3,667 for the three months ended March 31, 2015 compared to net cash provided by operating activities of $4,125 for the three months ended March 31, 2014, a decrease of $7,792 or 188.9%. The decrease in cash from operating activities is primarily due to the following payments: (i) $4,000 related to accrued Sponsor advisory fees for the year ended December 31, 2014 which were paid during the three months ended March 31, 2015; (ii) $1,765 in increased cash paid for interest as a result of a higher weighted-average interest rate compared to the three months ended March 31, 2014; and (iii) a timing difference of $4,263 in real estate taxes paid during the three months ended March 31, 2015. These payments were partially offset by an increase of $2,039 in cash revenues primarily due to higher overall average base rental rates and a rise in our overall average occupancy at our Properties on a same-store basis and $450 in cash revenues contributed by the C&D Building since the date of acquisition during the three months ended March 31, 2015 when compared to the three months ended March 31, 2014.

Net cash used in investing activities

Our primary investing activities consist of capital expenditures. Net cash used in investing activities was $17,358 for the three months ended March 31, 2015 compared to $2,360 for the three months ended March 31, 2014, an increase of $14,998 or 635.5%. The increase was primarily due to our acquisition of the C&D Building in High Point, North Carolina, which totaled $11,082, net of $168 in cash acquired. Capital expenditures increased by $2,145 during the three months ended March 31, 2015 compared to the three months ended March 31, 2014. Capital expenditures during the three months ended March 31, 2015 primarily consisted of $2,545 in tenant improvements and $1,021 in recurring capital improvements at our Properties with the remaining $1,781 representing strategic capital expenditures relating to the continued re-merchandising of floors at the Las Vegas Property and the reconfiguration of the Las Vegas Property’s administrative offices. Capital expenditures during the three months ended March 31, 2014 primarily consisted of $1,400 in tenant improvements and $698 in recurring capital investments at our Properties with the remaining $1,104 representing

 

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strategic capital expenditures relating to the re-merchandising of floors at the Las Vegas Property. In addition, during the three months ended March 31, 2014, there was a release of restrictions of a portion of escrowed cash to unrestricted cash that was utilized to fund operating needs resulting in an inflow of $1,401, compared to an increase in restricted cash of $187 representing fluctuations in tenant security deposits under lease agreements during the three months ended March 31, 2015.

Net cash provided by/used in financing activities

Net cash provided by financing activities was $4,977 for the three months ended March 31, 2015 compared to net cash used in financing activities of $7,334 for the three months ended March 31, 2014, an increase of $12,311 or 167.9%. The increase was primarily due to $10,000 in additional borrowings made from our revolving credit facility to fund operations during the three months ended March 31, 2015. In addition, there was a decrease in debt principal payments of $6,322 from $7,334 during the three months ended March 31, 2014 to $1,012 during the three months ended March 31, 2015 in accordance with the terms of the credit agreement governing our first lien term loan facility. Cash provided by these financing activities was offset by an increase in distributions (net of contributions) of the annual taxable income required by the Code to maintain our REIT qualification paid to IMC LP of $3,000 during the three months ended March 31, 2015. Additionally, during the three months ended March 31, 2015, we paid $944 of accrued deferred financing costs related to the Refinancing Transactions.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013 (in thousands)

The following table summarizes our sources and uses of cash for the years ended December 31, 2014 and 2013:

 

     Years Ended
December 31,
 
     2014     2013  

Net cash provided by operating activities

   $ 27,931      $ 39,205   

Net cash provided by (used in) investing activities

     7,755        (28,561

Net cash used in financing activities

     (34,444     (14,949

Net cash provided by operating activities

Net cash from operating activities is primarily generated from operating income from our leasing activities. Net cash provided by operating activities was $27,931 for the year ended December 31, 2014 compared to $39,205 for the year ended December 31, 2013, a decrease of $11,274, or 28.8%. The decrease in cash from operating activities is primarily due to the following payments: (i) $10,633 related to accrued Sponsor advisory fees for the periods from inception through December 31, 2013; (ii) $11,498 of mortgage discounts and prepayment penalties in connection with our debt extinguishment; (iii) $2,875 in increased cash interest expense as a result of a higher weighted-average interest rate compared to the year ended December 31, 2013; and (iv) $1,232 in increased cash tax expense as a result of increased special events, publications and sponsorship income at our TRS entity when compared to the prior year. These payments were partially offset by: (i) an increase in cash revenues of $8,941 primarily due to higher overall average base rental rates and a rise in our overall average occupancy and (ii) $5,955 in accounts receivable due to improvements in collection resources over the prior year.

Net cash provided by/used in investing activities

Our primary investing activities consist of capital expenditures. Net cash provided by investing activities was $7,755 for the year ended December 31, 2014 compared to net cash used in investing activities of $28,561 for the year ended December 31, 2013, an increase of $36,316, or 127.2%. The increase was primarily due to a release of restrictions of escrowed cash no longer required by debt agreements upon the issuance of the senior secured credit facilities to unrestricted cash that was utilized to fund operating needs resulting in a net inflow of $27,818, a decrease of $1,000 in loans to IMC LP and a decrease in capital expenditures of $6,623. During the year ended December 31, 2013, we loaned $1,000 to IMC LP pursuant to an amendment to the limited partnership agreement. Capital expenditures during the year ended December 31, 2014 primarily consisted of

 

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$8,548 in tenant improvements and $2,016 in recurring capital improvements at our Properties with the remaining $6,074 representing strategic capital expenditures relating to the continued re-merchandising of floors at the Las Vegas Property and the reconfiguration of the Las Vegas Property’s administrative offices. During the year ended December 31, 2013, net cash from investing activities included $10,576 in strategic capital expenditures that were primarily utilized to build out and enhance the home décor and gift space in the Las Vegas Property and re-merchandise floors at the Las Vegas Property. Tenant improvements during the year ended December 31, 2013 totaled $8,331. The remaining $4,354 represented recurring capital improvements at our Properties during the year ended December 31, 2013.

Net cash used in financing activities

Net cash used in financing activities was $34,444 for the year ended December 31, 2014 compared to $14,949 for the year ended December 31, 2013, an increase of $19,495 or 130.4%. The increase in cash used in financing activities was due primarily to an increase in distributions (net of contributions) of the annual taxable income required by the Code to maintain our REIT qualification paid to IMC LP of $30,369 during the year ended December 31, 2014. The increase in distributions was partially offset by the net proceeds from the Refinancing Transactions. During the year ended December 31, 2014, we received $525,588 in proceeds (net of deferred financing costs and original issue discounts paid) from the senior secured credit facilities and fully repaid our mortgage notes payable. As a result, mortgage principal payments increased $512,757 over the year ended December 31, 2013. Additionally, in contemplation of this offering, we paid $1,608 in deferred offering costs during the year ended December 31, 2014.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 (in thousands)

The following table summarizes our sources and uses of cash for the years ended December 31, 2013 and 2012:

 

     Years Ended
December 31,
 
     2013      2012  

Net cash provided by operating activities

   $ 39,205       $ 36,940   

Net cash used in investing activities

     (28,561      (23,132

Net cash used in financing activities

     (14,949      (5,504

Net cash provided by operating activities

Net cash provided by operating activities was $39,205 for the year ended December 31, 2013 compared to $36,940 for the year ended December 31, 2012, an increase of $2,265, or 6.1%. The increase was primarily due to an $30,547 improvement in net loss, resulting from an increase in base rent revenues and a decrease in total operating expenses. Non-cash expenses declined $24,091 year over year, primarily due to a $14,985 decrease in depreciation and amortization mostly resulting from the reduction in intangible assets that fully amortized in 2012 and a $10,659 decline in the amortization and write-off of above and below market lease intangibles that were valued at the time of our acquisition by the Sponsors in 2011. Changes in operating assets and liabilities were $4,191 lower in net cash inflows than the year ended December 31, 2012, mostly as a result of certain vendor payments being made prior to the end of the year ended December 31, 2013.

Net cash used in investing activities

Net cash used in investing activities was $28,561 for the year ended December 31, 2013 compared to $23,132 for the year ended December 31, 2012, an increase of $5,429, or 23.5%. The increase was primarily due to a $14,173 increase in capital expenditures. For the year ended December 31, 2013, $10,576 was incurred to fund strategic capital expenditures primarily to build out and enhance the home décor and gift space in the Las Vegas Property and remerchandise floors at the Las Vegas Property. For the year ended December 31, 2012,

 

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strategic capital expenditures totaled $4,387. For the year ended December 31, 2013, tenant improvements totaled $8,331 compared to $2,413 for the year ended December 31, 2012. The growth in occupancy levels from 2012 to 2013 contributed to an increase of $2,167 in deferred leasing costs for the year ended December 31, 2013. An increase of $8,035 in restricted cash for the year ended December 31, 2013 was primarily due to the accumulation of escrowed funds and lockbox deposits for the year ended December 31, 2012 that were required under loan agreements for debt service, real estate taxes, property insurance, tenant improvements and capital improvements. Loans to our parent company decreased $1,663 for the year ended December 31, 2013. The loans were required by the amended limited partnership agreement and are more fully described in the notes to our consolidated financial statements. An increase of $734 in tenant security deposits for the year ended December 31, 2013 was primarily due to higher average occupancy rates in our Las Vegas property. A net increase of $430 in payments received on notes receivable for the year ended December 31, 2013 was due to an increase of $135 in scheduled principal receipts related to our TIF notes and a decrease of $295 in notes receivable issued to a senior member of our company.

Net cash used in financing activities

Net cash used in financing activities was $14,949 for the year ended December 31, 2013 compared to $5,504 for the year ended December 31, 2012, an increase of $9,445, or 171.6%. The increase was primarily due to an increase in mortgage principal payments of $7,611. The mortgage principal payments related to the Las Vegas Property’s B Notes, which required payment of principal based on 80% of available net cash flow after priority payments pursuant to a debt agreement. In addition, there was a $1,400 net cash outflow in 2013 relating to a distribution (net of contributions received) paid to members. There was a decrease of $436 in proceeds from the issuance of preferred shares to unrelated third-parties in 2012 as no preferred shares were issued in 2013.

Senior Secured Credit Facilities

On August 15, 2014, our Operating Partnership entered into senior secured credit facilities, comprised of a $405,000 first lien term loan facility, a $50,000 first lien revolving facility and a $125,000 second lien term loan facility. The first lien revolving facility was undrawn at the closing of such transaction.

Our Operating Partnership used the borrowings under the first lien term loan facility and the second lien term loan facility, together with cash on hand, to repay all of the outstanding borrowings under, and terminate, our then existing mortgage notes payable. We expect to use a portion of the proceeds from this offering to repay in full and terminate the second lien term loan facility. As of March 31, 2015, $21 million was drawn under the revolving credit facility and we expect to repay a portion of such borrowings with a portion of the proceeds from this offering. See “Use of Proceeds,” “Capitalization” and “Unaudited Pro Forma Consolidated Financial Information.” These senior secured credit facilities are guaranteed by IMC and by all subsidiaries of our Operating Partnership at the time of this offering and are secured by substantially all tangible and intangible assets of the Operating Partnership and the subsidiary guarantors, subject to customary exceptions. These facilities include customary financial and negative covenants, including restrictions on our ability (i) to incur additional indebtedness, (ii) to incur liens, (iii) to engage in certain fundamental changes (including changes in the nature of the business, mergers, liquidations and dissolutions), (iv) to sell assets, make acquisitions, investments, loans and advances, (v) to pay certain subordinated indebtedness, (vi) to modify the terms of organizational documents, (vii) to engage in certain transactions with affiliates, and (viii) to enter into negative pledge clauses and clauses restricting subsidiary distributions. In addition, our senior secured credit facilities generally restrict our Operating Partnership’s ability to make distributions to us, and therefore our ability to make distributions to our equityholders, except for distributions in an amount equal to 100% of our annual REIT taxable income and additional distributions that do not exceed the baskets described under “Description of Indebtedness.”

The agreement governing our revolving credit facility requires that we maintain a total debt to consolidated EBITDA ratio initially of no more than 7.00 to 1.00 (with step-downs of less than 5.00 to 1.00 during the term of

 

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the agreement) on the last day of each fiscal quarter beginning with the fiscal quarter ending March 31, 2015, which test is only in effect when revolving loans, plus drawn and unreimbursed letters of credit, exceed 25% of the commitments under the revolving credit facility as of the last day of such fiscal quarter.

The first lien term loan facility bears interest initially, at our option, at an adjusted LIBOR (with a 1% floor) plus 4.25% per annum or an alternative base rate plus 3.25% per annum. The second lien term loan facility bears interest initially, at our option, at an adjusted LIBOR (with a 1% floor) plus 7.75% per annum or an alternative base rate plus 6.75% per annum. The revolving credit facility bears interest initially, at our option, at an adjusted LIBOR plus 3.25% per annum or an alternative base rate plus 2.25% per annum. We expect the applicable margins for loans under the first lien term loan facility and the second lien term loan facility to be subject to reduction following achievement of a consolidated total net leverage ratio of less than 4.75 to 1.00.

Contractual Obligations

The following tables set forth our principal obligations and commitments, including periodic interest payments related to the indebtedness outstanding as of December 31, 2014:

(In thousands)

 

Contractual Obligations    Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Long-term debt, principal(1)

   $ 541,000       $ 4,050       $ 8,100       $ 19,100       $ 509,750   

Long-term debt, interest(2)

     193,196         32,994         65,401         64,262         30,539   

Operating lease(3)

     1,515         180         360         360         615   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(4)(5)

$ 735,711    $ 37,224    $ 73,861    $ 83,722    $ 540,904   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts include principal payments only. We will pay interest on outstanding indebtedness based on the rates and terms summarized in Note 6 to our consolidated financial statements included elsewhere in this prospectus.
(2) Amounts include interest expected to be incurred on our long-term debt based on obligations outstanding at December 31, 2014.
(3) We lease certain land from the City of High Point, North Carolina under a ground lease. The ground lease has an initial maturity date of May 31, 2023, which is subject to three 10-year renewal options and a final 19-year renewal option. The renewal options are automatically exercised unless the lessee delivers prior written notice to lessor of its election not to renew. The amounts in the tables above include rent expected to be incurred through the initial maturity date.
(4) On August 15, 2014, our Operating Partnership entered into senior secured credit facilities, which are comprised of a $405,000 first lien term loan facility, a $50,000 first lien revolving credit facility and a $125,000 second lien term loan facility. As of March 31, 2015, $21,000 was drawn under our revolving credit facility.

 

   We expect our Operating Partnership to use the net proceeds from this offering together with cash on hand: (i) to pay approximately $125,456 of principal and interest to terminate our second lien term loan facility and approximately $1,250 of prepayment fees in connection therewith; and (ii) to distribute an aggregate of $9,340 to IMC LP (x) to pay aggregate fees of $5,337 to Bain Capital and Oaktree in connection with the termination of the advisory agreement among IMC LP and Bain Capital and Oaktree, and (y) to make a concurrent distribution equal to $4,003 to a minority limited partner of IMC LP required to be made under the limited partnership agreement of IMC LP upon payment of fees under the advisory agreement. See “Certain Relationships and Related Party Transactions—Advisory Agreement.”

 

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(5) As of December 31, 2014, we had asset retirement obligations and environmental remediation liabilities totaling $5,305 and $260, respectively, as further discussed in Note 2 to our consolidated financial statements included elsewhere in this prospectus. As we are unable to make a reliable estimate of the period of cash settlement for these liabilities, the amounts are not included in the table above as of December 31, 2014.

Funds from Operations and Adjusted Funds from Operations

Consistent with real estate industry and investment community practices, we use FFO as a supplemental measure of our operating performance, and in conformity with the NAREIT, we define FFO as net income (loss) (computed in accordance with GAAP), excluding gains or losses from sales of depreciable operating properties, cumulative effects of accounting changes, extraordinary items, plus real estate related depreciation and amortization and impairment write-downs of depreciable real estate and after adjustments for unconsolidated partnership and joint ventures to reflect funds from operations on the same basis.

We consider FFO a useful supplemental measure and a complement to GAAP measures because it facilitates an understanding of the operating performance of our properties. FFO does not include real estate depreciation and amortization required by GAAP because these amounts are computed to allocate the cost of a property over its useful life. Since values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides investors with a clearer view of our operating performance.

FFO does not represent cash flow from operating activities as defined by GAAP, should not be considered as an alternative to GAAP net loss attributable to common stockholders and is not necessarily indicative of cash available to fund cash requirements. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose AFFO, which is FFO after specific and defined supplemental adjustments (a) to exclude: (i) straight-line rent and above/below market lease adjustments to revenue and bad debt expense; (ii) non-cash incentive unit compensation expense; (iii) equity registration, reorganization and other expenses; (iv) non-core expenditures; (v) loss on extinguishment of debt; (vi) amortization of debt discounts and deferred financing costs; and (vii) Sponsor fees and expenses that were included in net loss to common members; and (b) to include (i) non-strategic capital expenditures incurred to maintain the quality of properties and (ii) additions to deferred leasing costs.

We believe AFFO provides a more meaningful supplemental measure of our operating performance because we believe that the items noted above are not indicative of our operating performance and that by adjusting for the items noted above, analysts and investors are presented with an indicator of our operating performance that more closely achieves the objectives of the real estate industry in presenting FFO.

As with FFO, our reported AFFO may not be comparable to other REITs’ AFFO, should not be used as a measure of our liquidity and is not indicative of our funds available for our cash needs, including our ability to pay dividends.

 

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The following table sets forth reconciliations of our net loss to FFO and our FFO to AFFO for the periods presented:

 

(in thousands)   Three Months Ended
March 31,
    Years Ended December 31,  
    2015     2014     2014     <