UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _____ TO ______

COMMISSION FILE NUMBER: 000-56543

EXCHANGERIGHT INCOME FUND

(Exact name of registrant as specified in its charter)

Maryland	36-7729360
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1055 E. Colorado Blvd, Suite 310
Pasadena, California	91106
(Address of principal executive offices)	(Zip Code)

(855) 317-4448

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
		Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2023, the issuer had the following shares of common stock outstanding: 9,785,547 Class A Common Shares, $0.01 par value per share; and 5,572,067 Class I Common Shares, $0.01 par value per share.

ExchangeRight Income Fund

(d/b/a ExchangeRight Essential Income REIT)

Quarterly Report on Form 10-Q

Quarter ended June 30, 2023

Table of Contents

		Page
Cautionary Note Regarding Forward-Looking Statements		i
Part I. Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets - June 30, 2023 and December 31, 2022 (Unaudited)	1
	Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income - Three and Six Months ended June 30, 2023 and 2022 (Unaudited)	2
	Condensed Consolidated Statements of Equity - Three and Six Months ended June 30, 2023 and 2022 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows - Six Months ended June 30, 2023 and 2022 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
Part II. Other Information
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
Signatures		46

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Current Report on Form 10-Q other than historical facts may be considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and, as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of ExchangeRight Income Fund (the “Company”) d/b/a the ExchangeRight Essential Income REIT (the "Company") to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “may”, “will”, “should”, “estimates”, “projects”, “anticipates”, “believes”, “expects”, “intends”, “future”, and words of similar import, or the negative thereof. Forward-looking statements in this Current Report on Form 10-Q include information about possible or assumed future events, including, among other things, discussion and analysis of our future financial condition, results of operations, our strategic plans and objectives, occupancy, leasing rates and trends, liquidity and ability to meet future obligations, anticipated expenditures of capital and other matters. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the Securities and Exchange Commission.

Any such forward-looking statements are subject to unknown risks, uncertainties, and other factors, which in some cases are beyond our control, and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide distributions to shareholders, and maintain the value of our real estate properties, may be significantly hindered.

Factors that could cause actual results, performance or achievements to differ materially from current expectations include, but are not limited to:

•risks inherent in the real estate business, including tenant defaults, illiquidity of real estate investments, potential liability relating to environmental matters and potential damages from natural disasters;

•general business and economic conditions;

•the accuracy of our assessment that certain businesses are e‑commerce resistant and recession‑resilient;

•the accuracy of the tools we use to determine the creditworthiness of our tenants;

•concentration of our business within certain tenant categories;

•ability to renew leases, lease vacant space or re‑lease space as existing leases expire;

•our ability to successfully execute our acquisition strategies;

•the degree and nature of our competition;

•inflation and interest rate fluctuations;

•failure, weakness, interruption or breach in security of our information systems;

•our failure to generate sufficient cash flows to service our outstanding indebtedness;

•continued volatility and uncertainty in the credit markets and broader financial markets;

•our ability to maintain our qualification as a real estate investment trust (“REIT”) for federal income tax purposes;

•our limited operating history as a REIT, which may adversely affect our ability to make distributions to our shareholders;

•current loans, or future loans, may be subject to certain unfavorable provisions or may not be able to be refinanced;

•changes in, or the failure or inability to comply with, applicable laws or regulations; and

•future sales or issuances of our common shares or other securities convertible into our common shares, or the perception thereof, could cause the value of our common shares to decline and could result in dilution.

The foregoing list is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. The foregoing should be read in conjunction with the complete discussion of risk factors we face, which are set forth in “Item 1A. Risk Factors” of the Company’s Registration Statement on Form 10 that was filed with the Securities and Exchange Commission on July 7, 2023.

i

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ExchangeRight Income Fund

(d/b/a ExchangeRight Essential Income REIT)

Condensed Consolidated Balance Sheets

(Unaudited)

	June 30,			December 31,
	2023			2022
ASSETS
Real estate:
Land	$	195,524,000		$	195,295,000
Buildings and improvements		830,791,000			828,454,000
		1,026,315,000			1,023,749,000
Less accumulated depreciation		(48,087,000	)		(34,663,000	)
Real estate, net		978,228,000			989,086,000
Intangible assets, net		69,510,000			76,387,000
RSLCA notes receivable from affiliates		45,239,000			26,723,000
Restricted cash		13,067,000			14,206,000
Cash and cash equivalents		7,956,000			22,439,000
Receivables		7,742,000			7,187,000
Notes receivable from affiliates		6,012,000			6,007,000
Right-of-use asset		4,630,000			4,609,000
Other assets		1,190,000			1,712,000
Due from affiliates		16,000			54,000
TOTAL ASSETS	$	1,133,590,000		$	1,148,410,000
LIABILITIES AND EQUITY
Mortgage loans payable, net	$	556,708,000		$	497,067,000
Revolving credit facilities		-			73,311,000
Intangible liabilities, net		24,001,000			25,337,000
Accounts payable, accrued expenses and other liabilities		10,730,000			9,214,000
Right-of-use liability		4,874,000			4,772,000
Pending trade deposits		2,954,000			6,446,000
Distributions payable		3,302,000			3,189,000
Due to affiliates		470,000			-
Total liabilities		603,039,000			619,336,000
Commitments and contingencies
Equity:
Class A common shares, $0.01 par value per share, 77,425,099 and 77,425,099 shares authorized, 9,743,917 and 9,268,108 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		97,000			93,000
Class I common shares, $0.01 par value per share, 77,425,099 and 77,425,099 shares authorized, 5,535,028 and 5,193,941 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		55,000			52,000
Class S common shares, $0.01 par value per share, 77,425,099 and 77,425,099 shares authorized, 0 and 0 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively		-			-
Additional paid-in capital		394,531,000			371,459,000
Cumulative distributions in excess of net income		(44,338,000	)		(30,761,000	)
Accumulated other comprehensive income (loss)		(127,000	)		-
Total shareholders’ equity		350,218,000			340,843,000
Noncontrolling interests attributable to operating partnership		180,333,000			188,231,000
Total equity		530,551,000			529,074,000
TOTAL LIABILITIES AND EQUITY	$	1,133,590,000		$	1,148,410,000

See accompanying notes to condensed consolidated financial statements.

1

ExchangeRight Income Fund

(d/b/a ExchangeRight Essential Income REIT)

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2023			2022			2023			2022
Revenues
Rental revenue	$	18,960,000		$	12,296,000		$	38,487,000		$	23,098,000
Interest income on notes receivable from affiliates		1,280,000			2,935,000			2,446,000			5,356,000
Other		40,000			8,000			46,000			19,000
Total revenues		20,280,000			15,239,000			40,979,000			28,473,000
Operating Expenses
Property operating expenses		2,192,000			1,598,000			5,062,000			3,085,000
Management fees to affiliates		626,000			463,000			1,247,000			865,000
General and administrative expenses		707,000			198,000			1,135,000			415,000
Depreciation and amortization		10,095,000			6,549,000			20,252,000			12,076,000
Total operating expenses		13,620,000			8,808,000			27,696,000			16,441,000
Income from Operations		6,660,000			6,431,000			13,283,000			12,032,000
Other Income and Expenses
Interest expense		(6,905,000	)		(4,121,000	)		(14,137,000	)		(7,396,000	)
Interest income		21,000			-			21,000			-
Total other expenses		(6,884,000	)		(4,121,000	)		(14,116,000	)		(7,396,000	)
Net (loss) income		(224,000	)		2,310,000			(833,000	)		4,636,000
Net loss (income) attributable to noncontrolling interests		73,000			(512,000	)		279,000			(1,017,000	)
Net (loss) income attributable to common shareholders	$	(151,000	)	$	1,798,000		$	(554,000	)	$	3,619,000
Net (loss) income per common share attributable to common shareholders, basic and diluted	$	(0.01	)	$	0.14		$	(0.04	)	$	0.30
Weighted average number of common shares outstanding, basic and diluted		15,186,606			12,598,938			14,987,459			11,936,771
Other comprehensive income (loss):
Net (loss) income	$	(224,000	)	$	2,310,000		$	(833,000	)	$	4,636,000
Other comprehensive income (loss) - unrealized income (loss) on change in fair value of cash flow hedges		690,000		$	-			(189,000	)		-
Comprehensive income (loss)		466,000			2,310,000			(1,022,000	)		4,636,000
Comprehensive (income) loss attributable to noncontrolling interests		(159,000	)		(512,000	)		341,000			(1,017,000	)
Comprehensive income (loss) attributable to common shareholders	$	307,000		$	1,798,000		$	(681,000	)	$	3,619,000

See accompanying notes to condensed consolidated financial statements.

2

ExchangeRight Income Fund

(d/b/a ExchangeRight Essential Income REIT)

Condensed Consolidated Statements of Equity

Six months ended June 30, 2023

(Unaudited)

																													Noncontrolling
																				Cumulative			Accumulated						interest
	Common Shares																Additional			distributions			other			Total			attributable to
	Class A						Class I						Class S				paid-in			in excess			comprehensive			shareholders'			operating			Total
	Shares			Amount			Shares			Amount			Shares		Amount		capital			of net income			(loss)			equity			partnership			equity
Balance, December 31, 2022		9,268,108		$	93,000			5,193,941		$	52,000			-	$	-	$	371,459,000		$	(30,761,000	)	$	-		$	340,843,000		$	188,231,000		$	529,074,000
Net (loss)		-			-			-			-			-		-		-			(403,000	)		-			(403,000	)		(206,000	)		(609,000	)
Unrealized (loss) on change in fair value of cash flow hedges		-			-			-			-			-		-		-			-			(585,000	)		(585,000	)		(294,000	)		(879,000	)
Issuance of common shares		446,995			5,000			256,807			3,000			-		-		20,622,000			-			-			20,630,000			-			20,630,000
Redemption of common shares		(64,461	)		(1,000	)		(73,645	)		(1,000	)		-		-		(3,531,000	)		-			-			(3,533,000	)		-			(3,533,000	)
Offering costs		-			-			-			-			-		-		(995,000	)		-			-			(995,000	)		-			(995,000	)
Distributions		-			-			-			-			-		-		-			(6,423,000	)		-			(6,423,000	)		(3,275,000	)		(9,698,000	)
Balance, March 31, 2023		9,650,642			97,000			5,377,103			54,000			-		-		387,555,000			(37,587,000	)		(585,000	)		349,534,000			184,456,000			533,990,000
Net (loss)		-			-			-			-			-		-		-			(151,000	)		-			(151,000	)		(73,000	)		(224,000	)
Unrealized gain on change in fair value of cash flow hedges		-			-			-			-			-		-