Generation Income Properties, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparable figures are for 2021. The company is an internally managed REIT focused on U.S. retail, office and industrial properties, primarily leased to single tenants. It held 12 properties and a 50% interest in a tenancy-in-common property at year-end.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $5.43 million | $3.90 million |
| Total expenses | $7.90 million | $5.55 million |
| Net loss | $2.75 million | $0.71 million |
| Net loss attributable to common shareholders | $3.24 million | $1.23 million |
| Basic and diluted loss per share | $1.40 | $1.15 |
| Net cash from (used in) operating activities | $0.58 million | ($0.17 million) |
- Revenue grew about 39%, primarily reflecting acquisitions of three properties during 2022; management attributes the year-over-year increase to four additional properties compared with 2021, partly offset by a property sold in 2021. Rental income was $5.39 million.
- Expense growth outpaced revenue growth. General and administrative expense rose to $1.65 million, depreciation and amortization to $2.11 million, interest expense to $1.62 million, and compensation costs to $1.31 million.
- Cash used in investing was $13.28 million, principally for property acquisitions. Cash from financing was $5.83 million; cash and restricted cash declined to $3.75 million from $10.62 million.
- Year-end total assets were $64.21 million. Mortgage debt had a gross principal balance of $37.45 million and a net carrying value of $35.23 million. The company also reported a $1.50 million related-party loan and $2.59 million payable related to a unit redemption. Year-end equity was $11.14 million, including redeemable non-controlling interests presented separately.
- Approximately 64% of annualized portfolio rent came from investment-grade-rated tenants; the four largest tenants contributed approximately 62%. Portfolio annualized base rent was $5.43 million, and reported occupancy was 100% at year-end.
Changes, outlook and material items
- Revenue increased with acquisitions, while net loss widened to $2.75 million from $0.71 million. The prior-year result included a $0.92 million gain on the sale of a property; 2022 included $0.17 million of dead-deal expense and a $0.14 million loss on debt extinguishment.
- The company acquired Fresenius, Starbucks and Kohl’s properties in 2022. It refinanced properties during the year and reported no balance outstanding on its American Momentum Bank facility at December 31, 2022. The facility’s borrowing rate is variable, based on 30-day CME Term SOFR plus 2.40%, subject to a 3.25% floor; the filing describes an increase in facility size to $50 million as contingent on a future capital raise of at least $25 million.
- Management stated that cash on hand, facility availability, property revenue and debt financing were expected to provide sufficient liquidity for at least the next 12 months. This outlook depends on financing access, operating cash flow and tenant performance. No numerical earnings or acquisition guidance was provided.
- The tenant at a Norfolk, Virginia property did not renew and vacated on January 31, 2023. Its lease represented $375,588 of annualized base rent, about 7% of year-end portfolio rent. The filing does not establish whether or when a replacement tenant will be secured.
- On February 10, 2023, the Operating Partnership agreed to acquire a Best Buy-occupied property in Overland Park, Kansas for $8.2 million, subject to customary closing conditions and due diligence. Proposed funding was approximately half mortgage debt and half equity; the lease had about two years remaining and one five-year renewal option.
- Monthly distributions were reduced from $0.054 to $0.039 per share beginning with the October 2022 record date. The company disclosed that distributions to date had been funded from offering proceeds because it had not generated cumulative profit; future distributions are discretionary and may not be sustained.
- In February 2023, a related party invested $3.0 million in preferred units tied to the Norfolk properties, with a 7% preferred return and redemption rights after two years. Proceeds funded unit redemptions and corporate expenses. The company was evaluating possible tax-protection-agreement consequences.
- Debt-service coverage covenants were reported as satisfied at year-end. The CEO personally guaranteed certain borrowings and nonrecourse carve-out obligations; the company recorded $128,901 of related guaranty-fee expense in 2022. Mortgage principal payments due in 2024 were $12.43 million, in addition to related-party amounts shown in the filing’s maturity schedule.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not required to attest to internal control effectiveness.
Key investor risks and verification points
- Verify leasing progress and the financial impact of the Maersk vacancy, as well as the status of any replacement tenant at the Norfolk property.
- Assess refinancing and liquidity risk, particularly 2024 maturities, variable-rate financing exposure, the related-party redemption payable, and the conditions attached to the expanded credit facility.
- Review the sustainability and funding source of distributions against operating cash flow; the company has a history of losses and cumulative net loss of approximately $8.6 million through 2022.
- Evaluate tenant and geographic concentration, lease renewal and termination options, and the potential effect of a default or nonrenewal in this small, predominantly single-tenant portfolio.
- Confirm completion and financing of the proposed Kansas acquisition and consider its short remaining lease term and equity-funding needs.
- Review related-party financing, preferred returns, CEO guarantees, unit redemptions and potential tax-protection obligations, including dilution or cash requirements upon redemption or conversion.
- Consider the limited trading market and potential dilution: the company had 1.10 million warrants outstanding at year-end and issued additional restricted shares after year-end.