Disclosure Regarding Forward-Looking Statements.
Certain statements in this Annual Report on Form 10-K, 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 Annual Report on Form 10-K. Such risks, uncertainties and other important factors include, among others: the risks, uncertainties and factors set forth under “Part I-Item IA. Risk Factors” and “Part II-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the risks and uncertainties related to the following: business, financial and operating risks inherent to real estate investments and the industry; our ability to renew leases, lease vacant space, or re-let space as leases expire; our ability to repay or refinance our debt as it comes due; the nature of our properties may make them more difficult to sell or re-lease due to their specific characteristics as described elsewhere in this report; the business, financial and operating risks inherent to real estate investments; contraction in the global economy or low levels of economic growth; our ability to sell our assets at a price and on a timeline consistent with our investment objectives, or at all; our ability to service our debt; changes in interest rates and operating costs; compliance with regulatory regimes and local laws; uninsured or underinsured losses, including those relating to natural disasters or terrorism; our status as an emerging growth company; the amount of debt that we currently have or may incur in the future; provisions in our debt agreements that may restrict the operation of our business; our separation from InvenTrust and our ability to operate as a stand-alone public reporting company; our organizational and governance structure; our status as a REIT; the cost of compliance with and liabilities under environmental, health and safety laws; adverse litigation judgments or settlements; the outcomes and projected length of the foreclosure proceedings currently pending relating to our assets; 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.
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 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 which were designed to consolidate in us the ownership of substantially all of InvenTrust’s remaining “non-core” assets.
The majority of these “non-core” assets were acquired by Inventrust between 2005 and 2008 as part of its historical focus on acquiring, owning and operating a diversified portfolio of commercial real estate, including retail, multi-family, student housing, industrial, correctional, lodging and office assets located in the United States. In addition, certain of the "non-core" assets, including the undeveloped land in Florida, were acquired when borrowers defaulted on loans issued by Inventrust during this time period. Beginning in 2012, InvenTrust began to implement its strategy of focusing its diverse portfolio of real estate into three platforms - retail, lodging and student housing - with the goal of enhancing long-term stockholder value and positioning InvenTrust to explore various strategic transactions. As part of this strategy, InvenTrust executed a series of transactions, including the sale of its conventional apartment assets in 2013, the sale of certain of its net lease assets consummated through multiple closings through 2013 and 2014, and the disposition of other “non-core” assets in individual and portfolio transactions. Also in furtherance of this strategy, in 2014 and 2015, InvenTrust disposed of its lodging platform through the sale of its suburban select service lodging portfolio and the spin-off of Xenia Hotels & Resorts, Inc., respectively. In June 2016, InvenTrust completed the sale of its student housing portfolio. As part of InvenTrust’s stated strategy to become a pure-play retail REIT, and in order to maximize the value of InvenTrust’s retail platform, InvenTrust disposed of its remaining “non-core” assets by forming and spinning off Highlands to own and manage these assets.
This portfolio of “non-core” assets, which were substantially acquired between 2005 and 2008, includes 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. Assets with such characteristics are relatively illiquid compared to other types of real estate assets and may require additional investments to improve our disposition options. In addition, certain of these assets are in hyper-amortization under their loan agreements (resulting in rental payments less certain expenses being used to pay down the principal amount of the loan); have rental payments, less certain expenses, being “swept” and held by the lender pursuant to the loan agreement; and are in or likely to enter foreclosure proceedings. These factors may also limit our disposition options with respect to these properties and has had, and is expected to continue to have, an adverse impact on the cash flow generated by such assets. For example, three of our assets, contributing $47.93 million (or 54.1%) in annualized base rent for the year ended December 31, 2015, prior to the Distribution, are now either in foreclosure or are likely to enter into foreclosure proceedings in 2017. The debt associated with the assets is non-recourse, and is not cross-collateralized with our other obligations.
As of December 31, 2016, our portfolio consisted of six office assets, two industrial assets, six retail assets, two correctional facilities, four parcels of unimproved land and one bank branch. All of our assets are located in the United States, in fourteen states with no geographic concentration. We currently have three business segments, consisting of (i) net lease, (ii) retail and (iii) multi-tenant office. Our unimproved land is presented in “other”. We may have additional or fewer segments in the future to the extent we enter into additional real property sectors, dispose of property sectors, or change the character of assets. Highlands was incorporated in December 2016 as a Maryland corporation and intends to be taxed as and operate in a manner that will allow us to qualify as a REIT for federal tax purposes.
References to the “Company,” “we” or “us” are to Highlands and its predecessors, as well as all of Highlands’ wholly owned subsidiaries. For the complete presentation of our reportable segments, see Note 10 to our Combined Consolidated Financial Statements for the years ended December 31, 2016, 2015, and 2014.
Business Strategy
Our investment objectives are to preserve, protect and maximize the total value of our portfolio with the long term objective of providing stockholders with a return of their investment. Given the nature of the assets in our portfolio, we expect that this strategy will take multiple years to develop and execute. We engage in rigorous asset management, and will 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, and improving its overall capital structure. We intend to hold our assets until such time as we determine that a sale or other disposition achieves our investment objectives or until it appears such objectives will not be met. Assets may be sold individually or as one or more portfolios. There can be no assurances that future dispositions will occur as planned, or if they occur, that they will help us to meet our liquidity demands.
Disposition Policy
We evaluate each of our assets on a rigorous and ongoing basis in an effort to optimize and enhance the total value of our assets. In furtherance of this strategy, for the foreseeable future, we anticipate disposing of select assets that are not generating income or have unfavorable risk-adjusted returns and using the proceeds from such sales (in each case if the asset can be disposed of for greater than the debt associated with it) to improve the quality and income-producing ability of our portfolio by engaging in selective acquisitions or reinvesting in our existing assets through capital expenditures and improvements to our capital structure.
The determination of when a particular asset should be sold or otherwise disposed of will be made after consideration of all of the relevant factors, including whether our portfolio as a whole is attractive to a potential acquirer of the entire company, prevailing and projected economic and market conditions, the cash flow being generated by a particular asset, tax implications of a disposition, debt characteristics of the asset, and whether the value of the asset is anticipated to decline or increase. The timing of any disposition will depend upon then prevailing economic and market conditions, which could result in differing holding periods among the assets.