EX-99.1 2 d51311dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

 

LOGO

                    ,         

Dear InvenTrust Properties Corp. Stockholder:

In only a few years, InvenTrust Properties Corp. (“InvenTrust,” the “Company,” “we” or “our”) has completed several significant and complex transactions in an effort to execute on our strategy of focusing our diverse portfolio of real estate into three platforms. We believe this strategy has best positioned InvenTrust to continue to explore strategic transactions to maximize stockholder value. InvenTrust has achieved several important milestones in its efforts to execute on this strategy and provide liquidity events for stockholders, including:

 

    Since 2012, we have completed a series of acquisitions and dispositions totaling approximately $4.1 billion (excluding the spin-off of Xenia Hotels & Resorts, Inc. (“Xenia”)) to reposition our portfolio;

 

    Since 2012, we have paid down approximately $4.2 billion in debt;

 

    In 2013, we sold the majority of our net lease assets and conventional multi-family assets for approximately $2.5 billion;

 

    In 2014, through a series of transactions we became a self-managed REIT and paid no internalization fee to our former sponsor;

 

    In 2014, we completed a $395 million modified “Dutch Auction” tender offer for shares of our common stock;

 

    In November 2014, we completed the sale of our $1.1 billion suburban select service lodging portfolio;

 

    In February 2015, we completed the spin-off and listing of our lodging platform, Xenia, representing a significant liquidity event for our stockholders; and

 

    In April 2015, the Company changed its name to InvenTrust in order to highlight and develop a brand that was independent from our former sponsor and distinguish ourselves in our core retail business.

We are now pleased to announce that we are completing the execution of our previously disclosed strategy to dispose of our remaining “non-core” assets through the pro rata distribution of 100% of the outstanding shares of common stock of Highlands REIT, Inc. (“Highlands”). Highlands is a wholly owned subsidiary of InvenTrust that was formed to hold our remaining “non-core” assets. Highlands’ portfolio is expected to consist of seven single- and multi-tenant office assets, two industrial assets, six retail assets, two correctional facilities, four parcels of unimproved land and one bank branch. We believe the spin-off will allow us to maximize the value of our remaining “non-core” assets that will form Highlands’ portfolio. Upon completion of the separation and distribution from InvenTrust, Highlands will be an independent, self-managed, non-traded REIT. Highlands will have a dedicated management team focused on preserving, protecting and maximizing the total value of its portfolio. As a stand-alone company, we believe that Highlands will be better positioned to provide stockholders with a return of their investment by liquidating and distributing net sale proceeds from the “non-core” portfolio in a value-maximizing manner.

Moving forward, InvenTrust’s strategy will be to continue to refine and tailor our retail portfolio into key growth markets with favorable demographics and expected above-average net operating income growth and to continue to build our student housing platform through acquisitions and developments at top universities.


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The pro rata distribution by InvenTrust of 100% of the outstanding shares of Highlands common stock will occur on             by way of a taxable pro rata special distribution to InvenTrust stockholders of record on the record date of the distribution. Each InvenTrust stockholder will be entitled to receive             share(s) of Highlands common stock for every             share(s) of InvenTrust common stock held by such stockholder at the close of business on                 , the record date of the distribution. The Highlands common stock will be issued in book-entry form only, which means that no physical share certificates will be issued. Following the distribution, you will own shares in both InvenTrust and Highlands. The number of InvenTrust shares you own will not change as a result of this distribution. Stockholder approval of the distribution is not required, and you will not be required to make any payment, surrender or exchange your shares of InvenTrust common stock or take any other action to receive your shares of Highlands common stock on the distribution date. Following the completion of the distribution, InvenTrust will not continue to own any shares of common stock of Highlands.

Highlands’ portfolio produces significant cash flow for InvenTrust. If the spin-off occurs, InvenTrust’s distribution payments will decrease. Additionally, immediately following the spin-off, the value of InvenTrust common stock will be lower than the value of such stock immediately prior to the spin-off because the value of InvenTrust stock will no longer reflect the value of the Highlands assets. Due to the spin-off, we are delaying our new estimated share value announcement and currently plan to publish a new estimated share value in closer proximity to the Highlands spin-off date. The board of directors of InvenTrust has engaged Real Globe Advisors, which is the same third-party valuation firm retained by our board last year, to value our assets and calculate the new estimated share value. Once the new estimated share value is determined, we will communicate it and how it was calculated to our stockholders.

Although the distribution of the outstanding shares of Highlands common stock will be in the form of a taxable distribution to InvenTrust stockholders, InvenTrust does not anticipate recognizing taxable gain as a result of the distribution. As a result, so long as you own your InvenTrust common stock for the entire year in which the distribution occurs, InvenTrust anticipates that the spin-off and distribution of Highlands common stock will not increase the amount of dividend income you would have recognized if the distribution had not occurred. For a more detailed discussion of the tax consequences of the distribution, please refer to the section titled “Our Separation From InvenTrust—Certain Material U.S. Federal Income Tax Consequences of the Separation” and “Material U.S. Federal Income Tax Consequences” of the Information Statement.

The Information Statement, which is being mailed to all holders of InvenTrust common stock on the record date for the distribution, describes the distribution in detail and contains important information about Highlands, its business, financial condition and operations and risks related to its business. The Information Statement also explains how you will receive your shares of Highlands common stock. We urge you to read the entire Information Statement carefully. If you have any questions, please contact 855-377-0510.

On behalf of the board of directors, the senior management team and the employees of InvenTrust, I want to thank you for your continued support of InvenTrust. We look forward to this next chapter in InvenTrust’s history.

Sincerely,

 

LOGO

Thomas P. McGuinness

President and Chief Executive Officer of InvenTrust

Properties Corp.

 

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Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED DECEMBER 23, 2015

INFORMATION STATEMENT

Common Stock

HIGHLANDS REIT, INC.

 

 

This Information Statement is being furnished in connection with the taxable distribution by InvenTrust Properties Corp. (“InvenTrust”), a Maryland corporation that has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, to its stockholders of 100% of the outstanding shares of common stock of Highlands REIT, Inc. (“Highlands,” “we” or “us”), a Maryland corporation. InvenTrust currently owns 100% of the outstanding shares of common stock of Highlands. Highlands holds, or will hold, directly or indirectly, a portfolio of office assets, industrial assets, retail assets, correctional facilities, parcels of unimproved land and a bank branch. To implement the distribution, InvenTrust will distribute 100% of the outstanding shares of common stock of Highlands on a pro rata basis to existing stockholders of InvenTrust.

For every              share(s) of common stock of InvenTrust held of record by you as of the close of business on                 , 2016, or the distribution record date, you will receive              share(s) of our common stock. We expect our common stock will be distributed by InvenTrust to you on or about                 , 2016, referred to herein as the distribution date.

No vote of InvenTrust’s stockholders is required in connection with the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send us a proxy, in connection with the distribution. You will not be required to pay any consideration, exchange or surrender your existing shares of common stock of InvenTrust or take any other action to receive our common stock to which you are entitled on the distribution date.

There is no current trading market for our common stock, and we do not intend to list any shares of our common stock on any securities exchange or other market in connection with the distribution.

We intend to elect to be taxed as a REIT for U.S. federal income tax purposes commencing with our short taxable year commencing immediately prior to the separation and ending on December 31, 2016. To assist us in qualifying as a REIT, among other purposes, stockholders are generally restricted from owning more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding shares of any class or series of our capital stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

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.

In reviewing the Information Statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 21.

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

This Information Statement was first mailed to InvenTrust stockholders on or about                , 2016.                                         , 2016.


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TABLE OF CONTENTS

 

BASIS OF PRESENTATION

     i   

SUMMARY

     1   

RISK FACTORS

     21   

FORWARD-LOOKING STATEMENTS

     46   

OUR SEPARATION FROM INVENTRUST

     48   

DISTRIBUTION POLICY

     56   

CAPITALIZATION

     57   

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

     58   

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS

     62   

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

     67   

BUSINESS AND PROPERTIES

     99   

MANAGEMENT

     110   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     114   

PRINCIPAL STOCKHOLDERS

     115   

DESCRIPTION OF INDEBTEDNESS

     116   

DESCRIPTION OF CAPITAL STOCK

     118   

CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

     124   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     130   

WHERE YOU CAN FIND MORE INFORMATION

     151   

INDEX TO FINANCIAL STATEMENTS

     F-1   

BASIS OF PRESENTATION

Prior to and in connection with our separation from InvenTrust, we will effect the transactions (the “Reorganization Transactions”) described under “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization.” We refer in this Information Statement to the assets owned by MB REIT (Florida), Inc. (“MB REIT”) and assets owned by certain subsidiaries of InvenTrust from time to time since January 1, 2012, as well as the Non-Core Contributed Assets (as defined under “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization”), as the “Prior Combined Portfolio.” We refer in this Information Statement to all of the assets owned by Highlands following the Reorganization Transactions as the “Highlands Portfolio.” At the time of our separation from InvenTrust, we expect the Highlands Portfolio to consist of seven office assets, two industrial assets, six retail assets, two correctional facilities, four parcels of unimproved land and one bank branch.

Unless otherwise indicated or the context otherwise requires, all information herein reflects the consummation of the Reorganization Transactions and the completion of our separation from InvenTrust, which will occur on the distribution date. References herein to “we,” “our,” “us” and the “Company” refer to Highlands and its consolidated subsidiaries, and references to “Highlands REIT, Inc.” refer only to Highlands REIT, Inc., exclusive of its subsidiaries.

Additionally, unless otherwise indicated or the context otherwise requires, all information in this Information Statement gives effect to the filing of our Articles of Amendment and Restatement and the effectiveness of our Amended and Restated Bylaws, which will occur prior to the completion of our separation from InvenTrust.

 

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Presentation of Historical Operating and Non-Financial Data and Pro Forma Financial Information

Unless otherwise indicated below or the context otherwise requires, (i) operating and non-financial data disclosed in the sections of this Information Statement other than the Financial Statement Sections (as defined below) and (ii) pro forma financial information in this Information Statement:

 

    reflect the business and operations of the Company after the consummation of the Retail Asset Disposition (as defined under Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization) and immediately following the completion of the separation of the Company from InvenTrust;

 

    exclude (i) 63 assets sold during the fiscal year ended December 31, 2012 and reflected as discontinued operations in the historical financial statements, (ii) 14 assets sold during the fiscal year ended December 31, 2013 and reflected as discontinued operations in the historical financial statements and (iii) 27 assets sold during the fiscal year ended December 31, 2014 and reflected as discontinued operations in the historical financial statements (collectively, the “Discontinued Operations Disposed Assets”);

 

    exclude four assets sold during the fiscal year ended December 31, 2014 and one asset sold during the nine months ended September 30, 2015 reflected as continuing operations in the historical financial statements for the fiscal years ended December 31, 2012, 2013 and 2014 and for the nine months ended September 30, 2015, as applicable (collectively, the “Continuing Operations Disposed Assets” and, together with the Discontinued Operations Disposed Assets, the “Disposed Assets”);

 

    reflect the capital contribution from InvenTrust of $         prior to the completion of our separation from InvenTrust (the “Capital Contribution”);

 

    reflect the issuance of             shares of our common stock to InvenTrust pursuant to a stock dividend effectuated prior to the distribution;

 

    reflect the distribution of             shares of our common stock to holders of InvenTrust common stock based upon the number of InvenTrust shares outstanding on                 , 2016; and

 

    reflect certain other adjustments as described in “Unaudited Pro Forma Combined Consolidated Financial Statements.

Presentation of Combined Consolidated Financial Information And Certain Operating And Non-Financial Data

Unless otherwise indicated below or the context otherwise requires, (i) the historical financial data (excluding all pro forma financial data) in this Information Statement and (ii) the operating and non-financial data (but excluding all related data prepared on a pro forma basis) disclosed in “Summary Historical and Pro Forma Financial and Operating Data,” “Selected Historical Financial and Operating Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (excluding all pro forma financial data) (collectively, the “Financial Statement Sections”) reflect the combined and consolidated business and operations of the Company prior to the Retail Asset Disposition and the completion of the Company’s separation from InvenTrust, but after giving effect to the Non-Core Asset Contributions (as defined under Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization), reflecting ownership of the Prior Combined Portfolio.

 

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SUMMARY

This summary highlights some of the information in this Information Statement relating to our Company, our separation from InvenTrust and the distribution of our common stock by InvenTrust to its stockholders. For a more complete understanding of our business and the separation and distribution, you should read carefully the more detailed information set forth under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Our Separation from InvenTrust” and the other information included in this Information Statement.

 

 

Overview

We are a self-advised and self-administered REIT with a portfolio of single- and multi-tenant office assets, industrial assets, retail assets, correctional facilities, unimproved land and a bank branch, which represent InvenTrust’s remaining “non-core” assets. InvenTrust historically focused on acquiring, owning and operating a diversified portfolio of commercial real estate, including retail, multi-family, student housing, industrial, correctional, lodging and office assets located in the United States. InvenTrust’s “non-core” assets were originally part of this diversified investment strategy. Beginning in 2012, InvenTrust began to implement its strategy of focusing its diverse portfolio of real estate into three platforms – retail, lodging and student housing – with the goal of enhancing long-term stockholder value and positioning InvenTrust to explore various strategic transactions. As part of this strategy, InvenTrust executed a series of transactions, including the sale of its conventional apartment assets in 2013, the sale of certain of its net lease assets consummated through multiple closings throughout 2013 and 2014, and disposition of other “non-core” assets in individual and portfolio transactions. Also in furtherance of this strategy, beginning in 2014, InvenTrust executed a series of strategic transactions, including a modified Dutch tender offer for its common stock and the disposition of its lodging platform through the sale of its suburban select service lodging portfolio and the spin-off of Xenia Hotels & Resorts, Inc. (“Xenia”). In furtherance of this strategy, InvenTrust is now planning to spin-off Highlands by distributing 100% of the outstanding shares of common stock of Highlands on a pro rata basis to existing stockholders of InvenTrust.

As of September 30, 2015, the Highlands Portfolio consisted of seven office assets, two industrial assets, six retail assets, two correctional facilities, four parcels of unimproved land and one bank branch.

Reasons for the Separation

Upon careful review and consideration, InvenTrust’s board of directors determined that our separation from InvenTrust is in the best interests of InvenTrust. The board’s determination was based on a number of factors, including those set forth below.

 

    Enabling our dedicated management to focus solely on maximizing the total value of our portfolio in connection with our evaluation of various strategic opportunities. The separation of the Highlands Portfolio from InvenTrust will enable our dedicated management team to focus on preserving, protecting and maximizing the total value of our portfolio until such time as we determine that a sale or other disposition of all or a portion of our portfolio achieves our investment objectives or until it appears such objectives will not be met.

 

    Allow InvenTrust’s management to focus on its retail and student housing platforms. As part of its overall strategic plan and long-term goal of maximizing shareholder value, InvenTrust intends to dispose of its “non-core” assets in order to focus on its multi-tenant retail and student housing platforms. InvenTrust intends to continue to refine and tailor its retail portfolio into key growth markets with favorable demographics and expected above-average net operating income growth and to continue to build its student housing platform through acquisitions and developments at top universities.

 



 

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The anticipated benefits of the separation are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated, or at all. In the event that the separation does not result in such benefits, the costs associated with the separation could have a material adverse effect on our business and are not quantifiable. Following our separation from InvenTrust, we will be a smaller company than InvenTrust, and we will not have access to the financial and other resources of InvenTrust or to resources comparable to those of InvenTrust. As a separate, standalone company, we may be unable to obtain debt or goods, technology and services at prices and on terms as favorable as those available to us prior to the separation. For more information about the risks associated with the separation, see “Risk Factors—Risks Related to Our Relationship with InvenTrust and the Separation.”

Business Strategy

Our investment objectives are to preserve, protect and maximize the total value of our portfolio in connection with our evaluation of various strategic opportunities while seeking to provide stockholders with a return of their investment by liquidating and distributing net sales proceeds. We may seek to sustain and enhance the values of our assets through additional leasing or capital expenditures, where necessary, while identifying and implementing disposition strategies for the assets in our portfolio. We intend to hold our assets until such time as we determine that a sale or other disposition achieves our investment objectives or until it appears such objectives will not be met.

Investment Risks

An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations. You should carefully consider the matters discussed in “Risk Factors” beginning on page 21 of this Information Statement when making investment decisions with respect to our common stock. Some of the risks relating to an investment in Highlands include the following:

 

    we may be unable to renew leases, lease vacant space or re-let space as leases expire, thereby increasing or prolonging vacancies, which could adversely affect our financial condition, cash flows and results of operations;

 

    one of our tenants, AT&T, is party to three leases with us and generates a significant portion of our revenue. The original terms of such leases expire in 2016, 2017 and 2019. AT&T did not renew its lease expiring in 2016 during the contractual renewal option period, and there is a strong possibility that AT&T will not renew any or all of its leases. If AT&T elects not to renew any one or more of such leases, and if we are unable to re-let the space as leases expire, or if we are required to make significant capital expenditures for such assets, our financial condition, cash flows and results of operations would be adversely affected;

 

    we depend on tenants for our revenue, and accordingly, lease terminations, vacancies, tenant defaults and bankruptcies could adversely affect the income produced by our assets;

 

    our portfolio includes assets that are special use, single-tenant and/or build-to-suit that may be difficult to lease, finance or sell;

 

    many of our properties are located in weak markets or submarkets, which may adversely affect our ability to rent such properties, increase rental rates and/or sell such properties;

 

    economic and market conditions could negatively impact our business, results of operations and financial condition;

 

    our ongoing business strategy involves the selling of assets; however, we may be unable to sell an asset at acceptable terms and conditions, if at all;

 



 

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    we may not successfully implement our disposition strategy, in which case you may have to hold your investment for an indefinite period;

 

    real estate is a competitive business;

 

    if we are unable to repay or refinance our existing debt as it comes due, we may need to sell the underlying asset sooner than anticipated or the lender may foreclose, in which case our financial condition, cash flows and results of operations could be materially adversely affected;

 

    our special purpose property-owning subsidiaries may default under non-recourse mortgage loans;

 

    MB REIT is subject to obligations under certain “non-recourse carve out” indemnity agreements and guarantees that may be deemed to be triggered in the future;

 

    our failure to comply with all covenants in our existing or future debt agreements could materially and adversely affect us;

 

    we may be unable to achieve some or all of the benefits that we expect to achieve from our separation from InvenTrust, and we may no longer enjoy certain benefits from InvenTrust;

 

    our ability to operate our business effectively may suffer if we do not, quickly and cost-effectively, establish our own financial, administrative and other support functions in order to operate as a standalone company or our own internal controls and procedures, and we cannot assure you that the transitional services InvenTrust has agreed to provide us will be sufficient for our needs;

 

    failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders;

 

    if either InvenTrust or MB REIT failed to qualify as a REIT in its 2012 through 2016 taxable years, we would be prevented from electing to qualify as a REIT;

 

    REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions;

 

    since our shares will not be traded on any securities exchange after our separation from InvenTrust, there is no established public market for our shares and you may not be able to sell your shares; and

 

    our cash available for distribution to stockholders may not be sufficient to pay distributions at expected or required levels, and we may need external sources in order to make such distributions, or we may not be able to make such distributions at all.

Our Structure and Reorganization Transactions

Our History

Highlands was formed as a Maryland corporation on December 16, 2015 as a direct, wholly owned subsidiary of InvenTrust.

Since 2011, InvenTrust or its wholly owned subsidiaries have owned all of the outstanding capital stock of MB REIT, a Florida corporation, other than 125 shares of Series B Preferred Stock issued to 125 individual accredited investors for the purpose of facilitating MB REIT’s qualification as a REIT for U.S. federal income tax purposes. On December 15, 2015, MB REIT redeemed all of the outstanding shares of its Series B Preferred Stock and became a wholly owned subsidiary of InvenTrust. At that time, MB REIT became a “qualified REIT subsidiary” (“QRS”) of InvenTrust and ceased to be treated as a REIT for U.S. federal income tax purposes.

 



 

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Prior to the internal reorganization transactions described below, MB REIT owned the assets included in the Retail Asset Disposition (as defined below) and all of the assets in the Highlands Portfolio other than the Non-Core Contributed Assets (as defined below). Prior to the internal reorganization transactions described below, the Non-Core Contributed Assets are owned by subsidiaries of InvenTrust other than Highlands or MB REIT.

At all times prior to InvenTrust’s self-management in March 2014, our management team and other employees were employees of InvenTrust’s sponsor or its affiliates. Following the self-management transactions, our management team and our other employees became employed by InvenTrust or a subsidiary of InvenTrust, and employees hired since the self-management transactions were employed by InvenTrust. In connection with the separation, we will be the employer of our management team and other employees.

Our Corporate Reorganization

Prior to or concurrently with the completion of the separation and distribution, we have engaged or will engage in certain reorganization transactions, through a series of contributions, distributions and exchanges, which are designed to consolidate the ownership of the Highlands Portfolio into Highlands, transfer certain retail assets currently owned directly or indirectly by MB REIT to InvenTrust, facilitate our separation from InvenTrust and the distribution and enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our short taxable year ending December 31, 2016.

The significant elements of the Reorganization Transactions include:

 

    MB REIT will become a wholly owned subsidiary of Highlands;

 

    The direct and indirect subsidiaries of MB REIT owning the following assets will be transferred to InvenTrust:

 

    Lakeport Commons, a multi-tenant retail asset in Sioux City, IA

 

    Fabyan Randall Plaza, a multi-tenant retail asset in Batavia, IL

 

    New Forest Crossing Phase II, a multi-tenant retail asset in Houston, TX

 

    Spring Town Center Phase I & II, a multi-tenant retail asset in Spring, TX

 

    Spring Town Shopping Center Phase III, a multi-tenant retail asset in Spring, TX

We refer in this Information Statement to these transfers as the “Retail Asset Disposition.”

 

    The direct and indirect subsidiaries of InvenTrust owning the following assets will be transferred to Highlands or its subsidiaries:

 

    Versacold USA—St. Paul, an industrial asset in St. Paul, MN

 

    Versacold USA—New Ulm, an industrial asset in New Ulm, MN

 

    Trimble, an R&D office asset in San Jose, CA

 

    Rolling Plains Detention Facility, a correctional facility in Haskell, TX

 

    Hudson Correctional Facility, a correctional facility in Hudson, CO

 

    Bridgeside Point, a single-tenant office building in Pittsburgh, PA

 

    Citizens—Providence, a bank branch in Providence, RI

 

    Sand Lake Land, a parcel of unimproved land in Orlando, FL

 



 

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    Palazzo Land, a parcel of unimproved land in Orlando, FL

 

    North Pointe Land, a parcel of unimproved land in Hanahan, SC

 

    RDU Land, a parcel of unimproved land in Raleigh, NC

We refer in this Information Statement to these assets as the “Non-Core Contributed Assets” and to these transfers as the “Non-Core Asset Contributions.”

 

    We will issue             shares of our common stock to InvenTrust pursuant to a stock dividend effectuated prior to the distribution.

Our Post-Separation Relationship with InvenTrust

We will enter into a Separation and Distribution Agreement with InvenTrust to effect the separation and distribution. In addition, we will enter into various other agreements with InvenTrust to effect the separation and provide a framework for our relationship with InvenTrust after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and InvenTrust of InvenTrust’s assets, liabilities and obligations attributable to periods prior to, at and after our separation from InvenTrust and will govern certain relationships between us and InvenTrust after the separation.

For additional information regarding the Separation and Distribution Agreement, the Transition Services Agreement and the Employee Matters Agreement, please refer to “Risk Factors—Risks Related to Our Relationship with InvenTrust and the Separation” and “Certain Relationships and Related Transactions.”

Our Financing Strategy

Certain of our existing assets are currently encumbered by debt, and debt financing may be used from time to time for property improvements, tenant improvements, leasing commissions and other working capital needs. The form of our indebtedness may vary and could be long-term or short-term, secured or unsecured, or fixed-rate or floating rate. We will not enter into interest rate swaps or caps or similar hedging transactions or derivative arrangements for speculative purposes, but may do so in order to manage or mitigate our interest rate risks on variable rate debt. For additional information regarding our existing debt, please refer to “Description of Indebtedness.”

Distribution Policy

We generally intend over time to make annual distributions in an amount at least equal to the amount that will allow us to qualify as a REIT for U.S. federal income tax purposes and to avoid current entity level U.S. federal income taxes. To qualify as a REIT for U.S. federal income tax purposes, we must distribute to our stockholders an amount at least equal to:

 

  i. 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with Generally Accepted Accounting Principles (“GAAP”)); plus

 

  ii. 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Internal Revenue Code of 1986 (the “Code”); less

 

  iii. any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

 



 

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Distributions made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law and other factors described under “Distribution Policy.” We cannot assure you that our distribution policy will remain the same in the future, or that any estimated distributions will be made or sustained. Our ability to make distributions to our stockholders will depend upon the performance of our asset portfolio and our ability to successfully execute on our disposition strategy. Distributions will be made in cash to the extent cash is available for distribution. We may not be able to generate sufficient cash flows to pay distributions to our stockholders. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider funding sources other than cash flow from operations or funds from operations, which may reduce the amount of capital available for operations, may have negative tax implications, and may have a negative effect on the value of your shares under certain conditions. In addition, our board of directors could change our distribution policy in the future. See “Risk Factors—Risks Related to Ownership of Our Common Stock and our Corporate Structure—Our cash available for distribution to stockholders may not be sufficient to pay distributions at expected or required levels, and we may need external sources in order to make such distributions, or we may not be able to make such distributions at all.” For a discussion of the tax treatment of distributions to holders of our common stock, please refer to “Material U.S. Federal Income Tax Consequences.”

Our Tax Status

We intend to elect to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year commencing immediately prior to the separation and ending on December 31, 2016. We believe that we have been organized and will operate in a manner that will allow us to qualify as a REIT for U.S. federal income tax purposes commencing with such short taxable year. To qualify for REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. See “Material U.S. Federal Income Tax Consequences.”

Restrictions on Ownership and Transfer of Our Stock

Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary or appropriate to enable us to qualify as a REIT. Furthermore, our charter prohibits any person from actually or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board of directors, in its sole discretion, may exempt (prospectively or retroactively) a person from the ownership limits if certain conditions are satisfied. However, our board of directors may not grant an exemption from the ownership limits to any person if that exemption would result in our failing to qualify as a REIT. These restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to or to continue to qualify as a REIT. The ownership limits may delay or impede a transaction or a change of control that might be in your best interest. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

JOBS Act

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 (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 of 1933, as amended (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. We intend to take advantage of the extended transition period.

 



 

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An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public reporting 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 we cease to be an emerging growth company. We will, in general, qualify as an emerging growth company until the earliest of (a) the last day of our fiscal year following the fifth anniversary of the date of the first sale of our equity securities pursuant to an effective Registration Statement under the Securities Act of 1933; (b) the last day of our fiscal year in which we have an annual gross revenue of $1.0 billion or more; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (d) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), which would occur at such time as we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (2) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) have filed at least one annual report pursuant to the Exchange Act.

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.

Our Principal Office

Our principal executive offices are located at                 , and our telephone number is                 . We maintain a website at www.                 .com. The information contained on our website or that can be accessed through our website neither constitutes part of this prospectus nor is incorporated herein by reference.

 



 

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Questions and Answers about Us and the Separation

 

Why is the separation structured as a distribution?

InvenTrust believes that a distribution of our shares is an efficient way to separate our assets and that the separation will create benefits and value for us and InvenTrust and our stockholders.

 

Why am I receiving this document?

InvenTrust is delivering this document to you because you are a holder of common stock of InvenTrust. If you are a holder of InvenTrust common stock as of the close of business on             , 2016, you are entitled to receive             share(s) of Highlands common stock for                 share(s) of InvenTrust common stock that you held at the close of business on such date. The number of shares of InvenTrust common stock you own will not change as a result of the distribution. This document will help you understand how the separation and distribution will affect your investment in InvenTrust, and your investment in Highlands following the separation.

 

How will the separation work?

At the time of the separation and distribution, Highlands will own, directly or indirectly, a portfolio of commercial real estate assets. InvenTrust will distribute 100% of the outstanding shares of Highlands’ common stock to InvenTrust’s stockholders on a pro rata basis. Following the separation, we will be an independent public company, but we do not intend to list any shares of our common stock on any securities exchange or other market in connection with the distribution.

 

When will the distribution occur?

We expect that InvenTrust will distribute the shares of our common stock on                 , 2016 to holders of record of shares of InvenTrust common stock as of the close of business on                 , 2016, subject to certain conditions described under “Our Separation from InvenTrust—Conditions to the Distribution.” No assurance can be provided as to the timing of the separation or that all conditions to the separation will be met.

 

What do stockholders of InvenTrust need to do to participate in the distribution?

Nothing, but we urge you to read this entire Information Statement carefully. Holders of shares of InvenTrust common stock as of the distribution record date will not be required to take any action to receive Highlands common stock on the distribution date. No stockholder approval of the distribution is required or sought. We are not asking you for a proxy, and you are requested not to send us a proxy. You will not be required to make any payment, or to surrender or exchange your shares of InvenTrust common stock or take any other action to receive your shares of our common stock on the distribution date. If you own shares of InvenTrust common stock as of the close of business on the distribution record date, InvenTrust, with the assistance of DST Systems, Inc., the distribution agent, will electronically issue shares of our common stock to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account

 



 

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statement that reflects your shares of our common stock, or your bank or brokerage firm will credit your account for the shares.

 

How many shares of Highlands common stock will I receive in the distribution?

InvenTrust will distribute to you                 share(s) of Highlands common stock for every                 share(s) of InvenTrust common stock held by you as of the distribution record date. An aggregate of             shares of Highlands common stock will be distributed to stockholders of InvenTrust. For additional information on the distribution, please refer to “Our Separation from InvenTrust.”

 

Will I be taxed on the shares of Highlands common stock that I receive in the distribution?

Yes. The distribution will be in the form of a taxable distribution to InvenTrust stockholders. An amount equal to the fair market value of our common stock received by you will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of InvenTrust, with the excess treated as a nontaxable return of capital to the extent of your tax basis in your shares of InvenTrust common stock and any remaining excess treated as capital gain. Although the distribution will be taxable to InvenTrust and InvenTrust stockholders, InvenTrust does not anticipate recognizing taxable gain as a result of the distribution. As a result, InvenTrust anticipates that the distribution will not increase its earnings and profits for the year in which the distribution occurs, which is anticipated to be 2016. Thus, if you own your InvenTrust common stock for the entire year in which the distribution occurs, InvenTrust anticipates that the distribution will not increase the amount of dividend income you will recognize for that year compared to the amount of dividend income you would have recognized if the distribution had not occurred. InvenTrust or other applicable withholding agents may be required to withhold on all or a portion of the distribution payable to non-U.S. stockholders. For a more detailed discussion, see “Our Separation From InvenTrust—Certain Material U.S. Federal Income Tax Consequences of the Separation” and “Material U.S. Federal Income Tax Consequences.”

 

Can InvenTrust decide to cancel the distribution of our common stock even if all the conditions have been met?

Yes. The distribution is subject to the satisfaction or waiver of certain conditions. See “Our Separation from InvenTrust—Conditions to the distribution.” Even if all conditions to the distribution are satisfied, InvenTrust may terminate and abandon the distribution at any time prior to the effectiveness of the distribution in its sole discretion.

 

When will I receive liquidity related to my Highlands common stock?

We intend to evaluate each of our assets on a rigorous and ongoing basis in an effort to optimize and enhance the value of our assets. As each of our assets reaches what we believe to be the asset’s optimum value, we will consider disposing of the asset for the purpose of either distributing the net sales proceeds to our stockholders or retaining the proceeds as part of a plan to achieve an optimal exit value. The timing of any liquidity event or events will depend upon then-prevailing economic and market conditions, which could result in different holding periods among the assets. We expect we will need to retain a portion of the net proceeds obtained from dispositions in order to achieve a final liquidity event.

 



 

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Does Highlands plan to pay dividends?

We generally intend over time to make annual distributions in an amount at least equal to the amount that will allow us to qualify as a REIT and to avoid current entity level U.S. federal income taxes. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  i. 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  ii. 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  iii. any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

 

  Distributions made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law and other factors described under “Distribution Policy.” We may pay distributions from sources other than cash flow from operations or funds from operations, which may reduce the amount of capital available for operations, may have negative tax implications, and may have a negative effect on the value of your shares under certain conditions. We cannot assure you that our distribution policy will remain the same in the future, or that any estimated distributions will be made or sustained.

 

Will Highlands have a dividend reinvestment plan?

Highlands does not intend to have a dividend reinvestment plan in the foreseeable future. Any future determination to adopt a dividend reinvestment plan will be at the discretion of our board of directors and will depend on such factors as our board of directors deems relevant.

 

Will Highlands have any debt?

Certain of our existing assets are currently encumbered by debt, and debt financing may be used from time to time for property improvements, tenant improvements, leasing commissions and other working capital needs.

 

  For additional information relating to our planned financing arrangements, see “Business and Properties—Financing Strategy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Indebtedness.”

 



 

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What will the separation cost?

InvenTrust anticipates that it will incur pre-tax separation costs of approximately $         million to $         million. Pursuant to the Separation and Distribution Agreement, InvenTrust shall be responsible for paying all costs and expenses incurred in connection with the separation and distribution and all transactions related thereto, whether incurred prior to or after the distribution date.

 

How will the separation affect my tax basis and holding period in shares of InvenTrust common stock?

Your tax basis in shares of InvenTrust held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by InvenTrust in the distribution exceeds InvenTrust’s current and accumulated earnings and profits. Your holding period for such InvenTrust shares will not be affected by the distribution. See “Our Separation from InvenTrust—Certain Material U.S. Federal Income Tax Consequences of the Separation.” You should consult your tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

What will my tax basis and holding period be for shares of Highlands common stock that I receive in the distribution?

Your tax basis in shares of our common stock received will equal the fair market value of such shares on the distribution date. Your holding period for such shares will begin the day after the distribution date. See “Our Separation from InvenTrust—Certain Material U.S. Federal Income Tax Consequences of the Separation.”

 

  You should consult your tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

What will be the relationships between InvenTrust and Highlands following the separation?

Following the distribution, we and InvenTrust will be separate companies. We will enter into a Separation and Distribution Agreement to effect the separation and distribution. In addition, we will enter into various other agreements with InvenTrust to effect the separation and provide a framework for our relationship with InvenTrust after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and InvenTrust of InvenTrust’s assets, liabilities and obligations attributable to periods prior to, at and after our separation from InvenTrust and will govern certain relationships between us and InvenTrust after the separation. We cannot assure you that these agreements are on terms as favorable to us as agreements with independent third parties. Following the completion of the distribution, InvenTrust will not continue to own any shares of our common stock. See “Certain Relationships and Related Transactions.”

 

Will I receive physical certificates representing shares of Highlands common stock following the separation?

No. Following the separation, neither InvenTrust nor we will be issuing physical certificates representing shares of our common stock. Instead, InvenTrust, with the assistance of DST Systems, Inc., the distribution agent, will electronically issue shares of our common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will

 



 

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mail you a book-entry account statement that reflects your shares of Highlands common stock, or your bank or brokerage firm will credit your account for the shares. A benefit of issuing stock electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning shares represented by physical share certificates.

 

Might I receive a fractional number of shares of Highlands common stock?

Yes. InvenTrust will distribute to you         share(s) of Highlands common stock for every             share(s) of InvenTrust common stock held by you as of the record date, which may result in your receiving a fractional number of shares.

 

Will I be able to trade shares of Highlands common stock on a public market?

No. There is not currently a public market for our common stock, and we do not intend to list any shares of our common stock on any securities exchange or other market in connection with the distribution.

 

Will the number of InvenTrust shares I own change as a result of the distribution?

No. The number of shares of InvenTrust common stock you own will not change as a result of the distribution.

 

Will the separation and distribution affect the value of my InvenTrust shares?

Yes. As a result of the distribution, InvenTrust expects the value of the shares of InvenTrust stock immediately following the distribution to be lower than the value of such shares immediately prior to the distribution because the value of the InvenTrust stock will no longer reflect the value of the Highlands Portfolio.

 

Will the separation and distribution affect the dividend I receive on my InvenTrust shares?

Yes. If the separation and distribution are completed, InvenTrust will review and announce a revised dividend and distribution policy. InvenTrust’s distribution payments will decrease after the separation and distribution because Highlands will own a portion of InvenTrust’s current portfolio. After giving effect to the separation and distribution, the aggregate distributions paid by InvenTrust and Highlands, on a combined basis, will be less than the current level of distributions paid by InvenTrust.

 

Are there risks to owning shares of Highlands common stock?

Yes. Our business is subject to various risks including risks relating to the separation. These risks are described in the “Risk Factors” section of this Information Statement beginning on page 21. We encourage you to read that section carefully.

 

Where can InvenTrust stockholders get more information?

Before the separation, if you have any questions relating to the separation, you should contact:

InvenTrust Investor Services

Tel: 855-377-0510

www.inventrustpropertiescorp.com

 



 

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  After the separation, if you have any questions relating to our common stock, you should contact:

 

  After the separation, if you have any questions relating to InvenTrust’s common stock, you should contact:

InvenTrust Investor Services

Tel: 855-377-0510

www.inventrustpropertiescorp.com

 



 

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The Separation and Distribution

 

Distributing company

InvenTrust Properties Corp.

 

Distributed company

Highlands REIT, Inc.

 

  We are a Maryland corporation and, prior to the separation, InvenTrust owned 100% of the outstanding shares of our common stock. After the separation, we will be an independent public company, but we do not intend to list any shares of our common stock on any security exchange or other market, and intend to conduct our business so as to qualify as a REIT for U.S. federal income tax purposes.

 

Distribution ratio

Each holder of shares of InvenTrust common stock will receive             share(s) of our common stock for every             share(s) of InvenTrust common stock held as of the close of business on                 , 2016.

 

Distributed securities

InvenTrust will distribute 100% of the shares of Highlands common stock outstanding immediately before the distribution. Based on the approximately          shares of InvenTrust common stock outstanding as of                 , 2016, assuming distribution of 100% of the outstanding shares of our common stock and applying the distribution ratio, we expect that approximately          million shares of Highlands common stock will be distributed to InvenTrust stockholders.

 

Record date

The record date is the close of business on                 , 2016.

 

Distribution date

The distribution date is on or about                 , 2016.

 

Distribution

On the distribution date, InvenTrust, with the assistance of DST Systems, Inc., the distribution agent, will electronically issue shares of our common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. You will not be required to make any payment or surrender or exchange your shares of InvenTrust common stock or take any other action to receive your shares of our common stock on the distribution date. The distribution agent will mail you a book-entry account statement that reflects your shares of our common stock, or your bank or brokerage firm will credit your account for the shares. Beneficial stockholders that hold shares through brokerage firms will receive additional information from their brokerage firms shortly after the distribution date.

 



 

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Conditions to the distribution

The distribution of shares of our common stock by InvenTrust is subject to the satisfaction of certain conditions, including the following:

 

    the board of directors of InvenTrust shall have authorized the distribution, which authorization may be made or withheld in the InvenTrust board of directors’ sole and absolute discretion;

 

    our registration statement on Form 10, of which this Information Statement is a part, shall have become effective under the Exchange Act, and no stop order relating to the registration statement shall be in effect and no proceedings for such purpose shall be pending before, or threatened by, the SEC;

 

    no preliminary or permanent injunction or other order, decree, or ruling issued by a governmental authority, and no statute (as interpreted through orders or rules of any governmental authority duly authorized to effectuate the statute), rule, regulation or executive order promulgated or enacted by any governmental authority shall be in effect preventing the consummation of, or materially limiting the benefits of, the separation and distribution and other transaction contemplated thereby;

 

    any required actions and filings necessary or appropriate under federal or state securities and blue sky laws of the U.S. will have been taken;

 

    the Transition Services Agreement and the Employee Matters Agreement shall have been executed and delivered by each of the parties thereto and no party to any of such agreements shall be in material breach of any such agreement;

 

    no event or development shall have occurred or failed to occur that, in the judgment of the board of directors of InvenTrust, in its sole discretion, prevents the consummation of the separation and distribution and related transactions or any portion thereof or makes the consummation of such transactions inadvisable;

 

    any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect; and

 

    the Separation and Distribution Agreement will not have been terminated.

 

  Even if all conditions to the distribution are satisfied, InvenTrust may terminate and abandon the distribution at any time prior to the effectiveness of the distribution.

 

Distribution agent, transfer agent and registrar for Highlands Common Stock

DST Systems, Inc.
333 West 11th Street
Kansas City, MO 64105
(816) 435-1000

 



 

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Tax considerations

The distribution of our common stock will not qualify for tax-deferred treatment, and an amount equal to the fair market value of the shares received by you on the distribution date will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of InvenTrust. The excess will be treated as a non-taxable return of capital to the extent of your tax basis in shares of InvenTrust common stock and any remaining excess will be treated as capital gain. Although the distribution will be taxable to InvenTrust and InvenTrust stockholders, InvenTrust does not anticipate recognizing taxable gain as a result of the distribution. As a result, InvenTrust anticipates that the distribution will not increase its earnings and profits for the year in which the distribution occurs, which is anticipated to be 2016. Thus, if you own your InvenTrust common stock for the entire year in which the distribution occurs, InvenTrust anticipates that the distribution will not increase the amount of dividend income you will recognize for that year compared to the amount of dividend income you would have recognized if the distribution had not occurred. Your tax basis in shares of InvenTrust held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by InvenTrust in the distribution exceeds InvenTrust’s current and accumulated earnings and profits. Your holding period for such InvenTrust shares will not be affected by the distribution. Your tax basis in shares of our common stock received will equal the fair market value of the shares received by you on the distribution date. Your holding period for such shares will begin the day following the distribution of our common stock. InvenTrust will not be able to advise stockholders of the amount of earnings and profits of InvenTrust until after the end of the 2016 calendar year. InvenTrust or other applicable withholding agents may be required to withhold on all or a portion of the distribution payable to non-U.S. stockholders. For a more detailed discussion, see “Our Separation From InvenTrust—Certain U.S. Material Federal Income Tax Consequences of the Separation” and “Material U.S. Federal Income Tax Consequences.”

 

Relationship between InvenTrust and Highlands following the separation and distribution

We will enter into a Separation and Distribution Agreement to effect the separation and distribution. In addition, we will enter into various other agreements with InvenTrust to effect the separation and provide a framework for our relationship with InvenTrust after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and InvenTrust of InvenTrust’s assets, liabilities and obligations attributable to periods prior to, at and after our separation from InvenTrust and will govern certain relationships between us and InvenTrust after the separation. See “Certain Relationships and Related Transactions.” InvenTrust will not own any shares of our common stock following the separation and distribution.

 



 

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Summary Historical and Pro Forma Financial and Operating Data

You should read the following summary historical and pro forma combined consolidated financial and operating data together with “Selected Historical Financial and Operating Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and the combined consolidated financial statements and related notes included elsewhere in this Information Statement.

The following table sets forth our summary historical and pro forma combined consolidated financial and operating data. Our summary historical combined consolidated financial data as of December 31, 2014, 2013 and 2012 and for the years then ended have been derived from our audited combined consolidated financial statements included elsewhere in this Information Statement. The summary historical condensed combined consolidated financial and operating data as of and for the nine months ended September 30, 2015 and 2014 have been derived from our unaudited condensed combined consolidated interim financial statements included elsewhere in this Information Statement.

Our financial statements reflect the operations of the Prior Combined Portfolio, which, among other things, includes allocations of costs from certain corporate and shared functions provided to us by InvenTrust. The allocation methods for corporate and shared services costs vary by function but were generally based on historical costs of assets.

Because the historical combined consolidated financial statements represent the financial and operating data of the Prior Combined Portfolio, and the Company will own the Highlands Portfolio following the separation from InvenTrust, the historical combined consolidated financial statements included in this Information Statement do not reflect our financial position, results of operations and cash flows as if we had operated as a stand-alone public reporting company during the period presented owning solely the Highlands Portfolio. Accordingly, our historical results should not be relied upon as an indicator of future performance.

The summary pro forma combined consolidated financial and operating data is derived from our unaudited pro forma combined consolidated financial statements as of September 30, 2015 and for the nine months then ended as well as our unaudited pro forma combined consolidated statement of income for the year ended December 31, 2014, included elsewhere in this Information Statement. We derived our unaudited pro forma combined consolidated financial statements by applying pro forma adjustments to our historical combined consolidated financial statements included elsewhere in this Information Statement. The pro forma combined consolidated financial and operating data give effect to:

 

    the business and operations of the Company after the consummation of the Retail Asset Disposition and immediately following the completion of the separation of the Company from InvenTrust, after which we will own solely the Highlands Portfolio;

 

    the exclusion of the Disposed Assets;

 

    the Capital Contribution;

 

    the issuance of             shares of our common stock to InvenTrust pursuant to a stock dividend prior to the distribution;

 

    the distribution of             shares of our common stock to holders of InvenTrust common stock based upon the number of InvenTrust shares outstanding on                 , 2016; and

 

    certain other adjustments as described in “Unaudited Pro Forma Combined Consolidated Financial Statements.”

 



 

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The pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the pro forma combined consolidated financial statements provide a detailed discussion of how such adjustments were derived and presented in the pro forma combined consolidated financial and operating data. See “Unaudited Pro Forma Combined Consolidated Financial Statements—Notes to Pro Forma Combined Consolidated Financial Statements.” The pro forma combined consolidated financial information should be read in conjunction with “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization,” “Capitalization,” “Selected Historical Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Transactions,” “Description of Indebtedness” and our combined consolidated financial statements and related notes thereto included elsewhere in this Information Statement.

 



 

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    Highlands Portfolio   Prior Combined Portfolio  
    Pro Forma Combined
Consolidated
  Condensed
Combined Consolidated
    Combined Consolidated  
    For the nine
months ended
September 30,
2015
  For the twelve
months ended
December 31,
2014
  For the nine
months ended
September 30,
2015
    For the nine
months ended
September 30,
2014
    For the twelve
months ended
December 31,
2014
    For the twelve
months ended

December 31,
2013
    For the twelve
months ended

December 31,
2012
 

Selected Statement of Operations Data:

             

Revenues:

             

Rental income

      $ 72,606      $ 78,637      $ 104,218      $ 108,841      $ 109,999   

Tenant recovery income

        10,850        13,077        17,190        18,611        18,214   

Other property income

        356        659        739        743        922   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

      $ 83,812      $ 92,373      $ 122,147      $ 128,195      $ 129,135   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

             

Property operating expenses

        10,649        11,479        15,443        15,888        15,862   

Real estate taxes

        8,156        9,498        12,379        13,312        12,624   

Depreciation and amortization

        27,261        27,454        37,235        47,113        55,043   

General and administrative expense

        9,212        5,477        7,161        4,534        3,884   

Business management fee

        —          423        423        6,742        8,015   

Provision for asset impairment

        —          15,640        15,640        258,648        934   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

      $ 55,278      $ 69,971      $ 88,281      $ 346,237      $ 96,362   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

      $ 28,534      $ 22,402      $ 33,866      $ (218,042   $ 32,773   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest and dividend income

        1        4        5        1,006        1,881   

Loss on sale of investment properties

        (197     (1,169     (1,018     —          —     

Gain on extinguishment of debt

        —          12,123        11,959        2,419        —     

Other (loss) income

        (11     415        488        889        1,038   

Interest expense

        (21,062     (25,198     (32,681     (37,583     (40,803

Equity in earnings of unconsolidated entity

        —          —          —          628        14   

Gain on investment in unconsolidated entity

        —          —          —          2,930        —     
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

      $ 7,265      $ 8,577      $ 12,619      $ (247,753   $ (5,097
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

        (24     54        (64     (110     (341
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

      $ 7,241      $ 8,631      $ 12,555      $ (247,863   $ (5,438
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

        —          4,657        4,632        48,469        (19,773
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

      $ 7,241      $ 13,288      $ 17,187      $ (199,394   $ (25,211
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

        (16     (16     (16     (16     (16
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Company

      $ 7,225      $ 13,272      $ 17,171      $ (199,410   $ (25,227
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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    Highlands Portfolio   Prior Combined Portfolio  
    Pro Forma Combined
Consolidated
  Condensed
Combined Consolidated
    Combined Consolidated  
    For the nine
months ended
September 30,
2015
  For the twelve
months ended
December 31,
2014
  For the nine
months ended
September 30,
2015
    For the nine
months ended
September 30,
2014
    For the twelve
months ended
December 31,
2014
    For the twelve
months ended

December 31,
2013
    For the twelve
months ended

December 31,
2012
 

Per Share Data:

             

Pro forma basic earnings per share

             

Pro forma diluted earnings per share

             

Pro forma weighted average shares outstanding—basic

             

Pro forma weighted average shares outstanding—diluted

             

Other Financial Data:

             

Funds from operations(1)

      $ 34,702      $ 51,990      $ 65,522      $ 65,895      $ 81,826   

Modified net operating income(2)

      $ 66,523      $ 72,046      $ 95,413      $ 99,000      $ 100,404   

 

     Highlands
Portfolio
          Prior Combined Portfolio  
     Pro Forma
Combined
Consolidated
   Condensed
Combined
Consolidated
     Combined Consolidated  
     As of
September 30,
2015
   As of
September 30,
2015
     As of December 31,  
Selected Balance Sheet Data:          2014      2013      2012  

Cash and cash equivalents

      $ 23,575       $ 10,291       $ 6,076       $ 8,088   

Restricted cash & escrows

        4,648         5,044         11,389         7,180   

Total assets

        747,128         841,894         1,216,502         1,795,064   

Total debt

        426,782         487,825         468,970         1,039,914   

Total equity

        283,634         317,108         389,694         700,673   

 

(1) We calculate Funds From Operations (“FFO”) in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairment, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, adjustments for unconsolidated partnerships and joint ventures, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding our operating performance by excluding the effect of real estate depreciation and amortization, gains (losses) from sales for real estate, impairments of real estate assets extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation of FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

 

(2) Modified net operating income reflects the income from operations excluding nonrecurring events, such as lease termination income, and other GAAP rent adjustments in order to provide a comparable presentation of operating activity across periods. Includes adjustments for items that affect the comparability of, and were excluded from, the same store results. Such adjustments include lease termination income, GAAP rent adjustments, such as straight-line rent, and above/below market lease amortization.

 



 

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RISK FACTORS

Owning our common stock involves a high degree of risk. You should consider carefully the following risk factors and all other information contained in this Information Statement. If any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, occur, our business, financial condition, cash flows, liquidity and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or a part of the value of your ownership in our common stock. Some statements in this Information Statement, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section in this Information Statement entitled “Forward-Looking Statements.”

Risks Related to Our Business and Industry

We may be unable to renew leases, lease vacant space or re-let space as leases expire, thereby increasing or prolonging vacancies, which could adversely affect our financial condition, cash flows and results of operations.

As of September 30, 2015, the current lease term for leases representing approximately 35% and 23% of the rentable square feet and approximately 35% and 18% of the annualized base rent of the assets in the Highlands portfolio will expire in 2016 and 2017, respectively (not taking into account any renewal options), and an additional 5% of the rentable square feet of the assets in portfolios was vacant. We cannot assure you that leases will be renewed or that our assets will be re-leased on terms equal to or better than the current terms, or at all. We also may not be able to lease space which is currently not occupied on acceptable terms and conditions, if at all. In addition, some of our tenants have leases that include early termination provisions that permit the lessee to terminate all or a portion of its lease with us after a specified date or upon the occurrence of certain events with little or no liability to us. We may be required to offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options to retain these tenants or attract new ones. It is possible that, in order to lease currently vacant space, or space that may become vacant, we will be required to make rent or other concessions to tenants, accommodate requests for renovations, make tenant improvements or and other improvements or provide additional services to our tenants. As a result, we may have to make significant capital or other expenditures in order to retain tenants whose leases expire or to attract new tenants. Portions of our assets may remain vacant for extended periods of time. If the rental rates for our assets decrease, our existing tenants do not renew their leases or we do not re-lease a significant portion of our available space and space for which leases will expire, our financial condition, cash flows and results of operations could be adversely affected.

One of our tenants, AT&T, is party to three leases with us and generates a significant portion of our revenue. The original terms of such leases expire in 2016, 2017 and 2019. AT&T did not renew its lease expiring in 2016 during the contractual renewal option period, and there is a strong possibility that AT&T will not renew any or all of its leases. If AT&T elects not to renew any one or more of such leases, and if we are unable to re-let the space as leases expire, or if we are required to make significant capital expenditures for such assets, our financial condition, cash flows and results of operations would be adversely affected.

For the nine months ended September 30, 2015, approximately 40% of our total annualized rental income was generated by three single-tenant assets leased to affiliates of AT&T, Inc. Our Hoffman Estates, Illinois lease represents 27% of our total annualized revenue. However, no value was attributed to this asset in calculating InvenTrust’s most recent net asset value (“NAV”). Similarly, we do not expect to attribute any value to this asset when calculating our NAV. The original term of the lease for this asset expires in August 2016. AT&T did not renew this lease during the contractual renewal option period. As of September 30, 2015, the principal amount of indebtedness on this asset is approximately $129 million. This asset is currently in hyper-amortization under the loan agreement and, as a result, rental payments less certain expenses are used to pay down the principal amount of the loan. As of September 30, 2015, there was approximately $16.1 million of accrued interest due to hyper-amortization. The characteristics of the property and market conditions are likely to make this asset difficult to re-lease and, consequently, difficult to sell. If AT&T does not renew, the potential difficulty of securing a new

 

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tenant is likely to make the loan difficult to refinance. Additionally, if AT&T does not renew and if we are unable to re-let the asset, we expect that we may be unable to make mortgage payments and may default under the loan agreement.

Our St. Louis, Missouri lease represents 18% of our total annualized revenue. However, no value was attributed to this asset in calculating InvenTrust’s NAV. Similarly, we do not expect to attribute any value to this asset when calculating our NAV. The original term of the lease for this asset expires in September 2017. AT&T may not exercise its renewal option for this asset, which expires in September 2016. As of September 30, 2015, the principal amount of indebtedness on this asset is approximately $113 million. If AT&T were to elect not to renew, market conditions are likely to make this asset difficult to re-lease and, consequently, difficult to sell. Additionally, if AT&T were to elect not to renew, this asset is likely to require significant capital expenditures. If AT&T does not renew, the potential difficulty of securing a new tenant is likely to make the loan difficult to refinance. Additionally, if AT&T were to elect not to renew and if we are unable to re-let the asset, we expect that we may be unable to make mortgage payments and may default under the loan agreement. Furthermore, if AT&T fails to renew, then one year prior to the expiration of the lease or upon notice by AT&T that they have elected not to renew, whichever is earlier, all rental payments, less certain expenses, will be “swept” and held by the lender pursuant to the loan agreement. Moreover, on January 1, 2017, the asset will go into hyper-amortization under the loan agreement.

Our Cleveland lease represents 5% of our total annualized revenue and the original term expires in September 2019. As of September 30, 2015, AT&T leased approximately 55% of the property, but is paying substantially all operating expenses for the full property. AT&T may not exercise its renewal option for all or any part of the asset. As of September 30, 2015, the principal amount of indebtedness on this asset is approximately $20 million. This asset is currently in hyper-amortization under the loan agreement. As of September 30, 2015, there was approximately $1.5 million of accrued interest due to hyper-amortization. Market conditions are likely to make this asset difficult to re-lease as office space. If AT&T does not renew, the potential difficulty of securing a new tenant, is likely to make the loan difficult to refinance.

If AT&T elects not to renew any one or more of these leases, and if we are unable to re-let the space as leases expire, or if we are required to make significant capital expenditures for such assets, our financial condition, cash flows and results of operations would be adversely affected.

We depend on tenants for our revenue, and accordingly, lease terminations, vacancies, tenant defaults and bankruptcies could adversely affect the income produced by our assets.

Our business and financial condition depends on the financial stability of our tenants. Certain economic conditions may adversely affect one or more of our tenants. For example, business failures and downsizings can affect the tenants of our office and industrial assets. As a result, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments, or declare bankruptcy. Individual tenants may lease more than one asset or space at more than one asset. As a result, the financial failure of one tenant could increase vacancy at more than one asset or cause more than one lease to become non-performing. Any of these actions could result in the termination of the tenants’ leases, the expiration of existing leases without renewal or the loss of rental income attributable to the terminated or expired leases, any of which could make our assets difficult to sell and could have a material adverse effect on our financial condition, cash flows and results of operations.

In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our asset. Specifically, a bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its asset, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past-due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is rejected by a tenant in bankruptcy, we would have only a general,

 

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unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.

Our portfolio includes assets that are special use, single-tenant and/or build-to-suit that may be difficult to lease, finance or sell.

Our portfolio includes assets that are special use, single-tenant and/or build-to-suit, which are relatively illiquid compared to other types of real estate assets. With these assets, if the current lease is terminated or not renewed, we may be required to make significant capital expenditures to reposition the asset or make rent concessions in order to lease the asset to another tenant, finance the asset or sell the asset.

Many of our properties are located in weak markets or submarkets, which may adversely affect our ability to rent such properties, increase rental rates and/or sell such properties.

Certain of our properties are located in weak markets or submarkets. These markets may be experiencing economic slowdowns, little or no job growth, and/or high numbers of vacancies. Additionally, demand for certain types of assets, such as office assets, may have shifted from suburban areas to city centers, or vice versa. The weakness of an asset’s market or submarket may adversely affect our ability to rent such properties, increase rental rates and/or sell such properties, which could have a material adverse effect on our financial condition, cash flows or results of operations.

Economic and market conditions could negatively impact our business, results of operations and financial condition.

Our business may be affected by market and economic challenges experienced by the U.S. or global economies or the real estate industry as a whole or by the local economic conditions in the markets in which our assets are located, including any dislocations in the credit markets. These conditions may materially affect our tenants, the value and performance of our assets and our ability to sell assets, as well as our ability to make principal and interest payments on, or refinance, any outstanding debt when due. Challenging economic conditions may also impact the ability of certain of our tenants to enter into new leasing transactions or satisfy rental payments under existing leases. Specifically, these conditions may have the following consequences:

 

    the financial condition of our tenants may be adversely affected, which may result in us having to increase concessions, reduce rental rates or make capital improvements in order to maintain occupancy levels or to negotiate for reduced space needs, which may result in a decrease in our occupancy levels;

 

    significant job loss may occur, which may decrease demand for space and result in lower occupancy levels, which will result in decreased revenues and which could diminish the value of assets, which depend, in part, upon the cash flow generated by our assets;

 

    an increase in the number of bankruptcies or insolvency proceedings of our tenants and lease guarantors, which could delay our efforts to collect rent and any past due balances under the relevant leases and ultimately could preclude collection of these sums;

 

    our ability to borrow on terms and conditions that we find acceptable may be limited;

 

    the amount of capital that is available to finance assets could diminish, which, in turn, could lead to a decline in asset values generally, slow asset transaction activity, and reduce the loan to value ratio upon which lenders are willing to lend; and

 

    the value of certain of our assets may decrease below the amounts we paid for them, which would limit our ability to dispose of assets at attractive prices or for potential buyers to obtain debt financing secured by these assets and could reduce our ability to finance our business.

 

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Our ongoing business strategy involves the selling of assets; however, we may be unable to sell an asset at acceptable terms and conditions, if at all.

We intend to hold our assets until such time as we determine that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears such objectives will not be met. As we look to sell these assets, general economic conditions, market conditions, and asset-specific issues may negatively affect the value of our assets and therefore reduce our return on the investment or prevent us from selling the asset on acceptable terms or at all. Some of our leases contain provisions giving the tenant a right to purchase the asset, such as a right of first offer or right of first refusal, which may lessen our ability to freely control the sale of the asset. Debt levels currently exceed the value of certain assets and debt levels on other assets may exceed the value of those assets in the future, making it more difficult for us to rent, refinance or sell the assets. In addition, real estate investments are relatively illiquid and often cannot be sold quickly, limiting our ability to sell our assets when we decide to do so, or in response to such changing economic or asset-specific issues. Further, economic conditions may prevent potential purchasers from obtaining financing on acceptable terms, if at all, thereby delaying or preventing our ability to sell our assets.

We may not successfully implement our disposition strategy, in which case you may have to hold your investment for an indefinite period.

We are under no obligation to complete our disposition strategy within a specified time period, and market conditions and other factors beyond our control could delay our ability to liquidate our portfolio. We may not be able to control the timing of the sale of our assets, and we cannot assure you that we will be able to sell our assets so as to return any portion of our stockholders’ invested capital or fully satisfy our debt obligations. Our ability to sell our assets may also be limited by our need to avoid a 100% penalty tax that is imposed on gain recognized by a REIT from the sale of assets characterized as dealer property, which may cause us to forego or defer sales of assets that otherwise would be in our best interests.

If we are not successful in implementing our disposition strategy in a timely manner, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment into cash easily, if at all, and could suffer losses on your investment.

Our ability to distribute all or a portion of the net proceeds from the sale of our assets to our stockholders may be limited.

When we sell any of our assets, we may not realize a gain on such sale or the amount of our taxable gain could exceed the cash proceeds we receive from such sale. We may determine to not distribute any proceeds from the sale of assets to our stockholders; for example, we may instead use such proceeds to repay debt or make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our other assets. Alternatively, we may elect to create working capital reserves, especially in light of the fact that we may not be able to reduce our operating overhead expenses to the same extent or on the same time frame as the reduction of operating revenues resulting from a sale of assets, which could materially adversely affect our operating margins.

Real estate is a competitive business.

We compete with numerous developers, owners and operators of commercial real estate assets in the leasing market, many of which own assets similar to, and in the same market areas as, our assets. In addition, some of these competitors may be willing to accept lower returns on their investments than we are, and many have greater resources than we have and may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Principal factors of competition include rents charged, attractiveness of location, the quality of the asset and breadth and quality of services provided. Our success depends upon, among other factors, trends affecting national and local economies, the financial condition and operating results of current and prospective tenants and customers, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation, job creation and population trends.

 

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We also face competition from other real estate investment programs for buyers. We perceive there to be a smaller universe of potential buyers for many of the types of assets that comprise our portfolio in comparison to assets in more core real estate sectors, which may make it challenging for us to sell our assets.

Any difficulties in obtaining capital necessary to make tenant improvements, pay leasing commissions and make capital improvements at our assets could materially and adversely affect our financial condition and results of operations.

Ownership of real estate is a capital intensive business that requires significant capital expenditures to operate, maintain and renovate assets. Access to the capital that we need to lease, maintain and renovate existing assets is critical to the success of our business. We may not be able to fund tenant improvements, pay leasing commissions or fund capital improvements at our existing assets solely from cash provided from our operating activities. As a result, our ability to fund tenant improvements, pay leasing commissions or fund capital improvements through retained earnings may be restricted. Consequently, we may have to rely upon the availability of debt, net proceeds from the dispositions of our assets or equity capital to fund tenant improvements, pay leasing commissions or fund capital improvements. The inability to do so could impair our ability to compete effectively and harm our business.

There are inherent risks with investments in real estate, including the relative illiquidity of such investments.

Investments in real estate are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly sold, and we cannot predict whether we will be able to sell any asset we desire to on the terms set by us or acceptable to us, or the length of time needed to find a willing purchaser and to close the sale of such asset. Moreover, the Code imposes restrictions on a REIT’s ability to dispose of assets that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs require that we hold our assets for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of assets that otherwise would be in our best interests. Therefore, we may not be able to vary our portfolio promptly in response to changing economic, financial and investment conditions and dispose of assets at opportune times or on favorable terms, which may adversely affect our cash flows and our ability to make distributions to stockholders.

Investments in real estate are also subject to adverse changes in general economic conditions. Among the factors that could impact our assets and the value of an investment in us are:

 

    risks associated with the possibility that cost increases will outpace revenue increases and that in the event of an economic slowdown, the high proportion of fixed costs will make it difficult to reduce costs to the extent required to offset declining revenues;

 

    changes in tax laws and property taxes, or an increase in the assessed valuation of an asset for real estate tax purposes;

 

    adverse changes in the federal, state or local laws and regulations applicable to us, including those affecting zoning, fuel and energy consumption, water and environmental restrictions, and the related costs of compliance;

 

    changing market demographics;

 

    an inability to finance real estate assets on favorable terms, if at all;

 

    the ongoing need for owner-funded capital improvements and expenditures to maintain or upgrade assets;

 

    fluctuations in real estate values or potential impairments in the value of our assets;

 

    natural disasters, such as earthquakes, floods or other insured or uninsured losses; and

 

    changes in interest rates and availability, cost and terms of financing.

 

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Our assets may be subject to impairment charges that may materially affect our financial results.

Economic and other conditions may adversely impact the valuation of our assets, resulting in impairment charges that could have a material adverse effect on our results of operations and earnings. On a regular basis, we evaluate our assets for impairments based on various triggers, including changes in the projected cash flows of such assets and market conditions. If we determine that an impairment has occurred, then we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse effect on our results of operations in the accounting period in which the adjustment is made. Furthermore, changes in estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions could result in the recognition of additional impairment losses for already impaired assets, which, under the applicable accounting guidance, could be substantial.

Many real estate costs and certain operating costs are fixed, even if revenue from our assets decreases.

Many real estate costs, such as real estate taxes, insurance premiums, maintenance costs and certain operating costs generally are more fixed than variable and, as a result, are not reduced even when an asset is not fully occupied, rents decrease or other circumstances cause a reduction in revenues. If we are unable to offset these fixed costs with sufficient revenues across our portfolio, it could materially and adversely affect our results of operations and profitability. This risk is particularly acute at our net lease assets.

Operating and other expenses may increase in the future, which may cause our cash flow and our operating results to decrease.

Certain operating expenses and certain general and administrative expenses are not fixed and may increase in the future. Any increases would cause our cash flow and our operating results to decrease. If we are unable to offset these decreases with sufficient revenues across our portfolio, our financial condition, cash flows and results of operations may be materially adversely affected.

Our revenue from our retail assets will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space and adversely affect our financial condition, cash flows and results of operations.

In the retail sector, a tenant occupying all or a large portion of the gross leasable area of a retail center, commonly referred to as an anchor tenant, may become insolvent, may suffer a downturn in business or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition. A lease termination by an anchor tenant also could result in lease terminations or reductions in rent by other tenants whose leases may permit cancellation or rent reduction if another tenant’s lease is terminated. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could reduce customer traffic in the retail center and thereby reduce the income generated by that retail center. A transfer of a lease to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases in accordance with lease terms. If we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to remodel the space to be able to re-lease the space to more than one tenant.

Public resistance to privatization of correctional facilities could negatively impact our tenants at such facilities, which could have an adverse impact on our business, financial condition or results of operations.

The management and operation of correctional facilities by private entities has not achieved complete acceptance by either government agencies or the public. Some governmental agencies have limitations on their ability to delegate their traditional management responsibilities for such facilities to private companies, and additional legislative changes or prohibitions could occur that further increase these limitations. In addition, the movement toward privatization of such facilities has encountered resistance from groups, such as labor unions, that believe that correctional facilities should only be operated by governmental agencies. In addition, negative

 

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publicity about poor conditions, an escape, riot or other disturbance at a privately-managed facility may result in adverse publicity to the private corrections industry. Any of these occurrences or continued trends may make it more difficult for the tenants of our correctional facilities to renew or maintain existing contracts or to obtain new contracts. Changes in governing political parties could also result in significant changes to previously established views of privatization. Increased public resistance to the privatization of correctional facilities could have a material adverse effect on our tenants who operate in this industry, which could adversely impact the value of our correctional facility assets and our results of operations.

The land underlying a portion of one of our assets is subject to a ground lease, which could limit our use of the asset, and a breach or termination of the ground lease could materially and adversely affect us.

We lease a portion of the land underlying one of our assets, Sherman Plaza, from a third party through a ground lease covering such land. As a lessee under a ground lease, we are exposed to the possibility of losing the right to use the portion of our asset covered by the ground lease upon termination, or an earlier breach by us, of the ground lease. The ground lease may also restrict our use of the asset, which may limit our flexibility in renting the asset and may impede our ability to sell the asset.

Uninsured and underinsured losses at our assets could materially and adversely affect our revenues and profitability.

We intend to maintain comprehensive insurance on each of our current assets, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by property owners. There are no assurances that coverage will be available at reasonable rates. Various types of catastrophic losses, like windstorms, earthquakes and floods, and losses from foreign terrorist activities may not be insurable or may not be economically insurable. Even when insurable, these policies may have high deductibles and/or high premiums. Lenders may require such insurance. Our failure to obtain such insurance could constitute a default under loan agreements, and/or our lenders may force us to obtain such insurance at unfavorable rates, which could materially and adversely affect our profitability and revenues.

In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in an asset, as well as the anticipated future revenue from the asset. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the asset. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate an asset after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property, which could materially and adversely affect our profitability.

In addition, insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. With the enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2007, United States insurers cannot exclude conventional, chemical, biological, nuclear and radiation terrorism losses. These insurers must make terrorism insurance available under their property and casualty insurance policies; however, this legislation does not regulate the pricing of such insurance. In many cases, mortgage lenders have begun to insist that commercial property owners purchase coverage against terrorism as a condition of providing mortgage loans. Such insurance policies may not be available at a reasonable cost, which could inhibit our ability to finance or refinance our assets. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses, which could materially and adversely affect our revenues and profitability.

 

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We could incur significant, material costs related to government regulation and litigation with respect to environmental matters, which could materially and adversely affect our revenues and profitability.

Our assets are subject to various U.S. federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require us, as the current owner of an asset, to perform or pay for the clean-up of contamination (including hazardous substances, asbestos and asbestos-containing materials, waste or petroleum products) at, on, under or emanating from the asset and to pay for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned an asset at the time it became contaminated, it is possible we could incur cleanup costs or other environmental liabilities even after we sell assets. Contamination at, on, under or emanating from our assets also may expose us to liability to private parties for costs of remediation and/or personal injury or property damage. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. If contamination is discovered on our assets, environmental laws also may impose restrictions on the manner in which the assets may be used or businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of an asset and, therefore, an owner’s ability to borrow funds using the asset as collateral or to sell the asset on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.

In addition, our assets are subject to various federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and wastewater discharges, lead-based paint, mold and mildew, and waste management. Some of our assets may handle and use hazardous or regulated substances and wastes as part of their operations, which substances and wastes are subject to regulation. Our assets incur costs to comply with these environmental, health and safety laws and regulations and could be subject to fines and penalties for non-compliance with applicable requirements.

Environmental laws in the U.S. also require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, adequately inform or train those who may come into contact with asbestos and undertake special precautions, including removal or other abatement, if that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos. Some of our assets may contain asbestos-containing building materials.

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 any of our assets could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected asset or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability to third parties if property damage or personal injury occurs.

Liabilities and costs associated with environmental contamination at, on, under or emanating from our assets, defending against claims related to alleged or actual environmental issues, or complying with environmental, health and safety laws could be material and could materially and adversely affect us. We can make no assurances that changes in current laws or regulations or future laws or regulations will not impose additional or new material environmental liabilities or that the current environmental condition of our assets will

 

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not be affected by our operations, the condition of the assets in the vicinity of our assets, or by third parties unrelated to us. The discovery of material environmental liabilities at our assets could subject us to unanticipated significant costs, which could significantly reduce or eliminate our profitability and the cash available for distribution to our stockholders.

Compliance or failure to comply with the Americans with Disabilities Act and other safety regulations and requirements could result in substantial costs.

Under the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder, which we refer to collectively as the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages.

Our assets are also subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements would require significant unanticipated expenditures that would affect our cash flow and results of operations. If we incur substantial costs to comply with the ADA or other safety regulations and requirements, it could materially and adversely affect our revenues and profitability.

Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profits or limit our ability to operate our business.

In the normal course of our business, we are involved in various legal proceedings. The outcome of these proceedings cannot be predicted. If any of these proceedings were to be determined adversely to us or a settlement involving a payment of a material sum of money were to occur, it could materially and adversely affect our profits or ability to operate our business. Additionally, we could become the subject of future claims by third parties, including current or former tenants, our employees, our investors or regulators. Any significant adverse judgments or settlements would reduce our profits and could limit our ability to operate our business. Further, we may incur costs related to claims for which we have appropriate third-party indemnity, but such third parties fail to fulfill their contractual obligations.

If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.

In connection with operating as a public reporting company, we will be required to provide reliable financial statements and reports to our stockholders. To monitor the accuracy and reliability of our financial reporting, we will establish an internal audit function, some or all of which may be outsourced, that will oversee our internal controls. We can provide no assurances that our initial accounting policy framework and accounting procedures manual will be adequate to provide reasonable assurance to our stockholders regarding the reliability of our financial reporting and the preparation of our financial statements. In addition, we are developing and documenting current policies and procedures with respect to company-wide business processes and cycles in order to implement effective internal control over financial reporting. We will establish controls and procedures designed to ensure that revenues and expenses are properly recorded at our assets. While we intend to undertake substantial work to comply with Section 404 of the Sarbanes-Oxley Act, we cannot be certain that we will be successful in implementing or maintaining effective internal control over our financial reporting and may determine in the future that our existing internal controls need improvement. If we fail to implement and comply with proper overall controls, we could be materially 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 reporting obligations, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits and cause investors to lose confidence in our reported financial information, which could lead to a substantial decline in the value of our common stock.

 

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As an “emerging growth company,” we are permitted to rely on exemptions from certain reporting and disclosure requirements, which may make our future public filings different than that of other public reporting companies.

We are an “emerging growth company” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting and disclosure requirements that are applicable to public reporting companies that are not emerging growth companies. We will remain an emerging growth company for up to five years, or until the earliest of: (1) the last date of the fiscal year during which we had total annual gross revenues of $1 billion or more; (2) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (3) the date on which we are deemed to be a “large accelerated filer” as defined under Rule 12b-2 under the Exchange Act. For so long as we remain an emerging growth company, we will not be required to:

 

    have an auditor attestation report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

    submit certain executive compensation matters to stockholder advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; or

 

    disclose certain executive compensation related items.

If we choose to take advantage of any or all of these exemptions, the information that we provide you in our future public filings may be different than that of other public reporting companies. The exact implications of the JOBS Act for us are still subject to interpretations and guidance by the Securities and Exchange Commission (the “SEC”) and other regulatory agencies. In addition, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We continue to evaluate and monitor developments with respect to these new rules and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act.

In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public reporting and private companies. This means that an emerging growth company can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. We intend to take advantage of the extended transition period.

We are increasingly dependent on information technology, and potential cyber-attacks, security problems, or other disruption present risks.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include an intruder gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationships with our tenants and private data exposure. Our financial results and reputation may be negatively impacted by such an incident.

 

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Risks Related to Debt Financing

If we are unable to repay or refinance our existing debt as it comes due, we may need to sell the underlying asset sooner than anticipated or the lender may foreclose, in which case our financial condition, cash flows and results of operations could be materially adversely affected.

Mortgages with a current aggregate principal amount outstanding of approximately $89 million underlying three of our assets will mature in 2016 and mortgages with a current aggregate principal amount outstanding of approximately $30.3 million underlying two of our assets will mature in 2017. Adverse economic conditions could cause the terms on which we borrow or refinance to be unfavorable. With respect to the debt that matures in 2016, we may not have sufficient funds on hand to repay this debt at maturity, and we may not be able to refinance the debt on acceptable terms, or at all. Additionally, although the mortgages on certain of our properties do not mature in the near term, due to the near-term expiration of tenant leases at these properties, we may be unable to make mortgage payments and may default under the applicable loan agreement. This may force us to dispose of those assets on disadvantageous terms, or the lender under such mortgages may foreclose, resulting in losses materially adversely affecting our cash flow, results of operations and financial condition.

Our special purpose property-owning subsidiaries may default under non-recourse mortgage loans.

Many of our assets are or will be held in special-purpose property-owning subsidiaries. In the future, such special purpose property-owning subsidiaries may default and/or send notices of imminent default on non- recourse mortgage loans where the relevant asset is or will be suffering from cash shortfalls on operating expenses, leasing costs and/or debt service obligations. If tenants at certain of our properties, such as AT&T— Hoffman Estates or AT&T—St. Louis, fail to renew their leases and we are unable to find new tenants, we may be unable to make mortgage payments and may default under the loan agreement. Additionally, in connection with our separation from InvenTrust, certain lenders under such non-recourse mortgage loans may allege that a default has been deemed to occur under such loans.

Any default by our special purpose property-owning subsidiaries under non-recourse mortgage loans would give the special servicers the right to accelerate the payment on the loans and the right to foreclose on the asset underlying such loans. There are several potential outcomes on the default of a non-recourse mortgage loan, including foreclosure, a deed-in-lieu of foreclosure, a cooperative short sale, or a negotiated modification to the terms of the loan. There is no assurance that we will be able to achieve a favorable outcome on a cooperative or timely basis on any defaulted mortgage loan.

MB REIT is subject to obligations under certain “non-recourse carve out” indemnity agreements and guarantees that may be deemed to be triggered in the future.

Nine of our assets, all of which were owned directly or indirectly by MB REIT prior to the consummation of the Reorganization Transactions, are encumbered by traditional non-recourse debt obligations. In connection with these loans, MB REIT entered into indemnity agreements and “non-recourse carve out” guarantees, which provide for these otherwise non-recourse loans to become partially or fully recourse against MB REIT if certain triggering events occur. Although these events differ from loan to loan, some of the common events include:

 

    The special purpose property-owning subsidiary’s or MB REIT’s filing of a voluntary petition for bankruptcy or commencing similar insolvency proceedings;

 

    Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to any subordinate financing or other voluntary lien encumbering the associated asset; and

 

    Subject to certain conditions, the special purpose property-owning subsidiary’s failure to obtain the lender’s written consent prior to a transfer or conveyance of the associated asset.

 

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In addition, other items that are customarily recourse to a non-recourse carve out guarantor include, but are not limited to, the payment of real property taxes, the breach of representations related to environmental issues or hazardous substances, physical waste of the property, liens which are senior to the mortgage loan and outstanding security deposits.

In the event that any of these triggering events occur and such loans become partially or fully recourse against MB REIT, our business, financial condition, results of operations, and the value of our common stock would be materially adversely affected, and we may be forced to sell other assets and/or our insolvency could result. Additionally, in connection with our separation from InvenTrust, certain lenders under such non-recourse mortgage loans may allege that a default has been deemed to occur under such loans and may seek to recover from Highlands and/or its subsidiaries the full extent of their losses with respect to such loans. Any such allegations may create a distraction for our management, result in significant liability, or subject us to litigation that could be costly or otherwise materially adversely affect us.

Our failure to comply with all covenants in our existing or future debt agreements could materially and adversely affect us.

The mortgages on our existing assets, and any future mortgages likely will, contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable asset or to discontinue insurance coverage. In addition, such loans contain negative covenants that, among other things, preclude certain changes of control, inhibit our ability to incur additional indebtedness or, under certain circumstances, restrict cash flow necessary to make distributions to our stockholders. Any credit facility or secured loans that we may enter into likely will contain customary financial covenants, restrictions, requirements and other limitations with which we must comply. Our continued ability to borrow under any credit facility that we may obtain will be subject to compliance with our financial and other covenants, including covenants relating to debt service coverage ratios, leverage ratios, and liquidity and net worth requirements, and our ability to meet these covenants will be adversely affected if our financial condition and cash flows are materially adversely affected or if general economic conditions deteriorate. In addition, our failure to comply with these covenants, as well as our inability to make required payments, could cause a default under the applicable agreement, which could result in the acceleration of the debt and require us to repay such debt with capital obtained from other sources, which may not be available to us or may be available only on unattractive terms. Furthermore, if we default on secured debt, lenders can take possession of the asset or assets securing such debt. In addition, agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the lenders the right to declare a default on its debt and to enforce remedies, including acceleration of the maturity of such debt upon the occurrence of a default under such other indebtedness. If we default on any of our agreements, it could have a material adverse effect on our financial condition, cash flows or results of operations.

In addition, in connection with our agreements we have entered, and in the future may enter, into lockbox and cash management agreements pursuant to which substantially all of the income generated by our assets will be deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our lenders and from which cash will be distributed to us only after funding of certain items, which may include payment of principal and interest on our debt, insurance and tax reserves or escrows and other expenses. Currently, AT&T—Hoffman Estates, AT&T—Cleveland, Dulles Executive Plaza and the Shops at Sherman Plaza are subject to such an arrangement. As a result, we may be forced to borrow additional funds in order to make distributions to our stockholders necessary to allow us to qualify as a REIT.

Volatility in the financial markets and challenging economic conditions could adversely affect our ability to secure debt financing on attractive terms and our ability to service any future indebtedness that we may incur.

The domestic and international commercial real estate debt markets could become very volatile as a result of, among other things, the tightening of underwriting standards by lenders and credit rating agencies. This could result in less availability of credit and increasing costs for what is available. If the overall cost of borrowing

 

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increases, either by increases in the index rates or by increases in lender spreads, the increased costs may result in lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets were to persist, our ability to borrow funds to finance activities related to real estate assets could be negatively impacted. In addition, we may find it difficult, costly or impossible to refinance indebtedness that is maturing.

Further, economic conditions could negatively impact commercial real estate fundamentals and result in declining values in our real estate portfolio and in the collateral securing any loan investments we may make, which could have various negative impacts. Specifically, the value of collateral securing any loan we hold could decrease below the outstanding principal amounts of such loans.

Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the assets securing the loans.

In some instances, InvenTrust acquired assets by assuming existing financing or borrowing new monies. We may borrow money for other purposes to, among other things, satisfy the requirement that we distribute at least 90% of our “REIT annual taxable income,” subject to certain adjustments, or as is otherwise necessary or advisable to assure that we qualify as a REIT for federal income tax purposes. Over the long term, however, payments required on any amounts we borrow reduce the funds available for, among other things, capital expenditures for existing assets or distributions to our stockholders because cash otherwise available for these purposes is used to pay principal and interest on this debt.

If there is a shortfall between the cash flow from an asset and the cash flow needed to service mortgage debt on an asset, then the amount of cash flow from operations available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by an asset may result in lenders initiating foreclosure actions. In such a case, we could lose the asset securing the loan that is in default, thus reducing the value of your investment. For tax purposes, a foreclosure is treated as a sale of the asset or assets for a purchase price equal to the outstanding balance of the debt secured by the asset or assets. If the outstanding balance of the debt exceeds our tax basis in the asset or assets, we would recognize taxable gain on the foreclosure action and we would not receive any cash proceeds. We also may fully or partially guarantee any funds that subsidiaries borrow to operate assets. In these cases, we will likely be responsible to the lender for repaying the loans if the subsidiary is unable to do so. If any mortgage contains cross-collateralization or cross-default provisions, more than one asset may be affected by a default.

If we are unable to borrow at favorable rates, we may not be able to refinance existing loans at maturity.

If we are unable to borrow money at favorable rates, or at all, we may be unable to refinance existing loans at maturity. Further, we may enter into loan agreements or other credit arrangements that require us to pay interest on amounts we borrow at variable or “adjustable” rates. Increases in interest rates will increase our interest costs. If interest rates are higher when we refinance our loans, our expenses will increase, thereby reducing our cash flow. Further, during periods of rising interest rates, we may be forced to sell one or more of our assets earlier than anticipated in order to repay existing loans, which may not permit us to maximize the return on the particular assets being sold.

Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.

We have obtained, and may continue to enter into mortgage indebtedness that does not require us to pay principal for all or a portion of the life of the debt instrument. During the period when no principal payments are required, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan is not reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal required during this period. After the interest-only period, we may be

 

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required either to make scheduled payments of principal and interest or to make a lump-sum or “balloon” payment at or prior to maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan if we do not have funds available or are unable to refinance the obligation.

Covenants applicable to current or future debt could restrict our ability to make distributions to our stockholders and, as a result, we may be unable to make distributions necessary to qualify as a REIT, which could materially and adversely affect us and the value of our common stock.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed 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 the Code. If, as a result of covenants applicable to our current or future debt, we are restricted from making distributions to our stockholders, we may be unable to make distributions necessary for us to avoid U.S. federal corporate income and excise taxes and maintain our qualification as a REIT, which could materially and adversely affect us.

Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.

We have borrowed money, which bears interest at variable rates, and therefore are exposed to increases in costs in a rising interest rate environment. Increases in interest rates would increase our interest expense on any variable rate debt, as well as any debt that must be refinanced at higher interest rates at the time of maturity. Our future earnings and cash flows could be adversely affected due to the increased requirement to service our debt and could reduce the amount we are able to distribute to our stockholders.

Our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly leveraged in the future, which could materially and adversely affect us.

Our organizational documents contain no limitations on the amount of debt that we may incur, and our board of directors may change our financing policy at any time without stockholder notice or approval. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:

 

    our cash flows from operations may be insufficient to make required payments of principal and interest;

 

    our debt and resulting maturities may increase our vulnerability to adverse economic and industry conditions;

 

    we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes;

 

    the terms of any refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced, or we may not be able to refinance our debt at all;

 

    we may be obligated to repay the debt pursuant to guarantee obligations; and

 

    the use of leverage could adversely affect our ability to raise capital from other sources or to make distributions to our stockholders and could adversely affect the value of our common stock.

 

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If we violate covenants in future agreements relating to indebtedness that we may incur, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. In addition, indebtedness agreements may require that we meet certain covenant tests in order to make distributions to our stockholders.

Risks Related to Our Relationship with InvenTrust and the Separation

Our historical financial results as a subsidiary of InvenTrust may not be representative of our results as a separate, stand-alone public reporting company.

The historical financial information we have included in this Information Statement has been derived from InvenTrust’s consolidated financial statements and does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been a separate, stand-alone reporting public company during the periods presented. InvenTrust did not historically account for Highlands, and we were not operated as a separate, stand-alone company for the historical periods presented. The historical costs and expenses reflected in our combined financial statements include an allocation for certain corporate and shared functions historically provided to us by InvenTrust. These allocation methods varied by function, but were generally based on historical costs of assets. The historical information does not necessarily indicate what our results of operations, financial position, cash flows or costs and expenses will be in the future. Our pro forma adjustments reflect changes that may occur in our funding and operations as a result of the separation. However, there can be no assurances that these adjustments will reflect our costs as a stand-alone public reporting company. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Financial and Operating Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements” and the notes to those statements included elsewhere in this Information Statement.

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from InvenTrust, and we may no longer enjoy certain benefits from InvenTrust.

By separating from InvenTrust, we will be more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of InvenTrust. Following our separation from InvenTrust, we will be a significantly smaller company than InvenTrust, and we will not have access to the financial and other resources of InvenTrust or to resources comparable to those of InvenTrust. As a separate, stand-alone company, we will likely be unable to obtain debt or goods, technology and services at prices and on terms as favorable as those available to us prior to the separation, which could materially and adversely affect our business, financial condition, cash flows and results of operations. Additionally, we may not be able to achieve the strategic benefits that we anticipate will result from our separation from InvenTrust or such benefits may be delayed or may not occur at all.

Our ability to operate our business effectively may suffer if we do not, quickly and cost-effectively, establish our own financial, administrative and other support functions in order to operate as a stand-alone company or our own internal controls and procedures, and we cannot assure you that the transitional services InvenTrust has agreed to provide us will be sufficient for our needs.

Historically, we have relied on financial, administrative and other resources of InvenTrust to operate our business. In conjunction with our separation from InvenTrust, we will need to create our own financial, administrative and other support systems or contract with third parties to replace InvenTrust’s systems. We expect the cost of creating this infrastructure to be approximately $             million, including approximately $             million in capital expenditures. We have entered into an agreement with InvenTrust under which InvenTrust will provide certain transitional services to us. See “Certain Relationships and Related Transactions” for a description of these services. These services may not be sufficient to meet our needs, and, after our agreement with InvenTrust expires, we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have. Any failure or significant downtime in our own financial

 

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or administrative systems or in InvenTrust’s financial or administrative systems during the transitional period could impact our results and/or prevent us from paying our employees, or performing other administrative services on a timely basis and could materially and adversely affect us.

Additionally, upon completion of the separation, we will be required to develop and implement our own control systems and procedures to assist us in qualifying and maintaining our qualification as a public reporting REIT and satisfying our periodic and current reporting requirements under applicable SEC regulations. As a result, substantial work on our part will be required to implement and execute appropriate reporting and compliance processes and assess their design, remediate any deficiencies identified and test the operation of such processes.

We may have potential business conflicts of interest with InvenTrust with respect to our past and ongoing relationships.

Conflicts of interest may arise between InvenTrust and us in a number of areas relating to our past and ongoing relationships, including:

 

    labor, tax, employee benefit, indemnification and other matters arising from our separation from InvenTrust;

 

    intellectual property matters; and

 

    employee recruiting and retention.

We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated third party.

Our agreements with InvenTrust may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.

The agreements related to our separation from InvenTrust were negotiated in the context of our separation from InvenTrust while we were still part of InvenTrust and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements we negotiated in the context of our separation related to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations among InvenTrust and us. See “Certain Relationships and Related Transactions.”

The distribution of shares of our common stock will not qualify for tax-deferred treatment and may be taxable to you as a dividend.

The distribution of shares of our common stock will not qualify for tax-deferred treatment, and an amount equal to the fair market value of the shares received by you on the distribution date will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of InvenTrust. Although the distribution will be taxable to InvenTrust and InvenTrust stockholders, InvenTrust does not anticipate recognizing taxable gain as a result of the distribution. As a result, InvenTrust anticipates that the distribution will not increase its earnings and profits for the year in which the distribution occurs, which is anticipated to be 2016. Thus, if you own your InvenTrust common stock for the entire year in which the distribution occurs, InvenTrust anticipates that the distribution will not increase the amount of dividend income you will recognize for that year compared to the amount of dividend income you would have recognized if the distribution had not occurred. The amount in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in shares of InvenTrust common stock and any remaining excess will be treated as capital gain. Your tax basis in shares of InvenTrust common stock held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by InvenTrust in the distribution exceeds InvenTrust’s current and accumulated earnings and profits. Your holding period for such

 

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InvenTrust shares will not be affected by the distribution. Your holding period for your shares of our common stock will begin the day following the distribution of our common stock, and your basis in our common stock will equal the fair market value of the shares received by you on the distribution date. InvenTrust will not be able to advise stockholders of the amount of earnings and profits of InvenTrust until after the end of the 2016 calendar year. InvenTrust or other applicable withholding agents may be required or permitted to withhold at the applicable rate on all or a portion of the distribution payable to non-U.S. stockholders, and any such withholding could be satisfied by InvenTrust or such agent by withholding and selling a portion of our shares otherwise distributable to non-U.S. stockholders or by withholding on other distributions made to non-U.S. stockholders. For a more detailed discussion, see “Our Separation from InvenTrust—Certain Material U.S. Federal Income Tax Consequences of the Separation” and “Material U.S. Federal Income Tax Consequences.”

Although InvenTrust will be ascribing a value to our shares in the distribution for tax purposes, and will report that value to stockholders and the Internal Revenue Service, or the IRS, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to our shares. Such a higher valuation may cause a larger reduction in the tax basis of your InvenTrust shares or may cause you to recognize additional dividend or capital gain income. You should consult your own tax advisor as to the particular tax consequences of the distribution to you.

InvenTrust’s board of directors has reserved the right, in its sole discretion, to amend, modify or abandon the separation and distribution and the related transactions at any time prior to the distribution date. In addition, the separation and distribution and related transactions are subject to the satisfaction or waiver by InvenTrust’s board of directors in its sole discretion of a number of conditions. We cannot assure you that any or all of these conditions will be met.

The InvenTrust board of directors has reserved the right, in its sole discretion, to amend, modify or abandon the separation and distribution and the related transactions at any time prior to the distribution date. This means that InvenTrust may cancel or delay the planned separation and distribution if at any time the board of directors of InvenTrust determines that it is not in the best interests of InvenTrust and its stockholders. If InvenTrust’s board of directors makes a decision to cancel the separation and distribution, stockholders of InvenTrust will not receive any distribution of our common stock and InvenTrust will be under no obligation whatsoever to its stockholders to distribute such common shares. In addition, the separation and distribution and related transactions are subject to the satisfaction or waiver by InvenTrust’s board of directors in its sole discretion of a number of conditions. We cannot assure you that any or all of these conditions will be met.

Risks Related to Our Status as a REIT

Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.

We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT beginning with our short taxable year commencing immediately prior to the separation and ending on December 31, 2016. However, we cannot assure you that we will qualify and remain qualified as a REIT. In connection with our separation from InvenTrust, we expect to receive an opinion from Hunton & Williams LLP that, beginning with our short taxable year commencing immediately prior to the separation and ending on December 31, 2016, we have been organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws and our proposed method of operations will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for our short taxable year ending December 31, 2016 and subsequent taxable years. You should be aware that Hunton & Williams LLP’s opinion is based upon customary assumptions, will be conditioned upon certain representations made by us, InvenTrust, Xenia and certain private REITs in which InvenTrust owns an interest (the “Private REITs”) as to factual matters, including representations regarding the nature of our, InvenTrust’s, Xenia’s and the Private REITs’ assets and the conduct of our, InvenTrust’s, Xenia’s and the Private REITs’ business, is not binding upon the IRS, or any court and speaks as of the date issued. In

 

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addition, Hunton & Williams LLP’s opinion will be based on existing U.S. federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the U.S. federal tax laws. Hunton & Williams LLP will not review our compliance with those tests on a continuing basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.

If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:

 

    we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

 

    we could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and

 

    unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock. See “Material U.S. Federal Income Tax Consequences” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.

If either InvenTrust or MB REIT failed to qualify as a REIT in its 2012 through 2016 taxable years, we would be prevented from electing to qualify as a REIT.

We believe that prior to the separation, we will be a “qualified REIT subsidiary” of InvenTrust. Under applicable Treasury regulations, if either InvenTrust or MB REIT failed, or fails, to qualify as a REIT in its 2012 through 2016 taxable years, unless such failure was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which InvenTrust or MB REIT failed to qualify.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, any taxable REIT subsidiary (“TRS”) that we may form will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.

Failure to make required distributions would subject us to federal corporate income tax.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code.

 

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REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.

To satisfy the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets sooner than anticipated, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. In addition, we may recognize significant cancellation of indebtedness income or gain from the workout of our debt or the disposition of our assets in foreclosure or deed-in-lieu transactions, which will result in the receipt of taxable income in excess of the cash received, if any, from those transactions. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT.

The prohibited transactions tax may limit our ability to dispose of our assets, and we could incur a material tax liability if the Internal Revenue Service successfully asserts that the 100% prohibited transaction tax applies to some of or all our past or future dispositions.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of asset, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transactions tax equal to 100% of net gain upon a disposition of an asset. As part of our plan to liquidate our portfolio, we intend to make dispositions of our assets in the future. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, some or all of our future dispositions may not qualify for that safe harbor. We intend to avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. To avoid the prohibited transaction tax, we may choose not to engage in certain sales of our assets or may conduct such sales through a TRS, which would be subject to federal, state and local income taxation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our future dispositions are subject to the 100% prohibited transactions tax. If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material.

The stock ownership limit imposed by the Code for REITs and our charter may restrict our business combination opportunities and you may be restricted from acquiring or transferring certain amounts of our common stock.

The stock ownership restrictions of the Code for REITs and the 9.8% stock ownership limit in our charter may restrict our business combination opportunities and restrict your ability to acquire or transfer certain amounts of our common stock.

In order to qualify as a REIT for each taxable year after 2016, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year after 2016. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock. However, these ownership limits might delay or prevent a transaction or a change in our control or other business combination opportunities.

Our charter authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors (prospectively or retroactively), our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares,

 

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whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to attempt to, or continue to, qualify as a REIT or that compliance is no longer required in order for us to qualify as a REIT.

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

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends treated as qualified dividend income, which could adversely affect the value of the shares of REITs, including our common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risk with respect to borrowings made, or to be made, to acquire or carry real estate assets generally will not constitute gross income for purposes of the 75% and 95% income requirements applicable to REITs. In addition, any income from certain other qualified hedging transactions would generally not constitute gross income for purposes of both the 75% and 95% income tests. However, we may be required to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to attempt to, or continue to qualify as a REIT. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

We may be subject to adverse legislative or regulatory tax changes that could reduce the value of our common stock.

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

 

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Risks Related to Ownership of Our Common Stock and Our Corporate Structure

Since our shares will not be traded on any securities exchange after our separation from InvenTrust, there is no established public market for our shares and you may not be able to sell your shares.

We do not intend to list our shares of common stock on any securities exchange or other market, and so there will be no established public trading market for our shares subsequent to our separation from InvenTrust, nor is there any assurance that one may develop. Our charter also prohibits the ownership of more than 9.8% (in value or number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of any class or series of our capital stock by any person unless exempted prospectively or retrospectively by our board. This may inhibit investors from purchasing a large portion of our shares. Our charter also does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading on a securities exchange or other market by a specified date or provide any other type of liquidity to our stockholders. Additionally, we do not intend to adopt a stock redemption plan subsequent to our separation from InvenTrust. Therefore, it will be difficult for you to sell your shares promptly or at all, including in the event of an emergency, and if you are able to sell your shares, you may have to sell them at a substantial discount from the estimated value per share.

Our cash available for distribution to stockholders may not be sufficient to pay distributions at expected or required levels, and we may need external sources in order to make such distributions, or we may not be able to make such distributions at all.

We generally intend over time to make annual distributions in an amount at least equal to the amount that will allow us to qualify as a REIT and to avoid current entity level U.S. federal income taxes, however, we may not have sufficient cash from operations to make a distribution required to qualify for or maintain our qualification as a REIT. All distributions will be made at the discretion of our board of directors and will depend on our historical and projected results of operations, liquidity and financial condition, REIT qualification, debt service requirements, capital expenditures and operating expenses, prohibitions and other restrictions under financing arrangements and applicable law and other factors as our board of directors may deem relevant from time to time. No assurance can be given that our projections will prove accurate or that any level of distributions will be made or sustained or achieve a market yield.

We may pay distributions from sources other than cash flow from operations or funds from operations, including funding such distributions from external financing sources, which may be available only at commercially unattractive terms, if at all. To the extent that the aggregate amount of cash distributed in any given year exceeds the amount of our current and accumulated earnings and profits for the same period, the excess amount will be deemed a return of capital for federal income tax purposes, rather than a return on capital. Furthermore, in the event that we are unable to fund future distributions from our cash flows from operating activities, the value of your shares, the sale of our assets or any other liquidity event may be materially adversely affected.

At any time that we are not generating cash flow from operations sufficient to cover the current distribution rate, we may determine to pay lower distributions, or to fund all or a portion of our future distributions from other sources. If we utilize borrowings for the purpose of funding all or a portion of our distributions, we will incur additional interest expense. We have not established any limit on the extent to which we may use alternate sources of cash for distributions, except that, in accordance with the law of the State of Maryland and our organizational documents, generally, we may not make distributions that would: (i) cause us to be unable to pay our debts as they become due in the usual course of business, (ii) cause our total assets to be less than the sum of our total liabilities, or (iii) jeopardize our ability to maintain our qualification as a REIT for so long as the board of directors determines that it is in our best interests to continue to qualify as a REIT. Distributions that exceed cash flow from operations may not be sustainable at current levels, or at all.

 

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Future issuances of debt securities, which would rank senior to our common stock upon our liquidation, and future issuances of equity securities, which would dilute the holdings of our existing common stockholders and may be senior to our common stock for the purposes of making distributions, periodically or upon liquidation, may negatively affect the value of our common stock.

In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before common stockholders. If we incur debt in the future, our future interest costs could increase, and adversely affect our liquidity and results of operations. We are not required to offer any additional equity securities to existing common stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities, warrants or options, will dilute the holdings of our existing common stockholders and such issuances, or the perception of such issuances, may reduce the value of our common stock. Our preferred stock, if issued, would likely have a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the value of our common stock.

Your percentage ownership in us may be diluted in the future.

Your percentage ownership in us may be diluted in the future because of new equity issuances, capital market transactions or otherwise, including, without limitation, equity awards that may be granted to our directors, officers and employees.

Increases in market interest rates may reduce demand for our common stock and result in a decline in the value of our common stock.

The value of our common stock may be influenced by the distribution yield on our common stock (i.e., the amount of our annual distributions as a percentage of the fair market value of our common stock) relative to market interest rates. An increase in market interest rates, which are currently low compared to historical levels, may lead prospective purchasers of our common stock to expect a higher distribution yield, which we may not be able, or may choose not, to provide. Higher interest rates would also likely increase our borrowing costs and decrease our operating results and cash available for distribution. Thus, higher market interest rates could cause the value of our common stock to decline.

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

Under Maryland law generally, a director is required to perform his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Under Maryland law, directors are presumed to have acted in accordance with this standard of conduct. In addition, our charter eliminates the liability of our directors and officers to us 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

 

    active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

Our charter authorizes us to obligate ourselves and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any present or former director or officer who is made or

 

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threatened to be made a party to the proceeding by reason of his or her service to us in that capacity. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws.

Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the Maryland General Corporation Law (“MGCL”), may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of our common stock with the opportunity to benefit from a sale of our common stock, including:

 

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

 

    “control share” provisions that provide that “control shares” of our company (defined as voting shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder 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 issued and outstanding 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 the votes entitled to be cast on the matter, excluding all interested shares.

As permitted by Maryland law, we have elected, by resolution of our board of directors, to opt out of the business combination provisions of the MGCL, provided that such business combination has been approved by our board of directors (including a majority of directors who are not affiliated with the interested stockholder), and, pursuant to a provision in our bylaws, to exempt any acquisition of our stock from the control share provisions of the MGCL. However, our board of directors may by resolution elect to repeal the exemption from the business combination provisions of the MGCL and may by amendment to our bylaws opt into the control share provisions of the MGCL at any time in the future.

Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to adopt certain mechanisms, some of which (for example, a classified board) we do not have. These provisions may have the effect of limiting or precluding a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide the holders of our common stock with the opportunity to benefit from a sale of our common stock. Our charter contains a provision whereby we will elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. See “Certain Provisions of Maryland Law and Our Charter and Bylaws.”

If our board of directors were to elect to be subject to the provision of Subtitle 8 providing for a classified board or the business combination provisions of the MGCL or if the provisions of our bylaws opting out of the control share acquisition provisions of the MGCL were amended or rescinded, these provisions of the MGCL could have anti-takeover effects.

 

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All of our assets will be owned by subsidiaries. We depend on dividends and distributions from these subsidiaries. The creditors of these subsidiaries are entitled to amounts payable to them by the subsidiaries before the subsidiaries may pay any dividends or other distributions to us.

All of our assets and assets are held through wholly owned subsidiaries. We depend on cash distributions from our subsidiaries for substantially all of our cash flow. The creditors of each of our subsidiaries are entitled to payment of that subsidiary’s obligations to them when due and payable before that subsidiary may make distributions or dividends to us. Thus, our ability to pay dividends, if any, to our stockholders depends on our subsidiaries’ ability to first satisfy their obligations to their creditors and our ability to satisfy our obligations, if any, to our creditors.

In addition, our participation in any distribution of the assets of any of our subsidiaries upon the liquidation, reorganization or insolvency of the subsidiary, is only after the claims of the creditors, including trade creditors and preferred stockholders, if any, of the applicable direct or indirect subsidiaries are satisfied.

Our charter places limits on the amount of common stock that any person may own.

In order for us to qualify as a REIT under the Code, no more than 50% of the outstanding shares of our common stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year (other than the first taxable year for which an election to be a REIT has been made). Unless exempted by our board of directors, prospectively or retroactively, our charter prohibits any person or group from owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets that might involve a premium price for holders of our common stock.

If anyone transfers shares in a way that would violate the ownership limit, or prevent us from qualifying as a REIT under the U.S. federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either purchased by us or sold to a person whose ownership of the shares will not violate the ownership limit. If this transfer to a trust fails to prevent such a violation or our continued qualification as a REIT, then the initial intended transfer shall be null and void from the outset. The intended transferee of those shares will be deemed never to have owned the shares. Anyone who acquires shares in violation of the ownership limit or the other restrictions on transfer in our charter bears the risk of suffering a financial loss when the shares are sold if the value of our shares falls between the date of purchase and the date of redemption or sale.

Our charter permits our board of directors to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.

Our board may classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of the stock and may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue without stockholder approval. Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or shares of preferred stock or common stock that could have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.

 

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Our conflict of interest policy may not be successful in eliminating the influence of future conflicts of interest that may arise between us and our directors, officers and employees.

Effective upon completion of the separation, we intend to adopt a policy that any transaction, agreement or relationship in which any of our directors, officers or employees has a material direct or indirect pecuniary interest must be approved by a majority of our disinterested directors. Other than this policy, however, we may not adopt additional formal procedures for the review and approval of conflict of interest transactions generally. As such, our policies and procedures may not be successful in eliminating the influence of conflicts of interest. See “Business and Properties—Conflict of Interest Policy.”

Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investment.

Our investment policies may change over time. The methods of implementing our investment policies may also vary, as new investment techniques are developed. Our investment policies, the methods for implementing them, and our other objectives, policies and procedures may be altered by a majority of the directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and commercial real property market fluctuations, all of which could materially and adversely affect our ability to achieve our investment objectives.

 

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FORWARD-LOOKING STATEMENTS

This Information Statement contains forward-looking statements within the meaning of the federal securities laws. All statements, other than statements of historical facts included in this Information Statement, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information referred to under “Summary,” “Risk Factors,” “Distribution Policy,” “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and “Description of Indebtedness” are forward-looking statements. When used in this Information Statement, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words and phrases, or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.

Forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Information Statement. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth above under “Risk Factors” and the risks and uncertainties related to the following:

 

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

 

    our ability to repay or refinance our debt as it comes due;

 

    business, financial and operating risks inherent to real estate investments;

 

    contraction in the global economy or low levels of economic growth;

 

    our ability to sell our assets at a price and on a timeline consistent with our investment objectives, or at all;

 

    our ability to service our debt;

 

    changes in interest rates and operating costs;

 

    compliance with regulatory regimes and local laws;

 

    uninsured or underinsured losses, including those relating to natural disasters or terrorism;

 

    our status as an emerging growth company;

 

    the amount of debt that we currently have or may incur in the future;

 

    provisions in our debt agreements that may restrict the operation of our business;

 

    our separation from InvenTrust and our ability to operate as a stand-alone public reporting company;

 

    our organizational and governance structure;

 

    our status as a REIT;

 

    the cost of compliance with and liabilities under environmental, health and safety laws;

 

    adverse litigation judgments or settlements;

 

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    changes in real estate and zoning laws and increase in real property tax rates;

 

    changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs;

 

    changes in governmental regulations or interpretations thereof; and

 

    estimates relating to our ability to make distributions to our stockholders in the future.

 

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OUR SEPARATION FROM INVENTRUST

General

The board of directors of InvenTrust determined upon careful review and consideration that the separation of our assets from the rest of InvenTrust and the establishment of us as a separate public reporting company was in the best interest of InvenTrust and its stockholders.

In furtherance of this plan, InvenTrust will distribute 100% of the outstanding shares of our common stock held by InvenTrust to holders of InvenTrust common stock, subject to certain conditions. The distribution of our common stock is expected to take place on                      , 2016. On the distribution date, each holder of InvenTrust common stock will receive              share(s) for every              share(s) of InvenTrust common stock held at the close of business on the distribution record date, as described below. You will not be required to make any payment, surrender or exchange your shares of InvenTrust common stock or take any other action to receive your shares of our common stock to which you are entitled on the distribution date.

The distribution of our common stock as described in this Information Statement is subject to the satisfaction or waiver of certain conditions. We cannot provide any assurances that the distribution will be completed. For a more detailed description of these conditions, see the section entitled “—Conditions to the Distribution.”

The Number of Shares You Will Receive

For every              share(s) of InvenTrust common stock that you owned at the close of business on or about                 , 2016, the distribution record date, you will receive              share(s) of our common stock on the distribution date.

Transferability of Shares You Receive

The shares of Highlands common stock distributed to InvenTrust stockholders will be freely transferable (subject to the restrictions in our charter on the ownership and transfer of stock intended to assist us in maintaining REIT status), except for shares received by persons who may be deemed to be our “affiliates” under the Securities Act. Persons who may be deemed to be our affiliates after the separation generally include individuals or entities that control, are controlled by or are under common control with us and may include directors and certain officers or principal stockholders of us. Our affiliates will be permitted to sell their shares of Highlands common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Rule 144.

When and How You Will Receive the Distributed Shares

InvenTrust will distribute the shares of our common stock on                      , 2016, the distribution date. DST Systems, Inc. will serve as distribution agent, transfer agent and registrar for our common stock and as distribution agent in connection with the distribution.

If you own InvenTrust common stock as of the close of business on the distribution record date, the shares of Highlands common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as is the case in the distribution.

Commencing on or shortly after the distribution date, if you hold your shares in book-entry form and you are the registered holder of such shares, the distribution agent will mail to you an account statement that indicates the number of shares of our common stock that have been registered in book-entry form in your name, or your bank or brokerage firm will credit your account for the shares.

 

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Treatment of Fractional Shares

InvenTrust will distribute to you              share(s) of Highlands common stock for every              share(s) of InvenTrust common stock held by you as of the record date, which may result in your receiving a fractional number shares.

Results of the Separation

After the separation, we will be a separate public company, but we do not intend to list any shares of our common stock on any securities exchange or other market. Immediately following the distribution, we expect to have approximately     stockholders of record, based on the number of registered stockholders of InvenTrust common stock on                  , 2016, and                 shares of our common stock outstanding. The actual number of shares to be distributed will be determined on the distribution record date and will reflect any changes in the number of shares of InvenTrust common stock between                  , 2016 and the distribution record date.

We will enter into a Separation and Distribution Agreement to effect the separation and distribution. In addition, we will enter into various other agreements with InvenTrust to effect the separation and provide a framework for our relationship with InvenTrust after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and InvenTrust of InvenTrust’s assets, liabilities and obligations attributable to periods prior to, at and after our separation from InvenTrust and will govern certain relationships between us and InvenTrust after the separation. For a more detailed description of these agreements, see the section entitled “Certain Relationships and Related Transactions.”

The distribution will not affect the number of outstanding shares of InvenTrust common stock or any rights of InvenTrust stockholders.

Certain Material U.S. Federal Income Tax Consequences of the Separation

The following is a summary of the material U.S. federal income tax consequences of the separation, and in particular the distribution by InvenTrust of shares of our common stock to stockholders of InvenTrust. For purposes of this section under the heading “Certain Material U.S. Federal Income Tax Consequences of the Separation”: (1) any references to the “separation” shall mean only the distribution of our common stock by InvenTrust to stockholders of InvenTrust; (2) references to “Highlands,” “we,” “our” and “us” mean only Highlands and not its subsidiaries or other lower-tier entities, except as otherwise indicated; and (3) references to InvenTrust refer to InvenTrust Properties Corp. This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. We have not sought and do not intend to seek an advance ruling from the IRS regarding any matter discussed herein. The summary is also based upon the assumption that InvenTrust, Highlands and their respective subsidiaries and affiliated entities will operate in accordance with their applicable organizational documents and the agreements and other documents applicable to the separation. This summary is for general information only and is not tax advice. The Code provisions governing the U.S. federal income tax treatment of REITs (such as InvenTrust and Highlands) and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof. This summary does not address all possible tax considerations that may be material to a stockholder and does not constitute legal or tax advice. Moreover, this summary does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular stockholder in light of its investment or tax circumstances, or to stockholders subject to special tax rules, such as:

 

    financial institutions;

 

    insurance companies;

 

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    broker-dealers;

 

    regulated investment companies;

 

    foreign sovereigns and their controlled entities;

 

    partnerships and trusts;

 

    persons who will hold InvenTrust common stock on behalf of other persons as nominees;

 

    persons who received InvenTrust common stock through the exercise of employee stock options or otherwise as compensation;

 

    persons who will hold InvenTrust common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment; and

 

    except to the extent discussed below, tax-exempt organizations and foreign investors.

This summary assumes that stockholders will hold their InvenTrust common stock as a capital asset for U.S. federal income tax purposes, which generally means as property held for investment.

For purposes of this discussion under the heading “Certain U.S. Federal Income Tax Consequences of the Separation,” a “U.S. stockholder” is a beneficial owner of InvenTrust common stock that is for U.S. federal income tax purposes:

 

    a citizen or resident of the United States;

 

    a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any of its states, or the District of Columbia;

 

    an estate whose income is subject to U.S. federal income taxation regardless of its source; or

 

    a trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.

A “non-U.S. stockholder” is a beneficial owner of InvenTrust common stock that is neither a U.S. stockholder nor a partnership (or other entity treated as a partnership) for U.S. federal income tax purposes. If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds InvenTrust common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A stockholder that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the separation.

THE U.S. FEDERAL INCOME TAX TREATMENT OF THE SEPARATION TO STOCKHOLDERS OF INVENTRUST DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF THE SEPARATION TO ANY PARTICULAR STOCKHOLDER OF INVENTRUST WILL DEPEND ON THE STOCKHOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU OF THE SEPARATION IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES.

Tax Classification of the Separation in General

For U.S. federal income tax purposes, the separation will not be eligible for treatment as a tax-deferred distribution by InvenTrust with respect to its stock. Accordingly, the separation will be treated as if InvenTrust

 

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had distributed to each InvenTrust stockholder an amount equal to the fair market value of the Highlands common stock received by such stockholder, determined as of the date of the separation. We refer to such amount as the “separation distribution amount.” The tax consequences of the separation to InvenTrust’s stockholders are thus generally the same as the tax consequences of InvenTrust’s cash distributions. The discussion below describes the U.S. federal income tax consequences to a U.S. stockholder, a non-U.S. stockholder, and a tax-exempt stockholder of InvenTrust common stock upon the receipt of Highlands common stock in the separation.

The separation will also be a taxable transaction for InvenTrust in which InvenTrust will recognize gain, but not loss, based on the difference between it tax basis in the Highlands common stock and its fair market value as of the separation. InvenTrust anticipates that its tax basis in the Highlands common stock will equal or exceed the fair market value of that stock as of the separation. Accordingly, InvenTrust does not anticipate recognizing taxable gain as a result of the separation. As a result, InvenTrust anticipates that the separation will not increase its earnings and profits for the year in which the separation occurs, which is anticipated to be 2016. Thus, if a stock holder owns its InvenTrust common stock for the entire year in which the separation occurs, InvenTrust anticipates that the separation will not increase the amount of dividend income the stockholder will recognize for that year compared to the amount of dividend income the stockholder would have recognized if the special distribution had not occurred.

Although InvenTrust will ascribe a value to the Highlands common stock distributed in the separation, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to the distributed Highlands common stock. Such a higher valuation may affect the distribution amount and thus the tax consequences of the separation to InvenTrust’s stockholders.

Tax Basis and Holding Period of Highlands Common Stock Received by Holders of InvenTrust Common Stock

An InvenTrust stockholder’s tax basis in shares of Highlands common stock received in the separation generally will equal the fair market value of such shares on the date of the separation, and the holding period for such shares will begin the day after the date of the separation.

Tax Treatment of the Separation to U.S. Stockholders

The following discussion describes the U.S. federal income tax consequences to a U.S. stockholder upon the receipt of shares of Highlands common stock in the separation.

Ordinary Dividend Distributions

The portion of the separation distribution amount received by a U.S. stockholder that is payable out of InvenTrust’s current or accumulated earnings and profits and that is not designated by InvenTrust as a capital gain dividend will generally be taken into account by such U.S. stockholder as ordinary income and will not be eligible for the dividends received deduction for corporations. With limited exceptions, dividends paid by InvenTrust are not eligible for taxation at the preferential income tax rates for qualified dividend income received by U.S. stockholders taxed at individual rates from taxable C corporations. Such U.S. stockholders, however, are taxed at the preferential rates on dividends designated by and received from a REIT, such as InvenTrust, to the extent that the dividends are attributable to dividends received by the REIT from TRSs or other taxable C corporations.

As noted above, InvenTrust does not anticipate recognizing taxable gain as a result of the separation. As a result, InvenTrust anticipates that the separation will not increase its earnings and profits for the year in which the separation occurs. Thus, if a U.S. stockholder owns its InvenTrust common stock for the entire year in which the separation occurs, InvenTrust anticipates that the separation will not increase the amount of dividend income

 

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the U.S. stockholder will recognize for that year compared to the amount of dividend income the U.S. stockholder would have recognized if the separation had not occurred.

Capital Gain Dividend Distributions

A distribution that InvenTrust designates as a capital gain dividend will generally be taxed to U.S. stockholders as long-term capital gain, to the extent that such distribution does not exceed InvenTrust’s actual net capital gain for the taxable year, without regard to the period for which the holder that receives such distribution has held its InvenTrust common stock. Corporate U.S. stockholders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at reduced maximum federal rates in the case of U.S. stockholders that are taxed at individual rates, and ordinary income rates in the case of stockholders that are corporations.

Non-Dividend Distributions

A distribution to U.S. stockholders in excess of InvenTrust’s current and accumulated earnings and profits will generally represent a return of capital and will not be taxable to a U.S. stockholder to the extent that the amount of such distribution does not exceed the adjusted basis of the holder’s InvenTrust common stock in respect of which the distribution was made. Rather, the distribution will reduce the U.S. stockholder’s adjusted tax basis in its InvenTrust common stock. To the extent that such distribution exceeds a U.S. stockholder’s adjusted tax basis in its InvenTrust common stock, the holder generally must include such distribution in income as long-term capital gain, or short-term capital gain if the holder’s InvenTrust common stock has been held for one year or less.

Tax Treatment of the Separation to Non-U.S. Stockholders

The following discussion describes the U.S. federal income tax consequences to a non-U.S. stockholder upon the receipt of shares of Highlands common stock in the separation.

Ordinary Dividend Distributions

The portion of the separation distribution amount received by a non-U.S. stockholder that is (1) payable out of InvenTrust’s earnings and profits, (2) not attributable to InvenTrust’s capital gains, and (3) not effectively connected with a U.S. trade or business of the non-U.S. stockholder, will be treated as a dividend that is subject to U.S. withholding tax at the rate of 30%, unless reduced or eliminated by treaty.

Except as described below, non-U.S. stockholders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of InvenTrust common stock. In cases where the dividend income from a non-U.S. stockholder’s investment in InvenTrust common stock is, or is treated as, effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business, the non-U.S. stockholder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by or on behalf of the non-U.S. stockholder. The income may also be subject to the 30% branch profits tax in the case of a non-U.S. stockholder that is a corporation.

Capital Gain Distributions

Under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), distributions that are attributable to gain from InvenTrust’s sales or exchanges of United States real property interests (“USRPIs”), will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business, and non-U.S. stockholders will be subject to U.S. federal income tax on the distributions at the rates applicable to U.S. individuals or corporations. InvenTrust will be required to withhold a 35% tax on such distributions.

 

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Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a corporate non-U.S. stockholder. It is anticipated that a portion of the separation distribution amount will be capital gain from the disposition of USRPIs.

Distributions received by a non-U.S. stockholder that are attributable to dispositions of InvenTrust’s assets other than USRPIs are not subject to U.S. federal income tax, unless (1) the gain is effectively connected with the non-U.S. stockholder’s U.S. trade or business, in which case the non-U.S. stockholder would be subject to the same treatment as U.S. stockholders with respect to such gain, or (2) the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the non-U.S. stockholder will incur a 30% tax on his capital gains.

Non-Dividend Distributions

Unless InvenTrust’s common stock constitutes a USRPI, the separation distribution amount, to the extent not made out of InvenTrust’s earnings and profits, and not attributable to gain from the disposition of USRPIs (including gain realized in the separation distribution), will not be subject to U.S. federal income tax. If InvenTrust cannot determine at the time of the separation whether the separation distribution amount will exceed its current and accumulated earnings and profits, the separation distribution will be subject to withholding at the rate applicable to ordinary dividends, as described above.

If InvenTrust’s stock constitutes a USRPI, a determination made as described below, distributions that it makes in excess of the sum of (1) the non-U.S. stockholder’s proportionate share of InvenTrust’s earnings and profits, plus (2) the non-U.S. stockholder’s basis in its InvenTrust common stock, will be taxed under FIRPTA in the same manner as if the InvenTrust stock had been sold. In such situations, InvenTrust would be required to withhold 15% of such excess, the non-U.S. stockholder would be required to file a U.S. federal income tax return, and the non-U.S. stockholder would be subject to the same treatment and same tax rates as a U.S. stockholder with respect to such excess, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals.

InvenTrust’s common stock will not be treated as a USRPI if less than 50% of InvenTrust’s assets throughout a prescribed testing period consist of interests in real property located within the United States, excluding, for this purpose, interests in real property solely in a capacity as a creditor. More than 50% of the value of InvenTrust’s assets consisted of USRPI during the relevant period.

InvenTrust’s common stock nonetheless will not constitute a USRPI if InvenTrust is a “domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes a REIT, less than 50% of value of which is held directly or indirectly by non-U.S. stockholders at all times during a specified testing period. It is anticipated that InvenTrust will be a domestically controlled qualified investment entity at the time of the separation distribution, and that a distribution with respect to InvenTrust’s stock in excess of InvenTrust’s earnings and profits will not be subject to withholding taxation under FIRPTA. No complete assurance can be given that InvenTrust will qualify as a domestically controlled qualified investment entity at the time of the separation distribution.

Exemptions from FIRPTA also apply to (1) certain foreign pension trusts and (2) certain non-U.S. stockholders that qualify for benefits under a comprehensive U.S. income tax treaty and are publicly traded entities or certain partnerships and other fiscally transparent entities. Non-U.S. stockholders should consult their tax advisors to determine whether they are entitled to an exemption under FIRPTA as a “qualified foreign pension,” a “qualified shareholder,” or “qualified collective investment vehicle.”

Gain in respect of a non-dividend distribution that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. stockholder in two cases: (1) if the non-U.S. stockholder’s investment in InvenTrust common stock is effectively connected with a U.S. trade or business

 

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conducted by such non-U.S. stockholder, the non-U.S. stockholder will be subject to the same treatment as a U.S. stockholder with respect to such gain; or (2) if the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

Withholding of Amounts Distributable to Non-U.S. Stockholders in the Separation

If InvenTrust is required to withhold any amounts otherwise distributable to a non-U.S. stockholder in the separation, InvenTrust or other applicable withholding agents could collect the amount required to be withheld by (1) reducing to cash for remittance to the IRS by a sufficient portion of shares of Highlands common stock that such non-U.S. stockholder would otherwise receive, and such holder may bear brokerage or other costs for this withholding procedure or (2) withholding from other distributions made to the non-U.S. stockholder. A non-U.S. stockholder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the amounts withheld exceeded the non-U.S. stockholder’s U.S. tax liability for the year in which the separation occurred.

Time for Determination of the Tax Impact of the Separation

The tax consequences of the separation will be affected by a number of facts that are yet to be determined, including InvenTrust’s final earnings and profits for 2016 (including as a result of the income and gain, if any, InvenTrust recognizes in connection with the separation), the fair market value of shares of Highlands common stock on the date of the separation and the extent to which InvenTrust recognizes gain on the sales of USRPIs or other capital assets. However, as noted above, if stockholder owns its InvenTrust common stock for the entire year in which the separation occurs, InvenTrust anticipates that the separation will not increase the amount of dividend income the stockholder will recognize for that year compared to the amount of dividend income the stockholder would have recognized if the special distribution had not occurred. See “—Tax Classification of the Separation in General.” Thus, a definitive calculation of the U.S. federal income tax consequences of the separation will not be possible until after the end of the 2016 calendar year. InvenTrust will provide its stockholders with tax information on an IRS Form 1099-DIV, informing them of the character of distributions made during the taxable year, including the separation.

Market for Common Stock

There is currently no public market for our common stock, and we do not intend to list any shares of our common stock on any securities exchange or other market in connection with the distribution.

Conditions to the Distribution

The distribution of our common stock by InvenTrust is subject to the satisfaction of the following conditions:

 

    the board of directors of InvenTrust shall have authorized the distribution, which authorization may be made or withheld in the InvenTrust board’s sole and absolute discretion;

 

    our registration statement on Form 10, of which this Information Statement is a part, shall have become effective under the Exchange Act, and no stop order relating to the registration statement shall be in effect and no proceedings for such purpose shall be pending before, or threatened by, the SEC;

 

    no preliminary or permanent injunction or other order, decree, or ruling issued by a governmental authority, and no statute (as interpreted through orders or rules of any governmental authority duly authorized to effectuate the statute), rule, regulation or executive order promulgated or enacted by any governmental authority shall be in effect preventing the consummation of, or materially limiting the benefits of, the separation and distribution and other transaction contemplated thereby;

 

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    any required actions and filings necessary or appropriate under federal or state securities and blue sky laws of the U.S. will have been taken;

 

    the Transition Services Agreement and the Employee Matters Agreement shall have been executed and delivered by each of the parties thereto and no party to any of such agreements shall be in material breach of any such agreement;

 

    no event or development shall have occurred or failed to occur that, in the judgment of the board of directors of InvenTrust, in its sole discretion, prevents the consummation of the separation and distribution and related transactions or any portion thereof or makes the consummation of such transactions inadvisable;

 

    any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect; and

 

    the Separation and Distribution Agreement will not have been terminated.

Even if all conditions to the distribution are satisfied, InvenTrust may terminate and abandon the distribution at any time prior to the effectiveness of the distribution.

Reasons for the Separation

Upon careful review and consideration, InvenTrust’s board of directors determined that our separation from InvenTrust is in the best interests of InvenTrust. The board’s determination was based on a number of factors, including those set forth below.

 

    Enabling our dedicated management to focus solely on maximizing the total value of our portfolio in connection with our evaluation of various strategic opportunities. The separation of the Highlands Portfolio from InvenTrust will enable our dedicated management team to focus on preserving, protecting and maximizing the total value of our portfolio until such time as we determine that a sale or other disposition of all or a portion of our portfolio achieves our investment objectives or until it appears such objectives will not be met.

 

    Allow InvenTrust’s management to focus on its retail and student housing platforms. As part of its overall strategic plan and long-term goal of maximizing shareholder value, InvenTrust intends to dispose of its “non-core” assets in order to focus on its multi-tenant retail and student housing platforms. InvenTrust intends to continue to refine and tailor its retail portfolio into key growth markets with favorable demographics and expected above-average net operating income growth and to continue to build its student housing platform through acquisitions and developments at top universities.

The anticipated benefits of the separation are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated, or at all. In the event that the separation does not result in such benefits, the costs associated with the separation could have a material adverse effect on each company individually and in the aggregate. For more information about the risks associated with the separation, see “Risk Factors—Risks Related to Our Relationship with InvenTrust and the Separation.”

Reasons for Furnishing this Information Statement

This Information Statement is being furnished solely to provide information to InvenTrust stockholders who are entitled to receive shares of our common stock in the distribution. The Information Statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or securities of InvenTrust. We believe that the information in this Information Statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither InvenTrust nor we undertake any obligation to update such information.

 

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DISTRIBUTION POLICY

We generally intend over time to make annual distributions in an amount at least equal to the amount that will allow us to qualify as a REIT and to avoid current entity level U.S. federal income taxes. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  i. 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  ii. 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  iii. any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

Distributions made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including our actual and projected results of operations, financial condition, cash flows and liquidity, our qualification as a REIT and other tax considerations, capital expenditures and other obligations, debt covenants, contractual prohibitions or other limitations under applicable law and other such matters as our board of directors may deem relevant from time to time. We cannot assure you that our distribution policy will remain the same in the future, or that any estimated distributions will be made or sustained.

Our ability to make distributions to our stockholders will depend upon the performance of our portfolio and our ability to successfully execute on our disposition strategy. Distributions will be made in cash to the extent cash is available for distribution. We may not be able to generate sufficient cash flows to pay distributions to our stockholders. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider funding sources other than cash flow from operations or funds from operations, which may reduce the amount of capital available for operations, may have negative tax implications, and may have a negative effect on the value of your shares under certain conditions. In addition, our board of directors could change our distribution policy in the future. See “Risk Factors.”

Distributions to our stockholders will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. See “Material U.S. Federal Income Tax Consequences.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2015 on a pro forma basis, adjusted to reflect:

 

    the business and operations of the Company after the consummation of the Retail Asset Disposition and immediately following the completion of the separation of the Company from InvenTrust, when we will own solely the Highlands Portfolio;

 

    the exclusion of the Disposed Assets;

 

    the Capital Contribution;

 

    the issuance of                 shares of our common stock to InvenTrust pursuant to a stock dividend effectuated prior to the distribution; and

 

    the distribution of                 shares of our common stock to holders of InvenTrust common stock based upon the number of InvenTrust shares outstanding on                 , 2016.

The information below is not necessarily indicative of what our cash and cash equivalents and capitalization would have been had the separation, distribution, capital contribution and related transactions been completed as of September 30, 2015. In addition, it is not indicative of our future cash and cash equivalents and capitalization. This table is derived from and is qualified entirely by reference to, our historical and pro forma financial statements and the accompanying notes included elsewhere in this Information Statement, and should be read in conjunction with the sections entitled “Selected Historical Financial and Operating Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined consolidated historical and pro forma financial statements and related notes included elsewhere in this Information Statement.

 

    As of
September 30, 2015
 
    (amounts in thousands,
except shares and per
share data)
 

Cash and cash equivalents

 

Restricted cash and escrows

 

Total

  $            
 

 

 

 

Total Debt:

 

Stockholders’ equity:

 

Common stock, par value $0.01 per share;                 shares authorized;                 shares issued and outstanding

 

Preferred stock, par value $0.01 per share;                 shares authorized;                 shares issued and outstanding

 

Additional paid-in capital

 

Retained earnings

 

Total stockholders’ equity

 

Total capitalization

  $     
 

 

 

 

 

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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following historical combined consolidated financial data as of December 31, 2014, 2013 and 2012 and for the years then ended have been derived from our audited combined consolidated financial statements, included elsewhere in this Information Statement. The historical condensed combined consolidated financial and operating data as of and for the nine months ended September 30, 2015 and 2014 have been derived from our unaudited condensed combined consolidated interim financial statements included elsewhere in this Information Statement.

Our financial statements reflect the operations of the Prior Combined Portfolio, which, among other things, includes allocations of costs from certain corporate and shared functions provided to us by InvenTrust. The allocation methods for corporate and shared services costs vary by function but were generally based on historical costs of assets.

Because the historical combined consolidated financial statements represent the financial and operating data of the Prior Combined Portfolio, and the Company will own the Highlands Portfolio following the separation from InvenTrust, the historical combined consolidated financial statements included in this Information Statement do not reflect our financial position, results of operations and cash flows as if we had operated as a stand-alone public reporting company during the period presented owning solely the Highlands Portfolio. Accordingly, our historical results should not be relied upon as an indicator of future performance.

The selected pro forma combined consolidated financial and operating data for the Highlands Portfolio is derived from our unaudited pro forma combined consolidated financial statements as of September 30, 2015 and for the nine months then ended as well as our unaudited pro forma combined consolidated statement of income for the year ended December 31, 2014, included elsewhere in this Information Statement. We derived our unaudited pro forma combined consolidated financial statements by applying pro forma adjustments to our historical combined consolidated financial statements included elsewhere in this Information Statement. The pro forma combined consolidated financial and operating data give effect to:

 

    the business and operations of the Company after the consummation of the Retail Asset Disposition and immediately following the completion of the separation of the Company from InvenTrust, after which we will own solely the Highlands Portfolio;

 

    the exclusion of the Disposed Assets;

 

    the Capital Contribution;

 

    the issuance of                 shares of our common stock to InvenTrust pursuant to a stock dividend prior to the distribution;

 

    the distribution of                 shares of our common stock to holders of InvenTrust common stock based upon the number of InvenTrust shares outstanding on                 , 2016; and

 

    certain other adjustments as described in “Unaudited Pro Forma Combined Consolidated Financial Statements.”

The pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the pro forma combined consolidated financial statements provide a detailed discussion of how such adjustments were derived and presented in the pro forma combined consolidated financial and operating data. See “Unaudited Pro Forma Combined Consolidated Financial Statements—Notes to Pro Forma Combined Consolidated Financial Statements.” The pro forma combined consolidated financial information should be read in conjunction with “Summary—Structure and Reorganization Transactions—Our Corporate Reorganization,” “Capitalization,” “Selected Historical Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Transactions,” “Description of Indebtedness” and our combined consolidated financial statements and related notes thereto included elsewhere in this Information Statement.

 

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Table of Contents

The pro forma combined consolidated financial and operating data has been prepared for illustrative purposes only and is not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such pro forma combined consolidated financial and operating data necessarily indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk Factors” and “Forward-Looking Statements.”

The information below should be read in connection with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and the combined consolidated financial statements and related notes included elsewhere in this Information Statement.

 

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Table of Contents
    Highlands Portfolio   Prior Combined Portfolio  
    Pro Forma Combined
Consolidated
  Condensed
Combined Consolidated
    Combined Consolidated  
    For the nine
months ended
September 30,
2015
  For the twelve
months ended
December 31,
2014
  For the nine
months ended
September 30,
2015
    For the nine
months ended
September 30,
2014
    For the twelve
months ended

December 31,
2014
    For the twelve
months ended

December 31,
2013
    For the twelve
months ended

December 31,
2012
 

Selected Statement of Operations Data:

             

Revenues:

             

Rental income

      $ 72,606      $ 78,637      $ 104,218      $ 108,841      $ 109,999   

Tenant recovery income

        10,850        13,077        17,190        18,611        18,214   

Other property income

        356        659        739        743        922   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

      $ 83,812      $ 92,373      $ 122,147      $ 128,195      $ 129,135   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

             

Property operating expenses

        10,649        11,479        15,443        15,888        15,862   

Real estate taxes

        8,156        9,498        12,379        13,312        12,624   

Depreciation and amortization

        27,261        27,454        37,235        47,113        55,043   

General and administrative expense

        9,212        5,477        7,161        4,534        3,884   

Business management fee

        —          423        423        6,742        8,015   

Provision for asset impairment

        —          15,640        15,640        258,648        934   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

      $ 55,278      $ 69,971      $ 88,281      $ 346,237      $ 96,362   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

      $ 28,534      $ 22,402      $ 33,866      $ (218,042   $ 32,773   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest and dividend income

        1        4        5        1,006        1,881   

Loss on sale of investment properties

        (197     (1,169     (1,018     —          —     

Gain on extinguishment of debt

        —          12,123        11,959        2,419        —     

Other (loss) income

        (11     415        488        889        1,038   

Interest expense

        (21,062     (25,198     (32,681     (37,583     (40,803

Equity in earnings of unconsolidated entity

        —          —          —          628        14   

Gain on investment in unconsolidated entity

        —          —          —          2,930        —     
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

      $ 7,265      $ 8,577      $ 12,619      $ (247,753   $ (5,097
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

        (24     54        (64     (110     (341
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

      $ 7,241      $ 8,631      $ 12,555      $ (247,863   $ (5,438
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations

        —          4,657        4,632        48,469        (19,773
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

      $ 7,241      $ 13,288      $ 17,187      $ (199,394   $ (25,211
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

        (16     (16     (16     (16     (16
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Company

      $ 7,225      $ 13,272      $ 17,171      $ (199,410   $ (25,227
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Highlands Portfolio   Prior Combined Portfolio  
    Pro Forma Combined
Consolidated
  Condensed
Combined Consolidated
    Combined Consolidated  
    For the nine
months ended
September 30,
2015
  For the twelve
months ended
December 31,
2014
  For the nine
months ended
September 30,
2015
    For the nine
months ended
September 30,
2014
    For the twelve
months ended

December 31,
2014
    For the twelve
months ended

December 31,
2013
    For the twelve
months ended

December 31,
2012
 

Per Share Data:

             

Pro forma basic earnings per share

             

Pro forma diluted earnings per share

             

Pro forma weighted average shares outstanding—basic

             

Pro forma weighted average shares outstanding—diluted

             

Other Financial Data:

             

Funds from operations(1)

      $ 34,702      $ 51,990      $ 65,522      $ 65,895      $ 81,826   

Modified net operating income(2)

      $ 66,523      $ 72,046      $ 95,413      $ 99,000      $ 100,404   

 

     Highlands
Portfolio
          Prior Combined Portfolio  
     Pro Forma
Combined
Consolidated
   Condensed
Combined
Consolidated
     Combined Consolidated  
     As of
September 30,
2015
   As of
September 30,
2015
     As of December 31,  
Selected Balance Sheet Data:          2014      2013      2012  

Cash and cash equivalents

      $ 23,575       $ 10,291       $ 6,076       $ 8,088   

Restricted cash & escrows

        4,648         5,044         11,389         7,180   

Total assets

        747,128         841,894         1,216,502         1,795,064   

Total debt

        426,782         487,825         468,970         1,039,914   

Total equity

        283,634         317,108         389,694         700,673   

 

(1) We calculate FFO in accordance with standards established by NAREIT, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairment, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, adjustments for unconsolidated partnerships and joint ventures, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding our operating performance by excluding the effect of real estate depreciation and amortization, gains (losses) from sales for real estate, impairments of real estate assets extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation of FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

 

(2) Modified net operating income reflects the income from operations excluding nonrecurring events, such as lease termination income, and other GAAP rent adjustments in order to provide a comparable presentation of operating activity across periods. Includes adjustments for items that affect the comparability of, and were excluded from, the same store results. Such adjustments include lease termination income, GAAP rent adjustments, such as straight-line rent, and above/below market lease amortization.

 

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Table of Contents

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma combined consolidated balance sheet as of September 30, 2015 and unaudited pro forma combined consolidated statements of operations for the nine months ended September 30, 2015 and the year ended December 31, 2014 have been prepared to reflect the following transactions as if they had occurred on September 30, 2015 for the unaudited pro forma combined consolidated balance sheet and January 1, 2014 for the unaudited pro forma combined consolidated statement of operations:

 

    the business and operations of the Company after the consummation of the Retail Asset Disposition and immediately following the completion of the separation of the Company from InvenTrust, after which we will own solely the Highlands Portfolio;

 

    the exclusion of the Disposed Assets;

 

    the Capital Contribution;

 

    the issuance of                 shares of our common stock to InvenTrust pursuant to a stock dividend prior to the distribution; and

 

    the distribution of                 shares of our common stock to holders of InvenTrust common stock based upon the number of InvenTrust shares outstanding on             , 2016.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the unaudited pro forma combined consolidated financial statements provide a detailed discussion of how such adjustments were derived and presented in the unaudited pro forma combined consolidated financial and operating data. The unaudited pro forma combined consolidated financial information should be read in conjunction with “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization,” “Capitalization,” “Selected Historical Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Transactions,” “Description of Indebtedness” and our combined consolidated financial statements and related notes thereto.

The unaudited pro forma combined consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited combined consolidated pro forma financial information necessarily indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk Factors” and “Forward-Looking Statements.”

 

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Table of Contents

Unaudited Pro Forma Combined Consolidated Balance Sheet

As of September 30, 2015

(in thousands)

 

     Historical     Retail
Asset
Disposition
(1)
    Capital
Contribution
(3)
   Other
Adjustments
   Pro Forma

Assets

            

Land

   $ 153,646      $ (14,981        

Building & other improvements

     710,124        (73,295        

Construction in progress

     313        —             
  

 

 

   

 

 

   

 

  

 

  

 

Total

     864,083        (88,276        

Less accumulated depreciation

     (178,233     19,350           
  

 

 

   

 

 

   

 

  

 

  

 

Net investment properties

     685,850        (68,926        

Cash & cash equivalents

     23,575        —             

Restricted cash & escrows

     4,648        —             

Accounts & rents receivable

     12,954        (637        

Intangible assets, net

     14,315        (489        

Deferred cost and other assets

     5,786        (465        
  

 

 

   

 

 

   

 

  

 

  

 

Total assets

   $ 747,128      $ (70,517        
  

 

 

   

 

 

   

 

  

 

  

 

Liabilities and Stockholders’ Equity

            

Mortgages and notes payable, net

   $ 426,782      $ —             

Accounts payable and accrued expenses

     28,504        (2,124        

Intangible liabilities, net

     5,213        (417        

Other liabilities

     2,995        (403        
  

 

 

   

 

 

   

 

  

 

  

 

Total Liabilities

   $ 463,494      $ (2,944        
  

 

 

   

 

 

   

 

  

 

  

 

Stockholders’ Equity

            

Capital

     1,557,779        (97,974        

Accumulated distributions in excess of net loss

     (1,274,270     30,401           
  

 

 

   

 

 

   

 

  

 

  

 

Total Company stockholders’ equity

   $ 283,509      $ (67,573        
  

 

 

   

 

 

   

 

  

 

  

 

Non-controlling interests

     125        —             
  

 

 

   

 

 

   

 

  

 

  

 

Total equity

   $ 283,634      $ (67,573        
  

 

 

   

 

 

   

 

  

 

  

 

Total Liabilities and Equity

   $ 747,128      $ (70,517        
  

 

 

   

 

 

   

 

  

 

  

 

See notes to unaudited pro forma combined consolidated financial statements.

 

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Table of Contents

Unaudited Pro Forma Combined Consolidated Statement of Operations

For the nine months ended September 30, 2015

(in thousands)

 

     Historical     Disposition
Adjustments
    Retail
Asset
Disposition
(1)
    Capital
Contribution
(3)
   Other
Adjustments
   Pro Forma

Revenues

              

Rental income

   $ 72,606      $ (240   $ (6,061        

Tenant recovery income

     10,850        (146     (2,338        

Other property income

     356        (37     (13        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Total revenues

   $ 83,812      $ (423   $ (8,412        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Expenses

              

Property operating expenses

   $ 10,649      $ (530   $ (1,330        

Real estate taxes

     8,156        (233     (1,889        

Depreciation and amortization

     27,261        (83     (2,939        

General and administrative expense(4)

     9,212        —          —             

Business management fee(4)

     —            —             

Provision for asset impairment

     —          —          —             
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Total expenses

   $ 55,278      $ (846   $ (6,158        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Operating income (loss)

   $ 28,534      $ 423      $ (2,254        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Interest and dividend income

     1        —          —             

Loss on sale of investment properties

     (197     197        —             

Other income

     (11     (10     —             

Interest expense

     (21,062     —          94           
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Income (loss) before income taxes

   $ 7,265      $ 610      $ (2,160        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Income tax expense

     (24     —          —             
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Net income (loss) from continuing operations

   $ 7,241      $ 610      $ (2,160        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

See notes to unaudited pro forma combined consolidated financial statements.

 

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Table of Contents

Unaudited Pro Forma Combined Consolidated Statement of Operations

For the twelve months ended December 31, 2014

(in thousands)

 

     Historical     Disposition
Adjustments
(2)
    Retail
Asset
Disposition
(1)
    Capital
Contribution
(3)
   Other
Adjustments
   Pro Forma

Revenues

              

Rental income

   $ 104,218      $ (2,048   $ (14,025        

Tenant recovery income

     17,190        (631     (5,425        

Other property income

     739        (30     (111        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Total revenues

   $ 122,147      $ (2,709   $ (19,561        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Expenses

              

Property operating expenses

   $ 15,443      $ (1,598   $ (3,135        

Real estate taxes

     12,379        (386     (4,093        

Depreciation and amortization

     37,235        (849     (6,943        

General and administrative expense(4)

     7,161        —          —             

Business management fee(4)

     423        —          —             

Provision for asset impairment

     15,640        (5,956     —             
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Total expenses

   $ 88,281      $ (8,789   $ (14,171        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Operating (loss) income

   $ 33,866      $ 6,080      $ (5,390        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Interest and dividend income

     5        —          (3        

Loss on sale of investment properties

     (1,018     2,923        5           

Gain on extinguishment of debt

     11,959        (12,128     (5        

Other income

     488        (10     —             

Interest expense

     (32,681     1,310        1,705           
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Income (loss) before income taxes

   $ 12,619      $ (1,825   $ (3,688        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Income tax expense

     (64     —          —             
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

Net income (loss) from continuing operations

   $ 12,555      $ (1,825   $ (3,688        
  

 

 

   

 

 

   

 

 

   

 

  

 

  

 

See notes to unaudited pro forma combined consolidated financial statements.

 

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Table of Contents

Notes to Pro Forma Combined Consolidated Financial Statements

1. Retail Asset Disposition

The Retail Asset Disposition, which will occur as part of the Reorganization Transactions, will transfer ownership of five multi-tenant retail assets to one or more wholly owned subsidiaries of InvenTrust.

2. Disposition Adjustments

The Disposition Adjustments reflect four assets sold in the twelve months ended December 31, 2014 and one asset sold in the nine months ended September 30, 2015 that did not qualify as discontinued operations. In line with our adoption of the new accounting standard governing discontinued operations, ASU No. 2014-08, effective January 1, 2014, only dispositions representing a strategic shift that has (or will have) a major effect on our results and operations would qualify as discontinued operations.

3. Capital Contribution

Prior to the completion of our separation from InvenTrust, we will receive a capital contribution of $        .

4. General and Administrative Expenses and Business Management Fee

For the nine months ended September 30, 2015, pro forma general and administrative expenses and business management fee totaled $9.2 million. This includes allocated general and administrative expenses from InvenTrust of $8.7 million and general and administrative expenses directly attributable to the Company of $0.5 million. For the year ended December 31, 2014, pro forma general and administrative expenses and business management fee totaled $7.6 million. This includes allocated general and administrative expenses from InvenTrust of $6.8 million, an allocated business management fee from InvenTrust of $0.4 million, and general and administrative expenses directly attributable to the Company of $0.4 million. Both the allocated general and administrative expenses and business manager fee are based upon the Company’s percentage share of the average invested assets of InvenTrust. The allocated general and administrative expenses relate to certain corporate and shared functions. Upon our separation from InvenTrust, the Company will no longer be allocated a portion of InvenTrust’s corporate overhead.

Effective with our separation from InvenTrust, we will assume responsibility for all corporate functions as a stand-alone entity. We expect to incur additional general and administrative expense as a result of becoming a stand-alone public reporting company, including but not limited to incremental salaries, board of directors’ fees and expenses, director and officer insurance, Sarbanes-Oxley Act compliance costs, third-party costs for outsourced services, including certain accounting functions, including property accounting, investor relations, human resources, risk management, information technology, corporate taxes, incremental audit and tax fees, and legal costs. No pro forma adjustments have been made to our financial statements to reflect the additional costs and expenses described in this paragraph.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Risk Factors,” “Selected Historical Financial and Operating Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Business and Properties” and historical combined consolidated financial statements, and related notes included elsewhere in this Information Statement. The following discussion and analysis contains forward-looking statements based upon our current expectations, estimates and assumptions that involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to, factors discussed in “Risk Factors” and “Forward-Looking Statements.”

Overview

Upon completion of the Reorganization Transactions and our separation from InvenTrust, we will be a self-advised and self-administered REIT with a portfolio of single- and multi-tenant office assets, industrial assets, retail assets, correctional facilities, unimproved land and a bank branch acquired by InvenTrust prior to our separation. As of September 30, 2015, the Highlands Portfolio consisted of seven office assets, two industrial assets, six retail assets, two correctional facilities, four parcels of unimproved land and one bank branch.

Our investment objectives are to preserve, protect and maximize the total value of our portfolio in connection with our evaluation of various strategic opportunities while seeking to provide stockholders with a return of their investment by liquidating and distributing net sales proceeds. We may seek to sustain and enhance the values of our assets through additional leasing or capital expenditures, where necessary, while identifying and implementing disposition strategies for the assets in our portfolio. We intend to hold our assets until such time as we determine that a sale or other disposition achieves our investment objectives or until it appears such objectives will not be met.

Prior to the Retail Asset Disposition and the completion of our separation from InvenTrust, but after giving effect to the Non-Core Asset Contributions, the Prior Combined Portfolio consisted of 27 assets and 4 parcels of unimproved land and 23 assets and 4 parcels of unimproved land as of December 31, 2014 and September 30, 2015, respectively.

We currently have three business segments, consisting of (i) net lease, (ii) retail and (iii) multi-tenant office. Our unimproved land is presented in “other”. We may have additional or fewer segments in the future to the extent we enter into additional real property sectors, dispose of property sectors, or change the character of our assets. For the complete presentation of our reportable segments, see Note 8 to our Condensed Combined Consolidated Financial Statements for the nine months ended September 30, 2015 and 2014 and Note 11 to our Combined Consolidated Financial Statements for the year ended December 31, 2014, 2013 and 2012.

For more information regarding the Reorganization Transactions, see “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization.” This discussion and analysis reflects the results of operations for the Prior Combined Portfolio. Where indicated, we have supplemented our discussion and analysis of our results of operations to reflect solely the Highlands Portfolio that the Company will own following the completion of the separation of the Company from InvenTrust.

Basis of Presentation

We refer in this Information Statement to the assets owned by MB REIT (Florida), Inc. (“MB REIT”) and assets owned by certain subsidiaries of InvenTrust from time to time since January 1, 2012, as well the Non-Core Contributed Assets (as defined under “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization”), as the “Prior Combined Portfolio.” We refer in this Information Statement to all of the assets owned by Highlands following the Reorganization Transactions as the “Highlands Portfolio.” At the

 

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time of our separation from InvenTrust, we expect the Highlands Portfolio to consist of seven office assets, two industrial assets, six retail assets, two correctional facilities, four parcels of unimproved land and one bank branch.

Our financial statements reflect the operations of the Prior Combined Portfolio, which, among other things, includes allocations of costs from certain corporate and shared functions provided to us by InvenTrust. The allocation methods for corporate and shared services costs vary by function but were generally based on historical costs of assets. InvenTrust allocated to us a portion of corporate overhead costs incurred by InvenTrust based upon our percentage share of the average invested assets of InvenTrust, which is reflected in general and administrative expense. As InvenTrust is managing various asset portfolios, the extent of services and benefits a portfolio receives is based on the size of its assets. We believe that using average invested assets to allocate costs is a reasonable reflection of the services and other benefits received by us and complies with applicable accounting guidance. InvenTrust also allocated to us a portion of InvenTrust’s unsecured credit facility and the related interest expense. The unsecured credit facility is subject to a borrowing base consisting of a pool of unencumbered assets. To the extent our assets were included within the pool of unencumbered assets, we were allocated a portion of the unsecured credit facility. However, actual costs may have differed from allocated costs if we had operated as a stand-alone entity during such period and those differences may have been material.

Our financial statements include transactions in which ordinary course cash transactions have been processed by InvenTrust due to InvenTrust’s centralized cash management process on our behalf, such as the repayment of debt, rental receipts and payables in the ordinary course of business, resulting in intercompany transactions between InvenTrust and us. These ordinary course intercompany transactions are considered to be effectively settled at the time of our separation from InvenTrust. Accordingly, these transactions are reflected as distributions to and contributions from InvenTrust in the financial statements.

Because the historical financial statements represent the financial and operating data of the Prior Combined Portfolio and the Company will own solely the Highlands Portfolio following the separation from InvenTrust, the historical financial statements included in this information statement do not reflect our financial position, results of operations and cash flows as if we had operated as a stand-alone public reporting company during the periods presented owning solely the Highlands Portfolio. Accordingly, our historical results should not be relied upon as an indicator of future performance.

Self-Management of InvenTrust

Prior to March 2014, our management team was employed by InvenTrust’s external manager, Inland American Business Manager and Advisor, Inc. (the “Business Manager”), or one of its affiliates. On March 12, 2014, InvenTrust entered into a series of agreements and amendments to existing agreements with affiliates of The Inland Group, Inc. pursuant to which InvenTrust began the process of becoming entirely self-managed (collectively, the “Self-Management Transactions”). After the Self-Management Transactions, our management team and our other employees ceased to be employed by the Business Manager or one of its affiliates and became employees of InvenTrust. In connection with the Self-Management Transactions, InvenTrust agreed with the Business Manager to terminate the management agreement with the Business Manager, hire all of the Business Manager’s employees, and acquire the assets or rights necessary to conduct the functions previously performed for InvenTrust by the Business Manager. Prior to the Self-Management Transactions, we were allocated a portion of the business management fee based upon our percentage share of the average invested assets of InvenTrust. The Self-Management Transactions resulted in a final business management fee incurred in January 2014. As a result, the Company was not allocated a business management fee after January 2014.

Separation from InvenTrust

On                     , 2016, InvenTrust declared the pro rata distribution of 100% of the outstanding shares of common stock of Highlands to InvenTrust stockholders. The pro rata distribution by InvenTrust of 100% of the outstanding shares of Highlands common stock will occur on                     , 2016 by way of a taxable pro rata

 

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special distribution to InvenTrust stockholders of record on the record date of the distribution. Each InvenTrust stockholder will be entitled to receive              share(s) of Highlands common stock for              share(s) of InvenTrust common stock held by such stockholder at the close of business on                     , 2016, the record date of the distribution.

Following the separation, we and InvenTrust will operate separately, each as an independent company. We and InvenTrust will enter into a Separation and Distribution Agreement that will effectuate the separation and distribution. In addition, we will enter into various other agreements with InvenTrust to effect the separation and provide a framework for our relationship with InvenTrust after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and InvenTrust of InvenTrust’s assets, liabilities and obligations attributable to periods prior to, at and after our separation from InvenTrust and will govern certain relationships between us and InvenTrust after the separation. For more information regarding these agreements, see “Certain Relationships and Related Transactions—Agreements with InvenTrust.”

Market Outlook

Our financial and operating performance is dependent upon the demand for office assets, industrial assets, retail assets, correctional facilities and unimproved land in our markets. Many of the assets in our portfolio are currently net-leased. Nationally, commercial real estate fundamentals such as vacancy, rent and absorption levels have improved over recent years. However, our portfolio consists of a wide variety of product types that are geographically disbursed, and many of our assets have not benefited from this improvement due to location, market or submarket weakness, product type and physical characteristics.

Office

Our portfolio includes seven office assets, five of which are single-tenant and two of which are multi-tenant. Despite a nationally-improving office outlook, there are factors negatively impacting demand, including factors such as the allocation by companies of less square feet per employee, “address-less” work-spaces, where no employee has an assigned office or desk, and telecommuting.

Three of our single-tenant assets are currently leased to AT&T, a telecommunications company. The original term of the lease for our office property located in Hoffman Estates, Illinois will expire in August 2016. AT&T did not renew the lease for this property during the contractual renewal option period. If AT&T does not renew, we anticipate that it will be difficult to lease this property for several reasons, including weak demand for large corporate campuses, its location in a weak submarket, and a growing trend for companies to locate employees in downtown Chicago instead of the suburbs. Additionally, the design and physical characteristics of this property will make it difficult to multi-tenant. The original term of the lease for our AT&T property located in St. Louis expires in 2017 and the original term of the lease for our AT&T property located in Cleveland expires in 2019. Demand for office space in both downtown St. Louis and Cleveland is weak, and certain physical characteristics of each property may make them difficult to lease.

Our office assets located in suburban Denver and in Pittsburgh are currently single-tenant with leases that expire in 2016 and it is likely that these assets will be converted to multi-tenant assets. We currently anticipate adequate demand though rental rates may be lower than rates under the current leases.

Our multi-tenant office property located in Herndon, Virginia near Dulles airport is 83% leased to Lockheed Martin Corporation. Demand in this market is heavily dependent on government spending levels. We currently anticipate adequate demand in the San Jose, California market, where our Trimble asset is located. There are two tenants at the Trimble asset, each with a lease that expires in the near term.

 

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Industrial

Both of our industrial assets, Versacold St. Paul and Versacold New Ulm, are leased to an affiliate of Americold Realty Trust, a cold storage operator and logistics company. Both assets are under long-term leases expiring in 2027.

Retail

Generally, over the past several years, the demand for retail space has improved. However, there are significant challenges to brick-and-mortar retail, including competition from other shopping venues and other forms of retailing, such as e-commerce and catalogues. However, many of our “big box” retailers have adopted an omnichannel shopping/distribution model to effectively integrate online and physical store shopping and to provide a seamless shopping experience for their customers. Our portfolio of retail assets are located in six distinct markets, and are typically anchored or shadow-anchored by grocers or “big box” tenants. Our retail assets are generally located in secondary markets where our ability to raise rents, lease space and sell assets may be more limited than in high-growth, first-tier markets.

Correctional Facilities

Our correctional facility located in Hudson, Colorado is approximately 40 miles northeast of Denver, and our correctional facility located Haskell, Texas is approximately 200 miles northwest of Dallas. Each of these facilities is leased to an experienced prison operator. The Hudson lease expires in January 2020 and the facility currently does not house any inmates. The Haskell lease expires in 2016. Given the niche market for these assets and the fact that management and operation of correctional facilities by private entities has not achieved complete acceptance by either governmental agencies or the public, demand for these assets by other tenants and buyers may be limited.

Vacant Land

We currently own four parcels of vacant land, two in Florida, one in North Carolina and one in South Carolina. We continue to evaluate options with respect to these assets.

Inflation

Most of our leases provide that real estate taxes and operating expenses are paid directly by the tenants or are recoverable in whole or in part from the tenants. We believe that inflationary increases in costs may be at least partially offset by contractual rent increases and the pass through or direct payment by the tenants of all or a portion of the real estate taxes and operating expenses.

Acquisition Activity

During the year ended December 31, 2013, InvenTrust entered into a definitive agreement with a joint venture partner which resulted in InvenTrust obtaining control of the venture, consisting of ten assets. InvenTrust consolidated the ten assets previously in the joint venture on December 31, 2013, recording the assets and liabilities of the joint venture at fair value. One asset, a multi-tenant office property, Trimble, is owned by Highlands.

Disposition Activity

During the nine months ended September 30, 2015, we disposed of one net lease asset:

 

Property

  Date     Gross Disposition
Price

(in thousands)
    Square Feet  

Citizens—Manchester

    7/9/2015      $ 8,200        148,000 Square Feet   

 

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During the years ended December 31, 2014, 2013 and 2012, we disposed of 100 net lease, six retail, one multi-tenant office and one other asset:

 

Property

  Date     Gross Disposition
Price

(in thousands)
    Square Feet  

Hunting Bayou

    2/19/2014      $ 10,300        133,269 Square feet   

Net lease portfolio—23 assets

    2/21/2014        219,400        3,685,390 Square feet   

Net lease portfolio—4 assets

    3/28/2014        58,500        1,118,096 Square feet   

Monadnock Marketplace

    4/9/2014        31,200        367,454 Square feet   

3801 S. Collins

    7/31/2014        10,500        239,905 Square feet   

Citizens—Plattsburgh

    11/7/2014        200        7,950 Square feet   
   

 

 

   
    $ 330,100     
   

 

 

   

Property

  Date     Gross Disposition
Price

(in thousands)
    Square Feet  

Citizens Bank—Chicago Heights

    1/24/2013      $ 2,000        6,276 Square feet   

Citizens Bank—Lewes

    2/22/2013        1,100        3,478 Square feet   

Citizens Bank—Westchester

    2/22/2013        1,400        3,410 Square feet   

Citizens Bank—3 assets

    3/19/2013        1,200        5,055 Square feet   

IDS Center

    4/25/2013        253,500        1,462,374 Square feet   

Citizens—Springfield

    5/10/2013        1,000        3,000 Square feet   

Citizens—Haddon Heights

    7/23/2013        1,400        4,810 Square feet   

Southgate Apartments

    8/1/2013        19,500        256 Units   

Net lease portfolio—3 assets

    9/24/2013        29,100        262,700 Square feet   

Citizens—Mellon Bank Building

    12/31/2013        3,300        14,567 Square feet   
   

 

 

   
    $ 313,500     
   

 

 

   

Property

  Date     Gross Disposition
Price

(in thousands)
    Square Feet  

Citizens Bank Branches—14 assets

    4/26/2012      $ 13,800        39,717 Square feet   

Union Venture

    5/17/2012        49,600        970,168 Square feet   

Lakewood Shopping Center I & II

    6/15/2012        31,500        236,679 Square feet   

Plaza at Eagle’s Landing

    8/2/2012        5,300        33,265 Square feet   

Canfield Plaza

    8/31/2012        8,800        100,958 Square feet   

Citizens Bank Branches—20 assets

    9/28/2012        32,100        88,995 Square feet   

Citizens Bank Branches—20 assets

    12/14/2012        34,500        111,044 Square feet   

Citizens Bank Branches—3 assets

    12/28/2012        4,700        7,737 Square feet   

Citizens—North Providence

    12/31/2012        2,300        5,864 Square feet   
   

 

 

   
    $ 182,600     
   

 

 

   

Our Revenues and Expenses

Revenues

Our revenues are primarily derived from rental income and expense recoveries we receive from our tenants under leases with us. Rental income primarily consists of monthly rent and other property income pursuant to tenant leases. Tenant recovery income primarily consists of reimbursements for real estate taxes, common area maintenance costs, management fees and insurance costs.

 

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Expenses

Our operating expenses consist primarily of the following:

 

    Property operating expenses—Property operating expenses primarily consist of repair and maintenance, management fees, utilities and insurance (in each case, some of which are recoverable from the tenant).

 

    Real estate taxes—These expenses consist of real estate taxes (some of which are recoverable from the tenant).

 

    Depreciation and amortization expense—These are non-cash expenses that primarily consist of depreciation of fixed assets such as buildings and capital equipment at our assets, as well as certain corporate assets. Amortization expense primarily consists of amortization of acquired above and below market leases and in-place leases, which are amortized over the life of the related lease or term.

 

    General and administrative expenses—General and administrative expenses consist primarily of compensation expense for our corporate staff and personnel supporting our business, transfer agent and investor relations expenses, office administrative and related expenses and transaction expenses. InvenTrust allocated to Highlands a portion of corporate overhead costs incurred by InvenTrust which is based upon Highlands’ percentage share of the average invested assets of InvenTrust and reflected in general and administrative expense. Upon our separation from InvenTrust, we will no longer be allocated a portion of InvenTrust’s corporate overhead. We will be party to a Transition Services Agreement with InvenTrust, pursuant to which we will be charged agreed-upon amounts for the corporate services we receive. We anticipate that we will have non-recurring and recurring expenses associated with establishing and maintaining our own information technology, financial reporting and other public reporting company infrastructure.

 

    Business management fee—During the years ended December 31, 2014, 2013 and 2012, InvenTrust paid an annual business management fee to the Business Manager based on the average invested assets. We were allocated a portion of the business management fee based upon our percentage share of the average invested assets of InvenTrust for the years ended December 31, 2014, 2013 and 2012. On March 12, 2014, InvenTrust entered into the Self-Management Transactions. After the Self-Management Transactions, our management team and our other employees ceased to be employed by the Business Manager or one of its affiliates and became employees of InvenTrust. In connection with the Self-Management Transactions, InvenTrust agreed with the Business Manager to terminate the management agreement with the Business Manager, hire all of the Business Manager’s employees and acquire the assets or rights necessary to conduct the functions previously performed for InvenTrust by the Business Manager. The Self-Management Transactions resulted in a final business management fee incurred in January 2014. As a result, we were not allocated a business management fee after January 2014.

 

    Provision for asset impairment—We hold amortizing intangible assets, intangible liabilities and long-lived asset investments. We assess the carrying values of our long-lived assets and equity method investment and evaluate these assets for impairment as discussed in “Critical Accounting Policies and Estimates.” These evaluations have, in the past, resulted in impairment losses for certain of these assets based on the specific facts and circumstances surrounding those assets and our estimates of the fair value of those assets. Based on economic conditions or other factors applicable to a specific asset, we may be required to take additional impairment losses to reflect further declines in our asset and/or investment values.

Factors that May Affect Results of Operations

Rental Income

The amount of net rental income generated by the assets in our portfolio depends principally on our ability to renew expiring leases or re-lease space upon the scheduled or unscheduled termination of leases, lease currently available space and maintain or increase rental rates at our assets. Local, regional or national economic

 

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conditions; changing tenant requirements; an oversupply of or a reduction in demand for the type of assets in our portfolio; changes in market rental rates; our ability to provide adequate services and maintenance at our assets; and fluctuations in interest rates could adversely affect our rental income in future periods. Future economic or regional downturns affecting our submarkets or downturns in our tenants’ industries that impair our ability to renew or re-lease space and the ability of our tenants to fulfill their lease commitments, as in the case of tenant bankruptcies, could adversely affect our ability to maintain or increase occupancy. Additionally, tenants may not renew such leases and we may be unable to re-lease such assets on comparably favorable terms or at all. This is a particular concern at our net lease assets.

Scheduled Lease Expirations

Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. In addition to approximately 321,826 square feet of gross leasable area of vacant space in our portfolio as of September 30, 2015, during the years ending December 31, 2015, 2016 and 2017, leases representing approximately 2.0%, 35.3% and 22.6%, respectively, of the gross leasable area of our retail portfolio are scheduled to expire. These leases are expected to represent approximately 1.3%, 35.3% and 18.0%, respectively, of our annualized base rent for such periods.

Operating Expenses

Our property operating expenses generally consist of property taxes, regular repair and maintenance, management fees, utilities and insurance. Many of these expenses are recoverable from the tenant or directly paid by the tenant, particularly at our net lease assets. Other operating expenses consist of general and administrative expenses. As a public reporting company, our annual general and administrative expenses may increase compared to the amount historically allocated to us by InvenTrust.

Key Indicators of Operating Performance

Funds From Operations (“FFO”)

We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairment, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, adjustments for unconsolidated partnerships and joint ventures, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding our operating performance by excluding the effect of real estate depreciation and amortization, gains (losses) from sales for real estate, impairments of real estate assets extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation of FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

Modified Same Store Net Operating Income

Modified net operating income reflects the income from operations excluding nonrecurring events, such as lease termination income, and other GAAP rent adjustments in order to provide a comparable presentation of

 

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operating activity across periods. Includes adjustments for items that affect the comparability of, and were excluded from, the same store results. Such adjustments include lease termination income, GAAP rent adjustments (such as straight-line rent and above/below market lease amortization).

Critical Accounting Policies and Estimates

General

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying combined consolidated financial statements and related notes. This section discusses those critical accounting policies and estimates. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. This discussion addresses our judgment pertaining to known trends, events or uncertainties which were taken into consideration upon the application of those policies.

Impairment

We assess the carrying values of the respective long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable, such as a reduction in the expected holding period of the asset. If it is determined that the carrying value is not recoverable because the undiscounted cash flows do not exceed carrying value, we are required to record an impairment loss to the extent that the carrying value exceeds fair value. The valuation and possible subsequent impairment of investment assets is a significant estimate that can and does change based on our continuous process of analyzing each asset and reviewing assumptions about uncertain inherent factors, as well as the economic condition of the asset at a particular point in time.

Cost Capitalization and Depreciation Policies

Our policy is to review all expenses paid and capitalize any items which are deemed to be an upgrade or a tenant improvement. These costs are capitalized and included in the investment properties classification as an addition to buildings and improvements.

Buildings and improvements are depreciated on a straight-line basis based upon estimated useful lives of 30 years for buildings and improvements, and 5-15 years for site improvements and furniture, fixtures and equipment. Tenant improvements are depreciated on a straight-line basis over the life of the related lease as a component of depreciation and amortization expense. The portion of the purchase price allocated to acquired above market leases and acquired below market leases is amortized on a straight-line basis over the life of the related lease as an adjustment to net rental income. Acquired in-place lease costs, customer relationship value and other leasing costs are amortized on a straight-line basis over the life of the related lease as a component of amortization expense.

Cost capitalization and the estimate of useful lives requires our judgment and includes significant estimates that can and do change based on our process which periodically analyzes each asset and on our assumptions about uncertain inherent factors.

Dispositions

The Company accounts for dispositions in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-20, Real Estate Sales. The Company recognizes gain in full when real estate is sold, provided (a) the profit is determinable, that is, the collectability of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (b) the earnings process is virtually complete, that is, the seller is not obliged to perform significant activities after the sale to earn the profit.

 

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In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, ASU 2014-08 expands the disclosure requirements for disposals that meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. ASU No. 2014-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2014. We have elected to early adopt ASU No. 2014-08, effective January 1, 2014. Beginning with the year ended December 31, 2014, all asset disposals have been included as a component of income from continuing operations unless they qualify as discontinued operations. The operations reflected in discontinued operations are related to the net lease assets that were classified as held for sale at December 31, 2013 and any asset dispositions reported as discontinued operations prior to our adoption of ASU No. 2014-08.

Revenue Recognition

We commence revenue recognition on our leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. The determination of who is the owner, for accounting purposes, of the tenant improvements determines the nature of the leased asset and when revenue recognition under a lease begins. If we are the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If we conclude we are not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any tenant improvement allowances funded under the lease are treated as lease incentives which reduces revenue recognized over the term of the lease. In these circumstances, we begin revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct their own improvements. We consider a number of different factors to evaluate whether it or the lessee is the owner of the tenant improvements for accounting purposes. These factors include:

 

    whether the lease stipulates how and on what a tenant improvement allowance may be spent;

 

    whether the tenant or landlord retains legal title to the improvements;

 

    the uniqueness of the improvements;

 

    the expected economic life of the tenant improvements relative to the length of the lease; and

 

    who constructs or directs the construction of the improvements.

The determination of who owns the tenant improvements, for accounting purposes, is subject to significant judgment. In making that determination, we consider all of the above factors. No one factor, however, necessarily establishes its determination.

We recognize rental income on a straight-line basis over the term of each lease. The difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts and rents receivable in the accompanying combined consolidated balance sheets. Due to the impact of the straight-line basis, rental income generally is greater than the cash collected in the early years and decreases in the later years of a lease. We periodically review the collectability of outstanding receivables. Allowances are taken for those balances that we deem to be uncollectible, including any amounts relating to straight-line rent receivables.

Reimbursements from tenants for recoverable real estate tax and operating expenses are accrued as revenue in the period the applicable expenses are incurred. We make certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. We do not expect the actual results to significantly differ from the estimated reimbursement.

 

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We will recognize lease termination income if there is a signed termination letter agreement, all of the conditions of the agreement have been met, collectability is reasonably assured and the tenant is no longer occupying the asset. Upon early lease termination, we will provide for losses related to unrecovered intangibles and other assets.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective, although it will not affect the accounting for rental related revenues. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU No. 2014-09 will have on our combined consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

Income Taxes

The Company intends to elect to be taxed as a REIT for U.S. federal income tax purposes beginning with the Company’s short taxable year commencing immediately prior to the Company’s separation from InvenTrust and ending on December 31, 2016. So long as it qualifies as a REIT, the Company generally will not be subject to federal income tax on taxable income that is distributed currently to stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders each year. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal and state income tax on its taxable income at regular corporate tax rates and would not be able to re-elect REIT status during the four years following the year of the failure. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.

The Company is currently a qualified REIT subsidiary (“QRS”) of InvenTrust, which has elected to be taxed as a REIT and has operated in a manner intended to qualify as a REIT under the Code. As a QRS, the Company is currently disregarded as a separate entity from InvenTrust for federal income tax purposes. All assets, liabilities and items of income, deduction and credit of the Company are currently treated for federal income tax purposes as those of InvenTrust.

The Company’s subsidiary, MB REIT, operated in a manner intended to qualify to be taxed as a REIT under the Code. On December 15, 2015, MB REIT redeemed all of the outstanding shares of its Series B Preferred Stock and became a wholly owned subsidiary of InvenTrust. At that time, MB REIT became a QRS of InvenTrust and ceased to be treated as a separate REIT for U.S. federal income tax purposes. As a QRS, MB REIT is currently disregarded as a separate entity from InvenTrust for federal income tax purposes. All assets, liabilities and items of income, deduction and credit of MB REIT are treated for federal income tax purposes as those of InvenTrust.

Results of Operations

Comparison of the nine months ended September 30, 2015 and 2014

Key performance indicators are as follows:

 

     As of September 30,  
     2015     2014  

Economic occupancy(a)

     95     93

Rent per square foot(b)

   $ 14.08      $ 13.86   

 

(a) Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by the tenant of the area being leased. Actual use may be less than economic square footage.

 

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(b) Rent per square foot is computed as annualized rent divided by the total occupied square footage at the end of the period. Annualized rent is computed as revenue for the last month of the period multiplied by twelve months. Annualized rent includes the effect of rent abatements, lease inducements and straight-line rent GAAP adjustments.

Condensed Combined Consolidated Results of Operations

 

     (in thousands)  
    

For the nine months ended

September 30,

     Increase  
         2015              2014          (Decrease)  

Net income from continuing operations

   $ 7,241       $ 8,631       $ (1,390

Net income attributable to Company

     7,225         13,272       $ (6,047

Net income from continuing operations decreased by $1.4 million to $7.2 million for the nine months ended September 30, 2015 from $8.6 million for the nine months ended September 30, 2014, primarily as a result of a gain on extinguishment of debt of $12.1 million for the nine months ended September 30, 2014, which primarily related to one property sold during 2014.

Operating Income and Expenses

 

     (in thousands)  
    

For the nine months ended

September 30,

     Increase         
         2015              2014          (Decrease)      Variance  

Income:

           

Rental income

   $ 72,606       $ 78,637       $ (6,031      (7.7 %) 

Tenant recovery income

     10,850         13,077         (2,227      (17.0 %) 

Other property income

     356         659         (303      (46.0 %) 

Operating Expenses:

           

Property operating expenses

     10,649         11,479         (830      (7.2 %) 

Real estate taxes

     8,156         9,498         (1,342      (14.1 %) 

Provision for asset impairment

     —           15,640         (15,640      (100.0 %) 

General and administrative expenses

     9,212         5,477         3,735         68.2

Business management fee

     —           423         (423      (100.0 %) 

Property Income and Operating Expenses

Rental income consists of monthly rent, straight-line rent adjustments, amortization of acquired above and below market leases, and other property income pursuant to tenant leases. Tenant recovery income consists of reimbursements for real estate taxes, common area maintenance costs, management fees, and insurance costs. Other property income consists of lease termination fees and other miscellaneous property income. Property operating expenses consist of regular repair and maintenance, management fees, utilities, and insurance (in each case, some of which are recoverable from the tenant).

There was a decrease in property income for the nine months ended September 30, 2015 compared to 2014. Total property income decreased by $8.6 million from the nine months ended September 30, 2014 compared to the same period in 2015 as a result of four assets sold during 2014 and one asset sold during 2015 that were not classified as discontinued operations as well as three assets that were transferred to InvenTrust during the first quarter of 2015. This disposition and transfer activity also caused property operating expenses to decrease $0.8 million, or 7.2%, when comparing the nine months ended September 30, 2015 to the same period in 2014.

 

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Real Estate Taxes

Real estate taxes decreased $1.3 million for the nine months ended September 30, 2015 compared to the same period in 2014 as a result of three properties that were transferred to InvenTrust during the first quarter of 2015.

Provision for Asset Impairment

For the nine months ended September 30, 2015, we recorded no impairment expense.

For the nine months ended September 30, 2014, we identified certain assets which may have a reduction in the expected holding period and reviewed the probability that we would dispose of these assets. As a result of our analysis, we identified one asset during the nine months ended September 30, 2014, which was subsequently sold, that we determined was impaired and wrote down to fair value. Additionally, AT&T—St. Louis, which was previously classified as held for sale as of December 31, 2013, was re-classified as held and used and was re-measured at the lesser of the carrying value or fair value as of May 8, 2014, resulting in an impairment charge to this asset of $9.7 million. Overall, we recorded a provision for asset impairment of $15.6 million to reduce the book value of these two assets to their fair values for the nine months ended September 30, 2014.

General Administrative Expenses

The increase in general and administrative expenses of $3.7 million from $5.5 million to $9.2 million for the nine months ended September 30, 2014 and 2015, respectively, was the result of an increase in the allocation of costs by InvenTrust for certain corporate services and other expenses. For both periods, we were allocated a portion of such expenses based upon our percentage share of the average invested assets of InvenTrust. Due to InvenTrust’s spin-off of its subsidiary Xenia Hotels & Resorts, Inc. in February 2015, InvenTrust’s total average invested assets decreased for the nine months ended September 30, 2015 and, therefore, our relative percentage share increased this period. The allocation includes costs related to corporate overhead expenses, such as payroll costs for certain of InvenTrust’s employees (accounting, finance, tax, treasury and legal) and outside professional services.

Business Management Fee

We incurred a business management fee of $0 and $0.4 million for the nine months ended September 30, 2015 and 2014, respectively.

During the nine months ended September 30, 2014, InvenTrust paid an annual business management fee to the Business Manager based on the average invested assets. We were allocated a portion of the business management fee based upon our percentage share of the average invested assets of InvenTrust for the nine months ended September 30, 2014. On March 12, 2014, InvenTrust entered into the Self-Management Transactions. After the Self-Management Transactions, our management team and our other employees ceased to be employed by the Business Manager or one of its affiliates and became our employees. In connection with the Self-Management Transactions, InvenTrust agreed with the Business Manager to terminate the management agreement with the Business Manager, hire all of the Business Manager’s employees and acquire the assets or rights necessary to conduct the functions previously performed for InvenTrust by the Business Manager. The Self-Management Transactions resulted in a final business management fee incurred in January 2014. As a result, we were not allocated a business management fee after January 2014.

 

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Non-Operating Income and Expenses

 

     (in thousands)  
    

For the nine months ended

September 30,

     Increase         
         2015              2014          (Decrease)      Variance  

Non-operating income and expenses:

           

Interest and dividend income

   $ 1       $ 4       $ (3      (75.0 %) 

Loss on sale of investment properties

     (197      (1,169      (972      (83.1 %) 

Gain on extinguishment of debt

     —           12,123         (12,123      (100.0 %) 

Other income

     (11      415         (426      (102.7 %) 

Interest expense

     (21,062      (25,198      (4,136      (16.4 %) 

Income from discontinued operations, net

     —           4,657         (4,657      (100.0 %) 

Loss on Sale of Investment Properties

In line with our early adoption of the new accounting standard governing discontinued operations, ASU No. 2014-08, effective January 1, 2014, only dispositions representing a strategic shift that has (or will have) a major effect on our results and operations would qualify as discontinued operations. For the nine months ended September 30, 2014, the operations reflected in discontinued operations include the net lease assets that were classified as held for sale at December 31, 2013. All other asset dispositions have been included as a component of income from continuing operations, except for any asset dispositions reported as discontinued operations prior to our adoption of the new accounting standard governing discontinued operations.

During the nine months ended September 30, 2015, the loss on sale of properties was $0.2 million, which is attributed to one property sold during 2015 that did not qualify as discontinued operations.

During the nine months ended September 30, 2014, the loss on sale of properties was $1.2 million, which is attributed to three assets sold during 2014 that did not qualify as discontinued operations.

Gain on Extinguishment of Debt

There was no gain on extinguishment of debt for the nine months ended September 30, 2015. The gain on extinguishment of debt of $12.1 million for the nine months ended September 30, 2014 primarily relates to the extinguishment of debt on one asset sold during 2014.

Interest Expense

Interest expense from continuing operations decreased to $21.1 million for the nine months ended September 30, 2015 from $25.2 million for the nine months ended September 30, 2014. Additional interest expense of $1.9 million was reflected in discontinued operations for the nine months ended September 30, 2014. There was no discontinued operation activity for the nine months ended September 30, 2015. Total interest expense decreased to $21.1 million for the nine months ended September 30, 2015 from $27.1 million for the nine months ended September 30, 2014. This was primarily driven by a decrease in the principal amount of our debt (including mortgages and the allocation of lines of credit from InvenTrust) to $426.8 million as of September 30, 2015 from $521.4 million as of September 30, 2014.

Our weighted average interest rate on total outstanding debt was 6.11% for the nine months ended September 30, 2015 and 6.10% for the year ended December 31, 2014.

 

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Discontinued Operations

In line with our early adoption of the new accounting standard governing discontinued operations, only dispositions representing a strategic shift that has (or will have) a major effect on our results and operations would qualify as discontinued operations. The operations of the net lease assets previously classified as held for sale on the combined consolidated balance sheet as of December 31, 2013 are included in discontinued operations for the nine months ended September 30, 2014.

There was no discontinued operation activity for the nine months ended September 30, 2015.

For the nine months ended September 30, 2014, as we completed the net lease portfolio sale, we recorded net income of $4.7 million from discontinued operations, which primarily included a gain on sale of properties of $5.6 million and a loss on extinguishment of debt of $2.1 million. Discontinued operations generated operating income of $3.1 million for the nine months ended September 30, 2014.

Same-store

At September 30, 2015 and 2014, the Prior Combined Portfolio consisted of 23 wholly owned assets and four parcels of unimproved land and 28 wholly owned assets and four parcels of unimproved land, respectively, and the Highlands Portfolio, a subset of the Prior Combined Portfolio, consisted of 18 wholly owned assets and four parcels of unimproved land, for both periods. The assets owned during these periods, which exclude discontinued operations, have been included in our results of operations during the respective periods since their dates of acquisition. Same store assets are all assets within the Highlands Portfolio and Prior Combined Portfolio that we have owned and operated for the entirety of the periods being compared. This same store analysis allows management to monitor the operations of our existing assets for comparable periods to determine the effects of our acquisitions and dispositions on net income.

The following are key performance indicators for same store assets within the Highlands Portfolio and the Prior Combined Portfolio at September 30, 2015 and 2014:

 

     Highlands Portfolio     Variance     Prior Combined Portfolio     Variance  
     As of September 30,     from 2013 to     As of September 30,     from 2013 to  
         2015             2014         2014         2015             2014         2014  

Economic occupancy(a)

     95     94     1.1     95     95     1.1

Rent per square foot(b)

   $ 14.08      $ 13.99        0.6   $ 14.18      $ 14.07        0.8

 

(a) Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by the tenant of the area being leased. Actual use may be less than economic square footage.
(b) Rent per square foot is computed as annualized rent divided by the total occupied square footage at the end of the period. Annualized rent is computed as revenue for the last month of the period multiplied by twelve months. Annualized rent includes the effect of rent abatements, lease inducements and straight-line rent GAAP adjustments.

 

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Modified Net Operating Income

The following table represents our same store modified net operating income for the nine months ended September 30, 2015 and 2014 for the Highlands Portfolio and the Prior Combined Portfolio (in thousands).

 

    Highlands Portfolio     Prior Combined Portfolio  
    Nine Months Ended                 Nine Months Ended              
    September 30,
2015
    September 30,
2014
    Favorable
(Unfav.)
Variance
    Favorable
(Unfav.)
Variance
    September 30,
2015
    September 30,
2014
    Favorable
(Unfav.)
Variance
    Favorable
(Unfav.)
Variance
 

No. of same store assets

    17        17            22        22       

Operating revenues

               

Rental income

  $ 66,474      $ 65,603      $ 871        1.3   $ 72,044      $ 70,869      $ 1,175        1.7

Tenant recovery income

    8,058        8,179        (121     (1.5 )%      10,125        10,249        (124     (1.2 )% 

Other property income

    172        151        21        13.9     185        177        8        4.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income

    74,704        73,933        771        1.0     82,354        81,295        1,059        1.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

               

Property operating expenses

    8,656        7,985        (671     (8.4 )%      9,885        9,287        (598     (6.4 )% 

Real estate taxes

    5,459        5,600        141        2.5     7,174        7,260        86        1.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    14,115        13,585        (530     (3.9 )%      17,059        16,547        (512     (3.1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified same store NOI(1)

    60,589        60,348        241        0.4     65,295        64,748        547        0.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified non same store NOI(1)

    1,004        1,013        (9     (0.9 )%      1,228        7,298        (6,070     (83.2 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified net operating income(1)

  $ 61,593      $ 61,361      $ 232        0.4   $ 66,523      $ 72,046      $ (5,523     (7.7 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments(2)

               

Adjustment to rental income

    (1,524     (802     (722     90.0     (1,635     (1,084     (551     50.8

Termination fee income

    119        379        (260     (68.6 )%      119        434        (315     (72.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

    (1,405     (423     (982     232.2     (1,516     (650     (866     133.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

  $ 60,188      $ 60,938      $ (750     (1.2 )%    $ 65,007      $ 71,396      $ (6,389     (8.9 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Modified net operating income reflects the income from operations excluding nonrecurring events, such as lease termination income, and other GAAP rent adjustments in order to provide a comparable presentation of operating activity across periods.
(2) Includes adjustments for items that affect the comparability of, and were excluded from, the same store results. Such adjustments include lease termination income and GAAP rent adjustments, (such as straight-line rent and above/below market lease amortization).

Modified net operating income on a same store basis for the Highlands Portfolio increased slightly, by 0.4%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. On a total segment basis, there was an increase in modified net operating income of $0.2 million, or 0.4%. This was a result of a slight occupancy increase to 95% for the nine months ended September 30, 2015 compared to 94% for the nine months ended September 30, 2014.

Modified net operating income on a same store basis for the Prior Combined Portfolio increased slightly, by 0.8%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. On a total segment basis, there was a decrease in modified net operating income of $5.5 million, or 7.7%. This was result of the disposition of two assets sold after September 30, 2014 that did not qualify as discontinued operations and the transfer of three assets to InvenTrust during January 2015.

 

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Comparison of the years ended December 31, 2014, 2013 and 2012

Key performance indicators are as follows:

 

     As of December 31,  
     2014     2013     2012  

Economic occupancy(a)

     93     91     94

Rent per square foot(b)

   $ 13.90      $ 13.94      $ 11.33   

 

(a) Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by the tenant of the area being leased. Actual use may be less than economic square footage.
(b) Rent per square foot is computed as annualized rent divided by the total occupied square footage at the end of the period. Annualized rent is computed as revenue for the last month of the period multiplied by twelve months. Annualized rent includes the effect of rent abatements, lease inducements and straight-line rent GAAP adjustments.

Combined Consolidated Results of Operations

 

     (in thousands)  
     Year ended
December 31, 2014
     Year ended
December 31, 2013
     Year ended
December 31, 2012
 

Net income (loss) from continuing operations

   $ 12,555       $ (247,863    $ (5,438

Net income (loss) attributable to Company

     17,171         (199,410      (25,227

Our net income from continuing operations increased to $12.6 million for the year ended December 31, 2014 from a net loss from continuing operations of $247.9 million for the year ended December 31, 2013. Our net income attributable to the Company increased to $17.2 million for the year ended December 31, 2014 from a net loss attributable to the Company of $199.4 million for the year ended December 31, 2013. These increases were primarily due to a decrease in impairment charges to $15.6 million, related to two assets, for the year ended December 31, 2014 from $258.6 million, related to nine assets, for the year ended December 31, 2013. These impairment charges were offset by gains from extinguishment of debt of $12.0 million, primarily related to one property sold during 2014 and included in continuing operations, and $2.4 million, primarily related to one property, for the years ended December 31, 2014 and 2013, respectively. Additionally, the net loss attributable to the Company for the year ended December 31, 2013 was offset by a gain on sale of discontinued operations of $57.2 million due to the net lease asset portfolio sale. The gain on sale of discontinued operations for the year ended December 31, 2014 was $5.6 million.

Our net loss from continuing operations increased to $247.9 million for the year ended December 31, 2013 from $5.4 million for the year ended December 31, 2012 and our net loss attributable to the Company increased to $199.4 million for the year ended December 31, 2013 from $25.2 million for the year ended December 31, 2012. These increases were primarily due to the increase in impairment charges to $258.6 million, related to nine assets, for the year ended December 31, 2013 from $0.9 million, related to one property, for the year ended December 31, 2012. Additionally, the net loss attributable to the Company for the year ended December 31, 2013 was offset by a gain on the sale of discontinued operations of $57.2 million, whereas the net loss attributable to the Company for the year ended December 31, 2012 included a gain on the sale of discontinued operations of $1.0 million.

 

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Operating Income and Expenses

 

     (in thousands)  
     Year ended
December 31,
2014
     Year ended
December 31,
2013
     Year ended
December 31,
2012
     2014 Increase
(decrease)
from 2013
    2013 Increase
(decrease)
from 2012
 

Income:

             

Rental income

   $ 104,218       $ 108,841       $ 109,999       $ (4,623   $ (1,158

Tenant recovery income

     17,190         18,611         18,214         (1,421     397   

Other property income

     739         743         922         (4     (179

Operating Expenses:

             

Property operating expenses

     15,443         15,888         15,862         (445     26   

Real estate taxes

     12,379         13,312         12,624         (933     688   

Provision for asset impairment

     15,640         258,648         934         (243,008     257,714   

General and administrative expenses

     7,161         4,534         3,884         2,627        650   

Business management fee

     423         6,742         8,015         (6,319     (1,273

Property Income and Operating Expenses

Rental income consists of basic monthly rent, straight-line rent adjustments, amortization of acquired above and below market leases, other property income, and percentage rental income recorded pursuant to tenant leases. Tenant recovery income consists of reimbursements for real estate taxes, common area maintenance costs, management fees, and insurance costs. Other property income consists of lease termination fees and other miscellaneous property income. Property operating expenses include regular repair and maintenance, management fees, utilities, and insurance (some of which are recoverable from the tenant).

There was a decrease in property income for the year ended December 31, 2014 compared to 2013. Total property income decreased by $6.0 million, or 4.7%, from December 31, 2013 compared to the same period in 2014 as a result of four assets sold during 2014 that were not classified as discontinued operations.

Property operating expenses decreased $0.4 million, or 3%, from the year ended December 31, 2013 compared to 2014.

There was a decrease in property income for the year ended December 31, 2013 compared to 2012. Total property income decreased by $0.9 million, or 0.7%, from December 31, 2012 compared to the same period in 2013 as a result of lower occupancy in 2013 compared to 2012.

Property operating expenses increased $0.03 million, or 0.2%, from the year ended December 31, 2012 compared to 2013.

Real Estate Taxes

Real estate taxes decreased by $0.9 million for the year ended December 31, 2014 compared to the same period in 2013 as a result of four assets sold in 2014 that were not classified as discontinued operations.

Real estate taxes increased by $0.7 million for the year ended December 31, 2013 compared to the same period in 2012.

Provision for Asset Impairment

For the year ended December 31, 2014, we identified certain assets which may have a reduction in the expected holding period and reviewed the probability that we would dispose of these assets. As a result of our analysis, we identified one asset during the year ended December 31, 2014, which was subsequently sold, that we determined was impaired and wrote down to fair value. Additionally, AT&T—St. Louis, which was previously

 

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classified as held for sale as of December 31, 2013, was re-classified as held and used and was re-measured at the lesser of the carrying value or fair value as of May 8, 2014, resulting in an impairment charge to this asset of $9.7 million. Overall, we recorded a provision for asset impairment of $15.6 million to reduce the carrying value of these two assets to their fair values for the year ended December 31, 2014.

For the year ended December 31, 2013, we identified certain assets which may have a reduction in the expected holding period and reviewed the probability that we would dispose of these assets. As part of our analysis, we identified one asset, AT&T—Hoffman Estates, in which we were exploring a potential disposition. After we began exploring a potential sale of the asset, we became aware of circumstances in which the tenant was considering vacating the space. Although the lease does not expire until September 2016, we analyzed various leasing and sale scenarios for AT&T—Hoffman Estates. Based on the probabilities assigned to such scenarios, it was determined the asset was impaired and therefore written down to its estimated fair value. As a result, we recorded an impairment charge of $147.5 million with respect to this asset for the year ended December 31, 2013.

Additionally, on August 8, 2013, InvenTrust entered into a purchase agreement to sell a portfolio of net lease assets. Thirty-one of the assets were part of the Highlands Portfolio. We evaluated the 31 assets as a disposal group and determined that the disposal group was in a net loss position. Based on the analysis, we attributed the impairment to one asset, AT&T—St. Louis, in which we recorded an impairment charge of $61.9 million for the year ended December 31, 2013.

Overall, we recorded a provision for asset impairment of $258.6 million to reduce the carrying value of certain investment assets to their estimated fair values for the year ended December 31, 2013.

For the year ended December 31, 2012, we identified one asset which may have a reduction in the expected holding period and reviewed the probability that we would dispose of this asset. As a result of our analysis, we recorded a provision for asset impairment of $0.9 million to reduce the book value of this asset to its fair value for the year ended December 31, 2012. This asset was subsequently sold during the year ended December 31, 2014.

General and Administrative Expenses

The increase in general and administrative expenses of $2.6 million from $4.5 million to $7.2 million from the year ended December 31, 2013 to 2014, respectively, was the result of an increase in expenses connected to payroll, legal, and other professional fees primarily related to the transition to self-management.

The increase in general and administrative expenses of $0.7 million from $3.9 million to $4.5 million from the year ended December 31, 2012 to 2013, respectively, was primarily a result of increased legal costs, increased consulting and professional fees due to our large amount of transaction activity and the execution of our portfolio strategy, as well as increased salary expenses resulting from additional personnel, which was reimbursed to the Business Manager.

Business Management Fee

We incurred a business management fee of $0.4 million, $6.7 million and $8.0 million for the years ended December 31, 2014, 2013 and 2012, respectively. The business management fee of $6.7 million and $8.0 million for the years ended December 31, 2013 and 2012, respectively, was equal to 16.9% and 20.0% of average invested assets, respectively.

During the years ended December 31, 2013 and 2012, InvenTrust paid an annual business management fee to the Business Manager based on the average invested assets. We were allocated a portion of the business management fee based upon our percentage share of the average invested assets of InvenTrust for the years ended December 31, 2013 and 2012. On March 12, 2014, InvenTrust entered into the Self-Management

 

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Transactions. After the Self-Management Transactions, our management team and our other employees ceased to be employed by the Business Manager or one of its affiliates and became our employees. In connection with the Self-Management Transactions, InvenTrust agreed with the Business Manager to terminate the management agreement with the Business Manager, hire all of the Business Manager’s employees and acquire the assets or rights necessary to conduct the functions previously performed for InvenTrust by the Business Manager. The Self-Management Transactions resulted in a final business management fee incurred in January 2014. As a result, we were not allocated a business management fee after January 2014.

Non-Operating Income and Expenses

 

     (in thousands)  
     Year ended
December 31,
2014
    Year ended
December 31,
2013
    Year ended
December 31,
2012
    2014 Increase
(decrease)
from 2013
    2013 Increase
(decrease)
from 2012
 

Non-operating income and expenses:

          

Interest and dividend income

   $ 5      $ 1,006      $ 1,881      $ (1,001   $ (875

Loss on sale of investment properties

     (1,018     —          —          (1,018     —     

Gain on extinguishment of debt

     11,959        2,419        —          9,540        2,419   

Other income

     488        889        1,038        (401     (149

Interest expense

     (32,681     (37,583     (40,803     (4,902     (3,220

Income (loss) from discontinued operations, net

     4,632        48,469        (19,773     (43,837     68,242   

Loss on Sale of Investment Properties

In line with our early adoption of the new accounting standard governing discontinued operations, ASU No. 2014-08, effective January 1, 2014, only dispositions representing a strategic shift that has (or will have) a major effect on our results and operations would qualify as discontinued operations. For the years ended December 31, 2014 and 2013, the operations reflected in discontinued operations include the net lease assets that were classified as held for sale at December 31, 2013. All other asset dispositions are now included as a component of income from continuing operations, except for those assets classified as discontinued operations prior to our adoption of the new accounting standard governing discontinued operations.

During the year ended December 31, 2014, the loss on sale of properties was $1.0 million, which is attributed to four assets sold during 2014 that did not qualify as discontinued operations. There was no gain or loss on sale of investment properties in continuing operations for the years end December 31, 2013 and 2012.

Gain on Extinguishment of Debt

The gain on extinguishment of debt of $12.0 million for the year ended December 31, 2014 was primarily due to the gain on extinguishment of debt of $12.1 million for one asset sold during 2014.

The gain on extinguishment of debt of $2.4 million for the year ended December 31, 2013 was primarily due to a discounted mortgage pay off for one asset.

There was no gain on extinguishment of debt for the year ended December 31, 2012.

Interest Expense

Interest expense from continuing operations decreased to $32.7 million for the year ended December 31, 2014 from $37.6 million for the year ended December 31, 2013. Additional interest expense of $1.9 million and $14.1 million was reflected in discontinued operations for the years ended December 31, 2014 and 2013, respectively. In total, interest expense decreased to $34.6 million for the year ended December 31, 2014 from

 

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$51.7 million for the year ended December 31, 2013. This was primarily due to the decrease in the principal amount of our total debt (including mortgages, and the allocation of lines of credit from InvenTrust) to $487.8 million as of December 31, 2014 from $776.6 million, which includes debt related to assets classified as held for sale, as of December 31, 2013.

Interest expense from continuing operations decreased to $37.6 million for the year ended December 31, 2013 from $40.8 million for the year ended December 31, 2012. Additional interest expense of $14.1 million and $21.5 million was reflected in discontinued operations for the years ended December 31, 2013 and 2012, respectively. In total, interest expense decreased to $51.7 million for the year ended December 31, 2013 from $62.3 million for the year ended December 31, 2012. This was primarily due to the decrease in the principal amount of our total debt to $776.6 million, which includes debt related to assets classified as held for sale, as of December 31, 2013 from $1,039.9 million as of December 31, 2012, offset by a 80 basis increase in the weighted average interest rate on our debt.

Our weighted average interest rate on total outstanding debt was 6.10%, 6.29%, and 5.49% per annum for the years ended December 31, 2014, 2013 and 2012, respectively.

Discontinued Operations

In line with our early adoption of the new accounting standard governing discontinued operations, for the year ended December 31, 2014, only dispositions representing a strategic shift that has (or will have) a major effect on our results and operations would qualify as discontinued operations. The operations of the net lease assets classified as held for sale on the combined consolidated balance sheet as of December 31, 2013 are included in discontinued operations for the year ended December 31, 2014. The operations of the net lease assets and assets sold prior to our adoption of ASU No. 2014-08 are included in discontinued operations for the years ended December 31, 2013 and 2012.

For the year ended December 31, 2014, as we completed the net lease portfolio sale, we recorded net income of $4.6 million from discontinued operations, which primarily included a gain on sale of properties of $5.6 million and a loss on extinguishment of debt of $2.1 million. Discontinued operations generated operating income of $3.1 million for the year ended December 31, 2014.

For the year ended December 31, 2013, we recorded net income of $48.5 million from discontinued operations, which primarily included a gain on sale of properties of $57.2 million and a loss on extinguishment of debt of $2.1 million. Discontinued operations generated operating income of $7.3 million for the year ended December 31, 2013, which includes a provision for asset impairment of $3.9 million.

For the year ended December 31, 2012, we recorded net loss of $19.8 million from discontinued operations, which primarily included a gain on sale of properties of $1.0 million, a loss on extinguishment of debt of $1.5 million. Discontinued operations generated operating income of $2.1 million for the year ended December 31, 2012, which includes a provision for asset impairment of $14.8 million.

Same-store

At December 31, 2014, 2013 and 2012, the Prior Combined Portfolio consisted of 27 wholly owned assets and four parcels of unimproved land, 58 wholly owned assets and four parcels of unimproved land and 71 wholly owned assets and four parcels of unimproved land, respectively, and the Highlands Portfolio, a subset of the Prior Combined Portfolio, consisted of 18 wholly owned assets and four parcels of unimproved land, 17 wholly owned assets and four parcels of unimproved land and 17 wholly owned assets and four parcels of unimproved land, respectively. The assets owned during these periods, which exclude discontinued operations, have been included in our results of operations during the respective periods since their dates of acquisition. Based on when a property was acquired, operating results for certain assets are not comparable for the years ended December 31, 2014, 2013 and 2012. Same store assets are all assets within the Highlands Portfolio and Prior Combined Portfolio that we have owned and operated for the entirety of the periods being compared. This same store analysis allows management to monitor the operations of our existing assets for comparable periods to determine the effects of our acquisitions and dispositions on net income.

 

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The following are key performance indicators for comparable assets within Highlands Portfolio and the Prior Combined Portfolio at December 31, 2014 and 2013:

 

     Highlands Portfolio     Variance     Prior Combined Portfolio     Variance  
     As of December 31,     from 2013 to     As of December 31,     from 2013 to  
         2014             2013         2014         2014             2013         2014  

Economic occupancy(a)

     94     95     (1.1 )%      94     95     (1.1 )% 

Rent per square foot(b)

   $ 13.97      $ 14.00        (0.2 )%    $ 14.13      $ 14.14        (0.1 )% 

 

(a) Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by the tenant of the area being leased. Actual use may be less than economic square footage.
(b) Rent per square foot is computed as annualized rent divided by the total occupied square footage at the end of the period. Annualized rent is computed as revenue for the last month of the period multiplied by twelve months. Annualized rent includes the effect of rent abatements, lease inducements and straight-line rent GAAP adjustments.

The following are key performance indicators for comparable assets within Highlands Portfolio and the Prior Combined Portfolio at December 31, 2013 and 2012:

 

     Highlands Portfolio     Variance     Prior Combined Portfolio     Variance  
     As of December 31,     from 2012 to     As of December 31,     from 2012 to  
         2013             2012         2013         2013             2012         2013  

Economic occupancy(a)

     95     95     —       95     95     —  

Rent per square foot(b)

   $ 14.00      $ 14.05        (0.4 )%    $ 14.14      $ 14.16        (0.1 )% 

 

(a) Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by the tenant of the area being leased. Actual use may be less than economic square footage.
(b) Rent per square foot is computed as annualized rent divided by the total occupied square footage at the end of the period. Annualized rent is computed as revenue for the last month of the period multiplied by twelve months. Annualized rent includes the effect of rent abatements, lease inducements and straight-line rent GAAP adjustments.

 

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Modified Net Operating Income

The following table represents our same store modified net operating income for the twelve months ended December 31, 2014, 2013 and 2012 for the Highlands Portfolio and the Prior Combined Portfolio (in thousands).

 

    Highlands Portfolio     Prior Combined Portfolio  
    Twelve Months Ended                 Twelve Months Ended              
    December 31,
2014
    December 31,
2013
    Favorable
(Unfav.)
Variance
    Favorable
(Unfav.)
Variance
    December 31,
2014
    December 31,
2013
    Favorable
(Unfav.)
Variance
    Favorable
(Unfav.)
Variance
 

No. of same store assets

    17        17            22        22       

Operating revenues

               

Rental income

  $ 87,520      $ 86,726      $ 794        0.9   $ 94,481      $ 93,769      $ 712        0.8

Tenant recovery income

    10,755        10,523        232        2.2     13,511        13,425        86        0.6

Other property income

    207        226        (19     (8.4 )%      242        279        (37     (13.3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income

    98,482        97,475        1,007        1.0     108,234        107,473        761        0.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

               

Property operating expenses

    10,929        10,973        44        0.4     12,651        12,901        250        1.9

Real estate taxes

    7,248        7,142        (106     (1.5 )%      9,430        9,302        (128     (1.4 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    18,177        18,115        (62     (0.3 )%      22,081        22,203        122        0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified same store NOI(1)

    80,305        79,360        945        1.2     86,153        85,270        883        1.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified non same store NOI(1)

    1,415        (483     1,898        393.0     9,260        13,730        (4,470     (32.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified net operating income(1)

  $ 81,720      $ 78,877      $ 2,843        3.6   $ 95,413      $ 99,000      $ (3,587     (3.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments(2)

               

Adjustment to rental income

    (1,174     (149     (1,025     687.9     (1,522     (365     (1,157     317.0

Termination fee income

    379        341        38        11.1     434        360        74        20.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

    (795     192        (987     (514.1 )%      (1,088     (5     (1,083     21,660
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

  $ 80,925      $ 79,069      $ 1,856        2.3   $ 94,325      $ 98,995      $ (4,670     (4.7 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Modified net operating income reflects the income from operations excluding nonrecurring events, such as lease termination income, and other GAAP rent adjustments in order to provide a comparable presentation of operating activity across periods.
(2) Includes adjustments for items that affect the comparability of, and were excluded from, the same store results. Such adjustments include lease termination income and GAAP rent adjustments (such as straight-line rent and above/below market lease amortization).

Modified net operating income on a same store basis for the Highlands Portfolio grew by 1.2% for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was the result of stable same store economic occupancy and comparable lease rates year to year. On a total segment basis, there was an increase in modified net operating income of $2.8 million, or 3.6%, partially due to the consolidation of one entity previously classified as a joint venture.

 

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Modified net operating income on a same store basis for the Prior Combined Portfolio grew by 1.0% for the year ended December 31, 2014 compared to the year ended December 31, 2013. This was the result of stable economic occupancy and comparable lease rates year to year. On a total segment basis, there was decrease in modified net operating income of $3.6 million, or 3.6%. This was result of the disposition of four assets in 2014 and one asset sold in 2015 that did not qualify as discontinued operations.

 

    Highlands Portfolio     Prior Combined Portfolio  
    Twelve Months Ended                 Twelve Months Ended              
    December 31,
2013
    December 31,
2012
    Favorable
(Unfav.)
Variance
    Favorable
(Unfav.)
Variance
    December 31,
2013
    December 31,
2012
    Favorable
(Unfav.)
Variance
    Favorable
(Unfav.)
Variance
 

No. of same store assets

    17        17            22        22       

Operating revenues

               

Rental income

  $ 86,726      $ 87,111      $ (385     (0.4 )%    $ 93,769      $ 93,971      $ (202     (0.2 )% 

Tenant recovery income

    10,523        10,190        333        3.3     13,425        12,783        642        5.0

Other property income

    226        224        2        0.9     279        233        46        19.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income

    97,475        97,525        (50     (0.1 )%      107,473        106,987        486        0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

               

Property operating expenses

    10,973        10,911        (62     (0.6 )%      12,901        12,711        (190     (1.5 )% 

Real estate taxes

    7,142        7,015        (127     (1.8 )%      9,302        9,148        (154     (1.7 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    18,115        17,926        (189     (1.1 )%      22,203        21,859        (344     (1.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified same store NOI(1)

    79,360        79,599        (239     (0.3 )%      85,270        85,128        142        0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified non same store NOI(1)

    (483     (197     (286     (145.2 )%      13,730        15,276        (1,546     (10.1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified net operating income(1)

  $ 78,877      $ 79,402      $ (525     (0.7 )%    $ 99,000      $ 100,404      $ (1,404     (1.4 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments(2)

               

Adjustment to rental income

    (149     (98     (51     52.0     (365     (358     (7     2.0

Termination fee income

    341        15        326        2,173.3     360        603        (243     (40.3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

    192        (83     275        (331.3 )%      (5     245        (250     (102.0 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

  $ 79,069      $ 79,319      $ (250     (0.3 )%    $ 98,995      $ 100,649      $ (1,654     (1.6 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Modified net operating income reflects the income from operations excluding nonrecurring events, such as lease termination income, and other GAAP rent adjustments in order to provide a comparable presentation of operating activity across periods.
(2) Includes adjustments for items that affect the comparability of, and were excluded from, the same store results. Such adjustments include lease termination income and GAAP rent adjustments (such as straight-line rent and above/below market lease amortization).

Modified net operating income on a same store basis for the Highlands Portfolio decreased by 0.3% for the year ended December 31, 2013 compared to the year ended December 31, 2012 due to a decrease in rent per square foot in 2013 compared to 2012. On a total segment basis, there was decrease in modified net operating income of $0.5 million, or 0.7%. This was result of the decrease in property income described above and a significant adjustment for real estate taxes for the year ended December 31, 2013 compared to the year ended December 31, 2012 for one retail asset.

 

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Modified net operating income on a same store basis for the Prior Combined Portfolio increased slightly by 0.2% for the year ended December 31, 2013 compared to the year ended December 31, 2012. On a total segment basis, there was a decrease in modified net operating income of $1.4 million, or 1.4%. This was primarily a result of a decrease in economic occupancy to 91% at December 31, 2013 from 94% at December 31, 2012.

Non-GAAP Financial Measures

We consider the non-GAAP financial measure of FFO useful to investors as key supplemental measures of our operating performance. This non-GAAP financial measure should be considered along with, but not as alternatives to, net income or loss, operating profit, cash from operations, or any other operating performance measure as prescribed per GAAP.

Funds From Operations

We calculate FFO in accordance with standards established by NAREIT, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairment, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, adjustments for unconsolidated partnerships and joint ventures, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding our operating performance by excluding the effect of real estate depreciation and amortization, gains (losses) from sales for real estate, impairments of real estate assets extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation of FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

 

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The following is a reconciliation of our GAAP net income (loss) to FFO for the nine months ended September 30, 2015 and 2014 and years ended December 31, 2014, 2013 and 2012 (in thousands):

 

    Pro Forma   Condensed Combined
Consolidated
    Combined Consolidated  
    Nine
Months
Ended
September 30,
2015
  Twelve
Months
Ended
December 31,
2014
  Nine
Months
Ended
September 30,
2015
    Nine
Months
Ended
September 30,
2014
    Twelve
Months
Ended
December 31,
2014
    Twelve
Months
Ended
December 31,
2013
    Twelve
Months
Ended
December 31,
2012
 

Net income (loss) from continuing operations

      $ 7,241      $ 8,631      $ 12,555      $ (247,863   $ (5,438

Net income (loss) from discontinued operations

        —          4,657        4,632        48,469        (19,773

Net income of non-controlling interests

        (16     (16     (16     (16     (16
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Company

      $ 7,225      $ 13,272      $ 17,171      $ (199,410   $ (25,227

Depreciation and amortization related to investment properties

        27,280        27,503        37,287        62,268        91,584   

Depreciation and amortization related to investment in an unconsolidated entity

        —          —          —          705        674   

Impairment of investment properties

        —          15,640        15,640        258,648        934   

Impairment of investment properties reflected in discontinued operations

        —          —          —          3,853        14,836   

(Gain) loss on sale of property

        197        (4,425     (4,576     (57,239     (975

Gain on investment in unconsolidated entity

        —          —          —          (2,930     —     
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations

      $ 34,702      $ 51,990      $ 65,522      $ 65,895      $ 81,826   
 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2015, (i) the loan agreements affiliated with AT&T—Hoffman Estates and AT&T—Cleveland are in “hyper-amortization,” and so all net operating income from these assets, less management operating expenses, is used to pay down the principal amount of the loan, and (ii) all net operating income, less management operating expenses, for Dulles Executive Plaza and Shops at Sherman Plaza is being “swept” and held by the lender pursuant to the applicable loan agreement, in each case, as a result of defaults under the respective loan agreements. For the nine months ended September 30, 2015, the company relinquished $17.1 million, $2.9 million and $0.5 million to the lenders under the loan agreements for AT&T Hoffman Estates, Dulles Executive Plaza and AT&T Cleveland, respectively. For the nine months ended September 30, 2015, Shops at Sherman Plaza had a net loss of $0.4 million.

 

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The table below reflects additional information related to certain items that significantly impact the comparability of our FFO and net income (loss) or significant non-cash items from the periods presented (in thousands):

 

    Pro Forma   Condensed Combined
Consolidated
    Combined Consolidated  
    Nine
Months
Ended
September 30,
2015
  Twelve
Months
Ended
December 31,
2014
  Nine
Months
Ended
September 30,
2015
    Nine
Months
Ended
September 30,
2014
    Twelve
Months
Ended
December 31,
2014
    Twelve
Months
Ended
December 31,
2013
    Twelve
Months
Ended
December 31,
2012
 

(Gain) loss on extinguishment of debt

      $ —        $ (9,999   $ (9,835   $ (364   $ 1,457   

Amortization of mark to market debt discounts or premium, net

        166        307        380        790        1,383   

Use and Limitations of Non-GAAP Financial Measures

FFO does not represent cash generated from operating activities under GAAP and should not be considered as an alternative to net income or loss, operating profit, cash flows from operations or any other operating performance measure prescribed by GAAP. Although we present and use FFO because we believe it is useful to investors in evaluating and facilitating comparisons of our operating performance between periods and between REITs that report similar measures, the use of this non-GAAP measures has certain limitations as analytical tools. This non-GAAP financial measure is not a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to fund capital expenditures, contractual commitments, working capital, service debt or make cash distributions. This measurement does not reflect cash expenditures for long-term assets and other items that we have incurred and will incur. This non-GAAP financial measure may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions and other commitments and uncertainties. FFO as presented may not be comparable FFO as calculated by other real estate companies.

We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliation to the most comparable GAAP financial measures, and our combined consolidated statements of operations and cash flows, include interest expense, capital expenditures and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. This non-GAAP financial measure reflects an additional way of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

Liquidity and Capital Resources

As of September 30, 2015, we had $23.6 million of cash and cash equivalents, and $4.6 million of restricted escrows.

Our principal demands for funds have been and will continue to be:

 

    to pay the operating expenses of our assets;

 

    to pay our general and administrative expenses;

 

    to make distributions to our stockholders;

 

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    to service or pay-down our debt; and

 

    to fund capital expenditures and leasing related costs.

Generally, our cash needs have been and will be funded from:

 

    cash flows from our investment assets;

 

    proceeds from sales of assets;

 

    proceeds from debt; and

 

    the Capital Contribution.

As of September 30, 2015, our AT&T—Hoffman Estates and AT&T—Cleveland assets are currently in hyper-amortization under our loan agreements and, as a result, rental payments less certain expenses are used to pay down the principal amount of the loan and are not available cash. In addition, all rental payments, less certain expenses, for Dulles Executive Plaza and Sherman Plaza are currently being “swept” and held by the lender pursuant to the loan agreement and, as a result, are not available cash.

Our assets have lease maturities within the next three years that may reduce our cash flows from operations. There is no assurance that we will be able to re-lease these assets at comparable rates or on comparable terms, or at all.

Borrowings

The table below presents, on a combined consolidated basis, the principal amount, weighted average interest rates and maturity date (by year) on our mortgage debt, as of September 30, 2015 (dollar amounts are stated in thousands).

 

Fixed rate mortgage debt maturing during the year
ended December 31,
   As of
September 30, 2015
     Weighted average
interest rate, fixed
 

2015

   $ —           —  

2016

     88,980         5.88

2017

     30,275         5.57

2018

     —           —  

2019

     —           —  

Thereafter

     292,458         6.23
  

 

 

    

Total

   $ 411,713         6.11
  

 

 

    

Of the total outstanding debt, none is recourse to us.

As of September 30, 2015, we had no mortgage debt maturing through the remainder of 2015, and $89.0 million in mortgage debt maturing in 2016.

We currently anticipate that we will pay off our debt upon the disposition of asset or refinance existing debt. However, there can be no assurance that we will be able to sell assets before their debt matures or that we can obtain such refinancing on satisfactory terms, or at all. Volatility in the capital markets could expose us to the risk of not being able to borrow on terms and conditions acceptable to us for refinancings.

As of September 30, 2015, our AT&T—Hoffman Estates and AT&T—Cleveland assets are currently in hyper-amortization under our loan agreements and, as a result, rental payments less certain expenses are used to pay down the principal amount of the loan and are not available cash. In addition, all rental payments, less certain expenses, for Dulles Executive Plaza and Sherman Plaza are currently being “swept” and held by the lender pursuant to the loan agreement and, as a result, are not available cash.

Mortgage loans outstanding as of September 30, 2015 and December 31, 2014 were $411.7 million and $447.1 million and had a weighted average interest rate of 6.11% and 6.10% per annum, respectively. For the years ended December 31, 2014 and 2013, we has no additional borrowings secured by mortgages on our assets. On May 1, 2014, the Company entered into a note payable in the amount of $32.9 million with Minto Builders, Inc. At December 31, 2014, the balance of this note payable was $15.1 million.

 

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On February 3, 2015, InvenTrust entered into an amended and restated credit agreement for a $300 million unsecured revolving line of credit, which matures on February 2, 2019. The unsecured revolving line of credit bears interest at a rate equal to LIBOR plus 1.40% and requires the maintenance of certain financial covenants. The unsecured revolving line of credit is subject to a borrowing base consisting of a pool of unencumbered assets. To the extent the Company’s assets were included within the pool of unencumbered assets, the Company was allocated its proportionate share of the revolving line of credit. As of September 30, 2015, the Company’s allocated portion of the revolving line of credit was $0.007 million and the interest rate was 1.40%. As of the distribution date, we will no longer have an allocated portion of the revolving line of credit.

In May 2013, InvenTrust entered into an unsecured credit facility in the aggregate amount of $500 million. The credit facility consisted of a $300 million unsecured revolving line of credit and a $200 million term loan. Upon closing the credit agreement, InvenTrust borrowed the full amount of the term loan which remained outstanding as of December 31, 2014 and was repaid during the nine months ended September 30, 2015. As of December 31, 2014, InvenTrust had $300 million available under the unsecured revolving line of credit. As of December 31, 2014, the interest rates of the unsecured revolving line of credit and term loan were 1.60% and 1.67%, respectively. The unsecured credit facility is supported by a pool of unencumbered assets. To the extent the Company’s assets were included within the pool of unencumbered assets, the Company was allocated a portion of the unsecured credit facility. As of December 31, 2014, the Company’s allocated portion of the term loan was $25.7 million. This credit agreement was refinanced on February 3, 2015, as described above.

Capital Expenditures and Reserve Funds

During the nine months ended September 30, 2015, we made total capital expenditures of $2.0 million for the Prior Combined Portfolio, of which $1.6 million was expended on improvements to the Highlands Portfolio. Our total capital expenditures in 2014, 2013 and 2012 were $4.5 million, $4.8 million and $5.5 million, respectively for the Prior Combined Portfolio, of which $3.3 million, $2.4 million and $1.4 million, respectively, was expended on improvements to the Highlands Portfolio.

Summary of Cash Flows

Comparison of the nine months ended September 30, 2015 to September 30, 2014

 

     (in thousands)  
    

For the nine months ended

September 30,

 
     2015      2014  

Cash provided by operating activities

   $ 37,226       $ 40,457   

Cash provided by investing activities

     3,302         116,819   

Cash used in financing activities

     (27,244      (155,047
  

 

 

    

 

 

 

Increase in cash and cash equivalents

     13,284         2,229   

Cash and cash equivalents, at beginning of year

     10,291         6,076   
  

 

 

    

 

 

 

Cash and cash equivalents, at end of year

   $ 23,575       $ 8,305   
  

 

 

    

 

 

 

Cash provided by operating activities was $37.2 million and $40.5 million for the nine months ended September 30, 2015 and 2014, respectively, and was generated primarily from operating income from property operations. Cash provided by operating activities decreased for the nine months ended September 30, 2015 mainly due to the disposition of two assets and transfer of three assets to InvenTrust subsequent to September 30, 2014.

 

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Our primary source of funding for our property-level operating activities and debt payments is rent collected pursuant to our tenant leases. The following table represents lease expirations for the Prior Combined Portfolio as of September 30, 2015: