Highlands REIT Sets Rewards for Top Management
May 1, 2023 | James Sprow | Blue Vault
Introduction and History
Highlands REIT came into existence in April 2016 as InvenTrust Properties Corp., (fka Inland American Real Estate Trust), spun-off 100% of its common stock to holders of InvenTrust’s common stock. The spin-off was designed to consolidate substantially all of InvenTrust’s “non-core” assets in Highlands. The REIT is self-advised and self-administered, i.e. internally managed, and has not been associated with Inland Real Estate Investment Corporation since 2016.
As of December 31, 2022, Highlands’ portfolio consisted of twelve multi-family assets, three retail assets, one office asset, two industrial assets, one correctional facility, and one parcel of unimproved land, which are all located in the United States. The REIT currently has two business segments, consisting of multi-family assets and other assets.
The 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 assets are retail properties located in tertiary markets, which are particularly susceptible to the negative trends affecting retail real estate. 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 the REIT’s asset disposition options, impact the timing of such dispositions and restrict the viable options available to the Company for a future potential liquidity option.
For example, the REIT owns a Hudson, Colorado, correctional facility that was leased to GEO with a lease that expired in 2020. In January 2021 President Biden issued an executive order directing the Attorney General to not renew DOJ contracts with privately operated criminal detention facilities. The facility has been vacant since the lease expiration. The REIT may be required to make significant capital expenditures to reposition, finance or sell the asset.
As of December 31, 2022, the REIT’s portfolio had a percentage of economic occupancy of 75.3%. The multifamily segment of 12 properties with 643,799 gross leasable area had a weighted average occupancy of 95.2% as of that date. Two cold storage facilities and a retail facility had 100% occupancy, but the vacant prison property, and a retail property (55.1% economic occupancy) and multi-tenant office property (54.7% economic occupancy) with a combined 32% of the REIT’s total GLA pulled the weighted average for the entire portfolio down to 75.3%.
Executive Compensation
On April 12, 2023, Highlands REIT, Inc. (the “Company”) entered into amended and restated executive employment agreements with Richard Vance, President and CEO of the Company and Robert J. Lange, Executive Vice President, COO, General Counsel and Secretary. The Company also entered into an executive employment agreement with Kimberly Karas, Senior Vice President, Chief Accounting Officer and Treasurer.
The Employment Agreements set forth annual base salary rates for Vance and Lange and Ms. Karas, which are $750,000, $600,000 and $350,000 respectively. Vance and Lange and Ms. Karas are each
eligible to receive an annual cash performance bonus based upon the achievement of performance criteria established by the Company’s board of directors or the compensation committee of the board of directors. The target annual bonus for each of Vance and Lange and Ms. Karas will be no less than 100%, 100% and 40% of the applicable Executive’s base salary, respectively, with threshold and maximum bonus levels to be determined on an annual basis. In the event of a “change in control” (as defined in the Employment Agreements) during their employment period, the Executives will be entitled to receive an annual bonus equal to the greater of the applicable Executive’s (x) annual bonus, if any, for the completed fiscal year immediately preceding the fiscal year in which a change in control occurs (“Prior Bonus”) or (y) target bonus for the year in which the change in control occurs, in each case, pro-rated for the portion of the fiscal year that elapsed before the change in control.
There are also provisions in the employment contracts whereby if either Mr. Vance’s or Mr. Lange’s employment is terminated without “cause” or by him for “good reason” then each will be entitled to a lump sum payment equal to one and a half times the sum of his annual base salary and target annual bonus, and payments for healthcare continuation coverage under COBRA for up to 18 months after the termination date. Ms. Karas has similar termination provisions.
The REIT’s Assets, Net Income and NAV
The aggregate cost of real estate owned on December 31, 2022, was approximately $443.0 million. The carrying value of the REIT’s assets as of that date was $275.6 million. The net loss attributable to common stockholders for the year 2022 was $7.7 million, or $0.01 per share on a net asset value per share as of December 15, 2022, of $0.28. The REIT has never paid distributions to shareholders or redeemed common shares since its inception. In Q4 2016, the REIT’s net asset value per share was estimated at $0.35.
Over the last three years, the REIT’s percentage of economic occupancy has increased from 72.8% as of December 31, 2020, to 75.3% as of December 31, 2022.
As of March 14, 2023, the REIT had 166,248 stockholders of record.
Sources: Blue Vault, SEC
