10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-55580

HIGHLANDS REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	81-0862795
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
1 South Dearborn Street, 20th Floor Chicago, Illinois	60603
(Address of Principal Executive Offices)	(Zip Code)

(312) 583-7990

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class	Trading Symbol	Name of each exchange on which registered
N/A	N/A	N/A

Securities registered pursuant to Section 12(g) of the Act: Common Stock

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer	Accelerated filer	Non-accelerated filer	Smaller reporting company	Emerging growth company
☐	☐	☑	☑	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No

As of May 12, 2022 there were 885,221,996 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

	Part I - Financial Information
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	1
	Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021	2
	Consolidated Statements of Equity for the three months ended March 31, 2022 and 2021	3
	Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021	4
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
	Part II - Other Information
Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	28
	Exhibit Index	29
	Signatures	30

i

HIGHLANDS REIT, INC.

Consolidated Balance Sheets (unaudited)

(Amounts in thousands, except per share amounts)

	March 31, 2022		December 31, 2021
Assets
Investment properties
Land	$	79,726	$	83,168
Building and other improvements	270,188		270,387
Construction in progress	26		6,542
Total	349,940		360,097
Less accumulated depreciation	(69,321)		(67,478)
Net investment properties	280,619		292,619
Cash and cash equivalents	18,149		18,321
Restricted cash and escrows	3,956		3,689
Accounts receivable (net of allowance of $154 and $153 as of March 31, 2022 and December 31, 2021, respectively)	3,220		2,739
Deferred costs and other assets, net	4,202		3,645
Total assets	$	310,146	$	321,013
Liabilities
Debt, net	$	53,209	$	62,130
Accounts payable and accrued expenses	8,909		9,526
Intangible liabilities, net	32		658
Other liabilities	1,962		2,162
Total liabilities	64,112		74,476
Commitments and contingencies (see Note 11)
Stockholders’ Equity
Common stock, $0.01 par value, 1,000,000 shares authorized, 885,222 shares issued and outstanding as of March 31, 2022 and December 31, 2021	8,852		8,852
Additional paid-in capital	1,411,818		1,411,818
Accumulated distributions in excess of net income	(1,174,795)		(1,173,905)
Accumulated other comprehensive loss	125		(202)
Total Highlands REIT, Inc. stockholders’ equity	246,000		246,563
Non-controlling interests	34		(26)
Total equity	246,034		246,537
Total liabilities and equity	$	310,146	$	321,013

See accompanying notes to the consolidated financial statements.

1

HIGHLANDS REIT, INC.

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

(Amounts in thousands, except per share amounts)

	Three Months Ended March 31,
	2022		2021
Revenues
Rental income	$	7,958	$	6,758
Other property income	216		249
Total revenues	8,174		7,007
Expenses
Property operating expenses	2,260		2,183
Real estate taxes	1,106		1,557
Depreciation and amortization	2,638		2,667
General and administrative expenses	2,365		4,188
Total expenses	8,369		10,595
Loss on sale of investment properties, net	(6)		—
Loss from operations	(201)		(3,588)
Interest income	2		8
Interest expense	(689)		(1,108)
Net loss	(888)		(4,688)
Net (income) loss attributable to non-controlling interests	(2)		10
Net loss attributable to Highlands REIT, Inc. common stockholders	$	(890)	$	(4,678)
Net loss per common share, basic and diluted	$	(0.00)	$	(0.01)
Weighted average number of common shares outstanding, basic and diluted	885,222		880,209
Comprehensive loss
Net loss	$	(888)	$	(4,688)
Unrealized gain on derivatives	385		113
Total other comprehensive income	385		113
Comprehensive loss	(503)		(4,575)
Comprehensive income attributable to non-controlling interests	(60)		(7)
Comprehensive loss attributable to Highlands REIT, Inc. common stockholders	$	(563)	$	(4,582)

See accompanying notes to the consolidated financial statements.

2

HIGHLANDS REIT, INC.

Consolidated Statements of Equity (unaudited)

(Dollar amounts in thousands)

Three Months Ended March 31, 2022 and 2021

	Common Stock			Additional Paid-in Capital		Accumulated Distributions in Excess of Net Income		Accumulated Other Comprehensive Loss		Total Company's Stockholders' Equity		Non- controlling Interests		Total Equity
	Shares	Amount
Balance at January 1, 2021	877,759	$	8,778	$	1,409,767	$	(1,160,859)	$	(548)	$	257,138	$	(75)	$	257,063
Net loss	—	—		—		(4,678)		—		(4,678)		(10)		(4,688)
Other comprehensive income	—	—		—		—		96		96		17		113
Share-based compensation	3,557	35		960		—		—		995		—		995
Balance at March 31, 2021	881,316	$	8,813	$	1,410,727	$	(1,165,537)	$	(452)	$	253,551	$	(68)	$	253,483
Balance at January 1, 2022	885,222	$	8,852	$	1,411,818	$	(1,173,905)	$	(202)	$	246,563	$	(26)	$	246,537
Net loss	—	—		—		(890)		—		(890)		2		(888)
Other comprehensive income	—	—		—		—		327		327		58		385
Balance at March 31,2022	885,222	$	8,852	$	1,411,818	$	(1,174,795)	$	125	$	246,000	$	34	$	246,034

See accompanying notes to the consolidated financial statements.

3

HIGHLANDS REIT, INC.

Consolidated Statements of Cash Flows (unaudited)

(Amounts in thousands)

	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net loss	$	(888)	$	(4,688)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	2,638		2,667
Amortization of below market leases	(17)		(21)
Amortization of debt discounts and financing costs	39		103
Straight-line rental income	(684)		36
Write-off of debt issuance costs	—		225
Loss on sale of investment properties, net	6		—
Non-cash stock-based compensation expense	—		1,879
Changes in assets and liabilities:
Accounts and rents receivable, net	203		(79)
Deferred costs and other assets, net	52		317
Accounts payable and accrued expenses	(617)		(1,928)
Other liabilities	183		49
Net cash flows provided by (used in) operating activities	$	915	$	(1,440)
Cash flows from investing activities:
Capital expenditures and tenant improvements	(122)		(1,070)
Proceeds from sale of investment properties, net	8,938		—
Payment of leasing fees	(677)		(964)
Net cash flows provided by (used in) investing activities	$	8,139	$	(2,034)
Cash flows from financing activities:
Payoff of debt	(8,677)		(20,000)
Principal payments of mortgage debt	(282)		(270)
Payment for tax withholding for share-based compensation	—		(883)
Net cash flows used in financing activities	$	(8,959)	$	(21,153)
Net increase (decrease) in cash and cash equivalents and restricted cash and escrows	95		(24,627)
Cash and cash equivalents and restricted cash and escrows, at beginning of period	22,010		53,637
Cash and cash equivalents and restricted cash and escrows, at end of period	$	22,105	$	29,010

Cash and cash equivalents	$	18,149	$	25,416
Restricted cash and escrows	3,956		3,594
Cash and cash equivalents and restricted cash and escrows, at end of period	$	22,105	$	29,010

See accompanying notes to the consolidated financial statements.

4

HIGHLANDS REIT, INC.

Consolidated Statements of Cash Flows (unaudited) (continued)

(Dollar amounts in thousands)

	Three Months Ended March 31,
	2022		2021
Supplemental disclosure of cash flows information:
Cash paid for interest	$	696	$	849
Supplemental schedule of non-cash investing and financing activities:
Non-cash accruals for capital expenditures and tenant improvements	$	414	$	625

See accompanying notes to the consolidated financial statements.

5

HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited consolidated financial statements of Highlands REIT, Inc. for the year ended December 31, 2021, which are included in the Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission by Highlands REIT, Inc. on March 16, 2022, as certain note disclosures contained in such audited consolidated financial statements have been condensed or omitted from this Report. In the opinion of management, all adjustments (consisting of normal recurring accruals, except as otherwise noted) necessary for a fair presentation, and to make these financial statements not misleading, have been included in these financial statements.

1. Organization

Highlands REIT, Inc. (“Highlands”), which was formed in December 2015, is a Maryland corporation with a portfolio of assets including multi-family, retail, office and industrial properties, a correctional facility and unimproved land. Prior to April 28, 2016, Highlands was a wholly-owned subsidiary of InvenTrust Properties Corp. (“InvenTrust” and formerly known as Inland American Real Estate Trust, Inc.), its former parent. Unless stated otherwise or the context otherwise requires, the terms “we,” “our” and “us” and references to the “Company” refer to Highlands and its consolidated subsidiaries.

On April 28, 2016, Highlands was spun-off from InvenTrust through a pro rata distribution by InvenTrust of 100% of the outstanding shares of common stock, $0.01 par value per share (the “Common Stock”), of Highlands to holders of record of InvenTrust's common stock as of the close of business on April 25, 2016 (the “Record Date”). Each holder of record of InvenTrust's common stock received one share of Common Stock for every one share of InvenTrust's common stock held at the close of business on the Record Date (the “Distribution”). As a result, Highlands became an independent, self-advised, non-traded public company. Highlands has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”) for U.S. federal income tax purposes commencing with Highlands' short taxable year ending December 31, 2016.

Each of our assets is owned by a separate legal entity, which maintains its own books and financial records, and each entity’s assets are not available to satisfy the liabilities of other affiliated entities, except as otherwise disclosed in Note 7. With the exception of one asset we own through a variable interest entity with a third-party partner (the “Corvue Venture”), we are the sole owner of each of these separate legal entities.  As of March 31, 2022, we have an approximate 85% interest in the Corvue Venture and have funded equity contributions to the Corvue Venture in the approximate amount of $9,000. See Note 2 for additional information regarding the basis of presentation of the Corvue Venture, which is consolidated in the accompanying consolidated financial statements.

As of March 31, 2022 and December 31, 2021, the Company owned 19 and 20 investment properties, respectively, and one parcel of unimproved land.

Impact of COVID-19 Pandemic

The impact of the COVID-19 pandemic was not as material during the three months ended March 31, 2022 and 2021, as compared to prior periods. The primary impact of the pandemic was and continues to be related to our tenants' ability to make rental payments in a timely fashion or at all. We have been working with our tenants to collect rental payments pursuant to our contractual rights under our lease agreements.

At this time, given the uncertainty related to variants of the virus, we are unable to predict whether cases of COVID-19 in our markets will decrease, increase, or remain the same, whether the approved COVID-19 vaccines will be effective against new variants of the virus, efficiently distributed in our markets and widely accepted by the public, and whether local governments will mandate closures of our tenants' businesses or implement other restrictive measures on their and our operations in the future in response to any future resurgence of the pandemic. We have taken and will continue to take a number of measures to mitigate the impact of the pandemic on our business and financial condition.

6

HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The accompanying consolidated financial statements include 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 non-controlling interests in our consolidated financial statements. Entities which Highlands does not control, and entities which are VIEs in which Highlands is not a primary beneficiary, if any, are accounted for under appropriate GAAP. Highlands' subsidiaries generally consist of limited liability companies (“LLCs”). The effects of all significant intercompany transactions have been eliminated.

Refer to the Company’s audited consolidated financial statements for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 16, 2022, as certain note disclosures contained in such audited financial statements have been condensed or omitted from these interim consolidated financial statements.

Variable Interest Entities

As of March 31, 2022 and December 31, 2021, we have determined we are the primary beneficiary of one VIE, the Corvue Venture, and have consolidated the operations of this entity in the accompanying consolidated financial statements. We reviewed the operating agreement of the Corvue Venture in order to determine our rights and the rights of our third-party partner, including whether those rights are protective or participating. We have determined we are the primary beneficiary of the Corvue Venture because we have (a) the power to direct the activities that most significantly impact the economic performance of the Corvue Venture, (b) the obligation to absorb the losses that could be significant to the Corvue Venture and (c) the right to receive the benefits that could be significant to the Corvue Venture. Included in total assets and liabilities on the Company’s consolidated balance sheets as of March 31, 2022 is $25,356 and $18,341, respectively, related to the Corvue Venture. Included in total assets and liabilities on the Company’s consolidated balance sheets as of December 31, 2021 is $25,396 and $18,521, respectively, related to the Corvue Venture. The assets of the Corvue Venture may only be used to settle obligations of the Corvue Venture and the creditors of the Corvue Venture have no recourse to the general credit of the Company.

Reclassifications

The Company has made certain reclassifications to the consolidated statements of cash flows as of March 31, 2021, to conform to the 2022 presentation.

Recently Issued Accounting Pronouncements

In January 2021 and March 2020, the FASB issued ASU 2021-01 and ASU 2020-04, respectively, “Reference Rate Reform (Topic 848)”. These pronouncements contain practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur. During March 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

7

HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

Other recently issued accounting standards or pronouncements not discussed above have been excluded because they are either not relevant to the Company, or are not expected to have, or did not have, a material effect on the consolidated financial statements of the Company.

3. Disposed Investment Properties

The following table reflects the investment property dispositions during the three months ended March 31, 2022. The Company recognized a net loss on sale of investment properties of $6.

Property	Location	Disposition Date	Gross Disposition Price		Sale Proceeds, Net		Loss on Sale
State Street Market	Rockford, Illinois	March 10, 2022	$	9,000	$	8,938	$	(6)

There were no investment property dispositions during the three months ended March 31, 2021.

4. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	March 31, 2022		December 31, 2021
Accrued real estate taxes	$	5,489	$	6,593
Accrued compensation	1,979		1,140
Accrued interest payable	170		215
Other accrued expenses	1,271		1,578
Total accounts payable and accrued expenses	$	8,909	$	9,526

5. Leases

Leasing as a lessor

We lease multifamily properties under operating leases with terms of generally one year or less. We lease commercial properties under operating leases with remaining lease terms that range from less than one year to sixteen years as of March 31, 2022 and December 31, 2021.

Lease income related to the Company's operating leases is comprised of the following:

	Three Months Ended March 31,
	2022		2021
Lease income related to fixed lease payments	$	6,755	$	5,695
Lease income related to variable lease payments (1)	1,203		1,063
Other	216		249
Total revenues	$	8,174	$	7,007

(1)    Variable lease payments are comprised of tenant recovery income.

8

HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

Future Minimum Rental Income

As of March 31, 2022, commercial operating leases provide for future minimum rental income, assuming no expiring leases are renewed, as follows. Apartment leases are not included as the terms are generally for one year or less.

2022 (remaining)	$	5,507
2023	9,058
2024	8,968
2025	8,215
2026	7,943
Thereafter	50,966
Total	$	90,657

6. Debt

Total debt outstanding as of March 31, 2022 and December 31, 2021 was as follows:

	March 31, 2022		December 31, 2021
Debt, gross	$	53,862	$	62,821
Mortgage discount	(246)		(257)
Deferred financing costs, net	(407)		(434)
Total Debt, Net	$	53,209	$	62,130

As of March 31, 2022, the Company’s outstanding mortgage indebtedness included four mortgage loans with various maturities through August 2027, as follows:

Debt maturing during the year ended December 31,	As of March 31, 2022		Weighted average interest rate
2022 (remaining)	$	—	—	%
2023	17,794		3.28	%	(1)
2024	—		—	%
2025	—		—	%
2026	24,619		4.56	%
Thereafter	11,449		3.99	%
Total	$	53,862	4.01	%

(1)    See below for discussion of the swap agreement entered into with the mortgage loan obtained in connection with the acquisition of The Locale asset. The weighted average interest rate reflected is the fixed swap rate.

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 asset. With respect to each mortgage loan, if the applicable wholly-owned property-owning subsidiary is unable to refinance or sell the related asset, or in the event that the estimated asset 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 asset to the lender or permitting a lender to foreclose. As of March 31, 2022 and December 31, 2021, none of our mortgage debt was recourse to the Company, although 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.

The loan documents governing the mortgage that encumbered State Street Market included a “cash trap” provision that was triggered when DICK'S Sporting Goods, which was an anchor tenant at the property, failed to renew its lease agreement. The lender exercised its right to trigger this “cash trap” provision, and, beginning in the fourth quarter of 2020, all of the cash flows from State Street Market which would otherwise have been available for our use were trapped into a blocked account controlled by the lender pending approval of a substitute lease or repayment of the loan. The Company sold the State Street Market asset

9

HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

on March 10, 2022 and the mortgage was simultaneously repaid. The funds previously trapped and held by the lender, along with all required lender escrows, totaling $2.0 million, were returned to the Company subsequent to the end of the first quarter of 2022. This amount is included in restricted cash and escrows on our consolidated balance sheets as of March 31, 2022.

Some of the mortgage loans require compliance with certain covenants, such as debt service coverage ratios and minimum net worth requirements. As of March 31, 2022 and December 31, 2021, the Company was in compliance with such covenants.

Termination of Credit Agreement

On January 21, 2021, the Company repaid $5,000 of the outstanding principal balance of the Revolving Credit Loan and on March 29, 2021, repaid in full all of the remaining outstanding indebtedness related to the Revolving Credit Loan, consisting of approximately $15,000 of principal plus accrued and unpaid interest thereon. The Credit Agreement and related security interests, and all commitments thereunder, were terminated in conjunction with such payment in full.

LIBOR Reform

In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC"), which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

The Company obtained a mortgage loan in the principal amount of $18,750 in connection with the acquisition of The Locale in 2019. Because that loan is indexed to LIBOR the Company is monitoring and evaluating the related risks that have arisen in connection with transitioning to an alternative rate, including any resulting value transfer that may occur. The value of derivative instruments tied to LIBOR, as well as interest rates on our current or future indebtedness, may also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.

While we expect LIBOR to be available in substantially its current form until at least the end of June 2023, it is possible that LIBOR will become unavailable prior to that point. This could occur, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.

Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.

The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.

Adjustments to systems and mathematical models to properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for the company.

7. Fair Value Measurements

In accordance with ASC 820, Fair Value Measurement and Disclosures, the Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and

10

HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

•Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

•Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company has estimated fair value using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and, to a limited extent, the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments, described below, are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company may use interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. We do not enter into derivative financial instruments for speculative purposes. As of March 31, 2022 and December 31, 2021, we had one derivative financial instrument designated as a cash flow hedge, with a notional amount of $18,750 and a maturity date of September 1, 2023. This derivative is an interest rate swap that is measured at fair value on a recurring basis.

For derivatives designated, and that qualify, as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income or loss on the consolidated balance sheets and is subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. The amounts recorded as other comprehensive income related to our derivative financial instrument was $385 and $113 for the three months ended March 31, 2022 and 2021, respectively.

Amounts reported in accumulated other comprehensive gain related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate debt. The Company estimates that $45 will be reclassified as a decrease to interest expense over the next twelve months.

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HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

	March 31, 2022
	Level 1		Level 2		Level 3		Total
Derivative financial instruments designated as cash flow hedges:
Classified as “Deferred costs and other assets, net”	$	—	$	148	$	—	$	148
	December 31, 2021
Derivative financial instruments designated as cash flow hedges:	Level 1		Level 2		Level 3		Total
Classified as “Other liabilities”	$	—	$	238	$	—	$	238

The fair value of our derivative financial instrument was determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivative financial instrument. This analysis reflected the contractual terms of the derivative, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivative fall within Level 2 of the fair value hierarchy under authoritative accounting guidance, the credit valuation adjustments associated with the derivative also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of March 31, 2022, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instrument was assessed, and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instrument. As a result, it was determined that the derivative financial instrument in its entirety should be classified in Level 2 of the fair value hierarchy.

Non-Recurring Measurements     

In accordance with ASC 360-10, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. During the three months ended March 31, 2022 and 2021, events and circumstances indicated that certain investment properties might be impaired. However, the Company's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the future resulting in the need to write down assets to fair value.

Financial Liabilities Disclosed at Fair Value on a Recurring Basis

The table below represents the fair value of financial instruments presented at carrying values in the consolidated financial statements as of March 31, 2022 and December 31, 2021.

	March 31, 2022				December 31, 2021
	Carrying  Value		Estimated  Fair Value		Carrying  Value		Estimated  Fair Value
Debt	$	53,862	$	50,836	$	62,821	$	61,052

The Company estimates the fair value of its debt instruments using a weighted average market effective interest rate of 5.89% and 5.05% per annum as of March 31, 2022 and December 31, 2021, respectively. The Company estimates the fair value of its mortgage loans by discounting the anticipated future cash flows of each instrument at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The rates used are based on credit spreads observed in the marketplace during the quarter for similar debt instruments, and a floor rate that the Company has derived using its subjective judgment for each asset segment. Based on this, the Company determines the appropriate rate for each of its individual mortgage loans based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The weighted average market effective interest rates used range from 4.65% to 7.14% and 3.38% to 6.87% as of March 31, 2022 and December 31, 2021, respectively. The assumptions reflect the terms currently available on similar borrowing terms to borrowers with credit profiles similar to the Company's. The Company has determined that its debt instrument valuations are classified in Level 2 of the fair value hierarchy.

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HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

8. Income Taxes

The Company is taxed and operates in a manner that will allow the Company to continue to qualify as a REIT for U.S. federal income tax purposes. So long as it maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that is distributed to stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders each year. If the Company fails to continue to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and would not be able to re-elect REIT status during the four years following the year of the failure. Although the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and U.S. federal income and excise taxes on its undistributed income.

During the three months ended March 31, 2022 and 2021, no income tax benefit or expense was included in the consolidated statements of operations and comprehensive loss.

9. Segment Reporting

GAAP has established guidance for reporting information about a company’s operating segments. The Company monitors and reviews its segment reporting structure in accordance with guidance under ASC Topic 280, Segment Reporting (“ASC 280”) to determine whether any changes have occurred that would impact its reportable segments. The Company currently has two business segments, consisting of multi-family and other.

The following table summarizes net operating income by segment for the three months ended March 31, 2022 and 2021.

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
	Total		Multi-family		Other		Total		Multi-family		Other
Lease income	$	7,958	$	3,920	$	4,038	$	6,758	$	3,576	$	3,182
Other property income	216		203		13		249		188		61
Total revenues	8,174		4,123		4,051		7,007		3,764		3,243
Operating expenses	3,366		1,883		1,483		3,740		1,911		1,829
Net operating income	$	4,808	$	2,240	$	2,568	$	3,267	$	1,853	$	1,414
Non-allocated expenses (1)	(5,003)						(6,855)
Loss on sale of investment properties, net	(6)						—
Other income and expenses (2)	(687)						(1,100)
Net (income) loss attributable to non-controlling interests	(2)						10
Net loss attributable to Highlands REIT, Inc. common stockholders	$	(890)					$	(4,678)
Balance Sheet Data
Real estate assets, net	$	280,619	$	175,104	$	105,515	$	295,180	$	180,679	$	114,501
Non-segmented assets (3)	29,527						35,345
Total assets	$	310,146					$	330,525
Capital expenditures	$	122	$	102	$	20	$	1,070	$	353	$	717

(1)Non-allocated expenses consists of general and administrative expenses and depreciation and amortization.

(2)Other income and expenses consists of interest income and interest expense.

(3)Non-segmented assets include cash and cash equivalents, restricted cash and escrows, accounts and rents receivable and deferred costs and other assets.

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HIGHLANDS REIT, INC.

Notes to Consolidated Financial Statements (unaudited)

(Amounts in thousands, except square footage and per share amounts)

March 31, 2022

10. Share Based Compensation

Incentive Award Plan

On April 28, 2016, the board of directors adopted, ratified and approved the Highlands REIT, Inc. 2016 Incentive Award Plan (the “Incentive Award Plan”), under which the Company may grant cash and equity-based incentive awards to eligible employees, directors, and consultants. Prior to the Company’s spin-off from InvenTrust, the board of directors of the Company (then a wholly-owned subsidiary of InvenTrust) adopted, and InvenTrust, as the sole stockholder of Highlands, approved, the Incentive Awards Plan.

During the three months ended March 31, 2022, the Company did not grant shares of common stock. During the three months ended March 31, 2021, the Company granted 6,518 of fully vested shares of common stock with an aggregate value of $1,825 based on an estimated net asset value per share of $0.28.

Under the Incentive Award Plan, the Company was initially authorized to grant up to 43,000 shares of the Company's common stock pursuant to awards under the Incentive Award Plan. On August 12, 2021, the board of directors increased the authorized number of shares of its Common Stock under the Incentive Award Plan from 43,000 to 67,000 pursuant to that certain Second Amendment to Highlands REIT, Inc. 2016 Incentive Award Plan, dated as of August 12, 2021. As of March 31, 2022, 21,544 shares were available for future issuance under the Incentive Award Plan.

For the three months ended March 31, 2022, the Company incurred no compensation expense and had no required payment for tax withholding for share-based compensation. For the three months ended March 31, 2021, the Company recognized stock-based compensation expense in the amount of $1,879 related to the Incentive Award Plan. For the three months ended March 31, 2021, the Company paid $883 related to tax withholding for share-based compensation.

11. Commitments and Contingencies

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the financial statements of the Company.

Highlands has also agreed to indemnify InvenTrust against all taxes related to the Company and its assets, including taxes attributable to periods prior to the separation and distribution. InvenTrust has agreed to indemnify the Company for any taxes attributable to InvenTrust's or MB REIT (Florida), Inc.'s, a subsidiary of the Company, failure to maintain its qualification as a REIT for any taxable year ending on or before December 31, 2016.

In April 2020, the Company executed a lease with Northwestern Medical Group for approximately 29,000 square feet at our Sherman Plaza asset. The lease required a significant amount of landlord work, a tenant allowance and a broker commission. The total commitment is estimated to be approximately $3,900. As of March 31, 2022, we estimate that remaining costs under this commitment are approximately $1,300. Rent commenced on this lease in the third quarter of 2021 and payment of the outstanding tenant allowance will be made upon tenant's request and verification that all requirements for payment have been met.

In February 2021, the Company executed a lease with Veeco Instruments, Inc. for approximately 97,000 square feet at our Trimble office asset. The lease requires a significant tenant allowance and broker commission. The total commitment is estimated to be approximately $9,100. As of March 31, 2022, we estimate that remaining costs under this commitment are approximately $1,000. The tenant was responsible for rent pursuant to this lease beginning January 1, 2022, however, the tenant has 12 months of rent abatement before any amounts are payable. A portion of the leasing commission related to this lease remains payable by the Company upon the date the tenant's rent abatement ends, which is January 1, 2023. The remainder of the tenant allowance will be paid by the Company upon the tenant receiving its final certificate of occupancy.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

References to “Highlands,” the “Company,” “we” or “us” are to Highlands REIT, Inc., 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 uncertainty and economic impact of pandemics, epidemics or other public health emergencies or fear of such events, such as the novel coronavirus disease 2019 (“COVID-19”) pandemic; 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 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; domestic or international instability or political or civil unrest, including the ongoing hostilities between Russia and Ukraine and its worldwide economic impact; 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; 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.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that may be heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. It is difficult to fully assess the impact of the COVID-19 pandemic at this time due to, among other factors, uncertainty regarding the severity, duration and any resurgences of the pandemic domestically and internationally, the rise of variants of the virus, the efficacy and public acceptance of COVID-19 vaccines, the effectiveness and duration of federal, state and local governments’ efforts to contain the spread of COVID-19, and the effect of the COVID-19 pandemic in the markets where we own and operate investment properties, including the effect on our tenants' operations and ability to pay rent.

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

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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 that were designed to consolidate substantially all of InvenTrust’s remaining “non-core” assets in Highlands.

This 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. A number of our assets are retail properties located in tertiary markets, which are particularly susceptible to the negative trends affecting retail real estate, including the effects of the COVID-19 pandemic. As a result of these characteristics, such assets are difficult to lease, finance and refinance and are relatively illiquid compared to other types of real estate assets. These factors also significantly limit our asset disposition options, impact the timing of such dispositions and restrict the viable options available to the Company for a future potential liquidity option.

Our strategy is focused on preserving, protecting and maximizing the total value of our portfolio with the long-term objective of providing stockholders with a return of their investment. We engage in rigorous asset management, seek to sustain and enhance our portfolio, and improve the quality and income-producing ability of our portfolio by engaging in selective dispositions, acquisitions, capital expenditures, financing, refinancing and enhanced leasing. We are also focused on cost containment efforts across our portfolio, improving our overall capital structure and making select investments in our existing “non-core” assets to maximize their value. To the extent we are able to generate cash flows from operations or dispositions of assets, in addition to the cash uses outlined above, our board of directors has determined that it is in the best interests of the Company to seek to reinvest in assets that are more likely to generate more reliable and stable cash flows, such as multi-family assets, as part of the Company’s overall strategy to optimize the value of the portfolio, enhance our options for a future potential liquidity option and maximize shareholder value. Given the nature and quality of the “non-core” assets in our portfolio as well as current market conditions, a definitive timeline for execution of our strategy cannot be made. The impact of the COVID-19 pandemic on our business has disrupted our efforts to implement a liquidity option and, although we cannot predict when circumstances will improve, we will continue to evaluate options to implement a liquidity option during 2022. However, we may be unable to execute on such a transaction on terms we would find attractive for our stockholders and our ability to do so will be influenced by external and macroeconomic factors, including, among others, the effects and duration of the COVID-19 pandemic and future resurgences, the timing and nature of recovery of the COVID-19 pandemic, interest rate movements, local, regional, national and global economic performance, government policy changes and competitive factors.

As of March 31, 2022, our portfolio of assets consisted of twelve multi-family assets, three retail assets, one office asset, two industrial assets, one correctional facility and one parcel of unimproved land. We currently have two business segments, consisting of multi-family and other assets. We may have additional or fewer segments in the future to the extent we enter into additional real property sectors, dispose of investment properties, or change the character of our assets. For the complete presentation of our reportable segments, see Note 9 to our consolidated financial statements for the three months ended March 31, 2022 and 2021.

Basis of Presentation

The accompanying consolidated financial statements reflect the accounts of Highlands and its consolidated subsidiaries (collectively, the "Company"). Highlands consolidates its wholly-owned subsidiaries and any other entities which it controls (i) through voting rights or similar rights or (ii) by means other than voting rights if Highlands is the primary beneficiary of a variable interest entity (“VIE”). The portions of the equity and net income of consolidated subsidiaries that are not attributable to the Company are presented separately as amounts attributable to non-controlling interests in our consolidated financial statements. Entities which Highlands does not control and entities which are VIEs in which Highlands is not a primary

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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, 2021 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 lease income and expense recoveries we receive from our tenants under leases with us, including monthly rent and other property income pursuant to tenant leases. Tenant recovery income primarily consists of reimbursements for real estate taxes, common area maintenance costs, management fees and insurance costs.

Expenses

Our expenses consist of property operating expenses, real estate taxes, depreciation and amortization expense, general and administrative expenses and provision for asset impairment. Property operating expenses primarily consist of repair and maintenance, management fees, utilities and insurance (in each case, some of which are recoverable from the tenant).

Key Indicators of Operating Performance

In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:

•Cash flow from operations as determined in accordance with GAAP;

•Economic and physical occupancy and rental rates;

•Leasing activity and lease rollover;

•Management of operating expenses;

•Management of general and administrative expenses;

•Debt maturities and leverage ratios;

•Liquidity levels;

•Funds From Operations (“FFO”), a supplemental non-GAAP measure; and

•Adjusted Funds From Operations (“AFFO”), a supplemental non-GAAP measure.

Impact of COVID-19

The impact of the COVID-19 pandemic was not as material during the three months ended March 31, 2022 and 2021, as compared to prior periods. The primary impact of the pandemic was and continues to be related to our tenants' ability to make rental payments in a timely fashion or at all. We have been working with our tenants to collect rental payments pursuant to our contractual rights under our lease agreements.

At this time, given the uncertainty related to variants of the virus, we are unable to predict whether cases of COVID-19 in our markets will decrease, increase, or remain the same, whether the approved COVID-19 vaccines will be effective against new variants of the virus, efficiently distributed in our markets and widely accepted by the public, and whether local governments will mandate closures of our tenants' businesses or implement other restrictive measures on their and our operations in the future in response to any future resurgence of the pandemic. We have taken and will continue to take a number of measures to mitigate the impact of the pandemic on our business and financial condition.

Acquisition and Disposition Activity

There were no asset acquisitions during the three months ended March 31, 2022 and 2021.

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During the three months ended March 31, 2022, consistent with our strategy of disposing of legacy “non-core” assets, we sold the following investment property:

			(in thousands)
Property	Location	Disposition Date	Gross Disposition Price		Sale Proceeds, Net		Loss on Sale
State Street Market	Rockford, Illinois	March 10, 2022	$	9,000	$	8,938	$	(6)

During the three months ended March 31, 2021, there were no asset dispositions.

Results of Operations

Comparison of the three months ended March 31, 2022 and 2021

Key performance indicators are as follows:

	As of March 31,
	2022			2021
Economic occupancy (1)	77.7		%	72.9		%
Rent per square foot (2)	$	15.06		$	14.50

(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 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 months ended March 31, 2022 and 2021.

	(dollar amounts in thousands)
	For the three months ended March 31,
	2022		2021		Increase (Decrease)
Net loss	$	(888)	$	(4,688)	$	(3,800)	(81.1)	%

Net loss decreased $3.8 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, due to an increase in total revenues and lower compensation expenses, real estate taxes and interest expense. Details of these changes are provided below.

The following table presents the changes in our revenues for the three months ended March 31, 2022 and 2021.

	(in thousands)
	For the three months ended March 31,
	2022		2021		Increase (Decrease)
Income:
Rental income	$	7,958	$	6,758	$	1,200	17.8	%
Other property income	216		249		(33)		(13.3)	%
Total revenues	$	8,174	$	7,007	$	1,167	16.7	%

Total revenues increased $1.2 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021, due to commencement of straight-line rental income on the Veeco Instruments, Inc. lease at Trimble and on rental income from the Northwestern Medical lease at Sherman Plaza. Additionally, rental income increased due to increased occupancy and rental rates at our multi-family assets.

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The following table presents the changes in our expenses for the three months ended March 31, 2022 and 2021.

	(dollar amounts in thousands)
	For the three months ended March 31,
	2022		2021		Increase (Decrease)
Expenses:
Property operating expenses	$	2,260	$	2,183	$	77	3.5	%
Real estate taxes	1,106		1,557		(451)		(29.0)	%
Depreciation and amortization	2,638		2,667		(29)		(1.1)	%
General and administrative expenses	2,365		4,188		(1,823)		(43.5)	%
Total expenses	$	8,369	$	10,595	$	(2,226)	(21.0)	%

Property operating expenses remained consistent for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

Real estate taxes decreased $0.5 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, due primarily to adjustments to the real estate tax estimate as a result of the sale of State Street Market and a lower estimate of taxes to be owed on our correctional facility.

Depreciation and amortization remained consistent for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.

General and administrative expense decreased $1.8 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, primarily due to reduced compensation expense. During the three months ended March 31, 2021, compensation expense included an employee stock grant and no such grant occurred during the three months ended March 31, 2022, resulting in reduced compensation expense for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

The following table presents the changes in our other income and expenses for the three months ended March 31, 2022 and 2021.

	(dollar amounts in thousands)
	For the three months ended March 31,
	2022		2021		Increase (Decrease)
Other income and (expenses):
Interest income	$	2	$	8	$	(6)	(75.0)	%
Loss on sale of investment properties, net	(6)		—		(6)		—	%
Interest expense	(689)		(1,108)		(419)		(37.8)	%

Interest income remained consistent during the three months ended March 31, 2022, as compared to the same period in 2021.

During the three months ended March 31, 2022, the loss on sale of investment properties of $0.01 million was attributed to the sale of State Street Market. There were no sales of investment properties during the the three months ended March 31, 2021.

Interest expense decreased $0.4 million during the three months ended March 31, 2022, as compared to the same period in 2021, due to the termination of the Credit Agreement during March 2021.

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Leasing Activity

Our primary source of funding for our property-level operating activities and debt payments is rent collected pursuant to our tenant leases. The following table represents lease expirations, excluding multi-family leases, as of March 31, 2022, 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
2022	3	58,130	$	1,338	6.3	%	12.2	%	$	23.02
2023	4	29,298	294		3.2	%	2.7	%	10.03
2024	4	29,348	538		3.2	%	4.9	%	18.32
2025	15	81,461	1,205		8.9	%	11.0	%	14.80
2026	3	10,441	328		1.1	%	3.0	%	31.38
2027	5	502,032	2,449		54.6	%	22.4	%	4.88
2028	7	50,095	896		5.5	%	8.2	%	17.89
2029	2	26,542	308		2.9	%	2.8	%	11.60
2030	1	2,790	75		0.3	%	0.7	%	27.00
2031	—	—	—		—	%	—	%	—
MTM	1	2,875	42		0.3	%	0.4	%	14.61
Thereafter	2	126,113	3,457		13.7	%	31.7	%	27.41
Grand Total	47	919,125	$	10,930	100.0	%	100.0	%	$	11.89

The following table represents new and renewed leases that commenced during the three months ended March 31, 2022 and 2021:

	Three Months Ended March 31, 2022					Three Months Ended March 31, 2021
	# 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	1	96,780	$	25.56	16.00	1	29,333	$	33.50	15.00
Renewals	2	8,608	28.25		3.32	—	—	—		—
Total	3	105,388	$	25.78	14.96	1	29,333	$	33.50	15.00

Critical Accounting Estimates

General

The accompanying consolidated financial statements have been prepared in accordance with GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, judgments, and assumptions are required in a number of areas, including, but not limited to, evaluating the collectability of accounts receivable, allocating the purchase price of acquired investment properties, and evaluating the impairment real estate assets. We base these estimates, judgments and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Acquisition of Real Estate

We evaluate the inputs, processes and outputs of each asset acquired to determine if the transaction is a business combination or asset acquisition. If an acquisition qualifies as a business combination, the related transaction costs are recorded as an expense in the consolidated statements of operations and comprehensive loss. If an acquisition qualifies as an asset acquisition, the related transaction costs are generally capitalized and amortized over the useful life of the acquired assets. Generally, acquisition of real estate qualifies as an asset acquisition.

20

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 intangible liabilities, net, respectively, in the consolidated balance sheets, and are amortized as either a decrease (in the case of above-market leases) or an increase (in the case of below-market leases) to lease income over the remaining term of the associated tenant lease. The values associated with in-place leases are recorded in intangible assets, net in the consolidated balance sheets and are amortized to depreciation and amortization expense in the consolidated statements of operations and comprehensive income 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 its long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable, such as a reduction in the expected holding period of the asset. If it is determined that the carrying value is not recoverable because the undiscounted cash flows do not exceed carrying value, the Company records an impairment loss to the extent that the carrying value exceeds fair value. The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on the Company’s continuous process of analyzing each asset and reviewing assumptions about uncertain inherent factors, as well as the economic condition of the asset at a particular point in time.

The use of projected future cash flows and related holding 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 assets.

Liquidity and Capital Resources

As of March 31, 2022, we had $18.1 million of cash and cash equivalents, and $4.0 million of restricted cash and escrows.

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 assets 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 Fitness International at Sherman Plaza expiring in April 2022 and Office Max at Market at Hilliard expiring in March 2023.

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.

21

Material Cash Requirements

In April 2020, the Company executed a lease with Northwestern Medical Group for approximately 29,000 square feet at our Sherman Plaza asset. The lease requires a significant amount of landlord work, a tenant allowance and a broker commission. The total commitment is estimated to be approximately $3.9 million. As of March 31, 2022, we estimate that remaining costs under this commitment are approximately $1.3 million. Rent commenced on this lease in the third quarter of 2021 and payment of the outstanding tenant allowance will be made upon tenant's request and verification that all requirements for payment have been met.

In September 2020, the Company entered into a Separation Agreement and General Release (the "Agreement") with its former Chief Financial Officer, Paul Melkus. The Agreement included a severance package which includes a payment in the amount of $1 million to be paid on or before May 31, 2022, which is included in accounts payable and accrued expenses on the accompanying consolidated balance sheets.

In February 2021, the Company executed a lease with Veeco Instruments, Inc. for approximately 97,000 square feet at our Trimble office asset. The lease requires a significant tenant allowance and broker commission. The total cost commitment is estimated to be approximately $9.1 million. As of March 31, 2022, we estimate that remaining costs under this commitment are approximately $1.0 million. The tenant was responsible for rent pursuant to this lease beginning January 1, 2022, however, the tenant has 12 months of rent abatement before any amounts are payable. A portion of the leasing commission related to this lease remains payable by the Company upon the date the tenant's rent abatement ends, which is January 1, 2023. The remainder of the tenant allowance will be paid by the Company upon the tenant receiving its final certificate of occupancy.

The loan documents governing the mortgage that encumbered State Street Market included a “cash trap” provision that was triggered when DICK'S Sporting Goods, which was an anchor tenant at the property, failed to renew its lease agreement. The lender exercised its right to trigger this “cash trap” provision, and, beginning in the fourth quarter of 2020, all of the cash flows from State Street Market which would otherwise have been available for our use were trapped into a blocked account controlled by the lender pending approval of a substitute lease or repayment of the loan. The Company sold the State Street Market asset on March 10, 2022 and the mortgage was simultaneously repaid. The funds previously trapped and held by the lender, along with all required lender escrows, totaling $2.0 million, were returned to the Company subsequent to the end of the first quarter. See also Note 7 (Debt) in the accompanying consolidated financial statements for additional discussion.

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 March 31, 2022 and December 31, 2021 was $53.9 million and $62.8 million, respectively, with a weighted average interest rate of 4.01% and 4.18% per annum, respectively.

The table below presents, on a consolidated basis, the principal amount, weighted average interest rates and maturity date (by year) on our mortgage debt, as of March 31, 2022 (dollar amounts are stated in thousands).

Debt maturing during the year ended December 31,	As of March 31, 2022		Weighted average interest rate
2022 (remaining)	$	—	—	%
2023	17,794		3.28	%	(1)
2024	—		—	%
2025	—		—	%
2026	24,619		4.56	%
Thereafter	11,449		3.99	%
Total	$	53,862	4.01	%

(1)    See below for discussion of the swap agreement entered into with the mortgage loan obtained in connection with the acquisition of The Locale asset. The weighted average interest rate reflected is the strike rate.

As of March 31, 2022 and December 31, 2021, none of our mortgage debt was recourse to the Company, although we have provided certain customary, non-recourse carve-out guarantees in connection with obtaining mortgage loans on certain of our investment properties.

22

Our ability to pay off our mortgages when they become due is, in part, dependent upon our ability either to refinance the related mortgage debt or to sell the related asset. With respect to each loan, if we are unable to refinance or sell the related asset, or in the event that the estimated asset value is less than the mortgage balance, we may, if appropriate, satisfy a mortgage obligation by transferring title of the asset to the lender or permitting a lender to foreclose.

Volatility in the capital markets could expose us to the risk of not being able to borrow on terms and conditions acceptable to us for refinancing.

The Company obtained a mortgage loan in the principal amount of $18.8 million in connection with the acquisition of The Locale in 2019. Because that loan is indexed to LIBOR, the Company is monitoring and evaluating certain risks that have arisen in connection with transitioning to an alternative rate, including any resulting value transfer that may occur. The value of derivative instruments tied to LIBOR, as well as interest rates on our current or future indebtedness, may also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.

In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC"), which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

While we expect LIBOR to be available in substantially its current form until at least the end of June 2023, it is possible that LIBOR will become unavailable prior to that point. This could occur, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.

Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.

The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.

Adjustments to systems and mathematical models to properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for the company.

On January 21, 2021, the Company repaid $5.0 million of the outstanding principal balance of the Revolving Credit Loan and on March 29, 2021, repaid in full all of the remaining outstanding indebtedness related to the Revolving Credit Loan consisting of approximately $15.0 million of principal plus accrued and unpaid interest thereon. The Credit Agreement and related security interests, and all commitments thereunder, were terminated in conjunction with such payment in full.

Summary of Cash Flows

Comparison of the three months ended March 31, 2022 and 2021

	(in thousands)
	Three Months Ended March 31,
	2022		2021
Net cash flows provided by (used in) operating activities	$	915	$	(1,440)
Net cash flows provided by (used in) investing activities	8,139		(2,034)
Net cash flows used in financing activities	(8,959)		(21,153)
Net increase (decrease) in cash and cash equivalents and restricted cash and escrows	95		(24,627)
Cash and cash equivalents and restricted cash and escrows, at beginning of period	22,010		53,637
Cash and cash equivalents and restricted cash and escrows, at end of period	$	22,105	$	29,010

23

Cash provided by operating activities was $0.9 million for the three months ended March 31, 2022. Cash provided by operating activities increased $2.4 million compared to the same period in 2021, primarily due to increased revenues from tenants and decreased real estate taxes and total compensation costs as a result of a change in timing of annual employee stock grants.

Cash provided by investing activities was $8.1 million for the three months ended March 31, 2022, compared to cash used in investing activities of $2.0 million for the three months ended March 31, 2021. Cash provided by investing activities increased $10.2 million compared to the same period in 2021 as a result of proceeds in the amount of $8.9 million from the sale of State Street Market and a decrease in cash used for capital expenditures and to pay leasing commissions.

Cash used in financing activities was $9.0 million for the three months ended March 31, 2022, compared to $21.2 million for the three months ended March 31, 2021. Cash used in financing activities for the three months ended March 31, 2022 included principal payments on mortgage debt in the amount of $0.3 million. Cash used in financing activities for the three months ended March 31, 2021 was primarily related to payoff of the credit facility in the amount of $20.0 million, principal payments on mortgage debt in the amount of $0.3 million and payment of tax withholding for share-based compensation in the amount of $0.9 million.

We consider all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements with a maturity of three months or less, at the date of purchase, to be cash equivalents. We maintain our cash and cash equivalents at financial institutions. The 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.

Distributions

For the three months ended March 31, 2022 and 2021, 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 also use Adjusted Funds From Operations, or AFFO as a measure of our operating performance. We define AFFO, a non-GAAP financial measure, to exclude from FFO adjustments for gains or losses related to early extinguishment of debt instruments as these items are not related to our continuing operations. By excluding these items, management believes that AFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other public, non-traded REITs. AFFO is not equivalent to our net income or loss as determined under GAAP.

In calculating FFO and AFFO, impairment charges of depreciable real estate assets are added back even though the impairment charge may represent a permanent decline in value due to decreased operating performance of the applicable investment property. Further, because gains and losses from sales of investment property are excluded from FFO and AFFO, it is consistent and appropriate that impairments, which are often early recognition of losses on prospective sales of investment property, also be excluded.

We believe that FFO and AFFO are useful measures of our investment properties’ operating performance because they exclude noncash items from GAAP net income. Neither FFO nor AFFO is intended to be an alternative to “net income” nor to “cash flows from operating activities” as determined by GAAP as a measure of our capacity to pay distributions. Other REITs may use alternative methodologies for calculating similarly titled measures, which may not be comparable to our calculation of FFO and AFFO.

24

The following section presents our calculation of FFO and AFFO to net income (in thousands):

	Three Months Ended March 31,
	2022		2021
Net loss attributable to Highlands REIT, Inc. common stockholders	$	(890)	$	(4,678)
Depreciation and amortization (1)	2,599		2,629
Loss on sale of investment properties	6		—
Funds From Operations and Adjusted Funds From Operations	$	1,715	$	(2,049)

(1)    The depreciation and amortization add-back excludes the portion of expense attributable to the non-controlling interest.

Use and Limitations of Non-GAAP Financial Measures

FFO and AFFO do not represent cash generated from operating activities under GAAP and should not be considered as an alternative to net income or loss, operating profit, cash flows from operations or any other operating performance measure prescribed by GAAP. Although we present and use FFO and AFFO because we believe they are useful to investors in evaluating and facilitating comparisons of our operating performance between periods and between REITs that report similar measures, the use of this non-GAAP measure has certain limitations as an analytical tool. This non-GAAP financial measure is not a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to fund capital expenditures, contractual commitments, working capital, service debt or make cash distributions. This measurement does not reflect cash expenditures for long-term assets and other items that we have incurred and will incur. This non-GAAP financial measure may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, 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.

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk associated with changes in interest rates both in terms of variable-rate debt and the price of new fixed-rate debt upon maturity of existing debt and for acquisitions.

Interest Rate Risk

Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. As of March 31, 2022, our debt included a variable-rate mortgage loan of $17.8 million, which has been swapped to a fixed rate.

With regard to our variable-rate financing, we assess interest rate cash flow risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We maintain risk management control systems to monitor interest rate cash flow risk attributable to both outstanding or forecasted debt obligations.

We may use financial instruments to hedge exposures to changes in interest rates on loans. To the extent we do, we are exposed to credit risk and market risk. Credit risk is the risk of failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates a credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, it does not pose credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with what we believe are high-quality counterparties. Market risk is the adverse effect on the value of a financial instrument resulting from a change in interest rates.

In the event that LIBOR is discontinued, the interest rate for certain of our debt instruments, including interest rate swap agreements that are indexed to LIBOR, will be based on a replacement rate or an alternate base rate as specified in the applicable documentation governing such debt or swaps or as otherwise agreed upon. Such an event would not affect our ability to borrow or maintain already outstanding borrowings or swaps, but the replacement rate or alternate base rate could be higher or more volatile than LIBOR prior to its discontinuance. While we expect LIBOR to be available in substantially its current form until at least the end of June 2023, it is possible that LIBOR will become unavailable prior to that point. This could occur, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.

Our interest rate swaps are indexed to USD-LIBOR. However, the interest rate swap agreement has provisions that allow for a transition to a new alternative rate, and we believe that the transition from USD-LIBOR to the alternative rate will not have a material impact on our consolidated financial statements.

As of March 31, 2022, we had one derivative financial instrument designated as a cash flow hedge, with a notional amount of $18.8 million and a maturity date of September 1, 2023. The fair value of the derivative was $0.1 million as of March 31, 2022 and is included in deferred costs and other assets in the accompanying consolidated balance sheets. The gains or losses resulting from marking-to-market our derivative financial instruments during the periods presented are recognized as an increase or decrease in comprehensive loss on our consolidated statements of operations and comprehensive loss.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and our principal financial officer evaluated, as of March 31, 2022, the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and Rule 15d-15(e) of the Exchange Act. Based on that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures, as of March 31, 2022, were effective at a reasonable assurance level for the purpose of ensuring that information required to be disclosed by us in this Quarterly Report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

26

Changes in Internal Control Over Financial Reporting.

There has been no change in the Company's internal control over financial reporting during the three months ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

27

Part II.

Item 1. Legal Proceedings

We are from time to time involved in legal actions arising in the ordinary course of business. We are not currently involved in any legal or administrative proceedings that we believe are likely to have a material adverse effect on our business, results of operations or financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto and are incorporated herein by reference.

28

EXHIBIT NO.	DESCRIPTION
3.2	Amended and Restated Bylaws of Highlands REIT, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 28, 2016)
4.1	Articles of Amendment and Restatement of Highlands REIT, Inc. (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on April 27, 2016)
31.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Link Document
104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*    Filed as part of this Quarterly Report on Form 10-Q.

29

SIGNATURES            

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Date
/s/ Richard Vance	May 12, 2022
Name: Richard Vance
Title: President and Chief Executive Officer (Principal Executive Officer)
/s/ Kimberly A. Karas	May 12, 2022
Name: Kimberly A. Karas
Title: Senior Vice President, Chief Accounting Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

30

EX-31.1

Exhibit 31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard Vance, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Highlands REIT, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 12, 2022	/s/ Richard Vance
		Name: Richard Vance
		Title: President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Kimberly A. Karas, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Highlands REIT, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 12, 2022	/s/ Kimberly A. Karas
		Name: Kimberly A. Karas
		Title: Senior Vice President, Chief Accounting Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

EX-32.1

Exhibit 32.1

Certification of Principal Executive Officer

Pursuant To 18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Highlands REIT, Inc. (the “Company”) for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	May 12, 2022	/s/ Richard Vance
		Name: Richard Vance
		Title: President and Chief Executive Officer (Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as a part of the Report or on a separate disclosure document.

EX-32.2

Exhibit 32.2

Certification of Principal Financial Officer

Pursuant To 18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of The Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Highlands REIT, Inc. (the “Company”) for the period ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to such officer’s knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	May 12, 2022	/s/ Kimberly A. Karas
		Name: Kimberly A. Karas
		Title: Senior Vice President, Chief Accounting Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as a part of the Report or on a separate disclosure document.

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Cover Page - shares	3 Months Ended
	Mar. 31, 2022	May 12, 2022
Cover [Abstract]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Mar. 31, 2022
Document Transition Report	false
Entity File Number	000-55580
Entity Registrant Name	HIGHLANDS REIT, INC.
Entity Incorporation, State or Country Code	MD
Entity Tax Identification Number	81-0862795
Entity Address, Address Line One	1 South Dearborn Street
Entity Address, Address Line Two	20th Floor
Entity Address, City or Town	Chicago
Entity Address, State or Province	IL
Entity Address, Postal Zip Code	60603
City Area Code	312
Local Phone Number	583-7990
Title of 12(g) Security	Common Stock
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		885,221,996
Entity Central Index Key	0001661458
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q1
No Trading Symbol Flag	true

XML

Consolidated Balance Sheets (unaudited) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Investment properties
Land	$ 79,726	$ 83,168
Building and other improvements	270,188	270,387
Construction in progress	26	6,542
Total	349,940	360,097
Less accumulated depreciation	(69,321)	(67,478)
Net investment properties	280,619	292,619
Cash and cash equivalents	18,149	18,321
Restricted cash and escrows	3,956	3,689
Accounts receivable (net of allowance of $154 and $153 as of March 31, 2022 and December 31, 2021, respectively)	3,220	2,739
Deferred costs and other assets, net	4,202	3,645
Total assets	310,146	321,013
Liabilities
Debt, net	53,209	62,130
Accounts payable and accrued expenses	8,909	9,526
Intangible liabilities, net	32	658
Other liabilities	1,962	2,162
Total liabilities	64,112	74,476
Commitments and contingencies (see Note 11)
Stockholders’ Equity
Common stock, $0.01 par value, 1,000,000 shares authorized, 885,222 shares issued and outstanding as of March 31, 2022 and December 31, 2021	8,852	8,852
Additional paid-in capital	1,411,818	1,411,818
Accumulated distributions in excess of net income	(1,174,795)	(1,173,905)
Accumulated other comprehensive loss	125	(202)
Total Highlands REIT, Inc. stockholders’ equity	246,000	246,563
Non-controlling interests	34	(26)
Total equity	246,034	246,537
Total liabilities and equity	$ 310,146	$ 321,013

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Consolidated Balance Sheets (unaudited) (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Statement of Financial Position [Abstract]
Allowance for accounts and rent receivables	$ 154	$ 153
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	1,000,000,000	1,000,000,000
Common stock, shares issued	885,221,996	885,221,996
Common stock, shares outstanding	885,221,996	885,221,996

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Consolidated Statements of Operations and Comprehensive Loss (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Revenues
Total revenues	$ 8,174	$ 7,007
Expenses
Property operating expenses	2,260	2,183
Real estate taxes	1,106	1,557
Depreciation and amortization	2,638	2,667
General and administrative expenses	2,365	4,188
Total expenses	8,369	10,595
Loss on sale of investment properties, net	(6)	0
Loss from operations	(201)	(3,588)
Interest income	2	8
Interest expense	(689)	(1,108)
Net loss	(888)	(4,688)
Net (income) loss attributable to non-controlling interests	(2)	10
Net loss attributable to Highlands REIT, Inc. common stockholders	$ (890)	$ (4,678)
Net income per common share, basic (in dollars per share)	$ (0.00)	$ (0.01)
Net income per common share, diluted (in dollars per share)	$ (0.00)	$ (0.01)
Weighted average number of common shares outstanding, basic (in shares)	885,222,000	880,209,000
Weighted average number of common shares outstanding, diluted (in shares)	885,222,000	880,209,000
Comprehensive loss
Net income	$ (888)	$ (4,688)
Unrealized gain on derivatives	385	113
Total other comprehensive income	385	113
Comprehensive loss	(503)	(4,575)
Comprehensive income attributable to non-controlling interests	(60)	(7)
Comprehensive loss attributable to Highlands REIT, Inc. common stockholders	(563)	(4,582)
Rental income
Revenues
Total revenues	7,958	6,758
Other property income
Revenues
Total revenues	$ 216	$ 249

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Consolidated Statements of Equity (unaudited) - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Accumulated Distributions in Excess of Net Income	Accumulated Other Comprehensive Loss	Total Company's Stockholders' Equity	Non- controlling Interests
Beginning balance at Dec. 31, 2020	$ 257,063	$ 8,778	$ 1,409,767	$ (1,160,859)	$ (548)	$ 257,138	$ (75)
Beginning balance (in shares) at Dec. 31, 2020		877,759
Net income (loss)	(4,688)			(4,678)		(4,678)	(10)
Other comprehensive income	113				96	96	17
Share-based compensation	995	$ 35	960			995
Share-based compensation (in shares)		3,557
Ending balance (in shares) at Mar. 31, 2021		881,316
Ending balance at Mar. 31, 2021	253,483	$ 8,813	1,410,727	(1,165,537)	(452)	253,551	(68)
Beginning balance at Dec. 31, 2021	246,537	$ 8,852	1,411,818	(1,173,905)	(202)	246,563	(26)
Beginning balance (in shares) at Dec. 31, 2021		885,222
Net income (loss)	(888)			(890)		(890)	2
Other comprehensive income	385				327	327	58
Ending balance (in shares) at Mar. 31, 2022		885,222
Ending balance at Mar. 31, 2022	$ 246,034	$ 8,852	$ 1,411,818	$ (1,174,795)	$ 125	$ 246,000	$ 34

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Consolidated Statements of Cash Flows (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Cash flows from operating activities:
Net loss	$ (888)	$ (4,688)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	2,638	2,667
Amortization of below market leases	(17)	(21)
Amortization of debt discounts and financing costs	39	103
Straight-line rental income	(684)	36
Write-off of debt issuance costs	0	225
Loss on sale of investment properties, net	6	0
Non-cash stock-based compensation expense	0	1,879
Changes in assets and liabilities:
Accounts and rents receivable, net	203	(79)
Deferred costs and other assets, net	52	317
Accounts payable and accrued expenses	(617)	(1,928)
Other liabilities	183	49
Net cash flows provided by (used in) operating activities	915	(1,440)
Cash flows from investing activities:
Capital expenditures and tenant improvements	(122)	(1,070)
Proceeds from sale of investment properties, net	8,938	0
Payment of leasing fees	(677)	(964)
Net cash flows provided by (used in) investing activities	8,139	(2,034)
Cash flows from financing activities:
Payoff of debt	8,677	20,000
Principal payments of mortgage debt	(282)	(270)
Payment for tax withholding for share-based compensation	0	(883)
Net cash flows used in financing activities	(8,959)	(21,153)
Net increase (decrease) in cash and cash equivalents and restricted cash and escrows	95	(24,627)
Cash and cash equivalents and restricted cash and escrows, at beginning of period	22,010	53,637
Cash and cash equivalents and restricted cash and escrows, at end of period	22,105	29,010
Restricted Cash [Abstract]
Cash and cash equivalents	18,149	25,416
Restricted cash	3,956	3,594
Total cash, cash equivalents and restricted cash	22,105	29,010
Supplemental disclosure of cash flows information:
Cash paid for interest	696	849
Supplemental schedule of non-cash investing and financing activities:
Non-cash accruals for capital expenditures and tenant improvements	$ 414	$ 625

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Organization

3 Months Ended

Mar. 31, 2022

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization

Organization

Highlands REIT, Inc. (“Highlands”), which was formed in December 2015, is a Maryland corporation with a portfolio of assets including multi-family, retail, office and industrial properties, a correctional facility and unimproved land. Prior to April 28, 2016, Highlands was a wholly-owned subsidiary of InvenTrust Properties Corp. (“InvenTrust” and formerly known as Inland American Real Estate Trust, Inc.), its former parent. Unless stated otherwise or the context otherwise requires, the terms “we,” “our” and “us” and references to the “Company” refer to Highlands and its consolidated subsidiaries.

On April 28, 2016, Highlands was spun-off from InvenTrust through a pro rata distribution by InvenTrust of 100% of the outstanding shares of common stock, $0.01 par value per share (the “Common Stock”), of Highlands to holders of record of InvenTrust's common stock as of the close of business on April 25, 2016 (the “Record Date”). Each holder of record of InvenTrust's common stock received one share of Common Stock for every one share of InvenTrust's common stock held at the close of business on the Record Date (the “Distribution”). As a result, Highlands became an independent, self-advised, non-traded public company. Highlands has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”) for U.S. federal income tax purposes commencing with Highlands' short taxable year ending December 31, 2016.

Each of our assets is owned by a separate legal entity, which maintains its own books and financial records, and each entity’s assets are not available to satisfy the liabilities of other affiliated entities, except as otherwise disclosed in Note 7. With the exception of one asset we own through a variable interest entity with a third-party partner (the “Corvue Venture”), we are the sole owner of each of these separate legal entities.  As of March 31, 2022, we have an approximate 85% interest in the Corvue Venture and have funded equity contributions to the Corvue Venture in the approximate amount of $9,000. See Note 2 for additional information regarding the basis of presentation of the Corvue Venture, which is consolidated in the accompanying consolidated financial statements.

As of March 31, 2022 and December 31, 2021, the Company owned 19 and 20 investment properties, respectively, and one parcel of unimproved land.

Impact of COVID-19 Pandemic

The impact of the COVID-19 pandemic was not as material during the three months ended March 31, 2022 and 2021, as compared to prior periods. The primary impact of the pandemic was and continues to be related to our tenants' ability to make rental payments in a timely fashion or at all. We have been working with our tenants to collect rental payments pursuant to our contractual rights under our lease agreements.

At this time, given the uncertainty related to variants of the virus, we are unable to predict whether cases of COVID-19 in our markets will decrease, increase, or remain the same, whether the approved COVID-19 vaccines will be effective against new variants of the virus, efficiently distributed in our markets and widely accepted by the public, and whether local governments will mandate closures of our tenants' businesses or implement other restrictive measures on their and our operations in the future in response to any future resurgence of the pandemic. We have taken and will continue to take a number of measures to mitigate the impact of the pandemic on our business and financial condition.

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Basis of Presentation and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2022

Accounting Policies [Abstract]

Basis of Presentation and Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The accompanying consolidated financial statements include 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 non-controlling interests in our consolidated financial statements. Entities which Highlands does not control, and entities which are VIEs in which Highlands is not a primary beneficiary, if any, are accounted for under appropriate GAAP. Highlands' subsidiaries generally consist of limited liability companies (“LLCs”). The effects of all significant intercompany transactions have been eliminated.

Refer to the Company’s audited consolidated financial statements for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 16, 2022, as certain note disclosures contained in such audited financial statements have been condensed or omitted from these interim consolidated financial statements.

Variable Interest Entities

As of March 31, 2022 and December 31, 2021, we have determined we are the primary beneficiary of one VIE, the Corvue Venture, and have consolidated the operations of this entity in the accompanying consolidated financial statements. We reviewed the operating agreement of the Corvue Venture in order to determine our rights and the rights of our third-party partner, including whether those rights are protective or participating. We have determined we are the primary beneficiary of the Corvue Venture because we have (a) the power to direct the activities that most significantly impact the economic performance of the Corvue Venture, (b) the obligation to absorb the losses that could be significant to the Corvue Venture and (c) the right to receive the benefits that could be significant to the Corvue Venture. Included in total assets and liabilities on the Company’s consolidated balance sheets as of March 31, 2022 is $25,356 and $18,341, respectively, related to the Corvue Venture. Included in total assets and liabilities on the Company’s consolidated balance sheets as of December 31, 2021 is $25,396 and $18,521, respectively, related to the Corvue Venture. The assets of the Corvue Venture may only be used to settle obligations of the Corvue Venture and the creditors of the Corvue Venture have no recourse to the general credit of the Company.

Reclassifications

The Company has made certain reclassifications to the consolidated statements of cash flows as of March 31, 2021, to conform to the 2022 presentation.

Recently Issued Accounting Pronouncements

In January 2021 and March 2020, the FASB issued ASU 2021-01 and ASU 2020-04, respectively, “Reference Rate Reform (Topic 848)”. These pronouncements contain practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur. During March 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Other recently issued accounting standards or pronouncements not discussed above have been excluded because they are either not relevant to the Company, or are not expected to have, or did not have, a material effect on the consolidated financial statements of the Company.

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Disposed Investment Properties

3 Months Ended

Mar. 31, 2022

Discontinued Operations and Disposal Groups [Abstract]

Disposed Investment Properties

Disposed Investment Properties

The following table reflects the investment property dispositions during the three months ended March 31, 2022. The Company recognized a net loss on sale of investment properties of $6.

Property	Location	Disposition Date	Gross Disposition Price		Sale Proceeds, Net		Loss on Sale
State Street Market	Rockford, Illinois	March 10, 2022	$	9,000	$	8,938	$	(6)

There were no investment property dispositions during the three months ended March 31, 2021.

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Leases

3 Months Ended

Mar. 31, 2022

Leases [Abstract]

Leases

Leases

Leasing as a lessor

We lease multifamily properties under operating leases with terms of generally one year or less. We lease commercial properties under operating leases with remaining lease terms that range from less than one year to sixteen years as of March 31, 2022 and December 31, 2021.

Lease income related to the Company's operating leases is comprised of the following:

	Three Months Ended March 31,
	2022		2021
Lease income related to fixed lease payments	$	6,755	$	5,695
Lease income related to variable lease payments (1)	1,203		1,063
Other	216		249
Total revenues	$	8,174	$	7,007

(1)    Variable lease payments are comprised of tenant recovery income.

Future Minimum Rental Income

As of March 31, 2022, commercial operating leases provide for future minimum rental income, assuming no expiring leases are renewed, as follows. Apartment leases are not included as the terms are generally for one year or less.

2022 (remaining)	$	5,507
2023	9,058
2024	8,968
2025	8,215
2026	7,943
Thereafter	50,966
Total	$	90,657

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Accounts Payable and Accrued Expenses

3 Months Ended

Mar. 31, 2022

Payables and Accruals [Abstract]

Accounts Payable and Accrued Expenses

Accounts Payable and Accrued ExpensesAccounts payable and accrued expenses consist of the following:

	March 31, 2022		December 31, 2021
Accrued real estate taxes	$	5,489	$	6,593
Accrued compensation	1,979		1,140
Accrued interest payable	170		215
Other accrued expenses	1,271		1,578
Total accounts payable and accrued expenses	$	8,909	$	9,526

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Debt

3 Months Ended

Mar. 31, 2022

Debt Disclosure [Abstract]

Debt

Debt

Total debt outstanding as of March 31, 2022 and December 31, 2021 was as follows:

	March 31, 2022		December 31, 2021
Debt, gross	$	53,862	$	62,821
Mortgage discount	(246)		(257)
Deferred financing costs, net	(407)		(434)
Total Debt, Net	$	53,209	$	62,130

As of March 31, 2022, the Company’s outstanding mortgage indebtedness included four mortgage loans with various maturities through August 2027, as follows:

Debt maturing during the year ended December 31,	As of March 31, 2022		Weighted average interest rate
2022 (remaining)	$	—	—	%
2023	17,794		3.28	%	(1)
2024	—		—	%
2025	—		—	%
2026	24,619		4.56	%
Thereafter	11,449		3.99	%
Total	$	53,862	4.01	%

(1)    See below for discussion of the swap agreement entered into with the mortgage loan obtained in connection with the acquisition of The Locale asset. The weighted average interest rate reflected is the fixed swap rate.

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 asset. With respect to each mortgage loan, if the applicable wholly-owned property-owning subsidiary is unable to refinance or sell the related asset, or in the event that the estimated asset 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 asset to the lender or permitting a lender to foreclose. As of March 31, 2022 and December 31, 2021, none of our mortgage debt was recourse to the Company, although 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.

The loan documents governing the mortgage that encumbered State Street Market included a “cash trap” provision that was triggered when DICK'S Sporting Goods, which was an anchor tenant at the property, failed to renew its lease agreement. The lender exercised its right to trigger this “cash trap” provision, and, beginning in the fourth quarter of 2020, all of the cash flows from State Street Market which would otherwise have been available for our use were trapped into a blocked account controlled by the lender pending approval of a substitute lease or repayment of the loan. The Company sold the State Street Market asset

on March 10, 2022 and the mortgage was simultaneously repaid. The funds previously trapped and held by the lender, along with all required lender escrows, totaling $2.0 million, were returned to the Company subsequent to the end of the first quarter of 2022. This amount is included in restricted cash and escrows on our consolidated balance sheets as of March 31, 2022.

Some of the mortgage loans require compliance with certain covenants, such as debt service coverage ratios and minimum net worth requirements. As of March 31, 2022 and December 31, 2021, the Company was in compliance with such covenants.

Termination of Credit Agreement

On January 21, 2021, the Company repaid $5,000 of the outstanding principal balance of the Revolving Credit Loan and on March 29, 2021, repaid in full all of the remaining outstanding indebtedness related to the Revolving Credit Loan, consisting of approximately $15,000 of principal plus accrued and unpaid interest thereon. The Credit Agreement and related security interests, and all commitments thereunder, were terminated in conjunction with such payment in full.

LIBOR Reform

In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC"), which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for USD LIBOR in derivatives and other financial contracts. The Company is not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

The Company obtained a mortgage loan in the principal amount of $18,750 in connection with the acquisition of The Locale in 2019. Because that loan is indexed to LIBOR the Company is monitoring and evaluating the related risks that have arisen in connection with transitioning to an alternative rate, including any resulting value transfer that may occur. The value of derivative instruments tied to LIBOR, as well as interest rates on our current or future indebtedness, may also be impacted if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative reference rate may be challenging, especially if we cannot agree with the respective counterparty about how to make the transition.

While we expect LIBOR to be available in substantially its current form until at least the end of June 2023, it is possible that LIBOR will become unavailable prior to that point. This could occur, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.

Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges, such as adjusting interest rate accrual calculations and building a term structure for an alternative rate.

The introduction of an alternative rate also may create additional basis risk and increased volatility as alternative rates are phased in and utilized in parallel with LIBOR.

Adjustments to systems and mathematical models to properly process and account for alternative rates will be required, which may strain the model risk management and information technology functions and result in substantial incremental costs for the company.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value MeasurementsIn accordance with ASC 820, Fair Value Measurement and Disclosures, the Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and

unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

•Level 1 - Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

•Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company has estimated fair value using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and, to a limited extent, the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments, described below, are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company may use interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. We do not enter into derivative financial instruments for speculative purposes. As of March 31, 2022 and December 31, 2021, we had one derivative financial instrument designated as a cash flow hedge, with a notional amount of $18,750 and a maturity date of September 1, 2023. This derivative is an interest rate swap that is measured at fair value on a recurring basis.

For derivatives designated, and that qualify, as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income or loss on the consolidated balance sheets and is subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. The amounts recorded as other comprehensive income related to our derivative financial instrument was $385 and $113 for the three months ended March 31, 2022 and 2021, respectively.

Amounts reported in accumulated other comprehensive gain related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate debt. The Company estimates that $45 will be reclassified as a decrease to interest expense over the next twelve months.

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

	March 31, 2022
	Level 1		Level 2		Level 3		Total
Derivative financial instruments designated as cash flow hedges:
Classified as “Deferred costs and other assets, net”	$	—	$	148	$	—	$	148
	December 31, 2021
Derivative financial instruments designated as cash flow hedges:	Level 1		Level 2		Level 3		Total
Classified as “Other liabilities”	$	—	$	238	$	—	$	238

The fair value of our derivative financial instrument was determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the derivative financial instrument. This analysis reflected the contractual terms of the derivative, including the period to maturity, and used observable market-based inputs, including interest rate market data and implied volatilities in such interest rates. While it was determined that the majority of the inputs used to value the derivative fall within Level 2 of the fair value hierarchy under authoritative accounting guidance, the credit valuation adjustments associated with the derivative also utilized Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default. However, as of March 31, 2022, the significance of the impact of the credit valuation adjustments on the overall valuation of the derivative financial instrument was assessed, and it was determined that these adjustments were not significant to the overall valuation of the derivative financial instrument. As a result, it was determined that the derivative financial instrument in its entirety should be classified in Level 2 of the fair value hierarchy.

Non-Recurring Measurements     

In accordance with ASC 360-10, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. During the three months ended March 31, 2022 and 2021, events and circumstances indicated that certain investment properties might be impaired. However, the Company's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the future resulting in the need to write down assets to fair value.

Financial Liabilities Disclosed at Fair Value on a Recurring Basis

The table below represents the fair value of financial instruments presented at carrying values in the consolidated financial statements as of March 31, 2022 and December 31, 2021.

	March 31, 2022				December 31, 2021
	Carrying  Value		Estimated  Fair Value		Carrying  Value		Estimated  Fair Value
Debt	$	53,862	$	50,836	$	62,821	$	61,052

The Company estimates the fair value of its debt instruments using a weighted average market effective interest rate of 5.89% and 5.05% per annum as of March 31, 2022 and December 31, 2021, respectively. The Company estimates the fair value of its mortgage loans by discounting the anticipated future cash flows of each instrument at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The rates used are based on credit spreads observed in the marketplace during the quarter for similar debt instruments, and a floor rate that the Company has derived using its subjective judgment for each asset segment. Based on this, the Company determines the appropriate rate for each of its individual mortgage loans based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property and its leverage ratio. The weighted average market effective interest rates used range from 4.65% to 7.14% and 3.38% to 6.87% as of March 31, 2022 and December 31, 2021, respectively. The assumptions reflect the terms currently available on similar borrowing terms to borrowers with credit profiles similar to the Company's. The Company has determined that its debt instrument valuations are classified in Level 2 of the fair value hierarchy.

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Income Taxes	3 Months Ended
	Mar. 31, 2022
Income Tax Disclosure [Abstract]
Income Taxes	Income TaxesThe Company is taxed and operates in a manner that will allow the Company to continue to qualify as a REIT for U.S. federal income tax purposes. So long as it maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that is distributed to stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders each year. If the Company fails to continue to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to U.S. federal and state income tax on its taxable income at regular corporate tax rates and would not be able to re-elect REIT status during the four years following the year of the failure. Although the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and U.S. federal income and excise taxes on its undistributed income.During the three months ended March 31, 2022 and 2021, no income tax benefit or expense was included in the consolidated statements of operations and comprehensive loss.

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Segment Reporting

3 Months Ended

Mar. 31, 2022

Segment Reporting [Abstract]

Segment Reporting

Segment Reporting

GAAP has established guidance for reporting information about a company’s operating segments. The Company monitors and reviews its segment reporting structure in accordance with guidance under ASC Topic 280, Segment Reporting (“ASC 280”) to determine whether any changes have occurred that would impact its reportable segments. The Company currently has two business segments, consisting of multi-family and other.

The following table summarizes net operating income by segment for the three months ended March 31, 2022 and 2021.

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
	Total		Multi-family		Other		Total		Multi-family		Other
Lease income	$	7,958	$	3,920	$	4,038	$	6,758	$	3,576	$	3,182
Other property income	216		203		13		249		188		61
Total revenues	8,174		4,123		4,051		7,007		3,764		3,243
Operating expenses	3,366		1,883		1,483		3,740		1,911		1,829
Net operating income	$	4,808	$	2,240	$	2,568	$	3,267	$	1,853	$	1,414
Non-allocated expenses (1)	(5,003)						(6,855)
Loss on sale of investment properties, net	(6)						—
Other income and expenses (2)	(687)						(1,100)
Net (income) loss attributable to non-controlling interests	(2)						10
Net loss attributable to Highlands REIT, Inc. common stockholders	$	(890)					$	(4,678)
Balance Sheet Data
Real estate assets, net	$	280,619	$	175,104	$	105,515	$	295,180	$	180,679	$	114,501
Non-segmented assets (3)	29,527						35,345
Total assets	$	310,146					$	330,525
Capital expenditures	$	122	$	102	$	20	$	1,070	$	353	$	717

(1)Non-allocated expenses consists of general and administrative expenses and depreciation and amortization.

(2)Other income and expenses consists of interest income and interest expense.

(3)Non-segmented assets include cash and cash equivalents, restricted cash and escrows, accounts and rents receivable and deferred costs and other assets.

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Share Based Compensation

3 Months Ended

Mar. 31, 2022

Share-based Payment Arrangement, Noncash Expense [Abstract]

Share Based Compensation

Share Based Compensation

Incentive Award Plan

On April 28, 2016, the board of directors adopted, ratified and approved the Highlands REIT, Inc. 2016 Incentive Award Plan (the “Incentive Award Plan”), under which the Company may grant cash and equity-based incentive awards to eligible employees, directors, and consultants. Prior to the Company’s spin-off from InvenTrust, the board of directors of the Company (then a wholly-owned subsidiary of InvenTrust) adopted, and InvenTrust, as the sole stockholder of Highlands, approved, the Incentive Awards Plan.

During the three months ended March 31, 2022, the Company did not grant shares of common stock. During the three months ended March 31, 2021, the Company granted 6,518 of fully vested shares of common stock with an aggregate value of $1,825 based on an estimated net asset value per share of $0.28.

Under the Incentive Award Plan, the Company was initially authorized to grant up to 43,000 shares of the Company's common stock pursuant to awards under the Incentive Award Plan. On August 12, 2021, the board of directors increased the authorized number of shares of its Common Stock under the Incentive Award Plan from 43,000 to 67,000 pursuant to that certain Second Amendment to Highlands REIT, Inc. 2016 Incentive Award Plan, dated as of August 12, 2021. As of March 31, 2022, 21,544 shares were available for future issuance under the Incentive Award Plan.

For the three months ended March 31, 2022, the Company incurred no compensation expense and had no required payment for tax withholding for share-based compensation. For the three months ended March 31, 2021, the Company recognized stock-based compensation expense in the amount of $1,879 related to the Incentive Award Plan. For the three months ended March 31, 2021, the Company paid $883 related to tax withholding for share-based compensation.

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2022

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the financial statements of the Company.

Highlands has also agreed to indemnify InvenTrust against all taxes related to the Company and its assets, including taxes attributable to periods prior to the separation and distribution. InvenTrust has agreed to indemnify the Company for any taxes attributable to InvenTrust's or MB REIT (Florida), Inc.'s, a subsidiary of the Company, failure to maintain its qualification as a REIT for any taxable year ending on or before December 31, 2016.

In April 2020, the Company executed a lease with Northwestern Medical Group for approximately 29,000 square feet at our Sherman Plaza asset. The lease required a significant amount of landlord work, a tenant allowance and a broker commission. The total commitment is estimated to be approximately $3,900. As of March 31, 2022, we estimate that remaining costs under this commitment are approximately $1,300. Rent commenced on this lease in the third quarter of 2021 and payment of the outstanding tenant allowance will be made upon tenant's request and verification that all requirements for payment have been met.

In February 2021, the Company executed a lease with Veeco Instruments, Inc. for approximately 97,000 square feet at our Trimble office asset. The lease requires a significant tenant allowance and broker commission. The total commitment is estimated to be approximately $9,100. As of March 31, 2022, we estimate that remaining costs under this commitment are approximately $1,000. The tenant was responsible for rent pursuant to this lease beginning January 1, 2022, however, the tenant has 12 months of rent abatement before any amounts are payable. A portion of the leasing commission related to this lease remains payable by the Company upon the date the tenant's rent abatement ends, which is January 1, 2023. The remainder of the tenant allowance will be paid by the Company upon the tenant receiving its final certificate of occupancy.

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Basis of Presentation and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2022

Accounting Policies [Abstract]

Impact of COVID-19 Pandemic

Impact of COVID-19 Pandemic

The impact of the COVID-19 pandemic was not as material during the three months ended March 31, 2022 and 2021, as compared to prior periods. The primary impact of the pandemic was and continues to be related to our tenants' ability to make rental payments in a timely fashion or at all. We have been working with our tenants to collect rental payments pursuant to our contractual rights under our lease agreements.

At this time, given the uncertainty related to variants of the virus, we are unable to predict whether cases of COVID-19 in our markets will decrease, increase, or remain the same, whether the approved COVID-19 vaccines will be effective against new variants of the virus, efficiently distributed in our markets and widely accepted by the public, and whether local governments will mandate closures of our tenants' businesses or implement other restrictive measures on their and our operations in the future in response to any future resurgence of the pandemic. We have taken and will continue to take a number of measures to mitigate the impact of the pandemic on our business and financial condition.

Basis of Presentation

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The accompanying consolidated financial statements include 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 non-controlling interests in our consolidated financial statements. Entities which Highlands does not control, and entities which are VIEs in which Highlands is not a primary beneficiary, if any, are accounted for under appropriate GAAP. Highlands' subsidiaries generally consist of limited liability companies (“LLCs”). The effects of all significant intercompany transactions have been eliminated.

Variable Interest Entities

Variable Interest EntitiesAs of March 31, 2022 and December 31, 2021, we have determined we are the primary beneficiary of one VIE, the Corvue Venture, and have consolidated the operations of this entity in the accompanying consolidated financial statements. We reviewed the operating agreement of the Corvue Venture in order to determine our rights and the rights of our third-party partner, including whether those rights are protective or participating. We have determined we are the primary beneficiary of the Corvue Venture because we have (a) the power to direct the activities that most significantly impact the economic performance of the Corvue Venture, (b) the obligation to absorb the losses that could be significant to the Corvue Venture and (c) the right to receive the benefits that could be significant to the Corvue Venture.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In January 2021 and March 2020, the FASB issued ASU 2021-01 and ASU 2020-04, respectively, “Reference Rate Reform (Topic 848)”. These pronouncements contain practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance is optional and may be elected over time as reference rate reform activities occur. During March 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Other recently issued accounting standards or pronouncements not discussed above have been excluded because they are either not relevant to the Company, or are not expected to have, or did not have, a material effect on the consolidated financial statements of the Company.

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Disposed Investment Properties (Tables)

3 Months Ended

Mar. 31, 2022

Discontinued Operations and Disposal Groups [Abstract]

Schedule of Disposal Group

The following table reflects the investment property dispositions during the three months ended March 31, 2022. The Company recognized a net loss on sale of investment properties of $6.

Property	Location	Disposition Date	Gross Disposition Price		Sale Proceeds, Net		Loss on Sale
State Street Market	Rockford, Illinois	March 10, 2022	$	9,000	$	8,938	$	(6)

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Leases (Tables)

3 Months Ended

Mar. 31, 2022

Leases [Abstract]

Lease Income

Lease income related to the Company's operating leases is comprised of the following:

	Three Months Ended March 31,
	2022		2021
Lease income related to fixed lease payments	$	6,755	$	5,695
Lease income related to variable lease payments (1)	1,203		1,063
Other	216		249
Total revenues	$	8,174	$	7,007

(1)    Variable lease payments are comprised of tenant recovery income.

Payments to be received under Topic 842

As of March 31, 2022, commercial operating leases provide for future minimum rental income, assuming no expiring leases are renewed, as follows. Apartment leases are not included as the terms are generally for one year or less.

2022 (remaining)	$	5,507
2023	9,058
2024	8,968
2025	8,215
2026	7,943
Thereafter	50,966
Total	$	90,657

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Accounts Payable and Accrued Expenses (Tables)

3 Months Ended

Mar. 31, 2022

Payables and Accruals [Abstract]

Schedule of Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	March 31, 2022		December 31, 2021
Accrued real estate taxes	$	5,489	$	6,593
Accrued compensation	1,979		1,140
Accrued interest payable	170		215
Other accrued expenses	1,271		1,578
Total accounts payable and accrued expenses	$	8,909	$	9,526

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Debt (Tables)

3 Months Ended

Mar. 31, 2022

Debt Disclosure [Abstract]

Schedule of Debt Outstanding

Total debt outstanding as of March 31, 2022 and December 31, 2021 was as follows:

	March 31, 2022		December 31, 2021
Debt, gross	$	53,862	$	62,821
Mortgage discount	(246)		(257)
Deferred financing costs, net	(407)		(434)
Total Debt, Net	$	53,209	$	62,130

Scheduled Maturities of Mortgage Indebtedness

As of March 31, 2022, the Company’s outstanding mortgage indebtedness included four mortgage loans with various maturities through August 2027, as follows:

Debt maturing during the year ended December 31,	As of March 31, 2022		Weighted average interest rate
2022 (remaining)	$	—	—	%
2023	17,794		3.28	%	(1)
2024	—		—	%
2025	—		—	%
2026	24,619		4.56	%
Thereafter	11,449		3.99	%
Total	$	53,862	4.01	%

(1)    See below for discussion of the swap agreement entered into with the mortgage loan obtained in connection with the acquisition of The Locale asset. The weighted average interest rate reflected is the fixed swap rate.

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Derivative Liabilities Measured On A Recurring Basis

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively.

	March 31, 2022
	Level 1		Level 2		Level 3		Total
Derivative financial instruments designated as cash flow hedges:
Classified as “Deferred costs and other assets, net”	$	—	$	148	$	—	$	148
	December 31, 2021
Derivative financial instruments designated as cash flow hedges:	Level 1		Level 2		Level 3		Total
Classified as “Other liabilities”	$	—	$	238	$	—	$	238

Schedule of the Fair Value of Financial Instruments

The table below represents the fair value of financial instruments presented at carrying values in the consolidated financial statements as of March 31, 2022 and December 31, 2021.

	March 31, 2022				December 31, 2021
	Carrying  Value		Estimated  Fair Value		Carrying  Value		Estimated  Fair Value
Debt	$	53,862	$	50,836	$	62,821	$	61,052

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Segment Reporting (Tables)

3 Months Ended

Mar. 31, 2022

Segment Reporting [Abstract]

Summary of Net Property Operations

The following table summarizes net operating income by segment for the three months ended March 31, 2022 and 2021.

	Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
	Total		Multi-family		Other		Total		Multi-family		Other
Lease income	$	7,958	$	3,920	$	4,038	$	6,758	$	3,576	$	3,182
Other property income	216		203		13		249		188		61
Total revenues	8,174		4,123		4,051		7,007		3,764		3,243
Operating expenses	3,366		1,883		1,483		3,740		1,911		1,829
Net operating income	$	4,808	$	2,240	$	2,568	$	3,267	$	1,853	$	1,414
Non-allocated expenses (1)	(5,003)						(6,855)
Loss on sale of investment properties, net	(6)						—
Other income and expenses (2)	(687)						(1,100)
Net (income) loss attributable to non-controlling interests	(2)						10
Net loss attributable to Highlands REIT, Inc. common stockholders	$	(890)					$	(4,678)
Balance Sheet Data
Real estate assets, net	$	280,619	$	175,104	$	105,515	$	295,180	$	180,679	$	114,501
Non-segmented assets (3)	29,527						35,345
Total assets	$	310,146					$	330,525
Capital expenditures	$	122	$	102	$	20	$	1,070	$	353	$	717

(1)Non-allocated expenses consists of general and administrative expenses and depreciation and amortization.

(2)Other income and expenses consists of interest income and interest expense.

(3)Non-segmented assets include cash and cash equivalents, restricted cash and escrows, accounts and rents receivable and deferred costs and other assets.

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Organization (Details) $ / shares in Units, $ in Thousands	Aug. 16, 2019 USD ($)	Apr. 28, 2016 $ / shares shares	Mar. 31, 2022 property parcel $ / shares	Dec. 31, 2021 parcel property $ / shares
Conversion of Stock [Line Items]
Common stock, par value (in dollars per share) | $ / shares		$ 0.01	$ 0.01	$ 0.01
Number of assets (in property) | property			19	20
Parcels of land | parcel			1	1
Common stock
Conversion of Stock [Line Items]
Shares issued for each share held at date of spin-off (in shares) | shares		1
Corvue Venture
Conversion of Stock [Line Items]
Ownership percentage	85.00%
Equity investment contributions | $	$ 9,000

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Basis of Presentation and Summary of Significant Accounting Policies - Additional Information (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021	Mar. 31, 2021
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Assets	$ 310,146	$ 321,013	$ 330,525
Liabilities	64,112	74,476
Variable Interest Entity, Primary Beneficiary | Corvue Venture
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Assets	25,356	25,396
Liabilities	$ 18,341	$ 18,521

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Disposed Investment Properties - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Discontinued Operations and Disposal Groups [Abstract]
Loss on sale of investment properties, net	$ (6)	$ 0

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Disposed Investment Properties - Disposals (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Sale Proceeds, Net	$ 8,938	$ 0
Loss on Sale	(6)	0
State Street Market Rockford, IL
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Gross Disposition Price	9,000	$ 0
Sale Proceeds, Net	$ 8,938

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Leases - Narrative (Details)	Mar. 31, 2022
Minimum
Lessor, Lease, Description [Line Items]
Lease terms	1 year
Maximum
Lessor, Lease, Description [Line Items]
Lease terms	16 years

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Leases - Lease Income (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Leases [Abstract]
Lease income related to fixed lease payments	$ 6,755	$ 5,695
Lease income related to variable lease payments	1,203	1,063
Other	216	249
Total revenues	$ 8,174	$ 7,007

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Leases - Receivable Maturity (Details) $ in Thousands	Mar. 31, 2022 USD ($)
Leases [Abstract]
2022 (remaining)	$ 5,507
2023	9,058
2024	8,968
2025	8,215
2026	7,943
Thereafter	50,966
Total	$ 90,657

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Accounts Payable and Accrued Expenses (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Payables and Accruals [Abstract]
Accrued real estate taxes	$ 5,489	$ 6,593
Accrued compensation	1,979	1,140
Accrued interest payable	170	215
Other accrued expenses	1,271	1,578
Total accounts payable and accrued expenses	$ 8,909	$ 9,526

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Debt - Outstanding Debt (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Debt Disclosure [Abstract]
Debt, gross	$ 53,862	$ 62,821
Mortgage discount	(246)	(257)
Deferred financing costs, net	(407)	(434)
Total Debt, Net	$ 53,209	$ 62,130

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Debt - Scheduled Maturities (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Debt Instrument [Line Items]
Total	$ 53,862	$ 62,821
Mortgages
Debt Instrument [Line Items]
2022 (remaining)	0
2023	17,794
2024	0
2025	0
2026	24,619
Thereafter	11,449
Total	$ 53,862
Weighted average interest rate
2022 (remaining)	0.00%
2023	3.28%
2024	0.00%
2025	0.00%
2026	4.56%
Thereafter	3.99%
Total	4.01%

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Debt - Additional Information (Details) $ in Thousands			3 Months Ended
	Mar. 29, 2021 USD ($)	Jan. 21, 2021 USD ($)	Mar. 31, 2022 USD ($) loan	Mar. 31, 2021 USD ($)	May 12, 2022 USD ($)	Dec. 31, 2021 USD ($)	Dec. 31, 2019 USD ($)
Debt Instrument [Line Items]
Number of mortgage loan | loan			4
Restricted cash			$ 3,956	$ 3,594		$ 3,689
Payoff of debt			$ 8,677	$ 20,000
Mortgages | Subsequent event
Debt Instrument [Line Items]
Restricted cash					$ 2,000
Mortgages | Mortgage Loan in Connection with Acquisition of The Locale
Debt Instrument [Line Items]
Principal amount							$ 18,750
Line of Credit | Revolving Credit Facility
Debt Instrument [Line Items]
Payoff of debt	$ 15,000	$ 5,000

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Fair Value Measurements - Narrative (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2022 USD ($) derivative_instrument	Mar. 31, 2021 USD ($)	Dec. 31, 2021 USD ($) derivative_instrument
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Unrealized loss on derivatives	$ (385)	$ (113)
Cash flow hedges to be reclassified in the next twelve months	$ 45
Discount rate | Long-term debt
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Measurement input percentage	0.0589		0.0505
Discount rate | Long-term debt | Minimum
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Measurement input percentage	0.0465		0.0338
Discount rate | Long-term debt | Maximum
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Measurement input percentage	0.0714		0.0687
Cash Flow Hedging | Interest Rate Swap
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Number of derivative instruments | derivative_instrument	1		1
Notional amount	$ 18,750		$ 18,750

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Fair Value Measurements - Derivative Liabilities (Details) - Recurring - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative liabilities	$ 148	$ 238
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative liabilities	0	0
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative liabilities	148	238
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Derivative liabilities	$ 0	$ 0

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Fair Value Measurements - Not Measured at Fair Value (Details) - USD ($) $ in Thousands	Mar. 31, 2022	Dec. 31, 2021
Carrying  Value
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt	$ 53,862	$ 62,821
Estimated  Fair Value
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Debt	$ 50,836	$ 61,052

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Income Taxes (Details) - USD ($)	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021
Income Tax Disclosure [Abstract]
Income tax benefit	$ 0	$ 0

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Segment Reporting - Narrative (Details)	3 Months Ended
	Mar. 31, 2022 segment
Segment Reporting [Abstract]
Number of business segments (in segments)	2

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Segment Reporting - Net Property Operations (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021	Dec. 31, 2021
Segment Reporting Information [Line Items]
Total revenues	$ 8,174	$ 7,007
Operating expenses	3,366	3,740
Net operating income (loss)	4,808	3,267
Loss on sale of investment properties, net	(6)	0
Net (income) loss attributable to non-controlling interests	(2)	10
Net loss attributable to Highlands REIT, Inc. common stockholders	(890)	(4,678)
Total assets	310,146	330,525	$ 321,013
Capital expenditures	122	1,070
Rental income
Segment Reporting Information [Line Items]
Total revenues	7,958	6,758
Other property income
Segment Reporting Information [Line Items]
Total revenues	216	249
Other
Segment Reporting Information [Line Items]
Total revenues	4,051	3,243
Operating expenses	1,483	1,829
Net operating income (loss)	2,568	1,414
Other | Rental income
Segment Reporting Information [Line Items]
Total revenues	4,038	3,182
Other | Other property income
Segment Reporting Information [Line Items]
Total revenues	13	61
Reconciling items
Segment Reporting Information [Line Items]
Non-allocated expenses	(5,003)	(6,855)
Other income and expenses	(687)	(1,100)
Total assets	29,527	35,345
Operating Segments And Corporate, Non-Segment
Segment Reporting Information [Line Items]
Total assets	280,619	295,180
Net Lease | Operating segments
Segment Reporting Information [Line Items]
Total assets	175,104	180,679
Capital expenditures	102	353
Retail | Operating segments
Segment Reporting Information [Line Items]
Total assets	105,515	114,501
Capital expenditures	20	717
Multi-family | Operating segments
Segment Reporting Information [Line Items]
Total revenues	4,123	3,764
Operating expenses	1,883	1,911
Net operating income (loss)	2,240	1,853
Multi-family | Operating segments | Rental income
Segment Reporting Information [Line Items]
Total revenues	3,920	3,576
Multi-family | Operating segments | Other property income
Segment Reporting Information [Line Items]
Total revenues	$ 203	$ 188

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Share Based Compensation (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2022	Mar. 31, 2021	Aug. 12, 2021	Apr. 28, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Payment for tax withholding for share-based compensation	$ 0	$ 883
Executive Officer
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted (in shares)	0	6,518
Granted (in dollars per share)		$ 0.28
Aggregate value of shares granted		$ 1,825
Incentive awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized to grant (up to) (in shares)			67,000,000	43,000,000
Shares available for future issuance (in shares)	21,544,000
Incentive Award Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 0	$ 1,879

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Commitments and Contingencies (Details) $ in Millions		1 Months Ended	3 Months Ended
	Feb. 28, 2021 USD ($) ft²	Apr. 30, 2020 ft²	Mar. 31, 2022 USD ($)	Apr. 30, 2021 USD ($)
Northwestern Medical Group Lease
Loss Contingencies [Line Items]
Leased area (in square feet) | ft²		29,000
Current estimated commitment				$ 3.9
Re-estimated remaining obligation			$ 1.3
Veeco Instrument, Inc. Lease
Loss Contingencies [Line Items]
Leased area (in square feet) | ft²	97,000
Current estimated commitment	$ 9.1
Re-estimated remaining obligation			$ 1.0
Rent abatement			12 months