HIGHLANDS REIT, INC. References to "Highlands," the "Company," "we" or "us" are to
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q, and the historical consolidated financial statements, and related notes included elsewhere in our Annual Report on Form 10-K. 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 "Part I - Item 1A. Risk Factors" and "Disclosure Regarding Forward-Looking Statements" in our Annual Report on Form 10-K. Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include statements about Highlands' plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "guidance," "predict," "potential," "continue," "likely," "will," "would," "illustrative" and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Highlands and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors include, among others: the uncertainty and economic impact of pandemics, epidemics or other public health emergencies or fear of such events, such as the novel coronavirus disease 2019 ("COVID-19") pandemic; the risks, uncertainties and factors set forth in our filings with theU.S. Securities and Exchange Commission , including our Annual Report on Form 10-K; business, financial and operating risks inherent to real estate investments and the industry; our ability to renew leases, lease vacant space, or re-lease space as leases expire; our ability to repay or refinance our debt as it comes due; difficulty selling or re-leasing our investment properties due to their specific characteristics as described elsewhere in this report; 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; domestic or international instability or political or civil unrest, including the ongoing hostilities betweenRussia andUkraine and its worldwide economic impact; 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; 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. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that may be heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. It is difficult to fully assess the impact of the COVID-19 pandemic at this time due to, among other factors, uncertainty regarding the severity, duration and any resurgences of the pandemic domestically and internationally, the rise of variants of the virus, the efficacy and public acceptance of COVID-19 vaccines, the effectiveness and duration of federal, state and local governments' efforts to contain the spread of COVID-19, and the effect of the COVID-19 pandemic in the markets where we own and operate investment properties, including the effect on our tenants' operations and ability to pay rent. These factors are not necessarily all of the important factors that could cause our actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or 16
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persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Overview
We are a self-advised and self-administered real estate investment trust
("REIT") created to own and manage substantially all of the "non-core" assets
previously owned and managed by our former parent, InvenTrust Properties Corp.,
a Maryland corporation ("InvenTrust"). On April 28, 2016 , we were spun-off from
InvenTrust through a pro rata distribution (the "Distribution") by InvenTrust of
100% of the outstanding shares of our common stock to holders of InvenTrust's
common stock. Prior to or concurrent with the separation, we and InvenTrust
engaged in certain reorganization transactions that were designed to consolidate
substantially all of InvenTrust's remaining "non-core" assets in Highlands.
This portfolio of "non-core" assets, which were acquired by InvenTrust between
2005 and 2008, included assets that are special use, single tenant or build to
suit; face unresolved legal issues; are in undesirable locations or in weak
markets or submarkets; are aging or functionally obsolete; and/or have
sub-optimal leasing metrics. A number of our assets are retail properties
located in tertiary markets, which are particularly susceptible to the negative
trends affecting retail real estate, including the effects of the COVID-19
pandemic. As a result of these characteristics, such assets are difficult to
lease, finance and refinance and are relatively illiquid compared to other types
of real estate assets. These factors also significantly limit our asset
disposition options, impact the timing of such dispositions and restrict the
viable options available to the Company for a future potential liquidity option.
Our strategy is focused on preserving, protecting and maximizing the total value
of our portfolio with the long-term objective of providing stockholders with a
return of their investment. We engage in rigorous asset management, seek to
sustain and enhance our portfolio, and improve the quality and income-producing
ability of our portfolio by engaging in selective dispositions, acquisitions,
capital expenditures, financing, refinancing and enhanced leasing. We are also
focused on cost containment efforts across our portfolio, improving our overall
capital structure and making select investments in our existing "non-core"
assets to maximize their value. To the extent we are able to generate cash flows
from operations or dispositions of assets, in addition to the cash uses outlined
above, our board of directors has determined that it is in the best interests of
the Company to seek to reinvest in assets that are more likely to generate more
reliable and stable cash flows, such as multi-family assets, as part of the
Company's overall strategy to optimize the value of the portfolio, enhance our
options for a future potential liquidity option and maximize shareholder value.
Given the nature and quality of the "non-core" assets in our portfolio as well
as current market conditions, a definitive timeline for execution of our
strategy cannot be made. The impact of rising interest rates, high inflation,
unstable financial markets, tightening capital markets and general economic
conditions on our business has disrupted our efforts to implement a liquidity
option and, although we cannot predict when circumstances will improve, we will
continue to evaluate options during 2022 and 2023 with the goal of implementing
a liquidity option during 2023. However, we may be unable to execute on such a
transaction on terms we would find attractive for our stockholders and our
ability to do so will be influenced by external and macroeconomic factors,
including, among others, interest rate movements, inflation, local, regional,
national and global economic performance, government policy changes, competitive
factors and the effects of any future resurgences of the COVID-19 pandemic.
As of September 30, 2022 , our portfolio of assets consisted
of twelve multi-family assets, three retail assets, one office
asset, two industrial assets, one correctional facility and one parcel of
unimproved land. We currently have two business segments, consisting of
multi-family and other assets. We may have additional or fewer segments in the
future to the extent we enter into additional real property sectors, dispose of
investment properties, or change the character of our assets. For the complete
presentation of our reportable segments, see Note 9 to our consolidated
financial statements for the three and nine months ended September 30, 2022 and
2021.
Basis of Presentation
The accompanying consolidated financial statements reflect the accounts of
Highlands and its consolidated subsidiaries (collectively, the "Company").
Highlands consolidates its wholly-owned subsidiaries and any other entities
which it controls (i) through voting rights or similar rights or (ii) by means
other than voting rights if Highlands is the primary beneficiary of a variable
interest entity ("VIE"). The portions of the equity and net income of
consolidated subsidiaries that are not attributable to the Company are presented
separately as amounts attributable to non-controlling interests in our
consolidated financial statements. Entities which Highlands does not control and
entities which are VIEs in which Highlands is not a primary
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beneficiary, if any, are accounted for under appropriate GAAP. Highlands' subsidiaries generally consist of limited liability companies ("LLCs"). The effects of all significant intercompany transactions have been eliminated.
Critical accounting policies are described in the "Notes to Consolidated Financial Statements" for the year endedDecember 31, 2021 contained in the Company's latest Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the "Notes to Consolidated Financial Statements" in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Revenues and Expenses
Revenues
Our revenues are primarily derived from lease income and expense recoveries we receive from our tenants under leases with us, including 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.
Expenses
Our expenses consist of property operating expenses, real estate taxes, depreciation and amortization expense, general and administrative expenses and provision for asset impairment. Property operating expenses primarily consist of repair and maintenance, management fees, utilities and insurance (some of which are recoverable from the tenant).
Key Indicators of Operating Performance
In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:
•Cash flow from operations as determined in accordance with GAAP;
•Economic and physical occupancy and rental rates;
•Leasing activity and lease rollover;
•Management of operating expenses;
•Management of general and administrative expenses;
•Debt maturities and leverage ratios;
•Liquidity levels;
•Funds From Operations ("FFO"), a supplemental non-GAAP measure; and
•Adjusted Funds From Operations ("AFFO"), a supplemental non-GAAP measure.
Impact of COVID-19
The impact of the COVID-19 pandemic was not as material during the three and nine months endedSeptember 30, 2022 and 2021, as compared to prior periods, due to the reduced impact of government mandated business closures and the related improvement of our tenants' financial performance. The primary impact of the pandemic was and continues to be related to our tenants' ability to make rental payments in a timely fashion or at all. We have been working with our tenants to collect rental payments pursuant to our contractual rights under our lease agreements. At this time, given the uncertainty related to variants of the virus, we are unable to predict whether cases of COVID-19 in our markets will decrease, increase, or remain the same, whether additional COVID-19 vaccines will be available to the general public or will be effective against new variants of the virus, whether local governments will mandate closures of our tenants' businesses or implement other restrictive measures on their and our operations in the future in response to any future resurgence of the pandemic or the degree to which consumers will frequent our tenants' businesses. We have taken and will continue to take a number of measures to mitigate the impact of the pandemic on our business and financial condition.
Acquisition and Disposition Activity
There were no asset acquisitions during the nine months ended
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During the nine months endedSeptember 30, 2022 , consistent with our strategy of disposing of legacy "non-core" assets, we sold the following investment property: (in thousands) Gross Disposition Sale Proceeds, Property Location Disposition Date Price Net Loss on Sale State Street Market Rockford, Illinois March 10, 2022$ 9,000 $ 8,938 $ (6)
During the nine months ended
Results of Operations
Comparison of the three and nine months ended
Key performance indicators are as follows:
As of September 30,
2022 2021
Economic occupancy (1) 75.2 % 72.9 %
Rent per square foot (2) $ 15.02 $ 15.80
(1)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.
(2)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.
Consolidated Results of Operations
The following section describes and compares our consolidated results of
operations for the three and nine months ended
(dollar amounts in thousands) (dollar amounts in thousands)
For the three months ended September 30, For the nine months ended September 30,
2022 2021 Increase (Decrease) 2022 2021 Increase (Decrease)
Net loss $ (1,605) $ (1,756) $ (151) (8.6) % $ (4,077) $ (8,473) $ (4,396) (51.9) %
Net loss decreased
Net loss decreased$4.4 million for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , due to an increase in total revenues and decreases in real estate tax, general and administrative and interest expenses.
Details of these changes are provided below.
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The following table presents the changes in our revenues for the three and nine
months ended
(in thousands) (dollar amounts in thousands)
For the three months ended September 30, For the nine months ended September 30,
2022 2021 Increase (Decrease) 2022 2021 Increase (Decrease)
Income:
Rental income $ 7,321 $ 6,842 $ 479 7.0 % $ 22,626 $ 20,498 $ 2,128 10.4 %
Other property income 283 280 3 1.1 % 727 738 (11) (1.5) %
Total revenues $ 7,604 $ 7,122 $ 482 6.8 % $ 23,353 $ 21,236 $ 2,117 10.0 %
Total revenues increased $0.5 million during the three months ended September
30, 2022 , compared to the three months ended September 30, 2021 , due to
commencement of straight-line rental income on the Veeco Instruments, Inc. lease
at Trimble and on rental income from the Northwestern Medical lease at Sherman
Plaza . Additionally, rental income increased due to increased occupancy and
rental rates at our multi-family assets. Partially offsetting this increase in
rental income is the sale of State Street Market in March 2022 and the
expiration of the Fitness International lease at Sherman Plaza in April 2022 .
Total revenues increased
The following table presents the changes in our expenses for the three and nine
months ended
(dollar amounts in thousands) (dollar amounts in thousands)
For the three months ended September 30, For the nine months ended September 30,
2022 2021 Increase (Decrease) 2022 2021 Increase (Decrease)
Expenses:
Property operating expenses$ 2,229 $ 2,017 $ 212 10.5 %$ 6,573 $ 6,112 $ 461 7.5 % Real estate taxes 1,400 1,513 (113) (7.5) % 3,836 4,639 (803) (17.3) % Depreciation and amortization 2,596 2,640 (44) (1.7) % 7,829 7,967 (138) (1.7) % General and administrative expenses 2,325 1,996 329 16.5 % 7,259 8,481 (1,222) (14.4) % Total expenses$ 8,550 $ 8,166 $ 384 4.7 %$ 25,497 $ 27,199 $ (1,702) (6.3) % Property operating expenses increased$0.2 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , due primarily to increased repair and maintenance costs. Property operating expenses increased$0.5 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , due primarily to increased repair and maintenance costs, utilities, insurance premiums on our properties and bad debt expense on our multi-family portfolio. Real estate taxes decreased$0.1 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , due primarily to a lower estimate of taxes to be owed on our correctional facility. Real estate taxes decreased$0.8 million for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , due primarily to adjustments to the real estate tax estimate as a result of the sale of State Street Market and a lower estimate of taxes to be owed on our correctional facility. Depreciation and amortization remained consistent for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 and was slightly impacted by the sale of State Street Market. Depreciation and amortization also remained consistent for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , with the same impact from the sale of State Street Market and partially offset by additional depreciation and amortization on new capital assets. 20
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General and administrative expense increased$0.3 million for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 , primarily due to increased salaries as a result of annual increases, legal expenses, corporate travel and increased costs for the Company's annual meeting. General and administrative expense decreased$1.2 million for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , primarily due to reduced share-based compensation expense. During the nine months endedSeptember 30, 2021 , share-based compensation expense included an employee stock grant and no such grant occurred during the nine months endedSeptember 30, 2022 , resulting in reduced share-based compensation expense.
The following table presents the changes in our other income and expenses for
the three and nine months ended
(dollar amounts in thousands) (dollar amounts in thousands)
For the three months ended September 30, For the nine months ended September 30,
2022 2021 Increase (Decrease) 2022 2021 Increase (Decrease)
Other income and (expenses):
Interest income $ 46 $ 3 $ 43 1,433.3 % $ 55 $ 27 $ 28 103.7 %
Loss on sale of investment
properties, net - - - - % (6) - (6) - %
Interest expense (705) (715) (10) (1.4) % (1,982) (2,537) (555) (21.9) %
Interest income increased $0.04 million and $0.03 million during the three and
nine months ended September 30, 2022 , as compared to the same periods in 2021,
due to higher cash balance maintained.
During the nine months ended September 30, 2022 , the loss on sale of investment
properties of $0.01 million was attributed to the sale of State Street Market.
There were no sales of investment properties during the three months ended
September 30, 2022 or during the three and nine months ended September 30, 2021 .
Interest expense decreased
Interest expense decreased$0.6 million during the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 , due to the sale of State Street Market inMarch 2022 and the termination of the Credit Agreement duringMarch 2021 . This decrease was partially offset by interest expense on the new multi-family asset mortgages entered into onJune 30, 2022 . 21
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Table of Contents Leasing Activity 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, excluding multi-family leases, as ofSeptember 30, 2022 , assuming none of the tenants exercise renewal options: Annualized Gross Leasable Area (GLA) of Rent of Percent of Total Expiring
Number of Expiring Leases Expiring Leases Percent of Total Annualized Rent/Square
Lease Expiration Year Expiring Leases (Sq. Ft.) (in thousands) GLA Rent Foot
2022 2 4,808 $ 124 0.5 % 1.2 % $ 25.84
2023 6 37,942 397 4.3 % 3.9 % 10.47
2024 4 29,348 540 3.3 % 5.4 % 18.39
2025 15 81,461 1,207 9.2 % 12.0 % 14.82
2026 3 10,441 329 1.2 % 3.3 % 31.52
2027 5 502,032 2,471 56.9 % 24.5 % 4.92
2028 7 50,095 947 5.7 % 9.4 % 18.89
2029 2 26,542 308 3.0 % 3.1 % 11.60
2030 1 2,790 75 0.3 % 0.7 % 27.00
2031 - - - - % - % -
MTM 1 2,875 42 0.3 % 0.4 % 14.61
Thereafter 4 134,913 3,632 15.3 % 36.1 % 26.92
Grand Total 50 883,247 $ 10,072 100.0 % 100.0 % $ 11.40 The following table represents new and renewed leases that commenced during
the nine months ended
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Gross Rent Weighted Gross Weighted
# of Leasable per square Average # of Leasable Rent Average
Leases Area foot Lease Term Leases Area per square foot Lease Term
New 1 96,780 $ 25.56 16.0 1 29,333 $ 33.50 15.0
Renewals 3 11,504 29.87 3.3 3 22,699 10.16 2.5
Total 4 108,284 $ 26.02 14.7 4 52,032 $ 23.32 9.5
Critical Accounting Estimates
General
The accompanying consolidated financial statements have been prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, judgments, and assumptions are required in a number of areas, including, but not limited to, evaluating the collectability of accounts receivable, allocating the purchase price of acquired investment properties, and evaluating the impairment of real estate assets. We base these estimates, judgments and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
Acquisition of Real Estate
We evaluate the inputs, processes and outputs of each asset acquired to
determine if the transaction is a business combination or asset acquisition. If
an acquisition qualifies as a business combination, the related transaction
costs are recorded as an expense in the consolidated statements of operations
and comprehensive loss. If an acquisition qualifies as an asset acquisition, the
related transaction costs are generally capitalized and amortized over the
useful life of the acquired assets. Generally, acquisition of real estate
qualifies as an asset acquisition.
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We allocate the purchase price of real estate to land, building, other building improvements, tenant improvements, and intangible assets and liabilities (such as the value of above- and below-market leases and in-place leases. The values of above- and below-market leases are recorded as intangible assets, net, and intangible liabilities, net, respectively, in the consolidated balance sheets, and are amortized as either a decrease (in the case of above-market leases) or an increase (in the case of below-market leases) to lease income over the remaining term of the associated tenant lease. The values associated with in-place leases are recorded in intangible assets, net in the consolidated balance sheets and are amortized to depreciation and amortization expense in the consolidated statements of operations and comprehensive income over the remaining lease term. The difference between the contractual rental rates and our estimate of market rental rates is measured over a period equal to the remaining non-cancelable term of the leases, including below-market renewal options for which exercise of the renewal option appears to be reasonably assured. The remaining term of leases with renewal options at terms below market reflect the assumed exercise of such below-market renewal options and assume the amortization period would coincide with the extended lease term.
Impairment of Real Estate
The Company assesses the carrying values of its 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, the Company records an impairment loss to the extent that the carrying value exceeds fair value. The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on the Company's 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. The use of projected future cash flows and related holding periods is based on assumptions that are consistent with the estimates of future expectations and the strategic plan the Company uses to manage its underlying business. However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions and the Company's ultimate investment intent that occur subsequent to the impairment analyses could impact these assumptions and result in future impairment charges of the real estate assets.
Liquidity and Capital Resources
As of
Sources:
•cash flows from our investment properties;
•proceeds from sales of investment properties; and
•proceeds from debt.
Uses:
•to pay the operating expenses of our investment properties;
•to pay our general and administrative expenses;
•to pay for acquisitions;
•to pay for capital commitments;
•to pay for short-term obligations;
•to service or pay-down our debt; and
•to fund capital expenditures and leasing related costs.
Certain of our assets have lease maturities within the next two years that we expect to reduce our cash flows from operations if they are not renewed or replaced. Significant lease maturities include Office Max at Market at Hilliard expiring inMarch 2023 andOld Navy at Market at Hilliard expiring inAugust 2024 .
We may, from time to time, repurchase our outstanding equity and/or debt securities, if any, through cash purchases or via other transactions. Such repurchases or transactions, if any, will depend on our liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.
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Table of Contents Material Cash Requirements InApril 2020 , the Company executed a lease withNorthwestern Medical Group for approximately 29,000 square feet at ourSherman Plaza asset. The lease requires a significant amount of landlord work, a tenant allowance and a broker commission. The total commitment is estimated to be approximately$3.9 million . As ofSeptember 30, 2022 , we estimate that remaining costs under this commitment are approximately$1.3 million . Rent commenced on this lease in the third quarter of 2021 and payment of the outstanding tenant allowance will be made upon tenant's request and verification that all requirements for payment have been met. InFebruary 2021 , the Company executed a lease with Veeco Instruments, Inc. for approximately 97,000 square feet at our Trimble office asset. The lease requires a significant tenant allowance and broker commission. The total cost commitment is estimated to be approximately$9.1 million . As ofSeptember 30, 2022 , we estimate that remaining costs under this commitment are approximately$1.0 million . The tenant was responsible for rent pursuant to this lease beginningJanuary 1, 2022 , however, the tenant has 12 months of rent abatement before any amounts are payable. A portion of the leasing commission related to this lease remains payable by the Company upon the date the tenant's rent abatement ends, which isJanuary 1, 2023 . The remainder of the tenant allowance will be paid by the Company upon the tenant receiving its final certificate of occupancy.
The Company expects to use cash on hand, cash flows from operations and proceeds from financings to fund the above commitments.
Borrowings
Total debt outstanding as of
The table below presents, on a consolidated basis, the principal amount,
weighted average interest rates and maturity date (by year) on our mortgage
debt, as of
Debt maturing during the year Weighted average
ended December 31, As of September 30, 2022 interest rate
2022 (remaining) $ - - %
2023 17,594 3.28 % (1)
2024 - - %
2025 - - %
2026 24,379 4.56 %
Thereafter 20,714 4.33 %
Total $ 62,687 4.12 %
(1) See below for discussion of the swap agreement entered into with the mortgage loan obtained in connection with the acquisition of The Locale asset. The weighted average interest rate reflected is the strike rate.
The Company obtained two loans onJune 30, 2022 which were each secured by a mortgage encumbering one of the Company's multi-family assets. The loan secured by a mortgage onKenilworth Court has a principal amount of$3,784 , and the loan secured by a mortgage on TheLafayette has a principal amount of$5,481 . Both loans mature onJuly 1, 2032 , bear interest at a fixed rate of 4.74% and require interest-only payments for the duration of their entire 10-year term. The Company's mortgage on The Locale maturesSeptember 1, 2023 . Prior to maturity, the Company expects it will exercise the one-year extension option provided for in the loan documents, which requires, among other criteria, that, at the time of extension, the mortgage is not in default and a minimum debt service coverage ratio and minimum loan to value ratio are met. As ofSeptember 30, 2022 andDecember 31, 2021 , none of our mortgage debt was recourse to the Company, although we have provided certain customary, non-recourse carve-out guarantees in connection with obtaining mortgage loans on certain of our investment properties. Our ability to pay off our mortgages when they become due is, in part, dependent upon our ability either to refinance the related mortgage debt or to sell the related asset. With respect to each loan, if we are unable to refinance or sell the related asset, or in the event that the estimated asset value is less than the mortgage balance, we may, if appropriate, satisfy a mortgage obligation by transferring title of the asset to the lender or permitting a lender to foreclose. 24
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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 refinancing.
The Company obtained a mortgage loan in the principal amount of$18.8 million in connection with the acquisition of The Locale in 2019. Because that loan is indexed to LIBOR, the Company is monitoring and evaluating certain risks that have arisen in connection with transitioning to an alternative rate, including any resulting value transfer that may occur. The value of derivative instruments tied to LIBOR, as well as interest rates on our current or future indebtedness, may also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.
Termination of Credit Agreement
OnJanuary 21, 2021 , the Company repaid$5.0 million of the outstanding principal balance of the Revolving Credit Loan and onMarch 29, 2021 , repaid in full all of the remaining outstanding indebtedness related to the Revolving Credit Loan consisting of approximately$15.0 million of principal plus accrued and unpaid interest thereon. The Credit Agreement and related security interests, and all commitments thereunder, were terminated in conjunction with such payment in full. LIBOR Reform InJuly 2017 , theFinancial Conduct Authority ("FCA") that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, theFederal Reserve Board and theFederal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC"), which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by theFCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form. While we expect LIBOR to be available in substantially its current form until at least the end ofJune 2023 , it is possible that LIBOR will become unavailable prior to that point. This could occur, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.
The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.
Adjustments to systems and mathematical models to properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for the company.
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