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 "Part I-Item 1A. Risk Factors," "Part I-Item 1. Business," "Part I-Item 2. Investment Properties" and the historical consolidated financial statements, and accompanying notes, which appear elsewhere in this Annual Report. 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."
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.
Our inherited 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. Certain 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 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 December 31, 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 assets 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 property
sectors, or change the character of our assets. For the complete presentation of
our reportable segments, see Note 10 to our consolidated financial statements
for the years ended December 31, 2022 and 2021.
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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 beneficiary, if any,
are accounted for under appropriate GAAP. Highlands' subsidiaries generally
consist of limited liability companies. The effects of all significant
intercompany transactions have been eliminated.
Our 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 (in each case, 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 Pandemic
The impact of the COVID-19 pandemic was not material during the years ended
Further discussion of the potential risks facing our business from pandemics and epidemics is provided under "Part I - Item 1A. Risk Factors."
Acquisition and Disposition Activity
There were no asset acquisitions during the years ended
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During the year ended
(in thousands)
Gross Disposition Sale Proceeds,
Investment Property Location Disposition Date Price Net Loss on Sale
State Street Market Rockford, IL March 10, 2022 $ 9,000 $ 8,938 $ (6)
During the year ended
Results of Operations
Comparison of the years ended
Key performance indicators are as follows:
As of December 31,
2022 2021
Economic occupancy (1) 75.3 % 72.5 %
Rent per square foot (2) $ 15.18 $ 15.98
(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 base 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 years ended
(in thousands)
For the Year ended December 31,
2022 2021 Increase/(Decrease)
Net loss $ (7,650) $ (13,058) $ 5,408 41.4 %
Net loss during the year ended December 31, 2022 was $7.7 million compared to
$13.1 million during the year ended December 31, 2021 . Factors contributing to
the change in net loss include increased revenues, lower total compensation
expense, depreciation and amortization expense, interest expense and provision
for asset impairment.
Details of these changes are provided below.
The following table presents the changes in our revenues for the years ended
(in thousands)
For the Year ended December 31,
2022 2021 Increase/(Decrease)
Revenues:
Lease income $ 30,436 $ 27,692 $ 2,744 9.9 %
Other property income 920 937 (17) (1.8) %
Total revenues $ 31,356 $ 28,629 $ 2,727 9.5 %
Total revenues increased $2.7 million during the year ended December 31,
2022 compared to the same period in 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 the 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 .
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The following table presents the changes in our expenses for the years ended
(in thousands)
For the Year ended December 31,
2022 2021 Increase/(Decrease)
Expenses:
Property operating expenses $ 8,794 $ 8,195 $ 599 7.3 %
Real estate taxes 5,597 5,557 40 0.7 %
Depreciation and amortization 10,413 10,586 (173) (1.6) %
General and administrative expenses 11,656 12,716 (1,060) (8.3) %
Provision for asset impairment - 1,412 (1,412) (100.0) %
Total expenses $ 36,460 $ 38,466 $ (2,006) (5.2) %
Property operating expenses increased $0.6 million in the year ended
December 31, 2022 compared to the same period in 2021 primarily as a result of
increased repair and maintenance costs, utilities, insurance premiums on our
investment properties and bad debt expense on our multi-family portfolio.
Real estate taxes remained relatively flat for the year ended
Depreciation and amortization decreased$0.2 million for the year endedDecember 31, 2022 compared to the same period in 2021 primarily as a result of the sale of State Street Market inMarch 2022 and partially offset by additional depreciation and amortization on new capital assets. General and administrative expenses decreased$1.1 million for the year endedDecember 31, 2022 , primarily due to reduced total compensation expense. During the year endedDecember 31, 2021 , the Company adjusted the timing for employee stock grants and therefore there were two grants during the year, compared to a single employee stock grant during the year endedDecember 31, 2022 . Partially offsetting this decrease in total compensation is an increase in salary and bonus expense due to annual increases. Provision for asset impairment was$1.4 million for the year endedDecember 31, 2021 , due to adjusting the fair market value of one retail asset as a result of entering into a contract to sell the asset at a price below its current book value. During the year endedDecember 31, 2022 , no asset impairments were required.
The following table presents the changes in our other income and expenses for
the years ended
(in thousands)
For the Year ended
2022 2021 Increase/(Decrease)
Other income and (expenses):
Interest income $ 140 $ 30 $ 110 366.7 %
Interest expense (2,680) (3,251) (571) (17.6) %
Loss on sale of investment properties (6) - (6) - %
Interest income increased
Interest expense decreased$0.6 million to$2.7 million for the year endedDecember 31, 2022 compared to the same period in 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 inJune 2022 .
During the year ended
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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 ofDecember 31, 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 2023 4 29,298 $ 294 3.3 % 2.9 %$ 10.03 2024 5 32,956 643 3.8 % 6.4 % 19.51 2025 16 82,661 1,234 9.5 % 12.4 % 14.93 2026 3 10,441 329 1.2 % 3.3 % 31.52 2027 5 502,032 2,473 57.4 % 24.8 % 4.93 2028 7 50,095 946 5.7 % 9.5 % 18.89 2029 2 26,542 308 3.0 % 3.1 % 11.60 2030 1 2,790 75 0.3 % 0.8 % 27.00 2031 - - - - % - % - 2032 2 8,800 176 1.0 % 1.8 % 19.98 Month to Month 1 2,875 42 0.3 % 0.4 % 14.61 Thereafter 2 126,113 3,456 14.5 % 34.6 % 27.41 48 874,603 $ 9,976 100.0 % 100.0 %$ 11.41 The following table represents new and renewed leases that commenced (not including multi-family leases) in the year endedDecember 31, 2022 and 2021. For the year ended December 31, 2022 For the year ended December 31, 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 3 105,580$ 25.09 15.52 2 30,113 $ 33.71 14.77 Renewals 4 12,704$ 29.12 3.28 3 22,699 $ 10.16 2.51 Total 7 118,284$ 25.52 14.21 5 52,812 $ 23.59 9.50
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 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.
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-
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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 loss 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 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, 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 period 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
Our primary sources and uses of capital are as follows:
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 investment properties 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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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 required a significant amount of landlord work, a tenant allowance and a leasing commission. The total commitment was estimated to be approximately$3.9 million . As ofDecember 31, 2022 , we estimate that remaining costs to be paid 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 required a significant tenant allowance and leasing commission. The total cost commitment was estimated to be approximately$9.1 million . As ofDecember 31, 2022 , we estimate that remaining costs to be paid under this commitment are approximately$1.0 million . While the lease went into effect onJanuary 1, 2022 , pursuant to its terms, the tenant was entitled to 12 months of base rent abatement prior to any amounts being 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. InNovember 2022 , the Company executed a lease withXP Power, LLC for approximately 80,000 square feet at our Trimble office asset. Rental payments under this lease are expected to commence inJanuary 2024 . The lease requires significant landlord work, a tenant allowance and leasing commission. The total cost commitment is estimated to be approximately$12.3 million . As ofDecember 31, 2022 , we estimate remaining costs under this commitment are approximately$11.3 million .
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 ofDecember 31, 2022 and 2021 was$62.4 million and$62.8 million , respectively, with a weighted average interest rate of 4.12% and 4.18% per annum, respectively.
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
Fixed and variable rate debt maturing during the year As of December
Weighted average
ended December 31, 31, 2022 interest rate
2023 $ 17,492 3.28 % (1)
2024 - - %
2025 - - %
2026 24,253 4.56 %
2027 11,401 3.99 %
Thereafter 9,265 4.74 %
Total $ 62,411 4.12 %
(1)See Note 8 in the accompanying consolidated financial statements for
discussion of the swap agreement entered into with the mortgage loan obtained in
connection with the acquisition of The Locale. The weighted average interest
rate reflected is the strike rate.
The Company obtained two loans on June 30, 2022 which were secured by mortgages
on Kenilworth Court and The Lafayette . The loan secured by a mortgage on
Kenilworth Court has a principal amount of $3.8 million and the loan secured by
a mortgage on The Lafayette has a principal amount of $5.5 million . Both loans
mature on July 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 matures September 1, 2023 . The principal
balance of this mortgage was $17.5 million at December 31, 2022 . 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.
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As ofDecember 31, 2022 and 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.
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.
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 Following announcements by theUnited Kingdom's Financial Conduct Authority ("FCA"), which regulates LIBOR, andICE Benchmark Administration Limited , which administers LIBOR's publication, publication of most LIBOR settings ceased afterDecember 31, 2021 . Publication of the remainingU.S. dollar LIBOR settings is expected to cease afterJune 30, 2023 . 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. SOFR is a broad measure of the cost of borrowing cash overnight collateralized byU.S. Treasury securities, and theFederal Reserve Bank of New York started to publish SOFR inApril 2018 . The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets and could have an adverse effect on LIBOR-based interest rates on our current or future debt obligations. As ofDecember 31, 2022 , the Company had one variable-rate mortgage with an interest rate swap to fix the rate at 3.28%. The derivative instrument had an original notional amount of$18.8 million and is indexed to one-month USD-LIBOR. InDecember 2022 , the Company completed an amendment to the mortgage loan agreement to replace LIBOR and establish SOFR that has been selected by the lender as the alternate rate for this mortgage and interest rate swap. The amendment did not have a material impact to the Company's consolidated financial statements.
Capital Expenditures and Reserve Funds
During the year endedDecember 31, 2022 , we made total capital expenditures of$2.6 million and during the year endedDecember 31, 2021 , capital expenditures totaled$7.7 million . Summary of Cash Flows
Comparison of the years ended
(in thousands)
For
the Year ended
2022 2021
Net cash flows provided by operating activities $ 2,493 $ 217
Net cash flows provided by (used in) investing activities 4,665 (9,040)
Net cash flows used in financing activities (1,250) (22,804)
Net increase (decrease) in cash and cash equivalents and restricted cash and escrows
5,908 (31,627)
Cash and cash equivalents and restricted cash and escrows, at beginning of year
22,010 53,637
Cash and cash equivalents and restricted cash and escrows, at end
of year $ 27,918 $ 22,010
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Cash provided by operating activities was$2.5 million and$0.2 million for the years endedDecember 31, 2022 and 2021, respectively. The increase in cash from operations was primarily due to increased revenues from tenants and decreased total compensation costs as a result of a change in timing of annual employee stock grants that caused there to be two grants in 2021 and only a single grant in 2022. Cash provided by investing activities was$4.7 million for the year endedDecember 31, 2022 , compared to cash used in financing activities of$9.0 million for the year endedDecember 31, 2021 . Cash provided by investing activities increased$13.7 million compared to the same period in 2021 as a result of proceeds in the amount of$8.9 million from the sale of State Street Market and a decrease in cash used for capital expenditures. Partially offsetting this increase in cash provided by investing activities was an increase in cash used to pay leasing commissions during the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . Cash used in financing activities was$1.3 million for the year endedDecember 31, 2022 , compared to$22.8 million for the year endedDecember 31, 2021 . Cash used in financing activities for the year endedDecember 31, 2022 included repayment of theState Street mortgage in conjunction with the sale, in the amount of$8.7 million , principal payments on mortgage debt in the amount of$1.0 million , the payment of debt issue costs of$0.2 million related to the two new mortgage loans closed during the second quarter of 2022 and payment of tax withholding for share-based compensation in the amount of$0.6 million . Partially offsetting this cash used in financing activities was the receipt of$9.3 million of mortgage debt proceeds. Cash used in financing activities for the year endedDecember 31, 2021 was primarily related to payoff of the credit facility$20.0 million , principal payments on mortgage debt in the amount of$1.1 million and payment of tax withholding for share-based compensation in the amount of$1.7 million . We consider all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements with a maturity of three months or less, at the date of purchase, to be cash equivalents. We maintain our cash and cash equivalents at financial institutions. The combined account balances at one or more institutions exceed theFederal Depository Insurance Corporation ("FDIC") insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess ofFDIC insurance coverage.
Funds From Operations and Adjusted Funds From Operations
The National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has promulgated a non-GAAP financial measure known as Funds From Operations, or FFO. As defined by NAREIT, FFO is net income (loss) in accordance with GAAP excluding gains (or losses) resulting from dispositions of investment properties, plus depreciation and amortization and impairment charges on depreciable property. We have adopted the NAREIT definition in our calculation of FFO as management considers FFO a widely accepted and appropriate measure of performance for REITs. FFO is not equivalent to our net income or loss as determined under GAAP. Since the definition of FFO was promulgated by NAREIT, management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we also use Adjusted Funds From Operations, or AFFO as a measure of our operating performance. We define AFFO, a non-GAAP financial measure, to exclude from FFO adjustments for gains or losses related to early extinguishment of debt instruments as these items are not related to our continuing operations. By excluding these items, management believes that AFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other public, non-traded REITs. AFFO is not equivalent to our net income or loss as determined under GAAP. In calculating FFO and AFFO, impairment charges of depreciable real estate assets are added back even though the impairment charge may represent a permanent decline in value due to decreased operating performance of the applicable investment property. Further, because gains and losses from sales of investment property are excluded from FFO and AFFO, it is consistent and appropriate that impairments, which are often early recognition of losses on prospective sales of investment property, also be excluded. We believe that FFO and AFFO are useful measures of our investment properties' operating performance because they exclude noncash items from GAAP net income. Neither FFO nor AFFO is intended to be an alternative to "net income" nor to "cash flows from operating activities" as determined by GAAP as a measure of our capacity to pay distributions. Other REITs may use alternative methodologies for calculating similarly titled measures, which may not be comparable to our calculation of FFO and AFFO. 40
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The following table presents our calculation of FFO and AFFO (in thousands):
Year Ended December 31,
2022 2021
Net loss attributable to
$ (7,662) $ (13,046)
Depreciation and amortization related to investment properties (1)
10,256 10,432
Impairment of investment properties - 1,412
Loss on sale of investment properties, net 6 -
Funds From Operations and Adjusted Funds From Operations $ 2,600
$ (1,202)
(1)The depreciation and amortization add-back excludes the portion of expense
attributable to the non-controlling interest.Use and Limitations of Non-GAAP Financial Measures
FFO and AFFO do 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 and AFFO because we believe they are 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 measure has certain limitations as an analytical tool. 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, investment property acquisitions and other commitments and uncertainties. This non-GAAP financial measure, as presented, may not be comparable to non-GAAP financial measures 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 consolidated statements of operations and comprehensive loss 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 measure. This non-GAAP financial measure reflects an additional way of viewing our operations that we believe, when viewed with our GAAP results and the reconciliation to the corresponding GAAP financial measure, provides 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. Distributions
For the years ended
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