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 SEPTEMBER 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 October 31, 2023, the issuer had the following shares of common stock outstanding: 9,845,092 Class A Common Shares, $0.01 par value per share; and 5,716,374 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 September 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 - September 30, 2023 and December 31, 2022 (Unaudited)	1
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - Three and Nine Months ended September 30, 2023 and 2022 (Unaudited)	2
	Condensed Consolidated Statements of Equity - Three and Nine Months ended September 30, 2023 and 2022 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows - Nine Months ended September 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)

	September 30,			December 31,
	2023			2022
ASSETS
Real estate:
Land	$	209,073,000		$	195,295,000
Buildings and improvements		892,987,000			828,454,000
		1,102,060,000			1,023,749,000
Less accumulated depreciation		(55,044,000	)		(34,663,000	)
Real estate, net		1,047,016,000			989,086,000
Intangible assets, net		72,114,000			76,387,000
RSLCA notes receivable from affiliates		19,256,000			26,723,000
Restricted cash		14,348,000			14,206,000
Cash and cash equivalents		6,549,000			22,439,000
Receivables		8,377,000			7,187,000
Notes receivable from affiliates		6,015,000			6,007,000
Right-of-use asset		4,641,000			4,609,000
Other assets		1,365,000			1,712,000
Due from affiliates		318,000			54,000
TOTAL ASSETS	$	1,179,999,000		$	1,148,410,000
LIABILITIES AND EQUITY
Mortgage loans payable, net	$	589,006,000		$	497,067,000
Revolving credit facilities		-			73,311,000
Intangible liabilities, net		25,353,000			25,337,000
Accounts payable, accrued expenses and other liabilities		10,890,000			9,214,000
Right-of-use liability		4,925,000			4,772,000
Pending trade deposits		1,153,000			6,446,000
Distributions payable		3,434,000			3,189,000
Due to affiliates		20,000			-
Total liabilities		634,781,000			619,336,000
Commitments and contingencies
Equity:
Class A common shares, $0.01 par value per share, 79,273,558 and 77,425,099 shares authorized, 9,861,179 and 9,268,108 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		99,000			93,000
Class I common shares, $0.01 par value per share, 79,273,558 and 77,425,099 shares authorized, 5,733,448 and 5,193,941 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		57,000			52,000
Class S common shares, $0.01 par value per share, 79,273,558 and 77,425,099 shares authorized, 0 and 0 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		-			-
Additional paid-in capital		403,148,000			371,459,000
Cumulative distributions in excess of net income		(51,338,000	)		(30,761,000	)
Accumulated other comprehensive income		178,000			-
Total shareholders’ equity		352,144,000			340,843,000
Noncontrolling interests attributable to operating partnership		193,074,000			188,231,000
Total equity		545,218,000			529,074,000
TOTAL LIABILITIES AND EQUITY	$	1,179,999,000		$	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 September 30,						Nine months ended September 30,
	2023			2022			2023			2022
Revenues
Rental revenue	$	19,409,000		$	15,367,000		$	57,896,000		$	38,465,000
Interest income on notes receivable from affiliates		1,301,000			2,455,000			3,747,000			7,811,000
Other		8,000			-			54,000			19,000
Total revenues		20,718,000			17,822,000			61,697,000			46,295,000
Operating expenses
Property operating expenses		2,551,000			1,913,000			7,613,000			4,998,000
Management fees to affiliates		556,000			588,000			1,803,000			1,453,000
General and administrative expenses		391,000			241,000			1,526,000			656,000
Depreciation and amortization		10,306,000			8,312,000			30,558,000			20,388,000
Total operating expenses		13,804,000			11,054,000			41,500,000			27,495,000
Income from operations		6,914,000			6,768,000			20,197,000			18,800,000
Other income and expenses
Interest expense		(7,344,000	)		(5,823,000	)		(21,481,000	)		(13,219,000	)
Interest income		26,000			-			47,000			-
Total other expenses, net		(7,318,000	)		(5,823,000	)		(21,434,000	)		(13,219,000	)
Net (loss) income		(404,000	)		945,000			(1,237,000	)		5,581,000
Net loss (income) attributable to noncontrolling interests		134,000			(358,000	)		413,000			(1,375,000	)
Net (loss) income attributable to common shareholders	$	(270,000	)	$	587,000		$	(824,000	)	$	4,206,000
Net (loss) income per common share attributable to common shareholders, basic and diluted	$	(0.02	)	$	0.04		$	(0.05	)	$	0.34
Weighted average number of common shares outstanding, basic and diluted		15,485,383			13,542,077			15,155,258			12,477,753
Other comprehensive income (loss):
Net (loss) income	$	(404,000	)	$	945,000		$	(1,237,000	)	$	5,581,000
Other comprehensive income - unrealized income on change in fair value of cash flow hedges		460,000		$	-			271,000			-
Comprehensive income (loss)		56,000			945,000			(966,000	)		5,581,000
Comprehensive (income) loss attributable to noncontrolling interests		(21,000	)		(358,000	)		320,000			(1,375,000	)
Comprehensive income (loss) attributable to common shareholders	$	35,000		$	587,000		$	(646,000	)	$	4,206,000

See accompanying notes to condensed consolidated financial statements.

2

ExchangeRight Income Fund

(d/b/a ExchangeRight Essential Income REIT)

Condensed Consolidated Statements of Equity

Nine months ended September 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			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
Repurchase 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		-			-			-			-			-		-		-			-			458,000			458,000			232,000			690,000
Issuance of common shares		111,741			-			194,897			2,000			-		-		8,693,000			-			-			8,695,000			-			8,695,000
Repurchase of common shares		(18,466	)		-			(74,451	)		(1,000	)		-		-		(2,450,000	)		-			-			(2,451,000	)		-			(2,451,000	)
Conversion of OP Units to common shares		-			-			37,479			-			-		-		1,014,000			-			-			1,014,000			(1,014,000	)		-
Offering costs		-			-			-			-			-		-		(281,000	)		-			-			(281,000	)		-			(281,000	)
Distributions		-			-			-			-			-		-