Highlands REIT Inc.
03/11/2026 | Press release | Distributed by Public on 03/11/2026 11:58
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
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 "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" 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 were special use, single tenant or build to suit; faced unresolved legal issues; undesirable locations or weak markets or submarkets; aging or functionally obsolete; and/or 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 within a year. 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 December 31, 2025, 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 10 to our consolidated financial statements for the years ended December 31, 2025 and 2024.
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. The effects of all significant intercompany transactions have been eliminated.
Our 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.
Acquisition and Disposition Activity
There were no investment property acquisitions during the years ended December 31, 2025 and 2024.
During the year ended December 31, 2025, there were no investment property dispositions. During the year ended December 31, 2024, we continued to execute on our strategy of disposing of legacy "non-core" investment properties by selling the following:
| Investment Property | Location | Disposition Date | Gross Disposition Price | Sale Proceeds, Net | Gain on Sale | |||||||||||||||||||||||||||
| Versacold USA | New Ulm, MN | February 5, 2024 | $ | 7,175 | $ | 6,995 | $ | 2,052 | ||||||||||||||||||||||||
| Versacold USA | St. Paul, MN | February 5, 2024 | 13,325 | 13,076 | 4,817 | |||||||||||||||||||||||||||
| $ | 20,500 | $ | 20,071 | $ | 6,869 | |||||||||||||||||||||||||||
Results of Operations
Comparison of the years ended December 31, 2025 and 2024
Key performance indicators are as follows:
| As of December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Economic occupancy (1) | 74.0 | % | 72.4 | % | |||||||
| Rent per square foot (2) | $ | 26.58 | $ | 25.93 | |||||||
(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 December 31, 2025 and 2024.
| (in thousands) | |||||||||||||||||||||||
| For the Year ended December 31, | |||||||||||||||||||||||
| 2025 | 2024 | Increase/(Decrease) | |||||||||||||||||||||
| Net loss | $ | (11,097) | $ | (1,010) | $ | (10,087) | (998.7) | % | |||||||||||||||
Net loss during the year ended December 31, 2025 was $11.1 million compared to $1.0 million during the year ended December 31, 2024. Factors contributing to the change in net loss include the gain on sale of investment properties recorded in conjunction with the February 2024 sale of our industrial portfolio and increased revenues. Additionally, increased property operating expenses, real estate taxes, general and administrative and interest expenses contributed to the change in net loss year-over-year.
Details of these changes are provided below.
The following table presents the changes in our revenues for the years ended December 31, 2025 and 2024.
| (in thousands) | |||||||||||||||||||||||
| For the Year ended December 31, | |||||||||||||||||||||||
| 2025 | 2024 | Increase/(Decrease) | |||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rental income | $ | 36,511 | $ | 35,077 | $ | 1,434 | 4.1 | % | |||||||||||||||
| Other property income | 895 | 1,003 | (108) | (10.8) | % | ||||||||||||||||||
| Total revenues | $ | 37,406 | $ | 36,080 | $ | 1,326 | 3.7 | % | |||||||||||||||
Total revenues increased $1.3 million during the year ended December 31, 2025 compared to the same period in 2024 due primarily to rent commencement on the Life Time lease at Sherman Plaza. Partially offsetting this increase in total revenues was decreased rental income on our multi-family properties as a result of lower occupancy throughout the year and the sale of our industrial portfolio in February 2024.
The following table presents the changes in our expenses for the years ended December 31, 2025 and 2024.
| (in thousands) | |||||||||||||||||||||||
| For the Year ended December 31, | |||||||||||||||||||||||
| 2025 | 2024 | Increase/(Decrease) | |||||||||||||||||||||
| Expenses: | |||||||||||||||||||||||
| Property operating expenses | $ | 11,049 | $ | 9,775 | $ | 1,274 | 13.0 | % | |||||||||||||||
| Real estate taxes | 5,061 | 4,217 | 844 | 20.0 | % | ||||||||||||||||||
| Depreciation and amortization | 11,750 | 11,842 | (92) | (0.8) | % | ||||||||||||||||||
| General and administrative expenses | 14,203 | 11,706 | 2,497 | 21.3 | % | ||||||||||||||||||
| Total expenses | $ | 42,063 | $ | 37,540 | $ | 4,523 | 12.0 | % | |||||||||||||||
Property operating expenses increased $1.3 million for the year ended December 31, 2025 compared to the same period in 2024 primarily as a result of higher legal and professional fees resulting from pursuit costs on transactions that have not closed. Additionally, the increase is due to increased insurance, utilities, repairs and maintenance and bad debt expense at our investment properties.
Real estate taxes increased $0.8 million for the year ended December 31, 2025 compared to the same period in 2024. During the years ended December 31, 2025 and 2024 we reversed an accrual for taxes in the amount of $1.0 million and $1.6 million, respectively, for real estate taxes on a property that had previously been foreclosed. The accruals remained until the 7-year statute of limitations expired and the potential for litigation ended. The larger accrual reversal in 2024 results in the appearance of an increase in real estate taxes. Actual estimated real estate tax expense remained relatively consistent year-over-year.
Depreciation and amortization remained consistent during the years ended December 31, 2025 and 2024.
General and administrative expenses increased $2.5 million for the year ended December 31, 2025 compared to the same period in 2024 primarily due to increased stock compensation expense resulting from larger annual stock grants as well as one-time grants for two employees. Additionally, consulting fees increased as a result of the consulting agreement entered into with our former chief executive officer upon his retirement and we have incurred additional legal expenses related to the amended employment agreement with our current chief executive officer, the separation and consulting agreement with our former chief executive officer and costs for the pursuit of transactions that did not close.
The following table presents the changes in our other income and expenses for the years ended December 31, 2025 and 2024.
| (in thousands) | |||||||||||||||||||||||
| For the Year ended December 31, | |||||||||||||||||||||||
| 2025 | 2024 | Increase/(Decrease) | |||||||||||||||||||||
| Other income and (expenses): | |||||||||||||||||||||||
| Gain on sale of investment properties | $ | - | $ | 6,869 | $ | (6,869) | (100.0) | % | |||||||||||||||
| Interest income | 751 | 1,210 | (459) | (37.9) | % | ||||||||||||||||||
| Interest expense | (7,191) | (7,629) | (438) | (5.7) | % | ||||||||||||||||||
There were no sales of investment properties during the year ended December 31, 2025. During the year ended December 31, 2024, the gain on sale of investment properties of $6.9 million was attributed to the sale of our industrial portfolio in February 2024.
Interest income decreased $0.5 million during the year ended December 31, 2025 compared to the same period in 2024 due to lower interest rates on our accounts.
Interest expense decreased $0.4 million to $7.2 million for the year ended December 31, 2025 compared to the same period in 2024 due to lower loan fee amortization on Trimble, lower interest rate on our variable rate mortgage and lower balances outstanding due to our monthly amortization payments.
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 residential leases, as of December 31, 2025, 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 | 7 | 40,509 | $ | 633 | 7.8 | % | 4.7 | % | $ | 15.64 | |||||||||||||||||||||||||
| 2027 | 4 | 13,583 | 350 | 2.6 | % | 2.6 | % | 25.77 | |||||||||||||||||||||||||||
| 2028 | 6 | 26,594 | 481 | 5.1 | % | 3.5 | % | 18.09 | |||||||||||||||||||||||||||
| 2029 | 11 | 87,760 | 1,933 | 16.9 | % | 14.2 | % | 22.02 | |||||||||||||||||||||||||||
| 2030 | 9 | 60,402 | 913 | 11.7 | % | 6.7 | % | 15.12 | |||||||||||||||||||||||||||
| 2031 | 1 | 2,441 | 119 | 0.5 | % | 0.9 | % | 48.76 | |||||||||||||||||||||||||||
| 2032 | 3 | 10,599 | 225 | 2.0 | % | 1.6 | % | 21.20 | |||||||||||||||||||||||||||
| 2033 | 1 | 815 | 28 | 0.2 | % | 0.2 | % | 33.95 | |||||||||||||||||||||||||||
| 2034 | - | - | - | - | % | - | % | - | |||||||||||||||||||||||||||
| 2035 | 2 | 8,813 | 213 | 1.7 | % | 1.6 | % | 24.16 | |||||||||||||||||||||||||||
| Thereafter | 4 | 266,930 | 8,705 | 51.5 | % | 64.0 | % | 32.61 | |||||||||||||||||||||||||||
| 48 | 518,446 | $ | 13,600 | 100.0 | % | 100.0 | % | $ | 26.23 | ||||||||||||||||||||||||||
The following table represents new and renewed leases that commenced (not including multi-family residential leases) in the years ended December 31, 2025 and 2024.
| For the year ended December 31, 2025 | For the year ended December 31, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||
|
# 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 | 15 | 103,942 | 14.43 | 4.1 | 7 | 26,588 | 38.95 | 5.0 | |||||||||||||||||||||||||||||||||||||||
| Total | 17 | 167,522 | $ | 20.40 | 8.2 | 7 | 26,588 | $ | 38.95 | 5.0 | |||||||||||||||||||||||||||||||||||||
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 Real Estate
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 Real Estate
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 investment property 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 properties.
Liquidity and Capital Resources
As of December 31, 2025, we had $19.5 million of cash and cash equivalents, and $2.2 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 2026. Subsequent to year-end, this tenant renewed its lease for one year.
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 $0.8 million covering the remainder of the 2025 fiscal year. Mr. Vance will also be paid $0.1 million 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) 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 premium 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 December 31, 2025 and 2024 was $122.9 million and $123.9 million, respectively, with a weighted average interest rate of 5.25% and 5.38% per annum, respectively.
The Company's outstanding mortgage indebtedness included 11 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 December 31, 2025, and the weighted average interest rates for the maturing debt in each specified period (dollar amounts are stated in thousands):
|
Fixed and variable rate debt maturing during the year ended December 31, |
As of December 31, 2025 |
Weighted average interest rate |
||||||||||||
| 2026 | $ | 23,084 | 4.56 | % | ||||||||||
| 2027 | 10,785 | 3.99 | % | |||||||||||
| 2028 | 234 | - | % | |||||||||||
| 2029 | 20,245 | 5.71 | % |
(1)
|
||||||||||
| 2030 | 28,208 | 5.88 | % | |||||||||||
| Thereafter | 40,348 | 5.32 | % |
(1)
|
||||||||||
| Total | $ | 122,904 | 5.25 | % | ||||||||||
(1)See Note 8 in the accompanying consolidated financial statements for discussion of the derivative agreements entered into with the mortgage loans obtained on Trimble and The Muse. For Trimble (2029), the interest rate in the table above is the fixed rate. For The Muse (thereafter), the interest rate is the rate in effect at December 31, 2025.
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 mortgage loan on Buckhorn Plaza, in the amount of $8.9 million, matures November 6, 2026. The Company intends to sell this investment property or seek to refinance it prior to this upcoming maturity date. The mortgage loan on Market at Hilliard, in the amount of $13.7 million, matures December 6, 2026. The Company expects to refinance this mortgage loan as we get closer to the upcoming maturity.
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.
As of December 31, 2024, Highlands guaranteed one mortgage loan up to $4.0 million and all other mortgage debt was non-recourse to the Company. There are no payment guarantees in place on mortgage loans as of 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.
Some of the mortgage loans require compliance with certain covenants, such as debt service coverage and net worth ratios. As of December 31, 2025 and 2024, the Company believes it was in compliance with such covenants.
Capital Expenditures and Reserve Funds
During the year ended December 31, 2025, we made total capital expenditures of $9.4 million and during the year ended December 31, 2024, capital expenditures totaled $5.6 million.
Summary of Cash Flows
Comparison of the years ended December 31, 2025 and 2024:
| (in thousands) | |||||||||||
| For the Year ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Net cash flows provided by operating activities | $ | 1,416 | $ | 2,669 | |||||||
| Net cash flows provided by (used in) investing activities | (9,724) | 13,841 | |||||||||
| Net cash flows used in financing activities | (4,182) | (1,766) | |||||||||
| Net increase (decrease) in cash and cash equivalents and restricted cash and escrows | (12,490) | 14,744 | |||||||||
| Cash and cash equivalents and restricted cash and escrows, at beginning of year | 34,228 | 19,484 | |||||||||
| Cash and cash equivalents and restricted cash and escrows, at end of year | $ | 21,738 | $ | 34,228 | |||||||
Cash provided by operating activities was $1.4 million and $2.7 million for the years ended December 31, 2025 and 2024, respectively. The decrease in cash provided by operating activities is the result of higher property operating and general and administrative expenses, partially offset by higher revenues, primarily from the lease commencement on Life Time Fitness at Sherman Plaza
Cash used in investing activities was $9.7 million for the year ended December 31, 2025, compared to cash provided by investing activities of $13.8 million for the year ended December 31, 2024. Cash used in investing activities changed by $23.6 million compared to the same period in 2024 as a result of proceeds from the sale of our industrial portfolio totaling $20.1 million during the year ended December 31, 2024 and higher cash spent for capital expenditures and tenant improvements during the year ended December 31, 2025.
Cash used in financing activities was $4.2 million for the year ended December 31, 2025, compared to $1.8 million for the year ended December 31, 2024. Cash used in financing activities for the year ended December 31, 2025 included principal payments on debt totaling $1.0 million, payment of tax withholding for share-based compensation in the amount of $1.2 million and $1.9 million to repurchase shares of our common stock from two former employees. Cash used in financing activities for the year ended December 31, 2024 included principal payments on mortgage debt in the amount of $0.9 million, payment of tax withholding for share-based compensation in the amount of $0.6 million and $0.2 million of additional costs in relation to the tender offer that we executed in the fourth quarter of 2023.
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 Depository 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.
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-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 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.
The following table presents our calculation of FFO to net loss (in thousands):
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Net loss attributable to Highlands REIT, Inc. common stockholders | $ | (11,097) | $ | (1,005) | |||||||
|
Depreciation and amortization related to investment properties (1)
|
11,703 | 11,791 | |||||||||
| Gain on sale of investment properties, net | - | (6,869) | |||||||||
| Funds From Operations | $ | 606 | $ | 3,917 | |||||||
| Funds From Operations per weighted average common shares, basic and diluted | $ | - | $ | 0.01 | |||||||
| Weighted average number of common shares outstanding, basic and diluted | $ | 720,703 | $ | 721,961 | |||||||
(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 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 December 31, 2025 and 2024, no cash distributions were paid by Highlands.
Highlands REIT Inc. published this content on March 11, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on March 11, 2026 at 17:58 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]