Our affiliated directors, Messrs. Halfacre and Wirta, are also directors of BRIX REIT.REIT and Messrs. Halfacre and Pacini are managers of Modiv Divisibles. The duties of our directors serving on the board of directors of BRIX REIT and Modiv Divisibles may influence their judgment as members of our board of directors when considering issues for us that also may affect the other programs, such as the following:
Our charter limits the number of shares a person may own and permits our board of directors to authorize the issuance of stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Internal Revenue Code, among other purposes, our charter prohibits a person from directly or constructively owning more than 9.8% of our outstanding shares of common stock, unless exempted by our board of directors. In addition, our board of directors may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of repurchase of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with priority as to distributions and amounts payable upon liquidation over the rights of the holders of our Class C Common Stockcommon stock and Class S Common Stock.common stock. These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our Class C Common Stock andcommon stock or Class S Common Stock.common stock.
Under the relevant provisions of Section 3(a)(1) of the Investment Company Act, an investment company is any issuer that:
We believe that neither we nor our Operating Partnership will be required to register as an investment company based on the following analysis. With respect to the 40% test, the entities through which we and our Operating Partnership intend to own our assets will be majority-owned subsidiaries that are not themselves investment companies and are not relying on the exceptions from the definition of investment company under Section 3(c)(1) or Section 3(c)(7).
With respect to the primarily engaged test, we and our Operating Partnership are holding companies and do not intend to invest or trade in securities ourselves. Rather, through the majority-owned subsidiaries of our Operating Partnership, we and our Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real estate and real estate-related assets.
We believe that most of the subsidiaries of our Operating Partnership will be able to rely on Section 3(c)(5)(c) of the Investment Company Act for an exception from the definition of an investment company (any other subsidiaries of our Operating Partnership should be able to rely on the exceptions for private investment companies pursuant to Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act). As reflected in no-action letters, the SEC staff’s position on Section 3(c)(5)(c) generally requires that an issuer maintain at least 55% of its assets in “mortgages and other liens on and interests in real estate,” or qualifying assets; at least 80% of its assets in qualifying assets plus real estate-related assets; and no more than 20% of the value of its assets in other than qualifying assets and real estate-related assets, which we refer to as miscellaneous assets. To constitute a qualifying asset under this 55% requirement, a real estate interest must meet various criteria based on no-action letters. We expect that each of the subsidiaries of our Operating Partnership relying on Section 3(c)(5)(c) will invest at least 55% of its assets in qualifying assets, and approximately an additional 25% of its assets in other types of real estate-related assets. We expect to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to types of assets to determine which assets are qualifying real estate assets and real estate-related assets.
To maintain compliance with the Investment Company Act, our subsidiaries may be unable to sell assets we would otherwise want them to sell and may need to sell assets we would otherwise wish them to retain. In addition, our subsidiaries may have to acquire additional assets that they might not otherwise have acquired or may have to forgo opportunities to make investments that we would otherwise want them to make and would be important to our investment strategy. Moreover, the SEC or its staff may issue interpretations with respect to various types of assets that are contrary to our views and current SEC staff interpretations are subject to change, which increases the risk of non-compliance and the risk that we may be forced to make adverse changes to our portfolio. In this regard, we note that in 2011 the SEC issued a concept release indicating that the SEC and its staff were reviewing interpretive issues relating to Section 3(c)(5)(c) and soliciting views on the application of Section 3(c)(5)(c) to companies engaged in the business of acquiring mortgages and mortgage-related instruments. If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement and a court could appoint a receiver to take control of us and liquidate our business.
Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exception from the definition of an investment company under the Investment Company Act.
If the market value or income potential of our qualifying real estate assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” under the Investment Company Act or REIT qualification tests changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” under the Investment Company Act or REIT qualification tests, whether as a result of increased interest rates, prepayment rates or other factors, we may need to modify our investment portfolio in order to maintain our REIT qualification or exception from the definition of an investment company. If the decline in asset values or income occurs quickly, this may be especially difficult, if not impossible, to accomplish. This difficulty may be exacerbated by the illiquid nature of many of the assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under the Maryland General Corporation Law (the “MGCL”) and our charter, stockholders have a right to vote only on limited matters. Our board’s broad discretion in setting policies and stockholders’ inability to exert control over those policies increases the uncertainty and risks stockholders face.
Our investors’ interest in us will be diluted if we issue additional shares, which could reduce the overall value of their investment.
Our stockholders do not have preemptive rights to any shares we issue in the future. Our charter currently authorizes us to issue 450,000,000 shares of capital stock, of which 400,000,000 shares are designated as common stock with 300,000,000 shares being designated as Class C Common Stockcommon stock and 100,000,000 shares being designated as Class S Common Stock.common stock. In August 2017, our board of directors increased the number of authorized shares of common stock without stockholder approval to facilitate an offering by us of up to 100,000,000 shares of Class S Common Stockcommon stock exclusively to non-U.S. persons as defined under Rule 903 promulgated under the Securities Act pursuant to an exemption from the registration requirements of the Securities Act under and in accordance with Regulation S thereunder. In the future, our board of directors may further increase the number of authorized shares of common stock without stockholder approval. For example, after our investors purchase shares in the Offerings, our board of directors may authorize us to: (i) sell additional shares in future public offerings, including through our distribution reinvestment plan;DRP; (ii) issue equity interests in private offerings; (iii) issue shares of our common stock to sellers of properties or assets we acquire in connection with an exchange of limited partnership interests of the Operating Partnership; (iv) issue shares of our common stock in connection with the acquisition of another company or its assets; (v) issue units of limited partnership interests of the Operating Partnership, which are convertible into shares of our Class C Common Stockcommon stock in connection with a long term incentive plan; or (vi) otherwise issue additional shares of our capital stock. To the extent we issue additional equity interests after our investors purchase shares, our investors’ percentage ownership interest in us would be diluted. In addition, depending upon the terms and pricing of any additional issuance of shares, the use of the proceeds and the value of our real estate investments, our investors could also experience dilution in the book value and NAV of their shares and in the earnings and distributions per share.
If we are unable to obtain funding for future capital needs, cash distributions to stockholders and the value of our investments could decline.
When tenants do not renew their leases or otherwise vacate their space, we will often need to expend substantial funds for improvements to the vacated space in order to attract replacement tenants. Even when tenants do renew their leases, we may agree to make improvements to their space as part of our negotiations. If we need additional capital in the future to improve or maintain our properties or for any other reason, we may have to obtain funding from sources other than our cash flow from operations or proceeds from our distribution reinvestment plan,DRP, such as borrowings or future equity offerings. These sources of funding may not be available on attractive terms, or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both, which would limit our ability to make distributions to stockholders and could reduce the value of stockholders’ investment in us.
Our board of directors may, in the future, adopt certain measures under Maryland law without stockholder approval that may have the effect of making it less likely that a stockholder would receive a “control premium” for his or her shares.
Corporations organized under Maryland law with a class of registered securities and at least three independent directors are permitted to elect to be subject, by a charter or bylaw provision or a board of directors resolution and notwithstanding any contrary charter or bylaw provision, to any or all of five provisions:
These provisions may discourage an extraordinary transaction, such as a merger, tender offer or sale of all or substantially all of our assets, all of which might provide a premium price for stockholders’ shares. In our charter, we have elected that vacancies on our board of directors be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred. Through other provisions in our charter and bylaws, we vest in our board of directors the exclusive power to fix the number of directorships, provided that the number is not less than three or more than seven and
Further, under the Maryland Business Combination Act, we may not engage in any merger or other business combination with an “interested stockholder” (which is defined as (1) any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding voting stock and (2) an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock) or any affiliate of that interested stockholder for a period of five years after the most recent date on which the interested stockholder became an interested stockholder. A person is not an interested stockholder if our board of directors approved in advance the transaction by which he, she or it would otherwise have become an interested stockholder. In approving a transaction, our board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms or conditions determined by our board of directors. After the five-year period ends, any merger or other business combination with the interested stockholder or any affiliate of the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least:
These super-majority voting requirements do not apply if, among other things, stockholders receive a minimum payment for their common stock equal to the highest price paid by the interested stockholder for his, her or its shares.
Maryland law limits, in some cases, the ability of a third party to vote shares acquired in a “control share acquisition.”
The Maryland Control Share Acquisition Act provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply: (1) to shares acquired in a merger, consolidation or share exchange if the Maryland corporation is a party to the transaction; or (2) to acquisitions approved or exempted by the charter or bylaws of the Maryland corporation.
We are subject to risks relating to litigation and regulatory liability.
We face legal risks in our businesses, including risks related to the securities laws and regulations across various state and federal jurisdictions. Non-traded REITs have been the subject of increased scrutiny by regulators and media outlets resulting from inquiries and investigations initiated by the Financial Industry Regulatory Authority (“FINRA”) and the SEC.
In March, April and May 2016, our affiliate, REIT I, sold shares of its stock in excess of the amount which it had registered for sale in California, resulting in a violation of the registration requirements of the California Securities Law of 1968. To remedy this, REIT I reported the sales in excess of the California permit to the Department of Business Oversight and made a repurchase offer pursuant to the California securities law to those investors who had purchased shares in excess of the permit.
In addition, beginning in 2017, the SEC conducted an investigation related to, among other things, the advertising and sale of securities in connection with the Offerings and compliance with broker-dealer regulations. BrixInvest proposed a settlement of the investigation with the SEC and, on September 26, 2019, the SEC accepted the settlement and entered an order (the “Order”) instituting proceedings against BrixInvest pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act. Under the settlement, BrixInvest, without denying or admitting any substantive findings in the Order, consented to entry of the Order, finding violations by it of Section 5(b)(1) of the Securities Act and Section 15(a) of the Exchange Act.
Under the terms of the Order, BrixInvest agreed to: (i) cease and desist from committing or causing any future violations of Section 5(b) of the Securities Act and Section 15(a) of the Exchange Act; (ii) pay, and has paid, to the SEC a civil money penalty in the amount of $300,000; and (iii) undertake that any REIT that is or was formed, organized or advised by it, including our Company, will not distribute securities except through a registered broker-dealer. We engaged North Capital Private Securities CorporationNCPS as our registered broker-dealer commencing January 2, 2020.
Violations of state and federal securities registration laws may result in contingent liabilities to purchasers for sales of unregistered securities and may also subject the seller to fines and penalties by securities regulatory agencies. It is possible that we and our affiliates could be subject to sanctions or to similar liabilities in the future, should another violation of securities registration requirements occur. A finding of such a violation could have a material adverse effect on our business, financial condition and operating results.
Economic, market and regulatory changes that impact the real estate market generally may decrease the value of our investments and weaken our operating results.
Our operating results and the performance of the properties we acquire are subject to the risks typically associated with real estate, any of which could decrease the value of our investments and could weaken our operating results, including:
Any of the above factors, or a combination thereof, could result in a decrease in our cash flow from operations and a decrease in the value of our investments, which would have an adverse effect on our operations, on our ability to pay distributions to stockholders and on the value of stockholders’ investment.
The seller
We may finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. Such provisions are typically provided by the terms of the agreement underlying a loan. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for share repurchases or distributions to stockholders. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.
Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in the stockholders’ best interests and, therefore, may have an adverse impact on the value of thetheir shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the stockholders’ best interests.
Properties that become vacant could be difficult to re-lease or sell, which could diminish the return on these properties and adversely affect our cash flow and ability to pay distributions to stockholders.
Properties may incur vacancies either by the expiration and non-renewal of tenant leases or the default of tenants under their leases. Vacancies will result in reduced revenues resulting in less cash available for distribution to stockholders.
We intend to purchase properties with (or enter into, as necessary) long-term leases with tenants, which may not result in fair market rental rates over time.
These leases would provide for rent to increase over time; however, if we do not accurately judge the potential for increases in market rental rates, we may set the terms of these long-term leases at levels such that, even after contractual rent increases, the rent under our long-term leases is less than then-current market rates. Further, we may have no ability to terminate those leases or to adjust the rent to then-prevailing market rates. As a result, our cash available for distribution could be lower than if we did not purchase properties with, or enter into, long-term leases.
We depend on tenants for our revenue generated by our real estate investments and, accordingly, our revenue generated by our real estate investments and our ability to make distributions to stockholders are dependent upon the success and economic viability of our tenants and our ability to retain and attract tenants. Non-renewals, terminations or lease defaults could reduce our net income and limit our ability to make distributions to stockholders.
The success of our real estate investments materially depends upon the financial stability of the tenants leasing the properties we own. The inability of a single major tenant or a significant number of smaller tenants to meet their rental obligations would significantly lower our net income. A non-renewal after the expiration of a lease term, termination or default by a tenant on its lease payments to us would cause us to lose the revenue associated with such lease and require us to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord of a property and may incur substantial costs in protecting our investment and re-leasing the property. Tenants may have the right to terminate their leases upon the occurrence of certain customary events of default and, in other circumstances, may not renew their leases or, because of market conditions, may only be able to renew their leases on terms that are less favorable to us than the terms of their initial leases. Further, some of our assets may be outfitted to suit the particular needs of the tenants. We may have difficulty replacing the tenants of these properties if the outfitted space limits the types of businesses that could lease that space without major renovation. If a tenant does not renew, terminates or defaults on a lease, we may be unable to lease the property for the rent previously received or sell the property without incurring a loss. These events could cause us to reduce distributions to stockholders.
The bankruptcy or insolvency of our tenants or delays by our tenants in making rental payments (including bankruptcies and insolvencies caused by the recent coronavirusCOVID-19 pandemic) could seriously harm our operating results and financial condition.
Any bankruptcy filings by or relating to any of our tenants could bar us from collecting pre-bankruptcy debts from that tenant (including tenants whose business and operations are severely impacted by the recent coronavirusCOVID-19 pandemic), unless we receive an order permitting us to do so from the bankruptcy court. A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. If a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold against a bankrupt entity may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. We may recover substantially less than the full value of any unsecured claims, which would harm our financial condition.
Actions of our potential future tenants-in-common could reduce the returns on tenants-in-common investments and decrease stockholders’ overall return.
We may enter into tenants-in-common or other joint ownership structures with third parties to acquire properties and other assets. Such investments may involve risks not otherwise present with other methods of investment, including, for example, the following risks:
•our co-owner in an investment could become insolvent or bankrupt;
•our co-owner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;
•our co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; or
•disputes between us and our co-owner may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our operations.
While we intend that any co-ownership investment that we enter into will be subject to a co-ownership contractual arrangement that will address some or all of the above issues, any of the above might still subject a property to liabilities in excess of those contemplated and thus reduce our returns on that investment and the value of stockholders’ investment in us.
Costs imposed pursuant to laws and governmental regulations may reduce our net income and our cash available for distribution to stockholders.
Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to protection of the environment and human health. We could be subject to liability in the form of fines, penalties or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials and other health and safety-related concerns.
Some of these laws and regulations may impose joint and several liability on the tenants, owners or operators of real property for the costs to investigate or remediate contaminated properties, regardless of fault, whether the contamination occurred prior to purchase, or whether the acts causing the contamination were legal. Activities of our tenants, the condition of properties at the time we buy them, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties.
The presence of hazardous substances, or the failure to properly manage or remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings. Any material expenditures, fines, penalties or damages we must pay will reduce our ability to pay distributions to stockholders and may reduce the value of stockholders’ investment in us.
The costs of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property or of paying personal injury or other damage claims could reduce our cash available for distribution to stockholders.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose liens on property or restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances and governments may seek recovery for natural resource damage. The costs of defending against claims of environmental liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury, property damage or natural resource damage claims could reduce our cash available for distribution to stockholders.
We intend that most if not all of our real estate acquisitions be subject to Phase I environmental assessments prior to the time they are acquired; however, such assessments may not provide complete environmental histories due, for example, to limited available information about prior operations at the properties or other gaps in information at the time we acquire the property. A Phase I environmental assessment is an initial environmental investigation to identify potential environmental liabilities associated with the current and past uses of a given property. If any of our properties were found to contain hazardous or toxic substances after our acquisition, the value of our investment could decrease below the amount paid for such investment.
Costs associated with complying with the ADA may decrease our cash available for distribution.
Our properties may be subject to the ADA. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The ADA has separate compliance requirements for ‘‘public accommodations’’ and ‘‘commercial facilities’’ that generally require that buildings and services be made accessible and available to people with disabilities. The ADA’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. Any funds used for ADA compliance will reduce our net income and the amount of cash available for distribution to stockholders.
Pandemics or other health crises, such as the recent outbreak of the coronavirus, may adversely affect our business and/or operations, our tenants’ financial condition and the profitability of our retail properties.
Our business and/or operations and the businesses of our tenants could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health crisis, such as the recent outbreak of coronavirus. The profitability of our retail properties depends, in part, on the willingness of customers to visit our tenants’ businesses. The risk, or public perception of the risk, of a pandemic or media coverage of infectious diseases could cause employees or customers to avoid our properties, which could adversely affect foot traffic to our tenants’ businesses and our tenants’ ability to adequately staff their businesses. Most of the states where we operate have issued orders to close fitness centers and other retail establishments. Such events have adversely impacted tenants’ sales and/or caused the temporary closure or slowdown of our tenants’ businesses, which has severely disrupted their operations and could have a material adverse effect on our business, financial condition and results of operations. Similarly, the potential effects of quarantined employees of office tenants may adversely impact their businesses and affect their ability to pay rent on a timely basis.
Uninsured losses relating to real property could reduce our cash flow from operations and the return on stockholders’ investment in us.
We expect that most of the properties we acquire will be subject to leases requiring the tenants thereunder to be financially responsible for property liability and casualty insurance. However, there are types of losses, generally catastrophic in nature, such as losses due to pandemics such as the coronavirus,COVID-19 pandemic, wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable and/or for which the tenants are not contractually obligated to provide insurance. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses.
We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which will reduce the value of stockholders' investment in us. In addition, other than any working capital reserve and other reserves we may establish, we have limited sources of funding to repair or reconstruct any uninsured property.
Changes in accounting pronouncements may materially and adversely affect our tenants’ credit quality and our ability to secure long-term leases and renewal options.
The Financial Accounting Standards BoardFASB issued a new accounting standard, effective for reporting periods beginning after December 15, 2018 for public business entities and December 15, 2019 for non-public business entities, that requires companies to capitalize all leases on their balance sheets by recognizing a lessee’s rights and obligations. Many companies that accounted for certain leases on an ‘‘off balance sheet’’ basis are now required to account for such leases ‘‘on balance sheet.’’ This change removed many of the differences in the way companies account for owned property and leased property, and could have a material effect on various aspects of our tenants’ businesses, including their credit quality and the factors they consider in deciding whether to own or lease properties. The new standard could cause companies that lease properties to prefer shorter lease terms, in an effort to reduce the leasing liability required to be recorded on their balance sheets. The new standard could also make lease renewal options less attractive, as, under certain circumstances, the rule would require a tenant to assume that a renewal right will be exercised and accrue a liability relating to the longer lease term.
Other general risks of investing in real estate include those set forth below.
If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
If we purchase an option to acquire a property but do not exercise the option, we likely would forfeit the amount we paid for such option, which would reduce the amount of cash we have available to make other investments.
We may not have funding for future tenant improvements, which may adversely affect the value of our assets, our results of operations and returns to stockholders.
We depend on the availability of public utilities and services, especially for water and electric power. Any reduction, interruption or cancellation of these services may adversely affect us.
We may be required to reimburse tenants for overpayments of estimated operating expenses.
Risks Related to Investments in Single Tenant Real Estate
Most of ourOur current properties will depend upon a single tenant for their rental income, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a tenant’s lease termination.
WeWhile we plan to expand our investment criteria to include a diversified portfolio of real estate and real estate-related investments, we initially expect that most of our properties will be occupied by only one tenant or will derive a majority of their rental income from one tenant and, therefore, the success of those properties will be materially dependent on the financial stability of such tenants. Lease payment defaults by tenants could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us and the potential resulting vacancy would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated or an existing tenant elects not to renew a lease upon its expiration, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant’s election not to extend a lease upon its expiration, could have an adverse effect on our financial condition and our ability to pay distributions.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of a tenant’s lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to stockholders. In the event of a bankruptcy, we cannot assure stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to stockholders may be adversely affected. Further, our lenders may have a first priority claim to any recovery under the leases, any guarantees and any credit support, such as security deposits and letters of credit.
Net leases may not result in fair market lease rates over time.
We expect most of our rental income to come from net leases. Net leases typically contain: (i) longer lease terms; (ii) fixed rental rate increases during the primary term of the lease; and (iii) fixed rental rates for initial renewal options, and, thus, there is an increased risk that these contractual lease terms will fail to result in fair market rental rates if fair market rental rates increase at a greater rate than the fixed rental rate increases.
Our real estate investments may include special use single tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.
We focus our investments on commercial properties, a number of which will be special use, single tenant properties. With these properties, if the current lease is terminated or not renewed, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed. These and other limitations may affect our ability to sell or re-lease properties and adversely affect returns to stockholders.
If a sale-leaseback transaction is recharacterized in a tenant’s bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be recharacterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were recharacterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to stockholders.
Risks Associated with Debt Financing
We obtain lines of credit, mortgage indebtedness and other borrowings, which increases our risk of loss due to potential foreclosure.
We obtain lines of credit and long-term financing that may be secured by our properties and other assets. In most instances, we acquire real properties by financing a portion of the price of the properties and mortgaging or pledging some or all of the properties purchased as security for that debt. We may also incur mortgage debt on properties that we already own in order to obtain funds to acquire additional properties, to fund property improvements and other capital expenditures, to pay distributions and for other purposes. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for U.S. federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90% of our annual REIT taxable income to stockholders (computed without regard to the dividends-paid deduction and excluding net capital gain). However, we can give stockholders no assurance that we will be able to obtain such borrowings on satisfactory terms or at all.
If we do mortgage a property and there is a shortfall between the cash flow generated by that property and the cash flow needed to service mortgage debt on that property, then the amount of cash available for distribution to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss of a property since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, reducing the value of stockholders’ investment in us. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we would not necessarily receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage or other debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of all or a part of the debt or other amounts related to the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a mortgage secured by a single property could affect mortgages secured by other properties.
We may utilize repurchase agreements as a component of our financing strategy. Repurchase agreements economically resemble short-term, variable-rate financing and usually require the maintenance of specific loan-to-collateral value ratios. If the market value of the assets subject to a repurchase agreement declines, we may be required to provide additional collateral or make cash payments to maintain the required loan-to-collateral value ratios. If we are unable to provide such collateral or cash repayments, we may lose our economic interest in the underlying assets.
We may also obtain recourse debt to finance our acquisitions and meet our REIT distribution requirements. If we have insufficient income to service our recourse debt obligations, our lenders could institute proceedings against us to foreclose upon our assets. If a lender successfully forecloses upon any of our assets, our ability to pay cash distributions to stockholders will be limited and the value of our shares could decrease.
HighIncreases in mortgage rates or changes in underwriting standards may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our cash flow from operations and the amount of cash available for distribution to stockholders.
If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on a property, we run the risk of being unable to refinance part or all of the debt when it becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance properties subject to mortgage debt, our income could be reduced. We may be unable to refinance or may only be able to partly refinance properties if underwriting standards, including loan to value ratios and yield requirements, among other requirements, are stricter than when we originally financed the properties. If any of these events occurs, our cash flow could be reduced and/or we might have to pay down existing mortgages. This, in turn, would reduce cash available for distribution to stockholders, could cause us to require additional capital and may hinder our ability to raise capital by issuing more stock or by borrowing more money.
We may use leverage in connection with any real estate investments we make, which increases the risk of loss associated with this type of investment.
We may finance the acquisition of certain real estate-related investments with warehouse lines of credit and repurchase agreements. Although the use of leverage may enhance returns and increase the number of investments that we can make, it may also substantially increase the risk of loss. There can be no assurance that leveraged financing will be available to us on favorable terms or that, among other factors, the terms of such financing will parallel the maturities of the leases in underlying assets acquired. If alternative financing is not available, we may have to liquidate assets at unfavorable prices to pay off such financing. The return on our investments and cash available for distribution to stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that we can derive from the assets we acquire.
Our debt service payments will reduce our cash available for distribution. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations. If we utilize repurchase financing and if the market value of the assets subject to a repurchase agreement declines, we may be required to provide additional collateral or make cash payments to maintain the required loan-to-collateral value ratio. If we are unable to provide such collateral or cash repayments, we may lose our economic interest in the underlying assets. Further, credit facility providers and warehouse facility providers may require us to maintain a certain amount of cash reserves or to set aside unleveraged assets sufficient to maintain a specified liquidity position that would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.
We may not be able to access financing sources on attractive terms, which could adversely affect our ability to execute our business plan.
We may finance our assets over the long-term through a variety of means, including repurchase agreements, credit facilities, issuances of commercial mortgage-backed securities and other structured financings. Our ability to execute this strategy will depend on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and greater credit spreads. We cannot be certain that these markets will remain an efficient source of long-term financing for our assets. If our strategy is not viable, we will have to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase agreements may not accommodate long-term financing. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flow, thereby reducing cash available for distribution to stockholders and funds available for operations as well as for future business opportunities.
Lenders may require us to enter into operationalrestrictive covenants relating to our operations, which could limit our ability to pay distributions to stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan agreements into which we enter may contain covenants that limit our ability to further mortgage a property or that prohibit us from discontinuing insurance coverage. These or other limitations would decrease our operating flexibility and our ability to achieve our operating objectives and limit our ability to pay distributions to stockholders.
Increases in interest rates would increase the amount of our debt payments and limit our ability to pay distributions to stockholders.
We may incur variable rate debt. Increases in interest rates will increase the cost of that debt, which could reduce our cash flow from operations and the cash we have available for distribution to stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at times that may not permit realization of the maximum return on such investments.
Subject to certain restrictions in our charter, we have broad authority to incur debt and debt levels could hinder our ability to make distributions and decrease the value of stockholders’ investment in us.
Our charter limits the amount we may borrow to 300% of our net assets. In March 2020, our board of directors approved an increase in our maximum leverage from 50% to 55% to allow us to take advantage of the current low interest rate environment, the relative cost of debt and equity capital, and strategic borrowing advantages potentially available to us. Our borrowings on one or more individual properties may exceed 55% of their individual cost, so long as our overall leverage does not exceed 55%. We may exceed this limit only if any excess borrowing is approved by a majority of our conflicts committeeindependent directors and is disclosed to stockholders in our next quarterly report, along with the justification for such excess. When calculating our use of leverage, we will not include borrowings relating to the initial acquisition of properties that are outstanding under a revolving credit facility (or similar agreement). There is no limitation on the amount we may borrow for the purchase of any single asset.
To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective.
From time to time, we may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy. There is no assurance that our hedging strategy will achieve our objectives. We may be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.
To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. There is a risk that counterparties could fail, shut down, file for bankruptcy or be unable to pay out contracts. The failure of a counterparty that holds collateral that we post in connection with an interest rate swap agreement could result in the loss of that collateral.
Federal Income Tax Risks
Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to stockholders.
We expect to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to continue to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may make, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year. If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable income. We might need to borrow money or sell assets to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.
In addition, as a result of the Merger, if REIT I is determined to have lost its REIT status or not qualified as a REIT prior to the Merger, we will face serious tax consequences that would substantially reduce cash available for distribution, including cash available to pay dividends to our stockholders, because:
•REIT I would be subject to U.S. federal income tax on its net income at regular corporate rates for the years it did not qualify for taxation as a REIT (and, for such years, would not be allowed a deduction for dividends paid to stockholders in computing its taxable income);
•REIT I could be subject to the federal alternative minimum tax and possibly increased state and local taxes for such periods;
•we would inherit any such liability, including any interest and penalties that have accrued on such federal income tax liabilities;
•we, if we were considered a “successor corporation” under the Internal Revenue Code and applicable Treasury Regulations, could not elect to be taxed as a REIT until the fifth taxable year following the year during which REIT I was disqualified; and
•for up to 5 years following re-election of REIT status, upon a taxable disposition of an asset owned as of such re-election, we could be subject to corporate level tax with respect to any built-in gain inherent in such asset at the time of re-election.
Moreover, if REIT I failed to qualify as a REIT prior to the Merger, but we nevertheless qualified as a REIT, in the event of a taxable disposition of a former REIT I asset during the five years following the Merger, we would be subject to corporate tax with respect to any built-in gain inherent in such asset as of the Merger. The failure of REIT I to qualify as a REIT prior to the Merger could impair our ability to remain qualified as a REIT, could impair our business and ability to raise capital, and would materially adversely affect the value of our stock.
If the Merger does not qualify as a tax-free reorganization, there may be adverse tax consequences.
The Merger is intended to qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code. Although we received an opinion of counsel to the effect that the Merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code, this legal opinion will not be binding on the Internal Revenue Service or on the courts. If, for any reason, the Merger were to fail to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code, then REIT I would be considered to have made a taxable sale of its assets to us and we would be required to pay the U.S. federal income tax on the gain, if any, arising from such taxable sale as a result of being the surviving entity in the Merger. Such a tax liability could have the effect of reducing the amounts available for distribution to stockholders.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders’ investment.
Our ability to dispose of a property during the first few years following its acquisition is restricted to a substantial extent as a result of our REIT status. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. Properties we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our taxable REIT subsidiaries, may, depending on how we conduct our operations, be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Under applicable provisions of the Internal Revenue Code regarding prohibited transactions by REITs, we would be subject to a 100% tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Any taxes we pay would reduce our cash available for distribution to our stockholders. Our concern over paying the prohibited transactions tax may cause us to forgo disposition opportunities that would otherwise be advantageous if we were not a REIT.
StockholdersOur stockholders may have current tax liability on distributions they elect to reinvest in our common stock.
If our stockholders participate in our distribution reinvestment plan,DRP, they will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for U.S. federal tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value, if any. As a result, unless our stockholders are tax-exempt entities, they may have to use funds from other sources to pay their tax liability on the value of the shares of common stock received.
Even if we qualify as a REIT for U.S. federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to stockholders.
Even if we qualify as a REIT for U.S. federal income tax purposes, we may be subject to some federal, state and local taxes on our income or property. For example:
•In order to qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income to stockholders (which is determined without regard to the dividends-paid deduction or net capital gain). To the extent that we satisfy the distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on the undistributed income.
•We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
•If we elect to treat property that we acquire in connection with certain leasehold terminations as ‘‘foreclosure property,’’ we may avoid the 100% tax on the gain from a resale of that property, but the income from the sale or operation of that property may be subject to corporate income tax at the highest applicable rate.
•If we sell an asset, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% ‘‘prohibited transaction’’ tax unless such sale were made by one of our taxable REIT subsidiaries or the sale met certain ‘‘safe harbor’’ requirements under the Internal Revenue Code.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.
From time-to-time, we may generate taxable income greater than our income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirements and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
To maintain our REIT status, we may be forced to forgo otherwise attractive business or investment opportunities, which may delay or hinder our ability to meet our investment objectives and reduce stockholders’ overall return.
To continue to qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and reduce the value of stockholders’ investment.
Distributions to tax-exempt stockholders may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to the shares of our common stock nor gain from the sale of the shares of our common stock should generally constitute unrelated business taxable income (“UBTI”) to a tax-exempt stockholder. However, there are certain exceptions to this rule. In particular:
•part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if the shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI;
•part of the income and gain recognized by a tax-exempt stockholder with respect to the shares of our common stock would constitute UBTI if the stockholder incurs debt in order to acquire the shares of our common stock; and
•part or all of the income or gain recognized with respect to the shares of our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from U.S. federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Internal Revenue Code may be treated as UBTI.UBTI; and
•part or all of the income and gain recognized by a tax-exempt stockholder with respect to the shares of our common stock would constitute UBTI if we directly or indirectly acquire a residual interest in certain mortgage loan securitization structures (i.e., a “taxable mortgage pool” or a residual interest in a real estate mortgage investment conduit (“REMIC”)).
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To continue to qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including investments in certain mortgage loans and residential and commercial mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Liquidation of assets may jeopardize our REIT qualification.
To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.
Characterization of any repurchase agreements we enter into to finance our investments as sales for tax purposes rather than as secured lending transactions would adversely affect our ability to qualify as a REIT.
We may enter into repurchase agreements with a variety of counterparties to achieve our desired amount of leverage for the assets in which we invest. When we enter into a repurchase agreement, we generally sell assets to our counterparty to the agreement and receive cash from the counterparty. The counterparty is obligated to resell the assets back to us at the end of the term of the transaction. We believe that for U.S. federal income tax purposes we will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured lending transactions notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the Internal Revenue Service could successfully assert that we did not own these assets during the term of the repurchase agreements, in which case we could fail to qualify as a REIT if tax ownership of these assets was necessary for us to meet the income and/or asset tests.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges:hedges (i) interest rate risk on liabilities incurred to carry or acquire real estate;estate or (ii) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
Ownership limitations may restrict change of control or business combination opportunities in which stockholders might receive a premium for their common stock.
In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. ‘‘Individuals’’ for this purpose include natural persons, and some entities such as private foundations. To preserve our REIT qualification, among other purposes, our charter generally prohibits any person from directly or indirectly owning more than 9.8% of our common stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which the stockholders might receive a premium for their shares over the then prevailing market price or which the stockholders might believe to be otherwise in their best interests.
Our ownership of and relationship with our taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A domestic taxable REIT subsidiary will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis. We cannot assure stockholders that we will be able to comply with the 20% value limitation on ownership of taxable REIT subsidiary stock and securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100% excise tax imposed on certain non-arm’s length transactions.
We may be subject to adverse legislative or regulatory tax changes.
At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and theour stockholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative interpretation.
The Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, made significant changes to the U.S. federal income tax rules for taxation of individuals and corporations. In the case of individuals, the tax brackets were adjusted, the top federal income rate was reduced to 37%, special rules reduce taxation of certain income earned through pass-through entities and reduce the top effective rate applicable to ordinary dividends from REITs to 29.6% (through a 20% deduction for ordinary REIT dividends received that are not ‘‘capital gain dividends’’ or ‘‘qualified dividend income,’’ subject to complex limitations) and various deductions were eliminated or limited, including limiting the deduction for state and local taxes to $10,000 per year. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The top corporate income tax rate was reduced to 21%, and the corporate alternative minimum tax was repealed. The deduction of net interest expense is limited for all businesses, other than certain electing businesses, including certain real estate businesses. There are only minor changes to the REIT rules (other than the 20% deduction applicable to individuals for ordinary REIT dividends received).
The Tax Cuts and Jobs Act makes numerous other large and small changes to the tax rules that do not affect REITs directly but may affect our stockholders and may indirectly affect us. For example, the Tax Cuts and Jobs Act amended the rules for accrual of income so that income is taken into account no later than when it is taken into account on applicable financial statements, even if financial statements take such income into account before it would accrue under the original issue discount rules, market discount rules or other rules in the Internal Revenue Code. Such rulerules may cause us to recognize income before receiving any corresponding receipt of cash, which may make it more likely that we could be required to borrow funds or take other action to satisfy the REIT distribution requirements for the taxable year in which such income is recognized, although the precise application of this rule is unclear at this time. In addition, the Tax Cuts and Jobs Act reduced the limit for individual’s mortgage interest expense to interest on $750,000 of mortgages and does not permit deduction of interest on home equity loans (after grandfathering all existing mortgages). Such change and the reduction in deductions for state and local taxes (including property taxes) may adversely affect the residential mortgage markets in which we may invest.
Prospective stockholders are urged to consult with their tax advisors with respect to the Tax Cuts and Jobs Act and any other regulatory or administrative developments and proposals and their potential effect on investment in our stock.
Distributions payable by REITs do not qualify for the reduced tax rates.rates available to individuals under the Tax Cuts and Jobs Act of 2017.
The maximum tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates is 20%. Distributions payable by REITs, however, are generally not eligible for the reduced rates. While this tax treatment does not adversely affect the taxation of REITs or distributions paid by REITs, the more favorable rates applicable to regular corporate distributions could cause investors who are individuals, trusts or estates to perceive investments in REITs to be relatively less attractive than investments in stock of non-REIT corporations that pay distributions, which could adversely affect the value of the stock of REITs, including our common stock. However, under the Tax Cuts and Jobs Act, ordinary dividends from REITs are treated as income from a ‘‘pass-through’’“pass-through” entity and are generally eligible for a 20% deduction against those same ordinary dividends. As a result, the top marginal federal tax rate on REIT dividends is reduced from 37% to 29.6% for individual and trust/estate shareholders.stockholders.
Dividend income received in respect of our shares and gain from the sale of our shares could be treated as effectively connected income.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits.Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business.Pursuant to the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), capital gain distributions attributable to sales or exchanges of U.S. real property interests (“USRPIs”) generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business.However, a capital gain distribution will not be treated as effectively connected income if (1) the distribution is received with respect to a class of shares that is regularly traded on an established securities market located in the United States and (2) the non-U.S. stockholder does not own more than 10% of the class of our shares at any time during the one-year period ending on the date the distribution is received.We do not anticipate that our shares will be “regularly traded” on an established securities market, and, therefore, this exception is not expected to apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our shares generally will not be subject to U.S. federal income taxation unless such shares constitute a USRPI within the meaning of FIRPTA.Our shares will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.”A domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’s shares is held directly or indirectly by non-U.S. stockholders. There can be no assurances that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our shares, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (1) our shares are “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and (2) such non-U.S. stockholder owned, actually and constructively, 10% or less of our shares at any time during the five-year period ending on the date of the sale.However, as noted above, we do not anticipate that our shares will be “regularly traded” on an established securities market.We encourage our non-U.S. stockholders to consult an independent tax advisor to determine the tax consequences applicable to them.
If our Operating Partnership fails to maintain its status as a disregarded entity or as a partnership, its income may be subject to taxation, which would reduce the cash available for distribution to stockholders and likely result in a loss of our REIT status.
We intend to maintain the status of our Operating Partnership as a disregarded entity or as a partnership for U.S. federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the Operating Partnership as a disregarded entity or as a partnership for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the Operating Partnership could make to us. This would also likely result in our losing REIT status, and, if so, becoming subject to a corporate level tax on our own income. This would substantially reduce any cash available to pay distributions. In addition, if any of the partnerships or limited liability companies through which the Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our status as a REIT.
Foreign purchasers of shares of our common stock may be subject to FIRPTA tax upon the sale of their shares of our common stock.
A foreign person disposing of a U.S. real property interest, including shares of stock of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to the Foreign Investment in Real Property Tax Act of 1980, as amended (“FIRPTA”), on the amount received from the disposition. However, foreign pension plans and certain foreign publicly traded entities are exempt from FIRPTA withholding. Further, such FIRPTA tax does not apply to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT’s existence. We cannot assure our stockholders that we will qualify as a “domestically controlled” REIT. If we were to fail to so qualify, amounts received by foreign investors on a sale of shares of our common stock would be subject to FIRPTA tax, unless the shares of our common stock were traded on an established securities market and the foreign investor did not at any time during a specified period directly or indirectly own more than 10.0% of the value of our outstanding common stock. However, these rules do not apply to foreign pension plans and certain publicly traded entities.
Retirement Plan Risks
If the fiduciary of an employee benefit plan subject to ERISA (such as a profit sharing, Section 401(k) or pension plan) or an owner of a retirement arrangement subject to Section 4975 of the Internal Revenue Code (such as an individual retirement account (“IRA”)) fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to penalties and other sanctions.
There are special considerations that apply to employee benefit plans subject to ERISA (such as profit sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA)IRA, annuity described in Section 408 or 408A of the Internal Revenue Code, health savings accounts described in Section 223(d) of the Internal Revenue Code, and Coverdell education savings accounts described in Section 530 of the Internal Revenue Code) that are investing in our shares. Fiduciaries and IRA owners investing the assets of such a plan or account in our Class C Common Stockcommon stock should satisfy themselves that:
•the investment is consistent with their fiduciary and other obligations under ERISA and the Internal Revenue Code;
•the investment is made in accordance with the documents and instruments governing the plan or IRA, including the plan’s or account’s investment policy;
•the investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA and other applicable provisions of ERISA and the Internal Revenue Code;
•the investment in our shares, for which no public market currently exists, is consistent with the liquidity needs of the plan or IRA;IRA, including liquidity needs to satisfy minimum and other distribution requirements and tax withholding requirements that may be applicable;
•the investment will not produce an unacceptable amount of “unrelated business taxable income” for the plan or IRA;
•stockholders will be able to comply with the requirements under ERISA and the Internal Revenue Code to value the assets of the plan or IRA annually;
•the investment will not be treated as “plan assets” of its plan or account under ERISA and Department of Labor regulations; and
•the investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.Code or similar applicable law.
With respect to the annual valuation requirements described above, we will provide an estimated value for our shares annually. We can make no claim whether such estimated value will or will not satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the Internal Revenue ServiceIRS may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our Class C Common Stock.common stock. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions. An investor should ensure that this approach to valuation is acceptable to the trustee or custodian of any plan or account before any investment in our shares is made by such plan or account.
Investment in our shares is intended to qualify for an exemption from the plan asset rules under ERISA and the Department of Labor regulations and thus, our assets should not be “plan assets” of the investing plan or account. No assurances, however, can be made that our assets are not treated as “plan assets” of an investing plan or account under ERISA, Section 4975 of the Internal Revenue Code, or similar applicable law. Fiduciaries of plans and accounts should consult with counsel before making an investment in our shares.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested.
In addition, the investment transaction must be undone. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax. ERISA plan fiduciaries
Risks Related to the Impact of the COVID-19 Pandemic on Our Business
Measures intended to prevent the spread of COVID-19 have disrupted our ability to operate our business.
In response to the outbreak of COVID-19 and IRA owners should consultthe federal and state mandates implemented to control its spread, most of our employees are working remotely. If our employees are unable to work effectively as a result of the COVID-19 pandemic, including because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurity incidents, data breaches or cyber-attacks, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of proprietary data, interruptions or delays in the operation of our business, damage to our reputation and any government imposed penalty.
The current COVID-19 pandemic, and any future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.
The COVID-19 pandemic has had, and any other pandemics in the future could have, repercussions across regional, national and global economies and financial markets. The outbreak of COVID-19 in the United States and in many countries has adversely impacted global economic activity and has contributed to significant volatility and negative pressure in the financial markets. The impact of the COVID-19 outbreak has been rapidly evolving and has continued to affect more countries. Many countries, including the United States, have responded by instituting quarantines for some period of time, mandating business and school closures and restrictions on their re-openings, banning group gatherings and restricting travel, among others.
Certain states and cities, including where we own properties, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules and restrictions to only essential businesses that may continue to operate. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly, including the real estate industry in which we and our tenants operate.
Many of our tenants have announced temporary closures of their stores or facilities and various tenants have requested rent deferral or rent abatement during this pandemic. In addition, in response to state and local government orders, all of our company personnel are currently working remotely. The effects of the state and local government orders, including an extended period of remote work arrangements, could strain our business continuity plans, introduce operational risk and impair our ability to manage our business. The COVID-19 pandemic may have a material adverse effect on our financial position, results of operations and cash flows, including among other factors:
•a partial or complete closure of, or other operational issues at, some or all of our properties resulting from government or tenant action;
•reduced economic activity severely impacts our tenants' business operations, financial condition and liquidity and may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;
•reduced economic activity could result in a prolonged recession, which could negatively impact consumer discretionary spending and in return could severely impact our tenants' business operations, financial condition and liquidity;
•difficulty accessing debt and equity on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund our business operations or address maturing liabilities on a timely basis and our tenants' ability to fund their business operations and meet their obligations to us;
•the COVID-19 pandemic could negatively impact our future compliance with counsel before making an investmentfinancial covenants of our mortgage notes payable and credit facilities and could result in a default or potential acceleration of payment of our debt obligations, which non-compliance could negatively impact our ability to make additional future borrowings;
•significant impairment in the value of our intangible assets as a result of weaker economic conditions;
•general decline in business activity and demand for real estate transactions has adversely affected our ability to grow our portfolio of properties;
•broad acceptance and success of working from home could negatively impact the demand for office space;
•the deterioration in our Class C Common Stock.or our tenants' ability to operate in affected areas or delays in the supply of products or services to us or our tenants from vendors that are needed for our or our tenants' efficient operations has adversely affected our operations and those of our tenants; and
•potential negative impact on the health of our personnel and staff, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption. The extent to which the COVID-19 pandemic impacts our business operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence; including the scope, severity and duration of the pandemic; the success of actions or measures taken to contain or treat COVID-19, or mitigate its impact; and the direct and indirect economic effects of the pandemic, among others. Extended closures by our tenants of their stores and any early terminations by our tenants of their leases could reduce our cash flows, which could impact our ability to continue paying distributions to our stockholders at expected levels, or at all.
The rapid development and fluidity of the COVID-19 pandemic precludes us from making any prediction as to the full adverse impact of the pandemic. Nevertheless, the pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance.
| |
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Properties:
As of December 31, 2019,2020, we owned 4536 operating properties, excluding four properties held for sale and the 72.7% TIC Interest, located in 14 states as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Location (1) | | Rentable
Square
Feet | | Property
Type | | Investment
in Real
Property,
Net, Plus
Above-/Below-
Market
Lease Intangibles, Net | | Mortgage
Financing
(Principal) | | Annualized
Base Lease
Revenue (2) | | Acquisition
Fee (3) | | Lease
Expiration
(4) | | Renewal Options (Number/Years) (4) |
| Accredo Health, Orlando, FL | | 63,000 | | | Office | | $ | 8,903,818 | | | $ | 8,538,000 | | | $ | 982,170 | | | $ | 5,796 | | | 12/31/2024 | | 2/5-yr |
| Dollar General, Litchfield, ME | | 9,026 | | | Retail | | 1,232,108 | | | 622,884 | | (5) | 92,960 | | | 40,008 | | | 9/30/2030 | | 3/5-yr |
| Dollar General, Wilton, ME | | 9,100 | | | Retail | | 1,471,978 | | | 627,992 | | (5) | 112,439 | | | 48,390 | | | 7/31/2030 | | 3/5-yr |
| Dollar General, Thompsontown, PA | | 9,100 | | | Retail | | 1,147,089 | | | 627,992 | | (5) | 85,998 | | | 37,014 | | | 10/31/2030 | | 3/5-yr |
| Dollar General, Mt. Gilead, OH | | 9,026 | | | Retail | | 1,133,110 | | | 622,884 | | (5) | 85,924 | | | 36,981 | | | 6/30/2030 | | 3/5-yr |
| Dollar General, Lakeside, OH | | 9,026 | | | Retail | | 1,056,780 | | | 622,884 | | (5) | 81,036 | | | 34,875 | | | 5/31/2035 | (6) | 3/5-yr |
| Dollar General, Castalia, OH | | 9,026 | | | Retail | | 1,036,002 | | | 622,884 | | (5) | 79,320 | | | 34,140 | | | 5/31/2035 | (6) | 3/5-yr |
| Dana, Cedar Park, TX | | 45,465 | | | Industrial | | 5,498,515 | | | 4,466,865 | | | 780,000 | | | 274,200 | | | 7/31/2022 | (7) | 2/5-yr |
| Northrop Grumman, Melbourne, FL | | 107,419 | | | Office | | 10,755,205 | | | 5,518,589 | | | 1,269,693 | | | 398,100 | | | 5/31/2026 | (6) | 1/5-yr |
| exp US Services, Maitland, FL | | 33,118 | | | Office | | 5,986,521 | | | 3,321,931 | | | 779,805 | | | 200,837 | | | 11/30/2026 | | 2/5-yr |
| Wyndham, Summerlin, NV | | 41,390 | | | Office | | 9,905,493 | | | 5,607,000 | | (8) | 889,804 | | | 390,906 | | | 2/28/2025 | | 1/5-yr |
| Williams Sonoma, Summerlin, NV | | 35,867 | | | Office | | 7,452,628 | | | 4,438,200 | | (8) | 681,955 | | | 239,880 | | | 10/31/2022 | | None |
| Omnicare, Richmond, VA | | 51,800 | | | Industrial | | 6,711,715 | | | 4,193,171 | | | 579,974 | | | 217,678 | | | 5/31/2026 | | 1/5-yr |
| EMCOR, Cincinnati, OH | | 39,385 | | | Office | | 5,583,804 | | | 2,811,539 | | | 491,712 | | | 177,210 | | | 2/28/2027 | | 2/5-yr |
| Husqvarna, Charlotte, NC | | 64,637 | | | Industrial | | 11,024,418 | | | 6,379,182 | | | 855,637 | | | 348,000 | | | 6/30/2027 | (9) | 2/5-yr |
| AvAir, Chandler, AZ | | 162,714 | | | Industrial | | 25,246,766 | | | 19,950,000 | | | 2,228,536 | | | 795,000 | | | 12/31/2032 | | 2/5-yr |
| 3M, DeKalb, IL | | 410,400 | | | Industrial | | 13,137,126 | | | 8,166,000 | | | 1,186,056 | | | 456,000 | | | 7/31/2022 | | 1/5-yr |
| Cummins, Nashville, TN | | 87,230 | | | Office | | 13,850,551 | | | 8,332,200 | | | 1,420,213 | | | 465,000 | | | 2/28/2023 | | 3/5-yr |
| Northrop Grumman Parcel, Melbourne, FL | | — | | | Land | | 329,410 | | | — | | | — | | | 9,000 | | | — | | — | |
| Texas Health, Dallas, TX | | 38,794 | | | Office | | 7,008,583 | | | 4,363,203 | | | 545,894 | | | 222,750 | | | 12/31/2025 | | None |
| Bon Secours, Richmond, VA | | 72,890 | | | Office | | 10,210,772 | | | 5,180,552 | | | 800,644 | | | 313,293 | | | 8/31/2026 | | None |
| Costco, Issaquah, WA | | 97,191 | | | Office | | 27,441,604 | | | 18,850,000 | | | 2,186,798 | | | 870,000 | | | 7/31/2025 | (10) | 1/5-yr |
| Taylor Fresh Foods, Yuma, AZ | | 216,727 | | | Industrial | | 24,964,055 | | | 12,350,000 | | | 1,584,858 | | | 741,000 | | | 9/30/2033 | | None |
| Levins, Sacramento, CA | | 76,000 | | | Industrial | | 4,449,897 | | | 2,032,332 | | | 299,220 | | | — | | | 8/20/2023 | | 2/5-yr |
| Dollar General, Bakersfield, CA | | 18,827 | | | Retail | | 4,977,336 | | | 2,268,922 | | | 328,250 | | | — | | | 7/31/2028 | | 3/5-yr |
| PMI Preclinical, San Carlos, CA | | 20,800 | | | Industrial | | 9,971,393 | | | 4,020,418 | | | 620,052 | | | — | | | 10/31/2025 | | 2/5-yr |
| GSA (MHSA), Vacaville, CA | | 11,014 | | | Office | | 3,130,381 | | | 1,752,092 | | | 340,987 | | | — | | | 8/24/2026 | | None |
| PreK Education, San Antonio, TX | | 50,000 | | | Retail | | 12,285,285 | | | 5,037,846 | | | 825,000 | | | — | | | 7/31/2021 | | 2/8-yr |
| Dollar Tree, Morrow, GA | | 10,906 | | | Retail | | 1,331,111 | | | — | | | 103,607 | | | — | | | 7/31/2025 | | 3/5-yr |
| Solar Turbines, San Diego, CA | | 26,036 | | | Office | | 7,066,559 | | | 2,777,552 | | | 534,179 | | | — | | | 7/31/2023 | | None |
| Wood Group, San Diego, CA | | 37,449 | | | Industrial | | 9,599,435 | | | 3,397,371 | | | 733,396 | | | — | | | 2/28/2026 | | 2/5-yr |
| ITW Rippey, El Dorado Hills, CA | | 38,500 | | | Industrial | | 7,051,102 | | | 3,039,777 | | | 528,615 | | | — | | | 7/31/2022 | | 1/3-yr |
| Dollar General, Big Spring, TX | | 9,026 | | | Retail | | 1,191,935 | | | 599,756 | | | 86,041 | | | — | | | 6/30/2030 | | 3/5-yr |
| Gap, Rocklin, CA | | 40,110 | | | Office | | 8,212,736 | | | 3,569,990 | | | 582,397 | | | — | | | 2/28/2023 | | 1/5-yr |
| L-3 Communications, Carlsbad, CA | | 46,214 | | | Industrial | | 11,515,683 | | | 5,185,929 | | | 787,789 | | | — | | | 4/30/2022 | | 2/3-yr |
| Sutter Health, Rancho Cordova, CA | | 106,592 | | | Office | | 30,163,857 | | | 13,879,655 | | | 2,112,777 | | | — | | | 10/31/2025 | | 3/5-yr |
| Walgreens, Santa Maria, CA | | 14,490 | | | Retail | | 5,676,983 | | | 3,172,846 | | | 369,000 | | | — | | | 3/31/2032 | | 8/5-yr |
| | 2,128,295 | | | | | $ | 317,711,744 | | | $ | 176,948,438 | | | $ | 26,052,736 | | | $ | 6,356,058 | | | | | |
(1)Each of the properties was 100% occupied by a single tenant at the time of acquisition and has remained 100% occupied by that tenant through December 31, 2020, except for the Dana property, which is currently vacant.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Location (1) | | Rentable Square Feet | | Property Type | | Investment in Real Property, Net, Plus Above-/Below- Market Lease Intangibles, Net | | Mortgage Financing (Principal) | | Annualized Base Lease Revenue (2) | | Acquisition Fee (3) | | Lease Expiration (4) | | Renewal Options (Number/Years) (4) |
| Accredo Health, Orlando, FL | | 63,000 |
| | Office | | $ | 9,154,640 |
| | $ | 4,738,338 |
| (5) | $ | 953,820 |
| | $ | 5,796 |
| | 12/31/2024 | | 1/5-yr |
| Walgreens, Stockbridge, GA | | 15,120 |
| | Retail | | 3,726,898 |
| | 2,115,104 |
| (5) | 360,000 |
| | — |
| | 2/28/2031 | | 8/5-yr |
| Dollar General, Litchfield, ME | | 9,026 |
| | Retail | | 1,272,352 |
| | 634,809 |
| (6) | 92,960 |
| | 40,008 |
| | 9/30/2030 | | 3/5-yr |
| Dollar General, Wilton, ME | | 9,100 |
| | Retail | | 1,523,481 |
| | 640,014 |
| (6) | 112,439 |
| | 48,390 |
| | 7/31/2030 | | 3/5-yr |
| Dollar General, Thompsontown, PA | | 9,100 |
| | Retail | | 1,185,756 |
| | 640,014 |
| (6) | 85,998 |
| | 37,014 |
| | 10/31/2030 | | 3/5-yr |
| Dollar General, Mt. Gilead, OH | | 9,026 |
| | Retail | | 1,170,182 |
| | 634,809 |
| (6) | 85,924 |
| | 36,981 |
| | 6/30/2030 | | 3/5-yr |
| Dollar General, Lakeside, OH | | 9,026 |
| | Retail | | 1,094,828 |
| | 634,809 |
| (6) | 81,036 |
| | 34,875 |
| | 5/31/2030 | | 3/5-yr |
| Dollar General, Castalia, OH | | 9,026 |
| | Retail | | 1,072,970 |
| | 634,809 |
| (6) | 79,320 |
| | 34,140 |
| | 5/31/2030 | | 3/5-yr |
| Dana, Cedar Park, TX | | 45,465 |
| | Industrial | | 8,021,486 |
| | 4,551,250 |
| | 696,335 |
| | 274,200 |
| | 6/30/2024 | | 2/5-yr |
| Northrop Grumman, Melbourne, FL | | 107,419 |
| | Office | | 11,538,234 |
| | 5,666,866 |
| | 1,232,096 |
| | 398,100 |
| | 5/31/2021 | | 1/5-yr |
| exp US Services, Maitland, FL | | 33,118 |
| | Office | | 6,274,208 |
| | 3,385,353 |
| | 753,434 |
| | 200,837 |
| | 11/30/2026 | | 2/5-yr |
| Harley, Bedford, TX | | 70,960 |
| | Retail | | 12,271,058 |
| | 6,748,029 |
| | 900,000 |
| | 382,500 |
| | 4/12/2032 | | 2/5-yr |
| Wyndham, Summerlin, NV | | 41,390 |
| | Office | | 10,259,985 |
| | 5,716,200 |
| (7) | 864,097 |
| | 390,906 |
| | 2/28/2025 | | 1/5-yr |
| Williams Sonoma, Summerlin, NV | | 35,867 |
| | Office | | 7,694,853 |
| | 4,530,600 |
| (7) | 662,093 |
| | 239,880 |
| | 10/31/2022 | | None |
| Omnicare, Richmond, VA | | 51,800 |
| | Industrial | | 6,956,314 |
| | 4,273,552 |
| | 565,828 |
| | 217,678 |
| | 5/31/2026 | | 1/5-yr |
| EMCOR, Cincinnati, OH | | 39,385 |
| | Office | | 5,748,557 |
| | 2,862,484 |
| | 491,712 |
| | 177,210 |
| | 2/28/2027 | | 2/5-yr |
| Husqvarna, Charlotte, NC | | 64,637 |
| | Industrial | | 11,338,003 |
| | 6,379,182 |
| | 830,716 |
| | 348,000 |
| | 6/30/2027 | (8) | 2/5-yr |
| AvAir, Chandler, AZ | | 162,714 |
| | Industrial | | 25,940,838 |
| | 14,575,000 |
| | 2,184,840 |
| | 795,000 |
| | 12/31/2032 | | 2/5-yr |
| 3M, DeKalb, IL | | 410,400 |
| | Industrial | | 14,055,775 |
| | 8,290,000 |
| | 1,173,744 |
| | 456,000 |
| | 7/31/2022 | | 1/5-yr |
| Cummins, Nashville, TN | | 87,230 |
| | Office | | 14,645,113 |
| | 8,458,600 |
| | 1,385,573 |
| | 465,000 |
| | 2/28/2023 | | 3/5-yr |
| Northrop Grumman Parcel, Melbourne, FL | | — |
| | Land | | 329,410 |
| | — |
| | — |
| | 9,000 |
| | — | | — |
|
| 24 Hour Fitness, Las Vegas NV | | 45,000 |
| | Retail | | 12,036,111 |
| | 6,283,898 |
| (9) | 842,199 |
| | 366,000 |
| | 3/31/2030 | | 3/5-yr |
| Texas Health, Dallas, TX | | 38,794 |
| | Office | | 7,305,895 |
| | 4,400,000 |
| | 535,191 |
| | 222,750 |
| | 12/5/2024 | | None |
| Bon Secours, Richmond, VA | | 72,890 |
| | Office | | 10,316,669 |
| | 5,250,000 |
| | 781,117 |
| | 313,293 |
| | 8/31/2026 | | None |
| Costco, Issaquah, WA | | 97,191 |
| | Retail | | 28,704,942 |
| | 18,850,000 |
| | 2,113,904 |
| | 870,000 |
| | 7/31/2025 | (10) | 1/5-yr |
| Taylor Fresh Foods, Yuma, AZ | | 216,727 |
| | Industrial | | 25,458,415 |
| | 12,350,000 |
| | 1,561,437 |
| | 741,000 |
| | 9/30/2033 | | None |
| Chevron Gas Station, San Jose, CA | | 1,060 |
| | Retail | | 4,242,075 |
| | — |
| | 199,800 |
| | — |
| | 5/31/2025 | | 4/5-yr |
| Levins, Sacramento, CA | | 76,000 |
| | Industrial | | 4,677,786 |
| | 2,079,793 |
| | 291,924 |
| | — |
| | 8/20/2023 | | 2/5-yr |
| Chevron Gas Station, Roseville, CA | | 3,300 |
| | Retail | | 3,809,418 |
| | — |
| | 201,600 |
| | — |
| | 9/30/2025 | | 4/5-yr |
| Island Pacific Supermarket, Elk Grove, CA | | 13,963 |
| | Retail | | 2,681,455 |
| | 1,891,225 |
| | 195,482 |
| | — |
| | 5/30/2033 | | 2/5-yr |
| Dollar General, Bakersfield, CA | | 18,827 |
| | Retail | | 5,119,605 |
| | 2,324,338 |
| | 328,250 |
| | — |
| | 7/31/2028 | | 3/5-yr |
| Rite Aid, Lake Elsinore, CA | | 17,272 |
| | Retail | | 7,448,827 |
| | 3,659,338 |
| | 535,777 |
| | — |
| | 2/29/2028 | | 6/5-yr |
| PMI Preclinical, San Carlos, CA | | 20,800 |
| | Office | | 10,195,435 |
| | 4,118,613 |
| | 607,894 |
| | — |
| | 10/31/2025 | | 2/5-yr |
| EcoThrift, Sacramento, CA | | 38,536 |
| | Retail | | 5,435,190 |
| | 2,639,237 |
| | 371,919 |
| | — |
| | 2/28/2026 | | 2/5-yr |
| GSA (MHSA), Vacaville, CA | | 11,014 |
| | Office | | 3,253,581 |
| | 1,796,361 |
| | 340,279 |
| | — |
| | 8/24/2026 | | None |
| PreK Education, San Antonio, TX | | 50,000 |
| | Retail | | 12,866,710 |
| | 5,140,343 |
| | 825,000 |
| | — |
| | 7/31/2021 | | 2/8-yr |
| Dollar Tree, Morrow, GA | | 10,906 |
| | Retail | | 1,403,845 |
| | — |
| | 103,607 |
| | — |
| | 7/31/2025 | | 3/5-yr |
| Dinan Cars, Morgan Hill, CA | | 27,296 |
| | Industrial | | 6,252,657 |
| | 2,710,834 |
| (11 | ) | 501,939 |
| | — |
| | 1/31/2020 | | None |
| Solar Turbines, San Diego, CA | | 26,036 |
| | Office | | 7,396,907 |
| | 2,843,863 |
| | 712,035 |
| | — |
| | 7/31/2022 | | 1/5-yr |
| Wood Group, San Diego, CA | | 37,449 |
| | Office | | 10,070,220 |
| | 3,478,480 |
| | 518,932 |
| | — |
| | 7/31/2022 | | 2/3-yr |
| ITW Rippey, El Dorado Hills, CA | | 38,500 |
| | Industrial | | 7,340,917 |
| | 3,112,349 |
| | 513,218 |
| | — |
| | 7/31/2022 | | 1/3-yr |
| Dollar General, Big Spring, TX | | 9,026 |
| | Retail | | 1,230,782 |
| | 611,161 |
| | 86,041 |
| | — |
| | 6/30/2030 | | 3/5-yr |
| Gap, Rocklin, CA | | 40,110 |
| | Office | | 8,670,446 |
| | 3,643,166 |
| | 567,958 |
| | — |
| | 2/28/2023 | | 1/5-yr |
| L-3 Communications, Carlsbad, CA | | 46,214 |
| | Office | | 11,911,811 |
| | 5,284,884 |
| | 764,844 |
| | — |
| | 4/30/2022 | | 2/3-yr |
| Sutter Health, Rancho Cordova, CA | | 106,592 |
| | Office | | 31,259,214 |
| | 14,161,776 |
| | 1,963,141 |
| | — |
| | 10/31/2025 | | 3/5-yr |
| Walgreens, Santa Maria, CA | | 14,490 |
| | Retail | | 5,832,214 |
| | 3,000,000 |
| | 369,000 |
| | — |
| | 3/31/2032 | | 8/5-yr |
| | | 2,360,802 |
| | | | $ | 390,196,068 |
| | $ | 195,739,481 |
| | $ | 29,424,453 |
| | $ | 7,104,558 |
| | | | |
(3)The acquisition fee was paid to our Former Advisor in connection with the acquisition of a property. The fee was equal to 3.0% of the contract purchase price of a property, as defined in the Advisory Agreement.
| |
(1) | Each of the properties was 100% occupied by a single tenant at the time of acquisition and has remained 100% occupied by that tenant through December 31, 2019, except for the Dana and Dinan Cars properties which are currently vacant. Dana is obligated to continue paying rent until the lease expires on June 30, 2024. We negotiated a termination of the lease with Dinan Cars effective January 31, 2020 in exchange for a termination payment of $783,182. |
| |
(2) | Annualized base lease revenue is calculated based on the contractual monthly base rent, excluding rent abatements, at December 31, 2019, multiplied by 12. |
| |
(3) | The acquisition fee was paid to our Former Advisor in connection with the acquisition of a property. The fee was equal to 3.0% of the contract purchase price of a property, as defined in the Advisory Agreement. |
| |
(4) | Represents the lease term beginning with the later of the purchase date or the rent commencement date through the end of the non-cancelable lease term, assuming no renewals are exercised unless otherwise noted. |
| |
(5) | These properties are both collateral for one mortgage note payable. The amounts shown on this schedule are based on the pro- rata investment in the two properties. |
| |
(6) | There is one loan for these six Dollar General properties and the amounts shown in this schedule are based on the pro-rata investment in the six properties. The deeds of trust contain cross-collateralization and cross-default provisions. |
| |
(7) | The loans for each of the Wyndham and Williams Sonoma properties located in Summerlin, Nevada were originated by Nevada State Bank (“Bank”). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing; in addition, the individual loans are subject to a cross-collateralization and cross-default agreement whereby any default under, or failure to comply with the terms of any one loan is an event of default under the terms of both loans. The value of the property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%. |
| |
(8) | The tenant’s right to cancel the lease on June 30, 2025 was not determined to be probable for financial accounting purposes. |
| |
(9) | Refinanced on March 7, 2019 with a 30-year mortgage note of $6,350,000 at a fixed rate of 4.64% for 11 years and a floating rate thereafter based on rates to be provided by the lender for new five-year commercial mortgage loans of similar size, quality, terms and security. |
| |
(10) | The tenant’s right to cancel the lease on July 31, 2023 was not determined to be probable for financial accounting purposes. |
| |
(11) | We used the lease termination proceeds from Dinan Cars described in footnote (1) above to reduce the principal balance under this mortgage by $650,000 and established a payment reserve with the remaining $133,182. In connection with the principal prepayment, we terminated the related swap agreement on February 4, 2020 at a cost of $47,000. |
(4)Represents the end of the non-cancelable lease term, assuming no early termination rights or renewals are exercised unless otherwise noted.
(5)There is one loan for these six Dollar General properties and the amounts shown in this schedule are based on the pro-rata investment in the six properties. The deeds of trust contain cross-collateralization and cross-default provisions.
(6)Reflects extension of lease subsequent to December 31, 2020 (see Notes 4 and 11 to our consolidated financial statements in this Annual Report on Form 10-K).
(7)Effective August 1, 2020, we executed an amendment for the early termination of the Dana lease changing the expiration from July 31, 2024 to July 31, 2022 in exchange for an early termination payment of $1,381,767 due on July 31, 2022 and continued rent payments of $65,000 per month from August 1, 2020 through July 1, 2022. In the event that we are able to re-lease or sell the Dana property prior to July 31, 2022, Dana is obligated to continue paying rent of $65,000 per month through July 1, 2022 or may elect to pay a cash lump sum to us equal to the net present value of the remaining rent payments.
(8)The loans for each of the Wyndham and Williams Sonoma properties located in Summerlin, Nevada were originated by Nevada State Bank (“Bank”). The loans are collateralized by a deed of trust and a security agreement with assignment of rents and fixture filing; in addition, the individual loans are subject to a cross-collateralization and cross-default agreement whereby any default under, or failure to comply with the terms of any one loan is an event of default under the terms of both loans. The value of the property must be in an amount sufficient to maintain a loan to value ratio of no more than 60%. If the loan to value ratio is ever more than 60%, the borrower shall, upon the Bank’s written demand, reduce the principal balance of the loans so that the loan to value ratio is no more than 60%.
(9) The tenant’s right to cancel the lease on June 30, 2025 was not determined to be probable for financial accounting purposes.
(10) The tenant’s right to cancel the lease on July 31, 2023 was not determined to be probable for financial accounting purposes.
Lease Expirations:
The following tables reflect lease expirations with respect to our properties as of December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year | | Number of Leases Expiring | | Leased Square Footage Expiring | | Percentage of Leased Square Footage Expiring | | Cumulative Percentage of Leased Square Footage Expiring | | Annualized Base Rent Expiring (1) | | Percentage of Annualized Base Rent Expiring | | Cumulative Percentage of Annualized Base Rent Expiring |
| 2021 | | 1 | | | 50,000 | | | 7.4 | % | | 7.4 | % | | $ | 825,000 | | | 3.1 | % | | 3.1 | % |
| 2022 | | 4 | | | 530,232 | | | 24.9 | % | | 32.3 | % | | 3,176,626 | | | 12.2 | % | | 15.3 | % |
| 2023 | | 4 | | | 229,376 | | | 10.8 | % | | 43.1 | % | | 2,836,009 | | | 10.9 | % | | 26.2 | % |
| 2024 | | 1 | | | 63,000 | | | 3.0 | % | | 46.1 | % | | 982,170 | | | 3.8 | % | | 30.0 | % |
| 2025 | | 6 | | | 315,673 | | | 14.8 | % | | 60.9 | % | | 6,458,931 | | | 24.8 | % | | 54.8 | % |
| 2026 | | 6 | | | 313,690 | | | 9.7 | % | | 70.6 | % | | 4,504,498 | | | 17.3 | % | | 72.1 | % |
| 2017 | | 2 | | | 104,022 | | | 4.9 | % | | 75.5 | % | | 1,347,349 | | | 5.2 | % | | 77.3 | % |
| 2028 | | 1 | | | 18,827 | | | 0.9 | % | | 76.4 | % | | 328,250 | | | 1.2 | % | | 78.5 | % |
| 2029 | | — | | | — | | | — | % | | 76.4 | % | | — | | | — | % | | 78.5 | % |
| 2030 | | 6 | | 91,492 | | | 5.1 | % | | 81.5 | % | | 1,251,152 | | | 4.8 | % | | 83.3 | % |
| Thereafter | | 5 | | | 411,983 | | | 18.5 | % | | 100.0 | % | | 4,342,751 | | | 16.7 | % | | 100.0 | % |
| Total | | 36 | | | 2,128,295 | | | 100.0 | % | | | | $ | 26,052,736 | | | 100.0 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Year | | Number of Leases Expiring | | Leased Square Footage Expiring | | Percentage of Leased Square Footage Expiring | | Cumulative Percentage of Leased Square Footage Expiring | | Annualized Base Rent Expiring (1) | | Percentage of Annualized Base Rent Expiring | | Cumulative Percentage of Annualized Base Rent Expiring |
| 2020 | | — |
| | — |
| | — | % | | — | % | | — |
| | — | % | | — | % |
| 2021 | | 8 |
| | 325,762 |
| | 13.8 | % | | 13.8 | % | | $ | 4,754,348 |
| | 16.1 | % | | 16.1 | % |
| 2022 | | 4 |
| | 530,981 |
| | 22.5 | % | | 36.3 | % | | 3,113,899 |
| | 10.6 | % | | 26.7 | % |
| 2023 | | 4 |
| | 194,612 |
| | 8.3 | % | | 44.6 | % | | 3,314,307 |
| | 11.3 | % | | 38.0 | % |
| 2024 | | 1 |
| | 45,465 |
| | 1.9 | % | | 46.5 | % | | 696,335 |
| | 2.4 | % | | 40.4 | % |
| 2025 | | 7 |
| | 314,868 |
| | 13.3 | % | | 59.8 | % | | 6,344,662 |
| | 21.6 | % | | 62.0 | % |
| 2026 | | 4 |
| | 178,608 |
| | 7.6 | % | | 67.4 | % | | 2,708,273 |
| | 9.2 | % | | 71.2 | % |
| 2017 | | 2 |
| | 104,022 |
| | 4.4 | % | | 71.8 | % | | 1,322,428 |
| | 4.5 | % | | 75.7 | % |
| 2028 | | 2 |
| | 17,263 |
| | 0.7 | % | | 72.5 | % | | 397,082 |
| | 1.3 | % | | 77.0 | % |
| 2029 | | — |
| | — |
| | — | % | | 72.5 | % | | — |
| | — | % | | 77.0 | % |
| Thereafter | | 13 |
| | 649,221 |
| | 27.5 | % | | 100.0 | % | | 6,773,119 |
| | 23.0 | % | | 100.0 | % |
| Total | | 45 |
| | 2,360,802 |
| | 100.0 | % | | | | $ | 29,424,453 |
| | 100.0 | % | | |
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(1) | (1)Annualized lease revenue is calculated based on the contractual monthly base rent at December 31, 2019 multiplied by 12. |
2019 Acquisitions:
On December 31, 2019, we acquired the following 20 operating properties as a result2020 multiplied by 12.
Chevron Gas property in San Jose, California
Levins property in Sacramento, California
Chevron Gas property in Roseville, California
Island Pacific Supermarket property in Elk Grove, California
Dollar General property in Bakersfield, California
Rite Aid property in Lake Elsinore, California
PMI Preclinical property in San Carlos, California
EcoThrift property in Sacramento, California
GSA (MSHA) property in Vacaville, California
PreK Education property in San Antonio, Texas
Dollar Tree property in Morrow, Georgia
Dinan Cars property in Morgan Hill, California
Solar Turbines property in San Diego, California
Amec Foster property in San Diego, California
ITW Rippey property in El Dorado, California
Dollar General Big Spring property in Big Spring, Texas
Gap property in Rocklin, California
L-3 Communication property in San Diego, California
Sutter Health property in Rancho Cordova, California
Walgreens property in Santa Maria, California
On October 24, 2019, through an Operating Partnership wholly-owned subsidiary, we acquired a 216,727 square foot cold storage warehouse and distribution facility in Yuma, Arizona, which we lease to Taylor Fresh Foods, Inc. The seller is not affiliated with us or the Advisor. The aggregate purchase price for the property was $24,700,000, plus an acquisition fee of $741,000 and legal and closing costs of $120,411.
Additional information about our properties, including our 2019 acquisitions, is included in Note 4 to our consolidated financial statements.
2019 Debt Financings:
On December 31, 2019, we assumed the following mortgage loans, secured by REIT I properties, as a result of the Merger (seeNotes 3 and 7 in the accompanying consolidated financial statements).
Levins property
Island Pacific Supermarket property
Dollar General property
Rite Aid property
PMI Preclinical property
EcoThrift property
GSA (MSHA) property
PreK Education property
Dinan Cars property
ITW Rippey/Solar Turbines/Amec Foster properties
Dollar General Big Spring property
Gap property
L-3 Communications property
Sutter Health property
Walgreens property
On October 24, 2019, we obtained a $12,350,000 mortgage loan through a nonaffiliated lender. The loan is secured by the Taylor Fresh Foods Property. The mortgage loan has a fixed interest rate of 3.85% per annum with five years of interest only payments and matures on November 1, 2029.
Additional information about the mortgage notes payable secured by our properties and our other indebtedness is included in Note 7 to our consolidated financial statements.
Investments:
As of December 31, 2019,2020, we had the following other real estate investment:
|
| | | |
| | Investment Balance |
| Santa Clara Property – an approximate 72.7% TIC Interest (1) | $ | 10,388,588 |
|
| | | | | | | | |
| TIC Interest | | Investment
Balance |
| Santa Clara Property – an approximate 72.7% TIC Interest (1) | This office property was acquired in 2017 and has approximately 91,740 rentable square feet. The purchase price was $29,625,075, including closing costs. The annualized base lease revenue is $1,981,584. The acquisition fee was $861,055, of which $626,073 was paid by us and the balance was paid by the other investors in the TIC. The lease expiration date is March 16, 2026 and the lease provides for three five-year renewal options. | $ | 10,002,368 | |
(1)This office property was acquired in 2017 and has approximately 91,740 rentable square feet. The purchase price was $29,625,075, including closing costs. The annualized base lease revenue is $1,981,584. The acquisition fee was $861,055, of which $626,073 was paid by us and the balance was paid by the other tenant-in-common owners of the property. The tenant's lease expiration date is March 16, 2026 and the lease provides for three five-year renewal options.
Additional information about our other real estate investments is included in Note 5 to our consolidated financial statements.
Investment in REIT I
In June 2016, we purchased 200,000 shares of common stock of REIT I, a California business trust for $2,000,000. Subsequent to the original purchase, we purchased additional shares of common stock of REIT I as follows: an aggregate of 164,352 shares at an aggregate cost of $1,643,518 during 2016 and an aggregate of 39,628 shares at an aggregate cost of $422,439 during 2018, bringing our total ownership prior to the Merger to 403,980 shares. These shares were canceled pursuant to the Merger on December 31, 2019. For additional information regarding the Merger, see Item 1. Business - Completion of the Merger and Self-Management Transaction, Note 3 to our accompanying consolidated financial statements, and our Current Reportsthis Annual Report on Form 8-K filed with the SEC on March 19, 2019, September 20, 2019 and December 31, 2019.10-K.
Prior to the Merger, REIT I owned 20 properties, which are primarily located in California, which we acquired pursuant to the Merger. These retail, office and industrial properties have an aggregate square footage of 614,000 square feet, as further described in Note 4 to our accompanying consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Note 10 - Commitments and Contingencies - Legal Mattersto our consolidated financial statements. in this Annual Report on Form 10-K.
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stockholder Information
As of February 29, 2020,28, 2021, we had 23,788,5427,659,424 shares (adjusted for the 1:3 reverse stock split) of Class C common stock outstanding held by a total of 8,4477,668 stockholders of record and 187,29563,029 shares (adjusted for the 1:3 reverse stock split) of Class S common stock outstanding held by nine stockholders.
Market Information
No public market currently exists for our shares of common stock, and we currently have no plans to list our shares on a national securities exchange. Until our shares are listed, if ever, our stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase requirements. Any sale must comply with applicable state and federal securities laws. In addition, our charter as supplemented by actions of our board of directors prohibits the ownership of more than 9.8% of our stock by a single person, unless exempted by our board of directors. Consequently, there is the risk that our stockholders may not be able to sell their shares at a time or price acceptable to them.
In the first quarter of each year, our board of directors annually adjusts the offering price of our shares of common stock sold in the Offerings and pursuant to our distribution reinvestment plan, which offering price is equal to our most recently publishedEstimated NAV per share. This is also the price used for purposes of calculating the price we pay to repurchase shares of our common stock pursuant to our share repurchase program described below under “Share Repurchase Program.”
Estimated Per Share Value
Overview
On January 31, 2020,27, 2021, the audit committee of our board of directors recommended, and our board of directors unanimously approved and established, an updated estimated NAV per share of our Class C common stock and Class S common stock of $10.27 per share (unaudited) as of December 31, 2019$23.03 (unaudited and adjusted for the 1:3 reverse stock split) based on the estimated market value of our assets less the estimated market value of our liabilities, divided by the number of fully-diluted Class C and Class S shares outstanding as of December 31, 2019.2020, adjusted to reflect the Company’s 1:3 reverse stock split which was effective on February 1, 2021. The updated estimated NAV per share as of December 31, 20192020 first appeared on investor dashboards on February 1, 2020. This is the third time that our2021. Our board of directors has determinedpreviously approved an estimated NAV per share of our common stock. Our board of directors previously determined an estimated NAV of our common stock of $10.16 per share (unaudited)$21.01 (unaudited and adjusted for the 1:3 reverse stock split) as of April 30, 2020 and $30.48 (unaudited and adjusted for the 1:3 reverse stock split) as of December 31, 2018 and $10.05 per share (unaudited) as of December 31, 2017.2019. We intend to continuebegin to publish an updated estimated NAV per share on at least an annual basis.quarterly basis within 45 days after the end of each quarter, barring extenuating circumstances. Additional information on the determination of our estimated NAV per share, including the process used to determine our estimated NAV per share, can be found in our Current Report on Form 8-K filed with the SEC on January 31, 2020.29, 2021.
Class C Common Stock (Registered Offerings)
Commencing on February 1, 2020, the offering price for shares of our Class C common stock pursuant to our Follow-on Offering is $10.27 per share (unaudited). All subscriptions that were received in good order and fully funded by the close of business on January 31, 202027, 2021 (prior to the most recent estimated per share NAV established by our board of directors) were processed using the $10.16$21.01 per share (unaudited and adjusted for the 1:3 reverse stock split) offering price (unaudited); all subscriptions for offering shares received afterprice. Effective January 31, 2020 will be processed using a $10.27 per share offering price (unaudited).27, 2021, the board of directors terminated the Follow-on Offering.
Class S Common Stock (Class S Offering)
Commencing on February 1, 2020,2021, the offering price for shares of our Class S common stock offered exclusively to non-US persons pursuant to an exemption from the registration requirements of the Securities Act, under and in accordance with Regulation S of the Securities Act, is $10.27$23.03 per share (unaudited)(unaudited and adjusted for the 1:3 reverse stock split), plus the amount of any applicable upfront commissions and fees. Our board of directors will adjust the offering price during the course of the Class S Offering on a quarterly basis to equal our most recently published NAV per share, plus the amount of any applicable upfront commissions and fees.
Historical Estimated ValuesNAVs per Share (Unaudited)
The historical reported estimated valueNAVs per share of our common stock (unaudited) approved by the board of directors is set forth below:
below (adjusted for the 1:3 reverse stock split): |
| | | | | | | | | | | | | |
Estimated ValueNAV per Share (Unaudited) | | Effective Date of Valuation | | Filing with the SEC |
$10.2723.03 | | December 31, 2020 | | January 29, 2021 |
| $21.01 | | April 30, 2020 | | May 22, 2020 |
| $30.81 | | December 31, 2019 | | January 31, 2020 | | January 31, 2020 |
$10.1630.48 | | January 11, 2019December 31, 2018 | | January 14, 2019 |
$10.05 | | January 18, 2018 | | January 19, 2018 |
$10.00 (initial offering price) | | N/A | | N/A |
Use of Proceeds from Sales of Registered Securities and Unregistered Sales of Equity Securities
Use of Proceeds from Sales of Registered Securities
On June 1, 2016, the Initial Registered Offering was declared effective by the SEC, and on July 20, 2016, we began offering shares of common stock to the public. Pursuant to the Initial Registered Offering, we sold shares of our Class C Common Stockcommon stock directly to investors. Commencing in August 2017, we began selling shares of Class C Common Stockcommon stock to U.S. persons only, as defined under the Securities Act, as a result of the commencement of the Class S Offering to non-U.S. Persons. Under applicable SEC rules, the registration statement for the Initial Registered Offering was scheduled to terminate on June 1, 2019, but remained effective because the Company filed a new registration statement on Form S-11 for the Follow-on Offering with the SEC on May 24, 2019 to extend the Initial Registered Offering in accordance with Rule 415 of the Securities Act. The Company’s initial registration statement on Form S-11 terminated when the Follow-on Offering was declared effective by the SEC on December 23, 2019. As required by some states,Effective January 27, 2021, the Company is also required to renew the registration statement for the Registered Offering annually or file a new registration statement to continue the Registered Offering. We may terminate this offering at any time. Our board of directors will adjustterminated the offering priceFollow-on Offering. In connection with the termination of the Follow-on Offering, the Company stopped accepting investor subscriptions on January 22, 2021. In connection with the termination of the Follow-on Offering, we stopped accepting investor subscriptions on January 22, 2021. On January 22, 2021, we filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 of additional shares of Class C common stock sold into be issued pursuant to the Primary Offering and2021 DRP Offering. We commenced offering shares of Class C common stock pursuant to the Registered2021 DRP Offering annually in the first quarter of each year during the courseupon termination of the offering.Follow-on Offering.
Through December 31, 2019,2020, we had sold 17,887,9496,627,934 shares (adjusted for the 1:3 reverse stock split) of Class C common stock in the Registered Offerings, including 1,527,839790,479 shares (adjusted for the 1:3 reverse stock split) of Class C common stock sold under our Registered DRP Offering, for aggregate gross offering proceeds of $179,698,905.$197,527,817.
Also, throughThrough December 31, 2019, we had paid a total of $5,429,105$5,371,195 to our Former Sponsor as reimbursement for organizational and offering costs for the Class C common stock, which reimbursement was subject to a limit of 3% of gross offering proceeds. Pursuant to an amendment of the Advisory Agreement, the Company agreed to pay all future organizationorganizational and offering costs, and to no longer be reimbursed by the Former Sponsor for investor relations personnel costs after September 30, 2019, in exchange for the Former Sponsor's agreement to terminate its right to receive 3% of all offering proceeds as reimbursement for organizationorganizational and offering costs paid by the Former Sponsor.
FromEffective January 27, 2021, our board of directors terminated the commencementFollow-on Offering. In connection with the termination of the RegisteredFollow-on Offering, through December 31, 2019, the net offering proceeds to us, after deducting the reimbursable organizational and offering expenses incurred as described above and costs we paid during the fourth quarter of 2019, were approximately $174,245,123, including net offering proceeds from our dividend reinvestment plan of $15,400,422. stopped accepting investor subscriptions on January 22, 2021.
Substantially all of these proceeds, along with proceeds from the Class S Offering and debt financing, were used to make approximately $287,732,000 of investments in real estate properties, including the purchase price of our investments, deposits paid for future acquisitions, acquisition fees and expenses, and costs of leveraging each real estate investment. Of the use of the offering proceeds described in the prior statement, $7,666,690 and $696,150 were used to pay acquisition fees and financing coordination fees to our Former Advisor, respectively. Our Former Sponsor was reimbursed for $5,429,105 of organizational and offering costs, including $57,910 of organizational and offering costs related to our Class S common stock. SeeNote 9 to our consolidated financial statements in this Annual Report on Form 10-K for details about fees paid to affiliates. Noneaffiliates.
Unregistered Sales of Equity Securities
During the three months ended December 31, 2019,2020, we issued 10,3353,810 shares (adjusted for the 1:3 reverse stock split) of Class C common stock to our directors for their services as board members. Such issuance was made in reliance on the exemption from registration under Rule 4(a)(2) of the Securities Act.
During the three months ended December 31, 2019,2020, we also issued 346257 shares (adjusted for the 1:3 reverse stock split) of Class S common stock in the Class S Offering for aggregate gross offering proceeds of $3,515.$5,407. Such issuances were made in reliance on an exemption from the registration requirements of the Securities Act under and in accordance with Regulation S of the Securities Act.
Distribution Information
We intend to pay distributions on a monthly basis, and we paid our first distribution on July 11, 2016. The rate is determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. Our board of directors has not pre-established a percentage range of return for distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders other than as necessary to meet REIT qualification requirements.
Subject to stockholder approval of planned amendments to our charter, we plan to pay a 13th distribution if our AFFO exceeds 100% of distributions declared for the year ending December 31, 2021. Any 13th distribution would be declared by our board of directors during January 2022 and be based on the outstanding shares held by stockholders on the declaration date using the following formula: (i) the daily amount of the 13th distribution divided by 365 days (ii) multiplied by the number of days such shares were held by such stockholder from January 1, 2021 through December 31, 2021. Stockholders will only be eligible for any 13th distribution declared by the board of directors if they hold such shares on the declaration date in January 2022.
During our offering stage, when we may raise capital more quickly than we acquire income-producing assets, and from time- to-time during our operational state, we may not pay distributions solely from operations. Historically, the sources of cash used to pay our distributions have been from net rental income received and deferral of management fees, if so elected by our Former Advisor.Advisor through December 31, 2019. The leases for certain of our real estate acquisitions may provide for rent abatements. These abatements are an inducement for the tenant to enter into or extend the term of its lease. In connection with the acquisition of some properties, we may be able to negotiate a reduced purchase price for the acquired property in an amount that equals the previously agreed-upon rent abatement. In connection with the extension of the lease term of some existing properties, we may agree to pay a lease extension fee. During the period of any rent abatement on properties that we acquire or in relation to lease extension fees we pay, we may be unable to fully fund our distributions from net rental income received. In that event, we may expand the sources of cash used to fund our stockholder distributions to include proceeds from the sale of our common stock, but only during the periods, and up to the amounts, of any rent abatements where we are able to negotiate a reduced purchase price or pay lease extension fees.
Distributions declared, distributions paid out, cash flows from operations and our sources of distribution payments were as follows:follows for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Cash Flows
Provided by
(Used in) Operating
Activities | | Sources of Distribution Payment |
| Period (1) | | Total
Distributions
Declared | | Distributions
Declared Per
Share | | | | | | | Net Rental
Income
Received | | Waived
Advisor
Asset
Management
Fees | | Deferred
Advisor Asset
Management
Fees | | Offering
Proceeds (10) |
| | | Distributions Paid | | | | | |
| | | Cash | | Reinvested | | | | | |
| 2020: | | | | | | | | | | | | | | | | | | |
| First Quarter 2020 (2) | | $ | 4,189,102 | | | $ | 0.523018 | | | $ | 1,379,751 | | | $ | 2,360,514 | | | $ | 1,947,505 | | (*) | $ | 4,189,102 | | | (11) | | (11) | | $ | — | |
| Second Quarter 2020 (3) | | 3,270,291 | | | 0.407691 | | | 1,710,514 | | | 2,304,199 | | | (774,533) | | (*) | 3,270,291 | | | (11) | | (11) | | — | |
| Third Quarter 2020 (4) | | 2,135,815 | | | 0.264656 | | | 981,432 | | | 1,150,452 | | | 2,638,676 | | | 2,135,815 | | | (11) | | (11) | | — | |
| Fourth Quarter 2020 (5) | | 2,106,620 | | | 0.264656 | | | 947,519 | | | 1,143,369 | | | 1,765,192 | | | 2,106,620 | | | (11) | | (11) | | — | |
| 2020 Totals | | $ | 11,701,828 | | | $ | 1.460021 | | | $ | 5,019,216 | | | $ | 6,958,534 | | | $ | 5,576,840 | | (*) | $ | 11,701,828 | | | | | | | $ | — | |
| 2019: | | | | | | | | | | | | | | | | | | |
| First Quarter 2019 (6) | | $ | 2,388,694 | | | $ | 0.527625 | | | $ | 552,134 | | | $ | 1,763,630 | | | $ | 773,736 | | | $ | 2,388,694 | | | $ | — | | | $ | — | | | $ | — | |
| Second Quarter 2019 (7) | | 2,605,268 | | | 0.527625 | | | 630,184 | | | 1,900,893 | | | 2,112,395 | | | 2,605,268 | | | — | | | — | | | — | |
| Third Quarter 2019 (8) | | 2,784,235 | | | 0.527625 | | | 719,257 | | | 2,020,768 | | | 1,677,064 | | (*) | 2,784,235 | | | — | | | — | | | — | |
| Fourth Quarter 2019 (9) | | 2,807,322 | | | 0.527625 | | | 2,116,411 | | | 667,391 | | | 185,709 | | (*) | 2,807,322 | | | — | | | — | | | — | |
| 2019 Totals | | $ | 10,585,519 | | | $ | 2.110500 | | | $ | 4,017,986 | | | $ | 6,352,682 | | | $ | 4,748,904 | | (*) | $ | 10,585,519 | | | $ | — | | | $ | — | | | $ | — | |
(*) Includes non-recurring Merger costs of $201,920 included in general and administrative expenses for the year ended December 31, 2020 ($193,460 during the quarter ended March 31, 2020 and $8,460 during the quarter ended June 30, 2020) and $1,468,913 for the year ended December 31, 2019 ($800,359 during the quarter ended September 30, 2019 and $668,554 during the quarter ended December 31, 2019).
(1)The distribution paid per share of Class S common stock is net of deferred selling commissions.
(2)The distribution of $1,415,328 for the month of March 2020 was declared in January 2020 and paid on April 27, 2020. The amount was recorded as a liability as of March 31, 2020.
(3)The distribution of $691,443 for the month of June 2020 was declared in May 2020 and paid on July 27, 2020. The amount was recorded as a liability as of June 30, 2020.
(4)The distribution of $674,837 for the month of September 2020 was declared in May 2020 and paid on October 26, 2020. The amount was recorded as a liability as of September 30, 2020.
(5)The distribution of $690,569 for the month of December 2020 was declared in September 2020 and paid on January 22, 2021. The amount was recorded as a liability as of December 31, 2020.
(6)The distribution of $821,300 for the month of March 2019 was declared in February 2019 and paid on April 25, 2019. The amount was recorded as a liability as of March 31, 2019.
(7)The distribution of $896,291 for the month of June 2019 was declared in February 2019 and paid on July 25, 2019. The amount was recorded as a liability as of June 30, 2019.
(8)The distribution of $937,863 for the month of September 2019 was declared in August 30, 2019 and paid on October 25, 2019. The amount was recorded as a liability as of September 30, 2019.
(9)The distribution of $966,491 for the month of December 2019 was declared in August 30, 2019 and paid on January 25, 2020. The amount was recorded as a liability as of December 31, 2019.
(10)In connection with the acquisition of some properties, we may negotiate a reduced purchase price for the acquired property in an amount that equals an agreed-upon rent abatement. During the period of any rent abatement on properties that we acquire, we may be unable to fully fund our distributions from net rental income received and waivers or deferrals of Advisor asset management fees. In connection with the extension of the lease term of some existing properties, we may agree to pay a lease extension fee. In those events, we may expand the sources of cash used to fund our stockholder distributions to include proceeds from the sale of our common stock, but only during the periods, and up to the amounts, of any rent abatements where we are able to negotiate a reduced purchase price or the amounts extend a lease term by payment of an extension fee.
(11)Subsequent to the Self-Management Transaction on December 31, 2019, asset management fees are not applicable.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Cash Flows Provided by Operating Activities | | Sources of Distribution Payment |
| Period (1)(2) | | Total Distributions Declared | | Distributions Declared Per Share | | | | | | | Net Rental Income Received | | Waived Advisor Asset Management Fees | | Deferred Advisor Asset Management Fees | | Offering Proceeds (11) |
| | | | Distributions Paid | | | | | |
| | | | Cash | | Reinvested | | | | | |
| | | | | | | | | | | | | | | | | | | |
| 2019: | | | | | | | | | | | | | | | | | | |
| First Quarter 2019 (7) | | $ | 2,388,694 |
| | $ | 0.175875 |
| | $ | 552,134 |
| | $ | 1,763,630 |
| | $ | 773,736 |
| | $ | 2,388,694 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Second Quarter 2019 (8) | | 2,605,268 |
| | 0.175875 |
| | 630,184 |
| | 1,900,893 |
| | 2,112,395 |
| | 2,605,268 |
| | — |
| | — |
| | — |
|
| Third Quarter 2019 (9) | | 2,784,235 |
| | 0.175875 |
| | 719,257 |
| | 2,020,768 |
| | 1,677,064 |
| (*) | 2,784,235 |
| | — |
| | — |
| | — |
|
| Fourth Quarter 2019 (10) | | 2,807,322 |
| | 0.175875 |
| | 2,116,411 |
| | 667,391 |
| | 185,709 |
| (*) | 2,807,322 |
| | — |
| | — |
| | — |
|
| 2019 Totals | | $ | 10,585,519 |
| | $ | 0.703500 |
| | $ | 4,017,986 |
| | $ | 6,352,682 |
| | $ | 4,748,904 |
| (*) | $ | 10,585,519 |
| | $ | — |
| | $ | — |
|
| $ | — |
|
| | | | | | | | | | | | | | | | | | | |
| 2018: | | | | | | | | | | | | | | | | | | |
| First Quarter 2018 (3) | | $ | 2,173,195 |
| | $ | 0.175875 |
| | $ | 335,216 |
| | $ | 1,260,232 |
| | $ | 38,144 |
| | $ | 2,173,195 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Second Quarter 2018 (4) | | 1,864,493 |
| | 0.175875 |
| | 392,014 |
| | 1,404,441 |
| | 1,279,870 |
| | 1,864,493 |
| | — |
| | — |
| | — |
|
| Third Quarter 2018 (5) | | 2,041,912 |
| | 0.175875 |
| | 445,312 |
| | 1,539,893 |
| | 1,237,975 |
| | 2,041,912 |
| | — |
| | — |
| | — |
|
| Fourth Quarter 2018 (6) | | 2,202,217 |
| | 0.175875 |
| | 483,531 |
| | 1,669,538 |
| | 3,325,900 |
| | 2,202,217 |
| | — |
| | — |
| | — |
|
| 2018 Totals | | $ | 8,281,817 |
| | $ | 0.703500 |
| | $ | 1,656,073 |
| | $ | 5,874,104 |
| | $ | 5,881,889 |
| | $ | 8,281,817 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
(*) | Includes non-recurring merger costs of $1,468,913 for the year ended December 31, 2019 ($800,359 during the quarter ended September 30, 2019 and $668,554 during the quarter ended December 31, 2019). |
| |
(1) | The distribution paid per share of Class S common stock is net of deferred selling commissions. |
| |
(2) | Our board of directors declared distributions for four months (December 2017 through March 2018) beginning in the first quarter of 2018. To transition to a process of declaring dividends prior to the beginning of each month, dividends declared per share of common stock in succeeding quarters reflects four rather than three months of dividends. |
| |
(3) | The distribution of $577,747 for the month of March 2018 was declared in March 2018 and paid on April 25, 2018. The amount was recorded as a liability as of the balance sheet date March 31, 2018. |
| |
(4) | The distribution of $641,785 for the month of June 2018 was declared in June 2018 and paid on July 25, 2018. The amount was recorded as a liability as of the balance sheet date June 30, 2018. |
| |
(5) | The distribution of $698,492 for the month of September 2018 was declared in September 2018 and paid on October 25, 2018. The amount was recorded as a liability as of the balance sheet date September 30, 2018. |
| |
(6) | The distribution of $751,640 for the month of December 2018 was declared in December 2018 and paid on January 25, 2019. The amount was recorded as a liability as of December 31, 2018 in the accompanying consolidated balance sheets. |
| |
(7) | The distribution of $821,300 for the month of March 2019 was declared in February 2019 and paid on April 25, 2019. The amount was recorded as a liability as of March 31, 2019. |
| |
(8) | The distribution of $896,291 for the month of June 2019 was declared in February 2019 and paid on July 25, 2019. The amount was recorded as a liability as of June 30, 2019. |
| |
(9) | The distribution of $937,863 for the month of September 2019 was declared in August 30, 2019 and paid on October 25, 2019. The amount was recorded as a liability as of September 30, 2019. |
| |
(10) | The distribution of $966,491 for the month of December 2019 was declared in August 30, 2019 and paid on January 25, 2020. The amount was recorded as a liability as of December 31, 2019 in the accompanying consolidated balance sheets. |
| |
(11) | In connection with the acquisition of some properties, we may negotiate a reduced purchase price for the acquired property in an amount that equals an agreed-upon rent abatement. During the period of any rent abatement on properties that we acquire, we may be unable to fully fund our distributions from net rental income received and waivers or deferrals of Advisor asset management fees. In connection with the extension of the lease term of some existing properties, we may agree to pay a lease extension fee. In those events, we may expand the sources of cash used to fund our stockholder distributions to include proceeds from the sale of our common stock, but only during the periods, and up to the amounts, of any rent abatements where we are able to negotiate a reduced purchase price or the amounts extend a lease term by payment of an extension fee. |
Distributions are paid on a monthly basis. For the year ended December 31, 2020, distributions paid to our stockholders were 0% ordinary income, 0% capital gain and 100% return of capital/non-dividend distribution. For the year ended December 31, 2019, distributions paid to our stockholders were 18.1% ordinary income, 0% capital gain and 81.9% return of capital/non-dividend distribution. For the year ended December 31, 2018, distributions paid to our stockholders were 5.0% ordinary income, 0% capital gain and 95.0% return of capital/non-dividend distribution. The following presents the U.S. federal income tax characterization of the distributions paid in 2020 and 2019 and 2018:(adjusted for the 1:3 reverse stock split):
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 |
| Ordinary income | | $ | — | | | $ | 0.3825 | |
| Non-taxable distribution | | 1.4600 | | | 1.7280 | |
| Total | | $ | 1.4600 | | | $ | 2.1105 | |
|
| | | | | | | |
| | Years Ended December 31 |
| | 2019 | | 2018 |
| Ordinary income | $ | 0.1275 |
| | $ | 0.0352 |
|
| Non-taxable distribution | 0.5760 |
| | 0.6683 |
|
| Total | $ | 0.7035 |
| | $ | 0.7035 |
|
For the periods January 1, 2019 through February 28, 2019, July 1, 2019 through August 31, 2019 and January 1, 2020 through January 31, 2020, distributionsDistributions to stockholders were declared and paid based on daily record dates at rates per share per day. Distributions to stockholders for the periods March 1, 2019 through June 30, 2019 were declared on February 28, 2019, September 1, 2019 through December 31, 2019 were declared on August 30, 2019 and February 1, 2020 through December 31, 2020 were declared on January 24, 2020 (seeThe distribution rate details below).are as follows:
|
| | | | | | | | |
| Distribution Period | | Rate Per Share Per Day (1) | | Declaration Date | | Payment Date |
| 2019 | | | | | | |
| January 1-31 | | $ | 0.00191183 |
| | December 26, 2018 | | February 25, 2019 |
| February 1-28 | | $ | 0.00209375 |
| | January 31, 2019 | | March 25, 2019 |
| March 1-31 | | $ | 0.00192740 |
| | February 28, 2019 | | April 25, 2019 |
| April 1-30 | | $ | 0.00192740 |
| | February 28, 2019 | | May 28, 2019 |
| May 1-31 | | $ | 0.00192740 |
| | February 28, 2019 | | June 25, 2019 |
| June 1-30 | | $ | 0.00192740 |
| | February 28, 2019 | | July 25, 2019 |
| July 1-31 | | $ | 0.00189113 |
| | June 25, 2019 | | August 26, 2019 |
| August 1-31 | | $ | 0.00189113 |
| | July 31, 2019 | | September 25, 2019 |
| September 1-30 | | $ | 0.00192740 |
| | August 30, 2019 | | October 25, 2019 |
| October 1-31 | | $ | 0.00192740 |
| | August 30, 2019 | | November 25, 2019 |
| November 1-30 | | $ | 0.00192740 |
| | August 30, 2019 | | December 26, 2019 |
| December 1-31 | | $ | 0.00192740 |
| | August 30, 2019 | | January 25, 2019 |
| | | | | | | |
| 2020 | | | | | | |
| January 1-31 | | $ | 0.00192210 |
| | December 18, 2019 | | February 25, 2020 |
| February 1-29 | | $ | 0.00191257 |
| | January 24, 2020 | | March 25, 2020 |
| March 1-31 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| April 1-30 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| May 1-31 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| June 1-30 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| July 1-31 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| August 1-31 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| September 1-30 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| October 1-31 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| November 1-30 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| December 1-31 | | $ | 0.00191257 |
| | January 24, 2020 | | (2) |
| | | | | | | | | | | | | | | | | | | | |
(1)Distribution Period | The distribution paid per share of Class S common stock is net of deferred selling commissions. | Rate Per Share
Per Day (1)(2) | | Declaration Date | | Payment Date |
| 2021: | | | | | | |
(2)January 1-31 | Distribution has not been paid as of the filing date of this Annual Report on Form 10-K. | $ | 0.00287670 | | | December 9, 2020 | | February 25, 2021 |
| February 1-28 | | $ | 0.00287670 | | | January 27, 2021 | | March 25, 2021 |
| March 1-31 | | $ | 0.00287670 | | | January 27, 2021 | | April 26, 2021 (3) |
| April 1-30 | | $ | 0.00287670 | | | March 25, 2021 | | May 25, 2021 (3) |
| May 1-31 | | $ | 0.00287670 | | | March 25, 2021 | | June 25, 2021 (3) |
| June 1-30 | | $ | 0.00287670 | | | March 25, 2021 | | July 26, 2021 (3) |
| | | | | | |
| 2020: | | | | | | |
| January 1-31 | | $ | 0.00576630 | | | December 18, 2019 | | February 25, 2020 |
| February 1-29 | | $ | 0.00573771 | | | January 24, 2020 | | March 25, 2020 |
| March 1-31 | | $ | 0.00573771 | | | January 24, 2020 | | April 27, 2020 |
| April 1-30 | | $ | 0.00573771 | | | January 24, 2020 | | May 26, 2020 |
| May 1-31 | | $ | 0.00481479 | | | May 20, 2020 | | June 25, 2020 |
| June 1-30 | | $ | 0.00287670 | | | May 20, 2020 | | July 27, 2020 |
| July 1-31 | | $ | 0.00287670 | | | May 20, 2020 | | August 25, 2020 |
| August 1-31 | | $ | 0.00287670 | | | May 20, 2020 | | September 25, 2020 |
| September 1-30 | | $ | 0.00287670 | | | May 20, 2020 | | October 26, 2020 |
| October 1-31 | | $ | 0.00287670 | | | September 30, 2020 | | November 25, 2020 |
| November 1-30 | | $ | 0.00287670 | | | September 30, 2020 | | December 28, 2020 |
| December 1-31 | | $ | 0.00287670 | | | September 30, 2020 | | January 22, 2021 |
(1)Adjusted for the 1:3 reverse stock split.
(2)The distribution paid per share of Class S common stock is net of deferred selling commissions.
(3)Expected payment date of distribution.
To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If we meet the REIT qualification requirements, we generally will not be subject to U.S. federal income tax on the income that we distribute to our stockholders each year. Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.
Our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including those discussed under Part I, Item 1A. Risk Factors. Those factors include: (a) our ability to continue to raise capital to make additional investments; (b) the future operating performance of our current and future real estate investments in the existing real estate and financial environment; (c) our ability to identify additional real estate investments that are suitable to execute our investment objectives; (d) the success and economic viability of our tenants; (e) our ability to refinance existing indebtedness at comparable terms; (e)(f) changes in interest rates on any variable rate debt obligations we incur; and (f)(g) the level of participation in our dividend reinvestment plan.DRPs. In the event our cash flow from operations decreases in the future, the level of our distributions may also decrease.
Distribution Reinvestment PlanPlans
Pursuant to the terms of our distribution reinvestment plans currently in effect (the “DRPs”),DRPs, distributions (excluding those our board of directors designates as ineligible for reinvestment through the DRPs) will be reinvested in shares of our Class C and Class S common stock at a price equal to the most recently disclosed estimated NAV per share, as determined by our board of directors. Accordingly, shares of our Class C and Class S common stock issued pursuant to the DRPs were issued for $30.48 per share (unaudited and adjusted for the 1:3 reverse stock split) from February 1, 2019 until January 31, 2020, $30.81 per share (unaudited and adjusted for the 1:3 reverse stock split) commencing February 1, 2020 until May 31, 2020, and $21.01 (unaudited and adjusted for the 1:3 reverse stock split) from June 1, 2020 to January 31, 2021, and will be issued for $10.27$23.03 per share (unaudited)(unaudited and adjusted for the 1:3 reverse stock split) commencing on February 1, 2020.2021.
On January 22, 2021, we filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 of additional shares of Class C common stock to be issued pursuant to the amended and restated DRP. We commenced offering shares of Class C common stock pursuant to the 2021 DRP Offering upon termination of the Follow-on Offering.
A participant may terminate participation in the DRP at any time by delivering electronic notice on their personal on-line dashboard or written notice to us. To be effective for any monthly distribution, such termination notice must be received by us at least 10 business days prior to the last day of the month to which the distribution relates. Any termination must include the investor's bank account information necessary for Automated Clearing House deposits directly in their bank account.
Stockholders who presently participate in the DRP do not need to take any action to continue their participation in the DRP.
Share Repurchase ProgramPrograms
In accordance with our share repurchase program for our Registered Offerings,the Class C SRP, prior to February 1, 2021, the per share repurchase price will dependfor shares of Class C common stock depended on the length of time the redeeming stockholder had held such shares as follows:
(i)less than one year from the purchase date, 97% of the most recently published NAV per share;
(ii)after at least one year but less than two years from the purchase date, 98% of the most recently published NAV per share;
(iii)after at least two years but less than three years from the purchase date, 99% of the most recently published NAV per share; and
(iv)after three years from the purchase date, 100% of the most recently published NAV per share.
Effective February 1, 2021, the per share repurchase price for shares of Class C common stock depends on the following length of time the redeeming stockholder has held such shares as follows:shares:
| |
(i) | less than one year from the purchase date, 97% of the most recently published NAV per share; |
| |
(ii) | after at least one year but less than two years from the purchase date, 98% of the most recently published NAV per share; |
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(iii) | after at least two years but less than three years from the purchase date, 99% of the most recently published NAV per share; and |
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(iv) | after three years from the purchase date, 100% of the most recently published NAV per share. |
(i) less than two years from the purchase date, 98% of the most recently published NAV per share; and
(ii) after at least two years from the purchase date, 100% of the most recently published NAV per share.
Repurchase requests submitted on or prior to January 31, 202022, 2021 were processed using the NAV of $10.16$21.01 per share (unaudited)(unaudited and adjusted for the 1:3 reverse stock split). For repurchase requests submitted after January 31, 2020,February 1, 2021, the estimated NAV of $10.27$23.03 per share (unaudited)(unaudited and adjusted for the 1:3 reverse stock split) shall serve as the most recently published NAV per share for purposes of the share repurchase programSRP applicable to shares of Class C common stock.
Shares of Class S common stock are not eligible for repurchase unless they have been held for at least one year. After this holding period has been met, shares of Class S common stock can be repurchased at the most recently published NAV per share. Therefore, repurchase requests submitted on or prior to January 31, 202022, 2021 were processed using the NAV of $10.16$21.01 per share (unaudited)(unaudited and adjusted for the 1:3 reverse stock split). For repurchase requests submitted after January 31, 2020,February 1, 2021, the estimated NAV of $10.27$23.03 per share (unaudited)(unaudited and adjusted for the 1:3 reverse stock split) shall serve as the most recently published NAV per share for purposes of the share repurchase programSRP applicable to shares of Class S common stock.
From inception of the Offering through December 31, 2019, 2,376,509 shares of Class C common stock had been repurchased by us, which represented all repurchase requests received in good order and eligible for repurchase through December 31, 2019. These shares were repurchased with the proceeds from reinvested distributions and the Registered Offerings at 97% of the prior-NAV price of $10.16 per share (unaudited) during the 12-month period and 98% of the prior-NAV price of $10.16 per share (unaudited) during the 12- to 24-month period following a stockholder’s investment in the shares. Effective
January 31, 2020, the estimated NAV of $10.27 per share (unaudited) became the most recently published NAV for purposes of the share repurchase program.
In connection with the Company's entry into the Merger Agreement, the Company's share repurchase program was suspended on September 19, 2019 and was reopened on January 2, 2020. From January 2, 2020 through March 27, 2020, two business days prior to month end, the Company received requests for redemptions of 1,737,191 shares of Class C common stock and 3,309 shares of Class S common stock aggregating $17,820,513 and repurchased 895,216 shares of Class C common stock and no shares of Class S common stock for a total of $9,091,146 through March 31, 2020.
Limitations on Repurchase
We may, but are not required to, use available cash not otherwise dedicated to a particular use to pay the repurchase price, including cash proceeds generated from the dividend reinvestment plan,DRP, securities offerings, operating cash flow not intended for distributions, borrowingsdebt financing and capital transactions, such as asset sales or loan refinancings.sales. We cannot guarantee that we will have sufficient available cash to accommodate all repurchase requests made in any given month.
In addition, we may not repurchase shares in an amount that would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
Additional limitations on share repurchases under the share repurchase programSRPs are discussed below.
•Repurchases per month will beare limited to no more than 2% of our most recently determined aggregate NAV, which we currently intend to calculate on an annuala quarterly basis inwithin 45 days after the first quarterend of each yearquarter, barring any extenuating circumstances (and calculated as of December 31the last day of the immediately preceding year)quarter). Repurchases for any calendar quarter will be limited to no more than 5% of our most recently determined aggregate NAV, which means we will be permitted to repurchase shares with a value of up to an aggregate limit of approximately 20% of our aggregate NAV in any 12-month period.
We currently intend that the•The foregoing repurchase limitations will be based on “net repurchases” during a quarter or month, as applicable. The term “net repurchases” means the excess of our share repurchases (capital outflows) over the proceeds from the sale of our shares (capital inflows) for a given period. Thus, for any given calendar quarter or month, the maximum amount of repurchases during that quarter or month will be equal to (1) 5% or 2% (as applicable) of our most recently determined aggregate NAV, plus (2) proceeds from sales of new shares in the current offering (including purchases pursuant to our dividend reinvestment plan)DRPs) since the beginning of a current calendar quarter or month, less (3) repurchase proceeds paid since the beginning of the current calendar quarter or month.
•While we currently intend to calculate the foregoing repurchase limitations on a net basis, our board of directors may choose whether the 5% quarterly limit will be applied to “gross repurchases,” meaning that amounts paid to repurchase shares would not be netted against capital inflows. If repurchases for a given quarter are measured on a gross basis rather than on a net basis, the 5% quarterly limit could limit the number of shares redeemedrepurchased in a given quarter despite us receiving a net capital inflow for that quarter.
•In order for our board of directors to change the basis of repurchases from net to gross, or vice versa, we will provide notice to our stockholders in a supplement to the prospectus for the Follow-on Offering or current or periodic report filed with the SEC, as well as in a press release or on our website, at least 10 days before the first business day of the quarter for which the new test will apply. The determination to measure repurchases on a gross or net basis, or vice versa, will only be made for an entire quarter, and not particular months within a quarter.
During the year ended December 31, 2020, we received valid repurchase requests under our SRPs totaling approximately 2,689,138 shares of common stock (adjusted for the 1:3 reverse stock split), including resubmitted requests which were previously declined when we honored partial requests, of which we repurchased approximately 690,869 shares (adjusted for the 1:3 reverse stock split) as of December 31, 2020 for approximately $17,576,261 (at an average repurchase price of $25.44 per share, as adjusted for the 1:3 reverse stock split). From inception of the Initial Registered Offering through December 31, 2020, we repurchased 1,482,188 shares (adjusted for the 1:3 reverse stock split) of common stock for approximately $41,074,457.
During the period October 2020 to December 2020, the Company received share repurchase requests and repurchased shares as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Value of Share Repurchase Requests Received | | Repurchase Date | | Value of Shares Repurchased (1) |
| October 2020 | | $ | 5,907,195 | | | November 4, 2020 | | $ | 1,537,198 | |
| November 2020 | | $ | 6,169,549 | | | December 3, 2020 | | $ | 1,491,664 | |
| December 2020 | | $ | 4,304,962 | | | January 6, 2021 | | $ | 2,980,560 | |
(1) Included extraordinary circumstance repurchases and after applicable administrative fees for shares held less than three years.
The following table summarizes our repurchase activity under our share repurchase programSRPs for our Class C common stock for the three months ended December 31, 2019. We temporarily suspended our share repurchase program on September 19, 2019 and reopened it on January 2, 2020. We did not repurchase any2020, including shares of our Class S common stock through December 31, 2019.in September 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchases (1)(2)(3) | | Total Number of
Shares
Repurchased
During the
Quarter | | Average Price
Paid per Share | | Total Number of Shares Purchased As Part of Publicly Announced Plan or Program | | Dollar Value of
Shares Available
That May
Be Repurchased
Under the
Program |
| October 2020 | | 66,552 | | | $ | 20.94 | | | 65,115 | | | (4) |
| November 2020 | | 73,200 | | | $ | 21.00 | | | 73,200 | | | (4) |
| December 2020 | | 71,429 | | | $ | 20.88 | | | 71,429 | | | (4) |
| Total | | 211,181 | | | $ | 20.94 | | | 209,743 | | | (4) |
|
| | | | | | | | | | | | |
| Repurchases (1) | | Total Number of Shares Repurchased During the Quarter | | Average Price Paid per Share (2) | | Total Number of Shares Purchased As Part of Publicly Announced Plan or Program | | Dollar Value of Shares Available That May Be Repurchased Under the Program |
| September 1-30 (3) | | 120,600 |
| | $ | 9.98 |
| | 120,600 |
| | (4) |
| October 1 - 31 | | 255,347 |
| | $ | 10.02 |
| | 255,347 |
| | (4) |
| November 1 - 30 | | — |
| | $ | — |
| | — |
| | (4) |
| December 1 -31 | | — |
| | $ | — |
| | — |
| | (4) |
| Total | | 375,947 |
| | $ | 10.01 |
| | 375,947 |
| | (4) |
(2)The shares of common stock repurchased in each month were requested for repurchase in the prior month.
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(1) | We generally repurchase shares within three business days following the end of the applicable month in which requests were received and not withdrawn. We temporarily suspended our SRPs on September 19, 2019 and reinstated the SRPs effective January 2, 2020. All shares repurchased were repurchased pursuant to our SRPs. |
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(2) | Following our board of directors’ initial determination of our NAV and NAV per share on January 11, 2019 and calculated as of December 31, 2018, we repurchased shares based on NAV per share during 2019. |
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(3) | The shares of Class C common stock requested for repurchase in September 2019 were repurchased in October 2019. |
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(4) | A description of the maximum number of shares that may be purchased under our SRPs is included in the narrative preceding this table. |
(3)Adjusted for the 1:3 reverse stock split on February 1, 2021.
(4)A description of the maximum number of shares that may be purchased under our SRPs is included in the narrative preceding this table.
Procedures for Repurchase
Qualifying stockholders who desire to have their shares repurchased by us would have to give notice as provided on their personal on-line dashboard at www.RichUncles.comwww.modiv.com. All requests for repurchase must be received by us at least two business days prior to the end of a month in order for the redemptionrepurchase to be considered in the following month. Stockholders may also withdraw a previously made request to have shares repurchased but must do so at least two business days prior to the end of a month. We will generally repurchase shares on the third business day after the end of a month in which a request for repurchase was received and not withdrawn. We cannot guarantee that we will have sufficient available cash to accommodate any or all repurchase requests made in any given month.
If, as a result of a request for repurchase, a stockholder will own shares of our Class C common stock or our Class S common stock having a value of less than $500$1,000 (based on our most recently-published offering price per share), we reserve the right to repurchase all of the shares of Class C common stock or Class S common stock owned by such stockholder.
As noted above, we may use cash not otherwise dedicated to a particular use to fund repurchases under the share repurchase program.SRPs. However, we haveour management has the discretion to repurchase fewer shares than have been requested to be repurchased in a particular month or quarter, or to repurchase no shares at all, in the event that we lack readily available funds to do so due to market conditions beyond our control, our need to main liquidity for our operations or because we determineour management determines that investing in real property or other illiquid investments is a better use of our capital than repurchasing our shares. Any determination to repurchase fewer shares than have been requested to be repurchased may be made immediately prior to the applicable date of repurchase.
In the event that we repurchase some but not all of the shares submitted for repurchase in a given period, shares submitted for repurchase during such period will be repurchased on a pro-rata basis. If, in each of the first two months of a quarter, the 2% monthly repurchase limit is reached and repurchases are reduced pro-rata for such months, then in the third and final month of that quarter, the applicable limit for such month will be less than 2% of our aggregate NAV because repurchases for that month, combined with repurchases for the two previous months, cannot exceed 5% of our aggregate NAV.
If we do not repurchase all shares presented for repurchase in a given period, then all unsatisfied repurchase requests must be resubmitted at the start of the next month or quarter, or upon the recommencement of the share repurchase programSRP (in the event of its suspension), as applicable.applicable, to be eligible for repurchase in a later month. Within three business days after a stockholder repurchase request becomes fully or partially unsatisfied, we will notify the stockholder by email that the unsatisfied portion of the request must be resubmitted.
Amendment, Suspension or Termination of Program and Notice
Our board of directors may amend, suspend or terminate the share repurchase programSRPs without stockholder approval upon 10 days’ notice, if our directors believe such action is in our and our stockholders’ best interests, including because share repurchases place an undue burden on our liquidity, adversely affect our operations, adversely affect stockholders whose shares are not repurchased, or if board of directors determines that the funds otherwise available to fund our share repurchase programSRPs are needed for other purposes. The SRPs will immediately terminate if our shares are listed on any national securities exchange. In addition, our board of directors may amend, suspend or terminate the share repurchase programSRPs due to changes in law or regulation, or if the board of directors becomes aware of undisclosed material information that it believes should be publicly disclosed before shares are repurchased. Material modifications, including any reduction to the monthly or quarterly limitations on repurchases, and suspensions of the stock repurchase program,SRPs, will be promptly disclosed (i) in a supplement or amendment to our prospectus supplement (or post-effective amendment) or private placement memorandum, if applicable, (ii) in a current or periodic report filed with SEC, as well asand (iii) on our website.
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ITEM 6. | SELECTED FINANCIAL DATA |
ITEM 6. SELECTED FINANCIAL DATA
The following is selected financial data as of December 31, 2019, 2018, 2017, 2016 and 2015 and for the years ended December 31, 2020, 2019, 2018, 2017 2016 and 2015,2016, which should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| Balance sheet data | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Real estate investments, net (1) | | $ | 339,459,007 | | | $ | 413,924,282 | | | $ | 238,924,160 | | | $ | 149,759,638 | | | $ | 36,275,665 | |
| Real estate investment held for sale, net (1) | | 24,585,739 | | | — | | | — | | | — | | | — | |
| Goodwill, net (2) | | 17,320,857 | | | 50,588,000 | | | — | | | — | | | — | |
| Intangible assets, net (2) | | 5,127,788 | | | 7,700,000 | | | — | | | — | | | — | |
| Total assets | | 407,433,014 | | | 490,917,263 | | | 252,425,902 | | | 157,073,447 | | | 41,302,560 | |
| Mortgage notes payable, net (3) | | 9,088,438 | | | 194,039,207 | | | 122,709,308 | | | 60,487,303 | | | 7,113,701 | |
| Mortgage notes payable related to real estate investments held for sale, net (3) | | 175,925,918 | | | — | | | — | | | — | | | — | |
| Unsecured credit facility, net | | 5,978,276 | | | 7,649,861 | | | 8,998,000 | | | 12,000,000 | | | 10,156,685 | |
| Total liabilities | | 217,180,778 | | | 236,675,009 | | | 143,332,182 | | | 77,777,232 | | | 18,874,794 | |
| Redeemable common stock (4) | | 7,365,568 | | | 14,069,692 | | | 6,000,951 | | | 46,349 | | | 196,660 | |
| Total equity | | 182,886,668 | | | 240,172,562 | | | 103,092,769 | | | 79,249,866 | | | 22,231,106 | |
(1) During the year ended December 31, 2020, we sold five real estate investments with an aggregate carrying value of $24,067,388 for a net gain of $4,139,749 and recorded impairment charges of $10,267,625 to six of our real estate investments primarily as a result of the COVID-19 pandemic as described in Notes 1, 3 and 4 to our consolidated financial statements in this Annual Report on Form 10-K. On December 31, 2019, we completed the Merger with REIT I resulting in the acquisition of 20 properties, primarily in California.
(2) During the year ended December 31, 2020, we recorded impairment charges of $33,267,143 to goodwill and $1,305,260 to intangible assets as a result of the COVID-19 pandemic as described in Notes 1, 3 and 4 to our consolidated financial statements in this Annual Report on Form 10-K.
(3) Changes from prior year relate primarily to notes payable on the five real estate investments sold as discussed in (1) above.
(4) Redeemable common stock as of the balance sheet date is a contingent obligation which reflects the maximum amount of common stock that could be repurchased during the first quarter following the balance sheet date.
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| Balance sheet data | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Total real estate investment, net | | $ | 413,924,282 |
| | $ | 238,924,160 |
| | $ | 149,759,638 |
| | $ | 36,275,665 |
| | $ | — |
|
| Goodwill | | 50,588,000 |
| | — |
| | — |
| | — |
| | — |
|
| Intangible assets | | 7,700,000 |
| | — |
| | — |
| | — |
| | — |
|
| Total assets | | 490,917,263 |
| | 252,425,902 |
| | 157,073,447 |
| | 41,302,560 |
| | 200,815 |
|
| Mortgage notes payable, net | | 194,039,207 |
| | 122,709,308 |
| | 60,487,303 |
| | 7,113,701 |
| | — |
|
| Unsecured credit facility, net | | 7,649,861 |
| | 8,998,000 |
| | 12,000,000 |
| | 10,156,685 |
| | — |
|
| Total liabilities | | 236,675,009 |
| | 143,332,182 |
| | 77,777,232 |
| | 18,874,794 |
| | 7,000 |
|
| Redeemable common stock (1) | | 14,069,692 |
| | 6,000,951 |
| | 46,349 |
| | 196,660 |
| | — |
|
| Total equity | | 240,172,562 |
| | 103,092,769 |
| | 79,249,866 |
| | 22,231,106 |
| | 193,815 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| Operating data | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Total revenues | | $ | 38,903,430 | | | $ | 24,544,958 | | | $ | 17,984,625 | | | $ | 7,390,206 | | | $ | 861,744 | |
| Net loss (1) | | $ | (49,141,910) | | | $ | (4,415,992) | | | $ | (1,801,724) | | | $ | (868,484) | | | $ | (1,237,441) | |
| Other data: | | | | | | | | | | |
| Cash flows provided by (used in) operations | | $ | 5,576,840 | | | $ | 4,748,904 | | | $ | 5,881,889 | | | $ | 3,790,837 | | | $ | (672,132) | |
| Cash flows provided by (used in) investing activities | | $ | 24,778,295 | | | $ | (29,602,469) | | | $ | (92,019,684) | | | $ | (115,593,935) | | | $ | (37,155,065) | |
| Cash flows (used in) provided by financing activities | | $ | (28,914,535) | | | $ | 23,034,567 | | | $ | 90,710,968 | | | $ | 112,308,480 | | | $ | 41,303,755 | |
| Per share data: | | | | | | | | | | |
| Distributions declared per common share per the period: | | | | | | | | | | |
| Class C common stock | | $ | 1.4600 | | | $ | 2.1105 | | | $ | 2.1105 | | | $ | 2.1000 | | | $ | 0.9600 | |
| Class S common stock (2) | | $ | 1.4600 | | | $ | 2.1105 | | | $ | 2.1105 | | | $ | 0.5250 | | | $ | — | |
Net loss per common share – basic and diluted (see Note 2 to our consolidated financial statements) (3) | | $ | (6.14) | | | $ | (0.88) | | | $ | (0.48) | | | $ | (0.45) | | | $ | (8.67) | |
| Weighted-average number of common shares outstanding, basic and diluted (3) | | 8,006,276 | | | 5,012,158 | | | 3,689,955 | | | 1,994,310 | | | 142,752 | |
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(1) | Redeemable common stock as of December 31, 2019 is a contingent obligation which reflects the maximum amount of common stock that could be repurchased during the first quarter of 2020. |
(1)Included impairment charges of $10,267,625, $33,267,143 and $1,305,260 related to our real estate investments, goodwill and intangible assets, respectively, as a result of the COVID-19 pandemic, net gain of $4,139,749 on sale of five real estate investments and lease termination expense of $1,039,648.
(2)The distribution paid per share of Class S common stock is net of deferred selling commissions.
(3)Adjusted for the 1:3 reverse stock split.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| Operating data | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Total revenues | | $ | 24,544,958 |
| | $ | 17,984,625 |
| | $ | 7,390,206 |
| | $ | 861,744 |
| | $ | — |
|
| Net loss | | $ | (4,415,992 | ) | | $ | (1,801,724 | ) | | $ | (868,484 | ) | | $ | (1,237,441 | ) | | $ | (6,185 | ) |
| Other data: | | |
| | |
| | | | |
| | |
|
| Cash flows provided by (used in) operations | | $ | 4,748,904 |
| | $ | 5,881,889 |
| | $ | 3,790,837 |
| | $ | (672,132 | ) | | $ | 815 |
|
| Cash flows used in investing activities | | $ | (29,602,469 | ) | | $ | (92,019,684 | ) | | $ | (115,593,935 | ) | | $ | (37,155,065 | ) | | $ | — |
|
| Cash flows provided by financing activities | | $ | 23,034,567 |
| | $ | 90,710,968 |
| | $ | 112,308,480 |
| | $ | 41,303,755 |
| | $ | 200,000 |
|
| Per share data: | | |
| | |
| | | | |
| | |
|
| Distributions declared per common share per the period: | | | | | | | | |
| | |
|
| Class C Common Stock | | $ | 0.7035 |
| | $ | 0.7035 |
| | $ | 0.7000 |
| | $ | 0.3200 |
| | $ | — |
|
| Class S Common Stock (1) | | $ | 0.7035 |
| | $ | 0.7035 |
| | $ | 0.1750 |
| | $ | — |
| | $ | — |
|
Net loss per common share – basic and diluted (see Note 2 to our consolidated financial statements) | | $ | (0.29 | ) | | $ | (0.16 | ) | | $ | (0.15 | ) | | $ | (2.89 | ) | | $ | (4.95 | ) |
| Weighted-average number of common shares outstanding, basic and diluted | | 15,036,474 |
| | 11,069,864 |
| | 5,982,930 |
| | 428,255 |
| | 1,250 |
|
| |
(1) | The distribution paid per share of Class S common stock is net of deferred selling commissions. |
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis should be read in conjunction with the “Selected Financial Data” above and our accompanying consolidated financial statements and the notes thereto. Also,see “Forward-Looking Statements” preceding Part I of this Annual Report on Form 10-K and Part I, Item 1A. Risk Factors herein.
Overview
Management’s discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
The following are some, but not all, of the assumptions, risks, uncertainties and other factors that could cause our actual results to differ materially from those presented in our forward-looking statements:
•We have only a limited prior operating history, and the prior performance of our real estate investments may not be indicative of our future results.
•We are subject to risks associated with deteriorating economic conditions resulting from the coronavirusCOVID-19 pandemic and related disruptions in the financialreal estate markets.
•The magnitude and duration of the coronavirusCOVID-19 pandemic and its impact on our tenants, operations and liquidity is uncertain as of the filing date of this annual reportAnnual Report on Form 10-K and may continue to have an adverse impact on our business and results of operations.
•We may be considered a “blind pool” because we have not identified additional properties to be acquired, and any potential acquisitions cannot be considered probable. As a result, stockholders will not be able to evaluate the economic merits of our future investments prior to their purchase. We may be unable to invest stockholders’ capital on acceptable terms to investors, or at all.
•We may be unable to renew leases, lease vacant space or re-lease space as leases expire on favorable terms or at all.
•We are subject to risks associated with tenant, geographic and industry concentrations with respect to our properties.
•Our properties, intangible assets and other assets may be subject to further impairment charges.
•We are subject to competition in the acquisition and disposition of properties and in the leasing of our properties, and we may be unable to acquire or dispose of, or lease, our properties on advantageous terms.
•We could be subject to risks associated with bankruptcies or insolvencies of tenants or from tenant defaults generally.
•We have substantial indebtedness, and may incur additional secured or unsecured debt, which may affect our ability to pay distributions, expose us to interest rate fluctuation risk, impose limitations on how we operate and expose us to the risk of default under our debt obligations.
•We may not be able to achieveextend or refinance existing indebtedness before it becomes due.
•We may not be able to attain or maintain profitability.
•The only sources of cash for distributions to investors will be cash flow from our operations (including sales of properties) or any net proceeds that result from financing or refinancing our properties.properties or proceeds from capital we raise.
•We may not generate cash flows sufficient to pay distributions to stockholders or meet our debt service obligations.
•We may be affected by risks resulting from losses in excess of insured limits.
•We may fail to qualify as a REIT for U.S. federal income tax purposes.
•There are significant restrictions and limitations on our stockholders' ability to have any of their shares of our common stock repurchased under our SRPs and, if stockholders are able to have their shares repurchased by us, the stated purchase price under the SRPs, which is based on our most recently published NAV per share, could be less than the then-current fair market value of the shares.
•Risks of security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology networks and related systems, could adversely affect our business and results of operations.
We were formed on May 14, 2015 as a Maryland corporation and elected to be treated as a REIT for federal income tax purposes beginning with the taxable year ended December 31, 2016, and we intend to continue to operate in suchso as to remain qualified as a manner. We intend to investREIT for federal income tax purposes thereafter. To date, we have invested primarily in single tenant income-producing properties that are leased to creditworthy tenants under long-term net leases. During 2020, we acquired the intellectual property of BuildingBITs, an innovative online real estate crowd funding platform, and the REITless investment platform, an online investment platform for commercial real estate investment offerings. In 2021, we will continue to seek opportunities to be an aggregator within the non-listed real estate product industry, utilizing the combination of our deep understanding of both the crowd funding and real estate markets and the strength of our stockholder-owned, self-managed business model. We plan to invest in a diversified portfolio of real estate and real estate-related investments.
Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in entities that own and operate real estate. We intend to make substantially all acquisitions of our real estate investments through our Operating Partnership either directly or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants-in-common, co-tenancies or other co-ownership arrangements with other owners of properties, some of which may be affiliated with us or our executive officers or directors. We also plan to continue to invest in fintech and crowd funding businesses similar to our investments in REITless and BuildingBits.
We consider the Company to be a perpetual-life investment vehicle because we have no finite date for liquidation and no intention to list our shares of common stock for trading on a national securities exchange or other over-the-counter trading market. Although we have registered a fixed number of shares pursuantWhile our charter does not require us to list the Registered Offerings, we intend to effectively conduct a continuous offering of an unlimited number of shares of our common stock over an unlimited time period by conducting an uninterrupted series of additional public offerings, subject to regulatory approvalfor trading on a national securities exchange or other over-the-counter trading market, we may consider such a listing in the future if we determine it is in the best interest of our filings for such additional offerings.stockholders. This perpetual-life structure is aligned with our overall objective of investing in real estate and related assets with a long-term view towards making regular distributions and generating capital appreciation.
Prior to January 1, 2020,
Until December 31, 2019, our business was externally managed by our Former Advisor, Rich Uncles NNN Operator, LLC, a limited liability company wholly ownedwholly-owned by our Former Sponsor, pursuant to the Advisory Agreement, which was terminated on December 31, 2019. Our Former Advisor managed our operations and our portfolio of core real estate properties and real estate relatedestate-related assets. Our Former Advisor also provided asset-management and other administrative services on our behalf and was paid certain fees as set forth in the Note 9 to our consolidated financial statements. Beginning in this Annual Report on January 1, 2020,Form 10-K. Effective December 31, 2019, we became self-managed as a result of the completion of the Merger and the Self-Management Transaction.
We expect to use substantially all of the net proceeds from the Offerings to acquire and manage a portfolio of real estate investments. While our focus is on single tenant net leased properties, we plan to diversify our portfolio by geography, investment size and investment risk with the goal of acquiring a portfolio of income-producing real estate investments that provides attractive and stable returns to our stockholders. Our investment objectives and policies may be amended or changed at any time by our board of directors. Although we have no plans at this time to change any of our investment objectives and policies, our board of directors may change any and all such investment objectives and policies, including our focus on single tenant properties, if it believes such changes are in the best interests of our stockholders.
From inception through December 31, 2019, we had sold 17,887,949 shares of our Class C common stock pursuant to the Registered Offerings for aggregate gross offering proceeds of $179,698,905 and 186,606 shares of our Class S common stock pursuant to the Class S Offering for aggregate gross offering proceeds of $1,893,827.
As we accept subscriptions for shares in the Offerings, we will transfer substantially all of the net proceeds of the Offerings to our Operating Partnership as a capital contribution in exchange for units of general partnership and/or limited partnership interest that will be held by our wholly-owned subsidiary, Rich Uncles NNN LP, LLC; however, we will be deemed to have made capital contributions to the Operating Partnership in the amount of the gross offering proceeds received from investors. Through September 30, 2019, we reimbursed our Former Sponsor for organizational and offering costs incurred on our behalf, up to an amount equal to 3% of gross offering proceeds, pursuant to the Advisory Agreement. Through September 30, 2019, expenses associated with investor relations personnel employed by us were reimbursed by our Former Sponsor since investor relations services were included within the scope of organizational and offering services our Former Sponsor was to provide to us. In connection with our Former Sponsor’s September 2019 settlement with the SEC, whereby all offerings of our common stock must be made through a registered broker-dealer, we agreed to be directly responsible for all organizationorganizational and offering costs, including our investor relations personnel, in exchange for our Former Sponsor’s agreement to terminate its right to receive up to 3% of gross offering proceeds pursuant to an October 2019 amendment to the Advisory Agreement.
Following the completion of the Self-Management Transaction, we, including NNN LP, owned an approximately 87%
partnership interest in the Operating Partnership. Daisho, a formerly wholly-owned subsidiary of BrixInvest which was spun off from BrixInvest on December 31, 2019, was issued and held 657,949.5 Class M OP Units, or an approximate 12% limited partnership interest, in the Operating Partnership as of December 31, 2019. The Class M OP Units were distributed to the members of Daisho during 2020. In connection with the Self-Management Transaction, our Chief Executive Officer and Chief Financial Officer were issued an aggregate of 56,029 Class P OP Units in the Operating Partnership and thereby owned the remaining approximate 1% limited partnership interest in the Operating Partnership as of December 31, 2019. Following the grant of 360,000 Class R OP Units (adjusted for the 1:3 reverse stock split) in the Operating Partnership to the Company’s employees, including the Chief Executive Officer and Chief Financial Officer, on January 25, 2021, as further described in Note 11 to the consolidated financial statements in this Annual Report on Form 10-K, the Company owns an approximately 83% partnership interest, the Daisho members hold an approximately 12% limited partnership interest and the Company's employees hold an approximately 5% limited partnership interest in the Operating Partnership.
From inception through December 31, 2020, we had sold 6,627,934 shares (adjusted for the 1:3 reverse stock split) of our Class C common stock pursuant to the Registered Offerings for aggregate gross offering proceeds of $197,527,817 and 63,711 shares (adjusted for the 1:3 reverse stock split) of our Class S common stock pursuant to the Class S Offering for aggregate gross offering proceeds of $1,932,065.
As we accept subscriptions for shares, we will transfer substantially all of the net proceeds of such subscriptions to our Operating Partnership as a capital contribution in exchange for units of general partnership; however, we will be deemed to have made capital contributions to the Operating Partnership in the amount of the gross offering proceeds received from investors.
We expect to use substantially all of the net capital we raise to acquire and manage a portfolio of real estate investments. While our focus to date has been on single tenant net leased properties, going forward we plan to invest in a diversified portfolio of real estate and real estate-related investments, including fintech and crowd funding businesses. We plan to diversify our portfolio by geography, investment size and investment risk with the goal of acquiring a portfolio of income-producing real estate investments that provides attractive and stable returns to our stockholders. Our investment objectives and policies may be amended or changed at any time by our board of directors. Although we have no plans at this time to change any of our investment objectives and policies, our board of directors may change any and all such investment objectives and policies, including our focus on the properties and investments described above, if it believes such changes are in the best interests of our stockholders.
We hold our investments in real property through special purpose limited liability companies which are wholly-owned subsidiaries of our Operating Partnership or Merger Sub, which is described below and was merged into the Operating Partnership on December 31, 2020. Because we plan to conduct substantially all of our operations through the Operating Partnership, we are considered an Umbrella Partnership Real Estate Investment Trust, or UPREIT. Using an UPREIT structure may give us an advantage in acquiring properties from persons who might not otherwise sell their properties because of unfavorable tax results. Generally, a sale of property directly to a REIT, or a contribution in exchange for REIT shares, is a taxable transaction to the selling property owner. However, in an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of property may transfer the property to the Operating Partnership in exchange for partnership interests in the Operating Partnership without recognizing gain for tax purposes.
On January 22, 2021, we historically have conducted,filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 of additional shares of Class C common stock to be issued pursuant to the amended and intendrestated DRP. We commenced offering shares of Class C common stock pursuant to continue to conduct, substantially allthe 2021 DRP Offering upon termination of the Follow-on Offering, as discussed below.
Effective January 27, 2021, we, with the approval of our operations throughboard of directors, terminated our public offering of up to $800,000,000 of our shares which was being conducted pursuant to the Operating Partnership, as a resultFollow-on Offering. In connection with the termination of the MergerFollow-on Offering, we stopped accepting investor subscriptions on January 22, 2021. As of January 27, 2021, we had $600,547,672 of unsold shares in the Follow-on Offering, which were deregistered with REIT I, we hold the assets acquired from REIT I through Merger Sub, our wholly-owned subsidiary.SEC.
Effective January 31, 2021, the Company and NCPS terminated their Dealer Manager Agreement, dated January 2, 2020, pursuant to which NCPS had agreed to act as dealer manager in connection with the Follow-on Offering. Effective January 31, 2021, with the authorization of the board of Directors, NCPS and the Company entered into a new Dealer Manager Agreement pursuant to which NCPS has agreed to act as dealer manager in connection with investments in the Company by accredited investors.
We intend to present our financial statements on a consolidated basis, including the Operating Partnership and Merger Sub. All items of income, gain, deduction (including depreciation), loss and credit of the Operating Partnership and Merger Sub flow to us as all subsidiary entities are disregarded for federal tax purposes. These tax items do not generally flow through us to our stockholders. Rather, our net income and net capital gain effectively flow through us to our stockholders as and when we pay distributions.
Liquidity and Capital Resources
Our proceedsProceeds from the sale of our shares sold in the Offeringsof common stock have been, and will continue to be, primarily used to invest in real estate and real estate-related investments or to re-lease and reposition our properties in accordance with our investment strategy and policies, including costs and fees associated with such investments. We also expect to use a portion of the proceeds from the sale of the Offeringsour shares of common stock for payment of principal on our outstanding indebtedness, including indebtedness assumed in the Self-Management Transaction;indebtedness; capital expenditures, tenant improvement costs and leasing costs related to our real estate investments; reserves required by financings of our real estate investments; the funding of stockholder distributions; and to provide liquidity to our stockholders pursuant to our share repurchase program;SRPs; and for general corporate purposes.
Generally, our cash requirements for property acquisitions, debt payments, capital expenditures, and other investments will be funded by the sale of shares of our common stock and bank borrowings from financial institutions and mortgage indebtedness on our properties, and to a lesser extent, by loans from affiliates and internally generated funds. Our cash requirements for operating and interest expenses, and distributions will generally be funded by internally generated funds. Proceeds from the sale of our common stock and debt financings may also be used to fund repurchases of common stock. When available, sources of capital include proceeds from the sale of properties, proceeds from the sale of shares of our common stock and secured or unsecured borrowings from banks or other lenders, as well as undistributed funds from operations.
The New Credit Facility (as defined below) provides a $10,000,000 increase in our line of credit from $12,000,000 to $22,000,000. After our initial draw of $6,000,000 to fund the repayment of our Unsecured Credit Facility (as defined below) on March 31, 2021, we have $11,000,000 available to finance real estate acquisitions and $5,000,000 available for working capital purposes.
To further our mission of being the leading provider of alternative real estate-related products, and to capitalize on the current opportunity in today’s public marketplace, we are sponsoring MACS, a SPAC. MACS publicly filed its registration statement on Form S-1 with the SEC on March 24, 2021 and plans to raise $100,000,000, or $115,000,000 if the over-allotment option is exercised, in its IPO. In connection with the public filing of the Form S-1, MVF deposited $4,500,000 in escrow with the attorneys for MACS. The $4,500,000 will be released from escrow upon completion of the IPO and used to purchase 9,000,000 warrants to purchase additional shares of MACS. Each warrant has the right to purchase 0.5 share of MACS common stock and can be exercised at a strike price of $11.50 per share.
MACS was formed for the purpose of entering into a business combination with one or more businesses or entities, and intends to focus on targets located in North America that are focused on fintech and proptech, with a focus on companies whose core purpose is related to the real estate industry. Within those parameters, MACS intends to pursue a business combination with companies that use technology driven platforms and solutions to disrupt or revolutionize the real estate capital markets, transactional marketplaces and investment management industry.
There is no assurance that our SPAC will be successful in raising capital in its IPO or in completing a business combination, or that any business combination will be successful. We can lose our entire investment in the SPAC if a business combination is not completed within 24 months of the SPAC's IPO or if the business combination is not successful, which may adversely impact our stockholder value.
Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our tangible assets. Our charter limits the amount we may borrow to 300% of our net assets; however, historically we have limited borrowings to 50% of the value of our tangible assets unless any excess borrowing is approved by a majority of the conflicts committee of our board ofindependent directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess. On March 27, 2020, our conflicts committee and board of directors approved an increase in our maximum leverage from 50% to 55% in order to allow us to take advantage of the current low interest rate environment, the relative cost of debt and equity capital, and strategic borrowing advantages potentially available to us. Our borrowings on one or more individual properties may exceed 55% of their individual
cost, so long as our overall leverage does not exceed 55% of the aggregate value of our tangible assets. We may exceed this limit only if any excess borrowing is approved by a majority of our conflicts committeeindependent directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess. When calculating our use of leverage, we will not include borrowings relating to the initial acquisition of properties and that are outstanding under a revolving credit facility (or similar agreement). There is no limitation on the amount we may borrow for the purchase of any single asset. As of December 31, 2020, our leverage ratio was 47%.
Debt financing for acquisitions and investments may be obtained at the time an asset is acquired or an investment is made or at such later time as determined to be appropriate. In addition, debt financing may be used from time-to-time for property improvements, lease inducements, tenant improvements and other working capital needs.
As of December 31, 2019,2020, the outstanding principal balance of our mortgage notes payable, including mortgage notes payable related to real estate investments held for sale, and theour unsecured revolving credit facility was $195,739,481were $185,014,356 and $7,740,000,$6,000,000, respectively. The portion of our mortgage notes payable due during 20202021 is $6,262,287.$17,091,541, of which $10,073,764 was refinanced on March 5, 2021, as described below.
On December 19, 2019, we, NNN LP, Merger Sub, BrixInvest and modiv, LLC entered into a loan agreement forLoan and Security Agreement (the “Unsecured Credit Facility”) with Pacific Mercantile Bank (“PMB”). The Unsecured Credit Facility is a new revolvingline of credit facility (the "New Credit Facility") for a maximum principal amount of $12,000,000, consisting of two facilities: a purchase contract and other loans facility (the "Purchase“Purchase Contract and Other Loans Facility"Facility”) of up to $10,000,000 which supersedes, and replaces our former credit facility, and a nonformula loans facility (the "Nonformula Loans Facility") of up to $2,000,000. Asas of December 31, 2020 and 2019, $7,740,000 was outstanding and an aggregate of $4,260,000 was available to be drawn under the New Credit Facility. In February 2020, we drew the remaining $4,260,000 available under the NewUnsecured Credit Facility to fund a portionhad an outstanding balance of share repurchases$6,000,000 and scheduled repayments of the short-term notes described below. $7,740,000, respectively.
On March 13, 2020, we amended the NewUnsecured Credit Facility to extend the maturity date of $4,940,000$6,940,000 of purchase contract loans and $2,000,000 of other loansoutstanding borrowings under the Unsecured Credit Facility from March 31, 2020 to July 31, 2020, and to extend the maturity date of $3,060,000 of other loansthe outstanding borrowings under the Unsecured Credit Facility from May 4, 2020 to August 31, 2020. As a result
On August 13, 2020, we amended the Unsecured Credit Facility to extend the maturity date of $6,000,000 of the outstanding borrowings under the Unsecured Credit Facility to September 1, 2020 and the maturity date of the remaining $6,000,000 of the outstanding borrowings under the Unsecured Credit Facility to October 15, 2021. We repaid $6,000,000 of the $12,000,000 then outstanding borrowings under the Unsecured Credit Facility with proceeds generated by property refinancings and asset sales in August 2020. Under the August 13, 2020 amendment, there is a temporary moratorium on new borrowings under the Unsecured Credit Facility until the remaining $6,000,000 is fully repaid. We paid PMB $25,000 for loan agreement isextension and modification fees in place until October 1, 2020. connection with the August 13, 2020 amendment.
In addition, entering intoconnection with the August 13, 2020 amendment was deemed a “trigger event” underto the loan agreement and, accordingly, the guaranty, payment and indemnification obligations provided byUnsecured Credit Facility, our Chairman, Mr. Wirta, and the Wirta Family Trust (the "Wirta Trust") guaranteed our obligations under the loanUnsecured Credit Facility. On July 30, 2020, we entered into an indemnification agreement are now effective; however, if the two loans referenced herein are paid in full in accordance with the amendment, then the trigger event will be deemed cured. The Purchase Contract and Other Loans Facility matures on October 1, 2020, unless earlier terminated or extended,Mr. Wirta and the Nonformula LoansWirta Trust with respect to their guarantees of our $12,000,000 Unsecured Credit Facility matureswith PMB pursuant to which we agreed to indemnify Mr. Wirta and the Wirta Trust if they are required to make payments to PMB pursuant to such guarantees.
Under the terms of the Unsecured Credit Facility, we pay a variable rate of interest on October 15,outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day shall not be less than 5.50% per annum. The interest rate was 5.50% and 5.75% as of December 31, 2020 unless earlier terminated or extended.and 2019, respectively. The current interest rate is 5.50%, which is the minimum rate.
To secure the payment and performance of all obligations under the Unsecured Credit Facility, each of modiv, LLC and BrixInvest granted to PMB a security interest in all of their right, title and interest in their accounts, inventory, equipment, deposit accounts, intellectual property, general intangibles, investment property and other property.
On March 29, 2021, we entered into a new credit facility with Banc of California (the “New Credit Facility”) for an aggregate line of credit of $22,000,000 with a maturity date of March 30, 2023, which replaced our Unsecured Credit Facility. We expect to refinance or extendborrowed $6,000,000 under the New Credit Facility and repaid the $6,000,000 that was owed to PMB on March 31, 2021. The New Credit Facility provides us with a $17,000,000 revolving line of credit for real estate acquisitions (including the $6,000,000 borrowed to repay PMB) and an additional $5,000,000 revolving line of credit for working capital. Under the terms of the New Credit Facility, we will pay a variable rate of interest on outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day shall not be less than 4.75% per annum. We paid Banc of California origination fees of $77,000 in connection with the New Credit Facility and will pay an unused commitment fee of 0.15% per annum of the unused portion of the New Credit Facility, charged quarterly in arrears based on the average unused commitment available under the New Credit Facility. The New Credit Facility is secured by substantially all of our tangible and intangible assets, including intellectual property. The New Credit Facility requires us to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and minimum tangible NAV (as defined in the loan agreement) of $120,000,000, measured quarterly. Mr. Wirta, our Chairman has guaranteed our $6,000,000 initial borrowing, which guarantee will expire upon repayment of the $6,000,000 which is due by September 30, 2021. Mr. Wirta has also guaranteed our $5,000,000 revolving line of credit for working capital. On March 29, 2021, we entered into an updated indemnification agreement with Mr. Wirta and the Wirta Trust with respect to their guarantees of borrowings under the New Credit Facility.
The New Credit Facility contains customary representations, warranties and covenants, which are substantially similar to those in our Unsecured Credit Facility. Our ability to borrow under the New Credit Facility will be subject to our ongoing compliance with various affirmative and negative covenants, including with respect to indebtedness, guaranties, mergers and asset sales, liens, corporate existence and financial reporting obligations. The New Credit Facility also contains customary events of default, including, without limitation, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, breaches of representations or warranties and change of ownership. Upon the occurrence of an event of default, Banc of California may accelerate the repayment of amounts outstanding under the New Credit Facility, take possession of any collateral securing the New Credit Facility and exercise other remedies subject, in certain instances, to the expiration of an applicable cure period.
On April 20, 2020, our subsidiary, modiv, LLC, entered into a loan agreement and promissory note evidencing an unsecured loan in the aggregate amount of $517,000 made to our subsidiary under the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The PPP is administered by the U.S. Small Business Administration (the “SBA”). Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. Modifications to the PPP by the U.S. Treasury and the Paycheck Protection Program Flexibility Act of 2020 extended the time period for loan forgiveness beyond the original eight-week period to 24 weeks, making it possible for our subsidiary to apply for forgiveness of 100% of the PPP loan prior to December 31, 2020 and the maturity dates.deadline was later extended to February 15, 2021.
PursuantThe PPP loan was made through PMB. In December 2020, our subsidiary submitted its application for forgiveness of the total amount of the loan to PMB. After PMB’s review, our subsidiary updated the forgiveness application on February 10, 2021, PMB submitted the application to the SBA on February 10, 2021, and on February 16, 2021, our subsidiary was notified by PMB that the application for forgiveness of the PPP loan had been approved by the SBA.
In connection with the Self-Management Transaction, we assumed from BrixInvest its unsecured short-term notes payable (formerly known as “Convertible Promissory Notes”) of $4,800,000 on December 31, 2019. The notes represented private party notes and bore interest at a fixed rate of 8% with all interest and principal due on the maturity date. Except for a portion of six notes from one borrower aggregating $4,800,000 with$1,024,750 for which the maturity dates during the first quarter of 2020. SeeNote 7 to our consolidated financial statements for additional information regarding our outstanding indebtedness. On March 4, 2020, the repayment schedule for $1,242,233 of these short-term notesdate was extended from March 9, 2020 to April 30, 2020, inall notes were repaid prior to March 31, 2020. In exchange for paymentthe maturity date extension, we agreed to pay 2% of the principal and accrued interest, or $24,845, as an extension fee of 2%, or $24,845, and agreed to an increase in the interest rate from 8% to 10% per annum during the extension period. The maturity date for the period$490,000 of the extension. The remainder of theseextended short-term notes was fullysubsequently accelerated to April 6, 2020 in exchange for a $10,000 reduction in the extension fee to $14,845 and these notes were repaid on March 9,April 6, 2020.
As of December 31, 2019,2020, our pro-rata share (approximately 72.7%) of the TIC Interest’s mortgage note payable was $10,127,812.$9,923,391.
ForDuring the year ended December 31, 2019, 1,218,295 shares2020, we sold five properties for net proceeds of Class C common stock had been tendered$13,530,968 (see Note 4 to our consolidated financial statements in this Annual Report on Form 10-K for repurchase by us. All of these shares were repurchased for an aggregate $12,145,903 utilizing proceeds from reinvested distributions and the Registered Offerings.more details). From January 2, 20201, 2021 through March 27, 2020, two business days priorthe date of this report, we sold an additional three properties for net proceeds of $10,515,344 (see Note 11 to month end, we received share repurchase requests relating to 1,737,191 sharesour consolidated financial statements in this Annual Report on Form 10-K for more details).
During the year ended December 31, 2020, we repurchased 895,216 shares of Class C common stock and no shares of Class S common stock for an aggregate of $9,091,146. From January 2, 2020 through March 27, 2020, we received cashrefinanced three mortgages that generated net proceeds of $6,718,997 from the Offerings (excludes distribution reinvestments)$6,904,178 (see Note 7 to our consolidated financial statements in this Annual Report on From 10-K), resultingand in aMarch 2021, we refinanced four mortgages aggregating $10,073,764 that generated net cash outflow from equity capital transactionsproceeds of $2,372,149.$1,975,184 as further described below:
On March 2, 2020, we borrowed a total of $4,000,000 from our Chairman, Mr. Wirta, to fund share repurchases and operations. These loans are secured by our two Chevron properties, bear an interest rate of 8.0% per annum and mature on June 3, 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | New | | | | | | Original | | New |
| Properties | | Principal Amount | | Principal Amount | | Prior Interest Rate | | New Interest Rate | | Maturity Date | | Maturity Date |
| Levins | | $ | 2,032,332 | | | $ | 2,700,000 | | | 3.74 | % | | 3.75 | % | | 3/5/2021 | | 3/16/2026 |
| Dollar General Bakersfield | | $ | 2,268,922 | | | $ | 2,280,000 | | | 3.38 | % | | 3.65 | % | | 3/5/2021 | | 3/16/2028 |
| PMI Preclinical | | $ | 4,020,418 | | | $ | 5,400,000 | | | 3.38 | % | | 3.75 | % | | 3/5/2021 | | 3/16/2026 |
| GSA (MSHA) | | $ | 1,752,092 | | | $ | 1,756,000 | | | 3.13 | % | | 3.65 | % | | 8/5/2021 | | 3/16/2026 |
Given the current low interest rate environment, we are in discussions with a number of potential lenders regarding longer term (five to ten years) loans which could allow us to reduce our interest expense and provide additional cash to fund operations. We are also in discussions with a prospective lender regarding a short-term loan on multiple properties that could providetwo additional working capital given the current low leverage on many of our properties.property mortgage refinancings. However, there can be no assurance that such financingrefinancing will be available in the near term or at all.
We entered into interest rate swaps as a fixed rate payer to mitigate our exposure to rising interest rates on our variable rate notes payable (Level 2 measurement). We do not enter into derivatives for speculative purposes. None of our derivatives at December 31, 20192020 or 20182019 were designated as hedging instruments,instruments; therefore, the net unrealized (losses) gainslosses recognized on interest rate swaps of $970,210$770,898 and $149,714,$820,496, respectively, was recorded as an addition to loss (gain) on interest rate swaps. In connection with the mergerMerger with REIT I, we acquired eight additional interest rate swaps on December 31, 2019 (see(see Notes 7 and 8 to our consolidated financial statements in this Annual Report on Form 10-K for more details)details) and had a total of twelve interest rate swaps as of December 31, 2019. During the year ended December 31, 2020, we terminated four of our interest rate swaps and as of December 31, 2020, we had eight remaining interest rate swaps. An additional four swaps were terminated or expired subsequent to December 31, 2020.
During the year ended December 31, 2020, we repurchased 690,869 shares of Class C common stock and Class S common stock for an aggregate of $17,576,261 utilizing proceeds from the Registered Offerings, debt financings and net proceeds from sales of properties. From January 1, 2021 through March 6, 2021, we repurchased 481,939 shares of Class C common stock and no shares of Class S common stock for an aggregate of $10,375,064. From January 1, 2021 through February 28, 2021, we received cash proceeds of $1,560,703 from the Offerings (excluding distribution reinvestments).
Generally, we expect to make payments of principal and interest on any indebtedness we incur from our cash flows from operating activities, including the proceeds from the sale of assets. We expect that our cash flows from normal operations, along with the potential sale of assets will be sufficient to make regularly scheduled payments of principal and interest. We will seek to structure our financing for acquisitions of assets such that any balloon payments or maturity dates involving extraordinary payments of principal are timed to match our expected receipt of funds from ownership and operation of the assets or the disposition by us of such assets. If cash flow from ownership and operation of an asset is not expected to be sufficient to make such payments of principal, and we do not anticipate that we will sell the asset at the time the principal payment comes due, we intend to make payments of principal out of proceeds from the refinancing of such indebtedness or out of cash flow from operationthe operations of our other assets or from our reserves. We may also use proceeds from the Offeringssale of shares of our common stock to pay down principal on indebtedness, including any balloon or monthly mortgage payments.
Our management will establish working capital reserves from net offering proceeds, out of cash flow generated by operating assets or out of proceeds from the sale of assets. Working capital reserves are typically utilized to fund tenant improvements, leasing commissions and major capital expenditures. Our lenders also may require working capital reserves. We are continuingcontinue to monitor the coronavirusCOVID-19 pandemic and the subsequent mutations of the virus into several variants, and its impact on our tenants, operating partners and the economy as a whole. The magnitude and duration of the COVID-19 pandemic which includes the mutations of the virus into several variants, and its impact on our operations and liquidity, are still uncertain and continue to evolve in the United States and globally. If the COVID-19 pandemic continues oncannot be contained at its current trajectory, such impacts are expected to becomecould be material. To the extent that our tenants and operating partners continue to be impacted by the coronavirusCOVID-19 pandemic, or by the other risks disclosed in this annual reportAnnual Report on Form 10-K, it wouldcould have a material adverse effect on our liquidity and capital resources.
Funds from Operations and Adjusted Funds from Operations
In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“Nareit”) promulgated a measure known as Funds from Operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, adding back asset impairment write-downs, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures and preferred distributions. Because FFO calculations adjust for such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current Nareit definition or may interpret the current Nareit definition differently than we do, making comparisons less meaningful.
Additionally, we use AFFO as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of stock-based compensation net, deferred rent, amortization of in-place lease valuation intangibles, acquisition-related costs, deferred financing fees, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, write-off transaction costs and other one-time transactions.
We also believe that AFFO is a recognized measure of sustainable operating performance by the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.
Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities.
For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods. However, FFO and AFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or cash flows from operating activities and each should be reviewed in connection with GAAP measurements.
Neither the SEC, Nareit, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or Nareit may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure.
Furthermore, as described in Notes 3 and 11 to our consolidated financial statements in this Annual Report on Form 10-K, the conversion ratios for Class M OP Units, Class P OP Units and Class R OP Units can increase if the specified performance hurdles are achieved. The following are the calculations of FFO and AFFO (as defined in the Operating Partnership Agreement) for the year ended December 31, 2020.
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 |
| Net loss | | $ | (49,141,910) | | | $ | (4,415,992) | |
| FFO adjustments: | | | | |
| Add: Depreciation and amortization | | 15,759,199 | | | 9,848,130 | |
| Amortization of lease incentives | | 61,204 | | | 61,203 | |
| Impairment of real estate investment properties | | 10,267,625 | | | — | |
| Impairment of goodwill and intangible assets | | 34,572,403 | | | — | |
| Depreciation and amortization for investment in TIC | | 727,048 | | | 1,001,751 | |
| Less: Gain on sale of real estate investments, net | | (4,139,749) | | | — | |
| FFO | | 8,105,820 | | | 6,495,092 | |
| AFFO adjustments: | | | | |
| Add: Amortization of corporate intangibles | | 1,833,054 | | | — | |
| Stock compensation | | 712,217 | | | 372,500 | |
| Financing costs | | 1,025,093 | | | 638,200 | |
| Amortization of above-market intangible leases | | 169,857 | | | 97,045 | |
| Unrealized losses on interest rate swaps | | 770,898 | | | 820,496 | |
| Acquisition fees and due diligence expenses, including abandoned pursuit costs | | 94,043 | | | 46,681 | |
| Merger expenses | | — | | | 1,468,914 | |
| Less: Deferred rents | | (958,779) | | | (1,309,272) | |
| Amortization of below-market intangible leases | | (1,541,313) | | | (646,745) | |
| Other adjustments for unconsolidated entities | | (90,803) | | | (165,865) | |
| AFFO | | $ | 10,120,087 | | | $ | 7,817,046 | |
| | | | |
| Weighted average shares outstanding - fully diluted | | 9,196,240 | | | 5,012,158 | |
| Weighted average shares outstanding - basic | | 8,006,276 | | | 5,012,158 | |
| | | | |
| FFO Per Share, Fully Diluted | | $ | 0.88 | | | $ | 1.30 | |
| AFFO Per Share, Basic | | $ | 1.26 | | | $ | 1.56 | |
Distributions
During our offering stage, when we may raise capital more quickly than we acquire income-producing assets, and from time-to-time during our operational stage, we may not pay distributions solely from cash flow from operations. Historically, the sources of cash used to pay our distributorsdistributions have been from net rental income received and the waiver and deferral of management fees.fees by our Former Advisor through December 31, 2019. The leases for certain of our real estate acquisitions may provide for rent abatements. These abatements are an inducement for the tenant to enter into or extend the term of its lease. In connection with the acquisition of some properties, we may be able to negotiate a reduced purchase price for the acquired property in an amount that equals the previously agreed-upon rent abatement. During the period of any rent abatement on properties that we acquire, we may be unable to fully fund our distributions from net rental income received. In connection with the extension of the lease term of some properties, we may agree to pay a lease extension fee. In those events, we may expand the sources of cash used to fund our stockholder distributions to include proceeds from the sale of our common stock, but only during the periods, and up to the amounts, of any rent abatements where we are able to negotiate a reduced purchase price or pay lease extension fees.
A table of distributions declared, distributions paid out, the impact on cash flows from operations and the source of distribution payments is disclosed in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Distribution Information.
Going forward, we expect that our board of directors will to continue to declare distributions based on daily record dates and to pay the distributions on a monthly basis, and after our offering period, to continue to declare stock distributions based on a single record date as of the end of the month, and to pay these distributions on a monthly basis. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends or distributions to our stockholders other than as necessary to meet REIT qualification standards.
Subject to stockholder approval of planned amendments to our charter, we plan to pay a 13th distribution if our AFFO exceeds 100% of distributions declared for the year ending December 31, 2021. Any 13th distribution would be declared by our board of directors during January 2022 and be based on the outstanding shares held by stockholders on the declaration date using the following formula: (i) the daily amount of the 13th distribution divided by 365 days (ii) multiplied by the number of days such shares were held by such stockholder from January 1, 2021 through December 31, 2021. Stockholders will only be eligible for any 13th distribution declared by the board of directors if they hold such shares on the declaration date in January 2022.
Cash Flow Summary
The following table summarizes our cash flow activity for the years ended December 31, 20192020 and 2018:2019:
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Net cash provided by operating activities | | $ | 4,748,904 |
| | $ | 5,881,889 |
|
| Net cash used in investing activities | | $ | (29,602,469 | ) | | $ | (92,019,684 | ) |
| Net cash provided by financing activities | | $ | 23,034,567 |
| | $ | 90,710,968 |
|
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Net cash provided by operating activities | | $ | 5,576,840 | | | $ | 4,748,904 | |
| Net cash provided by (used in) investing activities | | $ | 24,778,295 | | | $ | (29,602,469) | |
| Net cash (used in) provided by financing activities | | $ | (28,914,535) | | | $ | 23,034,567 | |
Cash Flows from Operating Activities
Net cash provided by operating activities was $4,748,904$5,576,840 and 5,881,889$4,748,904 for the years ended December 31, 20192020 and 2018,2019, respectively.
The cash provided by operating activities for the year ended December 31, 20192020 primarily reflects adjustments to our net loss of $4,415,992,$49,141,910 for distributions from investmentsan investment in an unconsolidated entitiesentity of $1,029,786$683,000; non-cash charges for impairment of goodwill, intangible assets and forimpairment of real estate investment property aggregating $44,840,028 due to the COVID-19 pandemic; and net non-cash charges of $9,647,509$12,762,668 primarily related to depreciation and amortization, unrealized loss on interest rate swap valuation, amortization of deferred financing costs, stock issued as compensation expense, and amortization of above-market lease intangibles, partially offset by gain on sale of real estate investments, amortization of deferred rents, amortization of below-market lease intangibles and income from investment in unconsolidated entities. In addition, the net non-cash charges were partially offset by use of cash resulting from a net change in operating assets and liabilities of $1,512,399$3,566,946 during the year ended December 31, 20192020 due primarily to increases in tenant receivables and prepaid expenses and other assets and a decreasedecreases in accounts payable, accrued and other liabilities and amounts due to affiliates, offset in part by an increasea decrease in accounts payable, accrued and other liabilities.tenant receivables.
The cash provided by operating activities for the year ended December 31, 20182019 primarily reflects adjustments to our net loss of $1,801,724$4,415,992 for distributions from investments in unconsolidated entities of $896,670$1,029,786 and net non-cash charges of $6,478,805$9,647,509 primarily related to depreciation and amortization, amortization of deferred financing costs, stock compensation expense, unrealized loss on interest rate swap valuation and amortization of lease incentives and above-market lease intangibles, partially offset by deferred rents, income from investment in unconsolidated entities, and amortization of below-market lease intangibles. Cash was also provided by the net change in operating assets and liabilities of $308,138$1,512,399 during the year ended December 31, 20182019 due to increases in accounts payable, accrued and other liabilities and amounts due to affiliates and decrease in prepaid expenses and other assets, partially offset by an increase in tenant receivables.
We expect that our cash flows from operating activities will increasebe positive in the next twelve months asmonths. We believe that the efforts by the government to vaccinate a significant portion of the population from the COVID-19 virus will result in improvements in the business environment we operate in, coupled with our plan to expand our existing lines of an entire yearbusiness in 2021.
Cash Flows from Investing Activities
Net cash provided by investing activities was $24,778,295 for the year ended December 31, 2020 and consisted primarily of the following:
•$27,008,028 from proceeds from sales of real estate investments; partially offset by
•$673,631 for additions to existing real estate properties;
•$566,102 for additions to intangible assets; and
•$990,000 for payments to lease incentives.
Net cash used in investing activities was $29,602,469 for the year ended December 31, 2019 and consisted primarily of the following:
•$24,820,410 for the acquisition of one operating property;
•$1,665,180 for capitalized costs and improvements to existing real estate investments;
•$3,486,927 for payment of tenant improvements; and
•$746,459 for payment of acquisition fees to affiliate; offset in part by
•$1,016,507 for cash acquired from acquisitions of affiliates; and
•$100,000 collection of refundablerefunded purchase deposit.deposit for a prospective acquisition property.
Cash Flows from Financing Activities
Net cash used in investingfinancing activities was $92,019,684$28,914,535 for the year ended December 31, 20182020 and consisted primarily of the following:
•$87,064,53510,908,856 of proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $1,204,581;
•$35,705,500 of proceeds from refinanced mortgage notes payable, more than offset by principal payments of $45,299,688 primarily related to refinancings and property sales and deferred financing cost payments of $387,341 to third parties;
•$4,260,000 of proceeds from borrowings on our Unsecured Credit Facility and $517,000 borrowed under the acquisitionPPP;
•these proceeds were more than offset by $6,000,000 of six operating propertiesrepayments under our Unsecured Credit Facility, $4,800,000 for repayments of short-term notes payable, $17,576,261 used for repurchases of shares under the SRPs, $5,019,216 of distributions paid to common stockholders and one parcel$18,804 of land;
$1,730,666 for improvements to existing real estate investments;
$2,702,043 for payment of acquisition fees to affiliate;
$422,440 of investments in unconsolidated entities; and
$100,000 refundable purchase deposit for a prospective acquisition property.
Cash Flows from Financing Activitiesloan deposits.
Net cash provided by financing activities was $23,034,567 for the year ended December 31, 2019 and consisted primarily of the following:
•$34,555,691 of proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $1,715,370;
$23,100,000 of proceeds from mortgage notes payable, partially offset by principal payments of $14,879,217 and deferred financing cost payments to affiliates of $107,500; partially offset by $1,260,000 of net repayments under our unsecured credit facility;
$495,148 of payments for deferred financing costs;
$12,145,903 used for repurchases of shares under the share repurchase plan; and
$4,017,986 of distributions paid to stockholders, after giving effect to distributions reinvested by stockholders of $6,352,682.
Net cash provided by financing activities was $90,710,968 for the year ended December 31, 2018 and consisted primarily of the following:
$44,223,885 of proceeds from issuance of common stock and investor deposits, partially offset by payments for offering costs and commissions of $1,500,285;$1,715,370;
•$75,687,50023,100,000 of proceeds from mortgage notes payable, partially offset by principal payments of $12,892,970,$14,879,217, deferred financing cost payments of $495,148 to third parties of $1,200,010 and deferred financing fee payments$107,500 to affiliatesan affiliate; and
•$12,609,000 of $262,050;
$3,000,000 of net proceeds from borrowings underon our newUnsecured Credit Facility; these proceeds were more than offset by $13,869,000 of repayments on our former unsecured credit facility;
$8,688,479 $12,145,903 used for repurchases of shares under the share repurchase plan;SRPs; and
$1,656,073 $4,017,986 of distributions paid to stockholders, after giving effect to distributions reinvested by stockholderscommon stockholders.
Capital Resources
Generally, our cash requirements for property acquisitions, debt payments, capital expenditures, and other investments will be funded by the Offerings and bank borrowings from financial institutions and mortgage indebtedness on our properties, and to a lesser extent, by loans from affiliates and internally generated funds. Our cash requirements for operating and interest expenses, and distributions will generally be funded by internally generated funds. Offering proceeds and debt financings may also be used to fund repurchases of common stock. If available, future sources of capital include proceeds from the Offerings, secured or unsecured borrowings from banks or other lenders and proceeds from the sale of properties, as well as undistributed funds from operations.
Results of Operations
As of December 31, 2019,2020, we owned (i) 4536 operating properties (excluding four operating properties held for sale as of December 31, 2020) including 14 of the 20 operating properties which were acquired through the Merger with REIT I on December 31, 2019; (ii) one parcel of land which currently serves as an easement to one of our office properties; and (iii) the TIC Interest. We acquired no operating properties in 2020 primarily as a result of the COVID -19 pandemic and 21 operating properties in 2019 (one property during October 2019 and 20 properties resulting from the Merger with REIT I on December 31, 2019) and six. Primarily due to the COVID-19 pandemic, we sold five operating properties in 2018 (one property each during the first2020 to support share repurchase payments to our stockholders and second quarters of 2018 and two properties each during the third and fourth quarters of 2018). The 20 operating properties acquired from the Merger with REIT I have no effect in our results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018.provide additional liquidity. We expect that rental income, tenant reimbursements, depreciation and amortization expense and interest expense will each significantly increase for the next twelve months asbe less on a result of the 2019quarter-over-quarter basis due to recent asset sales until we execute property acquisitions and initiatives for our anticipated future acquisitions of real estate properties.growth strategy. Our results of operations for the year ended December 31, 20192020 are not indicative of those expected in future periods as we expect to continue to raise capital through the sale of shares of our Offeringscommon stock and acquire additional operating properties.
However, due to the current coronavirusprolonged COVID-19 pandemic in the United States and globally and the subsequent mutations of the COVID-19 virus into several variants, our tenants and operating partners will continue to be impacted. The impact of the coronavirusprolonged COVID-19 pandemic onand the subsequent mutations of the virus into several variants could continue to significantly affect our future results could be significant andresults. The severity of the effect will depend largely depend on future developments, which are highlycontinue to be uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic, the success of action takenthe COVID-19 global vaccination, the duration of protection against the virus from the vaccines, the speed of inventing new vaccines to contain or treat the coronavirus,variants, and the reactions by consumers, companies, governmental entities and capital markets.
Comparison of the Year Ended December 31, 20192020 to the Year Ended December 31, 20182019
Rental Income
Rental income, including tenant reimbursements, was $38,903,430 and $24,544,958 for the years ended December 31, 20192020 and 2018 was $24,544,958 and $17,984,625,2019, respectively. The 2021 annualized rental income of the operating properties of the 4536 operating properties owned as of December 31, 2019 was $29,424,453, however 20 operating2020, excluding four retail properties were acquired in the Merger with REIT I on December 31, 2019, and therefore did not have an impact on rental income from operating propertiesheld for the year ended December 31, 2019. We owned 24 operating propertiessale as of December 31, 2018 and 252020, was $26,052,736. We owned 45 operating properties as of December 31, 2019, excluding thewhich included 20 operating properties acquired from the merger with REIT I on December 31, 2019. The significant increase of $6,560,333 or 36% year-over-year primarily reflects full year rental income from our six operating properties acquired in 2018. Pro forma rental income for 2019 including the 20 properties acquired inthrough the Merger on December 31, 2019, would include an additional $13,132,226and 36 operating properties as of December 31, 2020, excluding the four operating properties held for an aggregatesale as of $37,677,184.December 31, 2020. We sold five operating properties in 2020 (four retail properties and one industrial property). The $14,358,472, or 58%, year-over-year increase in rental income primarily reflects rental income from the 20 operating properties acquired through the Merger on December 31, 2019 and one operating property acquired in October 2019.
Fees to Affiliates
Fees to affiliates, for the years ended December 31, 2019 and 2018 were $3,305,021 and $2,843,810. The 2019 amount includesor asset management fees to affiliates, andwere $3,305,021 for the year ended December 31, 2019 for our investments in operating expense reimbursements, and the 2018 amount includes asset management fees to affiliates and a subordinated participation fee.properties. The asset management fee was equal to 0.1% of the total investment value of our properties on a monthly basis. The significant increase of $461,211 or 16% year-over-year primarily reflects full year asset management fees for the larger operating properties acquired in 2018, and the cost of $528,000 of operating expense reimbursements in the current year period which reflects the portion of the operating expenses incurred by our Former Advisor allocated to us, offset in part by the absence of a subordinated participation fee in the current year. We did not incur a similar operating expense reimbursement in the prior year period as such reimbursement would have caused us to exceed the 2%/25% Limitation for operating expenses for the four fiscal quarters endedbasis through December 31, 2018. We did not incur a subordinated participation fee2019, when the Advisory Agreement was terminated in connection with the Self-Management Transaction. The fees for the year ended December 31, 2019 duecorrespond to the August 2019 amendment to the Advisory Agreement which eliminated this fee.
25 operating properties owned during that year. In addition, we incurred asset management fees to ourthe Former Advisor of $191,907 related to theour approximate 72.7% TIC Interest during both yearsthe year ended December 31, 2019, and 2018, respectively, which amounts were reflected as a reduction of income recognized from investments in unconsolidated entities in the accompanying consolidated statements of operations.entities. The advisory agreementAdvisory Agreement with the entityentities that ownsown the TIC Interest property was assigned to our taxable REIT subsidiary following the Self-Management Transaction and we will earn a monthly management fee of equal to 0.1% of the total investment value of the property from this entity. Asentity, which resulted in a resultmanagement fee of the Self-Management Transaction, pro forma fees to affiliates$263,971 for the year ended December 31, 2019, including2020, of which our portion of expense relating to the 20 properties acquired in the Merger on December 31, 2019, would be zero.TIC Interest was $191,933.
General and Administrative
General and administrative expenses were $10,399,194 and $2,711,573 for the years ended December 31, 20192020 and 2018 were $2,711,573 and $2,570,529,2019, respectively. The increase of $141,044$7,687,621, or 5%284%, year-over-year primarily reflects increases in the costs of self-management of all 36 operating properties owned, four properties held for sale as of December 31, 2020 and five operating properties sold during the second half of 2020, including personnel, occupancy and technology services costs, compared with the costs of the Advisory Agreement for the 25 operating properties owned during the prior year period, along with increases in directors and officers insurance, audit fees, third party consulting costs and marketing, partially offset by decreases inpost-closing legal and professional fees. Pro forma general and administrativecosts related to the Self-Management Transaction.
Merger Costs
Merger costs or self-management transaction expenses for the yearyears ended December 31, 2019 including the 20 properties acquired in the Merger on December 31, 20192020 and the Self-Management Transaction on December 31, 2019 would include an additional $7,700,304 for an aggregate of $10,411,877, without reflecting the impact of expected cost savings due to the Merger and the reduction in the number of employees since the second quarter of 2019.
Self-Management Transaction Expenses
Self-Management Transaction expenses for the year ended December 31, 2019 were $201,920 and $1,468,913, respectively, primarily reflecting an allocation of the fees of the financial advisor to the special committee of our board of directors, along with legal fees for the special committee's legal counsel. Since these fees are a non-recurring expense, they are excluded from the pro forma financial information.
Depreciation and Amortization
Depreciation and amortization expenses for the years ended December 31, 2020 and 2019 were $17,592,253 and 2018 were $9,848,130, and $6,988,925, respectively. The purchase price of the acquired properties iswas allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The significant increase of $2,859,205$7,744,123, or 41%79%, year-over-year primarily reflects fullthe expenses of all 36 operating properties owned, five properties sold during the current year depreciationperiod and amortizationfour properties held for sale as of December 31, 2020, which included the six20 operating properties acquired in 2018 and a large property acquired in October 2019. Pro forma depreciation and amortization forthrough the year endedMerger on December 31, 2019, including the 20 properties acquired in the Merger and the intangible assetsamortization of intangibles of $1,833,054 primarily acquired in the Self-Management Transaction, on December 31, 2019 would include an additional $6,314,867as compared with expenses for an aggregate of $16,162,997.the 25 operating properties owned during the prior year period.
Interest Expense
Interest expense was $11,460,747 and $7,382,610 for the years ended December 31, 20192020 and 2018 was $7,382,610 and $5,577,828,2019, respectively. The significant increase of $1,804,782$4,078,137, or 32%55%, year-over-year primarily reflects an increase in the average principal balance of mortgage notes payable from approximately $90,431,000 for the year ended December 31, 2018 to approximately $127,931,000 for the year ended December 31, 2019 excluding the $62,495,761 principal amount of mortgage notes payable assumed in the Merger with REIT I on December 31, 2019. Average unsecured credit facility borrowings wereto approximately $4,875,000$201,863,000 for the year ended December 31, 2018 compared2020, including $9,088,000 of mortgage notes payable related to real estate investments held for sale as of December 31, 2020. Average Unsecured Credit Facility borrowings were approximately $3,110,000 for the year ended December 31, 2019, compared to approximately $8,748,000 for the year ended December 31, 2020.
Property Expenses
Property expenses were $6,999,178 and $4,877,658 for the years ended December 31, 2020 and 2019, respectively. These expenses primarily relate to property taxes as well as insurance, utilities, and repairs and maintenance expenses. The increase of $2,121,520, or 43%, year-over-year primarily reflects the expenses of all 36 operating properties owned, four properties held for sale as of December 31, 2020 and five operating properties sold during the second half of 2020, including the 20 operating properties acquired on December 31, 2019 in the Merger, as compared with expenses for the 25 operating properties owned during the prior year period, which excluded the 20 operating properties acquired through the Merger on December 31, 2019. Pro forma interest expense
Impairment of Investments in Real Estate Properties
Impairment charges aggregating $10,267,625 recorded during the year ended December 31, 2020 relates to the impairments on the sale of our three properties located in Lake Elsinore, California, Morgan Hill, California and Las Vegas Nevada, one vacant property located in Cedar Park, Texas and one held for sale property located in San Jose, California. These impairment charges were primarily due to the negative impacts of the COVID-19 pandemic as discussed further in Note 4 to our consolidated financial statements in this Annual Report on Form 10-K.
Impairment of Goodwill and Intangible Assets
Impairment charges of $34,572,403 recorded during the year ended December 31, 2020 consisted of goodwill impairment of $33,267,143 (approximates 66% of goodwill) and intangible assets impairment of $1,305,260 (approximates 16% of intangible assets) related to our investor list. These impairments were recorded in the first quarter of 2020 and reflect the negative impacts of the COVID-19 pandemic to the carrying values of goodwill and intangible assets (see Note 3 to our consolidated financial statements in this Annual Report on Form 10-K for impairment details).
Expenses Reimbursed by Former Sponsor or Affiliates
Expenses reimbursed by Former Sponsor or affiliates were $332,337 for the year ended December 31, 2019, includingreflecting the 20amounts reimbursed by the Former Sponsor for investor relations payroll costs of $373,252, partially offset by a $40,915 refund to the Former Sponsor of employment related legal fees. Concurrent with the closing of the Self-Management Transaction on December 31, 2019, the Advisory Agreement was terminated.
Total Operating Expenses
Total operating expenses, excluding depreciation and amortization, interest expense, non-cash stock compensation expense and acquisition expenses (“Total Operating Expenses”), were 4.3% and 3.2% of average invested assets for the years ended December 31, 2020 and 2019, respectively. Total Operating Expenses were 34% and 238% of the net loss for the years ended December 31, 2020 and 2019, respectively.
Gain on Sale of Real Estate Investments, net
The gain on sale of real estate investments, net of $4,139,749 for the year ended December 31, 2020 reflects the net gain on sale of five retail properties during the current year (see Note 4 to our consolidated financial statements in this Annual Report on Form 10-K for more details).
Other (Expense) Income, Net
The lease termination expense of $(1,039,648) for the year ended December 31, 2020 reflects the fee for early termination of our Costa Mesa, California office lease following the surrender of the leased premises to the lessor during the second quarter of 2020 (see Note 10 to our consolidated financial statements in this Annual Report on Form 10-K for more details).
Interest income was $4,923 and $66,570 for the years ended December 31, 2020 and 2019, respectively.
Income from investments in unconsolidated entities was $296,780 and $234,048 for the years ended December 31, 2020 and 2019 , respectively. This represents our approximate 72.7% TIC Interest in the Santa Clara, California property for the years ended December 31, 2020 and 2019, respectively, and includes the results of our approximate 4.8% interest in REIT I's results of operations for the year ended December 31, 2019. We acquired REIT I in the Merger on December 31, 2019 would include an additional $3,720,387 for an aggregate of $11,102,997.2019.
Property Expense
Property expense for the years ended December 31, 2019Organizational and 2018 was $4,877,658Offering Costs
Our organizational and $3,185,629, respectively. The significant increase of $1,692,029 or 53% year-over-year was primarily due to the increase in the number of operating properties owned from 18 as of December 31, 2018 to 25 as of December 31, 2019, excluding the 20 operating properties acquired in the merger with REIT I on December 31, 2019. The overall increase in property expenses primarily relate to increases in repairs and maintenance, property taxes, insurance and utilities. Pro forma property expense for the year ended December 31, 2019 including the 20 properties acquired in the Merger on December 31, 2019 would include an additional $2,427,839 for an aggregate of $7,305,497.
Expenses Reimbursed by Our Former Sponsor or Affiliate
Expenses reimbursedoffering costs were paid by our Former Sponsor or affiliate for the years ended December 31,on our behalf through September 30, 2019, and 2018 were $332,337 and $1,136,469, respectively. The expenses reimbursed by our Former Sponsor for the years ended December 31, 2019 and 2018, of $332,337 and $1,136,469, respectively, were compensation costs related to our investor relations employees. The significant decrease of $804,132, or 71%,at which point in reimbursements corresponds primarilyan amendment to the reduced number of investor relations personnel and related costs as described above under general and administrative expenses and to the receipt of reimbursements for only nine months for 2019 because of the effect of an amendment of the Advisory Agreement. In this amendment the CompanyAgreement we agreed to pay all future organizationorganizational and offering costs, and to no longer be reimbursed by our Former Sponsor for investor relations personnel costs after September 30, 2019, in exchange for our Former Sponsor's agreement to terminate its right to receive 3% of gross offering proceeds as reimbursement for organization and offering costs paid by our Former Sponsor. There were no waived asset management fees by our Former Sponsor or its affiliates for the years ended December 31, 2019 and 2018. As a result of the Self-Management Transaction, pro forma expenses reimbursed by our Former Sponsor or affiliates for the year ended December 31, 2019, including the 20 properties acquired in the Merger on December 31, 2019 would be zero.
Other Income
Interest income for the years ended December 31, 2019 and 2018 was $66,570 and $17,879, respectively.
Income from investments in unconsolidated entities for the years ended December 31, 2019 and 2018 was $234,048 and $226,024, respectively. This represents our approximate 4.80% share of the results of operations of REIT I for the years ended December 31, 2019 and 2018, respectively, and our approximate 72.7% share in the results of operations of the Santa Clara property for the years ended December 31, 2019 and 2018, respectively. Going forward, income from REIT I ceased as a result of the Merger with REIT I on December 31, 2019. Pro forma other income for the year ended December 31, 2019 including the 20 properties acquired in the Merger and the business acquired in the Self-Management Transaction on December 31, 2019 would be $294,871.
Organizational and Offering Costs
Our organizational and offering costs were paid by our Former Sponsor on our behalf through September 30, 2019, at which point in an amendment to the Advisory Agreement we agreed to pay all future organization and offering costs, and to no longer be reimbursed by our Former Sponsor for investor relations personnel costs after September 30, 2019, in exchange for our Former Sponsor's agreement to terminate its right to receive 3% of gross offering proceeds as reimbursement for organization and offering costs paid by our Former Sponsor. Offering costs include all expenses incurred in connection with the Offerings, including investor relations compensation costs. Other organizational and offering costs include all expenses incurred in connection with our formation, including, but not limited to legal fees, federal and state filing fees, and other costs to incorporate.
During the primary Offerings though the amendment of the Advisory Agreement described above, we were obligated to reimburse our Former Sponsor for organizational and offering costs related to the Offerings paid by themour Former Sponsor on our behalf provided such reimbursement did not exceed 3% of gross offering proceeds raised in the Offerings as of the date of the reimbursement.
Following the October 2019 amendment to the Advisory Agreement with our Former Sponsor, from October 1, 2019 through December 31, 2019, we incurred $509,791 of direct organizational and offering costs related to the Offerings, including primarily legal fees, FINRA, SEC and blue sky filing and personnel costs for investor relations personnel. As a result, the organizational and offering costs related to the Offerings recorded in our consolidated financial statements as of December 31, 2019 include the $509,791 of direct costs that we incurred plus $1,206,881 in reimbursements we made to our Former Sponsor to the extent of 3.0% of the gross offering proceeds through September 30, 2019. Through September 30, 2019, our Former Sponsor had incurred organizational and offering costs on our behalf in connection with the Offerings in excess of 3.0% of the gross offering proceeds received by the Company. As of December 31, 2019, we had recorded $5,429,105 of organizational and offering costs paid to our Former Sponsor or affiliates and $509,791 which we incurred directly for an aggregate of $5,938,896.
For the years ended December 31, 2020 and 2019, the costs of raising equity capital were 6.7% and 4.2%, respectively, of the equity capital raised.
Properties
Portfolio Information
As of December 31, 20192020 and 2018,2019, we owned real estate investments (excluding four assets held for sale as of December 31, 2020) as follows:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 (1) |
| Number of properties: | | | |
| Retail | 11 | | | 19 | |
| Office | 14 | | | 14 | |
| Industrial | 11 | | | 12 | |
| Total operating properties | 36 | | | 45 | |
| Parcel of land | 1 | | | 1 | |
| Total properties | 37 | | | 46 | |
| | | |
| Leasable square feet: | | | |
| Retail | 220,553 | | | 362,764 | |
| Office | 853,963 | | | 904,499 | |
| Industrial | 1,053,779 | | | 1,093,539 | |
| Total leasable square feet | 2,128,295 | | | 2,360,802 | |
|
| | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Number of properties: (1) | | | |
| Retail | 20 |
| | 9 |
|
| Office | 16 |
| | 10 |
|
| Industrial | 9 |
| | 5 |
|
| Total operating properties | 45 |
| | 24 |
|
| Parcel of land | 1 |
| | 1 |
|
| Total properties | 46 |
| | 25 |
|
| | | | |
| Leasable square feet: (2) | | | |
| Retail | 362,764 |
| | 185,384 |
|
| Office | 800,036 |
| | 616,284 |
|
| Industrial | 1,198,002 |
| | 735,016 |
|
| Total leasable square feet | 2,360,802 |
| | 1,536,684 |
|
| |
(1) | Includes 20 properties acquired through the Merger with REIT I as follows: (i) 11 retail properties with an aggregate leasable square feet of 177,380; (ii) six office properties with an aggregate leasable square feet of 183,752 and (iii) three industrial properties with an aggregate leasable square feet of 246,259. |
The above table does not include an approximate 72.7% TIC Interest in a 91,740 square feetfoot office property located in Santa Clara, California.
We have a limited operating history. As of December 31, 2019,2020, we have acquired:own: (i) 4536 operating properties; (ii) four properties held for sale; (iii) one parcel of land, which currently serves as an easement to one of our office propertiesproperties; and (iii)(iv) the TIC Interest. In evaluating these properties as potential acquisitions, including the determination of an appropriate purchase price to be paid for the properties, we considered a variety of factors, including the condition and financial performance of the properties, the terms of the existing leases and the creditworthiness of the tenants, property location, visibility and access, age of the properties, physical condition and curb appeal, neighboring property uses, local market conditions, including vacancy rates, area demographics, including trade area population and average household income and neighborhood growth patterns and economic conditions.
Sales of Real Estate Investments
During 2020, we sold the following real estate investments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property | | Location | | Disposition Date | | Property Type | | Rentable Square Feet | | Contract Sales Price | | Net Proceeds After Debt Repayment |
| Rite Aid | | Lake Elsinore, CA | | 8/3/2020 | | Retail | | 17,272 | | | $ | 7,250,000 | | | $ | 3,299,016 | |
| Walgreens | | Stockbridge, GA | | 8/27/2020 | | Retail | | 15,120 | | | 5,538,462 | | | 5,296,356 | |
| Island Pacific | | Elk Grove, CA | | 9/16/2020 | | Retail | | 13,963 | | | 3,155,000 | | | 1,124,016 | |
| Dinan Cars | | Morgan Hill, CA | | 10/28/2020 | | Industrial | | 27,296 | | | 6,100,000 | | | 3,811,580 | |
| 24 Hour Fitness (1) | | Las Vegas, NV | | 12/16/2020 | | Retail | | 45,000 | | | 9,052,941 | | | — | |
| | | | | | | | 118,651 | | | $ | 31,096,403 | | | 13,530,968 | |
(1) On December 16, 2020, we completed the sale of our Las Vegas, Nevada retail property which was formerly leased to 24 Hour Fitness for $9,052,941, which is expected to generate net proceeds of $1,324,383 upon collection of the receivable from the buyer and after assignment of the existing mortgage to the buyer, payment of commissions and closing costs, and reserves for tenant improvements and free rent.
Subsequent to December 31, 2020, we completed the sale of three of the four real estate investments classified as held for sale as of December 31, 2020.
On January 7, 2021, we completed the sale of our Roseville, California retail property which was leased to the operator of a Chevron gas station for $4,050,000, which generated net proceeds of $3,914,909 after payment of commissions and closing costs.
On January 29, 2021, we completed the sale of our Sacramento, California retail property which was leased to EcoThrift for $5,375,300, which generated net proceeds of $2,684,225 after repayment of the existing mortgage, commissions and closing costs.
On February 12, 2021, we completed the sale of our San Jose, California retail property which was leased to the operator of a Chevron gas station for $4,288,888, which generated net proceeds of $4,055,657 after payment of commissions and closing costs.
Extension of Leases
During December 2019 and January 2020, we amended lease agreements to extend the lease terms for three of our properties. The lease for the Walgreens property in Stockbridge, GAGeorgia was extended for 10 years to February 28, 2031 in exchange for an incentive payment of $500,000 payable in four installments of $125,000 each, commencing January 10, 2020 with the final installment paid April 1, 2020. The lease for the Walgreens property in Santa Maria, CACalifornia was extended for 10 years to March 31, 2032 in exchange for an incentive payment of $490,000 payable in four installments of $122,500 each, commencing January 15, 2020 with the final installment paid April 1, 2020. The lease for the Accredo property in Orlando, FLFlorida was extended for 3 1/2 years to December 31, 2024 and we paid a leasing commission of $215,713 to the tenant’s broker in February 2020.
Effective August 1, 2020, we executed an amendment for the early termination of the Dana lease from July 31, 2024 to July 31, 2022 in exchange for an early termination payment of $1,381,767 due on July 31, 2022 and continued rent payments of $65,000 per month from August 1, 2020 through July 1, 2022. In the event that we are able to re-lease or sell the Dana property prior to July 31, 2022, Dana would be obligated to continue paying rent of $65,000 per month through July 1, 2022, along with the early termination payment, or may elect to pay a cash lump sum payment to us equal to the net present value of the remaining rent payments.
Effective October 23, 2020, the Company extended the lease term of its Wood Group property located in San Diego, California for the five year period from February 28, 2021 to February 28, 2026 for minimum annual rents increasing annually. The Company paid an aggregate leasing commission of $146,679 to the broker, of which 50% was paid in November 2020 and the remaining 50% was paid in March 2021, in connection with this extension.
Effective December 15, 2020, the Company extended the lease term of its Solar Turbines property located in San Diego, California for an additional two years from July 31, 2021 to July 31, 2023 with minimum annual rents continuing at the rate in effect.
Effective January 21, 2021, the Company extended the lease terms of two of its Dollar General properties located in Lakeside, Ohio and in Castalia, Ohio for the five year period from June 1, 2030 to May 31, 2035 for an increased minimum annual rent for the extension period in exchange for one month of free rent, which amounted to $6,753 and $6,610 for the Lakeside and Castalia properties, respectively. In addition, the amendments provide for three five-year extension periods at the option of the tenant, each at an increased minimum rental amount.
Effective March 1, 2021, the Company also extended the lease term of its Northrop Grumman property located in Melbourne, Florida for the five year period from May 31, 2021 to May 31, 2026 for minimum annual rents increasing annually. The amendment includes both an early termination option at the end of the third year of the extension and an option for an additional extension of five years. The Company paid a leasing commission of $128,538 to the tenant's brokers and $128,538 to Northrop Grumman as a credit for additional tenant improvement costs in connection with this extension of the Northrop Grumman lease term. The Company also agreed to provide tenant improvements (including roof, HVAC and other improvements) that it estimates will cost approximately $1,150,000 in connection with this extension.
We are continuing to explore potential lease extensions for many of our properties.
Other than as discussed below, we do not have other plans to incur any significant costs to renovate, improve or develop theour properties. We believe that theour properties are adequately insured. We have one tenant with a lease that provides for a tenant improvement allowance which has a remainder of $63,000. We expect that the related improvements will be completed during the 20202021 calendar year. As of December 31, 2019,2020, there are restricted cash deposits of $92,684 that are available to be used to pay for these improvements. The remainder will be funded from operating cash flow or Offeringoffering proceeds.
In addition, we have identified approximately $2,576,000$2,596,000 of roof replacement, exterior painting and sealing and parking lot repairs/restriping that are expected to be completed in 2020.2021, including approximately $900,000 of the Northrop Grumman tenant improvements discussed above. Approximately $1,282,000$629,000 of these improvements are expected to be recoverable from tenants through their operating expense reimbursements. In addition, there are no restricted cash deposits that were reserved to pay for these improvements. We will have to pay for the improvements and the recoveries will be billed over an extended period of time according to the terms of the lease. The remaining costs of approximately $1,294,000$1,967,000 are not recoverable from tenants. These improvements will be funded from operating cash flows, debt financings or proceeds from the Offerings.sale of shares of our common stock.
More information on our properties and investments can be found in Part I, Item 2. Properties of this Annual Report.Report on Form 10-K.
Recent Market Conditions
DueWe continue to face significant uncertainties due to the current coronavirus pandemic in the United States and globally, the Company's tenants and operating partners, property locations and the economy as a whole are impacted. The magnitude and duration of the coronavirus pandemic and its impact on our tenants, our cash flows and our future results of operations could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic, the success of actions taken to contain or treat the coronavirus, and reactions by consumers, companies, governmental entities and capital markets. It is likely that the U.S. and global economies are entering into a recession, the severity of which is unpredictable but expected to be significant. The prolonged duration and impact of the coronavirus pandemic could materially disrupt the Company's business operations and impact its financial performance.
COVID-19 pandemic. Both the investing and leasing environments are highly competitive. Even before the coronavirusCOVID-19 pandemic, uncertainty regarding the economic and political environment had made businesses reluctant to make long-term commitments or changes in their business plans. The coronavirusCOVID-19 pandemic has resulted in significant disruptions in financial markets, business shutdowns and uncertainty about how the U.S. and global economy will perform over the next several months. The ongoing trade war between the U.S. and China has also increased the level of uncertainty and resulted in reductions in business investments.
Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, or rent abatements for tenants severely impacted by the coronavirusCOVID-19 pandemic, may result in decreases in cash flows from investment properties. ImpendingWe have one retail lease with a leasable area of 50,000 square feet scheduled to expire July 31, 2021, representing approximately 0.4% of projected 2021 net operating income from properties. We also have nine leases scheduled to expire in either 2022 or 2023, which comprise an aggregate of 805,822 leasable square feet and representing approximately 24.5% of projected 2021 net operating income from properties. The tenants of these properties could reevaluate their use of such properties in light of the impacts of the COVID-19 pandemic, including their ability to have workers succeed from working at home, and determine not to renew these leases or to seek rent or other concessions as a condition of renewing their leases. Potential declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio, which could have the following negative effects on us: the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to make distributions or meet our debt service obligations.
UncertaintiesWhile we have had success during 2020 and the first quarter of 2021 with refinancing certain properties, uncertainties in the capital markets may cause difficulty in refinancing debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. Market conditions have changedcan change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.
We plan to rely on debt financing to finance our real estate properties and we may have difficulty refinancing some of our debt obligations prior to or at maturity, or we may not be able to refinance these obligations at terms as favorable as the terms of our initial indebtedness and we also may be unable to obtain additional debt financing on attractive terms or at all. If we are not able to refinance our initial indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets. Market conditions have changed quickly, and such changes could negatively impact the value of our assets.
The debt market remains sensitive to the macro environment, such as impacts of the coronavirusCOVID-19 pandemic, Federal Reserve policy, market sentiment or regulatory factors affecting the banking and CMBScommercial mortgage-backed securities industries. Economic and financial marketWhile we have been able to successfully refinance seven of our properties over the last nine months, economic conditions have deteriorated rapidly during the last two monthsyear as a result of the coronavirusCOVID-19 pandemic and we may experience more stringent lending criteria in the future, which may affect our ability to finance certain property acquisitions or refinance any debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable. We expect to manage the current mortgage lending environment by considering alternative lending sources, including securitized debt, fixed rate loans, borrowings on a line of credit, short-term variable rate loans, or any combination of the foregoing.
Critical Accounting Policies
The discussion below is regarding the accounting policies that management believes are or will be critical to our operations. We consider these policies critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may have utilized different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Revenue Recognition
We adopted FASB Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), effective January 1, 2018 using the modified retrospective approach, which requires a cumulative effect adjustment as2018. Our sources of our date of adoption. The adoption of ASU No. 2014-09 did not result in a cumulative effect adjustment as of January 1, 2018. Based on our evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 included revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at our properties. Such revenues are recognized when the services are provided and the performance obligations are satisfied. OurTenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of ASU No. 2014-09 in 2018 did not have a significant impact on our consolidated financial statements. However, revenue recognition under ASU No. 2014-09 may have a significant impact on our consolidated financial statementsTopic 842, as defined and discussed below, in the near term.period the recoverable costs are incurred.
Effective January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”)FASB ASU No. 2016-02, “LeasesLeases (Topic 842)” and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01, which provide practical expedients, technical corrections and improvements for certain aspects of ASU 2016-02, on a modified retrospective basis (collectively “Topic 842”). Topic 842 establishesestablished a single comprehensive model for entities to use in accounting for leases and supersedes the existing leasing guidance. Topic 842 appliesapplied to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements were made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Topic 842 impacts our accounting for leases primarily as a lessor. However, Topic 842 also impactsimpacted our accounting as a lessee for an operating lease acquired as a result of the Self-Management Transaction, which was completed on December 31, 2019.
As a lessor, our leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. Under Topic 842, the lease of space is considered a lease component while the common area maintenance, property taxes and other recoverable costs billings are considered nonlease components, which fall under revenue recognition guidance in Topic 606.ASU No. 2014-09. However, upon adopting the guidance in Topic 842, we determined that our tenant leases met the criteria to apply the practical expedient provided by ASU No. 2018-11 to recognize the lease and non-lease components together as one single component. This conclusion was based on the consideration that (1) the timing and
pattern of transfer of the nonlease components and associated lease component are the same, and (2) the lease component, if accounted for separately, would be classified as an operating lease. As the lease of properties is the predominant component of our leasing arrangements, we accounted for all lease and nonlease components as one-single component under Topic 842. As a result, the adoption of Topic 842 did not have any impact on our timing or pattern of recognition of rental revenues as compared to previous guidance. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU 2018-11 have been combined under rental income subsequent to the adoption of Topic 842 for the year ended December 31, 2019 in our consolidated statements of operations. We also made a conforming reclassification for the prior year’s tenant reimbursements.
Prior to the adoption of Topic 842, lessor costs for certain services directly reimbursed by tenants have already been presented on a gross basis in revenues and expenses in our consolidated statement of operations.
We recognize rental income from tenants under operating leases on a straight-line basis over the noncancelable term of the lease when collectability of such amounts is reasonably assured. Recognition of rental income on a straight-line basis includes the effects of rental abatements, lease incentives and fixed and determinable increases in lease payments over the lease term. If the lease provides for tenant improvements, our management determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by us.
When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:
•whether the lease stipulates how a tenant improvement allowance may be spent;
•whether the amount of a tenant improvement allowance is in excess of market rates;
•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;
•whether the tenant improvements are unique to the tenant or general-purpose in nature; and
•whether the tenant improvements are expected to have any residual value at the end of the lease.
Tenant reimbursements of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if we are the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk. In instances where the operating lease agreement has an early termination option, the termination penalty is based on a predetermined termination fee or based on the unamortized tenant improvements and leasing commissions.
Gain or Loss on Sale of Real Estate Property
We recognize gain or loss on sale of real estate property when we have executed a contract for sale of the property, transferred controlling financial interest in the property to the buyer and determined that it is probable that we will collect substantially all of the consideration for the property. Operating results of the property that is sold remain in continuing operations, and any associated gain or loss from the disposition is included in gain or loss on sale of real estate investments in our accompanying consolidated statements of operations.
Bad Debts and Allowances for Tenant and Deferred Rent Receivables
UponWe evaluate the adoptioncollectability of Topic 842rents and other receivables on January 1, 2019,a regular basis based on factors including, among others, payment history, credit rating, the asset type, and current economic conditions. If our evaluation of these factors indicates we may not recover the full value of the receivable, we provide an allowance against the portion of the receivable that we estimate may not be recovered. This analysis requires us to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected.
Our determination of the adequacy of our allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection, we also may record an allowance under other authoritative GAAP depending upon our evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in our consolidated statements of operations.
Prior to the adoption of Topic 842, we evaluated the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, the operations, the asset type and current economic conditions. If our evaluation of these factors indicated we would not recover the full value of the receivable, we provided a reserve against the portion of the receivable that we estimated would not be recovered. This analysis required us to determine whether there were factors indicating a receivable would not be fully collectable and to estimate the amount of the receivable that would not be collected.
In addition, withWith respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, we will record a bad debt allowance for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.
Income Taxes
We elected to be taxed as a REIT for U.S. federal income tax purposes under Section 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2016. We expect to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes. To qualify as a REIT, we must meet certain organizational and operational requirements, including meeting various tests regarding the nature of our assets and our income, the ownership of our outstanding stock and distribution of at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to U.S. federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value for certain financial instruments is derived using a combination of market quotes, pricing models, and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of our financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. We evaluate several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value:
Cash and cash equivalents; restricted cash; tenant receivables; purchase and other deposits; prepaid expenses and other assets; accounts payable, accrued and other liabilities; and due to affiliates: These balances approximate their fair values due to the short maturities of these items.
Derivative instruments: Our derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, we classify these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.
Goodwill and Intangible Assets: Thefair value measurements of goodwill and intangible assets are considered Level 3 nonrecurring fair value measurements. For goodwill, fair value measurement involves the determination of fair value of a reporting unit. We use a discounted cash flow approach to estimate the fair value of our real estate assets, which requires the use of capitalization rates and discount rates. We use a Monte Carlo simulation model to estimate future performance, generating the fair value of the reporting unit's business. For intangible assets, fair value measurements include assumptions with inherent uncertainty, including projected securities offering volumes and related projected revenues and long-term growth rates, among others. The carrying value of intangible assets is at risk of impairment if future projected offering proceeds, revenues or long-term growth rates are lower than those currently projected.
Unsecured credit facility: The fair value of our unsecured credit facilityUnsecured Credit Facility approximates its carrying value as the interest rates are variable and the balances approximate their fair values due to the short maturities of this facility.
Mortgage notes payable: The fair value of our mortgage note payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. We classify these inputs as Level 3 inputs.
Related party transactions: We have concluded that it is not practical to determine the estimated fair value of related party transactions. Disclosure rules for fair value measurements require that for financial instruments for which it is not practicable to estimate fair value, information pertinent to those instruments be disclosed. Further information as to these financial instruments fromwith related parties is included in Note 9 to our consolidated financial statements.statements in this Annual Report on Form 10-K.
Real Estate
Real Estate Acquisition Valuation
We record acquisitions that meet the definition of a business as a business combination. If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. Under both methods, all assets acquired and liabilities assumed are measured based on their acquisition-date fair values. Transaction costs that are related to a business combination are charged to expense as incurred. Transaction costs that are related to an asset acquisition are capitalized as incurred.
We assess the acquisition date fair values of all tangible assets, identifiable intangibles, and assumed liabilities using methods similar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.
We record above-market and below-market in-place lease values for acquired properties based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases plus any extended term for any leases with below-market renewal options. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods.
We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease-up periods, considering current market conditions. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease up periods.
We amortize the value of tenant origination and absorption costs to depreciation and amortization expense over the remaining non-cancelable term of the respective lease.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of our net income (loss).
Depreciation and Amortization
Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated or amortized over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. Significant replacements and betterments are capitalized. We anticipate the estimated useful lives of our assets by class to be generally as follows:
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| . | Buildings | 10-48 years |
| . | Site improvements | Shorter of 15 years or remaining lease term |
| . | Tenant improvements | Shorter of 15 years or remaining lease term |
| . | Tenant origination and absorption costs, and above-/below-market lease intangibles | Remaining lease term |
Impairment of Real Estate and Related Intangible Assets
We continuallyregularly monitor events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset.
Real Estate Investments Held for Sale
We consider a real estate investment to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale and its related assets are classified as “real estate investment held for sale, net” and “assets related to real estate investment held for sale,” respectively, in the accompanying consolidated balance sheets. Mortgage notes payable and other liabilities related to real estate investments held for sale are classified as “mortgage notes payable related to real estate investments held for sale, net” and “liabilities related to real estate investments held for sale,” respectively, in the accompanying consolidated balance sheets. Real estate investments classified as held for sale are no longer depreciated and are reported at the lower of their carrying value or their estimated fair value less estimated costs to sell. Operating results of properties that were classified as held for sale in the ordinary course of business are included in continuing operations in our accompanying consolidated statements of operations.
Goodwill and Other Intangible Assets
We recordsrecord goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. We will evaluate goodwill and other intangible assets for possible impairment in accordance with ASC 350, Intangibles–Intangibles–Goodwill and Other,Other, on an annual basis, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized.
When testing goodwill for impairment, we may first assess qualitative factors. The qualitative testing analyzes current economic indicators associated with a reporting unit. If an initial qualitative assessment indicates a stable or improved fair value, no further testing is required. If an initial qualitative assessment identifies that it is more likely than not that the fair value of a reporting unit is less than its carrying value, additional quantitative testing is performed. We may also elect to skip the qualitative testing and proceed directly to the quantitative testing. If the quantitative testing indicates that goodwill is impaired, an impairment charge is recognized based on the difference between the reporting unit's carrying value and its fair value. We primarily will utilize a discounted cash flow methodology to calculate the fair value of its reporting units.
In assessing goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below its net book value. If, after assessing the totality of events or circumstances, we determine it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary.
However, if we concluded otherwise, or if we elect to bypass the qualitative analysis, then it is required that we perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit.
Intangible assets consist of purchased customer-related intangible assets, marketing related intangible assets, developed technology and other intangible assets. Intangible assets are amortized over their estimated useful lives using the straight-line method ranging from three to five years. No significant residual value is estimated for intangible assets. The Company willAn asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements. in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2019,2020, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as the Company is a smaller reporting company.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements at page F-1 of this Annual Report on Form 10-K.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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ITEM 9A. | CONTROLS AND PROCEDURES |
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 20192020 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of December 31, 2019,2020, were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Under Rule 13a-15(c), management must evaluate, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness, as of the end of each fiscal year, of our internal control over financial reporting. The term internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedure that:
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1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
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2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with the authorization of management and trust managers of the issuer; and |
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3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the issuer’s assets that could have a material effect on the financial statements. |
1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with the authorization of management and trust managers of the issuer; and
3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions of that the degree of compliance with the policies or procedures may deteriorate.
In the course of preparing this Annual Report on Form 10-K and the consolidated financial statements included herein, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20192020 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commissions (COSO) in the Internal Control-Integrated Framework (2013). Based on that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.2020.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm as we are an emerging growth company as of December 31, 2019,2020, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
Act, and such report is not required for emerging growth companies.
Changes in Internal Control Over Financial Reporting
ThereOther than our internal controls instituted related to the outsourcing of certain accounting functions and employees working remotely, there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) that occurred during the quarter ended December 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our disclosure controls and procedures and internal controls over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. We recognize that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurances that its objectives will be met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.
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ITEM 9B. | ITEM 9B. OTHER INFORMATION |
Not applicable.
On March 29, 2021, we entered into the New Credit Facility with Banc of California for an aggregate line of credit of $22,000,000 with a maturity date of March 30, 2023, which replaced our Unsecured Credit Facility. We borrowed $6,000,000 under the New Credit Facility and repaid the $6,000,000 that was owed to PMB on March 31, 2021. The New Credit Facility provides us with a $17,000,000 revolving line of credit for real estate acquisitions (including the $6,000,000 borrowed to repay PMB) and an additional $5,000,000 revolving line of credit for working capital. Under the terms of the New Credit Facility, we will pay a variable rate of interest on outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day shall not be less than 4.75% per annum. We paid Banc of California origination fees of $77,000 in connection with the New Credit Facility and will pay an unused commitment fee of 0.15% per annum of the unused portion of the New Credit Facility, charged quarterly in arrears based on the average unused commitment available under the New Credit Facility. The New Credit Facility is secured by substantially all of our tangible and intangible assets, including intellectual property. The New Credit Facility requires us to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and minimum tangible NAV (as defined in the loan agreement) of $120,000,000, measured quarterly. Mr. Wirta, our Chairman, has guaranteed our $6,000,000 initial borrowing, which guarantee will expire upon repayment of the $6,000,000 which is due by September 30, 2021. Mr. Wirta has also guaranteed our $5,000,000 revolving line of credit for working capital. On March 29, 2021, we entered into an updated indemnification agreement with Mr. Wirta and the Wirta Trust with respect to their guarantees of borrowings under the New Credit Facility.
The New Credit Facility contains customary representations, warranties and covenants, which are substantially similar to those in our Unsecured Credit Facility. Our ability to borrow under the New Credit Facility will be subject to our ongoing compliance with various affirmative and negative covenants, including with respect to indebtedness, guaranties, mergers and asset sales, liens, corporate existence and financial reporting obligations. The New Credit Facility also contains customary events of default, including, without limitation, nonpayment of principal, interest, fees or other amounts when due, violation of covenants, breaches of representations or warranties and change of ownership. Upon the occurrence of an event of default, Banc of California may accelerate the repayment of amounts outstanding under the New Credit Facility, take possession of any collateral securing the New Credit Facility and exercise other remedies subject, in certain instances, to the expiration of an applicable cure period.
PART III
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ITEM 10. | ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Executive Officers and Directors
We have provided below certainThe information about our executive officers and directors. We are not aware of any family relationship among any of our executive officers or directors. Each individual has stated that thererequired by this item is no arrangement or understanding of any kind between him or her and any other person relating to his or her position as an executive officer or director.
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Name (1) | | Age (2) | | Positions |
Aaron S. Halfacre | | 47 | | Chief Executive Officer, President and Director |
Raymond E. Wirta | | 76 | | Chairman of the Board and Director (5) |
Raymond J. Pacini | | 64 | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer |
Adam S. Markman | | 55 | | Independent Director (3)(4) |
Curtis B. McWilliams | | 64 | | Independent Director (4)(5)(7) |
Thomas H. Nolan, Jr. | | 62 | | Independent Director(4)(5)(8) |
Jeffrey Randolph | | 63 | | Independent Director (3)(4)(6) |
Joe F. Hanauer | | 82 | | Director (3) |
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(1) | The address of each executive officer and director listed is 3090 Bristol Street, Suite 550, Costa Mesa, California 92626. |
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(3) | Member of the audit committee of our board of directors. |
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(4) | Member of the conflicts committee of our board of directors. |
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(5) | Member of the compensation committee of our board of directors. |
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(6) | Chair of the audit committee of our board of directors |
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(7) | Chair of the conflicts committee of our board of directors. |
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(8) | Chair of the compensation committee of our board of directors. |
Mr. Aaron S. Halfacre. Mr. Halfacre has served as our Chief Executive Officer and President and a member of our board of directors since January 2019. Following the closing of the Self-Management Transaction on December 31, 2019, Mr. Halfacre is now employed and compensated directlyincorporated herein by the Company. From January 2019 through December 31, 2019, Mr. Halfacre also served as Chief Executive Officer and a Manager of our Former Sponsor and our Former Advisor where he also served as President from August 2018 through December 2019. Mr. Halfacre also served as the Chief Executive Officer, President and a Trust Manager of REIT I from August 2018 until the Merger on December 31, 2019. He has also served as a Director of BRIX REIT since January 2019 and as the Chief Executive Officer and President of BRIX REIT from January 2019 to October 2019. From January 2018 to July 2018, Mr. Halfacre served as President of Realty Mogul, Co., a real estate crowdfunding platform and its affiliates, MogulREIT I, LLC, a non-traded public real estate investment trust that invests in and manages a diversified portfolio of commercial real estate investments, including loans, equity in commercial real estate ventures and other real estate-related assets; and MogulREIT II, LLC, a non-traded public real estate investment trust that owns and manages a diversified portfolio of preferred equity and joint venture equity investments in multifamily properties located in target markets throughout the United States. Since April 2016, Mr. Halfacre also served as a Co-Founder of Persistent Properties, LLC which manages a multi-family portfolio focused on workforce housing. From July 2014 to March 2016, Mr. Halfacre served as president and chief investment officer of Campus Crest Communities, Inc., a publicly-traded real estate investment trust focusing on the ownership, development, building and management of student housing properties throughout the United States. From October 2012 to May 2014, Mr. Halfacre served as senior vice president and head of strategic relations at Cole Real Estate Investments, Inc., a publicly traded REIT focused on net lease real estate investments, where he oversaw all investor and strategic capital relationships. From November 2005 to December 2010, Mr. Halfacre served as the chief of staff and head of product development of the real estate group at BlackRock, a global investment management corporation. From June 2004 to November 2005, Mr. Halfacre served as director of investor relations for Green Street Advisors, a premier independent research and advisory firm concentrating on the commercial real estate industry in North America and Europe. Mr. Halfacre holds both Chartered Financial Analyst® and Chartered Alternative Investment Analyst® designations and received a Master of Business Administration from Rice University. Our board directors has concluded that Mr. Halfacre is qualified to serve as a director by reason of his extensive industry and leadership experience.
Mr. Raymond Wirta. Mr. Wirta is a founder of the Company and has served as our Chairman of the Board since 2016. Together with Mr. Halfacre, he owns a controlling interest in our Former Sponsor and our Former Advisor. Mr. Wirta has also served as the Chairman of the board of directors of affiliated BRIX REIT since October 2017 and served as the Chairman of the board of trust managers of REIT I until the merger on December 31, 2019. Mr. Wirta served as Chairman of the board of directors of CBRE Group (NYSE:CBRE), a global real estate services firm from 2014 to 2018, Vice Chair of the board of directors of CBRE from 2013 to 2014, a Director of CBRE since 2001 and served as the Chief Executive Officer of CBRE from 2001 to 2005 and Chief Executive Officer of its predecessor company, CBRE Services, from 1999 to 2001. Since 2009, he has served as Chief Executive Officer of The Koll Company, a West Coast-based real estate investment and development company. He previously served as Chief Executive Officer for Koll Management Services and The Bolsa Chica Company during time frames when both were publicly traded real estate companies. Based on these experiences, Mr. Wirta offers insights and perspective with respectreference to our real estate portfolio. From 2010 through March 2019, he served as a full-time advisor to the Irvine Company, and President since 2016. The Irvine Company is a privately held California based real estate development company with ownership of 120 million square feet of apartments, office, retail and resorts primarily in California. Mr. Wirta holds a B.A. from California State University, Long Beach and an M.B.A from Golden State University. Our board of directors has concluded that Raymond Wirta is qualified to serve as one of our directors by reason of his expertise with real estate-related investments and advise our board of directors on the critical issues facing our company.
Mr. Raymond J. Pacini.Mr. Pacini has served as our Executive Vice President, Chief Financial Officer and Treasurer since April 2018 and as our Secretary since September 2019. Following closing of the Self-Management Transaction on December 31, 2019, Mr. Pacini is now employed and compensated directly by the Company. Mr. Pacini also served as Executive Vice President, Chief Financial Officer and Treasurer of our Former Sponsor and our Former Advisor and REIT I from April 2018 through December 31, 2019. From April 2018 until October 2019, Mr. Pacini also served as Executive Vice President, Chief Financial Officer and Treasurer of BRIX REIT, for which he served as an independent director from November 2017 until April 2018. On January 29, 2020, Mr. Pacini was reappointed as Executive Vice President, Chief Financial Officer, Secretary and Treasurer of BRIX REIT. From June 2013 to April 2018, Mr. Pacini served as Chief Financial Officer of Northbound Treatment Services, a privately held company which treats drug and alcohol addictions. From 1998 to 2011, Mr. Pacini served as President, Chief Executive Officer and a Director of California Coastal Communities, Inc. (‘‘CALC’’), a residential land development and homebuilding company and was the Chief Financial Officer of CALC’s predecessors (Koll Real Estate Group, Inc., The Bolsa Chica Company and Henley Properties, Inc.) from 1992 to 1998. On October 27, 2009, CALC and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Central District of California. On March 1, 2011, CALC emerged from bankruptcy and became a privately held company. Mr. Pacini has seven years of experience as a certified public accountant with the accounting firm of Coopers & Lybrand (now known as PricewaterhouseCoopers LLP). Mr. Pacini has been a National Association of Corporate Directors (NACD) Board Leadership Fellow since 2014. Mr. Pacini also
served as an independent director, audit committee chair and the financial expert for Cadiz Inc. (NASDAQ: CDZI), a land and water resource development public company, from June 2005 to July 2019. Mr. Pacini received his B.A. in Political Science from Colgate University in 1977 and his M.B.A. from Cornell University in 1979.
Mr. Adam S. Markman.Mr. Markman has served as an independent member of our board of directors since January 2019. Mr. Markman has served as Executive Vice President, Chief Financial Officer and Treasurer of Equity Commonwealth (NYSE: EQC), a REIT primarily investing in office properties, since July 2014. Mr. Markman served as Managing Director of Green Street Advisors, Inc., a real estate research firm (‘‘Green Street’’), where he worked from 1994 to 2014. While at Green Street, Mr. Markman headed the firm’s consulting and advisory practice, played a key role in the firm’s investment arm for real estate investment trusts and previously led the firm’s retail and lodging research efforts. Mr. Markman has also served as a real estate consultant at Kenneth Leventhal & Co. Mr. Markman was a member of Green Street’s board of directors, currently sits on Mark IV Capital’s board of directors and is an adviser to Twin Rock Partner’s Housing Fund. He is also a member of the National Association of Real Estate Investment Trusts (NAREIT) and the Urban Land Institute (ULI). Mr. Markman earned his M.B.A. in Finance/Real Estate from Columbia University and a B.A. from U.C. Berkeley. Our board of directors has concluded that Mr. Markman is qualified to serve as an independent director by reason of his extensive experience in the real estate business.
Mr. Curtis B. McWilliams. Mr. McWilliams has served as an independent member of our board of directors since January 2019. He also has served as chair of the special committee since February 2019. Mr. McWilliams has served as the non-executive Chairman of the board of directors of Ardmore Shipping Corporation (NYSE: ASC) since January 1, 2019 and a director since January 2016. Mr. McWilliams was also Lead Director of Braemar Hotels & Resorts Inc. (NYSE: BHR) from November 2013 until July 2019 and he continues to be a member of the board and chair of the audit committee. Mr. McWilliams was also an independent director of Campus Crest Communities, Inc. from May 2015 to March 2016. Mr. McWilliams is a real estate industry veteran with over 25 years of experience in finance and real estate. He retired from his position as President and Chief Executive Officer of CNL Real Estate Advisors, Inc. in 2010 after serving in the role since 2007. Mr. McWilliams was also the President and Chief Executive Officer of Trustreet Properties Inc. from 1997 to 2007, and a director of the company from 2005 to 2007. He served on the board of directors and as the audit committee Chairman of CNL Bank from 1999 to 2004 and has over 13 years of investment banking experience at Merrill Lynch & Co. Mr. McWilliams holds a M.B.A., with a concentration in Finance, from the University of Chicago Graduate School of Business, and a Bachelor of Science in Engineering in Chemical Engineering from Princeton University. Our board of directors has concluded that Mr. McWilliams is qualified to serve as an independent director by reason of his extensive experience in the real estate business and investment banking.
Mr. Thomas H. Nolan, Jr. Mr. Nolan has served as an independent member of our board of directors since January 2019. Mr. Nolan has been a director of WashREIT (NYSE: WRE) since 2015. He previously served as Chairman of the board of directors and Chief Executive Officer of Spirit Realty Capital, Inc. (NYSE: SRC) from September 2011 until May 2017. Mr. Nolan previously worked for General Growth Properties, Inc. (‘‘GGP’’), serving as Chief Operating Officer from March 2009 to December 2010 and as President from October 2008 to December 2010. He also served as a member of the board of directors of GGP from 2005 to 2010. GGP filed for protection under Chapter 11 of the U.S. Bankruptcy Code in April 2009 and emerged from bankruptcy in November 2010. Mr. Nolan was a member of the senior management team that led GGP’s reorganization and emergence from bankruptcy, which included the restructuring of $15.0 billion in project-level debt, payment in full of all of GGP’s pre-petition creditors and the securing of $6.8 billion in equity commitments. From July 2004 to February 2008, Mr. Nolan served as a Principal and Chief Financial Officer of Loreto Bay Company, the developer of the Loreto Bay master planned community in Baja, California Sur, Mexico. From October 1984 to July 2004, Mr. Nolan held various financial positions with AEW Capital Management, L.P., a national real estate investment advisor, and from 1998 to 2004, he served as Head of Private Equity Investing and as President and Senior Portfolio Manager of The AEW Partners Funds. Mr. Nolan holds a B.B.A. from the University of Massachusetts, Amherst. Our board of directors has concluded that Mr. Nolan is qualified to serve as an independent director by reason of his extensive experience in the real estate business.
Mr. Jeffrey Randolph. Mr. Randolph has served as an independent member of our board of directors since July 2016. Mr. Randolph also served as an independent director and chair of the audit committee of BRIX REIT, Inc. from November 2017 until January 2020 and served as an independent Trust Manager of affiliated REIT I from 2014 to January 11, 2019. From 2002 through 2007 and then again from 2010 through March 2017 (now retired), Mr. Randolph was a Principal and served as Chief Financial Officer and Chief Compliance Officer for Affinity Investment Advisors, LLC, a firm specializing in U.S. stock exchange investments. In 2007, Affinity was purchased by Morgan Stanley Investment Management. From 2007 through 2010, Mr. Randolph served as Managing Director for Morgan Stanley and its wholly-owned subsidiary Van Kampen Investments. His role included supporting the firm’s domestic and international investment clients. Toward the end of 2010, Mr. Randolph was part of the decision to re-launch Affinity as an independent entity to capitalize on the increasing investor interest in boutique management firms. Mr. Randolph brings 25 years of investment experience to our REIT. His previous work experience includes Principal at Avalon Financial Group Inc., which specialized in the restructuring and placement of commercial real estate financings, Chief Financial Officer for Bonutto-Hofer Investments, a private real estate investment firm that specialized in acquisition and management of commercial real estate properties in the western U.S., and Vice President at Security Pacific National Bank. Mr. Randolph also serves on the board of TSJ Hope Builders, a Santa Ana, California based nonprofit dedicated to moving young men and women out of poverty through life and job skills training. He is also a cofounder of Building Blocks Foundation Fund, an organization of commercial real estate professionals dedicated to supporting Orange County’s disadvantaged youth. Mr. Randolph received his bachelor’s degree in Business Finance from California State University, Long Beach. Our board of directors has concluded that Mr. Randolph is qualified to serve as an independent director by reason of his extensive experience in real estate and investment management.
Mr. Joe F. Hanauer. Mr. Hanauer has served as a member of our board of directors since December 2019. He previously served as an independent director of BrixInvest, our former sponsor and former advisor, from November 2016 until the closing of the Self-Management Transaction on December 31, 2019. Mr. Hanauer has been principal of Combined Investments, LLC and affiliated companies which invest in real estate as well as real estate related businesses since January 1990. He also serves on the board of directors of Porch, Inc. and was Chairman of the Move, Inc. (formerly NASDAQ) Global Advisory Board, operator of Realtor.com, where he served as Chairman of the Board for thirteen years and negotiated the sale of the company to News Corp. Previously, as Chairman of Grubb & Ellis (formerly NYSE) from 1993 to 1998, he also became interim Chief Executive Officer to lead the financial restructuring of the company, one of the nation’s largest commercial real estate services and property management companies at the time, shedding all debt and returning the company to profitability. Prior to forming Combined Investments, Mr. Hanauer was Chairman and Chief Executive Officer of Coldwell Banker Residential Real Estate from 1981 through 1989, having been responsible for developing all of its residential brokerage, franchising and mortgage related businesses internationally. Under his direction, revenues grew to nearly $1 billion annually and broker coverage increased from 2,000 people to over 40,000 operating out of 2,000 locations. Coldwell Banker became an acknowledged leader in its field. He joined Coldwell Banker when he and his partners sold their Chicago based real estate firm to the company. Regarding charitable involvement, he is a life Trustee of Roosevelt University and Chairman of the Board of IHC Global, an organization dedicated to creating sustainable cities globally with safe and inclusive housing. He is a director of Laguna Beach Live!, an organization enabling people to easily access live, quality music; is immediate past Chair of Laguna Playhouse, a leading theatre which will be celebrating its 100th year in 2020 and on the board of Laguna Art Museum. He is a Senior Business Fellow at the Harvard University Joint Center for Housing Studies. Mr. Hanauer received an undergraduate degree in marketing and business from Roosevelt University and did graduate studies at the University of Chicago. Our board of directors has concluded that Joe F. Hanauer is qualified to serve as a director by reason of his extensive experience in real estate and investment management.
Other Key Officers
Ms. Sandra G. Sciutto.Ms. Sciutto, age 60, has served as our Senior Vice President and Chief Accounting Officer since July 2018. Ms. Sciutto has also served as Senior Vice President and Chief Accounting Officer for BRIX REIT since July 2018 and served as Senior Vice President and Chief Accounting Officer for REIT I from July 2018 until December 2019 and as an independent director of BRIX REIT from April 2018 until July 2018. From October 2016 to June 2018, Ms. Sciutto served as Chief Financial Officer for Professional Real Estate Services Inc., a privately held, full-service commercial real estate investment and operating company based in Orange County, California. From November 2012 to April 2016, Ms. Sciutto served as Chief Financial Officer and investment committee member for Shopoff Realty Investments, L.P., a real estate developer and real estate fund sponsor. From 1998 to 2012, Ms. Sciutto served as Chief Financial Officer of CALC. From 1993 until 1998, Ms. Sciutto was the Controller of CALC and its predecessor companies Koll Real Estate Group, Inc. and The Bolsa Chica Company. On October 27, 2009, CALC and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Central District of California. On March 1, 2011, CALC emerged from bankruptcy and became a privately held company. Ms. Sciutto also has five years of experience as a certified public accountant with the accounting firm of KPMG LLP. Ms. Sciutto received her B.S. in Business Administration with a concentration in Accounting from Cal Poly State University, San Luis Obispo in 1982. She also holds an active CPA license in the state of California.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires the Company’s directors, executive officers and any persons beneficially owning more than 10% of any registered class of our equity securities (collectively, the “insiders”) to report their initial ownership of those securities and most changes in that ownership to the SEC. To the Company’s knowledge, based solely on a review of the copies of the Section 16(a) reports furnished to the Company by the insiders or written representations from the insiders that no other reports were required with respect to the year ended December 31, 2019, all insiders timely filed all Section 16(a) reports requireddefinitive proxy statement to be filed by them for 2019, with the exceptionwithin 120 days of the following reports that were not filed timely:
Form 4 Filings. - Five Form 4 filings by Mr. David Perduk, who resigned as our Chief Investment Officer on JanuaryDecember 31, 2020 and delivered to report acquisitionsstockholders in connection with our 2021 annual meeting of 20, 20, 20, 10 and 10 shares of our common stock on January 23, 2019 (Form 4 filed January 29, 2019), February 20, 2019 (Form 4 filed February 27, 2019), March 20, 2019 (Form 4 filed March 27, 2019), July 23, 2019 (Form 4 filed July 29, 2019) and August 21, 2019 (Form 4 filed August 28, 2019), respectively, pursuant to the Company’s automatic investment program.stockholders.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all of our employees and officers, including our principal executive officer, principal financial officer and principal accounting officer and persons performing similar functions and all members of our board of directors. The Code covers topics including, but not limited to, conflicts of interest, confidentiality, fair dealings, record keeping and reporting, protection and proper use of our assets, payments to foreign and U.S. government personnel and compliance with laws, rules and regulations. The Code is posted in the NNN REIT Documents-Corporate Governance section of our website at www.RichUncles.com. To the extent required by SEC rules, we intend to promptly disclose future amendments to certain provisions of the Code, or waivers of such provisions granted to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, in the Corporate Governance section of our website, rather than filing a Current Report on Form 8-K with the SEC.
The Audit Committee
Our board of directors has established an audit committee. Our audit committee’s function is to assist our board of directors in fulfilling its responsibilities by overseeing (i) our accounting and financial reporting processes, (ii) the integrity of our financial statements, (iii) our compliance with legal and regulatory requirements, and (iv) the selection, appointment and compensation of our independent registered public accounting firm and (v) our independent registered public accounting firm’s qualifications, performance and independence. The audit committee fulfills these responsibilities primarily by carrying out the activities enumerated in the audit committee charter. The audit committee charter is available in the NNN REIT Documents-Corporate Governance section of our website at www.RichUncles.com. The members of the audit committee are Jeffrey Randolph (Chairman), Adam S. Markman and beginning December 17, 2019, Joe F. Hanauer. Messrs. Randolph and Markman, representing a majority of the members of the audit committee are “Independent Directors” as defined by our charter and are “independent” as defined by the New York Stock Exchange and applicable rules of the SEC. All members of the audit committee are financially literate, and our board of directors has determined that Mr. Randolph satisfies the SEC’s requirements for an “audit committee financial expert.”
The Conflicts Committee
Our board of directors established a conflicts committee, which consists of all independent directors, in order to reduce or eliminate certain potential conflicts of interest. The members of the conflicts committee are Messrs. McWilliams, Markman, Nolan and Randolph, with Mr. McWilliams serving as the chair of the conflicts committee. The conflicts committee operates pursuant to a conflicts committee charter, which has been adopted by the board of directors to define the committee’s responsibilities and authorizes our conflicts committee to act on any matter permitted under Maryland law. Our conflicts committee acts by majority vote of its members and is also empowered to retain its own legal and financial advisors at our expense. Our conflicts committee charter requires that our conflicts committee discharge the board’s responsibilities relating to the nomination of independent directors and make recommendations to the board regarding the compensation of our directors. Our conflicts committee also discharges the board’s responsibilities relating to the compensation of our executives. The audit conflicts committee charter is available in the NNN REIT Documents-Corporate Governance section of our website at www.RichUncles.com.
The Compensation Committee
Effective December 18, 2019, our board of directors established a compensation committee, which consists of all independent directors. The members of the compensation committee are Mr. McWilliams, Mr. Nolan and Mr. Wirta, with Mr. Nolan serving as chair of the compensation committee. The compensation committee is responsible for recommending, establishing, overseeing and directing the Company’s executive officer and director compensation philosophy, policies and programs, approving the compensation to be paid by the Company to the Company’s executive officers and making recommendations to the board of directors regarding the compensation of the non-employee members of the Company’s board of directors. The compensation committee fulfills these responsibilities primarily by carrying out the activities enumerated in the compensation committee charter. The compensation committee charter is available in the NNN REIT Documents-Corporate Governance section of our website at www.RichUncles.com.
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ITEM 11. | ITEM 11. EXECUTIVE COMPENSATION |
Compensation of Executive Officers
PriorThe information required by this item is incorporated herein by reference to our definitive proxy statement to be filed within 120 days of December 31, 2019, we did not employ our executive officers,2020 and our executive officers did not receive compensation directly from us for services rendereddelivered to us. Our executive officers were officers and/or employees of, and in some cases held an ownership interest in our Former Sponsor, and our executive officers were compensated by this entity, in part, for their services to us. For a discussion of the compensation paid to our Former Sponsor, Former Advisor and/or its affiliates for the year ended December 31, 2019, seePart III, Item 13, Certain Relationships and Related Transactions, and Director Independence-Certain Transactions with Related Persons. As a result, we did not have, and our board of directors did not consider, a compensation policy or program for our executive officers during 2019 and has not included a Compensation Discussion and Analysis or a Compensation Committee Report.
As a result of the Self-Management Transaction which closed on December 31, 2019, starting January 1, 2020, our executive officers are employed with us and will receive compensation directly from us for services rendered. Messrs. Halfacre and Pacini each receive an annual salary of $275,000. In connection with the Self-Management Transaction, on December 31, 2019, we entered into restricted units award agreements (each, an “Award Agreement”) with each of Messrs. Halfacre and Pacini regarding the grant of a number of Class P OP Units. Mr. Halfacre was granted a total of 40,000 Class P OP Units and Mr. Pacini was granted a total of 16,029 Class P OP Units, of which 20,262 and 9,449 Class P OP Units were issued to Messrs. Halfacre and Pacini, respectively,stockholders in connection with their entry into restrictive covenant agreements in consideration for their 2020 equity incentive compensation.our 2021 annual meeting of stockholders.
The Class P OP Units are intended to be treated as “profits interests” in NNN REIT OP, which are non-voting, non-dividend accruing, and are not able to be transferred or exchanged prior to the earlier of (1) March 31, 2024, (2) a change of control (as defined in the Amended OP Agreement), or (3) the date of the employee’s involuntary termination (as defined in the relevant Award Agreement) (collectively, the “Lockup Period”). Following the expiration of the Lockup Period, the Class P OP Units are convertible into Class C OP Units at a conversion ratio of 5 Class C OP Units for each 1 Class P OP Unit; provided, however, that the foregoing conversion ratio shall be subject to adjustment on generally the same terms and conditions as the Class M OP Units, as set forth above.
Compensation of Directors
If a director is also one of our executive officers, we do not pay any compensation to that person for services rendered as a director. For the year ended December 31, 2019, we paid each of our non-officer directors as follows: (i) quarterly retainers of $12,500 for each non-officer director, (ii) an additional quarterly retainer of $12,500 for each non-officer director serving on the special committee and (iii) a quarterly retainer of $2,500 for the chairs of the audit and conflicts committees, which amounts were, in each case, payable in shares of our Class C common stock.
The table below sets forth information regarding compensation to our independent directors for the year ended December 31, 2019:
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| | | | |
| Name (1) | | Compensation |
| Adam S. Markman | | $ | 87,500 |
|
| Curtis B. McWilliams | | $ | 97,500 |
|
| Thomas H. Nolan, Jr. | | $ | 90,000 |
|
| Jeffrey Randolph | | $ | 97,500 |
|
| Joe F. Hanauer (2) | | $ | 2,083 |
|
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(1) | The compensation paid to Mr. Halfacre, the Company’s Chief Executive Officer, and Mr. Wirta, our Chairman of the Board, is not included in this table because they are also executive officers of the Company and, therefore, received no compensation for their service as director. |
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(2) | Mr. Hanauer’s compensation commenced on December 17, 2019 when he was elected to serve on the board at the 2019 Annual Meeting of Stockholders. |
Beginning January 1, 2020, each of our non-officer directors will be compensated as follows: (i) annual retainer of $25,000 (paid in quarterly installments) payable in cash or, upon election by such director, in shares of Class C common stock; (ii) an annual stock grant of $50,000 (paid in quarterly installments) payable in shares of our Class C common stock; and (iii) annual committee chair fees of $10,000 for each of the chairs of the audit, conflicts, compensation and any other committee, payable in shares of our Class C common stock. The shares to be issued to directors will be restricted securities issued in private transactions in reliance on an exemption from registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof, and we have not agreed to file a registration statement with respect to registration of the shares to the directors. The directors will be able to resell their shares to us pursuant to our share repurchase plan. All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors.
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ITEM 12. | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Stock Ownership
As of March 20, 2020, thereThe information required by this item is no person who is knownincorporated herein by usreference to our definitive proxy statement to be the beneficial ownerfiled within 120 days of more than 5%December 31, 2020 and delivered to stockholders in connection with our 2021 annual meeting of the outstanding shares of our Class C or Class S common stock. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes securities over which a person has voting or investment power and securities that a person has the right to acquire within 60 days. The following table shows, as of February 29, 2020, the amount of our Class C common stock beneficially owned (unless otherwise indicated) by (1) each of our directors and executive officers and (2) all of our directors and executive officers as a group. None of our directors or executive officers beneficially owns any shares of our Class S common stock.stockholders.
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| | | | | | | | | | | | | |
| Name (1) | | Class C Shares Beneficially Owned (2) | | Class M and Class P OP Units | | Percent of Class C Shares (3) | | Class S Shares Beneficially Owned | | Percent of Common Stock (4) |
| Aaron S. Halfacre (2) | | 13,754 |
| | 60,000 |
| | * | | — |
| | * |
| Raymond E. Wirta | | 94,029 |
| | 190,282 |
| | * | | — |
| | * |
| Raymond J. Pacini (2) | | 1,000 |
| | 16,029 |
| | * | | — |
| | * |
| Joe F. Hanauer | | 206 |
| | 7,461 |
| | * | | — |
| | * |
| Adam S. Markman | | 8,833 |
| | — |
| | * | | — |
| | * |
| Curtis B. McWilliams | | 9,839 |
| | — |
| | * | | — |
| | * |
| Thomas H. Nolan, Jr. | | 9,080 |
| | — |
| | * | | — |
| | * |
| Jeffrey Randolph | | 28,265 |
| | — |
| | * | | — |
| | * |
| All directors and executive officers as a group (8 persons) | | 165,006 |
| | 273,772 |
| | * | | — |
| | * |
| |
* | Less than 1% of the outstanding Class C or Class S common stock (as applicable) and none of the shares is pledged as security. |
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(1) | The address of each named beneficial owner is 3090 Bristol Street, Suite 550, Costa Mesa, CA 92626. |
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(2) | On December 31, 2019, Mr. Halfacre and Mr. Pacini were granted 40,000 and 16,029 of Class P OP Units in the Operating Partnership, respectively, which will vest on March 31, 2024, or upon change of control of our Company or involuntary termination, as defined in the Amended OP Agreement. Upon vesting, each Class P OP Units is convertible into five Class C OP Units in the Operating Partnership subject to certain adjustments. The Class C OP Units are exchangeable for cash or shares of Class C common stock on a 1-for-1 basis, as determined by the Company. |
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(3) | Based on 23,788,542 shares of Class C common stock outstanding on February 29, 2020. |
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(4) | Based on 23,975,837 shares of common stock (Class C and Class S) outstanding on February 29, 2020. |
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ITEM 13. | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Director Independence
Our charter requires that a majority ofThe information required by this item is incorporated herein by reference to our directors be “Independent Directors” (as defined in our charter), except for a period of up to 60 days after the death, removal or resignation of an independent director pending the election of such independent director’s successor. A copy of our charter is available in the NNN REIT Documents - Corporate Governance section of our website at www.RichUncles.com. For purposes of our charter, an Independent Director is any director who is not associated and has not been associated within the last two years, directly or indirectly, with our sponsor or advisor or our management. A director is deemeddefinitive proxy statement to be associated with our sponsor or advisor if he or she: (i) owns an interest in our sponsor, advisor or any of their affiliates; (ii) is employed by our sponsor, advisor or any of their affiliates; (iii) is an officer or director of our sponsor, advisor or any of their affiliates; (iv) performs services, other than as a director, for us; (v) is a director for more than three REITs organized by our sponsor or advised by our advisor; or (vi) has any material business or professional relationship with our sponsor, advisor or any of their affiliates. For purposes of determining whether or not the business or professional relationship is material, the gross revenue derived by the director from our sponsor and advisor and affiliates shall be deemed material per se if it exceed 5% of the director’s annual gross revenue (derived from all sources) during either of the last two years or net worth (on a fair market value basis). A director is also deemed to be associated with our sponsor or advisor if the director’s spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law, or brothers- or sisters-in-law is or has been associated with our sponsor, advisor, any of their affiliates or us.
In addition, although our shares are not listed for trading on any national securities exchange, a majority of the directors, and a majority of the members of the audit committee and conflicts committee, are “independent” as defined by the New York Stock Exchange. The New York Stock Exchange standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, the board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us).
Our board of directors has determined that Adam S. Markman, Curtis B. McWilliams, Thomas H. Nolan, Jr. and Jeffrey Randolph each qualify as an “Independent Director” as defined in our charter and satisfy the New York Stock Exchange independence standards.
Our Policy Regarding Transactions with Related Persons
Our conflicts committee was required to review and approve all transactions between us and our former advisor, any of our officers or directors or any of their affiliates. Prior to entering into a transaction with a related party, a majority of the conflicts committee must conclude that the transaction is fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties. In addition, our Code of Business Conduct and Ethics requires our employees and directors to be scrupulous in avoiding any action or interest that conflicts with, or gives the appearance of a conflict with, our interests. Our employees and directors are required to report potential and actual conflicts to the Chief Financial Officer, or directly to the chairman of the conflicts committee, as appropriate.
Certain Transactions with Related Persons
Short-term loan from our Chairman
In connection with the Self-Management Transaction, we assumed two notes payable aggregating $630,820 on December 31, 2019 owed to Mr. Wirta. The secured notes payable are presented under due to affiliates in our consolidated balance sheet.
On February 28, 2020, the board of directors, including all of the members of the conflicts committee, unanimously approved our Company’s borrowing of $4,000,000 from Mr. Wirta as described in Note 11 to our consolidated financial statements.
Our Relationship with our Former Sponsor and Former Advisor.
Pursuant to the Self-Management Transaction effective December 31, 2019, the Advisory Agreement with our Former Advisor was terminated. Pursuant to the Advisory Agreement, our Former Advisor managed our operations and our portfolio of core real estate properties and real estate-related assets and provided asset management and other administrative services through December 31, 2019, the termination date of our Advisory Agreement.
Among the services provided by our Former Advisor under the terms of our Advisory Agreement were the following:
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• | accepting and executing any and all delegated duties from us as a general partner of our operating partnership; |
• | finding, presenting and recommending to us real estate investment opportunities consistent with our investment policies and objectives; |
• | structuring the terms and conditions of our investments, sales and co-ownerships; |
• | acquiring real estate investments on our behalf in compliance with our investment objectives and policies; |
• | arranging for financing and refinancing of our real estate investments; |
• | entering into leases and service contracts for our properties; |
• | reviewing and analyzing our operating and capital budgets; |
• | assisting us in obtaining insurance; |
• | generating an annual budget for us; |
• | reviewing and analyzing financial information for each of our assets and our overall portfolio; |
• | formulating and overseeing the implementation of strategies for the administration, promotion, management, operation, maintenance, improvement, financing and refinancing, marketing, leasing and disposition of our real estate investments; |
• | performing investor-relations services; |
• | maintaining our accounting and other records and assisting us in filing all reports required to be filed with the SEC, the IRS and other regulatory agencies; |
• | engaging in and supervising the performance of our agents, including our registrar and transfer agents; |
• | performing administrative and operational duties reasonably requested by us; |
• | performing any other services reasonably requested by us; and |
• | doing all things necessary to assure its ability to render the services described in the Advisory Agreement. |
Our Former Advisor was subject to the supervision of our board of directors and only had such authority our board of directors delegated to our Former Advisor as our agent. We initially entered the Advisory Agreement with our Former Advisor in connection with the Registered Offering of our Class C common stock and the agreement had been amended and restated at various times thereafter, until its termination on December 31, 2019.
The Advisory Agreement entitled our Former Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate investments, the management of those investments, among other services, and the disposition of investments, and also entitled our Former Advisor to reimbursement of organizational and offering costs incurred by our Former Advisor or Former Sponsor on our behalf, such as expenses related to our offerings of Class C and Class S common stock through September 30, 2019, and certain costs incurred by our Former Advisor or Former Sponsor in providing services to us. In addition, our Former Advisor was entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement.
Summarized below is information about the costs incurred by us pursuant to the Advisory Agreement for the year ended December 31, 2019.
Organizational and Offering Costs. Pursuant to the Advisory Agreement, prior to October 1, 2019, we were obligated to reimburse our Former Sponsor or its affiliates for organizational and offering expenses (as defined in the Advisory Agreement) paid by our Former Sponsor on our behalf. We reimbursed our Former Sponsor for organizational and offering expenses up to 3% of gross offering proceeds. Our Former Sponsor and affiliates were responsible for any organizational and offering expenses to the extent they exceeded 3% of gross offering proceeds. As of September 30, 2019, our Former Sponsor had incurred organizational and offering expenses of $9,189,209 on our behalf, which was in excess of 3% of the gross offering proceeds we received. Through September 30, 2019, we reimbursed our Former Sponsor $5,429,105 in organizational and offering costs. Our maximum liability for organizational and offering costs through September 30, 2019 was $5,429,105, all of which was paid as of September 30, 2019. We ceased reimbursing our Former Sponsor for these costs effective October 1, 2019 in connection with the change in our plan of distribution whereby we offer our shares of Class C common stock through a registered broker-dealer. Beginning October 1, 2019, such costs were recorded directly to equity as organization and offering costs.
Investor Relations Payroll Expense Reimbursements from our Former Sponsor. We employ investor relations personnel who answer inquiries from potential investors regarding our Company and/or its Registered Offerings of shares of Class C common stock. The compensation expenses associated with the investor relations personnel were reimbursed by our Former Sponsor from January 1, 2019 to September 30, 2019 in the amount of $373,251. Our Former Sponsor considered these payroll costs to be offering expenses. Beginning October 1, 2019, such costs were recorded directly to equity as organization and offering costs.
Acquisition Fees. We paid our Former Advisor a fee in an amount equal to 3.0% of the contract purchase price of our properties plus additions to real estate investments, as defined in the Advisory Agreement (the “acquisition fees”). The total of all acquisition fees and acquisition expenses should be reasonable and should not exceed 6.0% of the contract price of the property. However, through the termination of the Advisory Agreement on December 31, 2019, a majority of the directors (including a majority of the independent directors) not otherwise interested in the transaction was able to approve fees in excess of these limits if they determined the transaction to be commercially competitive, fair and reasonable to us. Acquisition fees paid for the year ended December 31, 2019 including fees paid for additions to existing properties were $746,459.
Asset Management Fees. We paid our Former Advisor as compensation for the advisory services rendered to us a monthly fee in an amount equal to 0.1% of our total investment value, as defined in the Advisory Agreement (the “Asset Management Fee”), as of the end of the preceding month. The Asset Management Fee was paid monthly on the last business day of such month. The Asset Management Fee, which was required to be reasonable in the determination of our independent directors at least annually, was allowed to be taken, in whole or in part as to any year, in the sole discretion of our Former Advisor. All or any portion of the Asset Management Fee not paid as to any fiscal year was deferred without interest and paid in such other fiscal year as determined by our Former Advisor.
Additionally, to the extent our Former Advisor elected, in its sole discretion, to defer all or any portion of its monthly Asset Management Fee, our Former Advisor was deemed to have waived, not deferred, that portion of its monthly Asset Management Fee that is up to 0.025% of the total investment value of our assets. The total amount of Asset Management Fees incurred and paid in the year ended December 31, 2019 was $2,777,021, of which $0 was waived.
Financing Coordination Fee. Other than with respect to any mortgage or other financing related to a property concurrent with its acquisition, if our Former Advisor or an affiliate provided a substantial amount of the services (as determined by a majority of our independent directors) in connection with the post-acquisition financing or refinancing of any debt that we obtained relative to a property, then we paid our Former Advisor or such affiliate a financing coordination fee equal to 1.0% of the amount of such financing. Financing coordination fees incurred and paid for the year ended December 31, 2019 were $107,500.
Property Management Fees. If our Former Advisor or any of its affiliates provided a substantial amount of the property management services (as determined by a majority of our independent directors) for our properties, then we paid our Former Advisor or such affiliate a property management fee equal to 1.5% of gross revenues from the properties managed. We also reimbursed our Former Advisor and any of its affiliates for property-level expenses that such person paid or incurred on our behalf, including salaries, bonuses and benefits of persons employed by such person, except for the salaries, bonuses and benefits of persons who also served as one of our executive officers or as an executive officer of such person. Our Former Advisor or its affiliate was allowed to subcontract the performance of its property management duties to third parties and pay all or a portion of its property management fee to the third parties with whom it contracted for these services. Property management fees and related salary reimbursements for the year ended December 31, 2019 were $224,922.
Disposition Fees. For substantial assistance in connection with the sale of properties, we were required to pay to our Former Advisor or one of its affiliates 3.0% of the contract sales price, as defined, of each property sold; provided, however, that if, in connection with such disposition, commissions were paid to third parties unaffiliated with our Former Advisor or its affiliates, the disposition fees paid to our Former Advisor or Former Sponsor or their respective affiliates and unaffiliated third parties could not exceed the lesser of the competitive real estate commission or 6% of the contract sales price. There were no disposition fees incurred or paid during the year ended December 31, 2019.
Subordinated Participation Fees. We were required to pay our Former Advisor or an affiliate a subordinated participation fee calculated asfiled within 120 days of December 31, of each year2020 and paid (if at all) in the immediately following January. The subordinated participation fee was terminated in an amendmentdelivered to the Advisory Agreement in August 2019. The subordinated participation fee was only due if the Preferred Return, as defined in the Advisory Agreement, was achieved and was equal to the sum of (using terms as defined in the Advisory Agreement):
30% of the product of (a) the difference of (x) the Preliminary NAV per share minus (y) the Highest Prior NAV per share, multiplied by (b) the number of shares outstanding as of December 31 of the relevant annual period, but only if this resulted in a positive number, plus finding, presenting and recommending to us real estate investment opportunities consistent with our investment policies and objectives;
30% of the product of: (a) the amount by which aggregate distributions to stockholders during the annual period, excluding return of capital distributions, divided by the weighted average number of shares outstanding for the annual period, exceeded the Preferred Return, multiplied by (b) the weighted average number of shares outstanding for the annual period calculated on a monthly basis.
We calculated a subordinated participation fee of $839,050 as of December 31, 2018, which our board of directors approved on January 11, 2019, which was paid in cash during the first quarter of 2019. No subordinated participation fee was calculated or paid for the year ended December 31, 2019 due to the August 2019 amendment to the Advisory Agreement which terminated this fee.
Leasing Commission Fees. If one or more of our properties became unleased and our Former Advisor or any of its affiliates provided a substantial amount of the services (as determined by a majority of our independent directors) in connection with our leasing2021 annual meeting of the property or properties to unaffiliated third parties, then we were required to pay to our Former Advisor or such affiliate leasing commissions equal to 6.0% of the rents due pursuant to such lease for the first ten years of the lease term; provided, however (i) if the term of the lease is less than ten years, such commission percentage will apply to the full term of the lease and (ii) any rents due under a renewal of a lease of an existing tenant upon expiration of the initial lease agreement (including any extensions provided for thereunder) shall accrue a commission of 3.0% in lieu of the aforementioned 6.0% commission. To the extent that an unaffiliated real estate broker assisted in such leasing services, any compensation paid by us to our Former Advisor or any of its affiliates was reduced by the amount paid to such unaffiliated real estate broker. There were no leasing commission fees incurred during the year ended December 31, 2019.stockholders.
Other Operating Expense Reimbursement. Under our charter, total operating expenses of our Company were limited to the greater of 2% of average invested assets or 25% of net income for the four most recently completed fiscal quarters (the “2%/25% Limitation”). If we exceed the 2%/25% Limitation, our Former Advisor reimbursed us the amount by which the aggregate total operating expenses exceeds the limitation, or we obtained a waiver from the conflicts committee of our board of directors. For purposes of determining the 2%/25% Limitation amount, “average invested assets” meant the average monthly book value of our assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. “Total operating expenses” meant all expenses paid or incurred by us, as determined by GAAP, that were in any way related to our operation including asset management fees, but excluding (a) the expenses of raising capital such as organizational and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of our common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based upon increases in NAV per share; (f) acquisition fees and acquisition expenses (including expenses, relating to potential investments that we do not close); and (h) disposition fees on the sale of real property and other expenses connected with the acquisition, disposition and ownership of real estate interests or other property (other than disposition fees on the sale of assets other than real property), including the costs of insurance premiums, legal services, maintenance, repair and improvement of real property.
Operating expense reimbursements were in compliance with the 2%/25% Limitation for the four fiscal quarters ended December 31, 2019.
Non-Solicitation Agreement. We had a non-solicitation agreement with our Former Advisor and Former Sponsor in which we agreed not to solicit the employment of any employee of our Former Advisor or Former Sponsor during the 12-month period following any termination of or failure to annually renew the Advisory Agreement. This non-solicitation agreement was terminated concurrent with the Self-Management Transaction on December 31, 2019.
Certain Conflict Resolution Measures
In order to ameliorate the risks created by conflicts of interest, the board of directors has delegated certain responsibilities to our conflicts committee action by majority vote. In addition, our charter and bylaws contain restrictions relating to conflicts of interest, including, among others, the following:
We will not purchase or lease assets in which any of our directors or officers or any of their affiliates has an interest without a determination by a majority of our board of directors (including a majority of our conflicts committee) not otherwise interested in the transaction that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the asset to the affiliated seller or lessor, unless there is substantial justification for the excess amount. In no event may we acquire any such real property at an amount in excess of its current appraised value.
A majority of our board of directors (including a majority of our conflicts committee) not otherwise interested in the transactions must conclude that all other transactions between us and any of our officers or directors or any of their affiliates are fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties.
We may not repurchase shares of our Class C common stock or our Class S common stock if such repurchase would impair our capital or operations. In addition, our charter prohibits us from paying a fee to our directors or officers, or any of their affiliates, in connection with our repurchase of our Class C common stock or our Class S common stock.
We will not make any loans to our directors or officers or any of their affiliates. In addition, we will not borrow from these affiliates unless a majority of our board of directors (including a majority of our conflicts committee) not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.
| |
ITEM 14. | ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES |
Independent Registered Public Accounting Firm
Squar Milner LLP (“Squar Milner”) has served asThe information required by this item is incorporated herein by reference to our independent registered public accounting firm since May 2018. Priordefinitive proxy statement to Squar Milner’s appointment, Ernst & Young LLP (“Ernst & Young”) served as our independent registered public accounting firm since June 2016.
Principal Independent Registered Public Accounting Firm Fees
Set forth below are aggregate fees billed to us for professional accounting services by Squar Milner for the years endedbe filed within 120 days of December 31, 20192020 and 2018 and Ernst & Young for the year ended December 31, 2018:delivered to stockholders in connection with our 2021 annual meeting of stockholders.
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Audit fees | | | | |
| Squar Milner | | $ | 396,778 |
| | $ | 210,295 |
|
| Ernst & Young | | — |
| | 69,984 |
|
| Audit-related fees | | | | |
| Squar Milner | | — |
| | — |
|
| Ernst & Young | | — |
| | — |
|
| Tax fees | | | | |
| Squar Milner (1) | | 3,219 |
| | — |
|
| Ernst & Young (2) | | — |
| | 12,360 |
|
| All other fees | | | | |
| Squar Milner | | — |
| | — |
|
| Ernst & Young | | — |
| | — |
|
| Total | | $ | 399,997 |
| | $ | 292,639 |
|
| |
(1) | Tax fees were related to the review of REIT I compliance tests for 2014, 2015 and 2016 in connection with the REIT I Merger transaction discussed in Note 3 to our consolidated financial statements. |
| |
(2) | Tax fees consisted of fees for services rendered during the fiscal year for professional services related to federal and state tax income preparation, tax compliance and planning, tax advice, tax filing assistance and qualification tests for REIT status. |
Audit Fees. These are fees for professional services performed for the audit of our annual consolidated financial statements, the required review of quarterly financial statements, registration statements and other procedures performed by independent auditors in order for them to be able to form an opinion on our consolidated financial statements.
Audit-Related Fees. These are fees for assurance and related services that traditionally are performed by independent auditors that are reasonably related to the performance of the audit or review of the financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, internal control reviews, and consultation concerning financial accounting and reporting standards.
Tax Fees. These are fees for all professional services performed by professional staff in our independent auditor’s tax division, except those services related to the audit of our consolidated financial statements. These include fees for tax compliance, tax planning, and tax advice, including federal, state, and local issues. Services may also include assistance with tax audits and appeals before the IRS and similar state and local agencies, as well as federal, state, and local tax issues related to due diligence.
All Other Fees. These are fees for any services not included in the above-described categories, including assistance with internal audit plans and risk assessments.
Pre-Approval Policies
In order to ensure that the provision of services by our independent registered public accounting firm does not impair the auditors’ independence, the audit committee pre-approves all auditing services performed for us by our independent auditors, as well as all permitted non-audit services. In determining whether or not to pre-approve services, the audit committee considers whether the service is a permissible service under the rules and regulations promulgated by the SEC. The audit committee may, in its discretion, delegate to one or more of its members the authority to pre-approve any audit or non-audit services to be performed by our independent auditors, provided any such approval is presented to and approved by the full audit committee at its next scheduled meeting.
All services rendered by Squar Milner for the years ended December 31, 2019 and 2018 were pre-approved
by the audit committee in accordance with the policies and procedures described above.
PART IV
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| |
(a)(1) | Financial Statements: |
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
See Index to Consolidated Financial Statements at page F-1 of this Annual Report.Report on Form 10-K.
| |
(a)(2) | Financial Statement Schedule: |
(a)(2) Financial Statement Schedule:
The following financial statement schedule is included herein at pages F-48 through F-50 of this Annual Report:Report on Form 10-K: Schedule III - Real Estate Assets and Accumulated Depreciation and Amortization.
(a)(3) Exhibits:
The exhibits listed in this section are included, or incorporated by reference, in this Annual Report.Report on Form 10-K.
(b) Exhibits:
See (a)(3) above.
(c) Financial Statements Schedule:
| |
(c) | Financial Statements Schedule: |
See (a)(2) above.
EXHIBITS LIST
|
| | | | |
| Exhibit | Description |
1.1*2.1 | |
2.1 | |
| 2.2 | |
| 3.1 | |
| 3.2 | |
| 3.3 | |
4.13.4 | |
| 4.1 | |
| 4.2 | |
4.3 | |
4.4 | |
4.54.3 | |
4.64.4 | |
| | | | | |
4.74.5 | |
4.8*4.6 | |
| 10.1 | |
| 10.2 | |
10.3 | |
|
| |
10.4 | |
10.5 | |
10.6 | |
10.710.3 | |
10.8 | |
10.910.4 | |
10.1010.5 | Business Loan Agreement, dated as of February 1, 2018 and executed on February 28, 2018, by and between RW Holdings NNN REIT, Inc., Rich Uncles NNN Operating Partnership, L.P., Rich Uncles NNN LP, LLC and Pacific Mercantile Bank (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-55776) filed with the Securities and Exchange Commission on March 5, 2018) |
10.10.110.6.1 | |
10.10.210.6.2 | |
10.1110.7 | |
10.1210.8 | |
10.13 | |
10.1410.9 | Loan and Security Agreement dated December 19, 2019 between Pacific Mercantile Bank and the RW Holdings NNN REIT, Inc., Rich Uncles NNN LP, LLC, Rich Uncles NNN Operating Partnership, LP, Katana Merger Sub, LP, BrixInvest, LLC and Modiv, LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-55776) filed with the Securities and Exchange Commission on December 23, 2019) |
10.1510.10 | |
10.16 | |
10.17 | First Amendment to Loan Agreement dated March 13, 2020 between Pacific Mercantile Bank and RW Holdings NNN REIT, Inc., RW Holdings NNN REIT Operating Partnership, LP, Rich Uncles NNN LP, LLC, Katana Merger Sub, LP, and Modiv, LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 000-55776) filed with the Securities and Exchange Commission on March 17, 2020) |
21.1*10.11 | Subsidiaries ofThird Amendment to Loan Agreement dated August 13, 2020 between Pacific Mercantile Bank and RW Holdings NNN REIT, Inc., Rich Uncles NNN LP, LLC, RW Holdings NNN REIT Operating Partnership, LP, BrixInvest, LLC, Katana Merger Sub, LP, and Modiv, LLC (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 000-55776) filed with the Securities and Exchange Commission on August 14, 2020) |
| 10.12* | |
| 10.13 | |
|
| | | | |
31.1*10.14 | |
| 10.15* | |
| 10.16* | |
| 10.17 | |
| 16.1 | |
| 21.1* | |
| 23.1* | |
| 31.1* | |
| 31.2* | |
| 32.1** | |
101.INS101.INS* | XBRL INSTANCE DOCUMENT |
101.SCH101.SCH* | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT |
101.CAL101.CAL* | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE |
101.DEF101.DEF* | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE |
101.LAB101.LAB* | XBRL TAXONOMY EXTENSION LABELS LINKBASE |
101.PRE101.PRE* | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
| 104* | COVER PAGE INTERACTIVE DATA FILE (FORMATTED AS INLINE XBRL AND CONTAINED IN EXHIBIT 101) |
** Furnished herewith. In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for
purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications
will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by
reference.
| |
ITEM 16. | FORM 10-K SUMMARY |
ITEM 16. FORM 10-K SUMMARY
None.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | |
| Consolidated Financial Statements | |
| |
| |
| |
| |
| |
| |
| |
| Financial Statement Schedule | |
| |
All other schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
RW Holdings NNN REIT,Modiv Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of RW Holdings NNN REIT,Modiv Inc. and subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, equity and cash flows for the years then ended, and the related notes to the consolidated financial statements and financial statement schedule listed in the index at Item 15 (a), Schedule III – Real Estate Assets and Accumulated Depreciation and Amortization (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
| | | | | |
| /s/ BAKER TILLY US, LLP | |
| |
/s/ SQUAR MILNER LLP | |
| |
| We have served as the Company’s auditor since 2018. | |
| |
| Irvine, California | |
April 6, 2020March 31, 2021 | |
RW HOLDINGS NNN REIT,
MODIV INC.
Consolidated Balance Sheets
| | | | As of December 31, | | As of December 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| Assets | |
| | |
| Assets | | | |
| Real estate investments: | |
| | |
| Real estate investments: | | | |
| Land | $ | 86,775,988 |
| | $ | 41,126,392 |
| Land | $ | 65,358,321 | | | $ | 86,775,988 | |
| Building and improvements | 309,904,890 |
| | 176,367,798 |
| Building and improvements | 272,397,472 | | | 309,904,890 | |
| Tenant origination and absorption costs | 27,266,610 |
| | 17,717,819 |
| Tenant origination and absorption costs | 23,792,057 | | | 27,266,610 | |
| Total investments in real estate property | 423,947,488 |
| | 235,212,009 |
| Total investments in real estate property | 361,547,850 | | | 423,947,488 | |
| Accumulated depreciation and amortization | (20,411,794 | ) | | (10,563,664 | ) | Accumulated depreciation and amortization | (32,091,211) | | | (20,411,794) | |
| Total investments in real estate property, net | 403,535,694 |
| | 224,648,345 |
| |
| Investments in unconsolidated entities (Note 5) | 10,388,588 |
| | 14,275,815 |
| |
| Total investments in real estate property, net | 413,924,282 |
| | 238,924,160 |
| |
| | | | | |
| Total investments in real estate property, net (Note 4) | | Total investments in real estate property, net (Note 4) | 329,456,639 | | | 403,535,694 | |
| Investment in unconsolidated entity (Note 5) | | Investment in unconsolidated entity (Note 5) | 10,002,368 | | | 10,388,588 | |
| Total real estate investments, net | | Total real estate investments, net | 339,459,007 | | | 413,924,282 | |
| Real estate investments held for sale, net (Note 4) | | Real estate investments held for sale, net (Note 4) | 24,585,739 | | | 0 | |
| Total real estate investments | | Total real estate investments | 364,044,746 | | | 413,924,282 | |
| Cash and cash equivalents | 6,823,568 |
| | 5,252,686 |
| Cash and cash equivalents | 8,248,412 | | | 6,823,568 | |
| Restricted cash | 113,362 |
| | 3,503,242 |
| Restricted cash | 129,118 | | | 113,362 | |
| Receivable from sale of real estate property | | Receivable from sale of real estate property | 1,824,383 | | | 0 | |
| Tenant receivables | 6,224,764 |
| | 3,659,114 |
| Tenant receivables | 6,665,790 | | | 6,224,764 | |
| Above-market lease intangibles, net | 1,251,734 |
| | 584,248 |
| Above-market lease intangibles, net | 820,842 | | | 1,251,734 | |
| Due from affiliates (Note 9) | 2,332 |
| | 16,838 |
| Due from affiliates (Note 9) | 0 | | | 2,332 | |
| Purchase and other deposits | — |
| | 100,000 |
| |
| Prepaid expenses and other assets | 1,867,777 |
| | 234,399 |
| Prepaid expenses and other assets | 2,171,717 | | | 1,867,777 | |
| Interest rate swap derivatives | 34,567 |
| | 151,215 |
| Interest rate swap derivatives | 0 | | | 34,567 | |
| Assets related to real estate investments held for sale | | Assets related to real estate investments held for sale | 1,079,361 | | | 0 | |
| Operating lease right-of-use asset | 2,386,877 |
| | — |
| Operating lease right-of-use asset | 0 | | | 2,386,877 | |
| Goodwill | 50,588,000 |
| | — |
| |
| Intangible assets | 7,700,000 |
| | — |
| |
| Goodwill, net | | Goodwill, net | 17,320,857 | | | 50,588,000 | |
| Intangible assets, net | | Intangible assets, net | 5,127,788 | | | 7,700,000 | |
| Total assets | $ | 490,917,263 |
| | $ | 252,425,902 |
| Total assets | $ | 407,433,014 | | | $ | 490,917,263 | |
| | | | | |
| Liabilities and Equity | | | | Liabilities and Equity | | | |
| Mortgage notes payable, net | $ | 194,039,207 |
| | $ | 122,709,308 |
| Mortgage notes payable, net | $ | 175,925,918 | | | $ | 194,039,207 | |
| Mortgage notes payable related to real estate investments held for sale, net | | Mortgage notes payable related to real estate investments held for sale, net | 9,088,438 | | | 0 | |
| Total mortgage notes payable, net | | Total mortgage notes payable, net | 185,014,356 | | | 194,039,207 | |
| Unsecured credit facility, net | 7,649,861 |
| | 8,998,000 |
| Unsecured credit facility, net | 5,978,276 | | | 7,649,861 | |
| Short-term notes payable | 4,800,000 |
| | — |
| Short-term notes payable | 0 | | | 4,800,000 | |
| Economic relief note payable | | Economic relief note payable | 517,000 | | | 0 | |
| Accounts payable, accrued and other liabilities | 11,555,161 |
| | 7,164,713 |
| Accounts payable, accrued and other liabilities | 7,579,624 | | | 11,555,161 | |
| Share repurchases payable | — |
| | 584,676 |
| Share repurchases payable | 2,980,559 | | | 0 | |
| Below-market lease intangibles, net | 14,591,359 |
| | 2,595,382 |
| Below-market lease intangibles, net | 12,565,737 | | | 14,591,359 | |
| Due to affiliates (Note 9) | 630,820 |
| | 979,174 |
| Due to affiliates (Note 9) | 0 | | | 630,820 | |
| Interest rate swap derivatives | 1,021,724 |
| | 300,929 |
| Interest rate swap derivatives | 1,743,889 | | | 1,021,724 | |
| Liabilities related to real estate investments held for sale | | Liabilities related to real estate investments held for sale | 801,337 | | | 0 | |
| Operating lease liability | 2,386,877 |
| | — |
| Operating lease liability | 0 | | | 2,386,877 | |
| Total liabilities | 236,675,009 |
| | 143,332,182 |
| Total liabilities | 217,180,778 | | | 236,675,009 | |
| | | | | | | | |
| Commitments and contingencies (Note 10) |
|
| |
|
| Commitments and contingencies (Note 10) | 0 | | 0 |
| | | | | |
| Redeemable common stock | 14,069,692 |
| | 6,000,951 |
| Redeemable common stock | 7,365,568 | | | 14,069,692 | |
| | | | | | | | |
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, no shares issued and outstanding | — |
| | — |
| |
| Class C common stock $0.001 par value, 300,000,000 shares authorized, 23,647,466 and 12,943,294 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 23,647 |
| | 12,943 |
| |
| Class S common stock $0.001 par value, 100,000,000 shares authorized, 186,606 and 17,594 shares issued and outstanding as of December 31, 2019 and 2018, respectively | 187 |
| | 18 |
| |
| Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding | | Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding | 0 | | | 0 | |
| Class C common stock $0.001 par value, 300,000,000 shares authorized, 7,874,541 and 7,882,489 shares issued and outstanding as of December 31, 2020 and 2019, respectively | | Class C common stock $0.001 par value, 300,000,000 shares authorized, 7,874,541 and 7,882,489 shares issued and outstanding as of December 31, 2020 and 2019, respectively | 23,623 | | | 23,647 | |
| Class S common stock $0.001 par value, 100,000,000 shares authorized, 62,860 and 62,202 shares issued and outstanding as of December 31, 2020 and 2019, respectively | | Class S common stock $0.001 par value, 100,000,000 shares authorized, 62,860 and 62,202 shares issued and outstanding as of December 31, 2020 and 2019, respectively | 189 | | | 187 | |
| Additional paid-in-capital | 220,714,676 |
| | 119,247,245 |
| Additional paid-in-capital | 224,272,542 | | | 220,714,676 | |
| Cumulative distributions and net losses | (31,168,948 | ) | | (16,167,437 | ) | Cumulative distributions and net losses | (92,012,686) | | | (31,168,948) | |
| Total RW Holdings NNN REIT, Inc. equity | 189,569,562 |
| | 103,092,769 |
| |
| Total Modiv Inc. equity | | Total Modiv Inc. equity | 132,283,668 | | | 189,569,562 | |
| Noncontrolling interest in the Operating Partnership | 50,603,000 |
| | — |
| Noncontrolling interest in the Operating Partnership | 50,603,000 | | | 50,603,000 | |
| Total equity | 240,172,562 |
| | 103,092,769 |
| Total equity | 182,886,668 | | | 240,172,562 | |
| Total liabilities and equity | $ | 490,917,263 |
| | $ | 252,425,902 |
| Total liabilities and equity | $ | 407,433,014 | | | $ | 490,917,263 | |
See accompanying notes to consolidated financial statements.