SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
Or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to .Commission File No. 000-52596
ARES REAL ESTATE INCOME TRUSTINC.
(Exact name of registrant as specified in its charter)
| |
| |
Maryland | 30-0309068 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
One Tabor Center, 1200 Seventeenth Street, | 80202 |
(Address of principal executive offices) 518 Seventeenth Street, 17th Floor, Denver, CO80202 (Former name or address, if changed from last report) | (Zip Code) |
Registrant’s telephone number, including area code: (303) (303) 228-2200
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | ||
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||
Smaller reporting company | ☐ | ||||||
Non-accelerated filer | ☒ | | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 10, 2017, 2,097,694August 5, 2022, there were 23,611,264 shares of the registrant’s Class T common stock, 16,75047,462,301 shares of the registrant’s Class S common stock, 2,519,5827,930,514 shares of the registrant’s Class D common stock, 33,977,25267,433,776 shares of the registrant’s Class I common stock and 95,661,03554,063,048 shares of the registrant’s Class E common stock of Black Creek Diversified Property Fund Inc., each with a par value $0.01 per share, were outstanding.
2
ITEM 1. FINANCIAL STATEMENTS
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | As of | ||||
| | June 30, | | December 31, | ||
(in thousands, except per share data) | | 2022 |
| 2021 | ||
| | (Unaudited) | | | | |
ASSETS | | |
| | |
|
Net investment in real estate properties | | $ | 3,659,577 | | $ | 2,589,826 |
Investment in unconsolidated joint venture partnerships | |
| 105,404 | |
| 57,425 |
Debt-related investments, net | |
| 108,206 | |
| 105,752 |
Cash and cash equivalents | |
| 19,529 | |
| 10,605 |
Restricted cash | |
| 4,909 | |
| 3,747 |
DST Program Loans | |
| 86,706 | |
| 62,123 |
Other assets | | | 57,732 | | | 56,397 |
Assets held for sale | | | 0 | | | 105,096 |
Total assets | | $ | 4,042,063 | | $ | 2,990,971 |
LIABILITIES AND EQUITY | |
| | |
|
|
Liabilities | |
| | |
|
|
Accounts payable and accrued expenses | | $ | 60,423 | | $ | 38,182 |
Debt, net | |
| 1,765,292 | |
| 1,363,234 |
Intangible lease liabilities, net | |
| 46,605 | |
| 47,499 |
Financing obligations, net | |
| 1,052,194 | |
| 661,075 |
Other liabilities | | | 98,452 | | | 89,817 |
Liabilities related to assets held for sale | | | 0 | | | 5,744 |
Total liabilities | |
| 3,022,966 | |
| 2,205,551 |
Commitments and contingencies (Note 13) | |
| | |
|
|
Redeemable noncontrolling interest | |
| 18,164 | |
| 8,994 |
Equity | |
| | |
| |
Stockholders’ equity: | |
| | |
| |
Preferred stock, $0.01 par value—200,000 shares authorized, NaN issued and outstanding | |
| — | |
| — |
Class T common stock, $0.01 par value—500,000 shares authorized, 21,672 shares and 16,425 shares issued and outstanding, respectively | |
| 217 | |
| 164 |
Class S common stock, $0.01 par value—500,000 shares authorized, 46,163 shares and 35,757 shares issued and outstanding, respectively | |
| 462 | |
| 358 |
Class D common stock, $0.01 par value—500,000 shares authorized, 7,947 shares and 6,749 shares issued and outstanding, respectively | |
| 79 | |
| 67 |
Class I common stock, $0.01 par value—500,000 shares authorized, 64,741 shares and 54,406 shares issued and outstanding, respectively | |
| 647 | |
| 544 |
Class E common stock, $0.01 par value—500,000 shares authorized, 54,578 shares and 56,328 shares issued and outstanding, respectively | |
| 546 | |
| 563 |
Additional paid-in capital | |
| 1,655,295 | |
| 1,457,296 |
Distributions in excess of earnings | |
| (882,795) | |
| (865,844) |
Accumulated other comprehensive loss | |
| (1,703) | |
| (13,418) |
Total stockholders’ equity | |
| 772,748 | |
| 579,730 |
Noncontrolling interests | |
| 228,185 | |
| 196,696 |
Total equity | | | 1,000,933 | | | 776,426 |
Total liabilities and equity | | $ | 4,042,063 | | $ | 2,990,971 |
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ARES REAL ESTATE INCOME TRUST INC.
As of | |||||||
September 30, 2017 | December 31, 2016 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Investments in real property | $ | 2,221,700 | $ | 2,204,322 | |||
Accumulated depreciation and amortization | (529,846 | ) | (492,911 | ) | |||
Total net investments in real property | 1,691,854 | 1,711,411 | |||||
Debt-related investments, net | 11,259 | 15,209 | |||||
Total net investments | 1,703,113 | 1,726,620 | |||||
Cash and cash equivalents | 5,841 | 13,864 | |||||
Restricted cash | 8,268 | 7,282 | |||||
Other assets, net | 40,549 | 35,962 | |||||
Total Assets | $ | 1,757,771 | $ | 1,783,728 | |||
LIABILITIES AND EQUITY | |||||||
Liabilities: | |||||||
Accounts payable and accrued expenses (1) | $ | 31,336 | $ | 34,085 | |||
Mortgage notes | 477,946 | 342,247 | |||||
Unsecured borrowings | 673,555 | 706,554 | |||||
Intangible lease liabilities, net | 55,856 | 59,545 | |||||
Other liabilities | 27,581 | 33,206 | |||||
Total Liabilities | 1,266,274 | 1,175,637 | |||||
Equity: | |||||||
Stockholders’ equity: | |||||||
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 139,949,658 and 150,636,393 shares issued and outstanding, as of September 30, 2017 and December 31, 2016, respectively (2) | 1,399 | 1,506 | |||||
Additional paid-in capital | 1,282,495 | 1,361,638 | |||||
Distributions in excess of earnings | (872,249 | ) | (839,896 | ) | |||
Accumulated other comprehensive loss | (4,618 | ) | (6,905 | ) | |||
Total stockholders’ equity | 407,027 | 516,343 | |||||
Noncontrolling interests | 84,470 | 91,748 | |||||
Total Equity | 491,497 | 608,091 | |||||
Total Liabilities and Equity | $ | 1,757,771 | $ | 1,783,728 |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
REVENUE: | |||||||||||||||
Rental revenue | $ | 49,478 | $ | 53,258 | $ | 152,022 | $ | 161,504 | |||||||
Debt-related income | 194 | 235 | 654 | 710 | |||||||||||
Total Revenue | 49,672 | 53,493 | 152,676 | 162,214 | |||||||||||
EXPENSES: | |||||||||||||||
Rental expense | 17,516 | 16,437 | 51,520 | 48,388 | |||||||||||
Real estate depreciation and amortization expense | 16,927 | 19,989 | 53,661 | 60,022 | |||||||||||
General and administrative expenses (1) | 2,760 | 2,234 | 7,034 | 7,192 | |||||||||||
Advisory fees, related party | 3,274 | 3,681 | 10,215 | 11,118 | |||||||||||
Acquisition-related expenses | — | 136 | — | 661 | |||||||||||
Impairment of real estate property (2) | — | 2,090 | 1,116 | 2,677 | |||||||||||
Total Operating Expenses | 40,477 | 44,567 | 123,546 | 130,058 | |||||||||||
OTHER (EXPENSES) INCOME: | |||||||||||||||
Other (expense) and income | (664 | ) | 2,308 | (862 | ) | 2,297 | |||||||||
Interest expense | (11,346 | ) | (10,011 | ) | (31,193 | ) | (31,394 | ) | |||||||
Gain on extinguishment of debt and financing commitments | — | — | — | 5,136 | |||||||||||
Gain on sale of real property (3) | 670 | 2,095 | 11,022 | 43,495 | |||||||||||
Net (loss) income | (2,145 | ) | 3,318 | 8,097 | 51,690 | ||||||||||
Net loss (income) attributable to noncontrolling interests | 185 | (353 | ) | (1,591 | ) | (4,826 | ) | ||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (1,960 | ) | $ | 2,965 | $ | 6,506 | $ | 46,864 | ||||||
NET (LOSS) INCOME PER BASIC AND DILUTED COMMON SHARE | $ | (0.01 | ) | $ | 0.02 | $ | 0.04 | $ | 0.29 | ||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | |||||||||||||||
Basic | 139,925 | 158,688 | 144,998 | 161,274 | |||||||||||
Diluted | 151,739 | 170,952 | 156,918 | 173,760 | |||||||||||
Distributions declared per common share | $ | 0.0892 | $ | 0.0892 | $ | 0.2674 | $ | 0.2677 |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net (loss) income | $ | (2,145 | ) | $ | 3,318 | $ | 8,097 | $ | 51,690 | ||||||
Other Comprehensive (Loss) Income: | |||||||||||||||
Change in value of cash flow hedging derivatives | 948 | 2,901 | 2,360 | (9,880 | ) | ||||||||||
Comprehensive (loss) income | (1,197 | ) | 6,219 | 10,457 | 41,810 | ||||||||||
Comprehensive loss (income) attributable to noncontrolling interests | 169 | (571 | ) | (1,664 | ) | (4,098 | ) | ||||||||
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS | $ | (1,028 | ) | $ | 5,648 | $ | 8,793 | $ | 37,712 |
Stockholders’ Equity | ||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||
Additional | Distributions | Other | ||||||||||||||||||||||||
Common Stock | Paid-in | in Excess of | Comprehensive | Noncontrolling | Total | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||
Balances, December 31, 2016 | 150,636 | $ | 1,506 | $ | 1,361,638 | $ | (839,896 | ) | $ | (6,905 | ) | $ | 91,748 | $ | 608,091 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||||
Net income | — | — | — | 6,506 | — | 1,591 | 8,097 | |||||||||||||||||||
Unrealized change in value of cash flow hedging derivatives | — | — | — | — | 2,287 | 73 | 2,360 | |||||||||||||||||||
Common stock: | ||||||||||||||||||||||||||
Issuance of common stock, net of offering costs | 4,125 | 41 | 31,028 | — | — | — | 31,069 | |||||||||||||||||||
Issuance of common stock, stock-based compensation plans | (99 | ) | (1 | ) | (647 | ) | — | — | — | (648 | ) | |||||||||||||||
Redemptions of common stock | (14,712 | ) | (147 | ) | (110,454 | ) | — | — | — | (110,601 | ) | |||||||||||||||
Amortization of stock-based compensation | — | — | 1,526 | — | — | — | 1,526 | |||||||||||||||||||
Distributions declared on common stock | — | — | — | (38,798 | ) | — | — | (38,798 | ) | |||||||||||||||||
Distributions on unvested Advisor RSUs | — | — | — | (61 | ) | — | — | (61 | ) | |||||||||||||||||
Noncontrolling interests: | ||||||||||||||||||||||||||
Contributions of noncontrolling interests | — | — | — | — | — | 106 | 106 | |||||||||||||||||||
Distributions declared to noncontrolling interests | — | — | — | — | — | (5,840 | ) | (5,840 | ) | |||||||||||||||||
Redemptions of noncontrolling interests | — | — | (596 | ) | — | — | (3,208 | ) | (3,804 | ) | ||||||||||||||||
Balances, September 30, 2017 | 139,950 | $ | 1,399 | $ | 1,282,495 | $ | (872,249 | ) | $ | (4,618 | ) | $ | 84,470 | $ | 491,497 |
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS(Unaudited)
| | | | | | | | | | | | | |
|
| For the Three Months Ended |
| For the Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
(in thousands, except per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Revenues: | | |
| | |
| | |
| | |
| |
Rental revenues | | $ | 73,494 | | $ | 48,629 | | $ | 135,999 | | $ | 99,061 | |
Debt-related income | |
| 846 | |
| 2,319 | |
| 4,314 | |
| 4,443 | |
Total revenues | |
| 74,340 | |
| 50,948 | |
| 140,313 | |
| 103,504 | |
Operating expenses: | |
| | |
|
| |
| | |
| | |
Rental expenses | |
| 24,896 | |
| 16,914 | |
| 46,210 | |
| 34,476 | |
Real estate-related depreciation and amortization | |
| 36,903 | |
| 17,174 | |
| 64,354 | |
| 33,907 | |
General and administrative expenses | |
| 2,594 | |
| 2,181 | |
| 4,631 | |
| 4,399 | |
Advisory fees | |
| 8,227 | |
| 5,085 | |
| 15,370 | |
| 9,909 | |
Performance participation allocation | |
| 6,186 | |
| 2,246 | |
| 18,379 | |
| 3,995 | |
Acquisition costs and reimbursements | |
| 1,093 | |
| 346 | |
| 2,722 | |
| 713 | |
Impairment of real estate property | |
| — | |
| — | |
| — | |
| 758 | |
Total operating expenses | |
| 79,899 | |
| 43,946 | |
| 151,666 | |
| 88,157 | |
Other expenses (income): | |
| | |
|
| |
| | |
| | |
Equity in income from unconsolidated joint venture partnerships | |
| (1,718) | |
| — | |
| (708) | |
| — | |
Interest expense | |
| 33,774 | |
| 17,048 | |
| 58,184 | |
| 33,611 | |
Gain on sale of real estate property | |
| (29,643) | |
| — | |
| (83,524) | |
| (27,342) | |
Gain on extinguishment of debt and financing commitments, net | |
| 8 | |
| — | |
| 8 | |
| — | |
Other income | |
| (1,413) | |
| (476) | |
| (3,540) | |
| (750) | |
Total other expenses (income) | |
| 1,008 | |
| 16,572 | |
| (29,580) | |
| 5,519 | |
Net (loss) income | |
| (6,567) | |
| (9,570) | |
| 18,227 | |
| 9,828 | |
Net loss (income) attributable to redeemable noncontrolling interests | | | 60 | | | 64 | | | (186) | | | (70) | |
Net loss (income) attributable to noncontrolling interests | |
| 919 | |
| 923 | |
| (2,618) | |
| (776) | |
Net (loss) income attributable to common stockholders | | $ | (5,588) | | $ | (8,583) | | $ | 15,423 | | $ | 8,982 | |
Weighted-average shares outstanding—basic | |
| 191,158 | |
| 150,126 | |
| 184,878 | |
| 148,005 | |
Weighted-average shares outstanding—diluted | |
| 224,857 | |
| 167,387 | |
| 217,806 | |
| 164,255 | |
Net (loss) income attributable to common stockholders per common share—basic and diluted | | $ | (0.03) | | $ | (0.06) | | $ | 0.08 | | $ | 0.06 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
4
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | | | | | | | | | | | |
|
| For the Three Months Ended |
| For the Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Net (loss) income | | $ | (6,567) | | $ | (9,570) | | $ | 18,227 | | $ | 9,828 | |
Change from cash flow hedging activities | |
| 1,819 | |
| 2,031 | |
| 13,813 | |
| 7,946 | |
Comprehensive (loss) income | |
| (4,748) | |
| (7,539) | |
| 32,040 | |
| 17,774 | |
Comprehensive loss (income) attributable to redeemable noncontrolling interests | | | 43 | | | 50 | | | (322) | | | (125) | |
Comprehensive loss (income) attributable to noncontrolling interests | |
| 680 | |
| 701 | |
| (4,580) | |
| (1,537) | |
Comprehensive (loss) income attributable to common stockholders | | $ | (4,025) | | $ | (6,788) | | $ | 27,138 | | $ | 16,112 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
5
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
|
| Stockholders’ Equity |
| | |
| | | ||||||||||||
| | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | |
| Additional |
| Distributions |
| Other |
| | |
| | | |||
| | Common Stock |
| Paid-in |
| in Excess of |
| Comprehensive | | Noncontrolling | | Total | ||||||||
(in thousands) |
| Shares |
| Amount |
| Capital | �� | Earnings |
| Income (Loss) |
| Interests |
| Equity | ||||||
FOR THE THREE MONTHS ENDED JUNE 30, 2021 | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2021 | | 147,292 | | $ | 1,473 | | $ | 1,298,328 | | $ | (837,019) | | $ | (22,096) | | $ | 119,665 | | $ | 560,351 |
Net loss (excluding $64 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | (8,583) | | | — | | | (923) | | | (9,506) |
Change from cash flow hedging activities (excluding $14 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | — | | | 1,795 | | | 222 | | | 2,017 |
Issuance of common stock |
| 7,161 | | | 71 | | | 54,859 | | | — | | | — | | | — | |
| 54,930 |
Share-based compensation |
| — | | | — | | | 38 | | | — | | | — | | | — | |
| 38 |
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | | — | |
| — | |
| (1,269) | |
| — | |
| — | |
| — | | | (1,269) |
Trailing distribution fees | | — | |
| — | |
| (2,826) | |
| 655 | |
| — | |
| — | | | (2,171) |
Redemptions of common stock |
| (2,432) | | | (24) | | | (18,427) | | | — | | | — | | | — | |
| (18,451) |
Issuances of OP Units for DST Interests |
| — | | | — | | | — | | | — | | | — | | | — | |
| — |
Distributions declared on common stock and noncontrolling interests (excludes $105 attributable to redeemable noncontrolling interest) |
| — | | | — | | | — | | | (14,074) | | | — | | | (1,520) | |
| (15,594) |
Redemption value allocation adjustment to redeemable noncontrolling interest | | — | | | — | | | (233) | | | — | | | — | | | — | | | (233) |
Redemptions of noncontrolling interests |
| — | | | — | | | (57) | | | — | | | — | | | (1,138) | |
| (1,195) |
Balance as of June 30, 2021 |
| 152,021 | | $ | 1,520 | | $ | 1,330,413 | | $ | (859,021) | | $ | (20,301) | | $ | 116,306 | | $ | 568,917 |
FOR THE THREE MONTHS ENDED JUNE 30, 2022 | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2022 | | 182,042 | | $ | 1,820 | | $ | 1,551,814 | | $ | (860,546) | | $ | (3,266) | | $ | 232,692 | | $ | 922,514 |
Net loss (excluding $60 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | (5,588) | | | | | | (919) | | | (6,507) |
Change from cash flow hedging activities (excluding $17 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | — | | | 1,563 | | | 239 | | | 1,802 |
Issuance of common stock |
| 14,679 | | | 147 | | | 127,869 | | | — | | | — | | | — | |
| 128,016 |
Share-based compensation |
| — | | | — | | | 50 | | | — | | | — | | | — | |
| 50 |
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | | — | |
| — | |
| (3,821) | |
| — | |
| — | |
| — | | | (3,821) |
Trailing distribution fees | | — | |
| — | |
| (5,335) | |
| 1,259 | |
| — | |
| — | | | (4,076) |
Redemptions of common stock |
| (1,620) | | | (16) | | | (13,929) | | | — | | | — | | | | |
| (13,945) |
Issuances of OP Units for DST Interests |
| — | | | — | | | — | | | — | | | — | | | — | |
| — |
Other noncontrolling interests net distributions | | — | | | — | | | — | |
| — | |
| — | |
| (40) | | | (40) |
Distributions declared on common stock and noncontrolling interests (excludes $191 attributable to redeemable noncontrolling interest) |
| — | | | — | | | — | | | (17,920) | | | | | | (2,966) | |
| (20,886) |
Redemption value allocation adjustment to redeemable noncontrolling interest | | — | | | — | | | (1,114) | | | — | | | — | | | — | | | (1,114) |
Redemptions of noncontrolling interests |
| — | | | — | | | (239) | | | — | | | — | | | (821) | |
| (1,060) |
Balance as of June 30, 2022 |
| 195,101 | | $ | 1,951 | | $ | 1,655,295 | | $ | (882,795) | | $ | (1,703) | | $ | 228,185 | | $ | 1,000,933 |
See accompanying Notes to Condensed Consolidated Financial Statements.
6
ARES REAL ESTATE INCOME TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
|
| Stockholders’ Equity |
| | |
| | | ||||||||||||
| | | | | | | | | | | | Accumulated | | | | | | | ||
| | | | | |
| Additional |
| Distributions |
| Other |
| | |
| | | |||
| | Common Stock |
| Paid-in |
| in Excess of |
| Comprehensive | | Noncontrolling | | Total | ||||||||
(in thousands) |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Interests |
| Equity | ||||||
FOR THE SIX MONTHS ENDED JUNE 30, 2021 | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2020 | | 143,041 | | $ | 1,430 | | $ | 1,269,146 | | $ | (841,496) | | $ | (27,431) | | $ | 96,242 | | $ | 497,891 |
Net income (excluding $70 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | 8,982 | | | — | | | 776 | | | 9,758 |
Change from cash flow hedging activities (excluding $55 attributable to redeemable noncontrolling interest) | | — | | | — | | | — | | | — | | | 7,130 | | | 761 | | | 7,891 |
Issuance of common stock |
| 13,648 | | | 136 | | | 104,148 | | | — | | | — | | | — | |
| 104,284 |
Share-based compensation |
| 8 | | | — | | | 85 | | | — | | | — | | | — | |
| 85 |
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs | | — | |
| — | |
| (2,300) | |
| — | |
| — | |
| — | | | (2,300) |
Trailing distribution fees | | — | |
| — | |
| (5,008) | |
| 1,241 | |
| — | |
| (2,404) | | | (6,171) |
Redemptions of common stock |
| (4,676) | | | (46) | | | (35,334) | | | — | | | — | | | — | |
| (35,380) |
Issuances of OP Units for DST Interests |
| — | | | — | | | — | | | — | | | — | | | 25,941 | |
| 25,941 |
Distributions declared on common stock and noncontrolling interests (excludes $208 attributable to redeemable noncontrolling interest) |
| — | | | — | | | — | | | (27,748) | | | — | | | (2,827) | |
| (30,575) |
Redemption value allocation adjustment to redeemable noncontrolling interest | | — | | | — | | | (185) | | | — | | | — | | | — | | | (185) |
Redemptions of noncontrolling interests |
| — | | | — | | | (139) | | | — | | | — | | | (2,183) | |
| (2,322) |
Balance as of June 30, 2021 |
| 152,021 | | $ | 1,520 | | $ | 1,330,413 | | $ | (859,021) | | $ | (20,301) | | $ | 116,306 | | $ | 568,917 |
FOR THE SIX MONTHS ENDED JUNE 30, 2022 | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2021 |
| 169,665 | | $ | 1,696 | | $ | 1,457,296 | | $ | (865,844) | | $ | (13,418) | | $ | 196,696 | | $ | 776,426 |
Net income (excluding $186 attributable to redeemable noncontrolling interest) |
| — | |
| — | |
| — | |
| 15,423 | |
| | |
| 2,618 | |
| 18,041 |
Change from cash flow hedging activities (excluding $136 attributable to redeemable noncontrolling interest) |
| — | |
| — | |
| — | |
| — | |
| 11,715 | |
| 1,962 | |
| 13,677 |
Issuance of common stock |
| 28,844 | |
| 289 | |
| 244,237 | |
| — | |
| — | |
| — | |
| 244,526 |
Share-based compensation |
| — | |
| — | |
| 100 | |
| — | |
| — | |
| — | |
| 100 |
Upfront offering costs, including selling commissions, dealer manager fees, and offering costs |
| — | |
| — | |
| (5,401) | |
| — | |
| — | |
| — | |
| (5,401) |
Trailing distribution fees |
| — | |
| — | |
| (10,372) | |
| 2,289 | |
| — | |
| (3,823) | |
| (11,906) |
Redemptions of common stock |
| (3,408) | |
| (34) | |
| (28,466) | |
| — | |
| — | |
| | |
| (28,500) |
Issuances of OP Units for DST Interests |
| — | |
| — | |
| — | |
| — | |
| — | |
| 39,441 | |
| 39,441 |
Other noncontrolling interests net distributions | | — | |
| — | |
| — | |
| — | |
| — | |
| (23) | | | (23) |
Distributions declared on common stock and noncontrolling interests (excludes $351 attributable to redeemable noncontrolling interest) |
| — | |
| — | |
| — | |
| (34,663) | |
| — | |
| (5,824) | |
| (40,487) |
Redemption value allocation adjustment to redeemable noncontrolling interest |
| — | |
| — | | | (1,596) | | | — | | | — | | | | |
| (1,596) |
Redemptions of noncontrolling interests |
| — | | | — | | | (503) | | | — | | | — | | | (2,862) | |
| (3,365) |
Balance as of June 30, 2022 |
| 195,101 | | $ | 1,951 | | $ | 1,655,295 | | $ | (882,795) | | $ | (1,703) | | $ | 228,185 | | $ | 1,000,933 |
| | | | | | | | | | | | | | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
7
(Unaudited)
| | | | | | |
|
| For the Six Months Ended June 30, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Operating activities: | | |
| | |
|
Net income | | $ | 18,227 | | $ | 9,828 |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
| |
Real estate-related depreciation and amortization | |
| 64,354 | |
| 33,907 |
Straight-line rent and amortization of above- and below-market leases | |
| (4,018) | |
| (3,177) |
Gain on sale of real estate property | |
| (83,524) | |
| (27,342) |
Performance participation allocation | | | 18,379 | | | 3,995 |
Equity in income of unconsolidated joint venture partnership | | | (708) | | | 0 |
Impairment of real estate property | | | 0 | | | 758 |
Amortization of debt and financing obligation costs | | | 7,478 | | | 6,104 |
Amortization of UPREIT valuation adjustment | | | 8,686 | | | (282) |
Other | |
| 1,463 | |
| (3,245) |
Changes in operating assets and liabilities | |
| 19,283 | |
| 1,317 |
Net cash provided by operating activities | |
| 49,620 | |
| 21,863 |
Investing activities: | |
| | |
|
|
Real estate acquisitions | |
| (1,180,365) | |
| (162,664) |
Capital expenditures | |
| (13,960) | |
| (14,840) |
Proceeds from disposition of real estate property | |
| 251,822 | |
| 48,960 |
Principal collections on debt-related investments | |
| 1,336 | |
| 2,406 |
Investment in unconsolidated joint venture partnerships | | | (47,904) | | | 0 |
Investment in debt-related investments | |
| (3,655) | |
| (402) |
Other | |
| (48) | |
| (10) |
Net cash used in investing activities | |
| (992,774) | |
| (126,550) |
Financing activities: | |
| | |
|
|
Repayments of mortgage notes | |
| (1,157) | |
| (1,597) |
Net proceeds from (repayments of) line of credit | |
| 127,000 | |
| (23,000) |
Proceeds from term loan | | | 275,000 | | | 0 |
Redemptions of common stock | |
| (28,500) | |
| (35,380) |
Distributions paid to common stockholders, redeemable noncontrolling interest holders and noncontrolling interest holders | |
| (23,274) | |
| (18,041) |
Proceeds from issuance of common stock | |
| 230,603 | |
| 93,179 |
Proceeds from financing obligations, net | |
| 393,330 | |
| 100,302 |
Offering costs for issuance of common stock and private placements | |
| (8,667) | |
| (5,376) |
Redemption of noncontrolling interests | |
| (3,365) | |
| (2,322) |
Redemption of redeemable noncontrolling interests | | | (7,724) | | | 0 |
Deferred financing costs paid | | | (6) | | | 0 |
Other | |
| 0 | |
| (2,464) |
Net cash provided by financing activities | |
| 953,240 | |
| 105,301 |
Net increase in cash, cash equivalents and restricted cash | |
| 10,086 | |
| 614 |
Cash, cash equivalents and restricted cash, at beginning of period | |
| 14,352 | |
| 21,734 |
Cash, cash equivalents and restricted cash, at end of period | | $ | 24,438 | | $ | 22,348 |
See accompanying Notes to Condensed Consolidated Financial Statements.
8
For the Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
OPERATING ACTIVITIES: | |||||||
Net income | $ | 8,097 | $ | 51,690 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Real estate depreciation and amortization expense | 53,661 | 60,022 | |||||
Gain on disposition of real property | (11,022 | ) | (43,495 | ) | |||
Impairment of real estate property | 1,116 | 2,677 | |||||
Gain on extinguishment of debt and financing commitments | — | (5,136 | ) | ||||
Other adjustments to reconcile net income to net cash provided by operating activities | 5,241 | 5,663 | |||||
Changes in operating assets and liabilities | (3,265 | ) | (3,583 | ) | |||
Net cash provided by operating activities | 53,828 | 67,838 | |||||
INVESTING ACTIVITIES: | |||||||
Acquisition of real property | (39,538 | ) | (65,861 | ) | |||
Capital expenditures in real property | (18,801 | ) | (18,598 | ) | |||
Proceeds from disposition of real property | 36,250 | 202,665 | |||||
Principal collections on debt-related investments | 3,915 | 349 | |||||
Other investing activities | (1,492 | ) | 7,788 | ||||
Net cash (used in) provided by investing activities | (19,666 | ) | 126,343 | ||||
FINANCING ACTIVITIES: | |||||||
Mortgage note proceeds | 299,469 | 84,045 | |||||
Mortgage note principal repayments | (162,037 | ) | (270,215 | ) | |||
Net (repayments of) proceeds from revolving line of credit borrowings | (34,000 | ) | 151,000 | ||||
Redemption of common shares | (110,665 | ) | (150,588 | ) | |||
Distributions on common stock | (30,086 | ) | (28,698 | ) | |||
Proceeds from sale of common stock | 12,486 | 51,968 | |||||
Offering costs for issuance of common stock | (3,425 | ) | (5,160 | ) | |||
Distributions to noncontrolling interest holders | (6,560 | ) | (5,498 | ) | |||
Redemption of OP Unit holder interests | (3,427 | ) | (4,316 | ) | |||
Other financing activities | (3,940 | ) | 1,915 | ||||
Net cash used in financing activities | (42,185 | ) | (175,547 | ) | |||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (8,023 | ) | 18,634 | ||||
CASH AND CASH EQUIVALENTS, beginning of period | 13,864 | 15,769 | |||||
CASH AND CASH EQUIVALENTS, end of period | $ | 5,841 | $ | 34,403 | |||
Supplemental Disclosure of Cash Flow Information: | |||||||
Cash paid for interest | $ | 27,985 | $ | 29,782 | |||
Supplemental Disclosure of Noncash Investing and Financing Activities: | |||||||
Common stock issued pursuant to the distribution reinvestment plan | $ | 18,433 | $ | 15,313 | |||
Non-cash disposition of real property * | $ | — | $ | 7,830 |
(Unaudited)
1. BASIS OF PRESENTATION
Unless the context otherwise requires, the “Company,” “we,” “our” or “us” refers to Ares Real Estate Income Trust Inc. and Nine Months Ended September 30, 2017
The accompanying unaudited condensed consolidated financial statements included herein have contributed 100% of the proceeds received from our offerings of common stock to our Operating Partnership in exchange for partnership units (“OP Units”) representing our interest as a limited partner of our Operating Partnership. Our Operating Partnership qualifies as a variable interest entity for accounting purposes and substantially all of the assets of the Company are held by our Operating Partnership, which, subject to certain Operating Partnership and subsidiary level financing restrictions, can be used to settle its obligations. Creditors of certain liabilities of our Operating Partnership have recoursebeen prepared pursuant to the Company. Under our Operating Partnership, we historically had variable interest entities that were joint ventures in which we had real estate investments. The accompanying condensed consolidated balance sheets included approximately $48.2 million, after accumulated depreciationrules and amortization, in net investments in real property in these consolidated variable interest entities asregulations of December 31, 2016. As of September 30, 2017, we did not hold any investment in any joint ventures.
As used herein, the term “commercial” refers to our office, retail and industrial properties or customers, as applicable.
Reclassifications
Certain items in our condensed consolidated statements of operations, condensed consolidated statements of equity and condensed consolidated statements of cash flows for the three and six months ended June 30, 2021 have been no significant changesreclassified to conform to the Company’s significant accounting policies during the nine months ended September 30, 2017 other than the updates described below.
The following table summarizes our consolidated investments in real property consistestate properties and excludes properties classified as held for sale. Refer to “Note 3” for detail relating to our real estate properties held for sale.
| | | | | | |
|
| As of, | ||||
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Land | | $ | 699,259 | | $ | 583,728 |
Buildings and improvements | |
| 3,137,777 | |
| 2,180,358 |
Intangible lease assets | |
| 317,840 | |
| 284,128 |
Right of use asset | |
| 13,637 | |
| 13,637 |
Investment in real estate properties | |
| 4,168,513 | |
| 3,061,851 |
Accumulated depreciation and amortization | |
| (508,936) | |
| (472,025) |
Net investment in real estate properties | | $ | 3,659,577 | | $ | 2,589,826 |
9
Acquisitions
During the six months ended June 30, 2022, we acquired 100% of the following properties, all of which were determined to be asset acquisitions:
| | | | | | | |
($ in thousands) |
| Property Type |
| Acquisition Date |
| Total Purchase Price (1) | |
2022 Acquisitions: | | | | | | | |
Skye 750 | | Residential | | 1/5/2022 | | $ | 92,845 |
Arabelle City Center | | Residential | | 4/12/2022 | | | 156,781 |
Dallas Cityline | | Residential | | 4/13/2022 | | | 111,093 |
Dallas Wycliff | | Residential | | 4/13/2022 | | | 94,083 |
Dallas Maple District | | Residential | | 4/13/2022 | | | 93,089 |
San Vance | | Residential | | 4/13/2022 | | | 77,586 |
San Stone Oak | | Residential | | 4/13/2022 | | | 72,605 |
General Washington IC | | Industrial | | 1/7/2022 | | | 11,051 |
Western Foods Center | | Industrial | | 1/14/2022 | | | 39,298 |
Orlando I & II LC | | Industrial | | 2/17/2022 | | | 94,759 |
Orlando III & IV LC | | Industrial | | 2/17/2022 | | | 42,347 |
Orlando V LC | | Industrial | | 2/17/2022 | | | 34,828 |
Orlando VI LC | | Industrial | | 2/17/2022 | | | 28,694 |
Orlando VII LC | | Industrial | | 2/17/2022 | | | 23,532 |
1403 Gillingham Lane | | Industrial | | 6/10/2022 | | | 20,550 |
Industrial Drive IC | | Industrial | | 6/17/2022 | | | 4,018 |
Glen Afton IC | | Industrial | | 6/17/2022 | | | 22,036 |
East 56th Ave IC | | Industrial | | 6/17/2022 | | | 19,041 |
Brockton IC | | Industrial | | 6/17/2022 | | | 6,522 |
Pine Vista IC | | Industrial | | 6/17/2022 | | | 18,790 |
Tri-County Parkway IC | | Industrial | | 6/17/2022 | | | 12,784 |
Miami NW 114th IC | | Industrial | | 6/17/2022 | | | 12,022 |
North Harney IC | | Industrial | | 6/17/2022 | | | 8,026 |
Wes Warren Drive IC | | Industrial | | 6/17/2022 | | | 7,515 |
Enterprise Way IC | | Industrial | | 6/17/2022 | | | 6,519 |
New Albany IC | | Industrial | | 6/17/2022 | | | 17,544 |
Maplewood Drive IC | | Industrial | | 6/17/2022 | | | 5,514 |
1801 N. 5th Street | | Industrial | | 6/24/2022 | | | 23,305 |
350 Carter Road | | Office | | 4/27/2022 | | | 31,256 |
Total 2022 acquisitions |
|
|
|
| | $ | 1,188,033 |
(1) | Total purchase price is equal to the total consideration paid plus any debt assumed at fair value. There was 0 debt assumed in connection with the 2022 acquisitions. |
During the six months ended June 30, 2022, we allocated the purchase price of our acquisitions to land, building and intangible lease assets and liabilities as follows:
| | | |
| | For the Six Months Ended | |
($ in thousands) |
| June 30, 2022 | |
Land | | $ | 152,767 |
Building | |
| 999,305 |
Intangible lease assets | |
| 41,439 |
Above-market lease assets | |
| 696 |
Below-market lease liabilities | |
| (6,174) |
Total purchase price (1) | | $ | 1,188,033 |
(1) | There was 0 debt assumed in connection with the 2022 acquisitions. |
The weighted-average amortization period for the intangible lease assets and liabilities acquired in office, industrial and retail properties. The following tables summarizeconnection with our consolidated investments in real propertyacquisitions during the six months ended June 30, 2022, as of Septemberthe respective date of each acquisition, was 5.2 years.
10
Dispositions
During the six months ended June 30, 20172022, we sold 5 retail properties, 1 office property and 1 retail land parcel for net proceeds of approximately $251.8 million. We recorded a net gain on sale of approximately $83.5 million.
During the six months ended June 30, 2021, we sold 1 retail property and 1 industrial property for net proceeds of approximately $49.0 million. We recorded a net gain on sale of approximately $27.3 million.
Intangible Lease Assets and Liabilities
Intangible lease assets and liabilities, excluding properties classified as held for sale, as of June 30, 2022 and December 31, 2016 (amounts in thousands):
Real Property | Land | Building and Improvements | Intangible Lease Assets | Total Investment Amount | Intangible Lease Liabilities | Net Investment Amount | ||||||||||||||||||
As of September 30, 2017: | ||||||||||||||||||||||||
Office | $ | 171,176 | $ | 718,316 | $ | 230,188 | $ | 1,119,680 | $ | (14,917 | ) | $ | 1,104,763 | |||||||||||
Industrial | 12,611 | 67,118 | 19,148 | 98,877 | (575 | ) | 98,302 | |||||||||||||||||
Retail | 292,483 | 598,730 | 111,930 | 1,003,143 | (75,264 | ) | 927,879 | |||||||||||||||||
Total gross book value | 476,270 | 1,384,164 | 361,266 | 2,221,700 | (90,756 | ) | 2,130,944 | |||||||||||||||||
Accumulated depreciation/amortization | — | (236,829 | ) | (293,017 | ) | (529,846 | ) | 34,900 | (494,946 | ) | ||||||||||||||
Total net book value | $ | 476,270 | $ | 1,147,335 | $ | 68,249 | $ | 1,691,854 | $ | (55,856 | ) | $ | 1,635,998 | |||||||||||
As of December 31, 2016: | ||||||||||||||||||||||||
Office | $ | 171,176 | $ | 701,859 | $ | 236,143 | $ | 1,109,178 | $ | (15,121 | ) | $ | 1,094,057 | |||||||||||
Industrial | 8,821 | 63,999 | 16,308 | 89,128 | (344 | ) | 88,784 | |||||||||||||||||
Retail | 293,973 | 599,020 | 113,023 | 1,006,016 | (75,515 | ) | 930,501 | |||||||||||||||||
Total gross book value | 473,970 | 1,364,878 | 365,474 | 2,204,322 | (90,980 | ) | 2,113,342 | |||||||||||||||||
Accumulated depreciation/amortization | — | (215,858 | ) | (277,053 | ) | (492,911 | ) | 31,435 | (461,476 | ) | ||||||||||||||
Total net book value | $ | 473,970 | $ | 1,149,020 | $ | 88,421 | $ | 1,711,411 | $ | (59,545 | ) | $ | 1,651,866 |
| | | | | | | | | | | | | | | | | | |
|
| As of June 30, 2022 |
| As of December 31, 2021 | ||||||||||||||
|
| | |
| Accumulated |
| | |
| | |
| Accumulated |
| | | ||
(in thousands) |
| Gross |
| Amortization |
| Net |
| Gross | | Amortization |
| Net | ||||||
Intangible lease assets | | $ | 294,941 | | $ | (198,710) | | $ | 96,231 | | $ | 261,401 | | $ | (186,820) | | $ | 74,581 |
Above-market lease assets | |
| 22,899 | |
| (19,337) | |
| 3,562 | |
| 22,727 | |
| (19,507) | |
| 3,220 |
Below-market lease liabilities | |
| (78,286) | |
| 31,681 | |
| (46,605) | |
| (80,206) | |
| 32,707 | |
| (47,499) |
Rental Revenue Adjustments and Depreciation and Amortization Expense
The following table summarizes our acquisition ofstraight-line rent adjustments, amortization recognized as an increase (decrease) to rental revenues from above- and below-market lease assets and liabilities, and real property duringestate-related depreciation and amortization expense:
| | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | ||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Increase (decrease) to rental revenue: | | |
| | |
| | |
| | |
| |
Straight-line rent adjustments | | $ | 1,240 | | $ | 693 | | $ | 1,966 | | $ | 1,869 | |
Above-market lease amortization | |
| (185) | |
| (87) | |
| (354) | |
| (189) | |
Below-market lease amortization | |
| 1,210 | |
| 746 | |
| 2,406 | |
| 1,497 | |
Real estate-related depreciation and amortization: | |
|
| |
|
| |
|
| |
|
| |
Depreciation expense | | $ | 25,349 | | $ | 14,054 | | $ | 45,547 | | $ | 27,408 | |
Intangible lease asset amortization | |
| 11,554 | |
| 3,120 | |
| 18,807 | |
| 6,499 | |
Real Estate Property Impairment
During the ninesix months ended SeptemberJune 30, 2017 (dollar amounts and square footage in thousands):
Real Property | Property Type | Market | Date of Acquisition | Acquired Ownership | Contract Price | Net Rentable Square Feet | Percent Leased at Acquisition | ||||||||||
Vasco Road | Industrial | East Bay, CA | 7/21/2017 | 100% | $ | 16,248 | 96 | 100% | |||||||||
Northgate | Industrial | Las Vegas, NV | 7/26/2017 | 100% | 24,500 | 248 | 100% | ||||||||||
$ | 40,748 | 344 |
Weighted-Average Amortization Period (Years) | ||||||||||||||||||||||||||||||||
Real Property | Land | Building and Improvements | Intangible Lease Assets | Intangible Lease Liabilities | Total Fair Value | Prorations and Credits | Contract Price | Intangible Lease Assets | Intangible Lease Liabilities | |||||||||||||||||||||||
Vasco Road | $ | 4,880 | $ | 9,637 | $ | 2,382 | $ | (575 | ) | $ | 16,324 | $ | (76 | ) | $ | 16,248 | 5.9 | 8.1 | ||||||||||||||
Northgate | 3,940 | 17,110 | 3,605 | — | 24,655 | (155 | ) | 24,500 | 9.8 | N/A | ||||||||||||||||||||||
Total/ Weighted Average | $ | 8,820 | $ | 26,747 | $ | 5,987 | $ | (575 | ) | $ | 40,979 | $ | (231 | ) | $ | 40,748 | 8.3 | 8.1 |
Property Type | Market | Ownership | Net Rentable Square Feet | Percentage Leased | Disposition Date | Contract Sales Price | Gain on Sale | |||||||||||||
For the nine months ended September 30, 2017 | ||||||||||||||||||||
Retail | Greater Boston | 100% | 51 | 61 | % | 5/31/2017 | $ | 4,500 | $ | — | ||||||||||
Industrial Portfolio (1) | Louisville, KY | 90% | 609 | 100 | % | 6/9/2017 | 26,800 | 10,352 | ||||||||||||
Industrial (2) | Dallas, TX | 100% | 128 | — | % | 7/21/2017 | 7,661 | 670 | ||||||||||||
Total/ Weighted Average | 788 | 81 | % | $ | 38,961 | $ | 11,022 | |||||||||||||
For the nine months ended September 30, 2016 | ||||||||||||||||||||
Office | Washington, DC | 100% | 574 | 100 | % | 2/18/2016 | $ | 158,400 | $ | 41,241 | ||||||||||
Office | Chicago, IL | 80% | 107 | 66 | % | 3/1/2016 | 9,850 | — | ||||||||||||
Office | Chicago, IL | 80% | 199 | 81 | % | 3/1/2016 | 18,000 | 159 | ||||||||||||
Retail | Greater Boston | 100% | 39 | 100 | % | 8/5/2016 | 3,625 | 975 | ||||||||||||
Industrial | Louisville, KY | 90% | 126 | 33 | % | 9/2/2016 | 5,400 | 1,120 | ||||||||||||
Office | Washington, DC | 100% | 178 | — | % | 9/30/2016 | 18,600 | — | ||||||||||||
Total/ Weighted Average | 1,223 | 73 | % | $ | 213,875 | $ | 43,495 |
3. ASSETS HELD FOR SALE
We classify a property as held for sale when certain criteria are met, in accordance with GAAP. Assets classified as held for sale are expected to reducebe sold to a third party. At such time the net book valueproperty meets the held for sale criteria, the respective assets and liabilities are presented separately in the consolidated balance sheets and depreciation is no longer recognized. Assets held for sale are reported at the lower of Hanover to our estimate of itstheir carrying amount or their estimated fair value less the costcosts to sell.sell the assets.
11
As of December 31, 2021, we recorded a $2.1 million impairment charge related to a consolidatedhad 1 retail property (Bandera Road) and 1 office property located(1st Avenue) that met the criteria to be classified as held for sale. Both properties were sold in the Washington, DC market ("Sunset Hills"), which we acquired in June 2010. We sold Sunset Hills in September 2016. Prior to the disposition, the net book valuefirst quarter of Sunset Hills exceeded the contract sales price less the cost to sell by $2.1 million. Accordingly, we recorded an impairment charge to reduce the net book value of Sunset Hills to our estimate of its fair value less the cost to sell.
| | | | | | |
|
| As of | ||||
(in thousands) |
| June 30, 2022 |
| December 31, 2021 | ||
Net investment in real estate properties | | $ | — | | $ | 101,690 |
Other assets | |
| — | |
| 3,406 |
Assets held for sale | | $ | — | | $ | 105,096 |
Accounts payable and accrued expenses | | $ | — | | $ | 3,172 |
Intangible lease liabilities, net | | | — | | | 995 |
Other liabilities | |
| — | |
| 1,577 |
Liabilities related to assets held for sale | | $ | — | | $ | 5,744 |
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURE PARTNERSHIPS
On November 30, 2021, we acquired interests in 2 joint venture partnerships, Pathfinder Core AREIT JV NNN Holdings, LLC (“Net Lease JV I”) and Pathfinder Core AREIT Net Lease Aggregator LLC (“Net Lease JV II”), for purposes of investing in properties across the U.S. with triple net lease agreements. On December 21, 2021, we also acquired interests in another joint venture partnership, AREIT-McDowell Vue Parent LLC (“Vue 1400 JV”), with third party investors for purposes of acquiring a 316 unit residential property in West Palm Beach, Florida. We record our investments in these joint venture partnerships under the equity method on our consolidated balance sheets as we have the ability to rental revenue related toexercise significant influence in each partnership but do not have control of the amortization of above-market lease assets, below-market lease liabilities, and straight-line rental adjustments for the three and nine months ended September 30, 2017 and 2016. In addition, theentities.
The following table summarizes tenant recovery income received from tenants for real estate taxes, insuranceour investments in unconsolidated joint venture partnerships as of June 30, 2022 and other property operating expenses and recognizedDecember 31, 2021:
| | | | | | | | | | |
| | | | | | Investment in Unconsolidated Joint | ||||
| | | ��� | Ownership | | Venture Partnerships as of | ||||
($ in thousands) |
| Segment |
| Percentage |
| June 30, 2022 |
| December 31, 2021 | ||
Vue 1400 JV | | Residential | | 85% | | $ | 25,845 | | $ | 26,117 |
Net Lease JV I | | Net Lease | | 50% | | | 16,393 | | | 16,267 |
Net Lease JV II | | Net Lease | | 50% | | | 63,166 | | | 15,041 |
Total investment in unconsolidated joint venture partnerships |
|
|
|
| | $ | 105,404 | | $ | 57,425 |
5. DEBT
A summary of our consolidated debt is as rental revenue (amounts in thousands):
| | | | | | | | | | | | |
| | Weighted-Average | | | | | | | | | ||
| | Effective Interest Rate as of | | | | Balance as of | ||||||
| | June 30, | | December 31, | | | | June 30, | | December 31, | ||
($ in thousands) |
| 2022 |
| 2021 |
| Current Maturity Date |
| 2022 |
| 2021 | ||
Line of credit (1) | | 3.04 | % | 1.35 | % | November 2025 | | $ | 383,000 | | $ | 256,000 |
Term loan (2) |
| 3.24 | | 3.16 | | November 2026 | | | 400,000 |
| | 325,000 |
Term loan (3) |
| 2.99 | | 3.19 | | January 2027 | |
| 400,000 |
|
| 200,000 |
Fixed-rate mortgage notes |
| 3.48 | | 3.49 | | October 2022 - May 2031 | |
| 380,797 |
|
| 381,954 |
Floating-rate mortgage note (4) |
| 3.92 | | 2.26 | | October 2024 - October 2026 | |
| 207,600 |
|
| 207,600 |
Total principal amount / weighted-average (5) |
| 3.27 | % | 2.78 | % |
| | $ | 1,771,397 |
| $ | 1,370,554 |
Less: unamortized debt issuance costs |
|
|
|
|
|
| | $ | (15,030) |
| $ | (16,762) |
Add: unamortized mark-to-market adjustment on assumed debt |
|
|
|
|
|
| |
| 8,925 |
|
| 9,442 |
Total debt, net |
|
|
|
|
|
| | $ | 1,765,292 |
| $ | 1,363,234 |
Gross book value of properties encumbered by debt | | | | | | | | $ | 966,932 | | $ | 981,927 |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Straight-line rent adjustments | $ | (109 | ) | $ | (296 | ) | $ | (464 | ) | $ | (742 | ) | |||
Above-market lease assets | (641 | ) | (1,402 | ) | (2,155 | ) | (3,930 | ) | |||||||
Below-market lease liabilities | 1,355 | 1,529 | 4,138 | 4,608 | |||||||||||
Total increase to rental revenue | $ | 605 | $ | (169 | ) | $ | 1,519 | $ | (64 | ) | |||||
Tenant recovery income (1) | $ | 9,865 | $ | 10,623 | $ | 30,911 | $ | 31,183 |
12
(1) |
Tenant | Locations | Industry | Annualized Base Rent (1) | % of Total Annualized Base Rent | Square Feet | % of Total Portfolio Square Feet | |||||||||||
Charles Schwab & Co, Inc (2) | 2 | Securities, Commodities, Fin. Inv./Rel. Activities | $ | 23,650 | 15.1 | % | 602 | 7.9 | % | ||||||||
Stop & Shop | 13 | Food and Beverage Stores | 13,498 | 8.6 | % | 803 | 10.5 | % | |||||||||
Novo Nordisk | 1 | Chemical Manufacturing | 4,721 | 3.0 | % | 167 | 2.2 | % | |||||||||
Seton Health Care | 1 | Hospitals | 4,339 | 2.8 | % | 156 | 2.0 | % | |||||||||
Shaw's Supermarket | 4 | Food and Beverage Stores | 4,055 | 2.6 | % | 240 | 3.1 | % | |||||||||
21 | $ | 50,263 | 32.1 | % | 1,968 | 25.7 | % |
(2) | The |
Principal Balance as of | Weighted Average Stated Interest Rate as of | Gross Investment Amount Securing Borrowings as of (1) | |||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||||||
Fixed-rate mortgages (2) | $ | 128,934 | $ | 290,970 | 3.9 | % | 4.9 | % | $ | 188,880 | $ | 462,954 | |||||||||
Floating-rate mortgages (3) | 353,100 | 52,500 | 3.5 | % | 2.3 | % | 530,949 | 70,485 | |||||||||||||
Total secured borrowings | 482,034 | 343,470 | 3.6 | % | 4.5 | % | 719,829 | 533,439 | |||||||||||||
Line of credit (4) | 202,000 | 236,000 | 2.9 | % | 2.3 | % | N/A | N/A | |||||||||||||
Term loans (5) | 475,000 | 475,000 | 3.5 | % | 3.2 | % | N/A | N/A | |||||||||||||
Total unsecured borrowings | 677,000 | 711,000 | 3.3 | % | 2.9 | % | N/A | N/A | |||||||||||||
Total borrowings | $ | 1,159,034 | $ | 1,054,470 | 3.4 | % | 3.4 | % | N/A | N/A | |||||||||||
Less: net debt issuance costs | (8,059 | ) | (6,295 | ) | |||||||||||||||||
Add: mark-to-market adjustment on assumed debt | 526 | 626 | |||||||||||||||||||
Total borrowings (net basis) | $ | 1,151,501 | $ | 1,048,801 |
(3) | The effective interest rate is calculated based on LIBOR, plus a margin ranging from 1.20% to 1.90%, depending on our consolidated leverage ratio. Total commitments for this term loan are $400.0 million. |
(5) | The weighted-average remaining term of our consolidated borrowings was approximately 4.3 years as of June 30, 2022, excluding the impact of certain extension options. |
As of June 30, 2022, the principal payments due on our consolidated debt during each of the next five years and thereafter were as follows:
| | | | | | | | | | | | |
(in thousands) |
| Line of Credit (1) |
| Term Loans |
| Mortgage Notes |
| Total | ||||
Remainder of 2022 | | $ | 0 | | $ | 0 | | $ | 455 | | $ | 455 |
2023 | |
| 0 | |
| 0 | |
| 1,463 | |
| 1,463 |
2024 | |
| 0 | |
| 0 | |
| 129,265 | |
| 129,265 |
2025 | |
| 383,000 | |
| 0 | |
| 72,360 | |
| 455,360 |
2026 | |
| 0 | |
| 400,000 | |
| 84,214 | |
| 484,214 |
Thereafter | |
| 0 | |
| 400,000 | |
| 300,640 | |
| 700,640 |
Total principal payments | | $ | 383,000 | | $ | 800,000 | | $ | 588,397 | | $ | 1,771,397 |
In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR in derivatives and other financial contracts. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
LIBOR is expected to be phased out or modified by June 2023. As of SeptemberJune 30, 2017, six mortgage notes were interest-only2022, our line of credit, term loans and four mortgage notes were fully amortizing with outstanding principal balances of approximately $456.1 million and $25.9 million, respectively. Nonecertain of our mortgage notes are currently recoursehave initial or extended maturity dates beyond 2023 with exposure to us exceptLIBOR. The agreements governing these loans provide procedures for determining a replacement or alternative base rate in the 655 Montgomery mortgage note (defined below), whichevent that LIBOR is subjectdiscontinued. However, there can be no assurances as to a limited guaranty provided by us for certain outstanding leasing costs aswhether such replacement or alternative base rate will be more or less favorable than LIBOR. We intend to monitor the developments with respect to the phasing out of September 6, 2017 (the "Outstanding Leasing Costs"). Our recourse liability in connectionLIBOR after 2023 and work with our lenders to seek to ensure any transition away from LIBOR will have minimal impact on our financial condition, but can provide no assurances regarding the Outstanding Leasing Costs will decrease asimpact of the discontinuation of LIBOR. In July 2022, we subsequently fundamended our credit facility and changed the Outstanding Leasing Costs. Other than this limited guarantee, the assets and credit of eachcalculation of our consolidated properties pledged as collateral for our mortgage notes are not availableeffective interest rate to satisfy our debt and obligations unless we first satisfy the mortgage note payable on the respective underlying property.
Debt Covenants
Our line of credit, (the “Facility”). The Facility provides us withterm loans and mortgage note agreements contain various property-level covenants, including customary affirmative and negative covenants. In addition, the ability from time to time to increase the size of the Facility up to a total of $900 million less the amount of any prepayments under the term loan component of the Facility, subject to receipt of lender commitments and other conditions.
Borrowings | Date Borrowed | Principal Balance | Fixed or Floating Interest Rate | Stated Interest Rate (1) | Contractual Maturity Date | Extension Options | Collateral Type | Collateral Market | |||||||||||
3 Second Street (2) | 1/10/2017 | $ | 127,000 | Floating | 3.50 | % | 1/10/2020 | 2 one-year extension | Office Property | Northern New Jersey | |||||||||
Centerton Square (3) | 6/5/2017 | 75,000 | Floating | 3.48 | % | 7/10/2019 | 2 one-year extension | Retail Property | Philadelphia, PA | ||||||||||
655 Montgomery (4) | 9/6/2017 | $ | 98,600 | Floating | 3.98 | % | 9/7/2020 | 2 one-year extension | Office Property | San Francisco, CA | |||||||||
Total/weighted average borrowings | $ | 300,600 | 3.65 | % |
Debt Obligation | Repayment Date | Balance Repaid/Extinguished | Interest Rate Fixed or Floating | Stated Interest Rate | Contractual Maturity Date | Collateral Type | Collateral Market | ||||||||||
Eastern Retail Portfolio | 1/10/2017 | $ | 110,000 | Fixed | 5.51 | % | 6/11/2017 | Retail Property | Various (1) | ||||||||
Wareham | 5/8/2017 | 24,400 | Fixed | 6.13 | % | 8/8/2017 | Retail Property | Greater Boston | |||||||||
Kingston | 6/1/2017 | 10,574 | Fixed | 6.33 | % | 11/1/2017 | Retail Property | Greater Boston | |||||||||
Sandwich | 6/1/2017 | 15,825 | Fixed | 6.33 | % | 11/1/2017 | Retail Property | Greater Boston | |||||||||
Total/weighted average borrowings | $ | 160,799 | 5.74 | % |
13
As of September 30, 2017 | ||||||||||||||||
Mortgage Notes | Unsecured Borrowings | Total | ||||||||||||||
Year Ending December 31, | Number of Borrowings Maturing | Outstanding Principal Balance | Number of Borrowings Maturing | Outstanding Principal Balance | Outstanding Principal Balance | |||||||||||
2017 | — | $ | 424 | — | $ | — | $ | 424 | ||||||||
2018 | — | 2,698 | 1 | 275,000 | 277,698 | |||||||||||
2019 | 1 | 78,698 | 1 | 202,000 | 280,698 | |||||||||||
2020 | 2 | 229,460 | — | — | 229,460 | |||||||||||
2021 | 1 | 12,764 | — | — | 12,764 | |||||||||||
2022 | 1 | 3,660 | 1 | 200,000 | 203,660 | |||||||||||
2023 | 2 | 77,899 | — | — | 77,899 | |||||||||||
2024 | — | 1,034 | — | — | 1,034 | |||||||||||
2025 | 1 | 71,094 | — | — | 71,094 | |||||||||||
2026 | — | 1,157 | — | — | 1,157 | |||||||||||
Thereafter | 2 | 3,146 | — | — | 3,146 | |||||||||||
Total | 10 | $ | 482,034 | 3 | $ | 677,000 | $ | 1,159,034 | ||||||||
Less: net debt issuance costs | (4,614 | ) | (3,445 | ) | ||||||||||||
Add: mark-to-market adjustment on assumed debt | 526 | — | ||||||||||||||
Total borrowings (net basis) | $ | 477,946 | $ | 673,555 |
Derivative Instruments
To manage interest rate risk attributable to bothfor certain of our outstanding and forecastedvariable-rate debt, obligations. We generally seek to limit the impact of interest rate changes on earnings and cash flows by selectively utilizing derivative instruments to hedge exposures to changes in interest rates on our secured and unsecured floating rate borrowings. While this hedging strategy is designed to minimize the impact on our net income (loss) and cash provided by operating activities from changes in interest rates, the overall returns on our investments may be reduced. Our board of directors has established policies and procedures regarding our use of derivative instruments for hedging or other purposes to achieve these risk management objectives.
For derivative instruments that are designated and that qualify as cash flow hedges, under ASC Topic 815the gain or loss is recorded inas a component of accumulated other comprehensive income (loss) income(“AOCI”) on the condensed consolidated balance sheets and is subsequently reclassified into earnings inas interest expense for the same period that the hedged forecasted transaction affects earnings.earnings, which is when the interest expense is recognized on the related debt. During the next 12 months, we estimate that approximately $1.3$2.9 million will be reclassified as an increasedecrease to interest expense related to active effective hedges of existing floating-rate debt, and we estimate that approximately $1.9 million will be reclassified as an increase to interest expense related to effectivedebt. Our interest rate swaps where the hedging instrument has been terminated. The ineffective portion of the changecap derivative instruments are not designated as hedges and therefore, changes in fair value ofmust be recognized through income. As a result, in periods with high interest rate volatility, we may experience significant fluctuations in our net income (loss).
The following table summarizes the derivatives is recognized directly in earnings.
| | | | | | | | | | | |
|
| Number of |
| | | | Fair Value | ||||
($ in thousands) |
| Contracts |
| Notional Amount (1) |
| | Other Assets |
| Other Liabilities | ||
As of June 30, 2022 | | | | | | | | | | | |
Interest rate swaps |
| 12 | | $ | 300,000 | | $ | 4,735 | | $ | 2,019 |
Interest rate caps |
| 2 | |
| 207,600 | |
| 2,690 | |
| 0 |
Total derivative instruments |
| 14 | | $ | 507,600 | | $ | 7,425 | | $ | 2,019 |
As of December 31, 2021 | | | | | | | | | | | |
Interest rate swaps |
| 13 | | $ | 500,000 | | $ | 164 | | $ | 11,236 |
Interest rate caps |
| 2 | |
| 207,600 | |
| 159 | |
| 0 |
Total derivative instruments |
| 15 | | $ | 707,600 | | $ | 323 | | $ | 11,236 |
(1) | Excludes $350.0 million of notional amount for 5 interest rate swaps entered into in June 2022 with an effective date in July 2022. |
The following table presents the effective portioneffect of our cash flow hedges as presentedconsolidated derivative instruments on our condensed consolidated financial statements:
| | | | | | | | | | | | | |
|
| For the Three Months Ended |
| For the Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Derivative instruments designated as cash flow hedges: | | |
| | |
| | |
| | |
| |
Gain (loss) recognized in AOCI | | $ | 787 | | $ | (600) | | $ | 10,862 | | $ | 2,743 | |
Amount reclassified from AOCI into interest expense | |
| 1,032 | |
| 2,631 | |
| 2,951 | |
| 5,203 | |
Total interest expense presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | |
| 33,774 | |
| 17,048 | |
| 58,184 | |
| 33,611 | |
Derivative instruments not designated as cash flow hedges: | |
|
| |
|
| |
| | |
|
| |
Gain (loss) recognized in income | | $ | 982 | | $ | — | | $ | 2,532 | | $ | (13) | |
6. DST PROGRAM
We have a program to raise capital through private placement offerings by selling beneficial interests (the “DST Interests”) in specific Delaware statutory trusts holding real properties (the “DST Program”).
In order to facilitate additional capital raise through the DST Program, we have made and may continue to offer loans (“DST Program Loans”) to finance a portion of the sale of DST Interests to potential investors. As of June 30, 2022 and December 31, 2021, there were approximately $86.7 million and $62.1 million, respectively, of outstanding DST Program Loans that we have made to partially finance the sale of DST Interests. We include our investments in DST Program Loans separately on our condensed consolidated balance sheets in the DST Program Loans line item and we include income earned from DST Program Loans in other income on our
14
condensed consolidated statements of operations. We do not have a significant credit concentration with any individual purchaser as well as amounts related toa result of DST Program Loans.
The following table presents our available-for-sale securities (amounts in thousands):
| | | | | | | | | | | | |
| | | For the Three Months Ended June 30, | | | For the Six Months Ended June 30, | ||||||
(in thousands) | | | 2022 | | | 2021 | | | 2022 | | | 2021 |
DST Interests sold | | $ | 161,861 | | $ | 63,107 | | $ | 442,663 | | $ | 114,923 |
DST Interests financed by DST Program Loans | | | 13,205 | | | 6,764 | | | 28,032 | | | 11,756 |
Income earned from DST Program Loans (1) | | | 833 | | | 538 | | | 1,501 | | | 1,009 |
Rent obligation incurred under master lease agreements (2) | | | 11,603 | | | 6,862 | | | 20,857 | | | 13,336 |
(Losses) and Gains on Cash Flow Hedges | Unrealized (Losses) and Gains on Available-For-Sale Securities | Accumulated Other Comprehensive Loss | |||||||||
Beginning balance as of December 31, 2016 | $ | (5,849 | ) | $ | (1,056 | ) | $ | (6,905 | ) | ||
Other comprehensive (loss) income: | |||||||||||
Amount of loss reclassified from AOCI into interest expense (effective portion) (net of tax benefit of $0) | 3,815 | — | 3,815 | ||||||||
Change in fair value recognized in AOCI (effective portion) (net of tax benefit of $0) | (1,455 | ) | — | (1,455 | ) | ||||||
Net current-period other comprehensive income | 2,360 | — | 2,360 | ||||||||
Attribution of and other adjustments to AOCI attributable to noncontrolling interests | (121 | ) | 48 | (73 | ) | ||||||
Ending balance as of September 30, 2017 | $ | (3,610 | ) | $ | (1,008 | ) | $ | (4,618 | ) |
(1) Included in other income and expenses on condensed consolidated statements of operations.
(2) Included in interest expense on condensed consolidated statements of operations.
Additionally, during the six months ended June 30, 2022 and 2021, 4.8 million partnership units (“OP Units”) in our operating partnership, AREIT Operating Partnership LP (the “Operating Partnership”) and 3.4 million OP Units, respectively were issued in exchange for DST Interests, for a net investment of $39.4 million and $25.9 million, respectively, in accordance with our Umbrella Partnership Real Estate Investment Trust (“UPREIT”) structure.
7. FAIR VALUE
We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of the amounts that we would realize upon disposition.
Fair ValuesValue Measurements on a Recurring Basis
The following table presents our financial instruments measured at fair value on a recurring basis:
| | | | | | | | | | | | |
|
| | |
| | |
| | |
| Total | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Fair Value | ||||
As of June 30, 2022 | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Derivative instruments | | $ | 0 | | $ | 7,425 | | $ | 0 | | $ | 7,425 |
Total assets measured at fair value | | $ | 0 | | $ | 7,425 | | $ | 0 | | $ | 7,425 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Derivative instruments | | $ | 0 | | $ | 2,019 | | $ | 0 | | $ | 2,019 |
Total liabilities measured at fair value | | $ | 0 | | $ | 2,019 | | $ | 0 | | $ | 2,019 |
As of December 31, 2021 | |
|
| |
|
| |
|
| |
|
|
Assets: | |
|
| |
|
| |
|
| |
|
|
Derivative instruments | | $ | 0 | | $ | 323 | | $ | 0 | | $ | 323 |
Total assets measured at fair value | | $ | 0 | | $ | 323 | | $ | 0 | | $ | 323 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Derivative instruments | | $ | 0 | | $ | 11,236 | | $ | 0 | | $ | 11,236 |
Total liabilities measured at fair value | | $ | 0 | | $ | 11,236 | | $ | 0 | | $ | 11,236 |
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Derivative Instruments
15
Nonrecurring Fair Value Measurements
As of SeptemberJune 30, 20172022 and December 31, 2016, we had 10 and 11 outstanding interest rate swaps, respectively, that were designated as cash flow hedges of interest rate risk, with a total notional amount of $383.0 million and $395.1 million, respectively. In addition, as of September 30, 2017 and December 31, 2016, we had one interest rate swap with a total notional amount of $52.5 million that will become effective in July 2018 and mature in July 2021, which was designated as a cash flow hedge of interest rate risk.
Fair Value of Asset Derivatives as of | Fair Value of Liability Derivatives as of | ||||||||||||||||||
Balance Sheet Location | September 30, 2017 | December 31, 2016 | Balance Sheet Location | September 30, 2017 | December 31, 2016 | ||||||||||||||
Derivatives accounted for as hedges: | |||||||||||||||||||
Interest rate contracts | Other assets, net (1) | $ | 1,960 | $ | 2,135 | Other liabilities (1) | $ | (1,687 | ) | $ | (2,777 | ) | |||||||
Derivatives not accounted for as hedges: | |||||||||||||||||||
Interest rate contracts | Other assets, net (1) | $ | 17 | $ | — | Other liabilities (1) | $ | — | $ | — | |||||||||
Total derivatives | $ | 1,977 | $ | 2,135 | $ | (1,687 | ) | $ | (2,777 | ) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Derivatives Accounted For as Hedges | |||||||||||||||
Derivative type | Interest rate contracts | Interest rate contracts | Interest rate contracts | Interest rate contracts | |||||||||||
Amount of (loss) gain recognized in OCI (effective portion) | $ | (123 | ) | $ | 1,747 | $ | (1,455 | ) | $ | (13,350 | ) | ||||
Location of loss reclassified from accumulated OCI into income (effective portion) | Interest expense | Interest expense | Interest expense | Interest expense | |||||||||||
Amount of loss reclassified from accumulated OCI into income (effective portion) | $ | 1,071 | $ | 1,154 | $ | 3,815 | $ | 3,470 | |||||||
Location of loss recognized in income (ineffective portion and amount excluded from effectiveness testing) | Other (expense) and income | Other (expense) and income | Other (expense) and income | Other (expense) and income | |||||||||||
Amount of loss recognized in income (ineffective portion and amount excluded from effectiveness testing) | $ | — | $ | — | $ | — | $ | — | |||||||
Derivatives Not Accounted For as Hedges | |||||||||||||||
Derivative type | Interest rate cap | N/A | Interest rate cap | N/A | |||||||||||
Amount of loss recognized in income | $ | (14 | ) | $ | — | $ | (114 | ) | $ | — | |||||
Location of loss recognized in income | Other (expense) and income | N/A | Other (expense) and income | N/A |
| | | | | | | | | | | | |
| | As of June 30, 2022 | | As of December 31, 2021 | ||||||||
|
| Carrying |
| Fair | | Carrying |
| Fair | ||||
(in thousands) | | Value (1) | | Value | | Value (1) | | Value | ||||
Assets: | | | | | | | | | | | | |
Debt-related investments | | $ | 108,782 | | $ | 108,782 | | $ | 106,463 | | $ | 106,463 |
DST Program Loans | |
| 86,706 | |
| 85,344 | |
| 62,123 | |
| 62,123 |
Liabilities: | |
|
| |
|
| |
|
| |
|
|
Line of credit | | $ | 383,000 | | $ | 383,000 | | $ | 256,000 | | $ | 256,000 |
Term loans | |
| 800,000 | |
| 798,603 | |
| 525,000 | |
| 525,000 |
Mortgage notes | |
| 588,397 | |
| 552,816 | |
| 589,554 | |
| 600,467 |
(1) | The carrying value reflects the principal amount outstanding. |
8. EQUITY
Public Offerings
We intend to conduct a continuous public offering that will not have a predetermined duration, subject to continued compliance with the rules and regulations of the SEC and applicable state laws. On May 3, 2022, the SEC declared our registration statement on Form S-11 with respect to our fourth public offering of up to $10.0 billion of shares of its common stock effective, and the fourth public offering commenced the same day. We ceased selling shares of our common stock under our third public offering of up to $3.0 billion of shares immediately upon the effectiveness of the registration statement for the fourth public offering. Under the fourth public offering, we are disclosedoffering up to $8.5 billion of shares of our common stock in Note 5,the primary offering and up to $1.5 billion of shares of our common stock pursuant to our distribution reinvestment plan, in any combination of Class T shares, Class D shares, Class S shares, and Class I shares. We may reallocate amounts between the primary offering and distribution reinvestment plan.
Pursuant to our public offerings, we offered and continue to offer shares of our common stock at the “transaction price,” plus applicable upfront selling commissions and dealer manager fees. The “transaction price” generally is equal to the net asset value (“NAV”) per share of our common stock most recently disclosed. Our NAV per share is calculated as of September 30, 2017the last calendar day of each month for each of our outstanding classes of stock, and December 31, 2016 (amounts in thousands):
As of September 30, 2017 | As of December 31, 2016 | ||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||
Assets: | |||||||||||||||
Fixed-rate debt-related investments, net | $ | 11,259 | $ | 11,594 | $ | 15,209 | $ | 15,784 | |||||||
Liabilities: | |||||||||||||||
Fixed-rate mortgage notes (1) | $ | 128,341 | $ | 130,557 | $ | 290,329 | $ | 291,624 | |||||||
Floating-rate mortgage notes | 349,605 | 352,022 | 51,918 | 51,942 | |||||||||||
Floating-rate unsecured borrowings (2) | 673,555 | 677,000 | 706,554 | 711,000 |
During the six months ended June 30, 2022, we raised gross proceeds of approximately $244.5 million from the sale of approximately 28.8 million shares of our performing debt-related investments are estimated using a discounted cash flow methodology. This method discounts estimated future cash flows using rates management determines best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. Credit spreads and market interest rates used to determine the fair value of these instruments are based on unobservable Level 3 inputs which management has determined to be its best estimate of current market values.
16
Common Stock
The following table describes the changes in each class of common shares during the nine months ended September 30, 2017 (sharesperiods presented below:
| | | | | | | | | | | | |
|
| Class T |
| Class S |
| Class D |
| Class I |
| Class E |
| Total |
(in thousands) | | Shares | | Shares | | Shares | | Shares | | Shares | | Shares |
FOR THE THREE MONTHS ENDED JUNE 30, 2021 | | | | | | | | | | | | |
Balance as of March 31, 2021 |
| 10,369 |
| 26,443 |
| 4,899 |
| 46,169 |
| 59,412 |
| 147,292 |
Issuance of common stock: |
| |
| | | | | | | |
|
|
Primary shares |
| 1,378 |
| 2,719 | | 640 | | 1,680 | | 0 |
| 6,417 |
Distribution reinvestment plan |
| 61 |
| 147 | | 29 | | 277 | | 230 |
| 744 |
Share-based compensation |
| 0 |
| 0 | | 0 | | 0 | | 0 |
| 0 |
Redemptions of common stock | | (56) |
| (351) | | (59) | | (441) | | (1,525) | | (2,432) |
Conversions |
| (60) |
| 0 | | 0 | | 60 | | 0 |
| 0 |
Balance as of June 30, 2021 |
| 11,692 |
| 28,958 |
| 5,509 |
| 47,745 |
| 58,117 |
| 152,021 |
FOR THE THREE MONTHS ENDED JUNE 30, 2022 | | | | | | | | | | | | |
Balance as of March 31, 2022 |
| 19,007 |
| 40,489 |
| 7,662 |
| 59,433 |
| 55,451 |
| 182,042 |
Issuance of common stock: |
| |
| | | | | | | |
|
|
Primary shares |
| 2,634 |
| 5,663 |
| 388 |
| 5,165 |
| 0 |
| 13,850 |
Distribution reinvestment plan |
| 100 |
| 200 |
| 38 |
| 305 |
| 186 |
| 829 |
Share-based compensation |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
Redemptions of common stock | | (30) | | (189) | | (141) | | (201) | | (1,059) | | (1,620) |
Conversions |
| (39) |
| 0 |
| 0 |
| 39 |
| 0 |
| 0 |
Balance as of June 30, 2022 |
| 21,672 |
| 46,163 |
| 7,947 |
| 64,741 |
| 54,578 |
| 195,101 |
FOR THE SIX MONTHS ENDED JUNE 30, 2021 | | | | | | | | | | | | |
Balance as of December 31, 2020 |
| 9,831 |
| 23,516 |
| 4,098 |
| 44,723 |
| 60,873 |
| 143,041 |
Issuance of common stock: |
| |
| |
| |
| |
| |
|
|
Primary shares |
| 1,916 |
| 5,628 |
| 1,456 |
| 3,181 |
| 0 |
| 12,181 |
Distribution reinvestment plan |
| 119 |
| 282 |
| 54 |
| 542 | | 470 |
| 1,467 |
Share-based compensation |
| 0 |
| 0 |
| 0 |
| 8 |
| 0 |
| 8 |
Redemptions of common stock |
| (99) | | (468) | | (99) | | (784) | | (3,226) |
| (4,676) |
Conversions | | (75) | | 0 | | 0 | | 75 | | 0 | | 0 |
Balance as of June 30, 2021 |
| 11,692 |
| 28,958 |
| 5,509 |
| 47,745 |
| 58,117 |
| 152,021 |
FOR THE SIX MONTHS ENDED JUNE 30, 2022 | | | | | | | | | | | | |
Balance as of December 31, 2021 |
| 16,425 |
| 35,757 |
| 6,749 |
| 54,406 |
| 56,328 |
| 169,665 |
Issuance of common stock: |
| |
| |
| |
| |
| |
|
|
Primary shares |
| 5,189 |
| 10,324 |
| 1,493 |
| 10,183 |
| 0 |
| 27,189 |
Distribution reinvestment plan |
| 192 |
| 393 |
| 75 |
| 607 |
| 388 |
| 1,655 |
Share-based compensation |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
Redemptions of common stock |
| (33) |
| (311) |
| (370) |
| (556) |
| (2,138) |
| (3,408) |
Conversions | | (101) | | 0 | | 0 | | 101 | | 0 | | 0 |
Balance as of June 30, 2022 |
| 21,672 |
| 46,163 |
| 7,947 |
| 64,741 |
| 54,578 |
| 195,101 |
17
Distributions
The following table summarizes our distribution activity (including distributions to noncontrolling interests and dollar amountsdistributions reinvested in thousands):
| | | | | | | | | | | | | | | | | | |
| | Amount | ||||||||||||||||
|
| | |
| Common Stock |
| | |
| | |
| | | | | | |
| | Declared per | | Distributions | | Other Cash | | Reinvested in | | Distribution | | Gross | ||||||
(in thousands, except per share data) | | Common Share (1) | | Paid in Cash | | Distributions (2) | | Shares | | Fees (3) | | Distributions (4) | ||||||
2022 |
| |
|
| |
|
| |
|
| |
|
| |
| | |
|
March 31 | | $ | 0.09375 | | $ | 8,837 | | $ | 3,018 | | $ | 6,876 | | $ | 1,030 | | $ | 19,761 |
June 30 | |
| 0.09375 | |
| 9,299 | |
| 3,157 | |
| 7,362 | |
| 1,259 | |
| 21,077 |
Total | | $ | 0.18750 | | $ | 18,136 | | $ | 6,175 | | $ | 14,238 | | $ | 2,289 | | $ | 40,838 |
2021 | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
March 31 | | $ | 0.09375 | | $ | 7,562 | | $ | 1,424 | | $ | 5,526 | | $ | 586 | | $ | 15,098 |
June 30 | |
| 0.09375 | |
| 7,696 | |
| 1,611 | |
| 5,723 | |
| 655 | |
| 15,685 |
September 30 | |
| 0.09375 | |
| 7,984 | |
| 1,854 | |
| 5,985 | |
| 759 | |
| 16,582 |
December 31 | |
| 0.09375 | |
| 8,265 | |
| 2,446 | |
| 6,361 | |
| 885 | |
| 17,957 |
Total | | $ | 0.37500 | | $ | 31,507 | | $ | 7,335 | | $ | 23,595 | | $ | 2,885 | | $ | 65,322 |
Class E | Class T | Class S | Class D | Class I | Total | ||||||||||||||||||||||||||||||||||||
Shares | Amount (1) | Shares | Amount (1) | Shares | Amount (1) | Shares | Amount (1) | Shares | Amount (1) | Shares | Amount (1) | ||||||||||||||||||||||||||||||
Balances, December 31, 2016 | 112,325 | $ | 1,298,189 | 2,001 | $ | 14,758 | N/A | N/A | 2,271 | $ | 16,381 | 34,039 | $ | 243,049 | 150,636 | $ | 1,572,377 | ||||||||||||||||||||||||
Issuance of common stock: | |||||||||||||||||||||||||||||||||||||||||
Shares sold | — | — | 125 | 975 | 17 | 125 | 265 | 1,996 | 1,264 | 9,515 | 1,671 | 12,611 | |||||||||||||||||||||||||||||
Distribution reinvestment plan | 1,546 | 11,615 | 48 | 360 | — | — | 56 | 420 | 804 | 6,038 | 2,454 | 18,433 | |||||||||||||||||||||||||||||
Stock-based compensation (2) | — | — | — | — | — | — | — | — | (99 | ) | (878 | ) | (99 | ) | (878 | ) | |||||||||||||||||||||||||
Redemptions and repurchases of common stock | (12,718 | ) | (95,404 | ) | (82 | ) | (615 | ) | — | — | (84 | ) | (632 | ) | (1,828 | ) | (13,718 | ) | (14,712 | ) | (110,369 | ) | |||||||||||||||||||
Balances, September 30, 2017 | 101,153 | $ | 1,214,400 | 2,092 | $ | 15,478 | 17 | $ | 125 | 2,508 | $ | 18,165 | 34,180 | $ | 244,006 | 139,950 | $ | 1,492,174 |
(1) |
(2) |
(3) | Distribution fees are paid monthly to the |
(4) | Gross distributions are total distributions before the deduction of any distribution fees relating to Class T shares, Class S shares and Class D shares issued in the primary portion of our public offerings. |
Redemptions and Repurchases
Below is a summary of redemptions and repurchases pursuant to our share redemption program for the six months ended June 30, 2022 and 2021. Our board of directors may modify or suspend our current share redemption programs if it deems such action to be in the best interest of our stockholders.
| | | | | | | | |
| | For the Six Months Ended June 30, | | | ||||
(in thousands, except for per share data) |
| 2022 |
| 2021 | | | ||
Number of shares requested for redemption or repurchase |
| | 3,408 |
| | 4,676 | | |
Number of shares redeemed or repurchased |
| | 3,408 |
| | 4,676 | | |
% of shares requested that were redeemed or repurchased |
| | 100.0 | % | | 100.0 | % | |
Aggregate dollar amount of shares redeemed or repurchased | | $ | 28,500 | | $ | 35,380 | | |
Average redemption or repurchase price per share | | $ | 8.37 | | $ | 7.57 | | |
9. REDEEMABLE NONCONTROLLING INTERESTS
The Operating Partnership’s net income and loss will generally be allocated to the general partner and the limited partners in accordance with the respective percentage interest in the OP Units issued by the Operating Partnership.
18
The responsibilities of our Advisor cover all facets of our business, and include the selection and underwriting of our real property and debt-related investments, the negotiations for these investments, the asset management and financing of these investments and the oversight of real property dispositions.
The following table summarizes the redeemable noncontrolling interests activity for the six months ended June 30, 2022 and 2021:
| | | | | | | |
| | For the Six Months Ended June 30, | | ||||
($ in thousands) | | 2022 | | 2021 |
| ||
Balance at beginning of the year | | $ | 8,994 | | $ | 3,798 | |
Settlement of prior year performance participation allocation (1) | | | 15,327 | | | 4,608 | |
Distributions to redeemable noncontrolling interests | | | (351) | | | (208) | |
Redemptions to redeemable noncontrolling interests (2) | | | (7,724) | | | 0 | |
Net income attributable to redeemable noncontrolling interests | | | 186 | | | 70 | |
Change from cash flow hedging activities attributable to redeemable noncontrolling interests | | | 136 | | | 55 | |
Redemption value allocation adjustment to redeemable noncontrolling interests | | | 1,596 | | | 185 | |
Ending balance | | $ | 18,164 | | $ | 8,508 | |
(1) | The 2021 performance participation allocation in the amount of $15.3 million became payable on December 31, 2021, and was issued as 1.9 million Class I OP Units in January 2022. At the direction of the Advisor and in light of our Former Sponsor having been the holder of a separate series of partnership interests in the Operating Partnership with special distribution rights (the “Special Units”) for the first six months of 2021, the holder of the Special Units designated 465,000 of these Class I OP Units to an entity owned indirectly by our Chairman, Mr. Mulvihill, and 465,000 of these Class I OP Units to an entity owned indirectly by a member of our Former Sponsor. The holder of the Special Units transferred 945,000 Class I OP Units to the Advisor thereafter. The 2020 performance participation allocation in the amount of $4.6 million became payable to the Former Sponsor, as the former holder of the Special Units, on December 31, 2020. At the Former Advisor’s election, it was paid in the form of Class I OP Units valued at $4.6 million (based on the NAV per unit as of December 31, 2020), which were issued to the Former Sponsor in January 2021 and subsequently transferred to its members or their affiliates. |
(2) | At the request of the Advisor, the Operating Partnership redeemed all Class I OP Units issued to the Advisor in January 2022 for $7.7 million. |
19
10. RELATED PARTY TRANSACTIONS
Summary of Fees and Expenses
The table below summarizes the fee paidfees and expenses incurred by us for services provided by the Advisor and its affiliates, and by the Dealer Manager related to our Advisorthe services the Dealer Manager provided in connection with our public offerings and any related amounts payable:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | Payable as of | | ||||||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| June 30, 2022 |
| December 31, 2021 | | ||||||
Selling commissions and dealer manager fees (1) | | $ | 1,556 | | $ | 615 | | $ | 2,866 | | $ | 1,021 | | $ | — | | $ | — | |
Ongoing distribution fees (1)(2) | | | 1,270 | | | 673 | | | 2,329 | | | 1,276 | | | 547 | | | 394 | |
Advisory fees—fixed component | | | 8,227 | | | 5,085 | | | 15,370 | | | 9,909 | | | 2,817 | | | 2,094 | |
Performance participation allocation | |
| 6,186 | |
| 2,246 | |
| 18,379 | |
| 3,995 | |
| 18,379 | |
| 15,327 | |
Other expense reimbursements—Advisor (3)(4) | |
| 3,206 | |
| 2,792 | |
| 5,346 | |
| 5,833 | |
| 7,908 | |
| 1,443 | |
Other expense reimbursements—Dealer Manager | |
| 143 | |
| 84 | |
| 170 | |
| 142 | |
| 170 | |
| — | |
Property accounting fee (5) | | | 303 | | | — | | | 303 | | | — | | | 303 | | | — | |
DST Program selling commissions, dealer manager and distribution fees (1) | |
| 5,660 | |
| 1,921 | |
| 13,184 | |
| 3,316 | |
| 268 | |
| 219 | |
Other DST Program related costs—Advisor (4) | |
| 3,478 | |
| 1,249 | |
| 8,400 | |
| 2,268 | |
| 143 | |
| 87 | |
Total | | $ | 30,029 | | $ | 14,665 | | $ | 66,347 | | $ | 27,760 | | $ | 30,535 | | $ | 19,564 | |
(1) | All or a portion of these amounts will be retained by, or reallowed (paid) to, participating broker-dealers and servicing broker-dealers. |
(2) | The distribution fees are payable monthly in arrears. Additionally, we accrue for future estimated amounts payable related to ongoing distribution fees. The future estimated amounts payable of approximately $46.0 million and $34.1 million as of June 30, 2022 and December 31, 2021, respectively, are included in other liabilities on the consolidated balance sheets. |
(3) | Other expense reimbursements include certain expenses incurred for organization and offering, acquisition and general administrative services provided to us under the advisory agreement, including, but not limited to, certain expenses described after this footnote, allocated rent paid to both third parties and affiliates of our Advisor, equipment, utilities, insurance, travel and entertainment. |
(4) | Includes costs reimbursed to the Advisor related to the DST Program. |
(5) | The cost of the property management fee, including the property accounting fee, is generally borne by the tenant or tenants at each real property, either via a direct reimbursement to us or, in the case of tenants subject to a gross lease, as part of the lease cost. In certain circumstances, we may pay for a portion of the property management fee, including the property accounting fee, without reimbursement from the tenant or tenants at a real property. |
Certain of the saleexpense reimbursements described in the table above include a portion of an assetthe compensation expenses of officers and employees of the ability of our Advisor or its affiliates related to share in or earn real estate commissions and separately agreed to pay our Advisor $1.4 million in consideration of disposition services rendered prior to September 1, 2017 andactivities for which the Advisor hasdid not otherwise been paidreceive a fee;separate fee. Amounts incurred related to these compensation expenses for the three months ended June 30, 2022, and
Property-Level Accounting Services. Pursuant to the Advisory Agreement expires on June 30, 2018. Per(2022) effective as of May 1, 2022, we have agreed to pay the Advisory Agreement,Advisor a property accounting fee in considerationconnection with providing services related to accounting for assetreal property operations, including the maintenance of the real property’s books and records in accordance with GAAP and our policies, procedures, and internal controls, in a timely manner, and the processing of real property-related cash receipts and disbursements. The property accounting fee is equal to the difference between: (i) the property management fee charged with respect to each real property, which reflects the market rate for all real property management services, performed, we payincluding property-level accounting services, based on rates charged for similar properties within the region or market in which the real property is located, and (ii) the amount paid to third-party property management firms for property management services, which fee is based on an arm’s length negotiation with a third party property management service provider (the difference between (i) and (ii), the “property accounting fee”).
Performance Participation Allocation
As used below, “Fund Interests” means our outstanding shares of common stock, along with OP Units, which may be or were held directly or indirectly by the Advisor, an advisory fee comprisedthe Former Sponsor, members or affiliates of two separate components: (1)the Former Sponsor, and third parties.
20
The performance participation allocation is a fixedperformance-based amount that accrues
The allocation of the performance componentparticipation interest is ultimately determined at the end of each calendar year and will be paid in Class I OP units or cash, at the election of the advisory fee. The loss carryforward is zeroAdvisor. As the performance hurdle was achieved as of Septemberboth June 30, 2017.2022 and 2021, we recognized approximately $6.2 million and $2.2 million for the three months ended June 30, 2022 and 2021, respectively, and $18.4 million and $4.0 million for the six months ended June 30, 2022 and 2021, respectively, of performance participation allocation expense in our condensed consolidated statements of operations.
11. NET INCOME (LOSS) PER COMMON SHARE
The computation of our basic and diluted net income (loss) per share attributable to common stockholders is as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | For the Three Months Ended June 30, | | For the Six Months Ended June 30, | | ||||||||
(in thousands, except per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Net (loss) income attributable to common stockholders—basic | | $ | (5,588) | | $ | (8,583) | | $ | 15,423 | | $ | 8,982 | |
Net (loss) income attributable to redeemable noncontrolling interests | | | (60) | | | (64) | | | 186 | | | 70 | |
Net (loss) income attributable to noncontrolling interests | |
| (919) | |
| (923) | |
| 2,618 | �� |
| 776 | |
Net (loss) income attributable to common stockholders—diluted | | $ | (6,567) | | $ | (9,570) | | $ | 18,227 | | $ | 9,828 | |
Weighted-average shares outstanding—basic | |
| 191,158 | |
| 150,126 | |
| 184,878 | |
| 148,005 | |
Incremental weighted-average shares effect of conversion of noncontrolling interests | |
| 33,699 | |
| 17,261 | |
| 32,928 | |
| 16,250 | |
Weighted-average shares outstanding—diluted | |
| 224,857 | |
| 167,387 | |
| 217,806 | |
| 164,255 | |
Net (loss) income per share attributable to common stockholders: | |
|
| |
|
| |
|
| |
|
| |
Basic | | $ | (0.03) | | $ | (0.06) | | $ | 0.08 | | $ | 0.06 | |
Diluted | | $ | (0.03) | | $ | (0.06) | | $ | 0.08 | | $ | 0.06 | |
12. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information and disclosure of non-cash investing and financing activities is as follows:
| | | | | | |
| | For the Six Months Ended | ||||
| | June 30, | ||||
(in thousands) | | 2022 | | 2021 | ||
Distributions reinvested in common stock | | $ | 13,922 | | $ | 11,105 |
Change in accrued future ongoing distribution fees | | | 11,908 | | | 6,158 |
Net increase in DST Program Loans receivable through DST Program capital raising | |
| 28,032 | |
| 11,756 |
Settlement of DST Program Loans through issuance of OP Units | | | 3,299 | | | 209 |
Redeemable noncontrolling interest issued as settlement of performance participation allocation | | | 15,327 | | | 4,608 |
Issuances of OP Units for DST Interests | |
| 39,441 | |
| 25,941 |
21
Restricted Cash
Restricted cash consists of its fees generally equal tolender and property-related escrow accounts. The following table presents the amountcomponents of the performance component that would have been payable with respect tobeginning of period and end of period cash, cash equivalents and restricted cash reported within the Class E sharescondensed consolidated statements of cash flows:
| | | | | | | |
| | For the Six Months Ended | | ||||
| | June 30, | | ||||
(in thousands) |
| 2022 |
| 2021 | | ||
Beginning of period: | | | | | | | |
Cash and cash equivalents | | $ | 10,605 | | $ | 11,266 | |
Restricted cash | |
| 3,747 | |
| 10,468 | |
Cash, cash equivalents and restricted cash | | $ | 14,352 | | $ | 21,734 | |
End of period: | | | | | | | |
Cash and cash equivalents | | $ | 19,529 | | $ | 11,784 | |
Restricted cash | |
| 4,909 | |
| 10,564 | |
Cash, cash equivalents and restricted cash | | $ | 24,438 | | $ | 22,348 | |
13. COMMITMENTS AND CONTINGENCIES
Litigation
We and the Series 1 Class E OP Units heldOperating Partnership are not presently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us or our investments.
Environmental Matters
A majority of the properties we acquire are subject to environmental reviews either by third parties untilus or the NAV of such shares or units exceeds $10.00 per share or unit, the benefit of which will be shared among all holders of Fund Interests.
14. SEGMENT FINANCIAL INFORMATION
Our 4 reportable segments are office, retail, residential and industrial. Factors used to determine our reportable segments include the physical and economic characteristics of our properties and the related operating activities. Our chief operating decision makers rely on net operating income, among other factors, to make decisions about allocating resources and assessing segment performance. Net operating income is not limitedthe key performance metric that captures the unique operating characteristics of each segment. Net investment in real estate properties, restricted cash, tenant receivables, straight-line rent receivables, and other assets directly assignable to a property are allocated to the Advisor's rent, utilitiessegment groupings. Corporate items that are not directly assignable to a property, such as investment in unconsolidated joint venture partnerships, debt-related investments and personnel costs.
Award | Grant Date | Vesting Dates | Number of Unvested Shares | Grant Date NAV per Class I Share | |||||||
Company RSU | 2/25/2015 | 4/13/2018 | 66 | $ | 7.18 | ||||||
Company RSU | 2/4/2016 | 4/15/2019 | 57 | 7.41 | |||||||
Total/ weighted average | 123 | $ | 7.29 |
The following table summarizes fees and other amounts earnedreflects our total consolidated assets by our Advisor and its related parties in connection with services performed for us during the three and nine months ended September 30, 2017 and 2016 (amounts in thousands, except footnoted information):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Advisory fees (1) | $ | 3,274 | $ | 3,681 | $ | 10,215 | $ | 11,118 | |||||||
Other reimbursements paid to our Advisor (2) | 2,203 | 1,928 | 6,507 | 6,232 | |||||||||||
Other reimbursements paid to our Dealer Manager | 151 | 155 | 489 | 237 | |||||||||||
Advisory fees related to the disposition of real properties (3) | 1,477 | 271 | 1,763 | 2,078 | |||||||||||
Development management fee (4) | — | — | — | 31 | |||||||||||
Primary dealer fee (5) | — | — | — | 1,697 | |||||||||||
Selling commissions | 4 | 7 | 29 | 73 | |||||||||||
Dealer manager fees | 79 | 99 | 306 | 274 | |||||||||||
Distribution fees | 27 | 18 | 65 | 52 | |||||||||||
Total | $ | 7,215 | $ | 6,159 | $ | 19,374 | $ | 21,792 |
| | | | | | |
| | As of | ||||
(in thousands) |
| June 30, 2022 | | December 31, 2021 (1) | ||
Assets: | | | | | | |
Office properties | | $ | 365,378 | | $ | 335,811 |
Retail properties | |
| 558,072 | |
| 639,584 |
Residential properties | |
| 1,514,570 | |
| 837,491 |
Industrial properties | |
| 1,277,062 | |
| 826,353 |
Corporate | |
| 326,981 | |
| 351,732 |
Total assets | | $ | 4,042,063 | | $ | 2,990,971 |
22
(1) | As of December 31, 2021, amounts held for sale are included in the corporate grouping. Refer to “Note 3” for further detail. |
The following table sets forth consolidated financial results by segment for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016 are described in the following table (amounts in thousands, except per share information):
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
Numerator | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net (loss) income | $ | (2,145 | ) | $ | 3,318 | $ | 8,097 | $ | 51,690 | ||||||
Net loss (income) attributable to noncontrolling interests | 185 | (353 | ) | (1,591 | ) | (4,826 | ) | ||||||||
Net (loss) income attributable to common stockholders | (1,960 | ) | 2,965 | 6,506 | 46,864 | ||||||||||
Dilutive noncontrolling interests share of net (loss) income | (165 | ) | 230 | 526 | 3,639 | ||||||||||
Numerator for diluted earnings per share – adjusted net (loss) income | $ | (2,125 | ) | $ | 3,195 | $ | 7,032 | $ | 50,503 | ||||||
Denominator | |||||||||||||||
Weighted average shares outstanding-basic | 139,925 | 158,688 | 144,998 | 161,274 | |||||||||||
Incremental weighted average shares effect of conversion of OP units | 11,814 | 12,264 | 11,920 | 12,486 | |||||||||||
Weighted average shares outstanding-diluted | 151,739 | 170,952 | 156,918 | 173,760 | |||||||||||
NET (LOSS) INCOME PER COMMON SHARE -BASIC AND DILUTED | $ | (0.01 | ) | $ | 0.02 | $ | 0.04 | $ | 0.29 |
| | | | | | | | | | | | | | | |
(in thousands) |
| Office |
| Retail |
| Residential |
| Industrial |
| Consolidated | |||||
For the Three Months Ended June 30, 2022 | | | | | | | | | | | | | | | |
Rental revenues | | $ | 13,148 | | $ | 16,509 | | $ | 25,824 | | $ | 18,013 | | $ | 73,494 |
Rental expenses |
| | (5,772) |
| | (3,776) |
| | (11,059) |
| | (4,289) |
| | (24,896) |
Net operating income | | $ | 7,376 | | $ | 12,733 | | $ | 14,765 | | $ | 13,724 | | $ | 48,598 |
Real estate-related depreciation and amortization | | $ | 4,243 | | $ | 4,474 | | $ | 16,038 | | $ | 12,148 | | $ | 36,903 |
For the Three Months Ended June 30, 2021 | | | | | | | | | | | | | | | |
Rental revenues | | $ | 15,953 | | $ | 17,010 | | $ | 7,008 | | $ | 8,658 | | $ | 48,629 |
Rental expenses | | | (7,496) |
| | (4,292) |
| | (3,167) |
| | (1,959) | | | (16,914) |
Net operating income | | $ | 8,457 | | $ | 12,718 | | $ | 3,841 | | $ | 6,699 | | $ | 31,715 |
Real estate-related depreciation and amortization | | $ | 5,000 | | $ | 4,482 | | $ | 2,589 | | $ | 5,103 | | $ | 17,174 |
For the Six Months Ended June 30, 2022 | | | | | | | | | | | | | | | |
Rental revenues | | $ | 26,780 | | $ | 33,576 | | $ | 42,178 | | $ | 33,465 | | $ | 135,999 |
Rental expenses |
| | (11,963) |
| | (8,405) |
| | (18,004) |
| | (7,838) |
| | (46,210) |
Net operating income | | $ | 14,817 | | $ | 25,171 | | $ | 24,174 | | $ | 25,627 | | $ | 89,789 |
Real estate-related depreciation and amortization | | $ | 8,240 | | $ | 9,128 | | $ | 24,392 | | $ | 22,594 | | $ | 64,354 |
For the Six Months Ended June 30, 2021 | | | | | | | | | | | | | | | |
Rental revenues | | $ | 32,776 | | $ | 34,921 | | $ | 13,648 | | $ | 17,716 | | $ | 99,061 |
Rental expenses | | | (15,005) |
| | (9,194) |
| | (6,409) |
| | (3,868) | | | (34,476) |
Net operating income | | $ | 17,771 | | $ | 25,727 | | $ | 7,239 | | $ | 13,848 | | $ | 64,585 |
Real estate-related depreciation and amortization | | $ | 9,869 | | $ | 9,109 | | $ | 5,329 | | $ | 9,600 | | $ | 33,907 |
We have three reportable operating segments, which include our three real property operating sectors (office, industrial, and retail), and we measure our profit and loss of our operating segments based onconsider net operating income (“NOI”). We organize and analyze the operations and results of each of these segments independently, due to inherently different considerations for each segment. Such considerations include, but are not limited to, the nature and characteristics of the investment, investment strategies and objectives. Specifically, the physical characteristics of our buildings, the related operating characteristics, the geographic markets, and the type of tenants are inherently different for each of our segments. The following tables set forth revenue and the components of NOI of our segments for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
For the Three Months Ended September 30, | |||||||||||||||
Revenues | NOI | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Office | $ | 27,099 | $ | 31,082 | $ | 15,730 | $ | 20,657 | |||||||
Industrial | 1,538 | 1,449 | 1,194 | 968 | |||||||||||
Retail | 20,841 | 20,727 | 15,038 | 15,196 | |||||||||||
Total | $ | 49,478 | $ | 53,258 | $ | 31,962 | $ | 36,821 |
For the Nine Months Ended September 30, | |||||||||||||||
Revenues | NOI | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Office | $ | 84,163 | $ | 96,034 | $ | 50,253 | $ | 64,785 | |||||||
Industrial | 4,438 | 4,694 | 3,172 | 3,345 | |||||||||||
Retail | 63,421 | 60,776 | 47,077 | 44,986 | |||||||||||
Total | $ | 152,022 | $ | 161,504 | $ | 100,502 | $ | 113,116 |
23
The following table is a reconciliation of our reported net income (loss) income attributable to common stockholders to our NOInet operating income for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016 (amounts2021:
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
(in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Net (loss) income attributable to common stockholders | | $ | (5,588) | | $ | (8,583) | | $ | 15,423 | | $ | 8,982 | |
Debt-related income | |
| (846) | |
| (2,319) | |
| (4,314) | |
| (4,443) | |
Real estate-related depreciation and amortization | |
| 36,903 | |
| 17,174 | |
| 64,354 | |
| 33,907 | |
General and administrative expenses | |
| 2,594 | |
| 2,181 | |
| 4,631 | |
| 4,399 | |
Advisory fees, related party | |
| 8,227 | |
| 5,085 | |
| 15,370 | |
| 9,909 | |
Performance participation allocation | |
| 6,186 | |
| 2,246 | |
| 18,379 | |
| 3,995 | |
Acquisition costs and reimbursements | |
| 1,093 | |
| 346 | |
| 2,722 | |
| 713 | |
Impairment of real estate property | |
| 0 | |
| 0 | |
| 0 | |
| 758 | |
Equity in income from unconsolidated joint venture partnerships | | | (1,718) | | | 0 | | | (708) | | | 0 | |
Other income | | | (1,413) | | | (476) | | | (3,540) | | | (750) | |
Interest expense | |
| 33,774 | |
| 17,048 | |
| 58,184 | |
| 33,611 | |
Gain on sale of real estate property | |
| (29,643) | |
| 0 | |
| (83,524) | |
| (27,342) | |
Gain on extinguishment of debt and financing commitments, net | |
| 8 | |
| 0 | |
| 8 | |
| 0 | |
Net (loss) income attributable to redeemable noncontrolling interests | | | (60) | | | (64) | | | 186 | | | 70 | |
Net (loss) income attributable to noncontrolling interests | |
| (919) | |
| (923) | |
| 2,618 | |
| 776 | |
Net operating income | | $ | 48,598 | | $ | 31,715 | | $ | 89,789 | | $ | 64,585 | |
15. SUBSEQUENT EVENTS
We performed a review of events subsequent to the condensed consolidated balance sheet date through the date the condensed consolidated financial statements were issued and determined that there were no such events requiring recognition or disclosure in thousands):the condensed consolidated financial statements.
24
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net (loss) income attributable to common stockholders | $ | (1,960 | ) | $ | 2,965 | $ | 6,506 | $ | 46,864 | ||||||
Debt-related income | (194 | ) | (235 | ) | (654 | ) | (710 | ) | |||||||
Real estate depreciation and amortization expense | 16,927 | 19,989 | 53,661 | 60,022 | |||||||||||
General and administrative expenses | 2,760 | 2,234 | 7,034 | 7,192 | |||||||||||
Advisory fees, related party | 3,274 | 3,681 | 10,215 | 11,118 | |||||||||||
Acquisition-related expenses | — | 136 | — | 661 | |||||||||||
Impairment of real estate property | — | 2,090 | 1,116 | 2,677 | |||||||||||
Other expense and (income) | 664 | (2,308 | ) | 862 | (2,297 | ) | |||||||||
Interest expense | 11,346 | 10,011 | 31,193 | 31,394 | |||||||||||
Gain on extinguishment of debt and financing commitments | — | — | — | (5,136 | ) | ||||||||||
Gain on sale of real property | (670 | ) | (2,095 | ) | (11,022 | ) | (43,495 | ) | |||||||
Net (loss) income attributable to noncontrolling interests | (185 | ) | 353 | 1,591 | 4,826 | ||||||||||
Net operating income | $ | 31,962 | $ | 36,821 | $ | 100,502 | $ | 113,116 |
As of | |||||||
September 30, 2017 | December 31, 2016 | ||||||
Segment assets: | |||||||
Office | $ | 807,451 | $ | 825,961 | |||
Industrial | 76,065 | 57,651 | |||||
Retail | 808,338 | 827,799 | |||||
Total segment assets, net | 1,691,854 | 1,711,411 | |||||
Non-segment assets: | |||||||
Debt-related investments, net | 11,259 | 15,209 | |||||
Cash and cash equivalents | 5,841 | 13,864 | |||||
Other non-segment assets (1) | 48,817 | 43,244 | |||||
Total assets | $ | 1,757,771 | $ | 1,783,728 |
References to the terms “we,” “our” or “us” refer to Ares Real Estate Income Trust Inc. and its consolidated subsidiaries. The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities“Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange“Exchange Act.” Such forward-looking statements may relate to, without limitation, our future capital expenditures, distributions, acquisitions and acquisitionsdispositions (including the amount and nature thereof), other developmentdevelopments and trends of the real estate industry, business strategies, and the expansion and growth of our operations. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such statements are subject to a number of assumptions, risks and uncertainties thatwhich may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements are generally identifiable by the use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” “project,” “continue,” or the negative of these words, or other similar words or terms. Readers are cautioned not to place undue reliance on these forward-looking statements. Among
Some of the factorsrisks and uncertainties that may cause our actual results, performance or achievements to vary are general economic and business (particularly real estate and capital market) conditions being less favorable than expected,differ materially from those expressed or implied by forward-looking statements include, among others, the following:
● | the impact of macroeconomic trends, such as the unemployment rate, availability of credit, impact of inflation, rising interest rates, the conflict in Ukraine and the COVID-19 pandemic, which may have a negative effect on the following, among other things: |
● | the fundamentals of our business, including overall market occupancy, space utilization for our tenants, who we refer to as customers from time-to-time herein, and rental rates; |
● | the financial condition of our customers, some of which are retail, financial, legal and other professional firms, our lenders, and institutions that hold our cash balances and short-term investments, which may expose us to increased risks of breach or default by these parties; |
● | customers’ ability to pay rent on their leases or our ability to re-lease space that is or becomes vacant; and |
● | the value of our real estate assets, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing secured by our properties or on an unsecured basis; |
● | general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on customers’ financial condition, and competition from other developers, owners and operators of real estate); |
● | our ability to effectively raise and deploy proceeds from our ongoing public offerings; |
● | risks associated with the demand for liquidity under our share redemption program and our ability to meet such demand; |
● | risks associated with the availability and terms of debt and equity financing and the use of debt to fund acquisitions and developments, including the risk associated with interest rates impacting the cost and/or availability of financing; |
● | the business opportunities that may be presented to and pursued by us, changes in laws or regulations (including changes to laws governing the taxation of real estate investment trusts (“REITs”)); |
● | the failure to successfully integrate Black Creek Group into the business, operations and corporate culture of Ares, and to retain Black Creek Group personnel following Ares’ acquisition of Black Creek Group’s U.S. real estate investment advisory and distribution business in July 2021; |
● | conflicts of interest arising out of our relationships with the Sponsor, the Advisor, and their affiliates; |
● | changes in accounting principles, policies and guidelines applicable to REITs; |
● | environmental, regulatory and/or safety requirements; and |
● | the availability and cost of comprehensive insurance, including coverage for terrorist acts. |
25
For a further discussion of these factors and other risk factors, that could lead to actual results materially different from those described in the forward-looking statements, see risk factors contained under (i) the heading "Risk Factors" in Post-Effective Amendment No. 10 to our Registration Statement on Form S-11 (File No. 333-197767), filed with the Securities and Exchange Commission (the "Commission") on September 1, 2017 and available at www.sec.gov, which are incorporated herein by reference and update the risk factors under the same headingPart I, Item 1A, “Risk Factors” in our Annual Report on2021 Form 10-K; and (ii) Part II, Item 1A of this Quarterly Report on Form 10-Q. These new risk factors are equally applicable to all of our current investors, regardless of which class of our common stock they own.
OVERVIEW
General
Ares Real Estate Income Trust Inc. (f/k/a Dividend Capital Diversified Property Fund Inc.) is a Maryland corporationNAV-based perpetual life REIT that was formed on April 11, 2005, to investas a Maryland corporation. We are primarily focused on investing in and operating a diverse portfolio of real property. As of June 30, 2022, our real property portfolio consisted of 90 properties, totaling approximately 18.5 million square feet located in 33 markets throughout the U.S. We also owned 115 properties through our unconsolidated joint venture partnerships as of June 30, 2022. Unless otherwise noted, these unconsolidated properties are excluded from the presentation of our portfolio data herein.
We have operated and real estate related investments. As used herein, “the Company,” “we,” “our” and “us” referelected to Black Creek Diversified Property Fund Inc. and its consolidated subsidiaries and partnerships except where the context otherwise requires.
As a NAV-based perpetual life REIT, we intend to conduct ongoing public primary offerings of our common stock on a perpetual basis. We arealso intend to conduct an externally managed REIT and have no employees. Our day-to-day activities are managed by Black Creek Diversified Total Advisors LLC (f/k/a Dividend Capital Total Advisors LLC) (our “Advisor”), a related party, under the terms and conditions of an advisory agreement (as amended fromongoing distribution reinvestment plan offering for our stockholders to reinvest distributions in our shares. From time to time, we intend to file new registration statements on Form S-11 with the “Advisory Agreement”).
Additionally, we have a program to raise capital through private placement offerings by selling DST Interests. These private placement offerings are exempt from registration requirements pursuant to Section 4(a)(2) of the Securities Act. We anticipate that these interests may serve as replacement properties for investors seeking to complete like-kind exchange transactions under Section 1031 of the Code. Similar to our prior private placement offerings, we expect that the DST Program will give us the opportunity to expand and earnings include rent received from customersdiversify our capital raise strategies by offering what we believe to be an attractive and unique investment product for investors that may be seeking replacement properties to complete like-kind exchange transactions under operating leases at our properties, including reimbursements from customersSection 1031 of the Code. We also offer DST Program Loans to finance a portion of the sale of DST Interests to certain purchasers of the interests in the Delaware statutory trusts to finance no more than 50% of the purchase price payable upon their acquisition of such interests. During the six months ended June 30, 2022, we sold $442.7 million of gross interests related to the DST Program, $28.0 million of which were financed by DST Program Loans. See “Note 6 to the Condensed Consolidated Financial Statements” for certain operating costs. Our primary expenses include rental expenses, depreciation and amortization expenses, general and administrative expenses, advisory fees and interest expenses.
We currently have three business segments, consisting of investmentsoperate in (i)four reportable segments: office, property, (ii) industrial property,retail, residential and (iii) retail property. We may have additional segments in the future to the extent we enter into additional real property sectors, such as multifamily, hospitality, and other real property types. For a discussion of our business segments and the associated revenue and net operating income by segment, see Note 10 to our financial statements included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q. We also have investments in real estate related-debt investments (which we refer to as “debt-related investments”).
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Average | | | | | | | | | |
| | | | | | | | % of Total | | Effective Annual | | | | | | | % of |
| |
($ and square feet in thousands, |
| Number of |
| Number of |
| Rentable |
| Rentable |
| Base Rent per |
| % |
| Aggregate |
| Aggregate | | ||
except for per square foot data) | | Markets (1) | | Real Properties | | Square Feet | | Square Feet |
| Square Foot (2) | | Leased | | Fair Value | | Fair Value | | ||
Office properties |
| 7 |
| 7 | | 1,542 |
| 8.3 | % | $ | 34.06 |
| 75.9 | % | $ | 601,450 |
| 13.1 | % |
Retail properties |
| 8 |
| 19 | | 2,481 |
| 13.4 | |
| 19.25 |
| 95.5 | |
| 755,850 |
| 16.4 | |
Residential properties |
| 8 |
| 14 | | 4,194 |
| 22.7 | |
| 26.08 |
| 94.3 | |
| 1,678,350 |
| 36.4 | |
Industrial properties |
| 28 |
| 50 | | 10,297 |
| 55.6 | |
| 5.78 |
| 99.0 | |
| 1,572,750 |
| 34.1 | |
Total real property portfolio |
| 33 |
| 90 |
| 18,514 |
| 100.0 | % | $ | 13.99 |
| 95.6 | % | $ | 4,608,400 |
| 100.0 | % |
Geographic Markets | Number of Properties | Net Rentable Square Feet | % Leased (1) | Aggregate Fair Value | |||||||||||
Office properties | 13 | 16 | 3,429 | 83.3 | % | $ | 1,190,050 | ||||||||
Industrial properties | 4 | 4 | 1,389 | 88.3 | % | 86,550 | |||||||||
Retail properties | 9 | 33 | 3,751 | 95.7 | % | 1,006,500 | |||||||||
Real properties | 20 (2) | 53 | 8,569 | 89.5 | % | $ | 2,283,100 |
(1) |
(2) | Amount calculated as total annualized base rent, which includes the impact of any contractual tenant concessions (cash basis) per the terms of the lease, divided by total lease square footage as of June 30, 2022. |
We currently focus our investment activities primarily across the major U.S. property sectors (industrial, residential (which includes and/or may target investmentsinclude multi-family and other types of rental housing such as manufactured, student, and single family rental housing), office (which includes and/or may include medical office and life science laboratories) and retail). To a lesser extent, we strategically
26
invest in four primary property categoriesand/or intend to invest in geographies outside of office, industrial, retailthe U.S., which may include Canada, the United Kingdom, Europe and multifamily. Although we may own propertiesother foreign jurisdictions, and in each of these categories, we are not tied to specific allocation targets and we may not always have significant holdings, or any holdings at all, in each category. For example, we do not currently own multifamilyother sectors such as triple net lease, real estate assets, although we intenddebt (which may include mortgages and subordinated interests) and infrastructure, to consider multifamily investment opportunities in the futurecreate a diversified blend of current income and our ownership of industrial real estate assets is less than 5% of our portfolio as of September 30, 2017. From 2013 through 2016, our investment strategy primarily focused on multi-tenant office and necessity-oriented, multi-tenant retail investments located in what we believe are strong markets poised for long-term growth. However, our current,value appreciation. Our near-term investment strategy intendsis likely to prioritize new investments in the industrial and multifamily and de-emphasize investmentsresidential sectors due to relatively attractive fundamental conditions. We also intend to continue to hold an allocation of properties in retail and office. We are currently working on selling certain non-strategicthe office and retail assets. If successful,sectors, the disposition of these assets will help us to increase our allocation to industrial and multifamily real estate assets and our shorter term liquidity. However, there can be no assurance that we will be successful in this investment strategy, including with respect to any particular asset class. To a lesser extent we may invest in other types of real estate including, but not limited to, hospitality, medical offices, student housing and unimproved land. We anticipate that the majority of our real property investments will be made in the United States, although we may also invest in Canada and Mexico, and potentially elsewhere on a limited basis, to the extent that opportunities exist that may help us meet our investment objectives.
Net Asset Value Calculation
Our board of directors, including a majority of our independent directors, has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our NAV. One fundamental elementWith the approval of the valuation process, the valuation of our real property portfolio, is managed by Altus Group U.S., Inc., an independent valuation firm (“the Independent Valuation Firm”) approved by our board of directors, including a majority of our independent directors. All partiesdirectors, we have engaged Altus Group U.S. Inc., a third-party valuation firm, to serve as our independent valuation advisor (“Altus Group” or the “Independent Valuation Advisor”) with respect to helping us administer the valuation and review process for the real properties in our portfolio, providing monthly real property appraisals, reviewing annual third-party real property appraisals, providing monthly valuations of our debt-related assets (excluding DST Program Loans), reviewing the internal valuations of DST Program Loans and debt-related liabilities performed by usour Advisor, providing quarterly valuations of our properties subject to master lease obligations associated with the DST Program, and assisting in the calculationdevelopment and review of our NAV, including the Advisor, are subject to the oversight of our board of directors.valuation procedures. As part of this process, our Advisor reviews the estimates of the values of our real property portfolio, and real estate-related assets, and other assets and liabilities within our portfolio for consistency with our valuation guidelines and the overall reasonableness of the valuation conclusions, and informs our board of directors of its conclusions (as needed, but at least once per year as part of their annual review, described below).conclusions. Although ourthird-party appraisal firms, the Independent Valuation FirmAdvisor, or other pricing sources may consider any comments received from us or our Advisor toor other valuation sources for their individual valuations, the final estimated fair values of our real properties or certain other assets and liabilities are determined by the Independent Valuation FirmAdvisor and the final estimates of fair values of our real estate-related assets, our other assets, and our liabilities are determined by the applicable pricing source (which may, in certain instances be our Advisor or other pricing source. Ouran affiliate of Ares), subject to the oversight of our board of directors. With respect to the valuation of our real properties, the Independent Valuation FirmAdvisor provides our board of directors with periodic valuation reports and is available to meet with our board of directors to review valuation information, as well as our valuation guidelines and the operation and results of the valuation and review process generally. Excluding real properties that are bought or sold during a given calendar year, unconsolidated real properties held through joint ventures or partnerships are valued by a third-party appraiser at least once per calendar year. For valuations during interim periods, either our Advisor will determine the estimated fair value of the real properties owned by unconsolidated affiliates or we will utilize interim valuations determined pursuant to valuation policies and procedures for such joint ventures or partnerships. All parties engaged by us in connection with our valuation procedures, including the Independent Valuation Advisor, ALPS Fund Services Inc. (“ALPS”), and our Advisor, are subject to the oversight of our board of directors. Our board of directors has the right to engage additional valuation firms and pricing sources to review the valuation process or valuations, if deemed appropriate. Every month our senior management team and our Independent Valuation Firm hold an NAV committee meeting to review the prior month’s adjustments to NAV and discuss any possible changes to the NAV policies and procedures which may be recommended to the board of directors. The information reviewed by this committee is summarized for the audit committee. At least once each calendar year our board of directors, including a majority of our independent directors, reviews the appropriateness of our valuation procedures. With respect to the valuation of our properties,procedures with input from the Independent Valuation Firm provides the board of directors with periodic valuation reports.Advisor. From time to time our board of directors, including a majority of our independent directors, may adopt changes to the valuation procedures if itit: (1) determines that such changes are likely to result in a more accurate reflection of NAV or a more efficient or less costly procedure for the determination of NAV without having a material adverse effect on the accuracy of such determinationdetermination; or (2) otherwise reasonably believes a change is appropriate for the determination of NAV. We will publicly announce material changes to our valuation procedures. See Exhibit 4.4 of this Quarterly Report on Form 10-Q for a more detailed description of our valuation procedures or the identity or role of, including important disclosure regarding real property valuations provided by the Independent Valuation Firm.
As of September 30, 2017 | As of June 30, 2017 (1) | |||||||
Office properties | $ | 1,190,050 | $ | 1,187,550 | ||||
Industrial properties | 86,550 | 54,850 | ||||||
Retail properties | 1,006,500 | 1,007,600 | ||||||
Real properties | $ | 2,283,100 | $ | 2,250,000 | ||||
Cash and other assets, net of other liabilities | 5,916 | (508 | ) | |||||
Debt obligations | (1,159,579 | ) | (1,111,852 | ) | ||||
Aggregate Fund NAV | $ | 1,129,437 | $ | 1,137,640 | ||||
Total Fund Interests outstanding | 151,550 | 151,738 | ||||||
NAV per Fund Interest | $ | 7.45 | $ | 7.50 |
Our valuation procedures, which address specifically each category of our assets and liabilities and are applied separately from the preparation of our financial statements in accordance with GAAP, involve adjustments from historical cost. There are certain factors which cause NAV to be different from net book valuetotal equity or stockholders’ equity on a GAAP basis. Most significantly, the valuation of our real estate assets, which is the largest component of our NAV calculation, will beis provided to us by the Independent Valuation Firm on a monthly basis.Advisor. For GAAP purposes, these assets are generally recorded at depreciated or amortized cost. In addition, after August 31, 2017, we valued our debt-related investments and real estate-related liabilities in accordance with fair value standards under GAAP. Also for NAV purposes, we mark-to-market our hedging instruments on a frequency that management determines to be practicable under the circumstances. However, our NAV policies and procedures allow for that frequency to change to be more or less frequent. Other examplesAnother example that will cause our NAV to differ from our GAAP net book value includetotal equity or stockholders’ equity is the straight-lining of rent, which results in a receivable for GAAP purposes that is not included in the determination of our NAV. Third party appraisers may valueThe fair values of our individual real estate assets and certain liabilities are determined using appraisal standards that deviate from fair value standardswidely accepted methodologies and, as appropriate, the GAAP principles within the FASB Accounting Standards Codification under GAAP. The use of such appraisal standards may causeTopic 820, Fair Value Measurements and Disclosures and are used by ALPS in calculating our NAV per share. However, our valuation procedures and our NAV are not subject to deviate from GAAP fair value principles.and will not be subject to independent audit. We did not develop our valuation procedures with the intention of complying with fair value concepts under GAAP and, therefore, there could be differences between our fair values and the fair values derived from the principal market or most advantageous market concepts of establishing fair value under GAAP. The aggregate real property valuation of $4.61 billion compares to a GAAP basis of real properties (net of intangible lease liabilities and before accumulated amortization and depreciation) of $4.09 billion, representing a difference of approximately $518.2 million, or 12.7%.
27
As used below, “Fund Interests” means our outstanding shares of common stock, along with OP Units, which may be or were held directly or indirectly by the Advisor, the Former Sponsor, members or affiliates of the Former Sponsor, and third parties, and “Aggregate Fund NAV” means the NAV of all the Fund Interests.
The following table sets forth the components of Aggregate Fund NAV as of June 30, 2022 and December 31, 2021:
| | | | | | | |
|
| As of | |||||
(in thousands) | | June 30, 2022 | | | December 31, 2021 | ||
Investments in office properties | | $ | 601,450 | | | $ | 668,700 |
Investments in retail properties | |
| 755,850 | | |
| 890,700 |
Investments in residential properties | |
| 1,678,350 | | |
| 907,000 |
Investments in industrial properties | |
| 1,572,750 | | |
| 983,700 |
Total investment in real estate properties | | | 4,608,400 | | | | 3,450,100 |
Investment in unconsolidated joint venture partnerships | |
| 117,100 | | |
| 57,425 |
Debt-related investments | |
| 108,782 | | |
| 106,463 |
DST Program Loans | | | 85,344 | | | | 62,123 |
Total investments | | | 4,919,626 | | | | 3,676,111 |
Cash and cash equivalents | |
| 19,529 | | |
| 10,605 |
Restricted cash | |
| 4,909 | | |
| 3,747 |
Other assets | |
| 51,724 | | |
| 53,361 |
Line of credit, term loans and mortgage notes | |
| (1,780,321) | | |
| (1,370,554) |
Financing obligations associated with our DST Program | |
| (1,088,407) | | |
| (682,748) |
Other liabilities | |
| (77,874) | | |
| (53,639) |
Accrued performance participation allocation | | | (18,379) | | | | (15,327) |
Accrued advisory fees | |
| (2,819) | | |
| (2,097) |
Noncontrolling interests in consolidated joint venture partnerships | |
| (1,255) | | |
| (1,176) |
Aggregate Fund NAV | | $ | 2,026,733 | | | $ | 1,618,283 |
Total Fund Interests outstanding | |
| 228,744 | | |
| 197,960 |
The following table sets forth the NAV per Fund Interest as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| Class T |
| Class S |
| Class D |
| Class I |
| Class E |
| OP | ||||||
(in thousands, except per Fund Interest data) | | Total | | Shares | | Shares | | Shares | | Shares | | Shares | | Units | |||||||
Monthly NAV | | $ | 2,026,733 | | $ | 192,016 | | $ | 409,016 | | $ | 70,412 | | $ | 573,626 | | $ | 483,581 | | $ | 298,082 |
Fund Interests outstanding | |
| 228,744 | |
| 21,672 | |
| 46,163 | |
| 7,947 | |
| 64,741 | |
| 54,578 | |
| 33,643 |
NAV Per Fund Interest | | $ | 8.86 | | $ | 8.86 | | $ | 8.86 | | $ | 8.86 | | $ | 8.86 | | $ | 8.86 | | $ | 8.86 |
Under GAAP, we record liabilities for dealer manager andongoing distribution fees that (i) we (i) currently owe Black Creek Capital Markets, LLC (f/k/a Dividend Capital Securities LLC) (our “Dealer Manager”)the Dealer Manager under the terms of our Dealer Managerdealer manager agreement and (ii) for anwe estimate that we may pay to ourthe Dealer Manager in future periods for sharesour Fund Interests. As of our common stock sold pursuantJune 30, 2022, we estimated approximately $46.0 million of ongoing distribution fees were potentially payable to the prior offering, which commenced on July 12, 2012 and terminated on September 15, 2015, and the current follow-on offering, which commenced on September 16, 2015. As of September 30, 2017, we recorded a total liability for dealer manager and distribution fees of approximately $1.9 million, comprised of a $14,000 current payable to our dealer manager and a $1.9 million estimated liability for dealer manager and distributions fees that we may pay to our dealer manager in future periods.Dealer Manager. We do not deduct the $1.9 million liability for estimated future dealer manager and distribution fees in our calculation of NAV since we intend for our NAV to reflect our estimated value on the date that we determine our NAV.
We include no discounts to our NAV for the illiquid nature of our shares, including the limitations on yourour stockholders’ ability to redeem shares under our share redemption program and our ability to suspendmodify or terminatesuspend our share redemption program at any time. Our NAV generally does not consider exit costs (e.g. selling costs and commissions related to the sale of a property) that would likely be incurred if our assets and liabilities were liquidated or sold.sold today. While we may use market pricing concepts to value individual components of our NAV, our per share NAV is not derived from the market pricing information of open-end real estate funds listed on stock exchanges.
Our NAV is not a representation, warranty or guarantee that: (1)(i) we would fully realize our NAV upon a sale of our assets; (2)(ii) shares of our common stock would trade at our per share NAV on a national securities exchange; and (3)(iii) a stockholder would be able to realize the per share NAV if such stockholder attempted to sell his or her shares to a third party.
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The September 30, 2017 valuation forvaluations of our real properties wasas of June 30, 2022, excluding certain newly acquired properties that are currently held at cost which we believe reflects the fair value of such properties, were provided by the Independent Valuation FirmAdvisor in accordance with our valuation procedures and determined starting with the appraised value. The aggregate real property valuation of $2.28 billion compares to a GAAP basis of real properties (before accumulated amortization and depreciation and the impact of intangible lease liabilities) of $2.13 billion, representing an increase of approximately $152.2 million or 7.1%.procedures. Certain key assumptions that were used by ourthe Independent Valuation FirmAdvisor in the discounted cash flow analysis are set forth in the following table based on weighted averagesweighted-averages by property type.
Office | Industrial | Retail | Weighted Average Basis | |||||||||
Exit capitalization rate | 6.46 | % | 7.25 | % | 6.41 | % | 6.47 | % | ||||
Discount rate / internal rate of return ("IRR") | 7.36 | % | 7.79 | % | 7.01 | % | 7.22 | % | ||||
Annual market rent growth rate | 3.15 | % | 2.84 | % | 2.86 | % | 3.01 | % | ||||
Average holding period (years) | 10.1 | 11.1 | 10.1 | 10.1 |
| | | | | | | | | | | |
| | | | | | | | | | Weighted- | |
|
| Office |
| Retail |
| Residential |
| Industrial |
| Average Basis | |
Exit capitalization rate |
| 6.06 | % | 6.24 | % | 4.64 | % | 4.81 | % | 5.16 | % |
Discount rate / internal rate of return |
| 6.60 | % | 6.85 | % | 5.93 | % | 5.82 | % | 6.14 | % |
Average holding period (years) |
| 9.6 |
| 10.0 |
| 10.0 |
| 10.1 |
| 10.0 | |
A change in the exit capitalization and discount rates used would impact the calculation of the value of our real properties.property. For example, assuming all other factors remain constant, the changes listed below would result in the following effects on the value of our real properties, excluding certain newly acquired properties that are currently held at cost which we believe reflects the fair value of such properties:
Input | Hypothetical Change | Office | Industrial | Retail | Weighted Average Values | |||||||||
Exit capitalization rate (weighted average) | 0.25% decrease | 2.69 | % | 2.13 | % | 2.43 | % | 2.55 | % | |||||
0.25% increase | (2.49 | )% | (1.98 | )% | (2.25 | )% | (2.36 | )% | ||||||
Discount rate (weighted average) | 0.25% decrease | 2.04 | % | 2.05 | % | 1.92 | % | 1.99 | % | |||||
0.25% increase | (2.00 | )% | (2.00 | )% | (1.88 | )% | (1.94 | )% |
| | | | | | | | | | | | | |
|
| Hypothetical |
| |
| |
| |
| |
| Weighted- |
|
Input | | Change | | Office | | Retail | | Residential | | Industrial | | Average Values |
|
Exit capitalization rate (weighted-average) |
| 0.25% decrease |
| 3.04 | % | 2.51 | % | 3.82 | % | 3.93 | % | 3.52 | % |
|
| 0.25% increase |
| (2.79) | % | (2.31) | % | (3.43) | % | (3.54) | % | (3.19) | % |
Discount rate (weighted-average) |
| 0.25% decrease |
| 2.05 | % | 1.90 | % | 2.03 | % | 2.11 | % | 2.04 | % |
|
| 0.25% increase |
| (2.00) | % | (1.86) | % | (1.98) | % | (2.06) | % | (1.99) | % |
From September 30, 2017 valuation ofthrough November 30, 2019, we valued our debt obligations wasdebt-related investments and real estate-related liabilities generally in accordance with fair value standards under GAAP. The key assumptionBeginning with our valuation for December 31, 2019, our property-level mortgages and corporate-level credit facilities that are intended to be held to maturity (which for fixed rate debt not subject to interest rate hedges may be the date near maturity at which time the debt will be eligible for prepayment at par for purposes herein), including those subject to interest rate hedges, were valued at par (i.e. at their respective outstanding balances). In addition, because we utilize interest rate hedges to stabilize interest payments (i.e. to fix all-in interest rates through interest rate swaps or to limit interest rate exposure through interest rate caps) on individual loans, each loan and associated interest rate hedge is treated as one financial instrument which is valued at par if intended to be held to maturity. This policy of valuing at par applies regardless of whether any given interest rate hedge is considered as an asset or liability for GAAP purposes. Notwithstanding, if we acquire an investment and assume associated in-place debt from the seller that is above-or below-market, then consistent with how we recognize assumed debt for GAAP purposes when acquiring an asset with pre-existing debt in place, the liabilities used in the discounted cash flow analysis wasdetermination of our NAV will include the market interest rate. Market interest rates relating to the underlyingvalue of such debt obligations are based on unobservable Level 3 inputs, whichmarket value as of the closing date. The associated premium or discount on such debt as of closing that is reflected in our liabilities will then be amortized through loan maturity. Per our valuation policy, the corresponding investment is valued on an unlevered basis for purposes of determining NAV. Accordingly, all else equal, we have determinedwould not recognize an immediate gain or loss to our NAV upon acquisition of an investment whereby we assume associated pre-existing debt that is above- or below-market. As of June 30, 2022, we classified all of our debt as intended to be held to maturity, and our bestliabilities included mark-to-market adjustments for pre-existing debt that we assumed upon acquisition. We currently estimate of current market interest rates of similar instruments. The weighted average market interest rate used in the September 30, 2017 valuation was 3.13%.
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Reconciliation of Stockholders’ Equity and Noncontrolling Interests to NAV
The following table reconciles stockholders’ equity and noncontrolling interests per our condensed consolidated balance sheet to our NAV as of June 30, 2022:
| | | |
(in thousands) | | As of June 30, 2022 | |
Total stockholder's equity | | $ | 772,748 |
Noncontrolling interests | | | 228,185 |
Total equity under GAAP | | | 1,000,933 |
| | | |
Adjustments: | | | |
Accrued distribution fee (1) | | | 45,972 |
Unrealized net real estate, debt and interest rate hedge appreciation (depreciation) (2) | | | 487,465 |
Accumulated depreciation and amortization (3) | | | 477,255 |
Other adjustments (4) | | | 15,108 |
Aggregate Fund NAV | | $ | 2,026,733 |
(1) | Accrued distribution fee represents the accrual for the full cost of the distribution fee for Class T, Class S, and Class D shares. Under GAAP, we accrued the full cost of the distribution fee payable over the life of each share (assuming such share remains outstanding the length of time required to pay the maximum distribution fee) as an offering cost at the time we sold the Class T, Class S, and Class D shares. For purposes of calculating the NAV, we recognize the distribution fee as a reduction of NAV on a monthly basis when such fee is paid and do not deduct the liability for estimated future distribution fees that may become payable after the date as of which our NAV is calculated. |
(2) | Our real estate and real estate-related investments are presented as historical cost in our condensed consolidated financial statements. Additionally, our mortgage notes, term loans and line of credit are presented at their carrying value in our condensed consolidated financial statements. As such, any increases of decreases in the fair market value of our real estate and real estate-related investments or our debt instruments are not included in our GAAP results. For purposes of determining our NAV, our real estate and real estate-related investments and certain of our debt are recorded at fair value. Notwithstanding, our property-level mortgages and corporate-level credit facilities that are intended to be held to maturity, including those subject to interest rates hedges, are valued at par (i.e. at their respective outstanding balances). |
(3) | We depreciate our investments in real estate and amortize certain other assets and liabilities in accordance with GAAP. Such depreciation and amortization is not recorded for purposes of determining our NAV. |
(4) | Includes (i) straight-line rent receivables, which are recorded in accordance with GAAP but not recorded for purposes of determining our NAV (ii) redeemable noncontrolling interests related to our OP Units, which are included in our determination of NAV but not included in total equity, and (iii) other minor adjustments. |
Performance
Our NAV increased from $8.17 per share as of December 31, 2021 to $8.86 per share as of June 30, 2022. The increase in NAV was primarily driven by performance of our real estate portfolio, including the dispositions of one office property, five retail properties, and a retail land parcel for net proceeds of approximately $251.8 million, which resulted in an increase to NAV, as well as the acquisitions of 21 industrial properties, seven residential properties, and one life science property for an aggregate contractual purchase price of $1.2 billion, which have been accretive to portfolio returns. Additionally, strong leasing and above-average market rent growth in the industrial and residential sectors have driven performance.
30
Effective December 31, 2019, our board of directors approved amendments to our valuation procedures which revised the way we value property-level mortgages, corporate-level credit facilities and associated interest rate hedges when loans, including associated interest rate hedges, are intended to be held to maturity, effectively eliminating all mark-to-market adjustments for such loans and hedges from the calculation of our NAV. The following table summarizes the impact of interest rate movements on our share class returns assuming we continued to include the mark-to-market adjustments for all borrowing-related interest rate hedge and debt instruments beginning with the December 31, 2019 NAV:
| | | | | | | | | | | | | |
|
| |
| |
| One-Year |
| |
| |
| Since NAV |
|
| | Trailing | | | | (Trailing | | Three-Year | | Five-Year | | Inception |
|
(as of June 30, 2022) (1) | | Three-Months | | Year-to-Date | | 12-Months) | | Annualized | | Annualized | | Annualized (2) |
|
Class T Share Total Return (with upfront selling commissions and dealer manager fees) (3) | | (0.64) | % | 6.59 | % | 16.00 | % | 9.78 | % | 7.02 | % | 7.27 | % |
Adjusted Class T Share Total Return (with upfront selling commissions and dealer manager fees) (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | 0.14 | % | 9.89 | % | 19.62 | % | 10.59 | % | 7.49 | % | 7.51 | % |
Difference | | (0.78) | % | (3.30) | % | (3.62) | % | (0.81) | % | (0.47) | % | (0.24) | % |
| | | | | | | | | | | | | |
Class T Share Total Return (without upfront selling commissions and dealer manager fees) (3) | | 2.84 | % | 10.32 | % | 20.06 | % | 11.05 | % | 7.67 | % | 7.41 | % |
Adjusted Class T Share Total Return (without upfront selling commissions and dealer manager fees) (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | 3.65 | % | 13.73 | % | 23.81 | % | 11.87 | % | 8.15 | % | 7.65 | % |
Difference | | (0.81) | % | (3.41) | % | (3.75) | % | (0.82) | % | (0.48) | % | (0.24) | % |
| | | | | | | | | | | | | |
Class S Share Total Return (with upfront selling commissions and dealer manager fees) (3) | | (0.64) | % | 6.59 | % | 16.00 | % | 9.78 | % | 7.02 | % | 7.27 | % |
Adjusted Class S Share Total Return (with upfront selling commissions and dealer manager fees) (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | 0.14 | % | 9.89 | % | 19.62 | % | 10.59 | % | 7.49 | % | 7.51 | % |
Difference | | (0.78) | % | (3.30) | % | (3.62) | % | (0.81) | % | (0.47) | % | (0.24) | % |
| | | | | | | | | | | | | |
Class S Share Total Return (without upfront selling commissions and dealer manager fees) (3) | | 2.84 | % | 10.32 | % | 20.06 | % | 11.05 | % | 7.67 | % | 7.41 | % |
Adjusted Class S Share Total Return (without upfront selling commissions and dealer manager fees) (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | 3.65 | % | 13.73 | % | 23.81 | % | 11.87 | % | 8.15 | % | 7.65 | % |
Difference | | (0.81) | % | (3.41) | % | (3.75) | % | (0.82) | % | (0.48) | % | (0.24) | % |
| | | | | | | | | | | | | |
Class D Share Total Return (3) | | 2.99 | % | 10.65 | % | 20.78 | % | 11.72 | % | 8.32 | % | 7.73 | % |
Adjusted Class D Share Total Return (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | 3.80 | % | 14.07 | % | 24.55 | % | 12.54 | % | 8.79 | % | 7.97 | % |
Difference | | (0.81) | % | (3.42) | % | (3.77) | % | (0.82) | % | (0.47) | % | (0.24) | % |
| | | | | | | | | | | | | |
Class I Share Total Return (3) | | 3.05 | % | 10.79 | % | 21.08 | % | 11.99 | % | 8.59 | % | 8.13 | % |
Adjusted Class I Share Total Return (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | 3.87 | % | 14.21 | % | 24.86 | % | 12.82 | % | 9.07 | % | 8.37 | % |
Difference | | (0.82) | % | (3.42) | % | (3.78) | % | (0.83) | % | (0.48) | % | (0.24) | % |
| | | | | | | | | | | | | |
Class E Share Return Total Return (3) | | 3.05 | % | 10.79 | % | 21.08 | % | 11.99 | % | 8.60 | % | 8.18 | % |
Adjusted Class E Share Total Return (continued inclusion of mark-to-market adjustments for borrowing-related interest rate hedge and debt instruments) (4) | | 3.87 | % | 14.21 | % | 24.86 | % | 12.82 | % | 9.08 | % | 8.42 | % |
Difference | | (0.82) | % | (3.42) | % | (3.78) | % | (0.83) | % | (0.48) | % | (0.24) | % |
(1) | Performance is measured by total return, which includes income and appreciation (i.e., distributions and changes in NAV) and is a compound rate of return that assumes reinvestment of all distributions for the respective time period, and excludes upfront selling commissions and dealer manager fees paid by investors, except for returns noted “with upfront selling commissions and dealer manager fees” (“Total Return”). Past performance is not a guarantee of future results. Current performance may be higher or lower than the performance data quoted. |
(2) | NAV inception was September 30, 2012, which is when we first sold shares of our common stock after converting to an NAV-based REIT on July 12, 2012. Investors in our fixed price offerings prior to NAV inception on September 30, 2012 are likely to have a lower return. |
31
(3) | The Total Returns presented are based on actual NAVs at which stockholders transacted, calculated pursuant to our valuation procedures. From NAV inception to November 30, 2019, these NAVs reflected mark-to-market adjustments on our borrowing-related interest rate hedge positions; and from September 1, 2017 to November 30, 2019, these NAVs also reflected mark-to-market adjustments on our borrowing-related debt instruments. Prior to September 1, 2017, our valuation policies dictated marking borrowing-related debt instruments to par except in certain circumstances; therefore, we did not formally track mark-to-market adjustments on our borrowing-related debt instruments during such time. |
(4) | The Adjusted Total Returns presented are based on adjusted NAVs calculated as if we had continued to mark our hedge and debt instruments to market following a policy change to largely exclude borrowing-related interest rate hedge and debt marks to market from our NAV calculations (except in certain circumstances pursuant to our valuation procedures), beginning with our NAV calculated as of December 31, 2019 NAV. Therefore, the NAVs used in the calculation are identical to those presented per Note (3) above from NAV inception through November 30, 2019. The adjusted NAVs include the incremental impacts to advisory fees and performance fees; however, the adjusted NAVs are not assumed to have impacted any share purchase or redemption. For calculation purposes, transactions were assumed to occur at the adjusted NAVs. |
Inflation and Rising Interest Rates
In the United States, inflation is at a 40-year high, and its impact on the U.S. economy and the impact of any measures that may be taken by government officials to curb inflation remain uncertain. Beginning in March of 2022, the United States Federal Reserve began raising the federal funds rate in an effort to curb inflation. As a result, interest rates and costs of borrowing have risen dramatically. The Federal Reserve’s action, coupled with other macroeconomic factors, may trigger a recession in the United States, globally, or both. In addition, periods of excessive or prolonged inflation and rising interest rates may negatively impact our customers’ businesses, resulting in increased vacancy, concessions or bad debt expense, which may adversely and materially affect our net operating income and NAV. These factors may also impact our customers’ ability to pay contractual rent, or where applicable expense reimbursements, requiring us to absorb a larger share of operating expenses. In combination with a potential U.S. and/or global recession, we may also experience a slowdown in the rate of increase in rental rates or a decrease in rental rates over time, which may adversely and materially affect our net operating income and NAV. In addition, rising interest rates may have other detrimental effects on our business. For example, rising interest rates could restrict our liquidity based on certain financial covenant requirements as well as our inability to refinance maturing debt in part or in full as it comes due depending on rates at such time. A rise in interest rates could also increase capitalization rates and make alternative interest bearing and other investments more attractive and, therefore, potentially lower the relative value of our existing real estate investments and our NAV. Finally, the combined impact of increased interest rates and a potential recession could cause prospective investors to become reluctant to purchase our shares or existing investors to redeem their shares, thus curtailing our ability to purchase new accretive, real estate investments that satisfy our investment criteria. We continue to monitor the uncertainty surrounding inflation and rising interest rates and the impact that these factors may have on the U.S. economy and on our business.
Conflict in Ukraine
The conflict between Russia and Ukraine has increased the disruption, instability and volatility in global markets and industries. We do not have any investments in Russia, Belarus or Ukraine. Therefore, to date, we have not been materially impacted by the actions of the Russian government. Market disruptions in a single country could cause a worsening of conditions on a regional and even global level, as economic problems in a single country can significantly impact other markets and economies. While the direct impact on us of Russia's invasion of Ukraine is limited, we are being affected by increases in the price of oil as a result of sanctions on Russia, which contributes to overall inflation and increased costs. The ongoing conflict could cause increased volatility in the economies and financial markets of countries throughout the region, or even globally. We continue to monitor the uncertainty surrounding the extent and duration of this ongoing conflict and the impact that it may have on the global economy and on our business.
Impacts of COVID-19
With respect to COVID-19, we are continuing to assess impacts to our portfolio and commercial real estate more broadly. Our properties have not experienced the same level of stress and valuation declines seen within harder hit sectors in which we are not invested such as hospitality, gaming, senior housing or shopping malls, nor do we have any investments in real estate securities which have experienced significant volatility. As of June 30, 2022, contractual rent collections are consistent with average annual collections prior to the pandemic. In addition, we are pleased to report that our retail portfolio as a whole has remained stable, and many of our customers are successfully supplementing their in-store sales with e-commerce and curbside pick-up.
We remain constant,an active buyer of institutional quality, income-producing and defensive real estate, particularly within the industrial and residential sectors which we believe should provide increased appreciation potential for the fund over time and complement our retail and office investment allocations that provide for higher income potential. Accordingly, during the six months ended June 30, 2022,
32
we directly acquired 21 industrial properties, seven residential properties, and one office property, specifically a life science property, in 2022 for an aggregate contractual purchase price of $1.2 billion.
RESULTS OF OPERATIONS
Summary of 2022 Activities
During the six months ended June 30, 2022, we completed the following activities:
● | We acquired 21 industrial properties, seven residential properties, and one office property, specifically a life science property comprising 5.7 million square feet for an aggregate contractual purchase price of approximately $1.2 billion. |
● | We sold five retail properties, one office property, and a retail land parcel for net proceeds of approximately $251.8 million and recorded a net gain on sale of approximately $83.5 million related to the sale of these properties. |
● | We leased approximately 613,000 square feet of our commercial properties, which included 271,000 square feet of new leases and 342,000 square feet of renewals. Additionally, our residential rent increases on new lease trade outs and renewals averaged 21% and 18%, respectively, during the second quarter of 2022 (excluding residential properties acquired during the second quarter of 2022). We are currently 95.2% occupied (95.6% leased) as of June 30, 2022, as compared to 94.0% occupied (94.6% leased) as of December 31, 2021. |
● | We decreased our leverage ratio from 37.6% as of December 31, 2021, to 36.2% as of June 30, 2022. Our leverage ratio for reporting purposes is calculated as the outstanding principal balance of our borrowings less cash and cash equivalents divided by the fair value of our real property, net investment in unconsolidated joint venture partnerships and debt-related investments not associated with the DST Program (determined in accordance with our valuation procedures). |
● | We raised $230.6 million of gross proceeds from the sale of common stock in our ongoing public primary offerings and $13.9 million from the sale of common stock under our distribution reinvestment plan. Additionally, we raised $442.7 million of gross capital through private placement offerings by selling DST Interests, $28.0 million of which were financed by DST Program Loans. |
● | We redeemed 3.4 million shares of common stock at a weighted-average purchase price of $8.37 per share for an aggregate amount of $28.5 million. |
● | We entered into five interest rate swap agreements with a notional amount of $350.0 million that become effective in July 2022. |
33
Results for the Three and Six Months Ended June 30, 2022 Compared to Prior Periods
The following table summarizes our results of operations for the three months ended June 30, 2022, as compared to the three months ended March 31, 2022 and six months ended June 30, 2022, as compared to the six months ended June 30, 2021. We evaluate the performance of consolidated operating properties we own and manage using a same store analysis because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of any material changes in the composition of the aggregate portfolio on performance measures. We have defined the same store portfolio to include consolidated operating properties owned for the entirety of both the current and prior reporting periods for which the operations had been stabilized. Other operating properties not meeting the same store criteria are reflected in the non-same store portfolio. The same store operating portfolio for the three months ended June 30, 2022 as compared to the three months ended March 31, 2022 presented below includes 62 properties totaling 12.8 million square feet owned as of January 1, 2022, which represented 69.2% of total rentable square feet as of June 30, 2022. The same store operating portfolio for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 presented below includes 46 properties totaling approximately 9.6 million square feet owned as of January 1, 2021, which represented 51.9% of total rentable square feet as of June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
|
| For the Three Months Ended |
| Change |
| For the Six Months Ended |
| Change | | ||||||||||||||
($ in thousands, except per square foot data) |
| June 30, 2022 |
| March 31, 2022 |
| $ |
| % |
| June 30, 2022 |
| June 30, 2021 |
| $ |
| % | | ||||||
Rental revenues: | | |
| | |
| |
|
| |
| | |
| | |
| |
|
| |
| |
Same store properties | | $ | 57,289 | | $ | 56,407 | | $ | 882 | | 1.6 | | $ | 85,012 | | $ | 82,116 | | $ | 2,896 | | 3.5 | % |
Non-same store properties | |
| 16,205 | |
| 6,098 | |
| 10,107 | | NM | |
| 50,987 | |
| 16,945 | |
| 34,042 | | NM | |
Total rental revenues | |
| 73,494 | |
| 62,505 | |
| 10,989 | | 17.6 | |
| 135,999 | |
| 99,061 | |
| 36,938 | | 37.3 | |
Rental expenses: | |
|
| |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
Same store properties | |
| (18,943) | |
| (19,161) | |
| 218 | | 1.1 | |
| (28,685) | |
| (27,654) | |
| (1,031) | | (3.7) | |
Non-same store properties | |
| (5,953) | |
| (2,153) | |
| (3,800) | | NM | |
| (17,525) | |
| (6,822) | |
| (10,703) | | NM | |
Total rental expenses | |
| (24,896) | |
| (21,314) | |
| (3,582) | | (16.8) | |
| (46,210) | |
| (34,476) | |
| (11,734) | | (34.0) | |
Net operating income: | |
|
| |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
Same store properties | |
| 38,346 | |
| 37,246 | |
| 1,100 | | 3.0 | |
| 56,327 | |
| 54,462 | |
| 1,865 | | 3.4 | |
Non-same store properties | |
| 10,252 | |
| 3,945 | |
| 6,307 | | NM | |
| 33,462 | |
| 10,123 | |
| 23,339 | | NM | |
Total net operating income | |
| 48,598 | |
| 41,191 | |
| 7,407 | | 18.0 | |
| 89,789 | |
| 64,585 | |
| 25,204 | | 39.0 | |
Other income and (expenses): | |
|
| |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
Debt-related income | |
| 846 | |
| 3,468 | |
| (2,622) | | (75.6) | |
| 4,314 | |
| 4,443 | |
| (129) | | (2.9) | |
Real estate-related depreciation and amortization | |
| (36,903) | |
| (27,451) | |
| (9,452) | | (34.4) | |
| (64,354) | |
| (33,907) | |
| (30,447) | | (89.8) | |
General and administrative expenses | |
| (2,594) | |
| (2,037) | |
| (557) | | (27.3) | |
| (4,631) | |
| (4,399) | |
| (232) | | (5.3) | |
Advisory fees, related party | |
| (8,227) | |
| (7,144) | |
| (1,083) | | (15.2) | |
| (15,370) | |
| (9,909) | |
| (5,461) | | (55.1) | |
Performance participation allocation | |
| (6,186) | |
| (12,192) | |
| 6,006 | | 49.3 | |
| (18,379) | |
| (3,995) | |
| (14,384) | | NM | |
Acquisition costs and reimbursements | |
| (1,093) | |
| (1,629) | |
| 536 | | 32.9 | |
| (2,722) | |
| (713) | |
| (2,009) | | NM | |
Impairment of real estate property | |
| — | |
| — | |
| — | | — | |
| — | |
| (758) | |
| 758 | | 100.0 | |
Equity in income (loss) from unconsolidated joint venture partnerships | | | 1,718 | | | (1,010) | | | 2,728 | | NM | | | 708 | | | — | | | 708 | | — | |
Interest expense | |
| (33,774) | |
| (24,410) | |
| (9,364) | | (38.4) | |
| (58,184) | |
| (33,611) | |
| (24,573) | | (73.1) | |
Gain on sale of real estate property | |
| 29,643 | |
| 53,881 | |
| (24,238) | | (45.0) | |
| 83,524 | |
| 27,342 | |
| 56,182 | | NM | |
Gain on extinguishment of debt and financing commitments, net | |
| (8) | |
| — | |
| (8) | | (100.0) | |
| (8) | |
| — | |
| (8) | | (100.0) | |
Other income | |
| 1,413 | |
| 2,127 | |
| (714) | | (33.6) | |
| 3,540 | |
| 750 | |
| 2,790 | | NM | |
Total other (expenses) income | |
| (55,165) | |
| (16,397) | |
| (38,768) | | NM | |
| (71,562) | |
| (54,757) | |
| (16,805) | | (30.7) | |
Net income | |
| (6,567) | |
| 24,794 | |
| (31,361) | | NM | |
| 18,227 | |
| 9,828 | |
| 8,399 | | 85.5 | |
Net income attributable to redeemable noncontrolling interests | | | 60 | | | (246) | | | 306 | | NM | | | (186) | | | (70) | | | (116) | | NM | |
Net income attributable to noncontrolling interests | |
| 919 | |
| (3,537) | |
| 4,456 | | NM | |
| (2,618) | |
| (776) | |
| (1,842) | | NM | |
Net income attributable to common stockholders | | $ | (5,588) | | $ | 21,011 | | $ | (26,599) | | NM | | $ | 15,423 | | $ | 8,982 | | $ | 6,441 | | 71.7 | |
Same store supplemental data: | |
|
| |
|
| |
|
| |
| |
|
| |
|
| |
|
| |
| |
Same store average percentage occupied | |
| 93.4 | % |
| 93.6 | % |
|
| |
| |
| 92.8 | % |
| 93.8 | % |
|
| |
| |
Same store average annualized base rent per square foot | | $ | 15.19 | | $ | 14.23 | |
|
| |
| | $ | 14.18 | | $ | 14.44 | |
|
| |
| |
NM = Not meaningful
34
Rental Revenues. Rental revenues are comprised of rental income, straight-line rent, and amortization of above- and below-market lease assets and liabilities. Total rental revenues increased by $11.0 million and $36.9 million for the three and six months ended June 30, 2022, respectively, as compared to the three and six months ended March 31, 2022 and June 30, 2021, respectively. For the three months ended June 30, 2022, same store revenues increased by $0.9 million, as compared to the three months ended March 31, 2022, primarily driven by increased occupancy and rental rates at certain of our residential and industrial properties in 2022. For the six months ended June 30, 2022, same store revenues increased by $2.9 million, as compared to the six months June 30, 2021, primarily driven by increased market rents and reduced rent concessions at the residential properties in the second quarter of 2022. Non-same store revenue increased by $10.1 million and $34.0 million for the three and six months ended June 30, 2022, as compared to the three months and six months ended March 31, 2022 and June 30, 2021, respectively, as a result of net positive acquisition activity, with acquisitions primarily in the industrial and residential segments and dispositions primarily in the office and retail segments.
The following table presents the components of our consolidated rental revenues:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | Change | | | For the Six Months Ended June 30, | | Change | | ||||||||||||||
(in thousands) |
| June 30, 2022 |
| March 31, 2022 |
| $ |
| % | |
| 2022 |
| 2021 |
| $ |
| % | | ||||||
Rental income | | $ | 71,229 | | $ | 60,752 | | $ | 10,477 | | 17.2 | % | | $ | 131,981 | | $ | 95,884 | | $ | 36,097 | | 37.6 | % |
Straight-line rent | |
| 1,240 | |
| 726 | |
| 514 | | 70.8 | | |
| 1,966 | |
| 1,869 | |
| 97 | | 5.2 | |
Amortization of above- and below-market intangibles | |
| 1,025 | |
| 1,027 | |
| (2) | | (0.2) | | |
| 2,052 | |
| 1,308 | |
| 744 | | 56.9 | |
Total rental revenues | | $ | 73,494 | | $ | 62,505 | | $ | 10,989 |
| 17.6 | % | | $ | 135,999 | | $ | 99,061 | | $ | 36,938 |
| 37.3 | % |
Rental Expenses. Rental expenses include certain property operating expenses typically reimbursed by our customers, such as real estate taxes, property insurance, property management fees, repair and maintenance, and include certain non-recoverable expenses, such as consulting services and roof repairs. Total rental expenses for the three and six months ended June 30, 2022 increased by $3.6 million and $11.7 million, as compared to the three and six months ended March 31, 2022 and June 30, 2021, respectively, primarily due to (i) an increase in non-same store rental expenses as a result of our acquisition activity since January 1, 2021, which was partially offset by our disposition activity since January 1, 2021; and (ii) increased real estate tax expense driven by net acquisition activity and operating expenses associated with certain properties.
The following table presents the various components of our rental expenses:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| For the Three Months Ended | | | | | | |
| For the Six Months Ended | | | | | | | ||||||||
| | June 30, | | March 31 | | Change | | | June 30, | | Change | | ||||||||||||
(in thousands) |
| 2022 |
| 2022 |
| $ |
| % | |
| 2022 |
| 2021 |
| $ |
| % | | ||||||
Real estate taxes | | $ | 10,718 | | $ | 8,822 | | $ | 1,896 | | 21.5 | % | | $ | 19,540 | | $ | 14,043 | | $ | 5,497 | | 39.1 | % |
Repairs and maintenance | |
| 5,200 | |
| 4,883 | |
| 317 | | 6.5 | | |
| 10,083 | |
| 9,682 | |
| 401 | | 4.1 | |
Utilities | |
| 2,484 | |
| 2,530 | |
| (46) | | (1.8) | | |
| 5,014 | |
| 3,417 | |
| 1,597 | | 46.7 | |
Property management fees | |
| 1,723 | |
| 1,561 | |
| 162 | | 10.4 | | |
| 3,284 | |
| 2,407 | |
| 877 | | 36.4 | |
Insurance | |
| 1,254 | |
| 958 | |
| 296 | | 30.9 | | |
| 2,212 | |
| 1,121 | |
| 1,091 | | 97.3 | |
Other | |
| 3,517 | |
| 2,560 | |
| 957 | | 37.4 | | |
| 6,077 | |
| 3,806 | |
| 2,271 | | 59.7 | |
Total rental expenses | | $ | 24,896 | | $ | 21,314 | | $ | 3,582 | | 16.8 | % | | $ | 46,210 | | $ | 34,476 | | $ | 11,734 | | 34.0 | % |
Other Income and Expenses. The net amount of other expenses increased by $38.8 million for the three months ended June 30, 2022, as compared to the three months ended March 31, 2022, primarily as a result of (i) a decrease in gain from disposition of $24.2 million (ii) an increase in real estate-related depreciation and amortization of $9.5 million driven by our net acquisition activity; and (iii) an increase in interest expense of $9.4 million driven by higher interest expense on financing obligations associated with an increase in the weighted-average market interest rate ratesale of 0.25% would decreaseinterests related to our DST Program.
The net amount of other expenses increased $16.8 million for the fair valuesix months ended June 30, 2022, as compared to the same period in 2021, primarily as a result of (i) an increase in performance participation allocation of $14.4 million driven by the increased performance of our debtportfolio; (ii) an increase in real estate-related depreciation and amortization of $30.4 million driven by our net acquisition activity and lease termination amortization; and (iii) an increase in interest expense of $24.6 million driven by higher interest expense on financing obligations associated with an increase in the sale of interests related to our DST Program. The increase in these expenses was partially offset by approximately 0.22%.an increase in gain from dispositions of $56.2 million.
Segment Summary for the Three and Six months ended June 30, 2022 Compared to Prior Periods
Our segments are based on our internal reporting of operating results used to assess performance based on the type of our properties. Our markets are aggregated into four reportable segments: office, retail, residential and industrial. These segments are comprised of the markets by which management and its operating teams conduct and monitor business. See “Note 14 to the Condensed
35
Consolidated Financial Statements” for further information on our segments. Management considers rental revenues and net operating income (“NOI”) aggregated by segment to be the appropriate way to analyze performance. See “Additional Measures of Performance” below for detail regarding the use of NOI. The following table sets forthsummarizes certain operating trends in our consolidated same store properties by segment:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | | For the Six Months Ended | | | | | | | ||||||||
| | June 30, | | March 31 | | Change | | | June 30, | | Change | | ||||||||||||
($ in thousands, except per square foot data) | | 2022 |
| 2022 |
| | $ |
| % | | | 2022 |
| 2021 |
| $ |
| % | | |||||
Rental revenues: | | |
| | |
| | |
| |
| | | |
| | |
| | |
| |
| |
Office | | $ | 12,508 | | $ | 12,771 | | $ | (263) | | (2.1) | % | | $ | 25,278 | | $ | 25,029 | | $ | 249 | | 1.0 | % |
Retail | |
| 15,060 | |
| 14,970 | |
| 90 | | 0.6 | | |
| 27,413 | |
| 26,758 | |
| 655 | | 2.4 | |
Residential | |
| 15,673 | |
| 14,811 | |
| 862 | | 5.8 | | |
| 15,810 | |
| 13,648 | |
| 2,162 | | 15.8 | |
Industrial | |
| 14,048 | |
| 13,855 | |
| 193 | | 1.4 | | |
| 16,511 | |
| 16,681 | |
| (170) | | (1.0) | |
Total same store rental revenues | |
| 57,289 | |
| 56,407 | |
| 882 | | 1.6 | | |
| 85,012 | |
| 82,116 | |
| 2,896 | | 3.5 | |
Non-same store properties | |
| 16,205 | |
| 6,098 | |
| 10,107 | | NM | | |
| 50,987 | |
| 16,945 | |
| 34,042 | | NM | |
Total rental revenues | | $ | 73,494 | | $ | 62,505 | | $ | 10,989 | | 17.6 | % | | $ | 135,999 | | $ | 99,061 | | $ | 36,938 | | 37.3 | % |
NOI: | |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
| |
Office | | $ | 7,014 | | $ | 7,118 | | $ | (104) | | (1.5) | % | | $ | 14,132 | | $ | 14,292 | | $ | (160) | | (1.1) | % |
Retail | |
| 11,528 | |
| 10,995 | |
| 533 | | 4.8 | | |
| 20,497 | |
| 19,987 | |
| 510 | | 2.6 | |
Residential | |
| 9,131 | |
| 8,433 | |
| 698 | | 8.3 | | |
| 9,180 | |
| 7,239 | |
| 1,941 | | 26.8 | |
Industrial | |
| 10,673 | |
| 10,700 | |
| (27) | | (0.3) | | |
| 12,518 | |
| 12,944 | |
| (426) | | (3.3) | |
Total same store NOI | |
| 38,346 | |
| 37,246 | |
| 1,100 | | 3.0 | | |
| 56,327 | |
| 54,462 | |
| 1,865 | | 3.4 | |
Non-same store properties | |
| 10,252 | |
| 3,945 | |
| 6,307 | | NM | | |
| 33,462 | |
| 10,123 | |
| 23,339 | | NM | |
Total NOI | | $ | 48,598 | | $ | 41,191 | | $ | 7,407 | | 18.0 | % | | $ | 89,789 | | $ | 64,585 | | $ | 25,204 | | 39.0 | % |
Same store average percentage occupied: | | | | | | | | | | | | | | | | | | | | | | | | |
Office | |
| 76.1 | % |
| 78.4 | % | | | |
| | |
| 77.2 | % |
| 81.1 | % | |
| |
| |
Retail | |
| 93.3 | |
| 92.5 | | |
| |
| | |
| 93.0 | |
| 92.0 | | |
| |
| |
Residential | |
| 92.2 | |
| 93.0 | | |
| |
| | |
| 95.5 | |
| 94.9 | | |
| |
| |
Industrial | |
| 97.6 | |
| 97.6 | | |
| |
| | |
| 96.8 | |
| 98.2 | | |
| |
| |
Same store average annualized base rent per square foot: | | | | | | | | | | | | | | | | | | | | | | | | |
Office | | $ | 34.67 | | $ | 34.62 | | |
| |
| | | $ | 34.14 | | $ | 34.89 | | |
| |
| |
Retail | |
| 19.25 | |
| 19.25 | | |
| |
| | |
| 20.00 | |
| 20.28 | | |
| |
| |
Residential | |
| 29.36 | |
| 28.19 | | |
| |
| | |
| 22.96 | |
| 23.27 | | |
| |
| |
Industrial | |
| 6.18 | |
| 5.90 | | |
| |
| | |
| 4.58 | |
| 4.85 | | |
| |
| |
NM = Not meaningful
Office Segment. For the quarterly changesthree and six months ended June 30, 2022, our office segment same store NOI decreased by $0.1 million and $0.2 million, respectively, as compared to the componentsthree and six months ended March 31, 2022 and June 30, 2021, respectively, primarily due to reduced termination fee revenue at our Bala Pointe property, which was partially offset by increased parking and administration fee revenue and decreased operating expenses at our 3 Second Street property.
Retail Segment. For the three and six months ended June 30, 2022, our retail segment same store NOI increased by $0.5 million and $0.5 million as compared to the three and six months ended March 31, 2022 and June 30, 2021, respectively, primarily due to decreased bad debt expense for one tenant at our Suniland Shopping Center property in the second quarter of NAV for2022, as well as increased occupancy at certain properties during 2022.
Residential Segment. For the Companythree and six months ended June 30, 2022, our residential segment same store NOI increased by $0.7 million and $1.9 million, respectively, as compared to the reconciliation of NAV changes for each class of shares (amounts in thousands, except per share information):
Total | Class E Common Stock | Class T Common Stock | Class S Common Stock | Class D Common Stock | Class I Common Stock | Class E OP Units | |||||||||||||||||||||
NAV as of June 30, 2017 | $ | 1,137,640 | $ | 756,313 | $ | 15,428 | N/A | $ | 18,640 | $ | 258,112 | $ | 89,147 | ||||||||||||||
Fund level changes to NAV | |||||||||||||||||||||||||||
Realized/unrealized losses on net assets | (6,035 | ) | (4,013 | ) | (82 | ) | — | (99 | ) | (1,369 | ) | (472 | ) | ||||||||||||||
Income accrual | 16,173 | 10,768 | 221 | — | 266 | 3,658 | 1,260 | ||||||||||||||||||||
Dividend accrual | (13,546 | ) | (9,097 | ) | (147 | ) | — | (202 | ) | (3,040 | ) | (1,060 | ) | ||||||||||||||
Advisory fee | (3,283 | ) | (2,187 | ) | (45 | ) | — | (54 | ) | (742 | ) | (255 | ) | ||||||||||||||
Performance-based fee | — | — | — | — | — | — | — | ||||||||||||||||||||
Class specific changes to NAV | |||||||||||||||||||||||||||
Dealer Manager fee | (79 | ) | — | (16 | ) | — | (19 | ) | (44 | ) | — | ||||||||||||||||
Distribution fee | (28 | ) | — | (24 | ) | — | (4 | ) | — | — | |||||||||||||||||
NAV as of September 30, 2017 before share/unit sale/redemption activity | $ | 1,130,842 | $ | 751,784 | $ | 15,335 | $ | — | $ | 18,528 | $ | 256,575 | $ | 88,620 | |||||||||||||
Dollar/unit sale/redemption activity | |||||||||||||||||||||||||||
Amount sold | 9,202 | 5,046 | 305 | 125 | 278 | 3,448 | — | ||||||||||||||||||||
Amount redeemed | (10,607 | ) | (2,983 | ) | (47 | ) | — | (113 | ) | (5,783 | ) | (1,681 | ) | ||||||||||||||
NAV as of September 30, 2017 | $ | 1,129,437 | $ | 753,847 | $ | 15,593 | $ | 125 | $ | 18,693 | $ | 254,240 | $ | 86,939 | |||||||||||||
Shares/units outstanding as of June 30, 2017 | 151,738 | 100,877 | 2,058 | N/A | 2,486 | 34,427 | 11,890 | ||||||||||||||||||||
Shares/units sold | 1,229 | 674 | 41 | 17 | 37 | 460 | — | ||||||||||||||||||||
Shares/units redeemed | (1,417 | ) | (398 | ) | (7 | ) | — | (15 | ) | (773 | ) | (224 | ) | ||||||||||||||
Shares/units outstanding as of September 30, 2017 | 151,550 | 101,153 | 2,092 | 17 | 2,508 | 34,114 | 11,666 | ||||||||||||||||||||
NAV per share/unit as of June 30, 2017 | $ | 7.50 | $ | 7.50 | N/A | $ | 7.50 | $ | 7.50 | $ | 7.50 | ||||||||||||||||
Change in NAV per share/unit | (0.05 | ) | (0.05 | ) | N/A | (0.05 | ) | (0.05 | ) | (0.05 | ) | ||||||||||||||||
NAV per share/unit as of September 30, 2017 | $ | 7.45 | $ | 7.45 | $ | 7.45 | $ | 7.45 | $ | 7.45 | $ | 7.45 |
Industrial Segment. For the three months ended June 30, 2022, our industrial segment same store NOI remained consistent as compared to the three months ended March 31, 2022. For the six months ended June 30, 2022, our industrial segment same store NOI decreased by a discussion$0.4 million as compared to the six months ended June 30, 2021, primarily due to reduced occupancy at our Kaiser Business Center property.
36
ADDITIONAL MEASURES OF PERFORMANCE
Net Income and NOI
We define NOI as GAAP rental revenues less GAAP rental expenses. We consider NOI to be a meaningfulan appropriate supplemental performance measure and believe NOI provides useful information to our investors regarding our results of our operating performance. We also use net operating income ("NOI")operations because NOI reflects the specific operating performance of our real properties and excludes certain items that are not considered to be controllable in connection with the management of each property,the properties, such as other-than-temporary impairment, losses related to provisions for losses on debt-related investments, gains or losses on derivatives, acquisition-related expenses, gains or losses on extinguishment of debt and financing commitments, interest income,real estate-related depreciation and amortization, general and administrative expenses, advisory fees, impairment charges, interest expense, gains on sale of properties, other income and expense, gains and losses on the extinguishment of debt and noncontrolling interests. However, NOI should not be viewed as an alternative measure of our operating financial performance as a whole, since it does excludeexcludes such items, thatwhich could materially impact our results of operations. Further, our NOI may not be comparable to that of other real estate companies, as they may use different methodologies for calculating NOI. Therefore, we believe net income (loss), as defined by GAAP, to be the most appropriate measure to evaluate our overall financial performance. We present NOI inRefer to “Results of Operations—Results for the tables below,Three and includeSix Months Ended June 30, 2022 Compared to Prior Periods” above for a reconciliation toof our GAAP net income as defined by GAAP, in Note 10(loss) to our financial statements included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | ||||||||||||||||||||||
Revenue | |||||||||||||||||||||||||||||
Base rental revenue - Same Store Portfolio (1) | $ | 36,297 | $ | 40,874 | $ | (4,577 | ) | -11 | % | $ | 111,485 | $ | 122,402 | $ | (10,917 | ) | -9 | % | |||||||||||
Average % leased | 88 | % | 94 | % | (6 | )% | -6 | % | 89 | % | 94 | % | (5 | )% | -5 | % | |||||||||||||
Other rental revenue - Same Store Portfolio (2) | 11,115 | 10,702 | 413 | 4 | % | 34,547 | 31,885 | 2,662 | 8 | % | |||||||||||||||||||
Total rental revenue - Same Store Portfolio | 47,412 | 51,576 | (4,164 | ) | -8 | % | 146,032 | 154,287 | (8,255 | ) | -5 | % | |||||||||||||||||
Rental revenue - Non-Same Store Portfolio | 2,066 | 1,682 | 384 | 23 | % | 5,990 | 7,217 | (1,227 | ) | -17 | % | ||||||||||||||||||
Total rental revenue | $ | 49,478 | $ | 53,258 | $ | (3,780 | ) | -7 | % | $ | 152,022 | $ | 161,504 | $ | (9,482 | ) | -6 | % | |||||||||||
Rental Expenses | |||||||||||||||||||||||||||||
Same Store Portfolio | $ | 16,886 | $ | 15,942 | $ | 944 | 6 | % | $ | 49,483 | $ | 46,190 | $ | 3,293 | 7 | % | |||||||||||||
Non-Same Store Portfolio | 630 | 495 | 135 | 27 | % | 2,037 | 2,198 | (161 | ) | -7 | % | ||||||||||||||||||
Total rental expenses | $ | 17,516 | $ | 16,437 | $ | 1,079 | 7 | % | $ | 51,520 | $ | 48,388 | $ | 3,132 | 6 | % | |||||||||||||
Net Operating Income | |||||||||||||||||||||||||||||
Real property - Same Store Portfolio (2) | $ | 30,526 | $ | 35,634 | $ | (5,108 | ) | -14 | % | $ | 96,549 | $ | 108,097 | $ | (11,548 | ) | -11 | % | |||||||||||
Real property - Non-Same Store Portfolio | 1,436 | 1,187 | 249 | 21 | % | 3,953 | 5,019 | (1,066 | ) | -21 | % | ||||||||||||||||||
Total net operating income (3) | $ | 31,962 | $ | 36,821 | $ | (4,859 | ) | -13 | % | $ | 100,502 | $ | 113,116 | $ | (12,614 | ) | -11 | % |
Same Store Portfolio | Base Rent for the Three Months Ended September 30, | Average % Leased for the Three Months Ended September 30, | Annualized Base Rent per Square Foot for the Three Months Ended September 30 (1), | |||||||||||||||||||||||
2017 | 2016 | $ Change | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
Office | $ | 20,779 | $ | 25,407 | $ | (4,628 | ) | 81.5 | % | 95.6 | % | $ | 29.75 | $ | 30.99 | |||||||||||
Industrial | 870 | 847 | 23 | 84.5 | % | 84.5 | % | 3.94 | 3.84 | |||||||||||||||||
Retail | 14,648 | 14,620 | 28 | 95.7 | % | 95.8 | % | 16.69 | 16.65 | |||||||||||||||||
Total base rental revenue - same store | $ | 36,297 | $ | 40,874 | $ | (4,577 | ) | 88.3 | % | 94.3 | % | $ | 20.20 | $ | 21.30 |
Same Store Portfolio | Base Rent For the Nine Months Ended September 30, | Average % Leased For the Nine Months Ended September 30, | Annualized Base Rent per Square Foot for the Six Months Ended September 30 (1), | |||||||||||||||||||||||
2017 | 2016 | $ Change | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||
Office | $ | 64,447 | $ | 75,704 | $ | (11,257 | ) | 84.5 | % | 95.8 | % | $ | 29.65 | $ | 30.72 | |||||||||||
Industrial | 2,590 | 2,522 | 68 | 84.5 | % | 84.5 | % | 3.91 | 3.81 | |||||||||||||||||
Retail | 44,448 | 44,176 | 272 | 94.9 | % | 95.0 | % | 17.02 | 16.90 | |||||||||||||||||
Total base rental revenue - same store | $ | 111,485 | $ | 122,402 | $ | (10,917 | ) | 89.2 | % | 94.0 | % | $ | 20.46 | $ | 21.32 |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2017 | 2016 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | ||||||||||||||||||||||
Real estate taxes | $ | 6,854 | $ | 6,249 | $ | 605 | 9.7 | % | $ | 20,325 | $ | 18,038 | $ | 2,287 | 12.7 | % | |||||||||||||
Repairs and maintenance | 4,456 | 4,638 | (182 | ) | (3.9 | )% | 14,104 | 13,212 | 892 | 6.8 | % | ||||||||||||||||||
Utilities | 2,100 | 2,281 | (181 | ) | (7.9 | )% | 5,871 | 6,207 | (336 | ) | (5.4 | )% | |||||||||||||||||
Property management fees | 1,177 | 1,169 | 8 | 0.7 | % | 3,592 | 3,543 | 49 | 1.4 | % | |||||||||||||||||||
Insurance | 362 | 350 | 12 | 3.4 | % | 1,077 | 985 | 92 | 9.3 | % | |||||||||||||||||||
Other | 1,937 | 1,255 | 682 | 54.3 | % | 4,514 | 4,205 | 309 | 7.3 | % | |||||||||||||||||||
Total same store rental expense | $ | 16,886 | $ | 15,942 | $ | 944 | 5.9 | % | $ | 49,483 | $ | 46,190 | $ | 3,293 | 7.1 | % |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
Debt Obligation | 2017 | 2016 | 2017 | 2016 | |||||||||||
Mortgage notes | $ | 4,239 | $ | 5,702 | $ | 11,362 | $ | 18,812 | |||||||
Unsecured borrowings | 7,040 | 4,290 | 19,667 | 12,559 | |||||||||||
Financing obligations | 67 | 19 | 164 | 23 | |||||||||||
Total interest expense | $ | 11,346 | $ | 10,011 | $ | 31,193 | $ | 31,394 |
Funds From Operations
We believe that FFO, in addition to net income (loss) and cash flows from operating activities as defined by GAAP, are useful supplemental performance measures that our management uses to evaluate our consolidated operating performance. However, this supplemental, non-GAAP measure should not be considered as an alternative to net income (loss) or to cash flows from operating activities as an indication of our performance and is not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs, including our ability to make distributions to our stockholders. No single measure can provide users of financial information with sufficient information and only our disclosures read as a whole can be relied upon to adequately portray our financial position, liquidity, and results of operations. In addition, other REITs may define FFO and similar measures differently and choose to treat certain accounting line items in a manner different from us due to specific differences in investment and operating strategy or for other reasons.
FFO. As defined by the National Association of Real Estate Investment Trusts (“NAREIT”), FFO is a non-GAAP measure that excludes certain items such as real estate-related depreciation and amortization. We believe FFO is a meaningful supplemental measure of our operating performance that is useful to investors because historical cost accounting for real estate assetsdepreciation and amortization in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation and amortization expense. However, since real estate values have historically risentime. By excluding gains or fallen with market and other conditions, many industry investors and analysts have considered presentationlosses on the sale of operating results for real estate companies that use historical cost accounting to be insufficient. Thus, NAREIT createdassets, we believe FFO asprovides a supplementalhelpful additional measure of our consolidated operating performance for real estate investment trusts that consists of net income (loss), calculated in accordance with GAAP, plus real estate-related depreciation and amortization and impairment of depreciable real estate, less gains (or losses) from dispositions of real estate held for investment purposes.
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Reconciliation of net earnings to FFO: | |||||||||||||||
Net (loss) income attributable to common stockholders | $ | (1,960 | ) | $ | 2,965 | $ | 6,506 | $ | 46,864 | ||||||
Add (deduct) NAREIT-defined adjustments: | |||||||||||||||
Depreciation and amortization expense | 16,927 | 19,989 | 53,661 | 60,022 | |||||||||||
Gain on sale of real property | (670 | ) | (2,095 | ) | (11,022 | ) | (43,495 | ) | |||||||
Impairment of real estate property | — | 2,090 | 1,116 | 2,677 | |||||||||||
Noncontrolling interests’ share of net (loss) income | (185 | ) | 353 | 1,591 | 4,826 | ||||||||||
Noncontrolling interests’ share of FFO | (1,081 | ) | (1,719 | ) | (4,018 | ) | (6,298 | ) | |||||||
FFO attributable to common shares-basic | 13,031 | 21,583 | 47,834 | 64,596 | |||||||||||
FFO attributable to dilutive OP Units | 1,100 | 1,668 | 3,923 | 5,002 | |||||||||||
FFO attributable to common shares-diluted | $ | 14,131 | $ | 23,251 | $ | 51,757 | $ | 69,598 | |||||||
FFO per share-basic and diluted | $ | 0.09 | $ | 0.14 | $ | 0.33 | $ | 0.40 | |||||||
Weighted average number of shares outstanding | |||||||||||||||
Basic | 139,925 | 158,688 | 144,998 | 161,274 | |||||||||||
Diluted | 151,739 | 170,952 | 156,918 | 173,760 |
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The following unaudited table presents a complete picturereconciliation of our financial condition and operating performance. We caution investors against using FFO to determine a price to earnings ratio or yield relative to our NAV. We believe thatGAAP net income (loss) computed under GAAP remains theto NAREIT FFO:
| | | | | | | | | | | | | |
|
| For the Three Months Ended |
| For the Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
(in thousands, except per share data) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
GAAP net income (loss) attributable to common stockholders | | $ | (5,588) | | $ | (8,583) | | $ | 15,423 | | $ | 8,982 | |
GAAP net income (loss) per common share—basic and diluted | | $ | (0.03) | | $ | (0.06) | | $ | 0.08 | | $ | 0.06 | |
Reconciliation of GAAP net income (loss) to NAREIT FFO: | |
|
| |
|
| |
|
| |
|
| |
GAAP net income (loss) attributable to common stockholders | | $ | (5,588) | | $ | (8,583) | | $ | 15,423 | | $ | 8,982 | |
Real estate-related depreciation and amortization | |
| 36,903 | |
| 17,174 | |
| 64,354 | |
| 33,907 | |
Impairment of real estate property | |
| — | |
| — | |
| — | |
| 758 | |
Gain on sale of real estate property | |
| (29,643) | |
| — | |
| (83,524) | |
| (27,342) | |
Noncontrolling interests’ share of net income (loss) | |
| (919) | |
| (923) | |
| 2,618 | |
| 776 | |
Redeemable noncontrolling interests' share of net income (loss) | | | (60) | | | (64) | | | 186 | | | 70 | |
Noncontrolling interests’ share of NAREIT FFO | |
| (66) | |
| (736) | |
| 196 | |
| (1,572) | |
Redeemable noncontrolling interests' share of NAREIT FFO | | | (7) | | | (51) | | | 9 | | | (117) | |
NAREIT FFO attributable to common stockholders—basic | |
| 620 | |
| 6,817 | |
| (738) | |
| 15,462 | |
NAREIT FFO attributable to noncontrolling interests | |
| 73 | |
| 787 | |
| (205) | |
| 1,689 | |
NAREIT FFO | | $ | 693 | | $ | 7,604 | | $ | (943) | | $ | 17,151 | |
Weighted-average shares outstanding—basic | |
| 191,158 | |
| 150,126 | |
| 184,878 | |
| 148,005 | |
Weighted-average shares outstanding—diluted | |
| 224,857 | |
| 167,387 | |
| 217,806 | |
| 164,255 | |
NAREIT FFO per common share—basic and diluted | | $ | 0.00 | | $ | 0.05 | | $ | (0.00) | | $ | 0.10 | |
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary measuresources of performance and that FFO is only meaningful when used in conjunction withcapital for meeting our cash requirements include debt financings, cash generated from operating activities, net income (loss) computed under GAAP. Further, we believe that our consolidated financial statements, prepared in accordance with GAAP, provide the most meaningful picture of our financial condition and operating performance.
Our Advisor, subject to the oversight of our board of directors and, under certain circumstances, the investment committee or other committees established by our board of directors, will evaluate potential acquisitions or dispositions and will engage in negotiations with buyers, sellers and lenders on our behalf. Pending investment in property, debt, or other investments, we may decide to temporarily invest any unused proceeds from our public offerings in certain investments that are expected to yield lower returns than those earned on real estate assets. These lower returns may affect our NAV and our ability to make distributions to our stockholders. Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from our public and private offerings, proceeds from the sale of existingassets, and undistributed funds from operations.
As of June 30, 2022, contractual rent collections are consistent with average annual collections prior to the pandemic. We are pleased with these collections given the pandemic’s significant impacts on the broader economy, thus reflecting the relatively defensive nature of our assets.
As of June 30, 2022, our financial position was strong with 36.2% leverage, calculated as outstanding principal balance of our borrowings less cash and cash equivalents divided by the fair value of our real property, net investment in our unconsolidated joint venture partnerships and debt-related investments not associated with the DST Program (determined in accordance with our valuation procedures). In addition, our consolidated portfolio was 95.2% occupied (95.6% leased) as of June 30, 2022 and prospective debt or equity issuances willis diversified across 90 properties totaling 18.5 million square feet across 33 geographic markets. Our properties contain a diverse roster of 395 commercial customers, large and small, and has an allocation based on fair value of real estate properties as determined by our NAV calculation of 34.1% industrial, 36.4% residential, 16.4% retail which is primarily grocery-anchored, and 13.1% office.
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We believe that our cash on-hand, anticipated net offering proceeds, proceeds from our line of credit, and other financing and disposition activities should be sufficient to meet our liquidityanticipated future acquisition, operating, debt service, distribution and capital needsredemption requirements.
Cash Flows. The following table summarizes our cash flows for the foreseeable future,following periods:
| | | | | | | | | | |
|
| For the Six Months Ended June 30, | | | | | ||||
(in thousands) |
| 2022 |
| 2021 |
| $ Change | | |||
Total cash provided by (used in): | | |
| | |
| | |
| |
Operating activities | | $ | 49,620 | | $ | 21,863 | | $ | 27,757 | |
Investing activities | |
| (992,774) | |
| (126,550) | |
| (866,224) | |
Financing activities | |
| 953,240 | |
| 105,301 | |
| 847,939 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | $ | 10,086 | | $ | 614 | | $ | 9,472 | |
Net cash provided by operating activities increased by approximately $27.8 million for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to growth in our property operations as a result of our acquisition activity over the last year.
Net cash used in investing activities increased by approximately $866.2 million for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to (i) an increase in acquisition activity of $1.0 billion; and (ii) investment activity related to our investment in unconsolidated joint venture partnerships for $47.9 million that we entered into in the fourth quarter of 2021. These drivers were partially offset by an increase in net disposition proceeds of $202.9 million.
Net cash provided by financing activities increased by approximately $847.9 million for the six months ended June 30, 2022, compared to the same period in 2021, primarily due to an increase in net offering activity from our DST Program and public offering of $427.2 million and an increase in net borrowing activity of $425.4 million.
Capital Resources and Uses of Liquidity
In addition to our cash and cash equivalents balances available, our capital resources and uses of liquidity are as follows:
Line of Credit and Term Loans. As of June 30, 2022, we had an aggregate of $1.5 billion of commitments under our unsecured credit agreement, including $700.0 million under our line of credit and $800.0 million under our two term loans. As of that date, we had: (i) $383.0 million outstanding under our line of credit; and (ii) $800.0 million outstanding under our term loans. The weighted-average effective interest rate across all of our unsecured borrowings is 3.09%, which includes the effect of the interest rate swap agreements related to $300.0 million in borrowings under our term loans.
As of June 30, 2022, the unused and available portions under our line of credit were $317.0 million and $316.8 million, respectively. Our $700.0 million line of credit matures in November 2025, and may be extended pursuant to two six-month extension options, subject to certain conditions, including the next 12 months.payment of extension fees. One $400.0 million term loan matures in November 2026, with no extension option available. Our capital requirements over the next 12 monthsother $400.0 million term loan matures in January 2027, with no extension option available. Our line of credit borrowings are anticipated to include,available for general corporate purposes, including but are not limited to operating expenses, distributionthe refinancing of other debt, payment of redemptions, acquisition and operation of permitted investments. Refer to “Note 5 to the Condensed Consolidated Financial Statements” for additional information regarding our line of credit and term loans.
In July 2017, the Financial Conduct Authority (“FCA”) that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR in derivatives and other financial contracts. Any changes adopted by the FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments debt servicecould change. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments including debt maturities of approximately $277.4 million, redemption payments, issuer tender offers, and acquisitions of real property and debt-related investments. Borrowings that are subjecthigher or lower than if LIBOR were to extension options are also subjectremain available in its current form.
LIBOR is expected to be phased out or modified by June 2023. As of June 30, 2022, our line of credit, term loans and certain lender covenants and restrictions that we must meetof our mortgage notes have an initial or extended maturity dates beyond 2023 with exposure to extend the initial maturity date. We currently believe that we will qualifyLIBOR. The agreements governing these loans provide procedures for these extension options. However, we cannot guarantee that we will meet the requirements to extend the notes upon initial maturity. Indetermining a replacement or alternative base rate in the event that LIBOR is discontinued. However, there can be no assurances as to whether such replacement or alternative base rate will be more or less favorable than LIBOR. We
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intend to monitor the developments with respect to the phasing out of LIBOR after 2023 and work with our lenders to seek to ensure any transition away from LIBOR will have minimal impact on our financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR.
Mortgage Notes. As of June 30, 2022, we do not qualifyhad property-level borrowings of approximately $588.4 million outstanding with a weighted-average remaining term of approximately 4.8 years. These borrowings are secured by mortgages or deeds of trust and related assignments and security interests in the collateralized properties, and had a weighted-average interest rate of 3.63%. Refer to extend“Note 5 to the notes,Condensed Consolidated Financial Statements” for additional information regarding the mortgage notes.
Debt Covenants. Our line of credit, term loan and mortgage note agreements contain various property-level covenants, including customary affirmative and negative covenants. In addition, our line of credit and term loan agreements contain certain corporate level financial covenants, including leverage ratio, fixed charge coverage ratio, and tangible net worth thresholds. These covenants may limit our ability to incur additional debt, or to pay distributions. We were in compliance with our debt covenants as of June 30, 2022.
Leverage. We use financial leverage to provide additional funds to support our investment activities. We may finance a portion of the purchase price of any real estate asset that we expect to repay themacquire with proceedsborrowings on short or long-term basis from new borrowings or available proceeds from our revolving credit facility.
Offering Proceeds. For the sources and uses of our cash during the ninesix months ended SeptemberJune 30, 2017.
Lease Expirations | ||||||||||||||||
Year (1) | Number of Leases Expiring | Annualized Base Rent (2) | % | Square Feet | % | |||||||||||
2017 (3) | 21 | $ | 9,276 | 5.9 | % | 253 | 3.3 | % | ||||||||
2018 | 95 | 8,590 | 5.5 | % | 361 | 4.7 | % | |||||||||
2019 | 103 | 24,972 | 15.9 | % | 1,114 | 14.6 | % | |||||||||
2020 | 125 | 24,743 | 15.8 | % | 1,115 | 14.6 | % | |||||||||
2021 | 68 | 17,117 | 10.9 | % | 1,279 | 16.8 | % | |||||||||
2022 | 63 | 13,154 | 8.4 | % | 715 | 9.4 | % | |||||||||
2023 | 46 | 20,289 | 12.9 | % | 791 | 10.4 | % | |||||||||
2024 | 27 | 5,432 | 3.5 | % | 336 | 4.4 | % | |||||||||
2025 | 22 | 4,997 | 3.2 | % | 214 | 2.8 | % | |||||||||
2026 | 18 | 3,442 | 2.2 | % | 210 | 2.8 | % | |||||||||
Thereafter | 50 | 24,787 | 15.8 | % | 1,246 | 16.2 | % | |||||||||
Total | 638 | $ | 156,799 | 100.0 | % | 7,634 | 100.0 | % |
Distributions.To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our real estate investment trust taxable income, determined without regard to the deduction for distributions paid and by excluding net capital gains. The payment of distributions is determined by our board of directors and may be adjusted at its discretion at any time. Distribution levels are set by our board of directors at a level it believes to be appropriate and sustainable based upon a review of a variety of factors including the current and anticipated market conditions, current and anticipated future performance and make-up of our investments, our overall financial projections and expected future cash needs. We intend to continue to make distributions on a monthly basis.
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The following table sets forth the amounts andoutlines sources used, as determined on a GAAP basis, to pay total gross distributions (which are paid in cash or reinvested in shares of distributions declaredour common stock through our distribution reinvestment plan) for the three and nine months ended September 30, 2017 and 2016 (dollar amounts in thousands, except footnoted information):
| | | | | | | | | | | | |
| | For the Three Months Ended June 30, 2022 | | | For the Three Months Ended June 30, 2021 | | ||||||
(in thousands) | | Amount | | Percentage | | | Amount | | Percentage | | ||
Distributions | | | | | | | | | | | | |
Paid in cash (1) | | $ | 13,715 | | 65.1 | % | | $ | 9,962 | | 63.5 | % |
Reinvested in shares | | | 7,362 | | 34.9 | | | | 5,723 | | 36.5 | |
Total (2) | | $ | 21,077 | | 100.0 | % | | $ | 15,685 | | 100.0 | % |
Sources of Cash Distributions | |
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| |
| | |
|
| |
| |
Cash flows from operating activities | | $ | 13,715 | | 100.0 | % | | $ | 9,962 | | 100.0 | % |
Borrowings | |
| — | | — | | |
| — | | — | |
Total (2) | | $ | 13,715 | | 100.0 | % | | $ | 9,962 | | 100.0 | % |
| | | | | | | | | | | | |
| | For the Six Months Ended June 30, 2022 | | | For the Six Months Ended June 30, 2021 | | ||||||
(in thousands) | | Amount | | Percentage | | | Amount | | Percentage | | ||
Distributions | | | | | | | | | | | | |
Paid in cash (1) | | $ | 26,600 | | 65.1 | % | | $ | 19,534 | | 63.5 | % |
Reinvested in shares | | | 14,238 | | 34.9 | | | | 11,249 | | 36.5 | |
Total (2) | | $ | 40,838 | | 100.0 | % | | $ | 30,783 | | 100.0 | % |
Sources of Cash Distributions | |
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| |
| | |
|
| |
| |
Cash flows from operating activities | | $ | 26,600 | | 100.0 | % | | $ | 19,534 | | 100.0 | % |
Borrowings | |
| — | | — | | |
| — | | — | |
Total (2) | | $ | 26,600 | | 100.0 | % | | $ | 19,534 | | 100.0 | % |
For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||
Distributions: | September 30, 2017 | % of Total Distributions | September 30, 2016 | % of Total Distributions | September 30, 2017 | % of Total Distributions | September 30, 2016 | % of Total Distributions | |||||||||||||||||||
Common stock distributions paid in cash | $ | 7,549 | 55.2 | % | $ | 8,907 | 57.7 | % | $ | 23,865 | 56.1 | % | $ | 27,747 | 59.0 | % | |||||||||||
Other cash distributions (1) | 1,195 | 8.7 | % | 1,257 | 8.2 | % | 3,745 | 8.8 | % | 3,838 | 8.1 | % | |||||||||||||||
Total cash distributions | $ | 8,744 | 63.9 | % | $ | 10,164 | 65.9 | % | $ | 27,610 | 64.9 | % | $ | 31,585 | 67.1 | % | |||||||||||
Common stock distributions reinvested in common shares | 4,937 | 36.1 | % | 5,264 | 34.1 | % | 14,933 | 35.1 | % | 15,483 | 32.9 | % | |||||||||||||||
Total distributions | $ | 13,681 | 100.0 | % | $ | 15,428 | 100.0 | % | $ | 42,543 | 100.0 | % | $ | 47,068 | 100.0 | % | |||||||||||
Sources of distributions: | |||||||||||||||||||||||||||
Cash flow from operations (2) | $ | 18,237 | 133.3 | % | $ | 24,477 | 158.7 | % | $ | 53,828 | 126.5 | % | $ | 67,838 | 144.1 | % | |||||||||||
Financial performance metric: | |||||||||||||||||||||||||||
NAREIT-defined FFO (3) | $ | 14,131 | 103.3 | % | $ | 23,251 | 150.7 | % | $ | 51,757 | 121.7 | % | $ | 69,598 | 147.9 | % |
(1) |
(2) |
For the three months ended June 30, 2022 and 2021, our FFO was $0.7 million, or 3.3% of our total distributions, and $7.6 million, or 48.5% of our total distributions, respectively. For the six months ended June 30, 2022 and 2021, our FFO was a $0.9 million loss, or 2.3% of our total distributions and $17.2 million, or 55.7% of our total distributions, respectively. FFO is a non-GAAP operating metric and should not be used as a liquidity measure. However, management believes the relationship between FFO and distributions may be meaningful for investors to better understand the sustainability of our operating performance compared to distributions made. Refer to “Additional Measures of Performance” above for the definition of FFO, as well as a detailed reconciliation of our GAAP net income (loss) to FFO.
Redemptions.Below is a summary of (i) Class E common stockredemptions and repurchases pursuant to our self-tender offers, (ii) repurchases pursuant to our Class E Share Redemption Program (which terminated effective September 1, 2017) (the “Class E SRP”), (iii) repurchases pursuant to our Second Amendedshare redemption program for the six months ended June 30, 2022 and Restated Class A, W and I Share Redemption Program (which terminated effective September 1, 2017) (the “Class AWI SRP”) and (iv) repurchases pursuant to2021. Our board of directors may modify or suspend our current share redemption program, adopted September 1, 2017 and amended as of October 13, 2017 (the "New SRP"), for each of the last four quarterly periods (number of shares in thousands). Redemption requests accepted in September 2017 pursuantprograms if it deems such action to our New SRP are considered redeemed on October 1, 2017 and are not includedbe in the table below. Please see "Subsequent Events" included in "Item 2. Management's Discussion and Analysis"best interest of this Quarterly Report on Form 10-Q for additional information regarding redemptions paid subsequentour stockholders. Refer to September 30, 2017.
For the Quarter Ended: | Number of Shares Requested for Redemption or Purchase | Number of Shares Redeemed or Purchased | Percentage of Shares Requested for Redemption Redeemed or for Purchase Purchased | Price Paid per Share | |||||||||
December 31, 2016 | |||||||||||||
Class E SRP – Death or Disability Redemptions | 360 | 360 | 100 | % | $ | 7.48 | |||||||
Self-Tender Offer Purchases (1) | 7,697 | 7,697 | 100 | % | 7.44 | ||||||||
Class AWI SRP | 301 | 301 | 100 | % | 7.47 | ||||||||
Total / Average | 8,358 | 8,358 | 100 | % | 7.44 | ||||||||
March 31, 2017 | |||||||||||||
Class E SRP – Death or Disability Redemptions | 249 | 249 | 100 | % | 7.56 | ||||||||
Self-Tender Offer Purchases (1) | 5,685 | 5,685 | 100 | % | 7.51 | ||||||||
Class AWI SRP | 414 | 414 | 100 | % | 7.55 | ||||||||
Total / Average | 6,348 | 6,348 | 100 | % | 7.51 | ||||||||
June 30, 2017 | |||||||||||||
Class E SRP – Death or Disability Redemptions | 315 | 315 | 100 | % | 7.52 | ||||||||
Self-Tender Offer Purchases (1) | 6,071 | 6,071 | 100 | % | 7.49 | ||||||||
Class AWI SRP | 786 | 786 | 100 | % | 7.51 | ||||||||
Total / Average | 7,172 | 7,172 | 100 | % | 7.49 | ||||||||
September 30, 2017 | |||||||||||||
Class E SRP – Death or Disability Redemptions | 387 | 387 | 100 | % | 7.49 | ||||||||
Class AWI SRP | 805 | 805 | 100 | % | 7.48 | ||||||||
Total / Average | 1,192 | 1,192 | 100 | % | 7.48 | ||||||||
Average | 5,768 | 5,768 | 100 | % | $ | 7.48 |
| | | | | | | |
| | For the Six Months Ended June 30, | |||||
(in thousands, except for per share data) |
| 2022 |
| 2021 | | ||
Number of shares requested for redemption or repurchase | | | 3,408 | | | 4,676 | |
Number of shares redeemed or repurchased |
| | 3,408 |
| | 4,676 | |
% of shares requested that were redeemed or repurchased |
| | 100.0 | % | | 100.0 | % |
Aggregate dollar amount of shares redeemed or repurchased | | $ | 28,500 | | $ | 35,380 | |
Average redemption or repurchase price per share | | $ | 8.37 | | $ | 7.57 | |
For the threesix months ended SeptemberJune 30, 2017.
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SUBSEQUENT EVENTS
See “Note 15 to our New SRP
CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements includedhave been prepared in “Item 1.accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our unaudited condensed consolidated financial statements requires significant management judgments, assumptions, and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the condensed 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 condensed consolidated financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. For a detailed description of our critical accounting estimates, see Item 7, “Management’s Discussion and Analysis of Financial Statements”Condition and Results of this Quarterly Report onOperations” in our 2021 Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We have been and may continue to be exposed to the impact of interest rate changes. Our interest rate risk ismanagement objectives are to limit the adverse effect on the valueimpact of assets and liabilities that results from a change in the applicable market resulting from a variety of factors such as perceived risk, interest rate changes inflationon earnings and cash flows, and optimize overall general economic changes. Accordingly,borrowing costs. To achieve these objectives, we manage our market risk by matching projected cash inflows from operating, investingoften plan to borrow on a fixed interest rate basis for longer-term debt and financing activities with projected cash outflows forutilize interest rate swap and cap agreements on certain variable interest rate debt service, acquisitions, capital expenditures, distributionsin order to stockholders and unit holders, and other cash requirements. Our outstanding borrowings are directly impacted bylimit the effects of changes in market conditions. This impact is largely mitigated byinterest rates on our results of operations. As of June 30, 2022, our debt instruments consisted of borrowings under our line of credit, term loans and mortgage notes.
Fixed Interest Rate Debt. As of June 30, 2022, our fixed interest rate debt consisted of $380.8 million under our mortgage notes and $300.0 million of borrowings under our term loans that were effectively fixed through the fact that the majorityuse of interest rate swaps. In total, our fixed interest rate debt represented 38.4% of our outstandingtotal consolidated debt as of June 30, 2022. When taking into account the five interest rate swap agreements with a notional amount of $350.0 million, which we entered into in June 2022 and have effective dates in July 2022, an additional $350.0 million of our borrowings haveunder our terms loans become effectively fixed, which would bring our total fixed interest rates, which minimizerate debt to 58.2% of our exposure to the risk that fluctuatingtotal consolidated borrowings as of June 30, 2022. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed interest rates may pose to our operating results and liquidity.
Variable Interest Rate Debt.As of SeptemberJune 30, 2017, we had approximately $680.12022, our consolidated variable interest rate debt consisted of $383.0 million of unhedged floating-rate borrowings outstanding indexedunder our line of credit, $500.0 million of borrowings under our term loans and $207.6 million under our mortgage notes, which represented 61.6% of our total consolidated debt. When taking into account the five interest rate swap agreements with a notional amount of $350.0 million, which we entered into in June 2022 and have effective dates in July 2022, an additional $350.0 million of our borrowings under our terms loans become effectively fixed, which would lower our total variable interest rate debt to LIBOR rates. If the LIBOR rates relevant to41.8% of our remaining variable ratetotal consolidated borrowings were to increase 10%, we estimate that our quarterly interest expense would increase by approximately $210,000 based on our outstanding floating-rate debt as of SeptemberJune 30, 2017.
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Derivative Instruments. As of June 30, 2022, we had 14 outstanding and as capital market expectationseffective derivative instruments, with a total notional amount of $507.6 million. In addition, we had five derivative instruments with effective dates in July 2022 and a notional amount of $350.0 million. These derivative instruments were comprised of interest rate swaps and interest rate caps that were designed to mitigate the risk of future interest rates have declined, so haverate increases by either providing a fixed interest rate or capping the valuevariable interest rate for a limited, pre-determined period of time. See “Note 5 to the Condensed Consolidated Financial Statements” for further detail on our derivatives.
Evaluation of Disclosure Controls and Procedures
Under the direction of the end of the period covered by this report, management, including our Chief Executive Officerprincipal executive officer and Chief Financial Officer,principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures.procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2022. Based upon theon this evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer have concluded that, theas of June 30, 2022, our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act, is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have not been noany changes in our internal control over financial reporting that occurred(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our last fiscal quarterthe six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the heading "Risk Factors"other information set forth in Post-Effective Amendment No. 10 to our Registration Statement on Form S-11 (File No. 333-197767), filed with the Commission on September 1, 2017 and available at www.sec.gov, are incorporated herein by reference and updatethis report, you should carefully consider the risk factors discussed in Part I, Item 1A, “Risk Factors” of our 2021 Form 10-K, as supplemented by our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which could materially affect our business, financial condition, and/or future results. The risks described in our 2021 Form 10-K, as supplemented by our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.
With the exception of the risk factors set forth below, which updates and supplements the risk factors disclosed in our 2021 Form 10-K, there have been no material changes to the risk factors disclosed in our 2021 Form 10-K.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
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Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland shall be the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders with respect to our company, our directors, our officers or our employees (we note we currently have no employees). This choice of forum provision does not apply to claims under the same headingSecurities Act, the Exchange Act, any other claim for which the federal courts have exclusive jurisdiction or any action or proceeding against us arising out of, or in connection with, the sale of securities or out of violation of state securities laws. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our Annual Report on Form 10-K. These new risk factors are equally applicabledirectors, officers or employees, which may discourage meritorious claims from being asserted against us and our directors, officers and employees. Alternatively, if a court were to allfind this provision of our current investors, regardlessbylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which classcould adversely affect our business, financial condition or results of operations. We adopted this provision because we believe it makes it less likely that we will be forced to incur the expense of defending duplicative actions in multiple forums and less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements, and we believe the risk of a court declining to enforce this provision is remote, as the General Assembly of Maryland has specifically amended the Maryland General Corporation Law to authorize the adoption of such provisions.
Inflation, increased interest rates or deflation may adversely affect our common stock they own. In addition, the following updates the similar risk factors infinancial condition and results of operations.
Although neither inflation nor deflation has materially impacted our Registration Statement:
In addition, customers and potential customers of our properties may be adversely impacted by inflation and rising interest rates, which included accrued interest but excluded any credit valuation adjustments relatedcould negatively impact our customers’ ability to these agreements, was approximately $1.8 million. If we had breached anypay rent and demand for our properties. Such adverse impacts on our customers may cause increased vacancies, which may add pressure to lower rents and increase our expenditures for re-leasing. Inflation could also have an adverse effect on consumer spending which could impact our customers’ operations and, in turn, demand for our properties. Conversely, deflation could lead to downward pressure on rents and other sources of these provisions at September 30, 2017, we could have been required to settle our obligations under the agreements at their termination value of $1.8 million.
We are exposeddependent on our customers for revenue, and our inability to risks arisinglease our properties or to collect rent from a small number of tenants comprising a significant portion of our income.
Our revenues from our property investments are dependent on our ability to paylease our properties and the creditworthiness of our customers and would be adversely affected by the loss of or default by one or more significant lessees. Furthermore, certain of our assets may utilize leases with payments directly related to customer sales, where some or all of the amount of rent that we charge a customer is calculated as a percentage of such customer’s revenues over a fixed period of time, and a reduction in sales can reduce the amount of the lease payments required to be made to us by customers leasing space in such assets. Much of our
customer base is comprised of non-rated and non-investment grade customers. The success of our properties depends on the financial stability of such customers. The financial results of our customers can depend on several factors, including but not limited to the general business environment, interest rates, inflation, the availability of credit, taxation and overall consumer confidence.
In addition, our ability to increase our revenues and operating income partially depends on steady growth of demand for the products and services offered by the customers located in the assets that we own and manage. A drop in demand, as a result of a slowdown in the U.S. and global economy or otherwise, could result in a reduction in performance of our customers and consequently, adversely affect our results of operations, NAV and returns to our stockholders.
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If indicators of impairment exist in any of our properties, for example, we experience negative operating trends such as prolonged vacancies or operating losses, we may not recover some or all of our investment.
Lease payment defaults by customers could impact operating results, causing us to lower our NAV, reduce the amount of distributions to our stockholders. For additional information regarding thisstockholders, or could force us to find an alternative source of funding to pay any mortgage loan interest or principal, taxes, or other obligations relating to the property. In the event of a customer default, we may also experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property. If a lease expiration, seeis terminated, the value of the property may be immediately and negatively affected and we may be unable to lease the property for the rent previously received or at all or sell the property without incurring a loss.
Some of our discussion under “Item 2. Management’s Discussionproperties may be leased to a single or significant customer and, Analysisaccordingly, may be suited to the particular or unique needs of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operating Activities - Lease Expirations” included in this Quarterly Report on Form 10-Q.
As of June 30, 2022, our top five customers represented 11.4% of our Sponsor (defined below)total annualized base rent of our portfolio, our top ten customers represented 16.7% of our total annualized base rent of our portfolio and there were no customers that individually represented more than 5.0% of our total annualized base rent of our portfolio. Our results of operations are currently substantially dependent on our top customers, and any downturn in their business could have a material adverse effect on operations. In addition, certain of our properties are occupied by a single customer, and as a result, the success of those properties depends on the financial stability of that customer. Adverse impacts to such customers, businesses or operators, including as a result of changes in market or economic conditions, natural disasters, outbreaks of an infectious disease, pandemic or any other serious public health concern, political events or other factors that may impact the operation of these properties, may have negative effects on our business and financial results. As a result, some of our customers have been, and may in the future be, required to suspend operations at our properties for opportunitieswhat could be an extended period of time. Further, if such customers default under their leases, we may not be able to acquire, sellpromptly enter into a new lease or operating arrangement for such properties, rental rates or other terms under any new leases or operating arrangement may be less favorable than the terms of the current lease investments,or operating arrangement or we may be required to make capital improvements to such properties for a new customer, any of which could adversely impact our operating results.
Changes in global, national, regional or local economic, demographic, political, real estate or capital market conditions, including periods of generally deteriorating real estate industry fundamentals, may adversely affect our results of operations and returns to our stockholders.
We are subject to risks generally incident to the ownership of property, including changes in global, national, regional or local economic, demographic, political, real estate, or capital market conditions and other factors particular to the locations of the respective property investments. We are unable to predict future changes in these market conditions. For example, an economic downturn or a rise in interest rates could make it more difficult for us to lease properties or dispose of them and cause rental rates or future contractual rate increases to fall, which may adversely and materially affect our net operating income and NAV. In addition, rising interest rates could also increase capitalization rates and make alternative interest bearing and other investments more attractive and, therefore, potentially lower the relative value of our existing real estate investments and our NAV. These macroeconomic factors may cause investors to become reluctant to purchase our shares or existing investors to redeem their shares, curtailing our ability to purchase new accretive real estate investments that satisfy our investment criteria.
In addition, we believe the risks associated with our business and the value of our properties are more severe during periods of economic slowdown or recession if these periods are accompanied by deteriorating fundamentals and declining values in the real estate industry. Because all of our debt-related investments outstanding as of June 30, 2022 and debt-related investments we may make in the future might consist of mortgages secured by property, these same conditions could also adversely affect the underlying borrowers and collateral of assets that we own. Declining real estate values and deteriorating real estate fundamentals would also likely reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, additional properties. Furthermore, borrowers may not be able to pay principal and interest on such loans. Declining real estate values would also significantly increase the likelihood that we would incur losses on our debt investments in the event of a default because the value of our collateral may be insufficient to cover some or all of our basis in the investment.
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In the future, we may record impairments of properties, significant other-than-temporary impairment charges related to our real estate-related securities holdings, and provisions for losses on our debt-related investments, if any. To the extent that there is a general economic slowdown or real estate fundamentals deteriorate, such factors could have ana significant and adverse impact on our operations.
Share Redemption Program and Other Redemptions or Repurchases
While stockholders may request on a monthly basis that we redeem all or any portion of their shares; however,shares pursuant to our share redemption program, we are not obligated to redeem any shares and may choose to redeem only some, or even none, of the shares that have been requested to be redeemed in any particular month, in our discretion. Additionally,In addition, our boardability to fulfill redemption requests is subject to a number of directorslimitations. As a result, share redemptions may not be available each month. Under our share redemption program, to the extent we choose to redeem shares in any particular month, we will only redeem shares as of the last calendar day of that month (each such date, a “Redemption Date”). Shares redeemed on the Redemption Date remain outstanding on the Redemption Date and are no longer outstanding on the day following the Redemption Date. Redemptions will be made at the transaction price in effect on the Redemption Date, except that shares that have not been outstanding for at least one year will be redeemed at 95% of the transaction price (an “Early Redemption Deduction”). The Early Redemption Deduction may be waived in certain circumstances including: (i) in the case of redemption requests arising from the death or qualified disability of the holder; (ii) in the event that a stockholder’s shares are redeemed because the stockholder has failed to maintain the right$2,000 minimum account balance or (iii) with respect to modify, suspendshares purchased through our distribution reinvestment plan. To have his or terminateher shares redeemed, a stockholder’s redemption request and required documentation must be received in good order by 4:00 p.m. (Eastern time) on the New SRP if it deems such actionsecond to last business day of the applicable month. Settlements of share redemptions will be in our best interest andmade within three business days of the best interestRedemption Date. An investor may withdraw its redemption request by notifying the transfer agent before 4:00 p.m. (Eastern time) on the last business day of our stockholders.
The total amount of aggregate redemptions of Class E, Class T, Class S, Class D, Class I and Class IE shares (based on the price at which the shares are redeemed) will be limited during each calendar month to 2% of the aggregate NAV of all classes as of the last calendar day of the previous quarter and in each calendar quarter will be limited to 5% of the aggregate NAV of all classes of shares as of the last calendar day of the previous calendar quarter; provided, however, that every month and quarter each class of our common stock will be allocated capacity within such aggregate limit to allow stockholders in such class to either (a) redeem shares (based on the price at which the shares are redeemed) equal to at least 2% of the aggregate NAV of such share class as of the last calendar day of the previous quarter, or, if more limiting, (b) redeem shares (based on the price at which the shares are redeemed) over the course of a given quarter equal to at least 5% of the aggregate NAV of such share class as of the last calendar day of the previous quarter (collectively referred to herein as the “2% and 5% limits”), which in the second and third months of a quarter could be less than 2% of the NAV of such share class. In the event that we determine to redeem some but not all of the shares submitted for redemption during any month, shares redeemed at the end of the month will be redeemed on a pro rata basis. Even if the class-specific allocations are exceeded for a class, the program may offer such class additional capacity under the aggregate program limits. Redemptions and pro rata treatment, if necessary, will first be applied within the class-specific limitsallocated capacity and then applied on an aggregate basis in a second step.to the extent there is remaining capacity. All unsatisfied redemption requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the New SRP,share redemption program, as applicable.
For both the aggregate and class-specific allocations described above, (i) provided that the New SRPshare redemption program has been operating and not suspended for the first month of a given quarter and that all properly submitted redemption requests were satisfied, any unused capacity for that month will carry over to the second month and (ii) provided that the New SRPshare redemption program has been operating and not suspended for the first two months of a given quarter and that all properly submitted redemption requests were satisfied, any unused capacity for those two months will carry over to the third month. In no event will such carry-over capacity permit the redemption of shares with aggregate value (based on the redemption price per share for the month the redemption is effected) in excess of 5% of the combined NAV of all classes of shares as of the last calendar day of the previous calendar quarter (provided that for these purposes redemptions may be measured on a net basis as described in the paragraph below).
We currently measure the foregoing redemption allocations and limitations based on net redemptions during a month or quarter, as applicable. The term “net redemptions” means, during the applicable period, the excess of our share redemptions (capital outflows) over the proceeds from the sale of our shares (capital inflows). Net redemptions for the class-specific allocations will be based only on the capital inflows and outflows of that class, while net redemptions for the overall program limits would be based on capital inflows and outflows of all classes. Thus, for any given calendar quarter, the maximum amount of redemptions during that quarter will be equal to (1)(i) 5% of the combined NAV of all classes of shares as of the last calendar day of the previous calendar quarter, plus (2)
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(ii) proceeds from sales of new shares in our ongoing public offeringsthis offering (including purchases pursuant to our distribution reinvestment plan) and the Class E distribution reinvestment plan offering since the beginning of the current calendar quarter. The
Although the vast majority of our assets consist of properties that cannot generally be readily liquidated on short notice without impacting our ability to realize full value upon their disposition, we intend to maintain a number of sources of liquidity including (i) cash equivalents (e.g. money market funds), other short-term investments, U.S. government securities, agency securities and liquid real estate-related securities and (ii) one or more borrowing facilities. We may fund redemptions from any available source of funds, including operating cash flows, borrowings, proceeds from this offering and/or sales of our assets.
Should redemption requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the company as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than redeeming our shares is in the best interests of the company as a whole, then we may choose to redeem fewer shares than have been requested to be redeemed, or none at all. Further, our board of directors may modify or suspend our share redemption program if it deems such action to be in our best interest and the best interest of our stockholders. If the transaction price for the applicable month is not made available by the tenth business day prior to the last business day of the month (or is changed after such date), then no redemption requests will be accepted for such month and stockholders who wish to have their shares redeemed the following month must resubmit their redemption requests. The above description of the share redemption program is a summary of certain of the terms of the share redemption program. Please see the full text of the share redemption program, which is incorporated by reference as Exhibit 4.2 to this Quarterly Report on Form 10-Q, for all the terms and conditions.
The table below summarizes the redemption activity for the three months ended SeptemberJune 30, 2017, we2022, for which all eligible redemption requests were redeemed (i) approximately 1.2 million shares of common stock pursuant to the Class E SRP and the Class AWI SRP for approximately $8.9 million, as described further in the table below (number of shares in thousands, except footnoted information).
| | | | | | | | | |
|
| |
| | |
| Total Number of Shares |
| Maximum Number of |
| | | | | | | Redeemed as Part of | | Shares That May Yet Be |
| | Total Number of | | Average Price | | Publicly Announced | | Redeemed Pursuant | |
(shares in thousands) | | Shares Redeemed | | Paid Per Share (1) | | Plans or Programs | | to the Program (2) | |
For the Month Ended: |
|
|
| |
|
|
|
|
|
April 30, 2022 |
| 722 | | $ | 8.45 |
| 722 | | — |
May 31, 2022 |
| 439 | |
| 8.67 |
| 439 |
| — |
June 30, 2022 (3) |
| 459 | |
| 8.82 |
| 459 |
| — |
Total |
| 1,620 | | $ | 8.61 |
| 1,620 |
| — |
Total Number of Shares Redeemed or Repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Pursuant to the Program (1) | ||||||||||
July 1 - July 30, 2017 | 242 | $ | 7.50 | 242 | — | ||||||||
August 1 - August 31, 2017 | 950 | 7.48 | 950 | — | |||||||||
September 1 - September 30, 2017 (2) | — | — | — | — | |||||||||
Total | 1,192 | $ | 7.48 | 1,192 | — |
(1) |
(2) | We limit the number of shares that may be redeemed under the share redemption program as described above. |
(3) | Redemption requests accepted in |
ITEM 5. OTHER INFORMATION
Distribution Reinvestment Plan Suitability Requirements
Pursuant to the terms of our distribution reinvestment plan (“DRP”), participants in the DRP must promptly notify us if at any time they fail to meet the current suitability requirements for making an investment in us.
The current suitability standards require that Class E stockholders participating in the DRP other than investors in Arizona, California, Ohio and Oregon have either:
● | a net worth (exclusive of home, home furnishings and automobiles) of $150,000 or more; or |
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● | a net worth (exclusive of home, home furnishings and automobiles) of at least $45,000 and had during the last tax year, or estimate that such investor will have during the current tax year, a minimum of $45,000 annual gross income. |
The current suitability standards require that Class E stockholders participating in the DRP in Arizona, California, Ohio and Oregon must have either:
● | a net worth (exclusive of home, home furnishings and automobiles) of $250,000 or more; or |
● | a net worth (exclusive of home, home furnishings and automobiles) of at least $70,000 and had during the last tax year, or estimate that such investor will have during the current tax year, a minimum of $70,000 annual gross income. |
In addition, Class E stockholders participating in the DRP in Ohio and Oregon must have a net worth of at least 10 times their investment in us and any of our affiliates.
Stockholders can notify us of any changes to their ability to meet the suitability requirements or change their DRP election by contacting us at Black Creek Diversified Property FundAres Real Estate Income Trust Inc., Investor Relations, 5181200 17th Street, Suite 1700,2900, Denver, Colorado 80202, Telephone: (303) 228-2200.
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Exhibit | Description | |||
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3.1 | ||||
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3.2 | | |||
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3.3 | | |||
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3.4 | | |||
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3.5 | | |||
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3.6 | | |||
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3.7 | | |||
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3.8 | | |||
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3.9 | | |||
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3.10 | | |||
| | | ||
3.11 | | |||
| | | ||
4.1 | | |||
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4.2 | | |||
| | | ||
4.3 | ||||
| ||||
| | |
4.4 | | |
| | |
4.5 | | |
| | |
10.1* | | |
| | |
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Exhibit | Description | |
---|---|---|
| | |
10.2 | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32.1* | | |
| | |
99.1* | | |
| | |
101 | | The following materials from Ares Real Estate Income Trust Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, filed on August 11, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | Filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| | ARES REAL ESTATE INCOME TRUST INC. |
| | |
August 11, 2022 | By: | /s/ JEFFREY W. TAYLOR |
| | Jeffrey W. Taylor |
| | |
August 11, 2022 | By: | /s/ LAINIE P. MINNICK |
| | Lainie P. Minnick Managing Director, Chief Financial Officer and Treasurer |
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