Inland Real Estate Income Trust, Inc. - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

COMMISSION FILE NUMBER: 000-55146

Inland Real Estate Income Trust, Inc.

(Exact name of registrant as specified in its charter)

630-218-8000

(Registrant’s telephone number, including area code)

______________________________________________________

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 the filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o No þ

As of November 10, 2014, there were 34,954,973 shares of the registrant’s common stock, $.001 par value, outstanding.

INLAND REAL ESTATE INCOME TRUST, INC.

TABLE OF CONTENTS

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

Inland REAL ESTATE Income Trust, Inc.

(a Maryland Corporation)

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS

(unaudited)

See accompanying notes to consolidated financial statements.

Inland REAL ESTATE Income Trust, Inc.

(a Maryland Corporation)

CONSOLIDATED STATEMENT OF EQUITY

Nine months ended September 30, 2014

(unaudited)

See accompanying notes to consolidated financial statements.

Inland REAL ESTATE Income Trust, Inc.

(a Maryland Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to consolidated financial statements.

Inland REAL ESTATE Income Trust, Inc.

(a Maryland Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

See accompanying notes to consolidated financial statements.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(unaudited)

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited consolidated financial statements of Inland Real Estate Income Trust, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) for the year ended December 31, 2013, which are included in the Company’s 2013 Annual Report, as certain footnote disclosures contained in such audited consolidated financial statements have been omitted from this Quarterly Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for the fair presentation have been included in this Quarterly Report.

(1)  Organization

Inland Real Estate Income Trust, Inc. was formed on August 24, 2011 to acquire and manage a diversified portfolio of commercial real estate investments located in the United States. To date, the Company has focused on acquiring retail properties. The Company entered into a Business Management Agreement (the “Agreement”) with IREIT Business Manager & Advisor, Inc. (the “Business Manager”), an affiliate of Inland Real Estate Investment Corporation (the “Sponsor”), to be the Business Manager to the Company. The Company is authorized to sell up to 150,000,000 shares of common stock at $10 each in an initial public “best efforts” offering (the “Offering”) which commenced on October 18, 2012 and to issue 30,000,000 shares at $9.50 each issuable pursuant to the Company’s distribution reinvestment plan (“DRP”).

The Company provides the DRP to facilitate investment in the Company’s shares and the Share Repurchase Program (“SRP”) to provide limited liquidity for stockholders.

The Company will allow stockholders to purchase additional shares from the Company by automatically reinvesting distributions through the DRP, subject to certain share ownership restrictions. Such purchases under the DRP will not be subject to selling commissions or the marketing contribution and due diligence expense allowance, and are made at a price of $9.50 per share.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The Company is authorized to purchase shares from stockholders who purchased their shares from us or received their shares through a non-cash transfer and who have held their shares for at least one year under the SRP, if requested, if the Company chooses to repurchase them. Subject to funds being available, the Company will limit the number of shares repurchased during any calendar year to 5% of the number of shares outstanding on December 31st of the previous calendar year. Funding for the SRP will come from proceeds the Company receives from the DRP. In the case of repurchases made upon the death of a stockholder or qualifying disability, as defined in the SRP, the Company is authorized to use any funds to complete the repurchase, and neither the one year holding period, the limit regarding funds available from the DRP nor the 5% limit will apply. The SRP will immediately terminate if the Company’s shares become listed for trading on a national securities exchange. In addition, the Company’s board of directors, in its sole direction, may at any time amend, suspend or terminate the SRP.

At September 30, 2014, the Company owned 22 retail properties totaling 1,326,386 square feet. At September 30, 2014, the portfolio had weighted average physical occupancy of 96.7% and economic occupancy of 98.2%. Economic occupancy excludes square footage associated with an earnout component. At the time of acquisition, certain properties have an earnout component to the purchase price, meaning the Company did not pay a portion of the purchase price at closing related to certain vacant spaces, although it may own the entire property. The Company is not obligated to settle this contingent purchase price obligation unless the seller obtains leases for the vacant space within the time limits and parameters set forth in the applicable acquisition agreement.

(2)  Summary of Significant Accounting Policies

General

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. 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.

Reclassification

Certain reclassifications were made to the 2013 financial statements to conform to the 2014 consolidated financial statement presentation.

Consolidation

The accompanying consolidated financial statements include the accounts of the Company, as well as all wholly owned subsidiaries. Wholly owned subsidiaries generally consist of limited liability companies (LLCs). All intercompany balances and transactions have been eliminated in consolidation.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Each property 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 6.

Offering and Organization Costs

Costs associated with the Offering are deferred and charged against the gross proceeds of the Offering upon closing. Formation and organizational costs were expensed as incurred.

Partially-Owned Entities

The Company will consolidate the operations of a joint venture if the Company determines that it is either the primary beneficiary of a variable interest entity (VIE) or has substantial influence and control of the entity. The primary beneficiary is the party that has the ability to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses and the right to receive the returns from the VIE that would be significant to the VIE. There are significant judgments and estimates involved in determining the primary beneficiary of a VIE or the determination of who has control and influence of the entity. When the Company consolidates an entity, the assets, liabilities and results of operations will be included in our consolidated financial statements.

In instances where the Company determines that we are not the primary beneficiary of a VIE or the Company does not control the joint venture but can exercise influence over the entity with respect to its operations and major decisions, the Company will use the equity method of accounting. Under the equity method, the operations of a joint venture will not be consolidated with the Company’s operations but instead our share of operations will be reflected as equity in earnings (loss) of unconsolidated entity on our consolidated statements of operations and other comprehensive loss. Additionally, the Company’s net investment in the joint venture will be reflected as investment in unconsolidated entity on the consolidated balance sheets.

Cash and Cash Equivalents

The Company considers all demand deposits, money market accounts and all short term investments with a maturity of three months or less, at the date of purchase, to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The account balance may periodically exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there could be a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk will not be significant, as the Company does not anticipate the financial institutions’ non-performance.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Acquisitions

Upon acquisition, the Company determines the total purchase price of each property, which includes the estimated contingent consideration to be paid or received in future periods, if any. The Company allocates the total purchase price of properties based on the fair value of the tangible and intangible assets acquired and liabilities assumed based on Level 3 inputs, such as comparable sales values, discount rates, capitalization rates, revenue and expense growth rates and lease-up assumptions, from a third party appraisal or other market sources.

Certain of the Company’s properties included earnout components to the purchase price, meaning the Company did not pay a portion of the purchase price of the property at closing, although the Company owns the entire property. The Company is not obligated to settle the contingent portion of the purchase price unless space which was vacant at the time of acquisition is later leased by the seller within the time limits and parameters set forth in the related acquisition agreements. The earnout payments are based on a predetermined formula applied to rental income received. The earnout agreements have a limited obligation period from the date of acquisition, as defined. If at the end of the time period certain space has not been leased, occupied and rent producing, the Company will have no further obligation to pay additional purchase price consideration and will retain ownership of that entire property. Based on its best estimate, the Company has recorded a liability for the potential future earnout payment using estimated fair value at the date of acquisition using Level 3 inputs including market rents ranging from $14.00 to $31.00 per square foot, probability of occupancy ranging from 0% to 100% based on leasing activity and utilizing a discount rate of 8.00% to 8.25%. The Company has recorded this earnout amount as additional purchase price of the related property and as a liability included in deferred investment property acquisition obligations on the accompanying consolidated balance sheets. The liability increases as the anticipated payment date draws near based on a present value; such increases in the liability are recorded as amortization expense on the accompanying consolidated statements of operations and other comprehensive loss. The Company records changes in the underlying liability assumptions to acquisition related costs on the accompanying consolidated statements of operations and other comprehensive loss.

The portion of the purchase price allocated to acquired above market lease value and acquired below market lease value are amortized on a straight-line basis over the term of the related lease as an adjustment to rental income. For below market lease values, the amortization period includes any renewal periods with fixed rate renewals. Amortization pertaining to the above market lease value of $150,238 and $0 for the three months ended September 30, 2014 and 2013, respectively, and $258,984 and $0 for the nine months ended September 30, 2014 and 2013, respectively, was recorded as a reduction to rental income. Amortization pertaining to the below market lease value of $181,083 and $5,906 for the three months ended September 30, 2014 and 2013, respectively, and $275,812 and $18,266 for the nine months ended September 30, 2014 and 2013, respectively, was recorded as an increase to rental income.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The portion of the purchase price allocated to acquired in-place lease value is amortized on a straight-line basis over the acquired leases’ weighted average remaining term. The Company incurred amortization expense pertaining to acquired in-place lease intangibles of $708,651 and $56,318 for the three months ended September 30, 2014 and 2013, respectively, and $1,303,880 and $170,572 for the nine months ended September 30, 2014 and 2013, respectively.

The portion of the purchase price allocated to customer relationship value is amortized on a straight-line basis over the weighted average remaining lease term. As of September 30, 2014, no amount has been allocated to customer relationship value.

The following table summarizes the Company’s identified intangible assets and liabilities as of September 30, 2014 and December 31, 2013: 

As of September 30, 2014, the weighted average amortization periods for acquired in-place leases, above market lease intangibles and below market lease intangibles are 9, 7 and 12 years, respectively.

Estimated amortization of the respective intangible lease assets and liabilities as of September 30, 2014 for each of the five succeeding years and thereafter is as follows:  

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Impairment of Investment Properties

The Company assesses the carrying values of its respective long-lived assets whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Recoverability of the assets is measured by comparison of the carrying amount of the asset to the estimated future undiscounted cash flows. In order to review its assets for recoverability, the Company considers current market conditions, as well as its intent with respect to holding or disposing of the asset. If the Company’s analysis indicates that the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, the Company recognizes an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third party appraisals, where considered necessary (Level 3 inputs).

The Company estimates the future undiscounted cash flows based on management’s intent as follows: (i) for real estate properties that the Company intends to hold long-term, including land held for development, properties currently under development and operating buildings, recoverability is assessed based on the estimated future net rental income from operating the property and termination value; and (ii) for real estate properties that the Company intends to sell, including land parcels, properties currently under development and operating buildings, recoverability is assessed based on estimated proceeds from disposition that are estimated based on future net rental income of the property and expected market capitalization rates, less sale costs.

The use of projected future cash flows is based on assumptions that are consistent with our estimates of future expectations and the strategic plan the Company uses to manage its underlying business. However, assumptions and estimates about future cash flows, including comparable sales values, discount rates, capitalization rates, revenue and expense growth rates and lease-up assumptions which impact the discounted cash flow approach to determining value, are complex and subjective. Changes in economic and operating conditions and the Company’s ultimate investment intent that occur subsequent to the impairment analysis could impact these assumptions and result in future impairment charges of the real estate properties.

During the three and nine months ended September 30, 2014 and 2013, the Company incurred no impairment charges.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Capitalization and Depreciation

Real estate acquisitions are recorded at cost less accumulated depreciation. Improvement and betterment costs are capitalized, and ordinary repairs and maintenance are expensed as incurred.

Transactional costs in connection with the acquisition of real estate properties accounted for as business combinations are expensed as incurred.

Depreciation expense is computed using the straight-line method. Building and improvements are depreciated based upon estimated useful lives of 30 years and 5-15 years for furniture, fixtures and equipment and site improvements.

Tenant improvements are amortized on a straight-line basis over the shorter of the life of the asset or the term of the related lease as a component of depreciation and amortization expense. Leasing fees are amortized on a straight-line basis over the term of the related lease as a component of depreciation and amortization expense.

Cost capitalization and the estimate of useful lives require judgment and include significant estimates that can and do change.

Depreciation expense was $1,868,538 and $193,028 for the three months ended September 30, 2014 and 2013, respectively, and $3,422,105 and $578,400 for the nine months ended September 30, 2014 and 2013, respectively.

Deferred Loan Fees

Direct financing costs are deferred and amortized on a straight-line basis, which approximates the effective interest method, over the term, or anticipated repayment date, of the related agreements as a component of interest expense.

Fair Value Measurements

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.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The Company defines fair value based on the price that it believes 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 establishes 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:

Revenue Recognition

The Company commences revenue recognition on its leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of, or controls the physical use of, the leased asset. Generally, this occurs on the lease commencement date. The determination of who is the owner, for accounting purposes, of the tenant improvements determines the nature of the leased asset and when revenue recognition under a lease begins. If the Company is the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If the Company concludes it is not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any tenant improvement allowances funded by the Company under the lease are treated as lease incentives which reduce revenue recognized over the term of the lease. In these circumstances, the Company begins revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct their own improvements. The Company considers a number of different factors to evaluate whether it or the lessee is the owner of the tenant improvements for accounting purposes. The determination of who owns the tenant improvements, for accounting purposes, is subject to significant judgment.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Rental income is recognized on a straight-line basis over the term of each lease. The difference between rental income earned on a straight-line basis and the cash rent due under the provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts and rents receivable in the accompanying consolidated balance sheets. Due to the impact of the straight-line basis, rental income generally will be greater than the cash collected in the early years and will decrease in the later years of a lease. The Company periodically reviews the collectability of outstanding receivables. Allowances are taken for those balances that the Company deems to be uncollectible, including any amounts relating to straight-line rent receivables.

Reimbursements from tenants for recoverable real estate tax and operating expenses are accrued as revenue in the period the applicable expenses are incurred. The Company makes certain assumptions and judgments in estimating the reimbursements at the end of each reporting period. The Company does not expect the actual results to materially differ from the estimated reimbursement.

The Company records lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met, the tenant is no longer occupying the property and amounts due are considered collectible. Upon early lease termination, the Company provides for gains or losses related to unrecovered intangibles and other assets.

As a lessor, the Company defers the recognition of contingent rental income, such as percentage rent, until the specified target that triggered the contingent rental income is achieved.

REIT Status

The Company has qualified and elected to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, for federal income tax purposes commencing with the tax year ended December 31, 2013. As a result, the Company generally will not be subject to 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 currently distributes at least 90% of its taxable income (subject to certain adjustments) to its stockholders. The Company will monitor the business and transactions that may potentially impact its REIT status. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal (including any applicable alternative minimum tax) and state income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Derivatives

The Company uses derivative instruments, such as interest rate swaps, primarily to manage exposure to interest rate risks inherent in variable rate debt. The Company may also enter into forward starting swaps or treasury lock agreements to set the effective interest rate on a planned fixed-rate financing. The Company’s interest rate swaps 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. In a forward starting swap or treasury lock agreement that the Company cash settles in anticipation of a fixed rate financing or refinancing, the Company will receive or pay an amount equal to the present value of future cash flow payments based on the difference between the contract rate and market rate on the settlement date. The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or the FASB, issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the company’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The adoption of ASU 2014-08 is effective prospectively for reporting periods beginning on or after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material effect on the Company’s consolidated financial statements.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

(3)  Acquisitions

2014 Acquisitions

During the nine months ended September 30, 2014, the Company acquired, through its wholly owned subsidiaries, the properties listed above for an aggregate purchase price of $215,765,734. The Company financed a portion of these acquisitions by borrowing $94,530,574.

The Company incurred $1,020,021 and $29,809 during the three months ended September 30, 2014 and 2013, respectively, and $4,384,100 and $82,315 during the nine months ended September 30, 2014 and 2013, respectively, of acquisition, dead deal and transaction related costs, including underlying liability assumptions to acquisition related costs, that were recorded in acquisition related costs in the consolidated statements of operations and other comprehensive loss related to both closed and potential transactions. These costs include third party due diligence costs such as appraisals, environmental studies, and legal fees as well as acquisition fees and time and travel expense reimbursements to the Sponsor and its affiliates. For properties acquired during the nine months ended September 30, 2014, the Company recorded revenue of $6,976,460 and property net income of $1,126,473, which excludes expensed acquisition related costs.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table presents certain additional information regarding the Company’s acquisitions during the nine months ended September 30, 2014. The amounts recognized for major assets acquired and liabilities assumed as of the acquisition date are as follows:

The following condensed pro forma consolidated financial statements for the three and nine months ended September 30, 2014 and 2013 include pro forma adjustments related to the acquisitions and related financings for such acquisitions during 2014 considered material to the consolidated financial statements which were made for Park Avenue Shopping Center, North Hills Square, Mansfield Pointe, MidTowne Shopping Center, Lakeside Crossing, Dogwood Festival, Pick N Save Center and Harris Plaza which are presented assuming the acquisition occurred on January 1, 2013 excluding acquisition related costs.

The following condensed pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the 2014 acquisitions had been consummated as of January 1, 2013, nor does it purport to represent the results of operations for future periods.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The pro forma information for the three and nine months ended September 30, 2014 was adjusted to exclude $954,928 and $4,219,294, respectively, of acquisition related costs recorded during such periods.

(4)  Investment in Unconsolidated Entity

The Company is a member of a limited liability company formed as an insurance association captive (the “Insurance Captive”), which is wholly-owned by the Company, Inland Real Estate Corporation, Inland American Real Estate Trust, Inc. and Retail Properties of America, Inc., and serviced by an affiliate of the Business Manager, Inland Risk and Insurance Management Services, Inc. This entity is considered a variable interest entity as defined in U.S. GAAP and the Company is not considered to be the primary beneficiary; however, the Company can exercise significant influence. Therefore, this investment is accounted for utilizing the equity method of accounting. The Company’s risk of loss is limited to its investment and the Company is not required to fund additional capital to the entity. Effective June 30, 2014, Inland Diversified Real Estate Trust, Inc. withdrew from the Insurance Captive.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The Company entered into an agreement and paid $100,000 in exchange for a membership interest in the Insurance Captive. The Company’s share of net income from its investment is based on the ratio of each member’s premium contribution to the venture. The Company was allocated income of $86,147 and $1,912 for the three months ended September 30, 2014 and 2013, respectively, and $78,686 and $5,782 for the nine months ended September 30, 2014 and 2013, respectively.

(5)  Operating Leases

Minimum lease payments to be received under operating leases, including ground leases, as of September 30, 2014 for the years indicated, assuming no expiring leases are renewed, are as follows:

The remaining lease terms range from less than one year to 18 years. Most of the revenue from the Company’s properties consists of rents received under long-term operating leases. Some leases require the tenant to pay fixed base rent paid monthly in advance, and to reimburse the Company for the tenant’s pro rata share of certain operating expenses including real estate taxes, special assessments, insurance, utilities, common area maintenance, management fees, and certain building repairs paid by the Company and recoverable under the terms of the lease. Under these leases, the Company pays all expenses and is reimbursed by the tenant for the tenant’s pro rata share of recoverable expenses paid. Certain other tenants are subject to net leases which provide that the tenant is responsible for fixed base rent as well as all costs and expenses associated with occupancy. Under net leases where all expenses are paid directly by the tenant rather than the landlord, such expenses are not included in the consolidated statements of operations and other comprehensive loss. Under leases where all expenses are paid by the Company, subject to reimbursement by the tenant, the expenses are included within property operating expenses and reimbursements are included in tenant recovery income on the consolidated statements of operations and other comprehensive loss.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

(6)  Mortgages and Notes Payable

As of September 30, 2014 and December 31, 2013, the Company had the following mortgages and notes payable outstanding:

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The principal amount of mortgage loans outstanding as of September 30, 2014 was $127,060,918 and had a weighted average interest rate of 2.69% per annum. All of the Company’s mortgage loans are secured by first mortgages on real estate assets.

The mortgage loans require compliance with certain covenants, such as debt service ratios, investment restrictions and distribution limitations. As of September 30, 2014, all of the mortgages were current in payments and the Company was in compliance with such covenants.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table shows the scheduled maturities of mortgages and notes payable as of September 30, 2014 for the next five years and thereafter:

The Company estimates the fair value of its total debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by the Company’s lenders using Level 3 inputs. The carrying value of the Company’s mortgage debt was $127,060,918 and $32,530,344 as of September 30, 2014 and December 31, 2013, respectively, and its estimated fair value was $127,438,000 and $32,555,000 as of September 30, 2014 and December 31, 2013, respectively.

Interest Rate Swap Agreements

The Company entered into interest rate swaps to fix certain of its floating LIBOR based debt under variable rate loans to a fixed rate to manage its risk exposure to interest rate fluctuations. The Company will generally match the maturity of the underlying variable rate debt with the maturity date on the interest swap. For the three and nine months ended September 30, 2014 and 2013, the Company recorded interest expense of $(152) and $0 and $71,278 and $0, respectively, related to interest rate swaps.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes the Company’s interest rate swap contracts outstanding as of September 30, 2014.

The table below presents the fair value of the Company’s cash flow hedges as well as their classification on the consolidated balance sheets as of September 30, 2014 and December 31, 2013.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statement of operations and other comprehensive loss (“OCL”) for the three and nine months ended September 30, 2014 and 2013.

(7)  Fair Value Financial Instruments

In some instances, certain of the Company’s assets and liabilities are required to be measured or disclosed at fair value according to a fair value hierarchy pursuant to relevant accounting literature. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The fair value hierarchy consists of three broad levels, which are described within Note 2.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their classifications within the fair value hierarchy levels.

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of the fair value for each major category of assets and liabilities is presented below:

The fair value of derivative instruments was estimated based on data observed in the forward yield curve which is widely observed in the marketplace. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the counterparty's nonperformance risk in the fair value measurements which utilizes Level 3 inputs, such as estimates of current credit spreads. The Company has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative and therefore has classified this in Level 2 of the hierarchy.

(8)  Income Tax

The Company had no uncertain tax positions as of September 30, 2014 and December 31, 2013. The Company expects no significant increases or decreases in uncertain tax positions due to changes in tax positions within one year of September 30, 2014. The Company has no interest or penalties relating to income taxes recognized in the consolidated statements of operations and other comprehensive loss for the three and nine months ended September 30, 2014 and 2013. As of September 30, 2014, returns for the calendar years 2013, 2012 and 2011 remain subject to examination by U.S. and various state and local tax jurisdictions.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited) 

(9)  Distributions

The Company currently pays distributions based on daily record dates, payable in arrears the following month. The distributions that the Company currently pays are equal to a daily amount of $0.001643836, per share based upon a 365-day period. During the three months ended September 30, 2014 and 2013, the Company declared distributions totaling $3,583,521 and $335,964, respectively. During the nine months ended September 30, 2014 and 2013, the Company declared distributions totaling $6,872,233 and $567,870, respectively.

(10)  Earnings (Loss) per Share

Basic earnings (loss) per share (“EPS”) are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period (the “common shares”). Diluted EPS is computed by dividing net income (loss) by the common shares plus potential common shares issuable upon exercising options or other contracts. As of September 30, 2014 and 2013, the Company did not have any dilutive common share equivalents outstanding.

(11)  Commitments and Contingencies

Five of the Company’s properties had earnout components relating back to the time the properties were acquired. The maximum potential earnout payment was $4,643,170 at September 30, 2014, in the aggregate for all five properties.

The table below presents the change in the Company’s earnout liability for the nine months ended September 30, 2014 and 2013.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited) 

The Company may be 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 consolidated financial statements of the Company.

(12)  Segment Reporting

The Company has one reportable segment as defined by U.S. GAAP for the three and nine months ended September 30, 2014 and 2013.

Concentration of credit risk with respect to accounts receivable currently exists due to the small number of tenants currently comprising the Company's rental revenue. The concentration of revenues for these tenants increases the Company's risk associated with nonpayment by these tenants. In an effort to reduce risk, the Company performs ongoing credit evaluations of its larger tenants.

For the nine months ended September 30, 2014, approximately 9.5% of the Company’s rental revenue was generated by twelve properties leased to Dolgencorp, LLC, a subsidiary of Dollar General Corporation, and approximately 8.3% of the Company’s rental revenue was generated by one location leased to L.A. Fitness.

(13)  Transactions with Related Parties

The Company is party to an agreement with an LLC formed as an insurance association captive which is wholly-owned by the Company, Inland Real Estate Corporation, Inland American Real Estate Trust, Inc., and Retail Properties of America, Inc. The entity is included in the Company’s disclosure of Investment in Unconsolidated Entity (note 4) and is included in investment in unconsolidated entity in the accompanying consolidated balance sheets.

The Company owns 1,000 shares of common stock in the Inland Real Estate Group of Companies with a recorded value of $1,000 at September 30, 2014 and December 31, 2013. This amount is included in other assets in the accompanying consolidated balance sheets.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table summarizes the Company’s related party transactions for the three and nine months ended September 30, 2014 and 2013. Certain compensation and fees payable to the Business Manager for services to be provided to the Company are limited to maximum amounts.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

(14)  Subsequent Events

The board of directors of the Company declared distributions payable to stockholders of record each day beginning on the close of business on October 1, 2014 through the close of business on December 31, 2014. Distributions were declared in a daily amount equal to $0.001643836 per share, which based upon a 365-day period, equates to $0.60 or a 6% annualized rate based on a purchase price of $10.00 per share. Distributions are paid monthly in arrears, as follows:

On October 14, 2014, the Company paid off in full, including accrued interest, the outstanding mortgage loan of $9,790,000 associated with the Newington Fair property.

On November 5, 2014, the Company acquired a fee simple interest in a 119,981 square foot multi-tenant retail center. The center is shadow anchored by Walmart and the major tenants include Ross Dress for Less and Marshalls. The Company purchased this property from an unaffiliated third party for approximately $13,600,000, of which $12,200,000 was funded at the initial close, plus closing costs.

INLAND REAL ESTATE INCOME TRUST, INC.

(a Maryland Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The following table provides information regarding the total shares sold in our offering as of November 10, 2014:

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

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Words such as “may,” “could,” “should,” “expect,” “intend,” “plan,” “goal,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “variables,” “potential,” “continue,” “expand,” “maintain,” “create,” “strategies,” “likely,” “will,” “would” and variations of these terms and similar expressions, or the negative of these terms or similar expressions, are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of the management of Inland Real Estate Income Trust, Inc. (which we refer to herein as the “Company,” “we,” “our” or “us”) based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 17, 2014, and factors described below:

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Quarterly Report, and may ultimately prove to be incorrect or false. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

The following discussion and analysis relates to the three and nine months ended September 30, 2014 and 2013 and as of September 30, 2014 and December 31, 2013. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included in this report.

Overview

We are an externally managed Maryland corporation formed in August 2011 to acquire a diversified portfolio of commercial real estate located throughout the United States. We are managed by our business manager, IREIT Business Manager & Advisor, Inc. referred to herein as our “Business Manager.” While we may acquire retail properties, office buildings, multi-family properties and industrial/distribution and warehouse facilities, within these property types, we will focus primarily on “core” real estate assets. To date, we have focused on acquiring retail properties. We believe that these properties continue to outperform other property types. We will continue to focus on retail properties unless and until the returns from other properties exceed those that we believe are available from investing in retail.

Core real estate assets are those assets that typically satisfy some, but not necessarily all, of the following criteria:

Core real estate assets also typically generate predictable, steady cash flow and have a lower risk profile than non-core real estate assets. We have purchased single-tenant, net-leased retail properties and may continue to purchase single-tenant, net-leased properties within any of these four property types.  We may purchase existing or newly-constructed properties as well as properties that are under development or construction, including those where development has not commenced. In addition, in all cases, we may acquire properties directly, by purchasing the property, also known as a “fee interest,” or through joint ventures, including joint ventures in which we do not own a controlling interest. We also may invest in real estate-related equity securities of both publicly traded and private real estate companies, as well as commercial mortgage-backed securities.

On October 18, 2012 we commenced our initial public offering, referred to herein as the “Offering.” We are offering 150,000,000 shares of our common stock at a price of $10.00 per share on a “best efforts” basis through Inland Securities Corporation, or “Inland Securities,” our dealer manager, a wholly owned subsidiary of our Sponsor. “Best efforts” means that Inland Securities is not obligated to purchase any specific number or dollar amount of shares. We also are offering up to 30,000,000 shares of our common stock at a price of $9.50 per share to stockholders who elect to participate in our distribution reinvestment plan (“DRP”). In each case, the offering price was determined by our board of directors. We qualified and elected to be taxed as a REIT commencing with the tax year ended December 31, 2013 for federal income tax purposes.

At September 30, 2014, we owned 22 retail properties, totaling 1,326,386 square feet. At September 30, 2014, our portfolio had weighted average physical and economic occupancy of 96.7% and 98.2%, respectively. Economic occupancy excludes square footage associated with an earnout component. At the time of acquisition, certain properties are subject to an earnout component to the purchase price, meaning we did not pay a portion of the purchase price at closing related to certain vacant spaces, although we own the entire property. We are not obligated to pay this contingent purchase price unless the seller obtains leases for the vacant space within the time limits and parameters set forth in the acquisition agreement. As of September 30, 2014, annualized base rent per square foot averaged $14.89 for all properties. Annualized base rent is calculated by annualizing the current, in-place monthly base rent for leases, including any tenant concessions, such as rent abatement or allowances, which may have been granted.

Market Outlook

On October 29, 2014, the Federal Open Market Committee of the Federal Reserve Board (“Federal Reserve”) announced an end to the bond buying stimulus program known as quantitative easing signaling that the Federal Reserve believes the U.S. economy is growing at a measured but sustained pace and that the need for continued stimulus has diminished. These actions and comments suggest that the Federal Reserve will eventually return to a normalized monetary policy. However, the Federal Reserve has provided no clear indication as to when it will raise interest rates.

Real estate pricing is generally influenced by market interest rates. However, the movements are not simultaneous and pricing generally lags behind interest rate adjustments for a period of time. Because part of our business strategy is to utilize debt to finance a portion of our real estate assets, we may be challenged in finding appropriately priced real estate during periods of rapidly rising interest rates.

Today’s economic environment continues to be characterized by historically low interest rates which may start to decrease capitalization rates for commercial properties. Commercial property prices have nearly recovered to 2007 values in many sectors. Although mild, we believe that the economy is moving from recovery status toward an expansionary cycle. Demographic trends are also favorable. In the past four years the population of the United States has grown, but there has been very little new real estate development during this period of time. While tenants recently have had pricing power over property owners, we believe we have reached an inflection point where that pricing power related to tenant leases will return to the property owner due to supply and demand considerations.

Our management team continues to believe that we can produce better risk adjusted returns by investing in multi-tenant necessity-based retail shopping centers than other types of commercial real estate. Multi-tenant retail assets tend to be relatively stable, yet they allow for growth opportunities in a recovering market. A needs-based shopping center usually consists of a large anchor tenant, like a supermarket, that draws patrons to the property along with a number of supporting tenants in smaller shop space. The anchor generally has a long-term lease that stabilizes cash flow to the property. The eight properties purchased during the nine months ended September 30, 2014, were multi-tenant retail properties.

Our general experience tells us that a period of economic expansion can translate into rising rental rates and consequently, increases in the net operating income (“NOI”) of a property, particularly at multi-tenant retail properties due to a higher instance of lease roll-over as the smaller tenants typically have shorter leases (usually between 1-3 years). In comparison to properties with longer leases, this provides significantly more opportunities to capture increases in rental rates and NOI at a rate above inflation. By capturing NOI growth rates above inflation, real value is added to a property. As of September 30, 2014, we own 12 single-tenant properties and 10 multi-tenant properties with average lease expirations of 13 years and 7 years, respectively.

In addition we believe that:

• Multi-tenant necessity-based retail real estate is generally recession resilient and has historically outperformed other asset classes.
• Grocery-anchored shopping centers tend to be resilient to internet sales and can weather changes in consumer sentiment.
• Demand for retail space is growing. According to a National Association of Realtors published report, the net absorption of retail space is expected to reduce the amount of vacant space in the market place. Also, according to the United States Census Bureau, the population of the United States is slated to grow by over 50 million over the next 20 years. We believe this supply/demand dynamic is beginning to create a favorable environment for retail property owners.
• If we begin to experience inflation, multi-tenant retail real estate can act as a hedge because of the expected ability to increase rents at a pace that keeps up with inflation.

Liquidity and Capital Resources

General

Our principal demand for funds is to acquire real estate assets, to pay operating and offering expenses, to pay interest on our outstanding indebtedness, to pay distributions to our stockholders and to fund our share repurchase program.  We generally seek to fund our cash needs for items other than asset acquisitions and offering costs from operations. Our cash needs for acquisitions are funded primarily from the sale of our shares, including those offered for sale through our DRP, as well as financing obtained concurrent with an acquisition or in the future.  There may be a delay between the sale of our shares and our purchase of assets, which could result in a delay in generating returns, if any, from our investment operations.  Our Business Manager and Inland Real Estate Acquisitions evaluate potential acquisitions and engage in negotiations with sellers and lenders on our behalf.  Pending investment in real estate assets, we may decide to invest proceeds from the Offering in certain investments that could yield lower returns than those earned on real estate assets.

Potential future sources of liquidity include proceeds from the Offering and DRP, proceeds from secured or unsecured financings from banks or other lenders and proceeds from the sale of assets.  If necessary, we may use financings or other sources of liquidity (capital) in the event of unforeseen significant capital expenditures.

We are exploring the opportunity to establish a credit facility (line of credit). We are currently in the process of evaluating several proposals which were received from major financial institutions. Although we may enter into a credit facility agreement, our financing strategy will remain consistent with recent acquisitions. Management expects overall debt to be at approximately 50% of the purchase price of the properties, including any proceeds from a credit facility. However, there can be no assurance we will be able to enter into a credit facility agreement with any financial institution on economic terms which would be acceptable to us.

Generally, a company is required to establish a pool of unencumbered assets to serve as collateral for a credit facility. In anticipation of this requirement, subsequent to the end of the quarter, on October 14, 2014, we paid off in full, including accrued interest, the outstanding mortgage loan of approximately $9.8 million associated with the Newington Fair property.

As of September 30, 2014, the Offering, since its inception, generated proceeds, net of commissions, the marketing contribution and due diligence expense reimbursements, the majority of which are re-allowed to third party soliciting dealers, totaling approximately $280.4 million.

Through September 30, 2014, our liquidity needs have primarily been to purchase twenty-two retail properties, to pay operating, organization and offering costs and to pay distributions. During the first nine months of 2014, we funded the purchase of Park Avenue Shopping Center, North Hills Square, Mansfield Pointe, MidTowne Shopping Center, Lakeside Crossing, Dogwood Festival, Pick N Save Center and Harris Plaza with mortgage debt of approximately $94.5 million and proceeds from the Offering of $121.3 million.

Following completion of our due diligence review, we entered into an agreement on September 16, 2014, to acquire fee simple interests in 15 retail centers from an unaffiliated third party for approximately $325.5 million plus closing costs. The closings of these acquisitions are subject to the satisfaction of customary closing conditions. We are also evaluating several additional acquisitions bringing the aggregate amount of potential properties under consideration to approximately $447.0 million. However, there can be no assurance that these acquisitions will occur.

As of September 30, 2014, we had total debt outstanding of approximately $127.1 million, which bore interest at a weighted average interest rate of 2.69% per annum, of which approximately $9.8 million is due in 2015, $15.3 million is due in 2018, $94.5 million is due in 2019 and the remaining amount of approximately $7.5 million is due in 2027. As of September 30, 2014 and December 31, 2013 our borrowings were 45% and 52%, respectively, of the purchase price of our properties.

As of September 30, 2014, our Sponsor has advanced approximately $1.63 million to us for the payment of organization and offering costs.

Cash Flow Analysis

Cash provided by (used in) operating activities was $2,232,801 and $(1,023,977) for the nine months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, funds generated from rental and tenant recovery income were offset primarily by property operating, interest, acquisition and general and administrative expenses. The increase from 2013 to 2014 is due to the growth of our real estate portfolio. For the nine months ended September 30, 2013, the cash deficit was funded by net offering proceeds.

Cash used in investing activities was $215,163,470 and $353,413 for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, we paid $214,530,013 to purchase eight shopping centers, funded $15,235 in capital expenditures, funded $500,000 in earnest money for a portfolio acquisition and funded $118,222 for other assets and a lender escrow. During the nine months ended September 30, 2013, we invested $100,000 in exchange for a membership interest in a limited liability company formed as an insurance association captive, which is wholly-owned by the Company, Inland Real Estate Corporation, Inland American Real Estate Trust, Inc. and Retail Properties of America, Inc., and serviced by an affiliate of the Business Manager, Inland Risk and Insurance Management Services, Inc. We also funded $243,745 in capital expenditures and $9,668 to a required lender held replacement escrow.

Cash provided by financing activities was $308,408,068 and $8,091,756 for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, we generated proceeds from the sale of shares, net of offering costs paid, of $219,013,580 and proceeds from the DRP of $2,889,768, paid distributions of $5,730,828, funded share repurchases of $76,634 and funded $1,845,263 in deferred investment property acquisition obligation payments for earnout closings at Wedgewood Commons and Lakeside Crossing. We also received $94,530,574 in loan proceeds, paid $1,013,506 in loan costs and received a capital contribution from our Sponsor of $640,000. During the nine months ended September 30, 2013, we generated proceeds from the sale of shares, net of offering costs paid, of $23,807,901 and proceeds from the DRP of $204,756, and paid distributions of $445,282. We also used $15,406,717 of offering proceeds to repay mezzanine financing, paid $8,181 in loan costs and were owed $60,721 from related parties for reimbursements of costs in connection with certain properties that we considered acquiring, but ultimately decided not to acquire, which were subsequently acquired by a related party.

A summary of the distributions declared, distributions paid and cash flows provided by operations for the nine months ended September 30, 2014 and 2013 follows:

Results of operations

The following discussions are based on our consolidated financial statements for the three and nine months ended September 30, 2014 and 2013.

These sections describe and compare our results of operations for the three and nine months ended September 30, 2014 and 2013. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the net operating income of properties that we have owned and operated for both periods presented, in their entirety, referred to herein as “same store” properties. By evaluating the property net operating income of our "same store" properties, management is able to monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of our new acquisitions on net income.

Comparison of the three months ended September 30, 2014 and 2013

A total of 13 of our 22 investment properties were acquired on or before July 1, 2013 and represent our “same store” properties during the three months ended September 30, 2014 and 2013. “Non-same store,” as reflected in the table below, includes properties acquired after July 1, 2013. For the three months ended September 30, 2014, nine properties were included in non-same store and for the three months ended September 30, 2013, no properties were included in non-same store. The following table presents the property net operating income broken out between same store and non-same store, prior to straight-line rental income, amortization of lease intangibles, interest, and depreciation and amortization for the three months ended September 30, 2014 and 2013, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.

Total property net operating income. On a “same store” basis, comparing the results of operations of investment properties owned during the three months ended September 30, 2014, with the results of the same investment properties owned during the three months ended September 30, 2013, property net operating income increased $44,406, total property income increased $54,036, and total property operating expenses including real estate tax expense increased $9,630 for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

The increase in “same store” total property income is primarily due to a scheduled rent increase and higher tenant recovery percentage during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, which resulted in increased rental income and tenant recovery income. The increase in “same store” total property expenses is primarily due to an increase in repairs and maintenance expense during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. “Same store” total property net operating income primarily increased due to higher rental income and tenant recovery income for the three months ended September 30, 2014 compared to the three months ended September 30, 2013.

“Non-same store” total property net operating income increased $3,821,569 for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The increase is a result of acquiring nine multi-tenant retail properties after July 1, 2013. On a “non-same store” basis, total property income increased $5,178,284 and total property operating expenses increased $1,356,715 during the three months ended September 30, 2014 as a result of these acquisitions.

Other income. Other income increased $223,508 for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. This increase is due to the acquisition of investment properties in December 2013 and the first nine months of 2014, which increased straight-line rental income by $92,637 and amortization of lease intangibles, net by $24,940. The increase is also due to an increase in interest income of $21,696 as a result of increased invested cash due to an increase in offering proceeds and an increase in equity in earnings of unconsolidated entity of $84,235.

Other expense. Other expense increased $4,510,439 for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The increase is primarily due to an increase in acquisition related expenses, depreciation and amortization and interest expense.

Acquisition related expenses increased $990,212 for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. These expenses include acquisition, dead deal and transaction related costs which relate to both closed and potential transactions. These costs include third party due diligence costs such as appraisals, environmental studies, and legal fees as well as acquisition fees and time and travel expense reimbursements to the Sponsor and its affiliates. The increase for the three months ended September 30, 2014 is due to an increase in acquisition activity during 2014.

Depreciation and amortization increased $2,385,611 for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. This increase is due to the acquisition of nine multi-tenant retail properties which occurred in December 2013 and during the first nine months of 2014.

Business management fees increased $388,853 for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. For the three months ended September 30, 2014, the Business Manager was entitled to a business management fee in the amount equal to $441,290.

Interest expense increased $673,654 for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The increase in interest expense is due to the interest associated with financings of new acquisitions which occurred in December 2013 and the first nine months of 2014. The increase in interest expense was partially offset by the payoff of approximately $15.4 million in mortgages and notes payable during 2013.

Comparison of the nine months ended September 30, 2014 and 2013

A total of 13 of our 22 investment properties were acquired on or before January 1, 2013 and represent our “same store” properties during the nine months ended September 30, 2014 and 2013. “Non-same store,” as reflected in the table below, includes properties acquired after January 1, 2013. For the nine months ended September 30, 2014, nine properties were included in non-same store and for the nine months ended September 30, 2013, no properties were included in non-same store. The following table presents the property net operating income broken out between same store and non-same store, prior to straight-line rental income, amortization of lease intangibles, interest, and depreciation and amortization for the nine months ended September 30, 2014 and 2013, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.

Total property net operating income. On a “same store” basis, comparing the results of operations of investment properties owned during the nine months ended September 30, 2014, with the results of the same investment properties owned during the nine months ended September 30, 2013, property net operating income increased $36,355, total property income increased $71,763 and total property operating expenses including real estate tax expense increased $35,408 for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

The increase in “same store” total property income and total property operating expenses was primarily due to a scheduled rent increase and due to an increase in repairs and maintenance and salt and snow removal expense during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, which resulted in increased tenant recovery income. “Same store” total property net operating income primarily increased due to increased rental income for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.

“Non-same store” total property net operating income increased $6,615,074 for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase is a result of acquiring nine multi-tenant retail properties after January 1, 2013. On a “non-same store” basis, total property income increased $8,944,073 and total property operating expenses increased $2,328,999 during the nine months ended September 30, 2014 as a result of these acquisitions.

Other income. Other income increased $291,012 for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. This increase is due to the acquisition of investment properties in December 2013 and the first nine months of 2014, which increased straight-line rental income by $179,533. The increase is also due to an increase in interest income of $40,013 as a result of increased invested cash due to an increase in offering proceeds and an increase in equity in earnings of unconsolidated entity of $72,904.

Other expense. Other expense increased $8,978,591 for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase is primarily due to an increase in acquisition related expenses, depreciation and amortization and interest expense.

Acquisition related expenses increased $4,301,785 for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. These expenses include acquisition, dead deal and transaction related costs which relate to both closed and potential transactions. These costs include third party due diligence costs such as appraisals, environmental studies, and legal fees as well as acquisition fees and time and travel expense reimbursements to the Sponsor and its affiliates. The increase for the nine months ended September 30, 2014 is due to an increase in acquisition activity during 2014.

Depreciation and amortization increased $4,108,998 for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. This increase is due to the acquisition of nine multi-tenant retail properties which occurred in December 2013 and the first nine months of 2014.

Business management fees increased $58,041 for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. For the nine months ended September 30, 2014, the Business Manager was entitled to a business management fee in the amount equal to $874,700, of which $433,410 was permanently waived. In the three months ended March 31, 2014, the Business Manager also permanently waived business management fees of $226,280 incurred for the year ended December 31, 2013. There is no assurance the Business Manager will waive all or a portion of business management fees in the future.

Interest expense increased $465,094 for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increase in interest expense is due to the interest associated with financings of new acquisitions which occurred in December 2013 and the first nine months of 2014. The increase in interest expense was partially offset by the payoff of approximately $15.4 million in mortgages and notes payable during 2013.

Select Property Information

The following table sets forth additional information regarding our properties as of September 30, 2014.