Highlands REIT Inc.
08/11/2026 | Press release | Distributed by Public on 08/11/2026 13:21
Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
References to "Highlands" are to Highlands REIT, Inc and references to the "Company," "we" or "us" are to Highlands as well as all of Highlands' wholly-owned and consolidated subsidiaries.
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 risks, uncertainties and factors set forth in our filings with the U.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 investment properties 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 in Ukraine and Israel and their 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; the uncertainty and economic impact of pandemics, epidemics or other public health emergencies or fear of such events; risks associated with international trade disputes, including threatened or implemented tariffs imposed by the U.S. and threatened or implemented tariffs imposed by foreign countries in retaliation or otherwise; 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.
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" investment properties 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" investment properties in Highlands.
This inherited portfolio of "non-core" investment properties, which were acquired by InvenTrust between 2005 and 2008, included investment properties that are special use, single tenant or build to suit; faced unresolved legal issues; are in undesirable locations or weak markets or submarkets; are aging or functionally obsolete; and/or have sub-optimal leasing metrics. Certain of our investment properties are retail properties located in tertiary markets, which are particularly susceptible to the negative trends affecting retail real estate. Such investment properties are difficult to lease, finance and refinance and are relatively illiquid compared to other types of real estate properties. These factors also significantly limit our "non-core" investment property disposition options, impact the timing of such dispositions and restrict the viable options available to the Company for future potential liquidity options.
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" investment properties to maximize their value. To the extent we are able to generate cash flows from operations or dispositions of investment properties, in addition to the cash uses outlined above, our board of directors has determined that it is in the best interest of the Company to seek to reinvest in investment properties that are more likely to generate more reliable and stable cash flows, such as multi-family investment properties, as part of the Company's overall strategy to optimize the value of the portfolio, enhance our options for future potential liquidity options and maximize shareholder value. Given the nature and quality of the remaining "non-core" investment properties in our portfolio as well as current market conditions, a definitive timeline for execution of our strategy cannot be made.
With this strategy in mind, in the fourth quarter of 2023, we launched a modified "Dutch Auction" self-tender offer in an effort to provide a liquidity option for certain of our stockholders who elected to tender their stock while at the same time balancing the best interests of the Company and of those stockholders who wished to remain invested in the Company. We believe that the tender offer provided an efficient mechanism to provide our stockholders who desired immediate liquidity with the opportunity to tender shares, while also providing a benefit to those stockholders who did not participate, as such stockholders automatically increased their relative percentage ownership interest in the Company and our future operations, including any liquidity events that we may have in the future. We will continue to explore offering an additional liquidity option to our shareholders, which we expect to announce during 2026. Our ability to execute on future liquidity events will be influenced by external and macroeconomic factors, including, among others, interest rate movements, inflation, local, regional, national and global economic performance and real estate markets, government policy changes and competitive factors and we may be unable to execute such a transaction on terms we find attractive for our stockholders.
As of June 30, 2026, our portfolio of investment properties included thirteen multi-family, three retail and one office property, one correctional facility and one parcel of unimproved land. We currently have two business segments, consisting of multi-family and other. 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 investment properties. For the complete presentation of our reportable segments, see Note 8 to our consolidated financial statements for the three and six months ended June 30, 2026 and 2025.
Basis of Presentation
The accompanying consolidated financial statements reflect the accounts of Highlands and its consolidated subsidiaries. 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 noncontrolling 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 ("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 ended December 31, 2025 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 rental 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, interest expense 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.
Results of Operations
Comparison of the three and six months ended June 30, 2026 and 2025
Key performance indicators are as follows:
| As of June 30, | |||||||||||
| 2026 | 2025 | ||||||||||
|
Economic occupancy (1)
|
72.3 | % | 75.0 | % | |||||||
|
Rent per square foot (2)
|
$ | 26.58 | $ | 26.33 | |||||||
(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 three and six months ended June 30, 2026 and 2025.
| (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | Increase (Decrease) | 2026 | 2025 | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | $ | (3,383) | $ | (3,018) | $ | (365) | (12.1) | % | $ | (5,972) | $ | (5,270) | $ | (702) | (13.3) | % | |||||||||||||||||||||||||||||||
Net loss increased $0.4 million during the three months ended June 30, 2026, compared to the three months ended June 30, 2025, due primarily to lower revenues and increased property operating and interest expenses. Partially offsetting these increases was a decrease in general and administrative expenses.
Net loss increased $0.7 million during the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, due to the same items impacting the three-month period.
Details of these changes are provided below.
The following table presents the changes in our revenues for the three and six months ended June 30, 2026 and 2025.
| (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | Increase (Decrease) | 2026 | 2025 | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| Income: | |||||||||||||||||||||||||||||||||||||||||||||||
| Rental income | $ | 8,789 | $ | 9,236 | $ | (447) | (4.8) | % | $ | 18,002 | $ | 18,324 | $ | (322) | (1.8) | % | |||||||||||||||||||||||||||||||
| Other property income | 243 | 235 | 8 | 3.4 | % | 424 | 452 | (28) | (6.2) | % | |||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 9,032 | $ | 9,471 | $ | (439) | (4.6) | % | $ | 18,426 | $ | 18,776 | $ | (350) | (1.9) | % | |||||||||||||||||||||||||||||||
Total revenues decreased $0.4 million during the three months ended June 30, 2026, compared to the three months ended June 30, 2025, due primarily to decreased revenue from our multi-family portfolio. Specifically, market conditions affecting the Company's Denver multifamily portfolio have required us to offer reduced rents and additional concessions. There has been significant construction of new multi-family units in the Denver market over the past few years. As they have reached completion, the market contains an abundance of available units that are newer and in buildings with more amenities than we offer at many of our investment properties, requiring us to reduce our rents to compete with this new product. Additionally, recovery revenue on our Trimble property is lower due to lower expenses at the property.
Total revenues decreased $0.4 million during the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, due primarily to the same items impacting the three-month period. Partially offsetting this decrease is the rent commencement on the Life Time Fitness lease at Sherman Plaza.
The following table presents the changes in our expenses for the three and six months ended June 30, 2026 and 2025.
| (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | Increase (Decrease) | 2026 | 2025 | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Property operating expenses | $ | 2,816 | $ | 2,641 | $ | 175 | 6.6 | % | $ | 5,808 | $ | 5,232 | $ | 576 | 11.0 | % | |||||||||||||||||||||||||||||||
| Real estate taxes | 1,538 | 1,494 | 44 | 2.9 | % | 3,021 | 2,985 | 36 | 1.2 | % | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 2,914 | 2,978 | (64) | (2.1) | % | 5,821 | 5,840 | (19) | (0.3) | % | |||||||||||||||||||||||||||||||||||||
| General and administrative expenses | 3,369 | 3,774 | (405) | (10.7) | % | 6,371 | 6,788 | (417) | (6.1) | % | |||||||||||||||||||||||||||||||||||||
| Total expenses | $ | 10,637 | $ | 10,887 | $ | (250) | (2.3) | % | $ | 21,021 | $ | 20,845 | $ | 176 | 0.8 | % | |||||||||||||||||||||||||||||||
Property operating expenses increased $0.2 million during the three months ended June 30, 2026, compared to the three months ended June 30, 2025, due to increased repairs and maintenance, security, utilities and payroll at our properties. This increase is partially offset by decreased insurance on our properties due to negotiating lower rates on our portfolio.
Property operating expenses increased $0.6 million during the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, due to increased repairs and maintenance, security, utilities and payroll at our properties.
Real estate taxes and depreciation and amortization expenses remained consistent during the three and six months ended June 30, 2026, compared to the three and six months ended June 30, 2025.
General and administrative expenses decreased $0.4 million for the three months ended June 30, 2026, as compared to the three months ended June 30, 2025, due primarily to lower compensation expense in conjunction with stock grants provided to two employees during the three months ended June 30, 2025. No similar stock grants to employees occurred during the three months ended June 30, 2026. Additionally, legal expenses were lower due to fees required during the three months ended June 30, 2025 for amending the employment agreement with our current chief executive officer and the separation and consulting agreement with our former chief executive officer. Partially offsetting these decreases was an increase in salaries and benefits due to annual increases, higher annual meeting costs and higher consulting fees paid for the third-party valuation of our common stock completed during the three months ended June 30, 2026.
General and administrative expenses decreased $0.4 million for the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, due primarily to the aforementioned stock grants during the prior year period, decreased salaries and benefits due to the retirement of our former chief executive officer and lower legal expenses as described for the three-month period. These decreases are partially offset by higher annual meeting costs and higher consulting fees paid for the third-party valuation of our common stock, which was not completed during the prior year period.
The following table presents the changes in our other income and expenses for the three and six months ended June 30, 2026 and 2025.
| (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| For the three months ended June 30, | For the six months ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2026 | 2025 | Increase (Decrease) | 2026 | 2025 | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||
| Other income and (expenses): | |||||||||||||||||||||||||||||||||||||||||||||||
| Other income | $ | 251 | $ | 178 | $ | 73 | 41.0 | % | $ | 369 | $ | 415 | $ | (46) | (11.1) | % | |||||||||||||||||||||||||||||||
| Interest expense | (2,029) | (1,780) | 249 | 14.0 | % | $ | (3,746) | $ | (3,616) | $ | 130 | 3.6 | % | ||||||||||||||||||||||||||||||||||
Other income increased $0.1 million for the three months ended June 30, 2026, as compared to the three months ended June 30, 2025, due primarily to higher interest income earned on higher cash balances.
Other income decreased $0.05 million for the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, due primarily to lower interest income earned on our cash balances due to lower interest rates.
Interest expense increased $0.2 million for the three months ended June 30, 2026, as compared to the three months ended June 30, 2025, due primarily to the Sherman Plaza mortgage entered into on April 30, 2026. Partially offsetting this increase was a decrease in interest expense on our variable rate mortgage for The Muse due to lower variable rates during the period.
Interest expense increased $0.1 million for the six months ended June 30, 2026, as compared to the six months ended June 30, 2025, due primarily to the same factors impacting the three-month period. Additionally, offsetting the increase was a decrease in loan fee amortization on our Trimble loan which was extended during 2025 with lower costs than the original loan.
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 scheduled tenant lease expirations, excluding multi-family residential leases, as of June 30, 2026, assuming none of the tenants exercise renewal options:
| Lease Expiration Year |
Number of Expiring Leases |
Gross Leasable Area (GLA) of Expiring Leases (Sq. Ft.) |
Annualized Rent of Expiring Leases (in thousands) |
Percent of Total GLA |
Percent of Total Annualized Rent |
Expiring Rent/Square Foot |
||||||||||||||||||||||||||||||||
| 2026 | 4 | 12,208 | $ | 331 | 2.4 | % | 2.4 | % | $ | 27.11 | ||||||||||||||||||||||||||||
| 2027 | 6 | 35,044 | 564 | 6.8 | % | 4.2 | % | 16.10 | ||||||||||||||||||||||||||||||
| 2028 | 6 | 26,594 | 482 | 5.1 | % | 3.6 | % | 18.14 | ||||||||||||||||||||||||||||||
| 2029 | 10 | 60,330 | 1,470 | 11.7 | % | 10.8 | % | 24.34 | ||||||||||||||||||||||||||||||
| 2030 | 8 | 57,612 | 833 | 11.1 | % | 6.1 | % | 14.45 | ||||||||||||||||||||||||||||||
| 2031 | 1 | 2,441 | 127 | 0.5 | % | 0.9 | % | 52.03 | ||||||||||||||||||||||||||||||
| 2032 | 3 | 10,599 | 225 | 2.1 | % | 1.7 | % | 21.20 | ||||||||||||||||||||||||||||||
| 2033 | 1 | 815 | 28 | 0.2 | % | 0.2 | % | 34.97 | ||||||||||||||||||||||||||||||
| 2034 | 1 | 27,430 | 483 | 5.3 | % | 3.6 | % | 17.60 | ||||||||||||||||||||||||||||||
| 2035 | 3 | 11,603 | 297 | 2.2 | % | 2.2 | % | 25.62 | ||||||||||||||||||||||||||||||
| MTM | 1 | 1,111 | 14 | 0.2 | % | 0.1 | % | 12.75 | ||||||||||||||||||||||||||||||
| Thereafter | 5 | 270,958 | 8,712 | 52.4 | % | 64.2 | % | 32.15 | ||||||||||||||||||||||||||||||
| Grand Total | 49 | 516,745 | $ | 13,566 | 100.0 | % | 100.0 | % | $ | 26.26 | ||||||||||||||||||||||||||||
The following table represents new and renewed leases that commenced during the six months ended June 30, 2026 and 2025:
| Six Months Ended June 30, 2026 | Six Months Ended June 30, 2025 | ||||||||||||||||||||||||||||||||||||||||||||||
|
# of Leases |
Gross Leasable Area |
Rent per square foot |
Weighted Average Lease Term |
# of Leases |
Gross Leasable Area |
Rent per square foot |
Weighted Average Lease Term |
||||||||||||||||||||||||||||||||||||||||
| New | - | - | $ | - | - | 2 | 63,580 | $ | 30.17 | 14.8 | |||||||||||||||||||||||||||||||||||||
| Renewals | 2 | 5,108 | 27.37 | 1.0 | 11 | 89,439 | 13.53 | 3.6 | |||||||||||||||||||||||||||||||||||||||
| Total | 2 | 5,108 | $ | 27.37 | 1.0 | 13 | 153,019 | $ | 20.44 | 8.3 | |||||||||||||||||||||||||||||||||||||
Critical Accounting Estimates
General
The accompanying consolidated financial statements have been prepared in accordance with GAAP, which requires 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, 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 Investment Properties
We evaluate the inputs, processes and outputs of each investment property 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-
and below-market leases are recorded as intangible assets, net, and other liabilities, 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 rental 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 Investment Properties
The Company assesses the carrying values of the respective long-lived investment properties whenever events or changes in circumstances indicate that the carrying amounts of these investment properties may not be fully recoverable, such as a reduction in the expected holding period of the investment property. 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 investment property 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 properties.
Liquidity and Capital Resources
As of June 30, 2026, we had $44.5 million of cash and cash equivalents, and $2.0 million of restricted cash and escrows.
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 in March 2027.
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.
Material Cash Requirements
In April 2025, the Company entered into a Separation and Consulting Agreement with its former President and Chief Executive Officer, Richard Vance. As part of this agreement, Mr. Vance was paid a consulting fee totaling $800 covering the remainder of the 2025 fiscal year. Mr. Vance will also be paid $100 quarterly during the 2026 and 2027 fiscal years. Also, as part of the agreement, the Company agreed to repurchase 6,698 shares of Mr. Vance's common stock, at a price of $0.28 per share (a discount from the most recent share valuation of $0.31 per share) for a total of $1,875 and may repurchase additional shares beginning in 2029, as stated in the agreement. The Company agreed to pay Mr. Vance's COBRA premiums for a period of 18-months from the effective date of the agreement.
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 June 30, 2026 and December 31, 2025 was $147.4 million and $122.9 million, respectively, with a weighted average interest rate of 5.31% and 5.25% per annum, respectively.
The Company's outstanding mortgage indebtedness included 12 mortgage loans with various maturities through January 2036. The following table presents the principal amount of debt maturing each year, including amortization of principal based on debt outstanding at June 30, 2026, and the weighted average interest rates for the maturing debt in each specified period (dollar amounts are stated in thousands):
|
Debt maturing during the year ended December 31, |
As of June 30, 2026
|
Weighted average interest rate |
|||||||||
|
2026 (remaining)
|
$ | 22,575 | 4.56 | % | |||||||
| 2027 | 10,785 | 3.99 | % | ||||||||
| 2028 | 234 | - | % | ||||||||
| 2029 | 45,245 | 5.82 | % | ||||||||
| 2030 | 28,208 | 5.88 | % | ||||||||
| Thereafter | 40,348 | 5.12 | % | ||||||||
| Total | $ | 147,395 | 5.31 | % | |||||||
The mortgage loan on Buckhorn Plaza, in the amount of $8.8 million, matures November 6, 2026. The Company intends to sell this investment property prior to this upcoming maturity date. The mortgage loan on Market at Hilliard, in the amount of $13.6 million, matures December 6, 2026. The Company expects to refinance this mortgage loan prior to this upcoming maturity date.
On April 30, 2026, we obtained a loan secured by a mortgage encumbering Sherman Plaza, one of our retail investment properties, located in Evanston, Illinois. The loan has a principal balance of $25.0 million and matures on April 30, 2029, with two 12-month extension options, provided certain criteria are met at the time of each extension. The mortgage requires interest only payments through maturity and principal and interest payments during the extension periods. Simultaneously with the loan closing, we entered into a swap arrangement to fix the interest rate at 5.90% for the term of the loan.
The mortgage loan encumbering the Trimble office investment property currently leased by Veeco Instruments, Inc. matured on April 6, 2025. This loan had a principal amount of $20.0 million, $4.0 million of which was guaranteed by Highlands. The Company exercised the 12-month extension option that was available under the original loan documents, and paid an extension fee equal to $0.02 million, to extend the maturity date on the loan to April 6, 2026. The swap arrangement that the Company entered into at the time we closed the loan fixed the interest rate at 5.86% for the term of the loan, including the extended maturity date.
In September 2025, the Company completed a long-term extension on the Trimble mortgage debt. The principal amount remains at $20.0 million and the payment guarantee has been removed. The loan now matures on April 6, 2029. Additionally, we completed an extension on the required fixed rate swap agreement. The swap agreement fixes the interest rate at 5.71% for the term of the loan. In conjunction with this extension, the Company paid a fee of $0.1 million to the lender.
The Company's ability to pay off the mortgages when they become due is dependent upon the Company's ability either to refinance the related mortgage debt or to sell the related investment property. With respect to each mortgage loan, if the applicable wholly-owned property-owning subsidiary is unable to refinance or sell the related investment property, or in the event that the estimated value is less than the mortgage balance, the applicable wholly-owned property-owning subsidiary may, if appropriate, satisfy a mortgage obligation by transferring title of the investment property to the lender or permitting a lender to foreclose.
There are no payment guarantees in place on mortgage loans as of June 30, 2026 and December 31, 2025. However, Highlands or its subsidiaries may act as guarantor under customary, non-recourse, carve-out guarantees in connection with obtaining mortgage loans on certain of our investment properties.
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.
Summary of Cash Flows
Comparison of the six months ended June 30, 2026 and 2025
| (in thousands) | |||||||||||
| Six Months Ended June 30, | |||||||||||
| 2026 | 2025 | ||||||||||
| Net cash flows provided by operating activities | $ | 1,273 | $ | 374 | |||||||
| Net cash flows used in investing activities | (580) | (8,360) | |||||||||
| Net cash flows provided by (used in) financing activities | 24,117 | (2,650) | |||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash and escrows | 24,810 | (10,636) | |||||||||
| Cash and cash equivalents and restricted cash and escrows, at beginning of period | 21,738 | 34,228 | |||||||||
| Cash and cash equivalents and restricted cash and escrows, at end of period | $ | 46,548 | $ | 23,592 | |||||||
Cash provided by operating activities was $1.3 million for the six months ended June 30, 2026, compared to $0.4 million for the six months ended June 30, 2025. The increase in cash provided by operating activities is the result of the rent commencement on Life Time Fitness at Sherman Plaza and lower general and administrative expenses. This increase is partially offset by reduced revenue from our Denver multi-family portfolio and higher property operating expenses.
Cash used in investing activities was $0.6 million for the six months ended June 30, 2026, compared to $8.4 million for the six months ended June 30, 2025. Cash used in investing activities decreased by $7.8 million compared to the same period in 2025, due to less cash spent for capital expenditures, tenant improvements and leasing commissions during the six months ended June 30, 2026.
Cash provided by financing activities was $24.1 million for the six months ended June 30, 2026, compared to cash used in financing activities of $2.7 million for the six months ended June 30, 2025. During the six months ended June 30, 2026, the Company closed on a mortgage loan encumbering its Sherman Plaza investment property, receiving total proceeds of $25 million and paying $0.4 million in debt issuance costs. During the six months ended June 30, 2025, the Company utilized $2 million to repurchase shares of our common stock from two former employees and used $0.2 million for employee stock grants. Principal payments on debt were relatively consistent in each period.
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 the Federal Deposit Insurance Corporation ("FDIC") insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage.
Distributions
For the six months ended June 30, 2026 and 2025, no cash distributions were paid by the Company.
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 may 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-listed 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 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" or 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. The Company may not present AFFO if the events and transactions of the reporting period do not include the related reconciling items.
The following section presents our calculation of FFO to net income (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | ||||||||||||||||||||
| Net loss attributable to Highlands REIT, Inc. common stockholders | $ | (3,378) | $ | (3,020) | $ | (5,964) | $ | (5,271) | |||||||||||||||
|
Depreciation and amortization (1)
|
2,903 | 2,966 | 5,800 | 5,815 | |||||||||||||||||||
| Funds From Operations | $ | (475) | $ | (54) | $ | (164) | $ | 544 | |||||||||||||||
| Funds From Operations per weighted average common shares, basic and diluted | $ | (0.00) | $ | (0.00) | $ | (0.00) | $ | 0.00 | |||||||||||||||
| Weighted average number of common shares outstanding, basic and diluted | 722,400 | 720,973 | 722,302 | 722,638 | |||||||||||||||||||
(1) The depreciation and amortization add-back excludes the portion of expense attributable to the noncontrolling 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 may 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 these non-GAAP measures has certain limitations as an analytical tool. These non-GAAP financial measures are not a measure of our liquidity, nor are they 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. These measurements do not reflect cash expenditures for long-term assets and other items that we have incurred and will incur. These non-GAAP financial measures 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. These non-GAAP financial measures, 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. These non-GAAP financial measures reflect 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.
Highlands REIT Inc. published this content on August 11, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on August 11, 2026 at 19:21 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]